UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, DC
20549


Form 10-K


(Mark
One)





þ
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR
15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


For
the fiscal year ended June 30, 2010


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


COMMISSION
FILE NUMBER: 814-00809


Full
Circle Capital Corporation


(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


MARYLAND
                27-2411476(State or
      jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      No.)800
      Westchester Ave., Suite S-620,
                10573Rye Brook,
      NY
                (Zip
      Code)(Address of principal
      executive office)


REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:


(914) 220-6300


SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Name
      of Each ExchangeTitle of Each
      Class
                on Which
      RegisteredCommon
      Stock, par value $0.01 per share
                NASDAQ
      Capital Market


SECURITIES REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT:


None


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES  ̈     No þ


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  YES  ̈     No þ


Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  YES  ̈NO þ


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈     No  ̈


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  þ


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large accelerated filer  ̈
            
            Accelerated filer  ̈
            
            Non-accelerated filer þ
            
            Smaller reporting company  ̈


(Do not
check if a smaller reporting company)


Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act)  YES  ̈     NO þ





The
number of shares of the registrant’s common stock outstanding as of September
27, 2010 was 5,787,853, excluding 403,662 shares that will be issued upon either
the exercise or expiration of the overallotment option granted to the
underwriters of the registrant's initial public offering. This
overallotment option expires on September 30, 2010.


The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant as of December 31, 2009 is not applicable because the
registrant completed its initial public offering in September 2010. Accordingly,
there was no public market for the registrant’s common stock on December 31,
2009, the last business day of the registrant’s most recently completed second
quarter.





DOCUMENTS INCORPORATED BY
REFERENCE


None





TABLE
OF CONTENTS


PagePART IItem
      1.
                    
                    Business
                    
                    3Item
      1A.
                    
                    Risk
      Factors
                    
                    31Item
      1B.
                    
                    Unresolved
      Staff Comments
                    
                    49Item
      2.
                    
                    Properties
                    
                    49Item
      3.
                    
                    Legal
      Proceedings
                    
                    49Item
      4.
                    
                    Reserved
                    
                    50PART IIItem
      5.
                    
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    51Item
      6.
                    
                    Selected
      Financial Data
                    
                    52Item
      7.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    53Item
      7A.
                    
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    
                    60Item
      8.
                    
                    Financial
      Statements and Supplementary Data
                    
                    61Item
      9.
                    
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    78Item
      9A.
                    
                    Controls
      and Procedures
                    
                    78Item
      9B.
                    
                    Other
      Information
                    
                    78PART IIIItem
      10.
                    
                    Directors,
      Executive Officers and Corporate Governance
                    
                    79Item
      11.
                    
                    Executive
      Compensation
                    
                    85Item
      12.
                    
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    85Item
      13.
                    
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    87Item
      14.
                    
                    Principal
      Accounting Fees and Services
                    
                    89PART IVItem
      15.
                    
                    Exhibits
      and Financial Statement Schedules
                    
                    90Signatures
                    
                    
                    
                    92Exhibit Index
                    
                    
                    
                    90


2





PART I


Item 1.
            Business




Full
Circle Capital Corporation (“Full Circle Capital,” the “Company,” or “we”), 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, LLC (“Full Circle Advisors” or the
“investment advisor”). Full Circle Service Company, LLC (“Full Circle Service
Company” or the “administrator”) provides the administrative services necessary
for us to operate.





On August
31, 2010, we priced our initial public offering of 2,000,000 shares of our
common stock at the offering price of $9.00 per share. Our shares are currently
listed on the NASDAQ Capital Market under the symbol “FULL.”





We were
formed to continue and expand the business of Full Circle Partners, LP and Full
Circle Fund, Ltd. (collectively, the “Legacy Funds”), which were formed in 2005
and 2007, respectively. As part of this continuation and expansion, we invest
primarily in asset-based senior secured loans and, to a lesser extent, mezzanine
loans and equity securities issued by smaller and lower middle-market companies
(annual revenues between $3 million and $75 million) that operate in a diverse
range of industries, with a specific focus on the media, communications and
business services industries where we believe we have particular expertise. In
our lending activities, we focus primarily on portfolio companies with both (i)
tangible and intangible assets available as collateral and security against our
loan to help mitigate our risk of loss, and (ii) cash flow to cover debt
service. We believe this provides us with a more attractive risk adjusted return
profile, with greater principal protection and likelihood of
repayment.





Our
investments generally range in size from $3 million to $10 million; however, we
may make larger investments from time to time on an opportunistic
basis.  We focus primarily on senior secured loans and “stretch”
senior secured loans, also referred to as “unitranche” loans, which combine
characteristics of traditional first-lien senior secured loans and second-lien
or subordinated loans. Our stretch senior secured loans typically possess a
greater advance rate against the borrower’s assets and cash flow, and
accordingly carry a higher interest rate and/or greater equity participation,
than traditional senior secured loans. We believe that having a first lien,
senior secured position provides us with greater control and security in the
primary collateral of a borrower and helps mitigate risk against loss of
principal should a borrower default. We also invest in mezzanine, subordinated
or unsecured loans. In addition, we may acquire equity or equity related
interests from a borrower along with our debt investment. We attempt to protect
against risk of loss on our debt investments by securing our loans against a
significant level of tangible or intangible assets of our borrowers, which may
include accounts receivable and contracts for services, and obtaining a
favorable loan-to-value ratio, and in many cases, securing other financial
protections or credit enhancements, such as personal guarantees from the
principals of our borrowers, make well agreements and other forms of collateral,
rather than lending predominantly against anticipated cash flows of our
borrowers. We believe this allows us more options and greater likelihood of
repayment from refinancing, asset sales of our borrowers and/or
amortization.





We
generally seek to invest in smaller and lower middle-market companies in areas
that we believe have been historically under-serviced, especially during the
current credit crisis. These areas include industries that are outside the focus
of mainstream institutions or investors due to required industry-specific
knowledge or are too small to attract interest from larger investment funds or
other financial institutions. Because we believe there are fewer banks and
specialty finance companies focused on lending to these smaller and lower
middle-market companies, we believe we can negotiate more favorable terms on our
debt investments in these companies than those that would be available for debt
investments in comparable larger, more mainstream borrowers. Such favorable
terms may include higher debt yields, lower leverage levels, more significant
covenant protection or greater equity grants than typical of other transactions.
We generally seek to avoid competing directly with other capital providers with
respect to specific transactions in order to avoid the less favorable terms we
believe are typically associated with such competitive bidding
processes.





Legacy
Portfolio Acquisition





Immediately
prior to the pricing of our initial public offering, we acquired a portfolio of
investments (the “Legacy Portfolio”) from the Legacy Funds, which are managed by
an affiliate of our investment adviser. The investments included in the Legacy
Portfolio had a collective fair value of approximately $72.3 million as of June
30, 2010, as determined by our Board of Directors. In connection with our
acquisition of the Legacy Portfolio, we issued an aggregate of 3,787,753 shares
of our common stock and approximately $3.4 million of senior unsecured notes
(the “Distribution Notes”) to investors in the Legacy Funds (the “Legacy
Investors”), pursuant to a Purchase and Sale Agreement (the “Asset Purchase
Agreement”). In addition, the Asset Purchase Agreement provides for a subsequent
payment to certain Legacy Investors 30 days after the pricing of our initial
public offering, or earlier if the over-allotment option granted to the
underwriters is exercised in full (the “Subsequent Payment Obligation”). If the
over-allotment option is exercised in full, these Legacy Investors will be
entitled to receive, collectively, 103,662 shares plus a cash amount equal to
the aggregate purchase price paid by the underwriters to acquire the number of
shares underlying the over-allotment option that corresponds to the number of
shares offered by such Legacy Investors (i.e., the public offering price less
underwriting discounts and commissions) less offering-related expenses. This
cash amount is estimated to be approximately $2.47 million, representing gross
proceeds to Legacy Investors of approximately $2.70 million less underwriting
discounts and commissions and offering-related expenses of approximately $0.23
million. If the over-allotment option is not exercised and expires, these Legacy
Investors will receive 403,662 additional shares of our common stock. If the
over-allotment option is partially exercised, these Legacy Investors will
receive a proportionate distribution of both cash and stock, depending upon the
amount of the shares underlying the over-allotment option that were actually
acquired by the underwriters. For information on the ownership of our shares,
see “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.” We also incurred approximately $27.5 million of debt upon
entry into a new secured revolving credit facility (the “New Credit Facility”)
with FCC, LLC d/b/a First Capital (“First Capital”) in connection with the
assumption of outstanding amounts under the Legacy Funds’ credit facility (the
“Legacy Credit Facilities”). We refer to these transactions, collectively, as
the “Full Circle Portfolio Acquisition.” All of the loans that constitute the
Legacy Portfolio are performing as of June 30, 2010.


3


The Investment
Adviser





We are
managed by Full Circle Advisors, whose investment team members have an average
of nearly 22 years of experience financing and investing in smaller and lower
middle-market companies. Full Circle Advisors’ investment team also presently
manages Full Circle Funding, LP, a specialty lender serving smaller and lower
middle-market companies that has originated approximately $216 million in loans
and investments in 42 distinct borrowers since its inception in 2005. 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, and are expected to be wound down as their remaining investments
mature.





We
benefit from the proven ability of our investment adviser’s investment team 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 adviser’s investment team 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 led by John E. Stuart, our Chief Executive Officer and
President, and the manager of Full Circle Advisors. Mr. Stuart is assisted by
Stephen J. Healey, who serves as a Vice President of Full Circle Advisors. We
consider Messrs. Stuart and Healey to be Full Circle Advisors’ investment
team.





Business
Strategy





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
      borrower’s performance.





•
            Focus on
      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.


4


•
            Focus on
      Asset-Based 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 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 perform periodic field exams 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 June 30, 2010, the Legacy Funds had lockbox or dominion
      of cash, or account control agreements, on over 92%, 92% and 91% of the
      borrowers in the Legacy Portfolio, as adjusted for the Lotus Transaction
      (as defined below), as calculated by principal amount, fair value and
      quarterly revenue, respectively. We assumed these agreements from the
      Legacy Funds in connection with our acquisition of the Legacy Portfolio.
      In addition, we may seek credit enhancements, such as personal guarantees
      from a borrower’s 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 June 30, 2010,
      the weighted average annualized yield of the debt investments comprising
      the Legacy Portfolio was approximately 12.1%, which includes a cash
      component of approximately 11.7%, as adjusted for the Lotus Transaction
      (as defined below). The 16 debt investments included in the Legacy
      Portfolio averaged a LTV ratio of approximately 51% as of June 30, 2010
      (i.e., each $51 of loan value outstanding is secured by $100 of collateral
      value), as adjusted for the Lotus Transaction (as defined below). 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
      the Legacy Portfolio. In addition, as of June 30, 2010, these same
      positions averaged a senior and pari passu debt to EBITDA multiple of
      approximately 3.49x, as adjusted for the Lotus Transaction (as defined
      below). 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
      Team.  Full Circle Advisors’ investment team members have
      an average of nearly 22 years of experience financing and investing in
      smaller and lower middle-market companies. The investment team 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.


5


•
            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 the media,
      communications and business services industries 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 borrower’s
      current cash flows. Going forward, we intend to seek to maintain a more
      balanced portfolio, compared to the Legacy Portfolio, to mitigate the
      potential effects of negative economic events for particular companies,
      regions and industries.





•
            Capitalize
      on Strong Transaction Sourcing Network.  Our investment
      adviser’s investment team 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 team 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
      adviser’s investment team 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 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.





Market
Opportunity





We
believe that the current credit environment provides favorable opportunities to
achieve attractive risk-adjusted returns on the types of asset-based senior
secured loans we target. In particular, we believe that 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.





Between
March 2009 and March 2010, the number of FDIC insured commercial lenders
decreased by approximately 6.94%, with the amount of total loans issued by these
lenders decreasing from $4.158 trillion to $3.064 trillion, according to FDIC
reports. In addition, media reports have indicated that the 22 banks that got
the most help from the U.S. Treasury’s bailout programs decreased their small
business lending by $12.5 billion collectively between April 2009 and January
2010. We believe that the remaining larger, traditional lenders and large,
private investment pools are focusing on larger investment transaction sizes and
as a result the smaller to lower middle-market companies we target are unable to
access sufficient financing. We believe that in the current environment, it is
possible to originate and refinance investments with higher returns achieved
through increased interest rates, equity participation and loan fees at lower
risk points, compared to those available in 2007 and 2008. We believe that many
lenders have been hurt by loans underwritten prior to the current economic
recession at high debt multiples, and as a result the debt multiples have
contracted. The average debt multiples for middle-market loans to businesses
with EBITDA of less than $50 million, including second lien and subordinated
debt, have decreased from a peak of 4.8x in 2007 to 4.2x in the first half of
2009. We believe these lower debt multiples provide for lower risk as there is
more cushion between the value of the company and the amount of debt the
borrowing company holds.


6


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.





•
            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 are in industries
      that are less visible or too specialized for larger mainstream
      institutions or investors, or require too little funding or are too
      localized for larger financial institutions to consider, particularly
      where those institutions lack the requisite industry-specific knowledge
      and expertise. During the period 1992 to 2009, loan composition for banks
      sized $1 billion to $10 billion in assets showed a decline of commercial
      and industrial loans from 25% to 17% while real estate lending grew from
      42% to 72%. Accordingly, we believe that many potential competitive
      lenders lack the personnel or lending experience required to address the
      very strong market demand for commercial and industrial lending. 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 operate underwriting, due diligence and loan
      portfolio management activities singularly focused on these types of
      companies.




•
            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. 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 the current
      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.


7


•
            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
      adviser’s investment team 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.




Investments





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 adviser’s
investment team 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
borrower’s equity performance through warrant participation, direct equity
ownership or otherwise, and many notes that we purchase 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 adviser’s investment team.





Full
Circle Advisors’ investment team 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.





Types
of Investments





We target
debt investments that yield meaningful current income and, in many cases,
provide the opportunity for capital appreciation through equity
securities.





Debt
Investments





Full
Circle Advisors’ investment team 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. As of June 30, 2010, all of the Legacy Portfolio’s debt investments were
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 provide a variable interest rate, 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.


8


•
            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 team 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.




Equity
Investments





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 non-control, equity co-investments in conjunction with a
loan transaction with a borrower. Full Circle Advisors’ investment team
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.





Asset
Based Collateral Focus





In most
cases, our investment adviser’s investment team 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.





As a
result of our asset-oriented lending philosophy, our investment adviser’s
investment team focuses on the media and communications industry, where
companies tend to have significant asset value relative to their earnings, and
the investment team possesses significant experience in sourcing, underwriting,
due diligence and restructuring. Full Circle Advisors’ investment team also
invests in other areas of opportunity with similar attributes, such as the
business services sector, in which companies often possess recurring monthly
revenue streams. Our investment focus may shift over time, consistent with our
overall lending and investment objectives, and desire for asset based
collateral.


9


Targeted
Industries





The
Legacy Portfolio contains a number of investments in the media and
communications and business services industries, as a result of the focus and
prior investing experience of our investment adviser’s investment team in those
sectors. We intend to leverage this prior investing experience to continue to
target attractive investments in those industries. However, these industries are
not our only focus, and we expect to seek prospective investments in other
industries and sectors. 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. In addition, we may from time to time invest
a relatively significant percentage of our portfolio in industries we do not
necessarily target, such as the finance/lending industry, represented by our
investment in the First Capital Lotus Asset-Based Loan Fund I, LP (the “Lotus
Fund”) and one additional investment.





Asset
Based Media and Communications Investments




As of
June 30, 2010, approximately 26% and 20% of the Legacy Portfolio consists of
loans to and investments in companies involved in the communications industry
(such as companies that perform residential security alarm monitoring or provide
digital video satellite and broadband service to multiple dwelling units) and
media industry (such as outdoor advertising and radio broadcasting companies),
respectively. These industries are a core area of our lending and investment
focus. Our investment adviser’s investment team 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.





Business
Services





As of
June 30, 2010, approximately 29% of the Legacy 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 and asset recovery). 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.





Investment
Selection





Our
investment adviser’s investment team is responsible for all aspects of our
investment process. The current members of the investment team are John Stuart,
the sole initial member of the investment committee of Full Circle Advisors, and
Steve Healey, who serves 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 team, Mr. Stuart must approve of
all investments in order for them to proceed. The stages of our investment
selection process are as follows:


10


Deal
Generation/Origination





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 adviser’s investment team 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 adviser’s investment team has developed
a reputation as a knowledgeable and reliable source of capital, providing
value-added industry advice and financing assistance to borrowers’
businesses.





Screening





In
screening potential investments, our investment adviser’s investment team
utilizes the same value-oriented investment philosophy they employed in their
work with the Legacy Funds and commits resources to managing downside
exposure.





Portfolio
Company Characteristics





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 adviser’s investment team’s 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 team to identify
investment candidates and to structure investments quickly and
effectively.





Established
Companies.  We 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 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.





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.


11


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
DiligenceOur investment adviser
conducts diligence on prospective portfolio companies consistent with the
approach its investment team adopted in their work with the Legacy Funds. We
believe that the investment team 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 adviser’s due diligence typically includes:





•
            review
      of historical and prospective financial
  information;




•
            research
      relating to the company’s 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 adviser’s investment team, 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 Mr. Stuart.





Ongoing Relationship with Portfolio
Companies





Managerial
Assistance





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 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.


12


Monitoring





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 company’s 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:





Investment
                Rating
              
              Summary Description1
              
              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 favorable3
              
              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
      34
              
              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 unfavorable5
              
              The
      investment is performing well below expectations and is not anticipated to
      be repaid in full


13


Our
investment adviser monitors and, when appropriate, changes the investment
ratings assigned to each investment in our portfolio. As of June 30, 2010, the
weighted average investment rating on the fair market value of the Legacy
Portfolio was 3.21, as adjusted for the Lotus Transaction (as defined below). 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 investment’s future performance.





Valuation
Procedures





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 represents 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 review
management’s 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 company’s ability to make
payments;




•
            the
      portfolio company’s 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;


14





•
            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.





Portfolio
Overview





As of
June 30, 2010, we had no portfolio investments. However, immediately prior to
the pricing of our initial public offering, we acquired the Legacy Portfolio
from the Legacy Funds, which are managed by an affiliate of our investment
adviser. The investments included in the Legacy Portfolio had a collective fair
value of approximately $72.3 million as of June 30, 2010, as determined by our
Board of Directors. In connection with our acquisition of the Legacy Portfolio,
we issued an aggregate of 4,191,415 shares of our common stock(assuming no exercise of the
underwriters’ overallotment option) and approximately $3.4 million of
Distribution Notes to the Legacy Investors. We also incurred approximately $27.5
million of debt under our New Credit Facility in connection with the assumption
of outstanding amounts under the Legacy Credit Facilities. All of the loans that
constitute the Legacy Portfolio are performing as of June 30,
2010.





As of
June 30, 2010, the Legacy Portfolio had approximately $72.3 million of debt and
equity investments, comprised of 17 portfolio companies, as adjusted to reflect
the Legacy Funds’ redemption of $9 million of their collective partnership
interests in the Lotus Fund in exchange for the purchase of loan participations
in three investments, BLSCO Newco, Inc., Exist, Inc., and Miken Sales, Inc.
prior to consummation of the Full Circle Portfolio Acquisition. In connection
therewith, the redemption of the remaining $6 million in Lotus partnership
interests has been rescheduled to July 31, 2014. We refer to these restructuring
transactions, collectively, as the “Lotus Transaction.” The debt investments
included in the Legacy Portfolio had a weighted average annualized yield of
approximately 12.1% as of June 30, 2010, as adjusted for the Lotus
Transaction.





Investment Advisory
Agreement





Management
Services





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);




15




•
            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.





Management
Fee





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. 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 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, the our
investment adviser has agreed to waive any portion of the base management fee
that exceeds 1.50% of Full Circle Capital’s gross assets until August 31,
2011.





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%;




•
            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).




16





The
following is a graphical representation of the calculation of the income-related
portion of the incentive fee:





Quarterly
Incentive Fee Based on Net Investment Income





Pre-incentive
fee net investment income





(expressed
as a percentage of the value of net assets)









Percentage
of pre-incentive fee net investment income allocated to the Full Circle
Advisors





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), commencing with the 2010 calendar year,
and will equal 20% of our realized capital gains, if any, on a cumulative basis
from inception through the end of each calendar year, computed net of all
realized capital losses and unrealized capital depreciation on a cumulative
basis, less the aggregate amount of any previously paid capital gain incentive
fees with respect to each of the investments in our portfolio, provided that,
the incentive fee determined as of December 31, 2010 will be 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.





Examples
of Quarterly Incentive Fee Calculation





Example
1: Income Related Portion of Incentive Fee*:





Alternative
1:





Assumptions





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.


17





Alternative
2:





Assumptions





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%





Alternative
3:





Assumptions





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.




18


(4)
            The
      “catch-up” provision is intended to provide the investment adviser with an
      incentive fee of 20% on all of Full Circle Capital’s 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.




Example
2: Capital Gains Portion of Incentive Fee:





Alternative
1:





Assumptions


•
            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: Capital gains incentive fee of $6 million ($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: Capital gains incentive fee of
$200,000




$6.2
million ($31 million cumulative realized capital gains multiplied by 20%) less
$6 million (capital gains fee taken in Year 2)





Alternative
2:





Assumptions





•
            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 $27 million and Investment C sold
      for $30 million




19




•
            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: None




•
            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 $6.4 million
cumulative capital gains fee paid in Year 2 and Year 3





(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.




Payment of Our
Expenses





The
investment team 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;


20





•
            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.





Duration and
Termination





The
Investment Advisory Agreement was initially approved by the Board of Directors
of Full Circle Capital on July 8, 2010. Unless earlier terminated as described
below, the Investment Advisory Agreement will remain in effect for a period of
two years from the date it was approved by our Board of Directors and will
remain in effect from year to year thereafter 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
“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 can resign on
60 days’ notice.”





Indemnification





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.





Organization of
our Investment Adviser





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.





Board
Approval of the Investment Advisory Agreement





Our Board
of Directors determined at a meeting held on July 8, 2010 to approve the
Investment Advisory Agreement. In its consideration of the approval of the
Investment Advisory Agreement, the Board of Directors focused on information it
had received relating to, among other things:


21




•
            the nature, quality and extent of
      the advisory and other services to be provided to us by Full Circle
      Advisors;




•
            comparative data with respect to
      advisory fees or similar expenses paid by other business development
      companies with similar investment
  objectives;




•
            our historical and projected
      operating expenses and expense ratio compared to business development
      companies with similar investment
  objectives;




•
            any existing and potential
      sources of indirect income to Full Circle Advisors or Full Circle Service
      Company from their relationships with us and the profitability of those
      relationships, including through the Investment Advisory Agreement and the
      Administration Agreement;




•
            information about the services to
      be performed and the personnel performing such services under the
      Investment Advisory
Agreement;




•
            the organizational capability and
      financial condition of Full Circle Advisors and its
      affiliates;




•
            Full Circle Advisors’ practices
      regarding the selection and compensation of brokers that may execute our
      portfolio transactions and the brokers’ provision of brokerage and
      research services to Full Circle Advisors;
  and




•
            the possibility of obtaining
      similar services from other third party service providers or through an
      internally managed
structure.




Based on
the information reviewed and related discussions, the Board of Directors,
including a majority of the non-interested directors, concluded that fees
payable to Full Circle Advisors pursuant to the Investment Advisory Agreement
were reasonable in relation to the services to be provided. The Board of
Directors did not assign relative weights to the above factors or the other
factors considered by it. In addition, the Board of Directors did not reach any
specific conclusion on each factor considered, but conducted an overall analysis
of these factors. Individual members of the Board of Directors may have given
different weights to different factors.





Administration
Agreement





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, 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 Company’s overhead in
performing its obligations under the Administration Agreement, including rent,
the fees and expenses associated with performing compliance functions and our
allocable portion of the compensation of our Chief Financial Officer and our
allocable portion of the compensation of any administrative support staff. 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.


22





Full
Circle Service Company also provides administrative services to our investment
adviser, Full Circle Advisors. As a result, Full Circle Advisors also reimburses
Full Circle Service Company for its allocable portion of Full Circle Service
Company’s overhead, including rent, the fees and expenses associated with
performing compliance functions for Full Circle Advisors, and its allocable
portion of the compensation of any administrative support staff. To the extent
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 Company’s 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 Fund
Services LLC. Full Circle Service Company has engaged Vastardis Fund Services to
provide certain administrative services to us and our investment adviser, Full
Circle Advisors, including the service of Mr. Vastardis as our Chief Financial
Officer, Treasurer and Secretary. 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
                  
                  Feefirst
      $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%)




Full
Circle Advisors is responsible for paying the allocable portion of the
sub-administration fees charged by Vastardis Fund Services for administrative
services provided to both Full Circle Capital and Full Circle Advisors
reflecting the proportionate share of such administrative services that it
receives.





In
addition, we reimburse 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 $250,000. Vastardis Fund
Services has agreed to cap its first year fees at $200,000 for administrative
services to us and Full Circle Advisors, and at $100,000 for the service of Mr.
Vastardis as our Chief Financial Officer, Treasurer and Secretary.





License
Agreement





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.





Staffing





We do not
currently have any employees. Mr. Stuart, our Chief Executive Officer and
President, currently serves as the manager of our investment adviser, Full
Circle Advisors. William E. Vastardis, our Chief Financial Officer, Treasurer
and Secretary, is the President of Vastardis Fund Services LLC, and performs his
function under the terms of an agreement between Full Circle Service Company and
Vastardis Fund Services LLC. 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.


23





Our
day-to-day investment operations are managed by Full Circle Advisors. Full
Circle Advisors’ investment team currently consists of the sole initial member
of its investment committee, Mr. Stuart, and Mr. Healey, an experienced senior
investment professional. Full Circle Advisors may hire additional investment
professionals, based upon its needs. See “Business – Investment Advisory
Agreement.”





Competition





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.”




Securities Exchange Act
Reports





We
maintain a website at www.fccapital.com.
The information on our website is not incorporated by reference in this annual
report on Form 10-K.





We make
available on or through our website certain reports and amendments to those
reports that we file with or furnish to the Securities and Exchange Commission
(the “SEC”) in accordance with the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). These include our annual reports on Form 10-K, our
quarterly reports on Form 10-Q and our current reports on Form 8-K. We
make this information available on our website free of charge as soon as
reasonably practicable after we electronically file the information with, or
furnish it to, the SEC.





Regulation





As a
business development company, we are 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 significant
managerial assistance available to them. A business development company may use
capital provided by public stockholders and from other sources to make
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: (a) 67% or more of such company’s 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 (b) more than 50% of the
outstanding voting securities of such company. We do not anticipate any
substantial change in the nature of our business.




24


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 us
or our stockholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person’s office.





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. 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.





As a
business development company, we are not generally permitted to invest in any
portfolio company in which our investment adviser or any of its affiliates
currently have an investment or to make any co-investments with our investment
adviser or its affiliates without an exemptive order from the SEC, subject to
certain exceptions.





Qualifying
Assets





Under the
1940 Act, a business development company may not acquire any asset other than
assets of the type listed in Section 55(a) of the 1940 Act, which are referred
to as qualifying assets, unless, at the time the acquisition is made, qualifying
assets represent at least 70% of the business development company’s gross
assets. The principal categories of qualifying assets relevant to our proposed
business are the following:





(1)
            Securities
      purchased in transactions not involving any public offering from the
      issuer of such securities, which issuer (subject to certain limited
      exceptions) is an eligible portfolio company, or from any person who is,
      or has been during the preceding 13 months, an affiliated person of an
      eligible portfolio company, or from any other person, subject to such
      rules as may be prescribed by the SEC. An eligible portfolio company is
      defined in the 1940 Act as any issuer
which:





(a)
            is
      organized under the laws of, and has its principal place of business in,
      the United States;





(b)
            is
      not an investment company (other than a small business investment company
      wholly owned by the business development company) or a company that would
      be an investment company but for certain exclusions under the 1940 Act;
      and





(c)
            satisfies
      any of the following:





i.
            does
      not have any class of securities that is traded on a national securities
      exchange;





ii.
            has
      a class of securities listed on a national securities exchange, but has an
      aggregate market value of outstanding voting and non-voting common equity
      of less then $250 million;





iii.
            is
      controlled by a business development company or a group of companies
      including a business development company and the business development
      company has an affiliated person who is a director of the eligible
      portfolio company; or





iv.
            is
      a small and solvent company having gross assets of not more than $4.0
      million and capital and surplus of not less than $2.0
    million.





(2)
            Securities
      of any eligible portfolio company which we
  control.





(3)
            Securities
      purchased in a private transaction from a U.S. issuer that is not an
      investment company or from an affiliated person of the issuer, or in
      transactions incident thereto, if the issuer is in bankruptcy and subject
      to reorganization or if the issuer, immediately prior to the purchase of
      its securities, was unable to meet its obligations as they came due
      without material assistance other than conventional lending or financing
      arrangements.


25





(4)
            Securities
      of an eligible portfolio company purchased from any person in a private
      transaction if there is no ready market for such securities and we already
      own 60% of the outstanding equity of the eligible portfolio
      company.





(5)
            Securities
      received in exchange for or distributed on or with respect to securities
      described in (1) through (4) above, or pursuant to the exercise of
      warrants or rights relating to such
securities.





(6)
            Cash,
      cash equivalents, U.S. government securities or high-quality debt
      securities maturing in one year or less from the time of
      investment.





Managerial
Assistance to Portfolio Companies





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 the types of securities described in (1), (2)
or (3) above. However, in order to count portfolio securities as qualifying
assets for the purpose of the 70% test, the business development company must
either control the issuer of the securities or must offer to make available to
the issuer of the securities (other than small and solvent companies described
above) significant managerial assistance; except that, where the business
development company purchases such securities in conjunction with one or more
other persons acting together, one of the other persons in the group may make
available such managerial assistance. Making available managerial assistance
means, among other things, any arrangement whereby the business development
company, through its directors, officers or employees, offers to provide, and,
if accepted, does so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company.





Temporary
Investments





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.





Senior
Securities





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.”


26





Code of
Ethics





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 SEC’s 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 SEC’s 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 SEC’s Public Reference Section, 100 F
Street, N.E., Washington, D.C. 20549.





Compliance
Policies and Procedures





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.




Sarbanes-Oxley
Act of 2002





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 Exchange 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 Exchange Act, our management must prepare an annual
      report regarding its assessment of our internal control over financial
      reporting and must obtain an audit of the effectiveness of internal
      control over financial reporting performed by our independent registered
      public accounting firm; 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 over financial reporting 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.





Proxy
Voting Policies and Procedures





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.





Introduction





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.


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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.





Proxy
Policies





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.





Proxy
Voting Records





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.





Privacy
Principles





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.





Material
U.S. Federal Income Tax Considerations





We intend
to elect to be treated as a RIC under Subchapter M of the Code. As a RIC, we
generally will not have to pay corporate-level federal income taxes on any
income that we distribute to our stockholders as dividends. To qualify as a RIC,
we must, among other things, meet certain source-of-income and asset
diversification requirements (as described below). In addition, in order to be
eligible for pass-through tax treatment as a RIC, we must distribute to our
stockholders, for each taxable year, at least 90% of our “investment company
taxable income,” which is generally our net ordinary income plus the excess of
realized net short-term capital gains over realized net long-term capital losses
(the “Annual Distribution Requirement”).




Taxation as a Regulated Investment
Company





As a
business development company, we intend to elect to be treated, and intend to
qualify annually, as a RIC under Subchapter M of the Code, beginning with our
tax year ended June 30, 2011.


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If
we:





•
            qualify
      as a RIC; and




•
            satisfy
      the Annual Distribution
Requirement,




then we
will not be subject to 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 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% 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 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 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 (which may arise if we receive
warrants in connection with the origination of a loan or possibly in other
circumstances), 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 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) 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.


29





Although
we do not presently expect to do so, we are authorized to borrow funds and to
sell assets in order to satisfy distribution requirements. However, 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. See “Regulation — Senior Securities.”
Moreover, 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.





Certain
of our investment practices may be subject to special and complex U.S. federal
income tax provisions that may, among other things: (i) disallow, suspend or
otherwise limit the allowance of certain losses or deductions; (ii) convert
lower taxed long-term capital gain into higher taxed short-term capital gain or
ordinary income; (iii) convert an ordinary loss or a deduction into a capital
loss (the deductibility of which is more limited); (iv) cause us to recognize
income or gain without a corresponding receipt of cash; (v) adversely affect the
time as to when a purchase or sale of securities is deemed to occur; (vi)
adversely alter the characterization of certain complex financial transactions;
and (vii) produce income that will not be qualifying income for purposes of the
90% gross income test described above. We will monitor its transactions and may
make certain tax elections in order to mitigate the potential adverse effect of
these provisions.





Gain or
loss realized by us from the sale or exchange of warrants acquired by us as well
as any loss attributable to the lapse of such warrants generally will be treated
as capital gain or loss. The treatment of such gain or loss as long-term or
short-term will depend on how long we held a particular warrant. Upon the
exercise of a warrant acquired by us, our tax basis in the stock purchased under
the warrant will equal the sum of the amount paid for the warrant plus the
strike price paid on the exercise of the warrant.





Failure
to Qualify as a Regulated Investment Company





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.  In addition, we would not be
required to make any distributions to our shareholders.  To the extent
of our current and accumulated earnings and profits,
any distributions made by us would be taxable to our stockholders as
ordinary dividend income, and if received in taxable years beginning before
January 1, 2011, could be eligible for the 15% maximum rate applicable to
qualified dividend income provided that certain holding periods and other
requirements are met. 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 stockholder’s tax basis, and any remaining distributions
would be treated as a capital gain. To requalify as a RIC in a subsequent
taxable year, we would be required to satisfy the RIC qualification requirements
for that year and dispose of any earnings and profits from any year in which we
failed to qualify as a RIC. Subject to a limited exception applicable to RICs
that qualified as such under Subchapter M of the Code for at least one year
prior to disqualification and that requalify as a RIC no later than the second
year following the non-qualifying year, we could be subject to tax on any
unrealized net built-in gains in the assets held by it during the period in
which it failed to qualify as a RIC that are recognized within the subsequent 10
years, unless we made a special election to pay corporate-level tax on such
built-in gain at the time of its requalification as a RIC.




30


Item 1A.   Risk
Factors





RISK
FACTORS





Investing
in our common stock involves a number of significant risks. In addition to the
other information contained in this annual report on Form 10-K, you should
consider carefully the following information before making an investment in our
common stock. The risks set out below are not the only risks we face. Additional
risks and uncertainties not presently known to us or not presently deemed
material by us might also impair our operations and performance. If any of the
following events occur, our business, financial condition and results of
operations could be materially and adversely affected. In such case, our net
asset value and the trading price of our common stock could decline, and you may
lose all or part of your investment.





Risks
Relating to Our Business and Structure





Our
investment portfolio is recorded at fair value, with our Board of Directors
having final responsibility for overseeing, reviewing and approving, in good
faith, its estimate of fair value and, as a result, there is uncertainty as to
the value of our portfolio investments.





Under the
1940 Act, we are required to carry our portfolio investments at market value or,
if there is no readily available market value, at fair value as determined by us
in accordance with our written valuation policy, with our Board of Directors
having final responsibility for overseeing, reviewing and approving, in good
faith, our estimate of fair value. Typically, there will not be a public market
for the securities of the privately held companies in which we invest. As a
result, we value these securities quarterly at fair value based on input from
management, a third party independent valuation firm and our audit committee,
with the oversight, review and approval of our Board of Directors.





The
determination of fair value and consequently, the amount of unrealized gains and
losses in our portfolio, are to a certain degree, subjective and dependent on a
valuation process approved by our Board of Directors. Certain factors that may
be considered in determining the fair value of our investments include external
events, such as private mergers, sales and acquisitions involving comparable
companies. Because such valuations, and particularly valuations of private
securities and private companies, are inherently uncertain, they may fluctuate
over short periods of time and may be based on estimates. Our determinations of
fair value may differ materially from the values that would have been used if a
ready market for these securities existed. Due to this uncertainty, our fair
value determinations may cause our net asset value on a given date to materially
understate or overstate the value that we may ultimately realize on one or more
of our investments. As a result, investors purchasing our common stock based on
an overstated net asset value would pay a higher price than the value of our
investments might warrant. Conversely, investors selling shares during a period
in which the net asset value understates the value of our investments will
receive a lower price for their shares than the value of our investments might
warrant.





Our
financial condition and results of operations depend on our ability to
effectively manage and deploy capital.





Our
ability to achieve our investment objective depends on our ability to
effectively manage and deploy capital, which depends, in turn, on our investment
adviser’s ability to identify, evaluate and monitor, and our ability to finance
and invest in, companies that meet our investment criteria.





Accomplishing
our investment objective on a cost-effective basis is largely be a function of
our investment adviser’s handling of the investment process, its ability to
provide competent, attentive and efficient services and our access to
investments offering acceptable terms. In addition to monitoring the performance
of our existing investments, our investment adviser’s investment team may also
be called upon, from time to time, to provide managerial assistance to some of
our portfolio companies. These demands on their time may distract them or slow
the rate of investment.





Even if
we are able to grow and build upon our investment operations, any failure to
manage our growth effectively could have a material adverse effect on our
business, financial condition, results of operations and prospects. The results
of our operations will depend on many factors, including the availability of
opportunities for investment, readily accessible short and long-term funding
alternatives in the financial markets and economic conditions. Furthermore, if
we cannot successfully operate our business or implement our investment policies
and strategies as described herein, it could negatively impact our ability to
pay dividends.





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We
may face increasing competition for investment opportunities.





We
compete for investments with other business development companies and investment
funds (including private equity funds, mezzanine funds and small business
investment companies), as well as traditional financial services companies such
as commercial banks and other sources of funding. Many of our competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than us. For example, some competitors have a lower cost of
capital and access to funding sources that is not available to us, including
from federal government agencies through federal rescue programs such as the
U.S. Department of Treasury’s Financial Stability Plan (formerly known as the
Troubled Asset Relief Program). In addition, some of our competitors have higher
risk tolerances or different risk assessments than we have. These
characteristics could allow our competitors to consider a wider variety of
investments, establish more relationships and offer better pricing and more
flexible structuring than we are able to offer. We may lose investment
opportunities if we do not match our competitors’ pricing, terms and structure.
If we are forced to match our competitors’ pricing, terms and structure, we may
not be able to achieve acceptable returns on our investments or may bear
substantial risk of capital loss. A significant part of our competitive
advantage stems from the fact that the market for investments in smaller and
lower middle-market companies is underserved by traditional commercial banks and
other financing sources. A significant increase in the number and/or the size of
our competitors in this target market could force us to accept less attractive
investment terms. Furthermore, many of our competitors have greater experience
operating under, or are not subject to, the regulatory restrictions that the
1940 Act impose on us as a business development company. We believe that certain
of our competitors will make first and second lien loans with interest rates and
returns that are comparable to or lower than the rates and returns that we
target. Therefore, we do not seek to compete solely on the interest rates and
returns that we offer to potential portfolio companies.





We
are dependent upon Full Circle Advisors’ key personnel for our future
success.





We depend
on the diligence, skill and network of business contacts of John E. Stuart, who
serves as the sole member of the investment committee of Full Circle Advisors,
and who leads Full Circle Advisors’ investment team. Mr. Stuart, together with
the other dedicated senior investment professionals available to Full Circle
Advisors, evaluates, negotiates, structures, closes and monitors our
investments. Our future success depends on the continued service of Mr. Stuart
and the other senior investment professionals available to Full Circle Advisors.
We cannot assure you that unforeseen business, medical, personal or other
circumstances would not lead Mr. Stuart or any other such individual to
terminate his relationship with us. The loss of Mr. Stuart or any of the other
senior investment professionals who serve on Full Circle Advisors’ investment
team, could have a material adverse effect on our ability to achieve our
investment objective as well as on our financial condition and results of
operations. In addition, we can offer no assurance that Full Circle Advisors
will continue indefinitely as our investment adviser.





The
members of Full Circle Advisors’ investment team are and may in the future
become affiliated with entities engaged in business activities similar to those
intended to be conducted by us, and may have conflicts of interest in allocating
their time. We expect that Mr. Stuart will dedicate a significant portion of his
time to the activities of Full Circle Capital; however, he may be engaged in
other business activities which could divert his time and attention in the
future.





Our
success depends on the ability of Full Circle Advisors to attract and retain
qualified personnel in a competitive environment.





Our
growth requires that Full Circle Advisors retain and attract new investment and
administrative personnel in a competitive market. Its ability to attract and
retain personnel with the requisite credentials, experience and skills depends
on several factors including, but not limited to, its ability to offer
competitive wages, benefits and professional growth opportunities. Many of the
entities, including investment funds (such as private equity funds and mezzanine
funds) and traditional financial services companies, with which it competes for
experienced personnel have greater resources than it has.





32


There
are significant potential conflicts of interest which could impact our
investment returns.





Full
Circle Advisors’ investment team presently manages Full Circle Funding, LP, a
specialty lender serving smaller and lower middle-market companies that has
originated approximately $216 million in loans and investments in 42 distinct
borrowers since its inception in 2005. In addition, our executive officers and
directors, as well as the current and future members of our investment adviser,
Full Circle Advisors, may serve as officers, directors or principals of other
entities that operate in the same or a related line of business as we do.
Accordingly, they may have obligations to investors in those entities, the
fulfillment of which obligations may not be in the best interests of us or our
stockholders. Although the existing investment funds managed by Full Circle
Funding, LP, which currently consist of the Legacy Funds, are no longer making
investments, any affiliated investment vehicle formed in the future and managed
by our investment adviser or its affiliates may, notwithstanding different
stated investment objectives, have overlapping investment objectives with our
own and, accordingly, may invest in asset classes similar to those targeted by
us. As a result, Full Circle Advisors may face conflicts in allocating
investment opportunities between us and such other entities. Although Full
Circle Advisors will endeavor to allocate investment opportunities in a fair and
equitable manner, it is possible that, in the future, we may not be given the
opportunity to participate in investments made by investment funds managed by
our investment adviser or an investment manager affiliated with our investment
adviser. In any such case, when Full Circle Advisors identifies an investment,
it will be forced to choose which investment fund should make the investment,
although we would expect Full Circle Advisors to implement 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.





33


We have
also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our Board of
Directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).





Our
incentive fee structure and the formula for calculating the management fee may
incentivize Full Circle Advisors to pursue speculative investments, use leverage
when it may be unwise to do so, or refrain from delevering when it would
otherwise be appropriate to do so.





The
incentive fee payable by us to Full Circle Advisors may create an incentive for
Full Circle Advisors to pursue investments on our behalf that are riskier or
more speculative than would be the case in the absence of such compensation
arrangement. The incentive fee payable to our investment adviser is calculated
based on a percentage of our return on invested capital. In addition, our base
management fee is calculated on the basis of our gross assets, including assets
acquired through the use of leverage. This may encourage our investment adviser
to use leverage to increase the aggregate amount of and the return on our
investments, even when it may not be appropriate to do so, and to refrain from
delevering when it would otherwise be appropriate to do so. Under certain
circumstances, the use of leverage may increase the likelihood of default, which
would impair the value of our common stock. In addition, the investment adviser
will receive the incentive fee based, in part, upon net capital gains realized
on our investments. Unlike that portion of the incentive fee based on income,
there will be no hurdle rate applicable to the portion of the incentive fee
based on net capital gains. As a result, the investment adviser may have a
tendency to invest more capital in investments that are likely to result in
capital gains as compared to income producing securities. Such a practice could
result in our investing in more speculative securities than would otherwise be
the case, which could result in higher investment losses, particularly during
economic downturns.





The
incentive fee payable by us to our investment adviser also may induce Full
Circle Advisors to invest on our behalf in instruments that have a deferred
interest feature, even if such deferred payments would not provide cash
necessary to enable us to pay current distributions to our stockholders. Under
these investments, we would accrue interest over the life of the investment but
would not receive the cash income from the investment until the end of the term.
Our net investment income used to calculate the income portion of our investment
fee, however, will include accrued interest. Thus, a portion of this incentive
fee would be based on income that we have not yet received in cash. In addition,
the “catch-up” portion of the incentive fee may encourage Full Circle Advisors
to accelerate or defer interest payable by portfolio companies from one calendar
quarter to another, potentially resulting in fluctuations in timing and dividend
amounts.





We may
invest, to the extent permitted by law, in the securities and instruments of
other investment companies, including private funds, and, to the extent we so
invest, will bear our ratable share of any such investment company’s expenses,
including management and performance fees. We will also remain obligated to pay
management and incentive fees to Full Circle Advisors with respect to the assets
invested in the securities and instruments of other investment companies. With
respect to each of these investments, each of our stockholders will bear his or
her share of the management and incentive fee of Full Circle Advisors as well as
indirectly bearing the management and performance fees and other expenses of any
investment companies in which we invest.





A
general increase in interest rates will likely have the effect of making it
easier for our investment adviser to receive incentive fees, without necessarily
resulting in an increase in our net earnings.





Given the
structure of our Investment Advisory Agreement with Full Circle Advisors, any
general increase in interest rates will likely have the effect of making it
easier for Full Circle Advisors to meet the quarterly hurdle rate for payment of
income incentive fees under the Investment Advisory Agreement without any
additional increase in relative performance on the part of our investment
adviser. In addition, in view of the catch-up provision applicable to income
incentive fees under the Investment Advisory Agreement, our investment adviser
could potentially receive a significant portion of the increase in our
investment income attributable to such a general increase in interest rates. If
that were to occur, our increase in net earnings, if any, would likely be
significantly smaller than the relative increase in our investment adviser’s
income incentive fee resulting from such a general increase in interest
rates.





34


Our
investment adviser has the right to resign on 60 days’ notice, and we may not be
able to find a suitable replacement within that time, resulting in a disruption
in our operations that could adversely affect our financial condition, business
and results of operations.





Our
investment adviser has the right, under the Investment Advisory Agreement, to
resign at any time upon not more than 60 days’ written notice, whether we have
found a replacement or not. If our investment adviser resigns, we may not be
able to find a new investment adviser or hire internal management with similar
expertise and ability to provide the same or equivalent services on acceptable
terms within 60 days, or at all. If we are unable to do so quickly, our
operations are likely to experience a disruption, our financial condition,
business and results of operations as well as our ability to pay distributions
are likely to be adversely affected and the market price of our shares may
decline. In addition, the coordination of our internal management and investment
activities is likely to suffer if we are unable to identify and reach an
agreement with a single institution or group of executives having the expertise
possessed by our investment adviser and its affiliates. Even if we are able to
retain comparable management, whether internal or external, the integration of
such management and their lack of familiarity with our investment objective may
result in additional costs and time delays that may adversely affect our
financial condition, business and results of operations.





We
have a limited operating history as a business development company.





As a
result of our limited operating history as a business development company, we
are subject to many of the business risks and uncertainties associated with
recently formed businesses, including the risk that we will not achieve our
investment objective and that the value of your investment could decline
substantially.




Our
investment adviser may not be able to achieve the same or similar returns as
those achieved by Mr. Stuart while he was employed at prior
positions.





Although
in the past Mr. Stuart held senior positions at a number of investment firms,
including Full Circle Funding, LP, his track record and achievements are not
necessarily indicative of future results that will be achieved by our investment
adviser. We cannot assure you that we will be able to achieve the results
realized by prior vehicles managed by Mr. Stuart, including the Legacy
Funds.





The
Legacy Portfolio represents only a portion of the investments of the Legacy
Funds and the performance of the investments in the Legacy Portfolio may not be
indicative of our investment adviser’s future performance in managing our
overall portfolio.





The
portfolio investments that comprise the Legacy Portfolio represent only a
portion of the total portfolio investments of the Legacy Funds. As a result, you
should not place undue reliance on the fact that the investments included in the
Legacy Portfolio are currently performing. Specifically, the Legacy Funds have
historically suffered some defaults and losses on certain of their portfolio
investments, including defaults unrelated to the satisfaction of payment
obligations in certain Legacy Portfolio investments. There can be no assurance
that the investments comprising the Legacy Portfolio, as well as additional
investments we may make subsequent to completion of our initial public offering,
will not suffer similar or more frequent defaults and losses in the future. In
addition, the investments comprising the Legacy Portfolio were selected in part
as a result of their performance and risk characteristics, and should not be
viewed as an indicator of either the overall performance of the Legacy Funds or
the prospective performance of our portfolio in the future. You should also be
aware that, because the Legacy Portfolio will be leveraged at the time we
acquire it, any inaccuracies in our determination of fair value of the Legacy
Portfolio will be magnified relative to a non-leveraged portfolio.





35


Any
failure on our part to maintain our status as a business development company
would reduce our operating flexibility.





We have
elected to be treated as a business development company under the 1940 Act. The
1940 Act imposes numerous constraints on the operations of business development
companies. For example, business development companies are required to invest at
least 70% of their gross assets in specified types of securities, primarily in
private companies or thinly-traded U.S. public companies, cash, cash
equivalents, U.S. government securities and other high quality debt investments
that mature in one year or less. Furthermore, any failure to comply with the
requirements imposed on business development companies by the 1940 Act could
cause the SEC to bring an enforcement action against us and/or expose us to
claims of private litigants. In addition, upon approval of a majority of our
stockholders, we may elect to withdraw our status as a business development
company. If we decide to withdraw our election, or if we otherwise fail to
qualify, or maintain our qualification, as a business development company, we
may be subject to the substantially greater regulation under the 1940 Act as a
closed-end investment company. Compliance with such regulations would
significantly decrease our operating flexibility, and could significantly
increase our costs of doing business.





Regulations
governing our operation as a business development company affect our ability to
raise additional capital and the way in which we do so. As a business
development company, the necessity of raising additional capital may expose us
to risks, including the typical risks associated with leverage.





We may
issue debt securities or preferred stock and/or borrow money from banks or other
financial institutions, which we refer to collectively as “senior securities,”
up to the maximum amount permitted by the 1940 Act. Under the provisions of the
1940 Act, we will be permitted, as a business development company, to issue
senior securities in amounts such that our asset coverage ratio, as defined in
the 1940 Act, equals at least 200% of gross assets less all liabilities and
indebtedness not represented by senior securities, after each issuance of senior
securities. If the value of our assets declines, we may be unable to satisfy
this test. If that happens, we may be required to sell a portion of our
investments and, depending on the nature of our leverage, repay a portion of our
indebtedness at a time when such sales may be disadvantageous. Also, any amounts
that we use to service our indebtedness would not be available for distributions
to our common stockholders. Furthermore, as a result of issuing senior
securities, we would also be exposed to typical risks associated with leverage,
including an increased risk of loss. We issued approximately $3.4 million of
Distribution Notes on August 31, 2010. In addition, immediately after our
initial public offering, we had approximately $11.7 million outstanding and an
additional $23.3 million of borrowing available under the New Credit Facility.
If we issue preferred stock, the preferred stock would rank “senior” to common
stock in our capital structure, preferred stockholders would have separate
voting rights on certain matters and might have other rights, preferences, or
privileges more favorable than those of our common stockholders, and the
issuance of preferred stock could have the effect of delaying, deferring or
preventing a transaction or a change of control that might involve a premium
price for holders of our common stock or otherwise be in your best
interest.





We are
not generally able to issue and sell our common stock at a price below net asset
value per share. We may, however, sell our common stock, or warrants, options or
rights to acquire our common stock, at a price below the then-current net asset
value per share of our common stock if our Board of Directors determines that
such sale is in the best interests of Full Circle Capital and its stockholders,
and our stockholders approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than a price that, in the
determination of our Board of Directors, closely approximates the market value
of such securities (less any distributing commission or discount). If we raise
additional funds by issuing more common stock or senior securities convertible
into, or exchangeable for, our common stock, then the percentage ownership of
our stockholders at that time will decrease, and you may experience
dilution.





36


We
borrow money, which magnifies the potential for gain or loss on amounts invested
and increases the risk of investing in us.





The use
of leverage magnifies the potential for gain or loss on amounts invested and,
therefore, increases the risks associated with investing in our securities. We
borrow from and issue senior debt securities to banks, insurance companies and
other lenders. Holders of these senior securities will have fixed dollar claims
on our assets that are superior to the claims of our common stockholders, and we
would expect such lenders to seek recovery against our assets in the event of a
default. If the value of our assets decreases, leveraging would cause net asset
value to decline more sharply than it otherwise would have had we not leveraged.
Similarly, any decrease in our income would cause net income to decline more
sharply than it would have had we not borrowed. Such a decline could also
negatively affect our ability to make dividend payments on our common stock.
Leverage is generally considered a speculative investment technique. Our ability
to service any debt that we incur will depend largely on our financial
performance and will be subject to prevailing economic conditions and
competitive pressures. Moreover, as the management fee payable to our investment
adviser, Full Circle Advisors, is payable based on our gross assets, including
those assets acquired through the use of leverage, Full Circle Advisors has a
financial incentive to incur leverage which may not be consistent with our
stockholders’ interests. In addition, our common stockholders bear the burden of
any increase in our expenses as a result of leverage, including any increase in
the management fee payable to Full Circle Advisors.





As a
business development company, we are generally required to meet an asset
coverage ratio, defined under the 1940 Act as the ratio of our gross assets
(less all liabilities and indebtedness not represented by senior securities) to
our outstanding senior securities, of at least 200% after each issuance of
senior securities. If this ratio declines below 200%, we may not be able to
incur additional debt and could be required by law to sell a portion of our
investments to repay some debt when it is disadvantageous to do so, which could
have a material adverse effect on our operations, and we may not be able to make
distributions. The amount of leverage that we employ depends on our investment
adviser’s and our Board of Directors’ assessment of market and other factors at
the time of any proposed borrowing.





In
addition, the New Credit Facility and Distribution Notes impose, and any other
debt facility into which we may enter would likely impose, financial and
operating covenants that restrict our business activities, including limitations
that could hinder our ability to finance additional loans and investments or to
make the distributions required to maintain our status as a RIC under Subchapter
M of the Code.





The
material financial terms of the Distribution Notes and the New Credit Facility
are as follows:




Distribution Notes
                  
                  New Credit FacilityApproximate
      Principal Amount at August 31, 2010
                  $3.4
      million(1)
                  
                  $11.7
      million(2)Interest
      Rate
                  8%
                  
                  LIBOR
      + 5.50%Maturity
      Date
                  February
      2014(3)
                  
                  January
      2012




(1)
            Reflects
      approximate total principal amount of Distribution Notes outstanding
      subsequent to completion of the
offering.




(2)
            Reflects
      approximate total amount of borrowings outstanding after completion of our
      initial public offering.




(3)
            Subject
      to redemption by us at our
election.




37


The
Distribution Notes contain certain terms that may be more favorable to us than
we would otherwise be able to obtain from other senior unsecured lenders. As a
result, we may be required to incur leverage equal to the amount of the
Distribution Notes on less favorable terms to us in order to repay the
Distribution Notes upon their maturity, to the extent we do not have sufficient
available cash on hand at that time.





We
may experience fluctuations in our quarterly results.





We could
experience fluctuations in our quarterly operating results due to a number of
factors, including our ability or inability to make investments in companies
that meet our investment criteria, the interest rate payable on the debt
securities we acquire, the level of portfolio dividend and fee income, the level
of our expenses, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, results
for any period should not be relied upon as being indicative of performance in
future periods.





Our
Board of Directors is authorized to reclassify any unissued shares of common
stock into one or more classes of preferred stock, which could convey special
rights and privileges to its owners.





Under
Maryland General Corporation Law and our charter, our Board of Directors is
authorized to classify and reclassify any authorized but unissued shares of
stock into one or more classes of stock, including preferred stock. Prior to
issuance of shares of each class or series, the Board of Directors will be
required by Maryland law and our charter to set the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the Board of Directors could
authorize the issuance of shares of preferred stock with terms and conditions
which could have the effect of delaying, deferring or preventing a transaction
or a change in control that might involve a premium price for holders of our
common stock or otherwise be in their best interest. The cost of any such
reclassification would be borne by our common stockholders. Certain matters
under the 1940 Act require the separate vote of the holders of any issued and
outstanding preferred stock. For example, holders of preferred stock would vote
separately from the holders of common stock on a proposal to cease operations as
a business development company. In addition, the 1940 Act provides that holders
of preferred stock are entitled to vote separately from holders of common stock
to elect two preferred stock directors. We currently have no plans to issue
preferred stock. The issuance of preferred shares convertible into shares of
common stock may also reduce the net income and net asset value per share of our
common stock upon conversion, provided, that we will only be permitted to issue
such convertible preferred stock to the extent we comply with the requirements
of Section 61 of the 1940 Act, including obtaining common stockholder approval.
These effects, among others, could have an adverse effect on your investment in
our common stock.





Our
Board of Directors may change our investment objective, operating policies and
strategies without prior notice or stockholder approval, the effects of which
may be adverse.





Our Board
of Directors has the authority to modify or waive our investment objective,
current operating policies, investment criteria and strategies without prior
notice and without stockholder approval. We cannot predict the effect any
changes to our current operating policies, investment criteria and strategies
would have on our business, net asset value, operating results and value of our
stock. However, the effects might be adverse, which could negatively impact our
ability to pay you dividends and cause you to lose all or part of your
investment.





We
will be subject to corporate-level income tax if we are unable to qualify as a
RIC under Subchapter M of the Code.





Although
we intend to elect to be treated as a RIC under Subchapter M of the Code
for the tax year ended June 30, 2011 and succeeding tax years, no
assurance can be given that we will be able to qualify for and maintain RIC
status. To obtain and maintain RIC tax treatment under the Code, we must meet
the following annual distribution, income source and asset diversification
requirements.





38


The
annual distribution requirement for a RIC will be satisfied if we distribute to
our stockholders on an annual basis at least 90% of our net ordinary income and
realized net short-term capital gains in excess of realized net long-term
capital losses, if any. Because we may use debt financing, we are subject to
certain asset coverage ratio requirements under the 1940 Act and financial
covenants under loan and credit agreements that could, under certain
circumstances, restrict us from making distributions necessary to satisfy the
distribution requirement. If we are unable to obtain cash from other sources, we
could fail to qualify for RIC tax treatment and thus become subject to
corporate-level income tax.





The
income source requirement will be satisfied if we obtain at least 90% of our
income for each year from dividends, interest, gains from the sale of stock or
securities or similar sources.





The asset
diversification requirement will be satisfied if we meet certain asset
diversification requirements at the end of each quarter of our taxable year.
Failure to meet those requirements may result in our having to dispose of
certain investments quickly in order to prevent the loss of RIC status. Because
most of our investments will be in private companies, and therefore will be
relatively illiquid, any such dispositions could be made at disadvantageous
prices and could result in substantial losses.





If we
fail to qualify for RIC tax treatment for any reason and remain or become
subject to corporate income tax, the resulting corporate taxes could
substantially reduce our net assets, the amount of income available for
distribution and the amount of our distributions.





There
is a risk that our stockholders may not receive distributions or that our
distributions may not grow over time.





We intend
to make distributions on a quarterly basis to our stockholders out of assets
legally available for distribution. We cannot assure you that we will achieve
investment results that will allow us to make a specified level of cash
distributions or year-to-year increases in cash distributions. In addition, due
to the asset coverage test applicable to us as a business development company,
we may be limited in our ability to make distributions. See “Business –
Regulation.”





We
may have difficulty paying our required distributions if we recognize income
before or without receiving cash representing such income.





For
federal income tax purposes, we include in income certain amounts that we have
not yet received in cash, such as original issue discount, which may arise if we
receive warrants in connection with the origination of a loan or possibly in
other circumstances, or contractual “payment-in-kind,” or PIK, interest, which
represents contractual interest added to the loan balance and due at the end of
the loan term. Such original issue discounts or increases in loan balances as a
result of contractual PIK arrangements will be included in income before we
receive any corresponding cash payments. We are also required to include in
income certain other amounts that we do not receive in cash.





Since, in
certain cases, we may recognize income before or without receiving cash
representing such income, we may have difficulty meeting the annual distribution
requirement necessary to maintain RIC tax treatment under the Code. In addition,
since our incentive fee is payable on our income recognized, rather than cash
received, we may be required to pay advisory fees on income before or without
receiving cash representing such income. Accordingly, we may have to sell some
of our investments at times and/or at prices we would not consider advantageous,
raise additional debt or equity capital or forgo new investment opportunities
for this purpose. If we are not able to obtain cash from other sources, we may
fail to qualify for RIC tax treatment and thus become subject to corporate-level
income tax. For additional discussion regarding the tax implications of a RIC,
please see “Business – Material U.S. Federal Income Tax
Considerations .”





39


We
may in the future choose to pay dividends in our own stock, in which case you
may be required to pay tax in excess of the cash you receive.





We may
distribute taxable dividends that are payable in part in our stock. Under a
recently issued IRS revenue procedure, up to 90% of any such taxable dividend
for taxable years ending prior to 2012 could be payable in our stock. Taxable
stockholders receiving such dividends will be required to include the full
amount of the dividend as ordinary income (or as long-term capital gain to the
extent such distribution is properly designated as a capital gain dividend) to
the extent of our current and accumulated earnings and profits for United States
federal income tax purposes. As a result, a U.S. stockholder may be required to
pay tax with respect to such dividends in excess of any cash received. If a U.S.
stockholder sells the stock it receives as a dividend in order to pay this tax,
the sales proceeds may be less than the amount included in income with respect
to the dividend, depending on the market price of our stock at the time of the
sale. Furthermore, with respect to non-U.S. stockholders, we may be required to
withhold U.S. tax with respect to such dividends, including in respect of all or
a portion of such dividend that is payable in stock. In addition, if a
significant number of our stockholders determine to sell shares of our stock in
order to pay taxes owed on dividends, it may put downward pressure on the
trading price of our stock.





Changes
in laws or regulations governing our operations may adversely affect our
business or cause us to alter our business strategy.





We and
our portfolio companies are subject to applicable local, state and federal laws
and regulations, including, without limitation, federal immigration laws and
regulations. New legislation may be enacted or new interpretations, rulings or
regulations could be adopted, including those governing the types of investments
we are permitted to make, any of which could harm us and our stockholders,
potentially with retroactive effect. Additionally, any changes to the laws and
regulations governing our operations relating to permitted investments may cause
us to alter our investment strategy in order to avail ourselves of new or
different opportunities. Such changes could result in material differences to
the strategies and plans set forth herein and may result in our investment focus
shifting from the areas of expertise of our investment adviser’s investment team
to other types of investments in which the investment team may have less
expertise or little or no experience. Thus, any such changes, if they occur,
could have a material adverse effect on our results of operations and the value
of your investment.





We
incur significant costs as a result of being a publicly traded
company.





As a
publicly traded company, we incur legal, accounting and other expenses,
including costs associated with the periodic reporting requirements applicable
to a company whose securities are registered under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, as well as additional corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002, and other rules implemented by the Securities and Exchange
Commission.





An
extended continuation of the disruption in the capital markets and the credit
markets could impair our ability to raise capital and negatively affect our
business.





As a
business development company, we must maintain our ability to raise additional
capital for investment purposes. Without sufficient access to the capital
markets or credit markets, we may be forced to curtail our business operations
or we may not be able to pursue new business opportunities. Since the middle of
2007, the capital markets and the credit markets have been experiencing extreme
volatility and disruption and, accordingly, there has been and will continue to
be uncertainty in the financial markets in general. Ongoing disruptive
conditions in the financial industry and the impact of new legislation in
response to those conditions could restrict our business operations and could
adversely impact our results of operations and financial condition.





If the
fair value of our assets declines substantially, we may fail to maintain the
asset coverage ratios imposed upon us by the 1940 Act. Any such failure would
affect our ability to issue senior securities, including borrowings, and pay
dividends, which could materially impair our business operations. Our liquidity
could be impaired further by an inability to access the capital markets or to
draw on our credit facilities. For example, we cannot be certain that we will be
able to renew our credit facilities as they mature or to consummate new
borrowing facilities to provide capital for normal operations, including new
originations. Reflecting concern about the stability of the financial markets,
many lenders and institutional investors have reduced or ceased providing
funding to borrowers. This market turmoil and tightening of credit have led to
increased market volatility and widespread reduction of business activity
generally.





40


If we are
unable to renew or replace such facilities and consummate new facilities on
commercially reasonable terms, our liquidity will be reduced significantly. If
we are unable to repay amounts outstanding under such facilities and are
declared in default or are unable to renew or refinance these facilities, we
would not be able to initiate significant originations or to operate our
business in the normal course. These situations may arise due to circumstances
that we may be unable to control, such as inaccessibility to the credit markets,
a severe decline in the value of the U.S. dollar, a further economic downturn or
an operational problem that affects third parties or us, and could materially
damage our business. Moreover, we are unable to predict when economic and market
conditions may become more favorable. Even if such conditions improve broadly
and significantly over the long term, adverse conditions in particular sectors
of the financial markets could adversely impact our business.





Terrorist
attacks, acts of war or natural disasters may affect any market for our common
stock, impact the businesses in which we invest and harm our business, operating
results and financial condition.





Terrorist
acts, acts of war or natural disasters may disrupt our operations, as well as
the operations of the businesses in which we invest. Such acts have created, and
continue to create, economic and political uncertainties and have contributed to
global economic instability. Future terrorist activities, military or security
operations, or natural disasters could further weaken the domestic/global
economies and create additional uncertainties, which may negatively impact the
businesses in which we invest directly or indirectly and, in turn, could have a
material adverse impact on our business, operating results and financial
condition. Losses from terrorist attacks and natural disasters are generally
uninsurable.





Risks
Related to Our Investments





Our
investments are very risky and highly speculative, and the smaller and lower
middle-market companies we target may have difficulty accessing the capital
markets to meet their future capital needs, which may limit their ability to
grow or to repay their outstanding indebtedness upon maturity.





We invest
primarily in senior secured term loans, mezzanine debt and select equity
investments issued by leveraged companies.





Senior Secured
Loans.  There is a risk that the collateral securing our loans
may decrease in value over time, may be difficult to sell in a timely manner,
may be difficult to appraise and may fluctuate in value based upon the success
of the business and market conditions, including as a result of the inability of
the portfolio company to raise additional capital, and, in some circumstances,
our lien could be subordinated to claims of other creditors. In addition,
deterioration in a portfolio company’s financial condition and prospects,
including its inability to raise additional capital, may be accompanied by
deterioration in the value of the collateral for the loan. Consequently, the
fact that a loan is secured does not guarantee that we will receive principal
and interest payments according to the loan’s terms, or at all, or that we will
be able to collect on the loan should we be forced to enforce our
remedies.





Mezzanine
Loans.  Our mezzanine debt investments are generally
subordinated to senior loans and are generally unsecured. As such, other
creditors may rank senior to us in the event of an insolvency, which could
likely in many cases result in a substantial or complete loss on such investment
in the case of such insolvency. This may result in an above average amount of
risk and loss of principal.





Equity
Investments.  When we invest in senior secured loans or
mezzanine loans, we may acquire equity securities as well. In addition, we may
invest directly in the equity securities of portfolio companies. The equity
interests we receive may not appreciate in value and, in fact, may decline in
value. Accordingly, we may not be able to realize gains from our equity
interests, and any gains that we do realize on the disposition of any equity
interests may not be sufficient to offset any other losses we
experience.





41


In
addition, investing in smaller and lower middle-market companies involves a
number of significant risks, including:





•
            these
      companies may have limited financial resources and may be unable to meet
      their obligations under their debt securities that we hold, which may be
      accompanied by a deterioration in the value of any collateral and a
      reduction in the likelihood of us realizing any guarantees we may have
      obtained in connection with our
investment;




•
            they
      typically have shorter operating histories, narrower product lines and
      smaller market shares than larger businesses, which tend to render them
      more vulnerable to competitors’ actions and market conditions, as well as
      general economic downturns;




•
            they
      are more likely to depend on the management talents and efforts of a small
      group of persons; therefore, the death, disability, resignation or
      termination of one or more of these persons could have a material adverse
      impact on our portfolio company and, in turn, on
  us;




•
            they
      generally have less predictable operating results, may from time to time
      be parties to litigation, may be engaged in rapidly changing businesses
      with products subject to a substantial risk of obsolescence, and may
      require substantial additional capital to support their operations,
      finance expansion
      or maintain their competitive position. In addition, our executive
      officers, directors and our investment adviser may, in the ordinary course
      of business, be named as defendants in litigation arising from our
      investments in the portfolio companies;
  and




•
            they
      may have difficulty accessing the capital markets to meet future capital
      needs, which may limit their ability to grow or to repay their outstanding
      indebtedness upon maturity.




Investing
in smaller and lower middle-market companies involves a high degree of risk and
our financial results may be affected adversely if one or more of our
significant portfolio investments defaults on its loans or fails to perform as
we expect.





Our
portfolio consists primarily of debt and equity investments in privately owned
smaller and lower middle-market companies. Investing in smaller and lower
middle-market companies involves a number of significant risks. Typically, the
debt in which we invest is not initially rated by any rating agency; however, we
believe that if such investments were rated, they would be below investment
grade. Compared to larger publicly owned companies, these smaller and lower
middle-market companies may be in a weaker financial position and experience
wider variations in their operating results, which may make them more vulnerable
to economic downturns. Typically, these companies need more capital to compete;
however, their access to capital is limited and their cost of capital is often
higher than that of their competitors. Our portfolio companies face intense
competition from larger companies with greater financial, technical and
marketing resources and their success typically depends on the managerial
talents and efforts of an individual or a small group of persons. Therefore, the
loss of any of its key employees could affect a portfolio company’s ability to
compete effectively and harm its financial condition. Further, some of these
companies conduct business in regulated industries that are susceptible to
regulatory changes. These factors could impair the cash flow of our portfolio
companies and result in other events, such as bankruptcy. These events could
limit a portfolio company’s ability to repay its obligations to us, which may
have an adverse affect on the return on, or the recovery of, our investment in
these businesses. Deterioration in a borrower’s financial condition and
prospects may be accompanied by deterioration in the value of the loan’s
collateral.





42


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 June 30, 2010, approximately 97.66% of debt instruments in the
Legacy Portfolio, on a fair value basis, will not fully amortize prior to
maturity. In order to create liquidity to pay the final principal payment,
borrowers typically must raise additional capital. If they are unable to raise
sufficient funds to repay us or we have not elected to enter into a new loan
agreement providing for an extended maturity, the loan will go into default,
which will require Full Circle Capital to foreclose on the borrower’s assets,
even if the loan was otherwise performing prior to maturity. This will deprive
Full Circle Capital from immediately obtaining full recovery on the loan and
prevent or delay the reinvestment of the loan proceeds in other, more profitable
investments.





Some of
these companies cannot obtain financing from public capital markets or from
traditional credit sources, such as commercial banks. Accordingly, loans made to
these types of companies pose a higher default risk than loans made to companies
that have access to traditional credit sources.





An
investment strategy focused primarily on privately held companies presents
certain challenges, including the lack of available information about these
companies, a dependence on the talents and efforts of only a few key portfolio
company personnel and a greater vulnerability to economic
downturns.





We invest
primarily in privately held companies. Generally, little public information
exists about these companies, and we are required to rely on the ability of Full
Circle Advisors’ investment team to obtain adequate information to evaluate the
potential returns from investing in these companies. If we are unable to uncover
all material information about these companies, we may not make a fully informed
investment decision, and we may lose money on our investments. Also, privately
held companies frequently have less diverse product lines and smaller market
presence than larger competitors. These factors could adversely affect our
investment returns as compared to companies investing primarily in the
securities of public companies.





Our
portfolio companies may incur debt that ranks equally with, or senior to, our
investments in such companies.





We invest
primarily in senior secured term debt issued by smaller and lower middle-market
companies. Our portfolio companies may have, or may be permitted to incur, other
debt that ranks equally with, or in some cases senior to, the debt in which we
invest. By their terms, such debt instruments may entitle the holders to receive
payment of interest or principal on or before the dates on which we are entitled
to receive payments with respect to the debt instruments in which we invest.
Also, in the event of insolvency, liquidation, dissolution, reorganization or
bankruptcy of a portfolio company, holders of debt instruments ranking senior to
our investment in that portfolio company would typically be entitled to receive
payment in full before we receive any distribution. After repaying such senior
creditors, such portfolio company may not have any remaining assets to use for
repaying its obligation to us. In the case of debt ranking equally with debt
instruments in which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the event of an
insolvency, liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.





There
may be circumstances where our debt investments could be subordinated to claims
of other creditors or we could be subject to lender liability
claims.





Even
though we may have structured most of our investments as secured loans, if one
of our portfolio companies were to go bankrupt, depending on the facts and
circumstances, and based upon principles of equitable subordination as defined
by existing case law, a bankruptcy court could subordinate all or a portion of
our claim to that of other creditors and transfer any lien securing such
subordinated claim to the bankruptcy estate. The principles of equitable
subordination defined by case law have generally indicated that a claim may be
subordinated only if its holder is guilty of misconduct or where the senior loan
is re-characterized as an equity investment and the senior lender has actually
provided significant managerial assistance to the bankrupt debtor. We may also
be subject to lender liability claims for actions taken by us with respect to a
borrower’s business or instances where we exercise control over the borrower. It
is possible that we could become subject to a lender’s liability claim,
including as a result of actions taken in rendering significant managerial
assistance or actions to compel and collect payments from the borrower outside
the ordinary course of business.





43


Second
priority liens on collateral securing loans that we make to our portfolio
companies may be subject to control by senior creditors with first priority
liens. If there is a default, the value of the collateral may not be sufficient
to repay in full both the first priority creditors and us.





Certain
loans that we make are secured by a second priority security interest in the
same collateral pledged by a portfolio company to secure senior debt owed by the
portfolio company to commercial banks or other traditional lenders. Often the
senior lender has procured covenants from the portfolio company prohibiting the
incurrence of additional secured debt without the senior lender’s consent. Prior
to and as a condition of permitting the portfolio company to borrow money from
us secured by the same collateral pledged to the senior lender, the senior
lender will require assurances that it will control the disposition of any
collateral in the event of bankruptcy or other default. In many such cases, the
senior lender will require us to enter into an “intercreditor agreement” prior
to permitting the portfolio company to borrow from us. Typically the
intercreditor agreements we will be requested to execute expressly subordinate
our debt instruments to those held by the senior lender and further provide that
the senior lender shall control: (1) the commencement of foreclosure or other
proceedings to liquidate and collect on the collateral; (2) the nature, timing
and conduct of foreclosure or other collection proceedings; (3) the amendment of
any collateral document; (4) the release of the security interests in respect of
any collateral; and (5) the waiver of defaults under any security agreement.
Because of the control we may cede to senior lenders under intercreditor
agreements we may enter, we may be unable to realize the proceeds of any
collateral securing some of our loans.





We
are currently in a period of capital markets disruption and recession and we do
not expect these conditions to improve in the near future.





The U.S.
capital markets have been experiencing extreme volatility and disruption for
more than 2 years and the U.S. economy is currently in a period of recession.
Disruptions in the capital markets have increased the spread between the yields
realized on risk-free and higher risk securities, resulting in illiquidity in
parts of the capital markets. We believe these conditions may continue for a
prolonged period of time or worsen in the future. A prolonged period of market
illiquidity may have an adverse effect on our business, financial condition and
results of operations. Unfavorable economic conditions could also 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 limit our investment
originations, limit our ability to grow and negatively impact our operating
results.





The
current economic recession could impair our portfolio companies and harm our
operating results.





Certain
of our portfolio companies may be susceptible to the current recession and may
be unable to repay our loans during this period. Therefore, assets may become
non-performing and the value of our portfolio may decrease during this period.
The current adverse economic conditions also may decrease the value of
collateral securing some of our loans and the value of our equity investments.
The current recession could lead to financial losses in our portfolio and a
decrease in revenues, net income and the value of our assets.





A
portfolio company’s failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, termination of
its loans and foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize our portfolio company’s
ability to meet its obligations under the debt securities that we hold. We may
incur expenses to the extent necessary to seek recovery upon default or to
negotiate new terms with a defaulting portfolio company. Any extension or
restructuring of our loans could adversely affect our cash flows. In addition,
if one of our portfolio companies were to go bankrupt, even though we may have
structured our interest as senior debt, depending on the facts and
circumstances, including the extent to which we actually provided managerial
assistance to that portfolio company, a bankruptcy court might recharacterize
our debt holding and subordinate all or a portion of our claim to that of other
creditors.




44




The
lack of liquidity in our investments may adversely affect our
business.





We invest
in companies whose securities are not publicly traded, and whose securities will
be subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. The illiquidity of these investments may
make it difficult for us to sell these investments when desired. In addition, if
we are required to liquidate all or a portion of our portfolio quickly, we may
realize significantly less than the value at which we had previously recorded
these investments. As a result, we do not expect to achieve liquidity in our
investments in the near-term. Our investments will usually be subject to
contractual or legal restrictions on resale or are otherwise illiquid because
there is usually no established trading market for such investments. The
illiquidity of most of our investments may make it difficult for us to dispose
of them at a favorable price, and, as a result, we may suffer
losses.





Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.





Following
an initial investment in a portfolio company, we may make additional investments
in that portfolio company as “follow-on” investments, in order to: (i) increase
or maintain in whole or in part our equity ownership percentage; (ii) exercise
warrants, options or convertible securities that were acquired in the original
or a subsequent financing; or (iii) attempt to preserve or enhance the value of
our investment. We may elect not to make follow-on investments or otherwise lack
sufficient funds to make those investments. We will have the discretion to make
any follow-on investments, subject to the availability of capital resources. The
failure to make follow-on investments may, in some circumstances, jeopardize the
continued viability of a portfolio company and our initial investment, or may
result in a missed opportunity for us to increase our participation in a
successful operation. Even if we have sufficient capital to make a desired
follow-on investment, we may elect not to make a follow-on investment because we
do not want to increase our concentration of risk, we prefer other
opportunities, we are subject to business development company requirements that
would prevent such follow-on investments, or the follow-on investment would
affect our RIC tax status.





Our
portfolio may lack diversification among portfolio companies which may subject
us to a risk of significant loss if one or more of these companies defaults on
its obligations under any of its debt instruments.





Our
portfolio may hold a limited number of portfolio companies. For example, the 5
largest investments in the Legacy Portfolio as of June 30, 2010 represented 51%
of the fair value of the Legacy Portfolio, as adjusted for the Lotus
Transaction. Beyond the asset diversification requirements associated with our
qualification as a RIC under the Code, we do not have fixed guidelines for
diversification, and our investments may be concentrated in relatively few
companies. As our portfolio is less diversified than the portfolios of some
larger funds, we are more susceptible to failure if a single loan fails.
Similarly, the aggregate returns we realize may be significantly adversely
affected if a small number of investments perform poorly or if we need to write
down the value of any one investment.





Our
portfolio may be concentrated in a limited number of industries, which may
subject us to a risk of significant loss if there is a downturn in a particular
industry in which a number of our investments are concentrated.





Our
portfolio may be concentrated in a limited number of industries. A downturn in
any particular industry in which we are invested could significantly impact the
aggregate returns we realize.





As of
June 30, 2010, our investments in the business services industry (such as
companies that provide services related to data and information, information
retrieval or asset recovery) represented approximately 29% of the fair value of
the Legacy Portfolio, our investments in the communications industry (such as
companies that perform residential security alarm monitoring or provide digital
video satellite and broadband service to multiple dwelling units) represented
approximately 26% of the fair value of the Legacy Portfolio, and our investments
in the media industry (such as outdoor advertising or radio broadcasting
companies) represented approximately 20% of the fair value of the Legacy
Portfolio. In addition, we may from time to time invest a relatively significant
percentage of our portfolio in industries we do not necessarily target, such as
the finance/lending industry, represented by our investment in the Lotus Fund
and one additional investment, which comprised approximately 10% of the Legacy
Portfolio as of June 30, 2010, as adjusted for the Lotus Transaction. 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.


45





Because
we generally do not hold controlling equity interests in our portfolio
companies, we may not be in a position to exercise control over our portfolio
companies or to prevent decisions by management of our portfolio companies that
could decrease the value of our investments.





Although
we may do so in the future, we do not currently hold controlling equity
positions in our portfolio companies. As a result, we are subject to the risk
that a portfolio company may make business decisions with which we disagree, and
that the management and/or stockholders of a portfolio company may take risks or
otherwise act in ways that are adverse to our interests. Due to the lack of
liquidity of the debt and equity investments that we typically hold in our
portfolio companies, we may not be able to dispose of our investments in the
event we disagree with the actions of a portfolio company and may therefore
suffer a decrease in the value of our investments.





Defaults
by our portfolio companies will harm our operating results.





A
portfolio company’s failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, termination of
its loans and foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio company’s
ability to meet its obligations under the debt or equity securities that we
hold. We may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms, which may include the waiver of certain
financial covenants, with a defaulting portfolio company. If any of these occur,
it could materially and adversely affect our operating results and cash
flows.





Any
unrealized losses we experience on our loan portfolio may be an indication of
future realized losses, which could reduce our income available for
distribution.





As a
business development company, we are required to carry our investments at market
value or, if no market value is ascertainable, at the fair value as determined
in good faith by our Board of Directors. Decreases in the market values or fair
values of our investments are recorded as unrealized depreciation. Any
unrealized losses in our loan portfolio could be an indication of a portfolio
company’s inability to meet its repayment obligations to us with respect to the
affected loans. This could result in realized losses in the future and
ultimately in reductions of our income available for distribution in future
periods.





Prepayments
of our debt investments by our portfolio companies could adversely impact our
results of operations and reduce our return on equity.





We are
subject to the risk that the investments we make in our portfolio companies may
be repaid prior to maturity. When this occurs, we will generally reinvest these
proceeds in temporary investments or repay the facility, depending on future
investment in new portfolio companies. These temporary investments will
typically have substantially lower yields than the debt being prepaid and we
could experience significant delays in reinvesting these amounts. Any future
investment in a new portfolio company may also be at lower yields than the debt
that was repaid. As a result, our results of operations could be materially
adversely affected if one or more of our portfolio companies elect to prepay
amounts owed to us. Additionally, prepayments could negatively impact our return
on equity, which could result in a decline in the market price of our common
stock. The Legacy Funds have historically experienced only limited prepayments
since their inception.





Because
we use debt to finance our investments, changes in interest rates will affect
our cost of capital and net investment income.





Because
we borrow money to make investments, our net investment income will depend, in
part, upon the difference between the rate at which we borrow funds and the rate
at which we invest those funds. As a result, we can offer no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net investment income in the event we use debt to finance our
investments. In periods of rising interest rates, our cost of funds would
increase, which could reduce our net investment income. We expect that our
long-term fixed-rate investments will be financed primarily with equity and
long-term debt. We may use interest rate risk management techniques in an effort
to limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities to the extent permitted by the 1940
Act. Our investment adviser does not have significant experience with utilizing
these techniques and did not implement these techniques to any significant
extent with the Legacy Portfolio. If we do not implement these techniques
properly, we could experience losses on our hedging positions, which could be
material.


46


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
of the amount of incentive fees payable to our investment adviser with respect
to our pre-incentive fee net investment income.





Immediately
after our initial public offering, we had approximately $3.4 million of
Distribution Notes outstanding and had $11.7 million outstanding and an
additional $23.3 million of borrowing available under the New Credit Facility
with First Capital.





We
may not realize gains from our equity investments.





Certain
investments that we may make in the future include warrants or other equity
securities. Investments in equity securities involve a number of significant
risks, including the risk of further dilution as a result of additional
issuances, inability to access additional capital and failure to pay current
distributions. Investments in preferred securities involve special risks, such
as the risk of deferred distributions, credit risk, illiquidity and limited
voting rights. In addition, we may from time to time make non-control, equity
investments in portfolio companies. Our goal is ultimately to realize gains upon
our disposition of such equity interests. However, the equity interests we
receive may not appreciate in value and, in fact, may decline in value.
Accordingly, we may not be able to realize gains from our equity interests, and
any gains that we do realize on the disposition of any equity interests may not
be sufficient to offset any other losses we experience. We also may be unable to
realize any value if a portfolio company does not have a liquidity event, such
as a sale of the business, recapitalization or public offering, which would
allow us to sell the underlying equity interests. We often seek puts or similar
rights to give us the right to sell our equity securities back to the portfolio
company issuer. We may be unable to exercise these puts rights for the
consideration provided in our investment documents if the issuer is in financial
distress.





Investments
in foreign securities may involve significant risks in addition to the risks
inherent in U.S. investments.





Our
investment strategy contemplates possible investments in debt securities of
foreign companies. Our investment adviser does not have significant experience
with investments in foreign securities and did not acquire such investments to
any significant extent in connection with its management of the Legacy
Portfolio. Investing in foreign companies may expose us to additional risks not
typically associated with investing in U.S. companies. These risks include
changes in exchange control regulations, political and social instability,
expropriation, imposition of foreign taxes, less liquid markets and less
available information than is generally the case in the United States, higher
transaction costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards and greater price
volatility.





Although
most of our investments are U.S. dollar-denominated, any investments denominated
in a foreign currency will be subject to the risk that the value of a particular
currency will change in relation to one or more other currencies. Among the
factors that may affect currency values are trade balances, the level of
short-term interest rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and capital
appreciation, and political developments. We may employ hedging techniques to
minimize these risks, but we can offer no assurance that we will, in fact, hedge
currency risk, or that if we do, such strategies will be
effective.


47


We
may expose ourselves to risks if we engage in hedging transactions.





If we
engage in hedging transactions, we may expose ourselves to risks associated with
such transactions. We may utilize instruments such as forward contracts,
currency options and interest rate swaps, caps, collars and floors to seek to
hedge against fluctuations in the relative values of our portfolio positions
from changes in currency exchange rates and market interest rates. Hedging
against a decline in the values of our portfolio positions does not eliminate
the possibility of fluctuations in the values of such positions or prevent
losses if the values of such positions decline. However, such hedging can
establish other positions designed to gain from those same developments, thereby
offsetting the decline in the value of such portfolio positions. Such hedging
transactions may also limit the opportunity for gain if the values of the
underlying portfolio positions increase. It may not be possible to hedge against
an exchange rate or interest rate fluctuation that is so generally anticipated
that we are not able to enter into a hedging transaction at an acceptable price.
Moreover, for a variety of reasons, we may not seek to establish a perfect
correlation between such hedging instruments and the portfolio holdings being
hedged. Any such imperfect correlation may prevent us from achieving the
intended hedge and expose us to risk of loss. In addition, it may not be
possible to hedge fully or perfectly against currency fluctuations affecting the
value of securities denominated in non-U.S. currencies because the value of
those securities is likely to fluctuate as a result of factors not related to
currency fluctuations.





Risks
Relating to Our Common Stock





Shares of
closed-end investment companies, including business development companies, may
trade at a discount to their net asset value.


Shares of
closed-end investment companies, including business development companies, may
trade at a discount from net asset value. This characteristic of closed-end
investment companies and business development companies is separate and distinct
from the risk that our net asset value per share may decline. We cannot predict
whether our common stock will trade at, above or below net asset
value.




Our
common stock price may be volatile and may decrease substantially.





The
trading price of our common stock may fluctuate substantially. The price of our
common stock may increase or decrease, depending on many factors, some of which
are beyond our control and may not be directly related to our operating
performance. These factors include, but are not limited to, the
following:





•
            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;


48


•
            operating
      performance of companies comparable to us;
or





•
            general
      economic conditions and trends and other external
  factors.





In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Due to the potential volatility of our stock price once a market
for our stock is established, we may become the target of securities litigation
in the future. Securities litigation could result in substantial costs and
divert management’s attention and resources from our business.





Provisions
of the Maryland General Corporation Law and of our charter and bylaws could
deter takeover attempts and have an adverse impact on the price of our common
stock.





The
Maryland General Corporation Law and our charter and bylaws contain provisions
that may discourage, delay or make more difficult a change in control of Full
Circle Capital or the removal of our directors. We are subject to the Maryland
Business Combination Act, subject to any applicable requirements of the 1940
Act. Our Board of Directors has adopted a resolution exempting from the Business
Combination Act any business combination between us and any other person,
subject to prior approval of such business combination by our board, including
approval by a majority of our independent directors. If the resolution exempting
business combinations is repealed or our board does not approve a business
combination, the Business Combination Act may discourage third parties from
trying to acquire control of us and increase the difficulty of consummating such
an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act
acquisitions of our stock by any person. If we amend our bylaws to repeal the
exemption from the Control Share Acquisition Act, the Control Share Acquisition
Act also may make it more difficult for a third party to obtain control of us
and increase the difficulty of consummating such a transaction.





We have
also adopted measures that may make it difficult for a third party to obtain
control of us, including provisions of our charter classifying our Board of
Directors in three classes serving staggered three-year terms, and authorizing
our Board of Directors to classify or reclassify shares of our stock in one or
more classes or series, to cause the issuance of additional shares of our stock,
to amend our charter without stockholder approval and to increase or decrease
the number of shares of stock that we have authority to issue. These provisions,
as well as other provisions of our charter and bylaws, may delay, defer or
prevent a transaction or a change in control that might otherwise be in the best
interests of our stockholders.





Item 1B.Unresolved Staff
Comments





Not
applicable.





Item 2.
Properties





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.





Item 3.
Legal
Proceedings





None of
us, our investment adviser or administrator, is currently subject to any
material legal proceedings, nor, to our knowledge, is any material legal
proceeding threatened against us, or against our investment adviser or
administrator. From time to time, we, our investment adviser or administrator,
may be a party to certain legal proceedings in the ordinary course of business,
including proceedings relating to the enforcement of our rights under contracts
with our portfolio companies. While the outcome of these legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will
have a material effect upon our financial condition or results of
operations.


49


Item 4.
Reserved


50





PART II





Item 5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities





Our
common stock began trading on the NASDAQ Capital Market under the symbol “FULL”
on September 1, 2010. Therefore, there was no trading of or public market for
our common stock through the period covered by this annual report on Form
10-K.


On
September 27, 2010, the last sale price of our common stock on the NASDAQ
Capital Market was $8.56 per share, and there were approximately 38 holders
of record of the common stock which did not include shareholders for whom shares
are held in “nominee” or “street name.”


Dividends


We intend
to distribute quarterly dividends to our stockholders. Our quarterly dividends,
if any, will be determined by our board of directors.




On July
21, 2010, our board of directors declared a quarterly dividend of $0.225 per
share, prorated for the number of days remaining in the third quarter after our
initial public offering. This first quarterly dividend of $0.076 per share is
payable on October 15, 2010 to holders of record as of September 30,
2010.




We intend
to elect to be taxed as a RIC under Subchapter M of the Code. To maintain our
RIC status, we must distribute at least 90% of our ordinary income and realized
net short-term capital gains in excess of realized net long-term capital losses,
if any, out of the assets legally available for distribution. In addition,
although we currently intend to distribute realized net capital gains (i.e., net long-term capital
gains in excess of short-term capital losses), if any, at least annually, out of
the assets legally available for such distributions, we may in the future decide
to retain such capital gains for investment.




We
maintain an “opt out” dividend reinvestment plan for our common stockholders. As
a result, if we declare a dividend, then stockholders’ cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically “opt out” of the dividend reinvestment plan so as to receive cash
dividends.




We may
not be able to achieve operating results that will allow us to make dividends
and distributions at a specific level or to increase the amount of these
dividends and distributions from time to time. In addition, we may be limited in
our ability to make dividends and distributions due to the asset coverage test
for borrowings when applicable to us as a BDC under the 1940 Act and due to
provisions in current and future credit facilities. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax
consequences, including possible loss of our RIC status. We cannot assure
stockholders that they will receive any dividends and distributions or dividends
and distributions at a particular level.




All
dividends declared in cash payable to stockholders that are participants in our
dividend reinvestment plan are generally automatically reinvested in shares of
our common stock. As a result, stockholders that do not participate in the
dividend reinvestment plan may experience dilution over time. Stockholders who
do not elect to receive dividends in shares of common stock may experience
accretion to the net asset value of their shares if our shares are trading at a
premium and dilution if our shares are trading at a discount. The level of
accretion or discount would depend on various factors, including the proportion
of our stockholders who participate in the plan, the level of premium or
discount at which our shares are trading and the amount of the dividend payable
to a stockholder.


51


Sales of Unregistered
Securities


On April
26, 2010, we issued 100 shares of common stock to Full Circle Advisors, LLC for
$1,500 in connection with the organization of the Company. The issuance of such
shares of our common stock was deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. We did not engage in
any other sales of unregistered securities during the period ended June 30,
2010.


On August
31, 2010, we acquired the Legacy Portfolio from the Legacy Funds, which are
managed by an affiliate of our investment adviser. The investments included in
the Legacy Portfolio have a collective fair value of approximately $72.3 million
as of June 30, 2010, as determined by our Board of Directors. In connection with
our acquisition of the Legacy Portfolio, we issued an aggregate of 4,191,415
shares of our common stock (assuming no exercise of the underwriters’
overallotment option) and approximately $3.4 million of Distribution Notes to
the Legacy Investors. The issuance of such shares of our common stock and
Distribution Notes was deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering.








Sales of Registered
Securities


On August
31, our registration statement on Form N-2 was declared effective (SEC File No.
333-166302), and we priced our initial public offering of 2,000,000 shares
of our common stock at the offering price of $9.00 per share. The initial public
offering closed on September 7, 2010, resulting in the sale of all 2,000,000
shares and net proceeds to Full Circle Capital of approximately $15.8 million,
of which the entire amount was used to reduce outstanding borrowings under the
New Credit Facility. Ladenburg Thalmann & Co. Inc. acted as the managing
underwriter.





Item 6.
Selected Financial
Data




The
following selected financial data for the period from April 16, 2010 (inception)
to June 30, 2010 is derived from our financial statements which have been
audited by Rothstein, Kass & Company, P.C., our independent registered
public accounting firm. The data should be read in conjunction with our
financial statements and related notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this report.




Income Statement
Data





Loss
      from Operations
                    
                    $
                    (12,545
                    )Net
      Loss
                    
                    $
                    (12,545
                    )Net
      Loss Per Share
                    
                    $
                    (125.45
                    )





Balance
Sheet Data





Cash
                                
                                $
                                1,455Deferred
      Offering Expenses
                                
                                
                                425,463Total Assets
                                
                                $
                                426,918Accrued
      Offering Expenses
                                
                                $
                                425,463Accrued
      Organizational Expenses
                                
                                
                                12,500Total Liabilities
                                
                                $
                                437,963Net
      Assets
                                
                                $
                                (11,045
                                )




52




Item 7.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations





Forward-Looking
Statements





This
annual report on Form 10-K 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. These statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors,
some of which are beyond our control and difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements, including without limitation:




•
            an
      economic downturn could impair our portfolio companies’ ability to
      continue to operate, which could lead to the loss of some or all of our
      investments in such portfolio
companies;





•
            a
      contraction of available credit and/or an inability to access the equity
      markets could impair our lending and investment
  activities;





•
            interest
      rate volatility could adversely affect our results, particularly if we
      elect to use leverage as part of our investment
  strategy;





•
            currency
      fluctuations could adversely affect the results of our investments in
      foreign companies, particularly to the extent that we receive payments
      denominated in foreign currency rather than U.S. dollars;
    and





•
            the
      risks, uncertainties and other factors we identify in “Risk Factors” and
      elsewhere in this annual report on Form 10-K and in our filings with the
      SEC.




Although
we believe that the assumptions on which these forward-looking statements are
based are reasonable, any of those assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also
could be inaccurate. In light of these and other uncertainties, the inclusion of
a projection or forward-looking statement in this annual report on Form 10-K
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 annual report on Form 10-K.
You should not place undue reliance on these forward-looking statements, which
apply only as of the date of this annual report on Form 10-K.




The
following analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
thereto contained elsewhere in this Form 10-K.





Overview





We are a
newly formed, externally managed non-diversified closed-end management
investment company that has elected to be treated as a business development
company under the 1940. Our investment objective is to generate both current
income and capital appreciation through debt and equity investments. We are
managed by Full Circle Advisors. Full Circle Service Company provides the
administrative services necessary for us to operate.





We were
formed to continue and expand the business of Full Circle Partners, LP and Full
Circle Fund, Ltd., which were formed in 2005 and 2007, respectively. As part of
this continuation and expansion, we invest primarily in asset-based senior
secured loans and, to a lesser extent, mezzanine loans and equity securities
issued by smaller and lower middle-market companies that operate in a diverse
range of industries, with a specific focus on the media, communications and
business services industries where we believe we have particular expertise. In
our lending activities, we focus primarily on portfolio companies with both (i)
tangible and intangible assets available as collateral and security against our
loan to help mitigate our risk of loss, and (ii) cash flow to cover debt
service. We believe this provides us with a more attractive risk adjusted return
profile, with greater principal protection and likelihood of
repayment.


53





Our
investments generally range in size from $3 million to $10 million; however, we
may make larger investments from time to time on an opportunistic
basis.  We focus primarily on senior secured loans and “stretch”
senior secured loans, also referred to as “unitranche” loans, which combine
characteristics of traditional first-lien senior secured loans and second-lien
or subordinated loans. Our stretch senior secured loans typically possess a
greater advance rate against the borrower’s assets and cash flow, and
accordingly carry a higher interest rate and/or greater equity participation,
than traditional senior secured loans. We believe that having a first lien,
senior secured position provides us with greater control and security in the
primary collateral of a borrower and helps mitigate risk against loss of
principal should a borrower default. We also invest in mezzanine, subordinated
or unsecured loans. In addition, we may acquire equity or equity related
interests from a borrower along with our debt investment. We attempt to protect
against risk of loss on our debt investments by securing our loans against a
significant level of tangible or intangible assets of our borrowers, which may
include accounts receivable and contracts for services, and obtaining a
favorable loan-to-value ratio, and in many cases, securing other financial
protections or credit enhancements, such as personal guarantees from the
principals of our borrowers, make well agreements and other forms of collateral,
rather than lending predominantly against anticipated cash flows of our
borrowers. We believe this allows us more options and greater likelihood of
repayment from refinancing, asset sales of our borrowers and/or
amortization.





We
generally seek to invest in smaller and lower middle-market companies in areas
that we believe have been historically under-serviced, especially during the
current credit crisis. These areas include industries that are outside the focus
of mainstream institutions or investors due to required industry-specific
knowledge or are too small to attract interest from larger investment funds or
other financial institutions. Because we believe there are fewer banks and
specialty finance companies focused on lending to these smaller and lower
middle-market companies, we believe we can negotiate more favorable terms on our
debt investments in these companies than those that would be available for debt
investments in comparable larger, more mainstream borrowers. Such favorable
terms may include higher debt yields, lower leverage levels, more significant
covenant protection or greater equity grants than typical of other transactions.
We generally seek to avoid competing directly with other capital providers with
respect to specific transactions in order to avoid the less favorable terms we
believe are typically associated with such competitive bidding
processes.





Recent
Developments





Dividend




On July
21, 2010, our board of directors declared a quarterly dividend of $0.225 per
share, prorated for the number of days remaining in the third quarter after our
initial public offering. This first quarterly dividend of $0.076 per share is
payable on October 15, 2010 to holders of record as of September 30,
2010.





Initial
Public Offering





On August
31, we priced our initial public offering of 2,000,000 shares of our common
stock at the offering price of $9.00 per share. The initial public offering
closed on September 7, 2010, resulting in net proceeds to Full Circle Capital of
approximately $15.8 million, of which the entire amount was used to reduce
outstanding borrowings under the New Credit Facility. Our shares are currently
listed on the NASDAQ Capital Market under the symbol “FULL.”
  We
estimate that our portion of the total expenses of this offering, excluding the
underwriting discounts, are approximately $850,000 and that organizational costs
are approximately $151,000.





54


Full
Circle Portfolio Acquisition





Immediately
prior to the pricing of our initial public offering, we acquired the Legacy
Portfolio from the Legacy Funds, which are managed by an affiliate of our
investment adviser. The investments included in the Legacy Portfolio had a
collective fair value of approximately $72.3 million as of June 30, 2010, as
determined by our Board of Directors. In connection with our acquisition of the
Legacy Portfolio, we issued an aggregate of 4,191,415 shares of our common stock
(assuming no exercise of the underwriters’ overallotment option) and
approximately $3.4 million of Distribution Notes to the Legacy Investors. We
also incurred approximately $27.5 million of debt under our New Credit Facility
in connection with the assumption of outstanding amounts under the Legacy Credit
Facilities. All of the loans that constitute the Legacy Portfolio are performing
as of June 30, 2010.





Credit
Facility





Immediately
prior to the Full Circle Portfolio Acquisition, Full Circle Capital entered into
the New Credit Facility, a secured revolving credit facility with First Capital.
The facility size is $35 million and expires in January 2012. Under the
agreement, base rate borrowings bear interest at the London Interbank Offered
Rate (“LIBOR”) plus 5.50%.





Recent
Portfolio Activity





The
Legacy Funds completed the Lotus Transaction immediately prior to the
consummation of the Full Circle Portfolio Acquisition, resulting in (a) the
redemption of $9 million of their collective partnership interests in the Lotus
Fund in exchange for the purchase of loan participations in three investments,
BLSCO Newco, Inc., Exist, Inc., and Miken Sales, Inc., and (b) rescheduling the
full redemption of the remaining $6 million in Lotus Fund partnership interests
to July 31, 2014.





On August
24, 2010, our Board of Directors determined that the fair value of Legacy Funds’
warrants in VaultLogix, LLC had decreased from $310,976 to $56,147 as a result
of dilution in the Legacy Funds’ indirect equity ownership
percentage.




Portfolio
Composition and Investment Activity





As of
June 30, 2010, we had no portfolio investments. However, immediately prior to
the pricing of our initial public offering, we acquired the Legacy Portfolio
from the Legacy Funds, which are managed by an affiliate of our investment
adviser. The investments included in the Legacy Portfolio had a collective fair
value of approximately $72.3 million as of June 30, 2010, as determined by our
Board of Directors. In connection with our acquisition of the Legacy Portfolio,
we issued an aggregate of 4,191,415 shares of our common stock (assuming no
exercise of the underwriters’ overallotment option) and approximately $3.4
million of Distribution Notes to the Legacy Investors. We also incurred
approximately $27.5 million of debt under our New Credit Facility in connection
with the assumption of outstanding amounts under the Legacy Credit Facilities.
All of the loans that constitute the Legacy Portfolio are performing as of June
30, 2010.





As of
June 30, 2010, the Legacy Portfolio had approximately $72.3 million of debt and
equity investments, comprised of 17 portfolio companies, as adjusted to reflect
the Lotus Transaction. The debt investments included in the Legacy Portfolio had
a weighted average annualized yield of approximately 12.1% as of June 30, 2010,
as adjusted for the Lotus Transaction.





Results
of Operations





Full
Circle Capital was formed on April 16, 2010, so there is no comparable period to
compare results for the period from April 16, 2010 (inception) to June 30,
2010.





For the
period ended June 30, 2010 the company incurred $45 in monthly bank service
fees, $425,463 in offering expenses (comprised
of $315,484 of legal costs, $73,338 of accounting and professional fees and
$36,641 of other costs associated with the initial public offering)and
$12,500 in organizational expenses.  The company held $1,455 in
unrestricted cash on June 30, 2010.





Earnings
per share for the period ended June 30, 2010 were $(125.45).


55





Financial Condition, Liquidity and
Capital Resources





On August
31, 2010, immediately prior to the pricing of our initial public offering, we
acquired the Legacy Portfolio from the Legacy Funds, which are managed by an
affiliate of our investment adviser. The investments included in the Legacy
Portfolio had a collective fair value of approximately $72.3 million as of June
30, 2010, as determined by our Board of Directors. In connection with our
acquisition of the Legacy Portfolio, we issued an aggregate of 4,191,415 shares
of our common stock (assuming no exercise of the underwriters’ overallotment
option) and approximately $3.4 million of Distribution Notes to the Legacy
Investors. We also incurred approximately $27.5 million of debt under our New
Credit Facility in connection with the assumption of outstanding amounts under
the Legacy Credit Facilities. All of the loans that constitute the Legacy
Portfolio are performing as of June 30, 2010.





On August
31, we priced our initial public offering of 2,000,000 shares of our common
stock at the offering price of $9.00 per share. The initial public offering
closed on September 7, 2010, resulting in net proceeds to Full Circle of
approximately $15.8 million, of which the entire amount was used to reduce
outstanding borrowings under the New Credit Facility. Our shares are currently
listed on the NASDAQ Capital Market under the symbol “FULL.”




Contractual
Obligations





We did
not incur any investment advisory or administration fees, or other material
contractual obligations, during the period from April 16, 2010 (inception) to
June 30, 2010.





Off-Balance
Sheet Arrangements





We
currently have no off-balance sheet arrangements, including any risk management
of commodity pricing or other hedging practices.





Borrowings





Secured Revolving
Credit Facility.Immediately prior to the
Full Circle Portfolio Acquisition, Full Circle Capital entered into the New
Credit Facility, a secured revolving credit facility with First Capital. The
facility size is $35 million and will expire in January 2012. Under the
agreement, base rate borrowings bear interest at LIBOR plus 5.50%. The New
Credit Facility will be secured by the assets from the Legacy Portfolio. Under
the New Credit Facility we are required to satisfy several financial covenants,
including maintaining a minimum level of stockholders’ equity, a maximum level
of leverage and minimum asset coverage and interest coverage ratios. In
addition, we are required to comply with other general covenants, including with
respect to indebtedness, liens, restricted payments and mergers and
consolidations.





Distribution
Notes. The Distribution Notes consist of $3.4 million in senior unsecured
notes, which bear interest at a rate of 8% per annum, payable quarterly in cash,
and mature on February 28, 2014. The Distribution Notes are callable by us at
any time, in whole or in part, at a price of 100% of their principal amount,
plus accrued and unpaid interest. In electing to exercise our call right with
respect to the Distribution Notes, our Board of Directors will consider all of
the relevant factors, including alternative uses of available capital and
whether any Distribution Notes have recently been transferred or sold at prices
below par value, and will be required to determine that such a call is in the
best interests of Full Circle Capital and our stockholders. The Distribution
Notes subject Full Circle Capital to customary covenants, including, among other
things, a restriction on incurring any debt on a junior lien basis, or any debt
that is contractually subordinated in right of payment to any other debt unless
it is also subordinated to the Distribution Notes on substantially identical
terms. The agreement under which the Distribution Notes were issued contains
customary events of default.


56




Distributions




On July
21, 2010, our board of directors declared a quarterly dividend of $0.225 per
share, prorated for the number of days remaining in the third quarter after our
initial public offering. This first quarterly dividend of $0.076 per share is
payable on October 15, 2010 to holders of record as of September 30,
2010.





Related Party
Transactions




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. Mr. Stuart, our Chief Executive Officer and President, is the
      manager of, and has financial and controlling interests in, Full Circle
      Advisors.




•
            We
      have entered into the Administration Agreement with Full Circle Service
      Company. Pursuant to the terms of the Administration Agreement, Full
      Circle Service Company provides us with the office facilities and
      administrative services necessary to conduct our day-to-day operations.
      Mr. Stuart, our Chief Executive Officer and President, is the managing
      member of, and has financial and controlling interests in, Full Circle
      Service Company.




•
            We
      have entered into a license agreement with Full Circle Advisors, pursuant
      to which Full Circle Advisors has agreed to grant us a non-exclusive,
      royalty-free license to use the name “Full
  Circle.”




•
            Our Chief Financial Officer,
      Treasurer and Secretary, William E. Vastardis, is the President of
      Vastardis Fund Services LLC. Full Circle Service Company has engaged
      Vastardis Fund Services to provide certain administrative services to us
      and our investment adviser, Full Circle Advisors, including the service of
      Mr. Vastardis as our Chief Financial Officer, Treasurer and
      Secretary.




•
            The
      Lotus Fund is an affiliate of First Capital, our lender under the New
      Credit Facility.




Full
Circle Advisors’ investment team presently manages Full Circle Funding, LP, a
specialty lender serving smaller and lower middle-market companies that has
originated approximately $216 million in loans and investments in 42 distinct
borrowers since its inception in 2005. Full Circle Advisors and its affiliates
may also manage other funds in the future that may have investment mandates that
are similar, in whole and in part, with ours. Full Circle Advisors and its
affiliates may determine that an investment is appropriate for us and for one or
more of those other funds. In such event, depending on the availability of such
investment and other appropriate factors, Full Circle Advisors or its affiliates
may determine that we should invest side-by-side with one or more other funds.
Any such investments will be made only to the extent permitted by applicable law
and interpretive positions of the SEC and its staff, and consistent with Full
Circle Advisors’ allocation procedures.





In
connection with our acquisition of the Legacy Portfolio, we issued an aggregate
of 3,787,753 shares of our common stock and approximately $3.4 million of
Distribution Notes to the Legacy Investors, pursuant to a Purchase and Sale
Agreement (the “Asset Purchase Agreement”). In addition, the Asset Purchase
Agreement provides for a subsequent payment to certain Legacy Investors 30 days
after the pricing of our initial public offering, or earlier if the
over-allotment option granted to the underwriters is exercised in full (the
“Subsequent Payment Obligation”). If the over-allotment option is exercised in
full, these Legacy Investors will be entitled to receive, collectively, 103,662
shares plus a cash amount equal to the aggregate purchase price paid by the
underwriters to acquire the number of shares underlying the over-allotment
option that corresponds to the number of shares offered by such Legacy Investors
(i.e., the public offering price less underwriting discounts and commissions)
less offering-related expenses. This cash amount is estimated to be
approximately $2.47 million, representing gross proceeds to Legacy Investors of
approximately $2.70 million less underwriting discounts and commissions and
offering-related expenses of approximately $0.23 million. If the over-allotment
option is not exercised and expires, these Legacy Investors will receive 403,662
additional shares of our common stock. If the over-allotment option is partially
exercised, these Legacy Investors will receive a proportionate distribution of
both cash and stock, depending upon the amount of the shares underlying the
over-allotment option that were actually acquired by the underwriters. For
information on the ownership of our shares, see “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.”


57





We have
also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our Board of
Directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).





Critical
Accounting Policies





Basis
of Presentation





The
financial statements included herein are expressed in United States dollars and
have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”).





Valuation
of Investments in Securities at Fair Value — Definition and
Hierarchy





In
accordance with GAAP, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement
date.





In
determining fair value, Full Circle Capital’s Board of Directors uses various
valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs
is used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available.





Observable
inputs are those that market participants would use in pricing the asset or
liability based on market data obtained from sources independent of the Board of
Directors. Unobservable inputs reflect the Board of Directors’ assumptions about
the inputs market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The fair
value hierarchy is categorized into three levels based on the inputs as
follows:





Level
1 — Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1 securities.
Since valuations are based on quoted prices that are readily and regularly
available in an active market, valuation of these securities does not entail a
significant degree of judgment.





Level
2 — Valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, either directly or
indirectly.





Level
3 — Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.





The
availability of valuation techniques and observable inputs can vary from
security to security and is affected by a wide variety of factors including, the
type of security, whether the security is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Those estimated values do not necessarily represent the amounts that
may be ultimately realized due to the occurrence of future circumstances that
cannot be reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower than the
values that would have been used had aready 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.


58


Fair
value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when market
assumptions are not readily available, the Company’s own assumptions are set to
reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Company uses prices and inputs that are
current as of the measurement date, including periods of market dislocation. In
periods of market dislocation, the observability of prices and inputs may be
reduced for many securities. This condition could cause a security to be
reclassified to a lower level within the fair value hierarchy.





Valuation
Techniques





Senior
and Subordinated Secured Loans





The
Legacy Portfolio consists primarily of private debt instruments (“Level 3
debt”). The Company considers its Level 3 debt to be performing loans if the
borrower is not in default, the borrower is remitting payments in a timely
manner, the loan is in covenant compliance or is otherwise not deemed to be
impaired. In determining the fair value of the performing Level 3 debt, the
Company’s Board of Directors considers fluctuations in current interest rates,
the trends in yields of debt instruments with similar credit ratings, financial
condition of the borrower, economic conditions and other relevant factors, both
qualitative and quantitative. In the event that a Level 3 debt instrument is not
performing, as defined above, the Company’s Board of Directors will evaluate the
value of the collateral utilizing the same framework described above for a
performing loan to determine the value of the Level 3 debt
instrument.





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, 3rd party
valuation agents and other data as may be acquired and analyzed by Management
and the Company’s Board of Directors.





Investments
in Private Companies





The
Company’s Board of Directors determines the fair value of its investments in
private companies by incorporating valuations that consider the evaluation of
financing and sale transactions with third parties, expected cash flows and
market-based information, including comparable transactions, and performance
multiples, among other factors, including third party valuation agents. This
nonpublic investment is included in Level 3 of the fair value
hierarchy.





Investment
in Private Investment Company


As
permitted under GAAP, investments in private investment companies are valued, as
a practical expedient, utilizing the net asset valuation provided by the
underlying private investment companies, without adjustment, when the net asset
valuation of the investment is calculated (or adjusted by Management if
necessary) in a manner consistent with GAAP for investment companies. If it is
probable that the Company will sell the investment at an amount different from
the net asset valuation or in other situations where the practical expedient is
not available, the Company’s Board of Directors considers other factors in
addition to the net asset valuation, such as features of the investment,
including subscription and redemption rights, expected discounted cash flows,
transactions in the secondary market, bids received from potential buyers, and
overall market conditions in its determination of fair value. Investment in
private investment company is included in Level 3 of the fair value hierarchy.
In determining the level, the Company’s Board of Directors considers the length
of time until the investment is redeemable, including notice and lock-up periods
or any other restrictions on the disposition of the investment. The Company’s
Board of Directors also considers the nature of the portfolio of the underlying
private investment company and its ability to liquidate its underlying
investments.


59





Warrants





The
Company’s Board of Directors will ascribe value to warrants based on fair value
holdings that can include discounted cash flow analyses, option pricing models,
comparable analyses and other techniques as deemed
appropriate.


Use
of Estimates




The
preparation of the financial statements of Full Circle Capital in conformity
with GAAP requires the Company to make estimates and assumptions that affect the
amounts disclosed in the financial statements of Full Circle Capital. Actual
results could differ from those estimates.




Recently Issued Accounting
Standards




On
January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued an
ASU, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements, which provides guidance on how investment assets
and liabilities are to be valued and disclosed. Specifically, the amendment
requires reporting entities to disclose i) the input and valuation techniques
used to measure fair value for both recurring and nonrecurring fair value
measurements, for Level 2 or Level 3 positions, ii) transfers between all levels
(including Level 1 and Level 2) will be required to be disclosed on a gross
basis (i.e. transfers out must be disclosed separately from transfers in) as
well as the reason(s) for the transfers and iii) purchases, sales, issuances and
settlements must be shown on a gross basis in the Level 3 rollforward rather
than as one net number. The effective date of the ASU is for interim and annual
periods beginning after December 15, 2009, however, the requirement to provide
the Level 3 activity for purchases, sales, issuances and settlements on a gross
basis will be effective for interim and annual periods beginning after December
15, 2010. At this time Management is evaluating the implications of the
amendment to ASC 820 and the impact to the financial statements of Full Circle
Capital Corporation.




ASC 860,
“Transfers and Servicing,” removes the concept of a qualifying special-purpose
entity (“QSPE”) and removes the exception from applying to variable interest
entities that are QSPEs. This statement also clarifies the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. This statement is effective for fiscal years beginning after
November 15, 2009.




Item 7A.
Quantitative and Qualitative
Disclosures about Market Risk




As of
June 30, 2010, we held no investments and no debt outstanding. However,
immediately prior to the pricing of our initial public offering, we acquired the
Legacy Portfolio from the Legacy Funds.




We are
subject to financial market risks, including changes in interest rates. As of
June 30, 2010, 7 debt investments in the Legacy Portfolio were at a fixed rate,
and the remaining 17 debt investments were at variable rates, representing
approximately $20 million and $46 million in principal debt, respectively. The
majority of our floating rate debt instruments are currently at their floor
interest rate.  The variable rates are based upon the Prime rate or
LIBOR.




To
illustrate the potential impact of a change in the underlying interest rate on
our net increase in net assets resulting from operations, we have assumed a 1%
increase in the underlying Prime rate or LIBOR, and no other change in the
Legacy Portfolio as of June 30, 2010. We have also assumed $15.1 million of
outstanding borrowings, with $11.7 million of outstanding borrowings having a
floating rate based upon LIBOR. Under this analysis, net investment income would
decrease by approximately $0.1 million annually. If we had instead assumed a 1%
decrease in the underlying Prime rate or LIBOR, net investment income would
increase correspondingly by approximately $0.1 million annually. Although
management believes that this analysis is indicative of our existing interest
rate sensitivity at June 30, 2010, it does not adjust for changes in the credit
quality, size and composition of our portfolio, and other business developments,
including borrowing under a credit facility, that could affect the net increase
in net assets resulting from operations. Accordingly, no assurances can be given
that actual results would not differ materially from the results under this
hypothetical analysis.


60




We may in
the future hedge against interest rate fluctuations by using standard hedging
instruments such as futures, options and forward contracts. While hedging
activities may insulate us against adverse changes in interest rates, they may
also limit our ability to participate in the benefits of lower interest rates
with respect to the investments in our portfolio with fixed interest
rates.





Item 8.
Financial Statements and
Supplementary Data





Index to Financial
Statements





PageReport
      of Independent Registered Public Accounting Firm
                      62Statement
      of Assets and Liabilities as of June 30, 2010
                      63Statement
      of Operations for the period from April 16, 2010 (date of inception) to
      June 30, 2010
                      64Statement
      of Changes in Net Assets for the period from April 16, 2010 (date of
      inception) to June 30, 2010
                      65Statement
      of Cash Flows for the period from April 16, 2010 (date of inception) to
      June 30, 2010
                      66Notes
      to Financial Statements
                      67


61





Report of
Independent Registered Public Accounting Firm
 
 
 
 
 To the
Board of Directors and Stockholders of
 Full
Circle Capital Corporation
 
 We have
audited the accompanying statement of assets and liabilities of Full Circle
Capital Corporation, (the “Company”) as of June 30, 2010, and the related
statements of operations, changes in net assets, and cash flows for the period
ended April 16, 2010 (date of inception) to June 30, 2010.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit 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 Company’s 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, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Full Circle Capital Corporation as
of June 30, 2010, and the results of its operations and its cash flows for the
period 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 & Company,
P.C.
 
 Roseland,
New Jersey
 September
28, 2010


62


Full
Circle Capital Corporation
 (a
development stage company)
 Statement
of Assets and Liabilities
 
 June 30, 2010AssetsCash
                                  
                                  $
                                  1,455Deferred
      Offering Expenses
                                  
                                  
                                  425,463Total
      Assets
                                  
                                  $
                                  426,918LiabilitiesAccrued
      Organizational Expenses
                                  
                                  $
                                  12,500Accrued
      Offering Expenses
                                  
                                  
                                  425,463Total
      Liabilities
                                  
                                  $
                                  437,963Net
      Assets
                                  
                                  $
                                  (11,045
                                  )Components
      of Net AssetsCommon
      Stock, par value $0.01 per share (100,000,000 authorized; 100 issued and
      outstanding)
                                  
                                  $
                                  1Paid-in
      capital in excess of par
                                  
                                  
                                  1,499Deficit
      accumulated during development stage
                                  
                                  
                                  (12,545
                                  )Net
      Assets
                                  
                                  $
                                  (11,045
                                  )Net
      Asset Value Per Share
                                  
                                  $
                                  (110.45
                                  )
  See Notes
to Financial Statements
 63


Full
Circle Capital Corporation
 (a
development stage company)
 Statement
of Operations
 
 For the period fromApril 16, 2010
                                  (date of inception) toJune 30, 2010Operating
      ExpensesBank
      Fees
                                
                                $
                                45Organizational
      Expenses
                                
                                $
                                12,500Total
      Operating Expenses
                                
                                
                                12,545Net
      Investment Loss
                                
                                $
                                (12,545
                                )Basic
      and diluted net loss per common share
                                
                                $
                                (125.45
                                )Weighted
      average shares of common stock outstanding
                                
                                
                                100
 
 See Notes
to Financial Statements
  64


Full
Circle Capital Corporation
 (a
development stage company)
 Statement
of Changes in Net Assets
 
 For the period from April 16,
      2010
                                                  (date of inception) to June 30,
      2010Decrease
      in Net Assets from OperationsNet
      Investment Loss
                                                
                                                $
                                                (12,545
                                                )Net Decrease in Net AssetsResulting from
      Operations
                                                
                                                
                                                (12,545
                                                )Capital
      Share TransactionsNet
      proceeds from shares sold
                                                
                                                
                                                1,500Net Increase in Net Assets
      Resulting from Capital Share
      Transactions
                                                
                                                
                                                1,500Net
      Assets at End of Period
                                                
                                                $
                                                (11,045
                                                )Capital
      Share ActivityShares
      sold
                                                
                                                
                                                100Net
      increase in capital share activity
                                                
                                                
                                                100Shares
      Outstanding at End of Period
                                                
                                                
                                                100
 
 See Notes
to Financial Statements


65


Full
Circle Capital Corporation
 (a
development stage company)
 Statement
of Cash Flows
 
 For the period from April 16,
      2010
                                                                      (date of inception) to June 30,
      2010Cash
      Flows from Operating ActivitiesNet
      Investment Loss
                                                                    
                                                                    $
                                                                    (12,545
                                                                    )Change
      in Accrued Organizational Expenses
                                                                    
                                                                    
                                                                    12,500Net Cash Used in Operating
      Activities
                                                                    
                                                                    
                                                                    (45
                                                                    )Cash
      Flows from Financing ActivitiesNet
      proceeds from shares sold
                                                                    
                                                                    
                                                                    1,500Net Cash Provided
      by Financing
      Activities
                                                                    
                                                                    
                                                                    1,500Net
      Increase in Cash
                                                                    
                                                                    
                                                                    1,455Cash
      Balance at End of Period
                                                                    
                                                                    $
                                                                    1,455Supplemental Disclosure of
      Non-Cash Financing Activity - Deferred Offering
      Expenses
                                                                    
                                                                    $
                                                                    425,463
 
 See Notes to Financial
Statements


66


Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements
 Note
1. Organization
  References
herein to “we”, “us” or “our” refer to Full Circle Capital Corporation unless
the context specifically requires otherwise.
  We were
formed as Full Circle Capital Corporation, a Maryland corporation. We were
organized on April 16, 2010 and were funded in an initial public offering, or
IPO, completed on September 7, 2010.  We are a non-diversified
closed-end investment company that has filed an election to be treated as a
Business Development Company, or BDC, under the Investment Company Act of 1940
(the “1940 Act”).  As a BDC, we expect to qualify and elect to be
treated as a regulated investment company, or RIC, under Subchapter M of the
Internal Revenue Code.  We will 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 Company is a new enterprise in the
development stage and presents its financial statements in accordance with
Accounting Standards Codification ("ASC") 915 "Development Stage Entities"
(formerly Statement of Financial Accounting Standard ("SFAS") No. 7, "Accounting
and Reporting by Development Stage Enterprises"), and has not engaged in any
business other than those related to its offering and organizational
efforts.
 Note
2. Significant Accounting Policies
  Basis
of Presenation and Use of Estimates
  The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America (“GAAP”) requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Changes in the economic environment, financial markets,
creditworthiness of our portfolio companies and any other parameters used in
determining these estimates could cause actual results to differ.
  Federal and State Income
Taxes
  We intend to elect to be treated as a
regulated investment company and intend to continue to comply with the
requirements of the Internal Revenue Code of 1986 (the “Code”), applicable to
regulated investment companies. We are required to distribute at least 90% of
our investment company taxable income and intend to distribute (or retain
through a deemed distribution) all of our investment company taxable income and
net capital gain to stockholders; therefore, we have made no provision for
income taxes. The character of income and gains that we will distribute is
determined in accordance with income tax regulations that may differ from GAAP.
Book and tax basis differences relating to stockholder dividends and
distributions and other permanent book and tax differences are reclassified to
paid-in capital.
  If we do not distribute (or are not
deemed to have distributed) at least 98% of our annual taxable income in the
year earned, we will generally be required to pay an excise tax equal to 4% of
the amount by which 98% of our annual taxable income exceeds the distributions
from such taxable income for the year. To the extent that we determine that our
estimated current year annual taxable income will be in excess of estimated
current year dividend distributions from such taxable income, we accrue excise
taxes, if any, on estimated excess taxable income as taxable income is earned
using an annual effective excise tax rate. The annual effective excise tax rate
is determined by dividing the estimated annual excise tax by the estimated
annual taxable income. We have adopted a June 30 year-end for federal income tax
purposes.
  67
 
 Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 Dividends
and Distributions
  Dividends and distributions to common
stockholders are recorded on the ex-dividend date. The amount, if any, to be
paid as a dividend is approved by our Board of Directors each quarter and is
generally based upon our management’s estimate of our earnings for the
quarter.  Net realized capital gains, if any, are distributed at least
annually.
   Deferred
Offering Expenses
 
 The
Company defers the direct incremental costs of raising capital until such time
as the offering is completed. At the time of completion of the offering, the
costs are charged against the capital raised. Should the offering be terminated,
deferred offering costs are charged to the operations during the period in which
the offering is terminated.
  
 Per
Share Information
  Basic Earnings (Loss) Per Common Share
is calculated using the weighted average number of common shares outstanding for
the period presented. Basic and diluted earnings per share are as the same since
there are no potentially dilutive securities outstanding.
  Note
3. Basic and Diluted Loss per Common Share
  The
following information sets forth the computation of basic and diluted loss per
common share for the period ended June 30, 2010.
  For the period fromApril
      16, 2010 (inception)to June 30, 2010Per
      Share Data:Net
      Investment Loss
                          
                          $
                          (12,545
                          )Average
      weighted shares outstanding for period
                          
                          
                          100Net
      Investment Loss per share
                          
                          $
                          (125.45
                          )
  Note
4. Related Party Agreements and Transactions
  Investment
Advisory Agreement
  As of June 30, 2010, Full Circle
Capital Corporation had not entered into an Investment Advisory
Agreement.
  68
  Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 Subsequent to June 30, 2010, we entered
into an investment advisory agreement (the “Investment Advisory Agreement”) with
Full Circle Advisors, LLC (the “Investment Adviser”) under which the Investment
Adviser, subject to the overall supervision of our Board of Directors, manages
the day-to-day operations of, and provides investment advisory services to, us.
Under the terms of the Investment Advisory Agreement, our Investment 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 Investment Adviser’s services under
the Investment Advisory Agreement are not exclusive, and it is free to furnish
similar services to other entities so long as its services to us are not
impaired. For providing these services the Investment Adviser receives a fee
from us, consisting of two components.
  The base management fee is calculated
at an annual rate of 1.75% of our gross assets. 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 at the end of the two most recently completed calendar
quarters, and appropriately adjusted for any share issuances or repurchases
during the current calendar quarter. Base management fees for any partial month
or quarter will be appropriately pro-rated. In addition, our investment adviser
has agreed to waive any portion of the base management fee that exceeds 1.50% of
Full Circle Capital Corporation’s gross assets until August 31,
2011.
  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%;
  ·
                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
  69
  Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 ·
                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).
  These calculations are appropriately
prorated for any period of less than three months and adjusted for any share
issuances or repurchases during the current quarter.
  The
second part of the incentive fee is determined and payable in arrears as of the
end of each calendar year (or upon termination of the Investment Advisory
Agreement, as of the termination date), commencing with the 2010 calendar year,
and will equal 20% of our realized capital gains, if any, on a cumulative basis
from inception through the end of each calendar year, computed net of all
realized capital losses and unrealized capital depreciation on a cumulative
basis, less the aggregate amount of any previously paid capital gain incentive
fees with respect to each of the investments in our portfolio, provided that,
the incentive fee determined as of December 31, 2010 will be 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 Corporation.
  Administration
Agreement
  As of June 30, 2010, Full Circle
Capital Corporation had not entered into an Administration
Agreement.
  Subsequent
to June 30, 2010, we have also entered into an Administration Agreement with
Full Circle Service Company (“Full Circle Service Company”) under which Full
Circle Service Company, among other things, 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 Company’s overhead in performing its obligations under
the Administration Agreement, including rent, the fees and expenses associated
with performing compliance functions and our allocable portion of the
compensation of our chief financial officer and our allocable portion of the
compensation of any administrative support staff. 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 will also provide administrative services to our
investment adviser, Full Circle Advisors. As a result, Full Circle Advisors will
also reimburse Full Circle Service Company for its allocable portion of Full
Circle Service Company’s overhead, including rent, the fees and expenses
associated with performing compliance functions for Full Circle Advisors, and
its allocable portion of the compensation of any administrative support staff.
To the extent 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.
  70
 Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
  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 Corporation 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 Company’s services under the Administration Agreement or otherwise as
administrator for Full Circle Capital Corporation.
  Sub-Administration
Agreement
  Our Chief
Financial Officer, William E. Vastardis, is the President of Vastardis Fund
Services LLC. Full Circle Service Company has engaged Vastardis Fund Services
LLC to provide certain administrative services to us and our investment adviser,
Full Circle Advisors, LLC, including the service of Mr. Vastardis as our Chief
Financial Officer, Treasurer and Secretary. In exchange for providing such
services, Full Circle Service Company will pay Vastardis Fund Services LLC an
asset-based fee with a $200,000 annual minimum. This asset-based fee will vary
depending upon our gross assets as follows:
 Gross
      Assets
                            
                            Feefirst
      $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%)
 Full
Circle Advisors, LLC will be responsible for paying the allocable portion of the
administrative fees charged by Vastardis Fund Services for administrative
services provided to both Full Circle Capital Corporation and Full Circle
Advisors, LLC reflecting the proportionate share of such administrative services
that it receives. In addition, we will reimburse 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
$250,000. Vastardis Fund Services has agreed to cap its first year fees at
$200,000 for administrative services to us and Full Circle Advisors, and at
$100,000 for the service of Mr. Vastardis as our Chief Financial Officer,
Treasurer and Secretary.
  71
 Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
  Note
5. Financial Highlights
  For the
                        period
                        fromApril 16,
                        2010
                        (inception)toJune30,
                        2010Per
      Share Data(1):Net
      asset value at issuance
                      
                      $
                      15.00Net
      investment loss
                      
                      
                      (125.45
                      )Realized
      gain (loss)
                      
                      
                      -Net
      unrealized appreciation (depreciation)
                      
                      
                      -Dividends
      declared and paid
                      
                      
                      -Net
      asset value at end of period
                      
                      $
                      (110.45
                      )Per
      share market value at end of period
                      
                      $
                      (110.45
                      )Total
      return based on market value(2)
                      
                      
                      (836.33
                      )%Total
      return based on net asset value(2)
                      
                      
                      (836.33
                      )%Shares
      outstanding at end of period
                      
                      
                      100Average
      weighted shares outstanding for period
                      
                      
                      100Ratio
      / Supplemental Data:Net
      assets at end of period
                      
                      $
                      (11,045
                      )Annualized
      ratio of operating expenses to average net assets(3)
                      
                      
                      (1,279.28
                      )%Annualized
      ratio of net operating income to average net assets(3)
                      
                      
                      1,279.28
                      %
  (1)
                Financial
      highlights are based on weighted average
shares.
 (2)
                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.
 (3)
                Financial
      Highlights as of June 30, 2010 are calculated from the inception of Full
      Circle Capital Corporation on April 16, 2010 and the annualized ratios of
      operating expenses to average net assets and net operating income to
      average net assets are adjusted
accordingly.
  72
  Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 Note
6. Recently Issued Accounting Standards
  On
January 21, 2010, the FASB issued an ASU, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,
which provides guidance on how investment assets and liabilities are to be
valued and disclosed. Specifically, the amendment requires reporting entities to
disclose i) the input and valuation techniques used to measure fair value for
both recurring and nonrecurring fair value measurements, for Level 2 or Level 3
positions, ii) transfers between all levels (including Level 1 and Level 2) will
be required to be disclosed on a gross basis (i.e. transfers out must be
disclosed separately from transfers in) as well as the reason(s) for the
transfers and iii) purchases, sales, issuances and settlements must be
shown on a gross basis in the Level 3 rollforward rather than as one net number.
The effective date of the ASU is for interim and annual periods beginning after
December 15, 2009, however, the requirement to provide the Level 3 activity for
purchases, sales, issuances and settlements on a gross basis will be effective
for interim and annual periods beginning after December 15, 2010. At this time
Management is evaluating the implications of the amendment to ASC 820 and the
impact to the future Schedules of Investments of Full Circle Capital
Corporation.
  ASC 860,
‘‘Transfers and Servicing,’’ removes the concept of a qualifying special-purpose
entity (‘‘QSPE’’) and removes the exception from applying to variable interest
entities that are QSPEs. This statement also clarifies the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. This statement is effective for fiscal years beginning after
November 15, 2009.
  Note
7. Other Subsequent Events
  Dividend
  On July
21, 2010, our board of directors declared a quarterly dividend of $0.225 per
share, prorated for the number of days remaining in the third quarter after our
initial public offering. This first quarterly dividend of $0.076 per share is
payable on October 15, 2010 to holders of record as of September 30,
2010.
 
 Initial
Public Offering
 
 On August
31, 2010 we priced our initial public offering of 2,000,000 shares of our
common stock at the offering price of $9.00 per share. The initial public
offering closed on September 7, 2010, resulting in net proceeds to Full Circle
Capital Corporation of approximately $15.8 million, of which the entire amount
was used to reduce outstanding borrowings under the New Credit Facility (see
below). Our shares are currently listed on the NASDAQ Capital Market under the
symbol “FULL.”
 We
estimate that our portion of the total expenses of this offering, excluding the
underwriting discounts, are approximately $850,000 and that organizational
costs are approximately $151,000. (Unaudited) Deferred
offering expenses of $425,463 incurred for the period from April 16, 2010
(inception) through June 30, 2010 are included on the Statement of Assets and
Liabilities and organizational expenses of $12,500 incurred
for such period are included on the Statement of Operations.
 Full
Circle Portfolio Acquisition
 
 Immediately
prior to the pricing of our initial public offering, we acquired the “Legacy
Portfolio”
from Full Circle Partners, LP and Full Circle Fund, Ltd. (the “Legacy Funds”),
which are managed by an affiliate of our investment adviser. The investments
included in the Legacy Portfolio had a collective fair value of approximately
$72.3 million as of June 30, 2010, as determined by our Board of Directors. In
connection with our acquisition of the Legacy Portfolio, we issued an aggregate
of approximately 4,191,415 shares of our common stock and approximately $3.4
million of callable senior unsecured notes (the “Distribution Notes”) to the
Legacy Funds’ investors,
which bear interest at an 8% rate and mature in February 2014. We also incurred
approximately $27.5 million of debt under our New Credit Facility (see below) in
connection with the assumption of outstanding amounts under the Legacy Credit
Facilities. We refer to these transactions, collectively, as the “Full Circle
Portfolio Acquisition.” Management
believes that all of the loans that constitute the Legacy Portfolio are
performing as of June 30, 2010. The
Company considers its debt to be performing loans 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.
  73
 Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 New
Credit Facility
 
 Immediately
prior to the Full Circle Portfolio Acquisition, Full Circle Capital entered into
the New Credit Facility, a secured revolving credit facility with First Capital.
The facility size is $35 million and expires in January 2012. Under the
agreement, base rate borrowings bear interest at the London Interbank Offered
Rate (“LIBOR”) plus 5.50%. The New Credit Facility will be secured by the assets
from the Legacy Portfolio. Under the New Credit Facility we are required to
satisfy several financial covenants, including maintaining a minimum level of
stockholders’ equity, a maximum level of leverage and minimum asset coverage and
interest coverage ratios. In addition, we are required to comply with other
general covenants, including with respect to indebtedness, liens, restricted
payments and mergers and consolidations.
 
 Recent
Portfolio Activity
 
 Immediately
prior to the consummation of the Full Circle Portfolio Acquisition
the Legacy Funds restructured their investment in the Lotus Fund, resulting
in (a) the redemption of $9 million of their collective partnership interests in
the Lotus Fund in exchange for the purchase of loan participations in three
investments, BLSCO Newco, Inc., Exist, Inc., and Miken Sales, Inc., and (b)
rescheduling the full redemption of the remaining $6 million in Lotus Fund
partnership interests to July 31, 2014 (collectively, the “Lotus
Transaction”).  The Lotus
Fund is an affiliate of First Capital, the Company's lender under the New Credit
Facility.
 On August
24, 2010, our Board of Directors determined that the fair value of Legacy Funds’
warrants in VaultLogix, LLC had decreased from $310,976 to $56,147 as a result
of dilution in the Legacy Funds’ indirect equity ownership
percentage.
  74


Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 Pro
Forma Information (Unaudited)


The
following pro forma balance sheet assumes the initial public offering, the
Full Circle Portfolio Acquisition, and the Lotus Transaction,
took place on June 30, 2010:




Pro Forma Balance Sheet
(Unaudited)
 June 30, 2010
                                                          
                                                          Pro Forma
                                                            Pre-Offering
                                                          
                                                          
                                                          Pro Forma
                                                            Post-Offering(Amounts
      in '000s)AssetsCash
      and cash equivalents
                                                          
                                                          $
                                                          1
                                                          
                                                          
                                                          $
                                                          1Interest
      receivable
                                                          
                                                          
                                                          558
                                                          
                                                          
                                                          
                                                          558Loans
      receivable, at fair value(cost
      $65,341)
                                                          
                                                          
                                                          65,341
                                                          
                                                          
                                                          
                                                          65,341Investments
      in private investment company, at fair value(cost
      $6,000)
                                                          
                                                          
                                                          6,000
                                                          
                                                          
                                                          
                                                          6,000Investments
      in equity and warrants, fair value(cost
      $967)
                                                          
                                                          
                                                          967
                                                          
                                                          
                                                          
                                                          967Total
      Assets
                                                          
                                                          $
                                                          72,867
                                                          
                                                          
                                                          $
                                                          72,867Liabilities
      and Stockholders' EquityLiabilitiesAccrued
      expenses and other liabilities
                                                          
                                                          $
                                                          395
                                                          
                                                          
                                                          $
                                                          395Interest
      payable
                                                          
                                                          
                                                          101
                                                          
                                                          
                                                          
                                                          101Line
      of credit
                                                          
                                                          
                                                          27,476
                                                          
                                                          
                                                          
                                                          11,676Distribution
      Notes
                                                          
                                                          
                                                          3,405
                                                          
                                                          
                                                          
                                                          3,405Total
      Liabilities
                                                          
                                                          
                                                          31,377
                                                          
                                                          
                                                          
                                                          15,577Stockholders'
      EquityCommon
      Stock, par value $0.01 per share; 100,000,000 shares authorized, 6,191,515
      shares outstanding, pro forma as adjusted
                                                          
                                                          
                                                          42
                                                          
                                                          
                                                          
                                                          62Capital
      in excess of par value
                                                          
                                                          
                                                          41,448
                                                          
                                                          
                                                          
                                                          57,228Total
      Stockholders' Equity
                                                          
                                                          
                                                          41,490
                                                          
                                                          
                                                          
                                                          57,290Total
      Liabilities and Stockholders' Equity
                                                          
                                                          $
                                                          72,867
                                                          
                                                          
                                                          $
                                                          72,867




75


Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)


The
following pro forma Schedule of Investments assumes the Full Circle Portfolio
Acquisition, and the Lotus
Transaction, took place on June 30, 2010:




Pro
Forma Schedule of Investments (Unaudited)
  June
      30, 2010
  Description1
                                
                                Industry
                                
                                InterestRate2
                                
                                Maturity/
                                  Expiration
                                  Date
                                
                                ParAmount/
                                  Quantity
                                
                                
                                Cost
                                
                                
                                Fair Value
                                
                                
                                % of pre-
                                  Offering
                                  Shareholders'
                                  EquityAttention
      Transit Advertising Systems, LLC
                                
                                Outdoor
      Advertising ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                13.50
                                %
                                11/01/12
                                
                                $
                                2,343,171
                                
                                
                                $
                                2,265,847
                                
                                
                                $
                                2,265,847
                                
                                
                                
                                5.41
                                %Blackstrap
      Broadcasting, LLC
                                
                                Radio
      BroadcastingSenior
      Secured Loan
                                
                                
                                
                                
                                5.25
                                %
                                09/25/10
                                
                                $
                                3,000,000
                                
                                
                                
                                2,676,000
                                
                                
                                
                                2,676,000
                                
                                
                                
                                6.38
                                %Subordinated
      Secured Loan
                                
                                
                                
                                
                                16.00
                                %
                                09/25/12
                                
                                $
                                3,500,000
                                
                                
                                
                                3,468,500
                                
                                
                                
                                3,468,500
                                
                                
                                
                                8.28
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                6,144,500
                                
                                
                                
                                6,144,500
                                
                                
                                
                                14.66
                                %Bloomingdale
      Partners, LP
                                
                                Consumer
      FinancingSenior
      Secured Loan
                                
                                
                                
                                
                                9.10
                                %
                                11/01/12
                                
                                $
                                1,604,259
                                
                                
                                
                                1,532,068
                                
                                
                                
                                1,532,068
                                
                                
                                
                                3.66
                                %BLSCO Newco, Inc.3
                                
                                Oilfield
      ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                11.50
                                %
                                08/31/11
                                
                                $
                                2,500,000
                                
                                
                                
                                2,500,000
                                
                                
                                
                                2,500,000
                                
                                
                                
                                5.96
                                %Equisearch
      Acquisition, Inc
                                
                                Asset
      Recovery ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                12.00
                                %
                                01/31/11
                                
                                $
                                2,164,935
                                
                                
                                
                                2,164,935
                                
                                
                                
                                2,164,935
                                
                                
                                
                                5.17
                                %Warrants
      for 5.99 shares (at a $0.01 strike price)
                                
                                
                                
                                
                                
                                
                                01/15/14
                                
                                
                                6
                                
                                
                                
                                146,345
                                
                                
                                
                                146,345
                                
                                
                                
                                0.35
                                %Warrants
      for 6.32 shares (at a $19,372 strike price)
                                
                                
                                
                                
                                
                                
                                01/15/14
                                
                                
                                6
                                
                                
                                
                                78,655
                                
                                
                                
                                78,655
                                
                                
                                
                                0.19
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2,389,935
                                
                                
                                
                                2,389,935
                                
                                
                                
                                5.70
                                %Exist, Inc.3
                                
                                ApparelSenior
      Secured Loan
                                
                                
                                
                                
                                11.50
                                %
                                12/31/10
                                
                                $
                                4,675,000
                                
                                
                                
                                4,675,000
                                
                                
                                
                                4,675,000
                                
                                
                                
                                11.15
                                %First Capital Lotus Asset-Based Loan Fund I,
      LP3
                                
                                Nondepository
      Credit InstitutionsPrivate
      Investment Company
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                6,000,000
                                
                                
                                
                                6,000,000
                                
                                
                                
                                14.32
                                %Georgia
      Outdoor Advertising, LLC
                                
                                Outdoor
      Advertising ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                14.00
                                %
                                07/01/12
                                
                                $
                                1,301,001
                                
                                
                                
                                1,235,300
                                
                                
                                
                                1,235,300
                                
                                
                                
                                2.95
                                %Senior
      Secured Loan
                                
                                
                                
                                
                                14.50
                                %
                                07/01/12
                                
                                $
                                564,883
                                
                                
                                
                                541,158
                                
                                
                                
                                541,158
                                
                                
                                
                                1.29
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,776,458
                                
                                
                                
                                1,776,458
                                
                                
                                
                                4.24
                                %Icon
      Groupe, LLC
                                
                                Outdoor
      Advertising ServicesSenior
      Secured Loan *
                                
                                
                                
                                
                                10.50
                                %
                                07/01/12
                                
                                $
                                3,883,823
                                
                                
                                
                                3,654,677
                                
                                
                                
                                3,654,677
                                
                                
                                
                                8.72
                                %Subordinated
      Secured Loan
                                
                                
                                
                                
                                14.50
                                %
                                07/01/12
                                
                                $
                                783,378
                                
                                
                                
                                711,699
                                
                                
                                
                                711,699
                                
                                
                                
                                1.70
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                4,366,376
                                
                                
                                
                                4,366,376
                                
                                
                                
                                10.42
                                %Iron
      City Brewing, LLC
                                
                                BeveragesSenior
      Secured Loan
                                
                                
                                
                                
                                16.50
                                %
                                08/31/11
                                
                                $
                                1,500,000
                                
                                
                                
                                1,500,000
                                
                                
                                
                                1,500,000
                                
                                
                                
                                3.58
                                %Warrants for 148 Membership Units (at a $0.01
      strike price)4
                                
                                
                                
                                
                                
                                
                                08/10/13
                                
                                
                                148
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                0.00
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,500,000
                                
                                
                                
                                1,500,000
                                
                                
                                
                                3.58
                                %MDU
      Communications (USA) Inc
                                
                                CableTV/Broadband
      ServicesSenior
      Secured Loan - Tranche A
                                
                                
                                
                                
                                11.85
                                %
                                06/30/11
                                
                                $
                                5,000,000
                                
                                
                                
                                5,000,000
                                
                                
                                
                                5,000,000
                                
                                
                                
                                11.93
                                %Senior
      Secured Loan - Tranche C
                                
                                
                                
                                
                                9.75
                                %
                                06/30/11
                                
                                $
                                250,000
                                
                                
                                
                                250,000
                                
                                
                                
                                250,000
                                
                                
                                
                                0.60
                                %Senior
      Secured Loan - Tranche D
                                
                                
                                
                                
                                8.75
                                %
                                06/30/11
                                
                                $
                                1,480,000
                                
                                
                                
                                1,480,000
                                
                                
                                
                                1,480,000
                                
                                
                                
                                3.53
                                %Warrants
      for 375,000 shares (at a $0.60 strike price)
                                
                                
                                
                                
                                
                                
                                06/30/13
                                
                                
                                375,000
                                
                                
                                
                                620
                                
                                
                                
                                620
                                
                                
                                
                                0.00
                                %Warrants
      for 304,762 shares (at a $0.82 strike price)
                                
                                
                                
                                
                                
                                
                                09/11/11
                                
                                
                                304,762
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                0.00
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                6,730,620
                                
                                
                                
                                6,730,620
                                
                                
                                
                                16.06
                                %Miken Sales, Inc.3
                                
                                ApparelSenior
      Secured Loan
                                
                                
                                
                                
                                11.50
                                %
                                10/31/10
                                
                                $
                                1,825,000
                                
                                
                                
                                1,825,000
                                
                                
                                
                                1,825,000
                                
                                
                                
                                4.35
                                %The
      Selling Source, LLC
                                
                                Information
      and Data ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                12.00
                                %
                                12/21/12
                                
                                $
                                7,137,911
                                
                                
                                
                                7,137,911
                                
                                
                                
                                7,137,911
                                
                                
                                
                                17.03
                                %VaultLogix,
      LLC
                                
                                Information
      Retrieval ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                12.00
                                %
                                09/04/11
                                
                                $
                                5,000,000
                                
                                
                                
                                4,765,000
                                
                                
                                
                                4,765,000
                                
                                
                                
                                11.37
                                %Warrants
      for Variable % Ownership (at a $307.855 strike price)
                                
                                
                                
                                
                                
                                
                                09/04/13
                                
                                
                                3,439
                                
                                
                                
                                310,976
                                
                                
                                
                                310,976
                                
                                
                                
                                0.74
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                5,075,976
                                
                                
                                
                                5,075,976
                                
                                
                                
                                12.11
                                %Verifier Capital LLC/Verifier Capital Limited5
                                
                                Security
      Systems ServicesSenior
      Secured Loan
                                
                                
                                
                                
                                12.00
                                %
                                06/25/11
                                
                                $
                                1,500,000
                                
                                
                                
                                1,500,000
                                
                                
                                
                                1,500,000
                                
                                
                                
                                3.58
                                %West World Media, LLC4,6
                                
                                Information
      and Data ServicesSenior
      Secured Loan *
                                
                                
                                
                                
                                15.00
                                %
                                12/31/11
                                
                                $
                                6,587,298
                                
                                
                                
                                6,175,592
                                
                                
                                
                                6,175,592
                                
                                
                                
                                14.73
                                %Limited
      Liability Company Interests
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                430,500
                                
                                
                                
                                430,500
                                
                                
                                
                                1.03
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                6,606,092
                                
                                
                                
                                6,606,092
                                
                                
                                
                                15.76
                                %Ygnition
      Networks, Inc.
                                
                                CableTV/Broadband
      ServicesSenior
      Secured Loan - Tranche A
                                
                                
                                
                                
                                12.25
                                %
                                07/06/11
                                
                                $
                                3,750,000
                                
                                
                                
                                3,706,875
                                
                                
                                
                                3,706,875
                                
                                
                                
                                8.84
                                %Senior
      Secured Loan - Tranche B
                                
                                
                                
                                
                                11.75
                                %
                                07/06/11
                                
                                $
                                2,500,000
                                
                                
                                
                                2,460,000
                                
                                
                                
                                2,460,000
                                
                                
                                
                                5.87
                                %Senior
      Secured Loan - Tranche C
                                
                                
                                
                                
                                11.75
                                %
                                07/06/11
                                
                                $
                                2,500,000
                                
                                
                                
                                2,460,000
                                
                                
                                
                                2,460,000
                                
                                
                                
                                5.87
                                %Senior
      Secured Loan - Tranche D
                                
                                
                                
                                
                                11.25
                                %
                                07/06/11
                                
                                $
                                1,689,944
                                
                                
                                
                                1,655,300
                                
                                
                                
                                1,655,300
                                
                                
                                
                                3.95
                                %Warrants
      for 644,474 shares (at a $1.15 strike price)
                                
                                
                                
                                
                                
                                
                                02/27/12
                                
                                
                                644,474
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                0.00
                                %Totals
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                10,282,175
                                
                                
                                
                                10,282,175
                                
                                
                                
                                24.53
                                %Total
      Investments
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                72,307,958
                                
                                
                                $
                                72,307,958
                                
                                
                                
                                172.52
                                %
 
 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 PRIME, and which reset
      daily, quarterly or semi-annually. For each debt investment we have
      provided the current interest rate in effect as of June 30,
      2010.
 3
              Adjusted
      to reflect the redemption of $9,000,000 of First Capital Lotus Asset-Based
      Loan Fund I, LP partnership interests in exchange for the purchase of loan
      participations in BLSCO Newco, Inc, Exist, Inc., and Miken Sales, Inc. in
      connection with the initial public
offering.
 4
              A
      portion of this investment is held in a wholly owned subsidiary of one of
      the Legacy Funds. Adjusted to reflect the dissolution of the the wholly
      owned subsidiary and direct ownership of the investment by Full Circle
      Capital Corporation in connection with the initial public
      offering
 5
              Joint
      borrowers under the loan facility, one entity domiciled in UK while other
      is domiciled in United States.
 6
              Denotes
      an Affiliate Investment. “Affiliate Investments” are investments in those
      companies that are “Affiliated Companies” of the Legacy Funds, as defined
      in the Investment Company Act of 1940, which are not “Control
      Investments.”  The Selling Funds are deemed to be an “Affiliate” of a
      company in which it has invested if it owns 5% or more but less than 25%
      of the voting securities of such
company.
  *
              Investment contains a partial PIK
      feature.
  76
 Full Circle Capital
Corporation
 (a development stage
company)
 Notes
to Financial Statements - (Continued)
 Pro Forma Portfolio Composition
(Unaudited)
  June
      30, 2010
 Fair Value
                        
                        
                        % of pre-Offering
                          Shareholders'
                          EquityIndustry
      ClassificationCableTV/Broadband
      Services
                        
                        $
                        17,012,795
                        
                        
                        
                        40.59
                        %Information
      and Data Services
                        
                        
                        13,744,003
                        
                        
                        
                        32.79
                        %Outdoor
      Advertising Services
                        
                        
                        8,408,681
                        
                        
                        
                        20.06
                        %Radio
      Broadcasting
                        
                        
                        6,144,500
                        
                        
                        
                        14.66
                        %Apparel
                        
                        
                        6,500,000
                        
                        
                        
                        15.51
                        %Nondepository
      Credit Institutions
                        
                        
                        6,000,000
                        
                        
                        
                        14.32
                        %Information
      Retrieval Services
                        
                        
                        5,075,976
                        
                        
                        
                        12.11
                        %Oilfield
      Services
                        
                        
                        2,500,000
                        
                        
                        
                        5.96
                        %Asset
      Recovery Services
                        
                        
                        2,389,935
                        
                        
                        
                        5.70
                        %Consumer
      Financing
                        
                        
                        1,532,068
                        
                        
                        
                        3.66
                        %Beverages
                        
                        
                        1,500,000
                        
                        
                        
                        3.58
                        %Security
      Systems Services
                        
                        
                        1,500,000
                        
                        
                        
                        3.58
                        %$
                        72,307,958
                        
                        
                        
                        172.52
                        %Investment ClassificationSenior
      Secured Loans
                        
                        $
                        61,160,663
                        
                        
                        
                        145.92
                        %Private
      Investment Company
                        
                        
                        6,000,000
                        
                        
                        
                        14.32
                        %Subordinated
      Secured Loans
                        
                        
                        4,180,199
                        
                        
                        
                        9.97
                        %Warrants
                        
                        
                        536,596
                        
                        
                        
                        1.28
                        %Limited
      Liability Company Interests
                        
                        
                        430,500
                        
                        
                        
                        1.03
                        %$
                        72,307,958
                        
                        
                        
                        172.52
                        %


77




Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure





Not
applicable.





Item 9A.
Controls and
Procedures





(a)   Evaluation of
Disclosure Controls and Procedures





As of
June 30, 2010 (the end of the period covered by this report), we, including our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective and
provided reasonable assurance that information required to be disclosed in our
periodic SEC filings is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. However, in evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no
matter how well designed and operated can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





(b) Management’s Report on Internal
Control Over Financial Reporting





This
annual report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.





(c) Attestation Report of the Independent
Registered Public Accounting Firm





Not
applicable.





(d) Changes in Internal Controls Over
Financial Reporting





Management
did not identify any change in the Company’s internal control over financial
reporting that occurred during the period ending June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.





Item 9B. Other Information





Not
applicable.


78


PART III


Item 10. Directors, Executive Officers and
Corporate Governance





Our Board
of Directors oversees our management. The Board of Directors currently consists
of four members, three of whom are not “interested persons” of Full Circle
Capital Corporation 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.





Board
of Directors and Executive Officers





Name
                
                Age
                
                Position
                
                Director
                  Since
                
                Expiration
                  of TermInterested
      DirectorJohn
      E. Stuart
                
                44
                
                Chief
      Executive Officer, President and Chairman of the Board of
      Directors
                
                2010
                
                2012Independent
      DirectorsMark
      C. Biderman
                
                64
                
                Director
                
                2010
                
                2013Edward
      H. Cohen
                
                71
                
                Director
                
                2010
                
                2011Thomas
      A. Ortwein, Jr.
                
                54
                
                Director
                
                2010
                
                2013





The
address for each of our directors is 800 Westchester Ave., Suite S-620, Rye
Brook, New York 10573.





Executive
Officers Who Are Not Directors





Name
                
                Age
                
                PositionWilliam
      E. Vastardis
                
                54
                
                Chief
      Financial Officer, Treasurer and SecretarySalvatore
      Faia
                
                47
                
                Chief
      Compliance Officer




79


The
address for each of our executive officers is 800 Westchester Ave., Suite S-620,
Rye Brook, New York 10573.





Biographical
Information





Directors





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.





Interested
Director





John E.
Stuart is our Chief Executive Officer and President and is primarily
responsible for overall investment strategies and portfolio management. In
addition, Mr. Stuart is the manager of Full Circle Advisors and 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 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.
Stuart’s depth of experience in corporate finance, capital markets and financial
services, as well as his intimate knowledge of Full Circle Capital’s 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.





Independent
Directors





Mark C.
Biderman serves as chairman of Full Circle Capital’s audit committee. He
also currently serves as a director and chairman of the audit committee of Atlas
Energy, Inc., an independent natural gas producer that also owns an interest in
an energy services provider. 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 served as NFP’s 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.





Edward H.
Cohen serves as chairman of Full Circle Capital’s 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
a director of Phillips-Van Heusen Corporation, a manufacturer and marketer of
apparel and footwear, and Gilman Ciocia, Inc., a tax and financial planning
firm. In the past five years, he has 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.


80




Thomas A.
Ortwein, Jr.founded Highbrace Partners in 2003. From 1997 to 2003 he was
Managing Director and Head of Capital Markets for CIBC World Markets, where he
was active in firm governance, and served on numerous boards and committees
including the Management Committee, Corporate and Leveraged Finance Executive
Board and the World Markets Executive Board; he also was Chairman of the
Commitment and Due Diligence committees. Mr. Ortwein started the Capital Markets
Group at Oppenheimer & Co., Inc. in 1991, which he managed until the Firm
was acquired by CIBC in 1997. From 1984 to 1991 he managed various business
units at Oppenheimer. Prior to that, he held various positions at Lehman
Brothers and Merrill Lynch. Mr. Ortwein is currently an active member of the
Greenwich Roundtable, a not-for-profit research and educational organization for
alternative investing and best practices in the hedge fund industry. He also
serves as President of the Board of Directors of the Greenwich Boys and Girls
Club. Mr. Ortwein’s extensive familiarity with the financial industry, and the
investment management process in particular, provide the board of directors with
valuable insight. Education — B.A., Economics, Moravian College,
1977.





Executive
Officers Who Are Not Directors





William E.
Vastardis is our Chief Financial Officer, Treasurer and Secretary. Mr.
Vastardis is a founder and President of Vastardis Fund Services LLC, which
serves as Full Circle Capital’s sub-administrator. Founded in 2003, Vastardis
Fund Services provides full-service fund administration services to hedge fund,
private equity and business development company clients. Prior to founding
Vastardis Fund Services, Mr. Vastardis managed a third-party fund administration
firm, AMT Capital Services Inc., which was acquired by Investors Bank &
Trust Company in 1998. Mr. Vastardis continued in the role of managing director
at the renamed Investors Capital Services until he departed in 2003 to found
Vastardis Fund Services. Mr. Vastardis served as Chief Financial Officer of
Prospect Capital Corporation, a business development company, from May 2005 to
November 2008. He also served as Prospect Capital’s Chief Compliance Officer
from January 2005 until September 2008. Education — B.S., Business
Administration, Villanova University, 1990.





Salvatore Faiais our Chief Compliance Officer. 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 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 Investment Company Institute’s Chief Compliance Officer Committee.
Education — B.S., Accounting and Finance, La Salle University, 1984;
J.D. University of Pennsylvania, 1988.











Board
Leadership Structure





Our Board
of Directors monitors and performs an oversight role with respect to the
business and affairs of Full Circle Capital, including with respect to
investment practices and performance, compliance with regulatory requirements
and the services, expenses and performance of service providers to Full Circle
Capital. Among other things, our Board of Directors approves the appointment of
our investment adviser and officers, reviews and monitors the services and
activities performed by our investment adviser and executive officers and
approves the engagement, and reviews the performance of, our independent public
accounting firm.





Under
Full Circle Capital’s 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.


81





Presently,
Mr. Stuart serves as the chairman of our Board of Directors. Mr. Stuart is an
“interested person” of Full Circle Capital as defined in Section 2(a)(19) of the
1940 Act because he is on the investment committee of our investment adviser and
is the manager and managing member of our investment adviser and administrator,
respectively. We believe that Mr. Stuart’s history with the Legacy Funds,
familiarity with Full Circle Capital’s 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 Capital is best served through this
existing leadership structure, as Mr. Stuart’s relationship with Full Circle
Capital’s 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 Circle Capital’s needs.





Board’s
Role In Risk Oversight





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
committee’s risk oversight responsibilities include overseeing Full Circle
Capital’s accounting and financial reporting processes, Full Circle Capital’s
systems of internal controls regarding finance and accounting, Full Circle
Capital’s valuation process, and audits of Full Circle Capital’s financial
statements. The nominating and corporate governance committee’s 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 Capital and its service providers. The Chief Compliance Officer’s annual
report will address, at a minimum, (a) the operation of the compliance policies
and procedures of Full Circle Capital 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 Officer’s 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 board’s 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.


82


We
recognize that different board roles in risk oversight are appropriate for
companies in different situations. We intend to re-examine the manners in which
the board administers its oversight function on an ongoing basis to ensure that
they continue to meet Full Circle Capital’s needs.





Committees
of the Board of Directors





An audit
committee and a nominating and corporate governance committee have been
established by our Board of Directors. All directors are expected to attend at
least 75% of the aggregate number of meetings of the Board of Directors and of
the respective committees on which they serve. 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.





Audit
Committee





The audit
committee operates pursuant to a charter approved by our Board of Directors,
which sets forth the responsibilities of the audit committee. The audit
committee’s 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 Capital, reviewing with such independent registered public
accounting firm the planning, scope and results of their audit of Full Circle
Capital’s 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 Circle Capital’s annual financial
statements and periodic filings and receiving Full Circle Capital’s audit
reports and financial statements. The audit committee is currently composed of
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 Capital 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.





Nominating
and Corporate Governance Committee





The
nominating and corporate governance committee operates pursuant to a charter
approved by our Board of Directors. 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 Capital 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 Capital and its stockholders. In considering possible
candidates for election as a director, the nominating 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;


83


•
            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
      Capital;





•
            are
      able to work with the other members of the Board of Directors and
      contribute to the success of Full Circle
  Capital;





•
            can
      represent the long-term interests of Full Circle Capital’s stockholders as
      a whole; and





•
            are
      selected such that the Board of Directors represents a range of
      backgrounds and experience.





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 committee’s goal of creating a Board of
Directors that best serves the needs of Full Circle Capital and the interests of
its shareholders.





Compensation
Committee





We do not
have a compensation committee because our executive officers do not receive any
direct compensation from us.





Section 16(a) Beneficial
Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934 requires our directors and executive
officers, and persons who own 10% or more of our voting stock, to file reports
of ownership and changes in ownership of our equity securities with the SEC.
Directors, executive officers and 10% or more holders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
As we did not price our initial public offering until August 31, 2010, no such
forms were required to be filed during the year ended June 30,
2010.





Code of
Ethics





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 SEC’s 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 SEC’s 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 SEC’s Public Reference Section, 100 F
Street, N.E., Washington, D.C. 20549.





The
Company has also adopted a code of ethics which applies to, among others, its
senior officers, including its Chief Executive Officer and its Chief Financial
Officer, as well as every officer, director and employee of the Company. The
Company’s code can be accessed via its website at http://www.fccapital.com. The
Company intends to disclose amendments to or waivers from a required provision
of the code on Form 8-K.


84





Item 11.Executive
Compensation





Compensation of
Directors





As we
priced our initial public offering on August 31, 2010, our directors received no
compensation for the year ended June 30, 2010.





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 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 is
expected to be paid to directors who are “interested persons” of Full Circle
Capital, as such term is defined in Section 2(a)(19) of the 1940
Act.





Compensation of Executive
Officers





None of
our officers receives direct compensation from Full Circle Capital. However, Mr.
Stuart, through his financial interest in Full Circle Advisors, will be entitled
to a portion of any investment advisory fees paid by Full Circle Capital to Full
Circle Advisors under the Investment Advisory Agreement. Mr. Vastardis, our
Chief Financial Officer, Treasurer and Secretary, through Vastardis Fund
Services LLC, 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 such persons to Full Circle Capital 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.
The Investment Advisory Agreement will be reapproved within two years of its
effective date, and thereafter on an annual basis, by our Board of Directors,
including a majority of our directors who are not parties to such agreement or
who are not “interested persons” of any such party, as such term is defined in
Section 2(a)(19) of the 1940 Act. See “Business – Investment Advisory
Agreement.”





Item 12.
            Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters





The
following table sets forth, as of September 27, 2010, information with respect
to the beneficial ownership of our common stock by:





•
            each
      of our directors and executive
officers;





•
            all
      of our directors and executive officers as a group;
  and





•
            each
      person known to us to beneficially own 5% or more of the outstanding
      shares of our common stock.





Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities. Percentage of
beneficial ownership is based on 6,191,515 shares of common stock
outstanding as of September 27, 2010, assuming the inclusion of 403,662 shares
issued pursuant to the Subsequent Payment Obligation, unless otherwise noted.
Ownership information for those persons who beneficially own 5% or more of our
shares of common stock is based upon Schedule 13G filings by such persons with
the SEC and other information obtained from such persons, if
available.





Unless
otherwise indicated, to our knowledge, each stockholder listed below has sole
voting and investment power with respect to the shares beneficially owned by the
stockholder, and has the same address as the Company. Our address is 800
Westchester Ave., Suite S-620, Rye Brook, New York 10573





As of
June 30, 2010 and before August 31, 2010 Full Circle Capital Corporation had 100
shares of common stock outstanding and one stockholder of record, Full Circle
Advisors, LLC.


85





Name and Address of Beneficial Owner
                  
                  Number of Shares
                    Owned Beneficially(1)
                  
                  
                  Percentage of
                    Class(2)Interested
      DirectorJohn
      E. Stuart(3)
                  
                  
                  28,544
                  
                  
                  
                  *Independent
      DirectorsMark
      C. Biderman
                  
                  
                  5,000
                  
                  
                  
                  *Edward
      H. Cohen
                  
                  
                  0
                  
                  
                  
                  -Thomas
      A. Ortwein, Jr.(4)
                  
                  
                  349,594
                  
                  
                  
                  5.65
                  %Executive
      OfficersWilliam
      E. Vastardis
                  
                  
                  0
                  
                  
                  
                  -Salvatore
      Faia
                  
                  
                  0
                  
                  
                  
                  -Executive
      officers and directors as a group
                  
                  
                  383,138
                  
                  
                  
                  6.19
                  %Absolute
      Return Partners LLP(5)
                  
                  
                  377,921
                  
                  
                  
                  6.10
                  %Aris
      Multi-Strategy Offshore Fund Ltd.(6)
                  
                  
                  373,674
                  
                  
                  
                  6.04
                  %Highbrace
      Partners, LP(4)
                  
                  
                  349,594
                  
                  
                  
                  5.65
                  %Eden
      Rock Unleveraged Finance Master Limited(7)
                  
                  
                  330,939
                  
                  
                  
                  5.35
                  %triple-i
      capital AG(8)
                  
                  
                  327,110
                  
                  
                  
                  5.28
                  %







*
            Represents
      less than 1%


(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 6,191,515 shares of the Company’s common stock issued and
      outstanding on September 27, 2010, assuming the inclusion of 403,662
      shares issued pursuant to the Subsequent Payment
    Obligation.


(3)
            Includes
      8,446 held by John E. Stuart GST Trust and 6,047 shares held by Mary E.
      Stuart 2001 Grantor Trust, by virtue of Mr. Stuart’s positions as trustee
      thereof, as well as 100 shares held by Full Circle Advisors, LLC and 197
      shares held by Full Circle Investments, LLC, by virtue of Mr. Stuart’s
      management positions thereof.


(4)
            Mr.
      Ortwein may be deemed to beneficially own the shares held by Highbrace
      Partners, LP by virtue of his position as the managing member of its
      general partner. The address of Highbrace Partners, LP is 26 Byfield Lane,
      Suite 102, Greenwich, CT 06830.


(5)
            The
      address of Absolute Return Partners LLP is 18-20 North Quay, Douglas, Isle
      of Man, IM1 4LE.


(6)
            The
      address of Aris Multi-Strategy Offshore Fund Ltd. is P.O. Box 1984, Grand
      Cayman, Cayman Islands, KY1-1104.


(7)
            The
      address of Eden Rock Unleveraged Finance Master Limited is 18-20 North
      Quay, Douglas, Isle of Man, IM1
4LE.


(8)
              The
      address of triple-i capital AG is Baslerstrasse 100, CH4601, Olten,
      Switzerland.


86




Set forth
below is the dollar range of equity securities beneficially owned by each of our
directors as of September 27, 2010. We are not part of a “family of investment
companies,” as that term is defined in the 1940 Act.





Name of Director
              
              Dollar Range of Equity
                Securities
                Beneficially Owned(1)(2)Interested
      DirectorJohn
      E. Stuart
              
              Over
      $100,000Independent
      DirectorsMark
      C. Biderman
              
              $10,001 -
      $50,000Edward
      H. Cohen
              
              NoneThomas
      A. Ortwein, Jr.
              
              Over
      $100,000





(1)
            The dollar ranges are: 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 $8.56 on September 27, 2010 on the NASDAQ Capital Market.
      Beneficial ownership has been determined in accordance with Rule
      16a-1(a)(2) of the Securities Exchange Act of
  1934.





Item 13. Certain Relationships and Related
Transactions, and Director Independence





Certain
Relationships and Related Transactions





We have
entered into the Investment Advisory Agreement with Full Circle Advisors. Mr.
Stuart, our Chief Executive Officer and President, is the manager of, and has
financial and controlling interests in, Full Circle Advisors.





In
addition, Full Circle Advisors’ investment team presently manages Full Circle
Funding, LP, a specialty lender serving smaller and lower middle-market
companies that has originated approximately $216 million in loans and
investments in 42 distinct borrowers since its inception in 2005. Full Circle
Advisors and its affiliates may also manage other funds in the future that may
have investment mandates that are similar, in whole and in part, with ours. Full
Circle Advisors and its affiliates may determine that an investment is
appropriate for us and for one or more of those other funds. In such event,
depending on the availability of such investment and other appropriate factors,
Full Circle Advisors or its affiliates may determine that we should invest
side-by-side with one or more other funds. Any such investments will be made
only to the extent permitted by applicable law and interpretive positions of the
SEC and its staff, and consistent with Full Circle Advisors’ allocation
procedures.





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 Chief Executive
Officer and President, is the managing member of, and has financial and
controlling interests in, Full Circle Service Company.


87





Our Chief
Financial Officer, Treasurer and Secretary, William E. Vastardis, is the
President of Vastardis Fund Services LLC. Full Circle Service Company has
engaged Vastardis Fund Services to provide certain administrative services to us
and our investment adviser, Full Circle Advisors, including the service of Mr.
Vastardis as our Chief Financial Officer, Treasurer and Secretary. 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
                  
                  Feefirst
      $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%)





Full
Circle Advisors is responsible for paying the allocable portion of the
sub-administration fees charged by Vastardis Fund Services for administrative
services provided to both Full Circle Capital and Full Circle Advisors
reflecting the proportionate share of such administrative services that it
receives.





In
addition, we reimburse 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 $250,000. Vastardis Fund
Services has agreed to cap its first year fees at $200,000 for administrative
services to us and Full Circle Advisors, and at $100,000 for the service of Mr.
Vastardis as our Chief Financial Officer, Treasurer and Secretary.





In
connection with our acquisition of the Legacy Portfolio, we issued an aggregate
of 3,787,753 shares of our common stock and approximately $3.4 million of
Distribution Notes to the Legacy Investors. In addition, the Asset Purchase
Agreement provides for a subsequent payment to certain Legacy Investors 30 days
after the pricing of our initial public offering, or earlier if the
over-allotment option granted to the underwriters is exercised in full. If the
over-allotment option is exercised in full, these Legacy Investors will be
entitled to receive, collectively, 103,662 shares plus a cash amount equal to
the aggregate purchase price paid by the underwriters to acquire the number of
shares underlying the over-allotment option that corresponds to the number of
shares offered by such Legacy Investors (i.e., the public offering price less
underwriting discounts and commissions) less offering-related expenses. This
cash amount is estimated to be approximately $2.47 million, representing gross
proceeds to Legacy Investors of approximately $2.70 million less underwriting
discounts and commissions and offering-related expenses of approximately $0.23
million. If the over-allotment option is not exercised and expires, these Legacy
Investors will receive 403,662 additional shares of our common stock. If the
over-allotment option is partially exercised, these Legacy Investors will
receive a proportionate distribution of both cash and stock, depending upon the
amount of the shares underlying the over-allotment option that were actually
acquired by the underwriters. For information on the ownership of our shares,
see “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”





The Lotus
Fund is an affiliate of First Capital, our lender under the New Credit Facility.
The Legacy Funds completed the Lotus Transaction immediately prior to the
consummation of the Full Circle Portfolio Acquisition, resulting in (a) the
redemption of $9 million of their collective partnership interests in the Lotus
Fund in exchange for the purchase of loan participations in three investments,
BLSCO Newco, Inc., Exist, Inc., and Miken Sales, Inc., and (b) rescheduling the
full redemption of the remaining $6 million in Lotus Fund partnership interests
to July 31, 2014.


88


We have
also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our Board of
Directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).




Director
Independence




Our board
of directors has determined that Messrs. Biderman, Cohen, and Ortwein are
“independent directors” as such term is defined in Rule 10A-3 of the Exchange
Act and the rules of the NASDAQ Capital Market.





Item 14. Principal Accounting Fees and
Services




The Audit
Committee and the independent directors of the Board of Directors have selected
Rothstein, Kass & Company, P.C. to serve as the independent registered
public accounting firm for the Company for the fiscal year ending June 30,
2010.




Rothstein,
Kass & Company, P.C. has advised us that neither the firm nor any present
member or associate of it has any material financial interest, direct or
indirect, in the Company or its affiliates.




Fiscal Year Ended
                        June 30, 2010Audit
      Fees
                      
                      $
                      20,000Audit-Related
      Fees
                      
                      
                      —Tax
      Fees
                      
                      $
                      2,500All
      Other Fees
                      
                      
                      —Total
      Fees:
                      
                      $
                      22,500





Audit Fees. Audit fees
consist of fees billed for professional services rendered for the audit of our
year-end financial statements and services that are normally provided by
Rothstein, Kass & Company, P.C. in connection with statutory and regulatory
filings.




Audit-Related
Fees. Audit-related services consist of fees billed for assurance
and related services that are reasonably related to the performance of the audit
or review of our financial statements and are not reported under “Audit Fees.”
These services include attest services that are not required by statute or
regulation and consultations concerning financial accounting and reporting
standards.




Tax Fees. Tax fees
consist of fees billed for professional services for tax compliance. These
services include assistance regarding federal, state, and local tax
compliance.




All Other Fees. All
other fees would include fees for products and services other than the services
reported above.




Policy
on Board Pre-Approval of Audit and Permissible Non-audit Services of Independent
Auditors




The Audit
Committee has established a pre-approval policy that describes the permitted
audit, audit-related, tax and other services to be provided by Rothstein, Kass
& Company, P.C., the Company’s independent registered public accounting
firm. The policy requires that the Audit Committee pre-approve the audit and
non-audit services performed by the independent auditor in order to assure that
the provision of such service does not impair the auditor’s
independence.


89


PART IV





Item 15.Exhibits and Financial Statement
Schedules





a.
Documents Filed as Part of this Report





The
following financial statements are set forth in Item 8:





PageReport
      of Independent Registered Public Accounting Firm
                      62Statement
      of Assets and Liabilities as of June 30, 2010
                      63Statement
      of Operations for the period from April 16, 2010 (date of inception) to
      June 30, 2010
                      64Statement
      of Changes in Net Assets for the period from April 16, 2010 (date of
      inception) to June 30, 2010
                      65Statement
      of Cash Flows for the period from April 16, 2010 (date of inception) to
      June 30, 2010
                      66Notes
      to Financial Statements
                      67





b.
Exhibits





The
following exhibits are filed as part of this report or hereby incorporated by
reference to exhibits previously filed with the SEC:





Exhibit
                              Number
                            
                            Description3.1
                            
                            Articles
      of Amendment and Restatement**3.2
                            
                            Bylaws*4.1
                            
                            Form
      of Common Stock Certificate*4.2
                            
                            Form
      of Note Agreement for Senior Unsecured Notes*4.3
                            
                            Form
      of Senior Unsecured Note*10.1
                            
                            Form
      of Dividend Reinvestment Plan*10.2
                            
                            Form
      of Second Amended and Restated Loan and Security Agreement by and between
      the Registrant and FCC, LLC d/b/a First Capital**10.3
                            
                            Investment
      Advisory Agreement by and between Registrant and Full Circle Advisors,
      LLC*10.4
                            
                            Administration
      Agreement by and between Registrant and Full Circle Service Company,
      LLC*10.5
                            
                            Form
      of Indemnification Agreement by and between Registrant and each of its
      directors*10.6
                            
                            Trademark
      License Agreement by and between Registrant and Full Circle Advisors,
      LLC*10.7
                            
                            Form
      of Purchase and Sale Agreement by and between Registrant, Full Circle
      Partners, LP, Full Circle Fund, Ltd., Full Circle Offshore, LLC, and FCC,
      LLC d/b/a First Capital**31.1
                            
                            Certification
      of Chief Executive Officer pursuant to Rule 13a-14 of the Securities
      Exchange Act of 1934, as amended.31.2
                            
                            Certification
      of Chief Financial Officer pursuant to Rule 13a-14 of the Securities
      Exchange Act of 1934, as amended.32.1
                            
                            Certification
      of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley
      Act of 2002.32.2
                            
                            Certification
      of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley
      Act of
2002.


*
                Previously
      filed in connection with Registrant’s registration statement on Form N-2
      Pre-Effective Amendment No. 2 (File No. 333-166302) filed on August 5,
      2010.
 **
                Previously
      filed in connection with Registrant’s registration statement on Form N-2
      Pre-Effective Amendment No. 3 (File No. 333-166302) filed on August 26,
      2010.


90




c. Financial
statement schedules




No
financial statement schedules are filed herewith because (1) such schedules
are not required or (2) the information has been presented in the
aforementioned financial statements.


91





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.




FULL
      CIRCLE CAPITAL CORPORATIONDate:
      September 28, 2010
              /s/ John E. StuartJohn
      E. Stuart, Chief Executive Officer and
President




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.





Date:
      September 28, 2010
            /s/ John E. StuartJohn
      E. Stuart, Chief Executive Officer, President and Chairman of the Board of
      Directors (Principal Executive Officer)Date:
      September 28, 2010
            /s/ William E. VastardisWilliam
      E. Vastardis, Chief Financial Officer, Treasurer and Secretary (Principal
      Financial and Accounting Officer)Date:
      September 28, 2010
            /s/ Mark C. BidermanMark
      C. Biderman, DirectorDate:
      September 28, 2010
            /s/ Edward H. CohenEdward
      H. Cohen, DirectorDate:
      September 28, 2010
            /s/ Thomas A. Ortwein,
  Jr.Thomas
      A. Ortwein, Jr., Director




92