Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-54251
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in its Charter)
Maryland | 27-2614444 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
405 Park Avenue, 15th Floor New York, New York | 10022 | |
(Address of Principal Executive Office) | (Zip Code) | |
(212) 415-6500
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 o | Accelerated filer o | |
Non-accelerated filer x | Smaller reporting company o | |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of May 11, 2012 was 5,276,112.
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012
TABLE OF CONTENTS
Page | |
PART I | |
Statements of Assets and Liabilities as of March 31, 2012 (Unaudited) and December 31, 2011 | |
Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited) | |
Statements of Changes in Net Assets for the Three Months Ended March 31, 2012 and 2011 (Unaudited) | |
Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited) | |
Schedule of Investments as of March 31, 2012 (Unaudited) and December 31, 2011 | |
Notes to Financial Statements | |
Item 2. Management's Discussion and Analysis | |
PART II | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. Defaults upon Senior Securities | |
Item 4. Mine Safety Disclosures | |
Item 5. Other Information | |
Item 6. Exhibits | |
Item 1. Financial Statements.
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
STATEMENTS OF ASSETS AND LIABILITIES
(dollars in thousands except share and per share data)
March 31, 2012 | December 31, 2011 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Investments, at fair value (amortized cost of $32,520 and $14,294, respectively) | $ | 32,830 | $ | 14,271 | |||
Cash and cash equivalents | 1,120 | 828 | |||||
Interest receivable | 265 | 142 | |||||
Due from affiliate | 2,106 | 918 | |||||
Deferred credit facility financing costs, net | 38 | 50 | |||||
Prepaid expenses and other assets | 27 | 41 | |||||
Total assets | 36,386 | 16,250 | |||||
LIABILITIES | |||||||
Revolving credit facility | $ | 10,000 | $ | 5,900 | |||
Payable for unsettled trades | 1,007 | 1,914 | |||||
Accounts payable and accrued expenses | 145 | 154 | |||||
Interest and credit facility fees payable | 32 | 19 | |||||
Stockholder distributions payable | 166 | 56 | |||||
Total liabilities | 11,350 | 8,043 | |||||
NET ASSETS | |||||||
Preferred stock, $.001 par value, 50,000,000 shares authorized, none issued and outstanding | $ | — | $ | — | |||
Common stock, $.001 par value, 450,000,000 shares authorized 2,726,639 and 912,297 shares issued and outstanding, respectively | 3 | 1 | |||||
Capital in excess of par value | 24,645 | 8,235 | |||||
Accumulated distributions in excess of net investment income | (3 | ) | (7 | ) | |||
Accumulated net realized gain from investments | 81 | 1 | |||||
Net unrealized appreciation (depreciation) on investments | 310 | (23 | ) | ||||
Net assets | 25,036 | 8,207 | |||||
Total liabilities and net assets | $ | 36,386 | $ | 16,250 | |||
Net asset value per share * | $ | 9.18 | $ | 9.00 | |||
Offering price per share excluding commissions and dealer manager fees | $ | 9.23 | $ | 9.23 | |||
*Net asset value per share and common shares outstanding for the period ended March 31, 2012 and year ended December 31, 2011 have been adjusted to reflect a stock dividend of $0.05 per share declared on March 29, 2012.
The accompanying notes are an integral part of these statements.
1
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
STATEMENTS OF OPERATIONS
(dollars in thousands except share and per share data)
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Investment income: | ||||||||
Interest income | $ | 569 | $ | — | ||||
Other income | 41 | — | ||||||
Total investment income | 610 | — | ||||||
Operating expenses: | ||||||||
Interest and credit facility financing expenses | 106 | 13 | ||||||
Professional fees | 119 | — | ||||||
Directors fees | 29 | — | ||||||
Insurance | 51 | — | ||||||
Management fees | 98 | — | ||||||
Incentive fees | 149 | — | ||||||
Other administrative | 26 | 50 | ||||||
Expenses before expense waivers and reimbursements | 578 | 63 | ||||||
Waiver of management and incentive fees | (247 | ) | — | |||||
Expense support reimbursement | (78 | ) | — | |||||
Total expenses, net of expense waivers and reimbursements | 253 | 63 | ||||||
Net investment income (loss) | 357 | (63 | ) | |||||
Realized and unrealized gain on investments: | ||||||||
Net realized gain from investments | 80 | — | ||||||
Net change in unrealized appreciation on investments | 333 | — | ||||||
Net realized and unrealized gain on investments | 413 | — | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 770 | $ | (63 | ) | |||
Per share information - basic and diluted*: | ||||||||
Net investment income (loss) | $ | 0.21 | $ | (2.82 | ) | |||
Net increase (decrease) in net assets resulting from operations | $ | 0.44 | $ | (2.82 | ) | |||
Weighted average common shares outstanding | 1,739,161 | 22,223 | ||||||
*Per share information - basic and diluted and weighted average common shares outstanding for the three months ended March 31, 2012 and 2011 have been adjusted to reflect a stock dividend of $0.05 per share declared on March 29, 2012.
The accompanying notes are an integral part of these statements.
2
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
STATEMENTS OF CHANGES IN NET ASSETS
(dollars in thousands except share and per share data)
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Operations: | ||||||||
Net investment income (loss) | $ | 357 | $ | (63 | ) | |||
Net realized gain from investments | 80 | — | ||||||
Net unrealized appreciation on investments | 333 | — | ||||||
Net increase (decrease) in net assets from operations | 770 | (63 | ) | |||||
Stockholder distributions: | ||||||||
Distributions from net investment income | (353 | ) | — | |||||
Net decrease in net assets from stockholder distributions | (353 | ) | — | |||||
Capital share transactions: | ||||||||
Issuance of common stock | 16,331 | — | ||||||
Reinvestment of stockholder distributions | 81 | — | ||||||
Net increase in net assets from capital share transactions | 16,412 | — | ||||||
Total increase (decrease) in net assets | 16,829 | (63 | ) | |||||
Net assets at beginning of period | 8,207 | 192 | ||||||
Net assets at end of period | $ | 25,036 | $ | 129 | ||||
Net asset value per common share * | $ | 9.18 | $ | 5.79 | ||||
Common shares outstanding at end of period * | 2,726,639 | 22,331 | ||||||
Accumulated distributions in excess of net investment income | $ | (3 | ) | $ | (63 | ) | ||
*Net asset value per share and common shares outstanding for the period ended March 31, 2012 and year ended December 31, 2011 have been adjusted to reflect a stock dividend of $0.05 per share declared on March 29, 2012.
The accompanying notes are an integral part of these statements.
3
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Operating activities: | ||||||||
Net increase (decrease) in net assets from operations | $ | 770 | $ | (63 | ) | |||
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities: | ||||||||
Net accretion of discount on investments | (66 | ) | — | |||||
Amortization of deferred financing costs | 12 | 13 | ||||||
Repayments of investments | 5,917 | — | ||||||
Purchase of investments | (23,997 | ) | — | |||||
Net realized gain from investments | (80 | ) | — | |||||
Net unrealized appreciation on investments | (333 | ) | — | |||||
Increase (decrease) in operating assets: | ||||||||
Interest receivable | (123 | ) | — | |||||
Prepaid expenses and other assets | 13 | (41 | ) | |||||
Increase (decrease) in operating liabilities: | ||||||||
Payable for unsettled trades | (907 | ) | — | |||||
Accounts payable and accrued expenses | 41 | 91 | ||||||
Interest and credit facility fees payable | 13 | — | ||||||
Net cash used in operating activities | (18,740 | ) | — | |||||
Financing activities: | ||||||||
Proceeds from issuance of shares of common stock, net | 16,412 | — | ||||||
Payments of offering costs | (674 | ) | (1 | ) | ||||
Proceeds from line of credit | 4,100 | — | ||||||
Payments of financing cost | (50 | ) | — | |||||
Payments to affiliate, net | (513 | ) | — | |||||
Stockholder distributions | (243 | ) | — | |||||
Net cash provided by (used in) financing activities | 19,032 | (1 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 292 | (1 | ) | |||||
Cash and cash equivalents, beginning of period | 828 | 1 | ||||||
Cash and cash equivalents, end of period | $ | 1,120 | $ | — | ||||
Supplemental information: | ||||||||
Interest paid during the period | $ | 65 | $ | — | ||||
Supplemental non-cash information: | ||||||||
Stock distribution | $ | 184 | $ | — | ||||
Cash distribution payable | $ | 118 | $ | — | ||||
The accompanying notes are an integral part of these statements.
4
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
SCHEDULE OF INVESTMENTS
(dollars in thousands)
March 31, 2012 (Unaudited) | ||||||||||||||||||||||
Portfolio Company (a) | Industry | Investment Coupon Rate/Maturity | Effective Yield | Principal / Number of Shares | Amortized Cost | Fair Value (c) | % of Net Assets | |||||||||||||||
Senior Secured First Lien Debt - 83.0% (b) | ||||||||||||||||||||||
Audio Messaging Solutions, LLC | Media: Diversified & Production | 12.00%, 6/16/2016 | 12.00 | % | $ | 1,085 | $ | 1,085 | $ | 1,085 | 4.3 | % | ||||||||||
BCBG Max Azria | Retail | L+10.50% (13.75%), 6/9/2015 | 16.51 | % | 997 | 932 | 932 | 3.7 | % | |||||||||||||
Caribbean Restaurants | Beverage, Food & Tobacco | L+7.50% (9.00%), 2/16/2017 | 9.44 | % | 1,000 | 980 | 980 | 3.9 | % | |||||||||||||
Community Choice | Banking, Finance, Insurance & Real Estate | 10.75%, 5/1/2019 | 11.34 | % | 2,000 | 1,972 | 1,972 | 7.9 | % | |||||||||||||
CST Industries | Construction & Building | L+6.50% (8.00%), 8/9/2013 | 14.42 | % | 2,287 | 2,124 | 2,124 | 8.5 | % | |||||||||||||
DS Waters | Beverage, Food & Tobacco | L+9.00% (10.50%), 8/22/2017 | 10.96 | % | 2,000 | 1,960 | 1,960 | 7.8 | % | |||||||||||||
EIG Investors | Services: Business | L+6.25% (7.75%), 12/19/2017 | 8.15 | % | 499 | 489 | 489 | 2.0 | % | |||||||||||||
Fertitta Morton's Restaurant, Inc. | Beverage, Food & Tobacco | L+7.25% (8.75%), 1/30/2017 | 9.79 | % | 1,000 | 976 | 976 | 3.9 | % | |||||||||||||
Global Tel Link | Telecommunications | L+5.50% (7.00%), 11/26/2017 | 7.59 | % | 499 | 489 | 489 | 2.0 | % | |||||||||||||
Harrah's Propco | Hotel, Gaming & Leisure | L+3.00% (3.23%), 2/13/2015 | 14.68 | % | 400 | 298 | 318 | 1.3 | % | |||||||||||||
J Jill | Retail | L+8.50% (10.00%), 3/17/2017 | 13.18 | % | 543 | 481 | 421 | 1.7 | % | |||||||||||||
K2 Pure Solutions | Chemicals, Plastics & Rubber | L+6.75% (10.00%), 9/10/2015 | 9.88 | % | 1,950 | 1,957 | 1,957 | 7.8 | % | |||||||||||||
McClatchy Co. | Media: Advertising, Printing & Publishing | 11.50%, 2/15/2017 | 12.55 | % | 500 | 481 | 533 | 2.1 | % | |||||||||||||
Metokote | Chemicals, Plastics & Rubber | L+6.50% (10.00%), 11/27/2013 | 9.98 | % | 1,177 | 1,177 | 1,177 | 4.7 | % | |||||||||||||
Omi Holdings | Capital Equipment | 12.00%, 4/13/2013 | 11.99 | % | 952 | 952 | 952 | 3.8 | % | |||||||||||||
Open Solutions | Services: Business | L+2.13% (2.69%), 1/23/2014 | 8.85 | % | 547 | 491 | 512 | 2.0 | % | |||||||||||||
Permian Tanks | Energy: Oil & Gas | L+7.75% (9.50%), 3/16/2017 | 10.62 | % | 2,000 | 1,950 | 1,950 | 7.8 | % | |||||||||||||
ProPT | Healthcare & Pharmaceuticals | L+7.00% (8.50%), 10/31/2016 | 8.84 | % | 975 | 975 | 975 | 3.9 | % | |||||||||||||
Tekelec | Telecommunications | L+7.50% (9.00%), 3/31/2018 | 9.34 | % | 1,000 | 985 | 985 | 3.9 | % | |||||||||||||
Sub Total Senior Secured First Lien Debt | 20,754 | 20,787 | 83.0 | % | ||||||||||||||||||
5
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
SCHEDULE OF INVESTMENTS
(dollars in thousands)
March 31, 2012 (Unaudited) | ||||||||||||||||||||||
Portfolio Company (a) | Industry | Investment Coupon Rate/Maturity | Effective Yield | Principal / Number of Shares | Amortized Cost | Fair Value (c) | % of Net Assets | |||||||||||||||
Senior Secured Second Lien Debt - 37.0% (b) | ||||||||||||||||||||||
Advantage Sales | Services: Business | L+7.75% (9.25%) 12/17/2017 | 9.68 | % | $ | 595 | $ | 589 | $ | 589 | 2.4 | % | ||||||||||
Blue Coat | High Tech Industries | L+10.00% (11.50%), 2/13/2018 | 11.87 | % | 1,500 | 1,476 | 1,512 | 6.0 | % | |||||||||||||
Bolthouse | Beverage, Food & Tobacco | L+7.50% (9.50%), 8/11/2016 | 9.60 | % | 1,500 | 1,505 | 1,505 | 6.0 | % | |||||||||||||
Infor Global | High Tech Industries | L+6.25% (6.49%), 3/2/2014 | 12.88 | % | 1,600 | 1,441 | 1,595 | 6.4 | % | |||||||||||||
Pierre Foods Inc. | Beverage, Food & Tobacco | L+9.50% (11.25%), 9/30/2017 | 11.15 | % | 1,000 | 999 | 999 | 4.0 | % | |||||||||||||
Rocket Software | Services: Business | L+8.75% (10.25%), 2/08/2018 | 10.67 | % | 1,000 | 980 | 1,005 | 4.0 | % | |||||||||||||
Sensus Metering | Utilities: Electric | L+7.25% (8.50%), 5/9/2017 | 8.61 | % | 600 | 589 | 589 | 2.4 | % | |||||||||||||
Southern Pacific Resource Corp. (d) | Energy: Oil & Gas | L+7.50% (10.75%), 1/7/2016 | 10.37 | % | 1,445 | 1,462 | 1,462 | 5.8 | % | |||||||||||||
Sub Total Senior Secured Second Lien Debt | 9,041 | 9,256 | 37.0 | % | ||||||||||||||||||
Senior Unsecured Debt- 3.8% (b) | ||||||||||||||||||||||
Avis Budget Car Rental | Automobile | 8.25%, 1/15/2019 | 8.92 | % | $ | 500 | $ | 488 | $ | 507 | 2.0 | % | ||||||||||
Momentive Performance | Chemicals, Plastics & Rubber | 9.00%, 1/15/2021 | 13.40 | % | 500 | 397 | 440 | 1.8 | % | |||||||||||||
Sub Total Senior Unsecured Debt | 885 | 947 | 3.8 | % | ||||||||||||||||||
Equity/Other - 7.3% (b) | ||||||||||||||||||||||
Carlyle CGMS | Banking, Finance, Insurance & Real Estate | 20 | $ | 1,840 | $ | 1,840 | 7.3 | % | ||||||||||||||
Sub Total Equity/Other | 1,840 | 1,840 | 7.3 | % | ||||||||||||||||||
TOTAL INVESTMENTS - 131.1% (b) | $ | 32,520 | $ | 32,830 | 131.1 | % | ||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS - 31.1% | (7,794 | ) | 31.1 | % | ||||||||||||||||||
NET ASSETS - 100% | $ | 25,036 | 100.0 | % | ||||||||||||||||||
(a) | All of the Company's debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Southern Pacific Resource Corp., Avis Budget Car Rental and Carlyle CGMS. |
(b) | Percentages are based on net assets of $25,036 thousand as of March 31, 2012. |
(c) | Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith by the Company's board of directors as required by the Investment Company Act of 1940. (See Note 3 to the financial statements). |
(d) | Non-U.S. company. The principal place of business for Southern Pacific Resource Corp. is Canada. |
6
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
SCHEDULE OF INVESTMENTS
(dollars in thousands)
December 31, 2011 | ||||||||||||||||||||||
Portfolio Company (a) | Industry | Investment Coupon Rate/Maturity | Effective Yield | Principal / Number of Shares | Amortized Cost | Fair Value (c) | % of Net Assets | |||||||||||||||
Senior Secured First Lien Debt - 117.2% (b) | ||||||||||||||||||||||
Audio Messaging Solutions, LLC | Media: Diversified & Production | 12.00%, 6/16/2016 | 12.00 | % | $ | 1,085 | $ | 1,085 | $ | 1,085 | 13.3 | % | ||||||||||
Avaya, Inc. | Telecommunications | L + 4.50% (5.01%), 10/26/2017 | 7.80 | % | 292 | 260 | 272 | 3.3 | % | |||||||||||||
California Healthcare Medical Billing, Inc. | Healthcare & Pharmaceuticals | 12.00%, 10/17/2015 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Central Parking | Automobile | L + 2.25% (2.81%), 5/22/2014 | 8.54 | % | 349 | 305 | 305 | 3.7 | % | |||||||||||||
Chrysler Group LLC | Automobile | L + 4.75% (6.00%), 5/24/2017 | 8.27 | % | 299 | 270 | 284 | 3.5 | % | |||||||||||||
EIG Investors | Services: Business | L + 6.50% (8.00%), 12/19/2017 | 8.43 | % | 500 | 490 | 490 | 6.0 | % | |||||||||||||
Global Tel Link | Telecommunications | L + 5.50% (7.00%), 11/26/2017 | 7.41 | % | 500 | 490 | 490 | 6.0 | % | |||||||||||||
Harrah's Propco | Hotel, Gaming & Leisure | L + 3.00% (3.25%), 2/13/2015 | 10.87 | % | 400 | 290 | 290 | 3.5 | % | |||||||||||||
Harrison Hydra-Gen, Ltd. | Capital Equipment | 12.00%, 6/4/2015 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Indianapolis Aviation Partners, LLC | Aerospace and Defense | 12.00%, 9/15/2014 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
J Jill | Retail | L + 8.50% (10.00%), 3/17/2017 | 13.18 | % | 550 | 484 | 451 | 5.5 | % | |||||||||||||
K2 Pure Solutions | Chemicals, Plastics & Rubber | L + 6.75% (10.00%), 9/10/2015 | 9.99 | % | 450 | 450 | 450 | 5.5 | % | |||||||||||||
KIK Custom Products Inc. | Consumer Goods: Non-Durable | L + 2.25% (2.53%), 11/24/2014 | 5.24 | % | 499 | 430 | 430 | 5.2 | % | |||||||||||||
McClatchy Co. | Media: Advertising, Printing & Publishing | 11.50%, 2/15/2017 | 12.55 | % | 500 | 481 | 481 | 5.9 | % | |||||||||||||
Mid-Columbia Lumber Products, LLC | Construction & Building | 12.00%, 12/18/2014 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Omi Holdings | Capital Equipment | 12.00%, 4/13/2013 | 11.99 | % | 996 | 996 | 996 | 12.1 | % | |||||||||||||
Open Solutions | Services: Business | L + 2.13% (2.55%), 1/23/2014 | 8.92 | % | 549 | 485 | 485 | 5.9 | % | |||||||||||||
OPI International Ltd. (d) | Energy: Oil & Gas | 12.00%, 11/30/2015 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Pegasus Research Group, LLC | Services: Business | 13.00% Cash / 3% PIK, 1/6/2016 | 16.00 | % | 231 | 231 | 231 | 2.8 | % | |||||||||||||
PPL Rvs, Inc | Automobile | 18.00%, 6/10/2015 | 17.99 | % | 215 | 215 | 215 | 2.6 | % | |||||||||||||
ProPT | Healthcare & Pharmaceuticals | L + 7.00% (8.50%), 10/31/2016 | 8.84 | % | 988 | 988 | 988 | 12.1 | % | |||||||||||||
River Aggregates, LLC | Construction & Building | 12.00%, 3/30/2016 | 12.00 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Texas Competitive Electric | Utilities: Electric | L + 4.50% (4.78%), 10/10/2017 | 12.43 | % | 450 | 307 | 288 | 3.5 | % | |||||||||||||
Sub Total Senior Secured First Lien Debt | 9,637 | 9,611 | 117.2 | % | ||||||||||||||||||
7
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
SCHEDULE OF INVESTMENTS
(dollars in thousands)
December 31, 2011 | ||||||||||||||||||||||
Portfolio Company (a) | Industry | Investment Coupon Rate/Maturity | Effective Yield | Principal / Number of Shares | Amortized Cost | Fair Value (c) | % of Net Assets | |||||||||||||||
Senior Secured Second Lien Debt - 36.5% (b) | ||||||||||||||||||||||
Bolthouse | Beverage, Food & Tobacco | L + 7.50% (9.50%), 8/11/2016 | 9.49 | % | $ | 500 | $ | 500 | $ | 500 | 6.1 | % | ||||||||||
Ceres Management, LLC | Automobile | 14.00%, 3/31/2013 | 13.98 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Condit Exhibits, LLC (e) | Media: Diversified & Production | 9.00% Cash / 9.00% PIK, 7/1/2013 | 17.97 | % | 230 | 230 | 230 | 2.8 | % | |||||||||||||
Infor Global | High Tech Industries | L + 6.25% (6.51%), 3/2/2014 | 9.01 | % | 600 | 498 | 498 | 6.1 | % | |||||||||||||
Pierre Foods Inc. | Beverage, Food & Tobacco | L + 9.50% (11.25%), 9/30/2017 | 11.18 | % | 500 | 499 | 499 | 6.1 | % | |||||||||||||
Sensus Metering | Utilities: Electric | L + 7.25% (8.50%), 5/9/2017 | 8.97 | % | 600 | 588 | 588 | 7.1 | % | |||||||||||||
Southern Pacific Resource Corp. (d) | Energy: Oil & Gas | L + 7.50% (10.75%), 1/7/2016 | 10.58 | % | 449 | 451 | 451 | 5.5 | % | |||||||||||||
Sub Total Senior Secured Second Lien Debt | 2,996 | 2,996 | 36.5 | % | ||||||||||||||||||
Senior Unsecured Debt - 10.7% (b) | ||||||||||||||||||||||
Avis Budget Car Rental | Automobile | 8.25%, 1/15/2019 | 8.92 | % | $ | 500 | $ | 488 | $ | 507 | 6.1 | % | ||||||||||
Momentive Performance | Chemicals, Plastics & Rubber | 9.00%, 1/15/2021 | 13.40 | % | 500 | 396 | 380 | 4.6 | % | |||||||||||||
Sub Total Senior Unsecured Debt | 884 | 887 | 10.7 | % | ||||||||||||||||||
Subordinated Debt - 2.8% (b) | ||||||||||||||||||||||
NTS Holdings, Inc. | Construction & Building | 12.00%, 4/30/2015 | 11.99 | % | $ | 230 | $ | 230 | $ | 230 | 2.8 | % | ||||||||||
Sub Total Subordinated Debt | 230 | 230 | 2.8 | % | ||||||||||||||||||
Equity/Other - 6.7% (b) | ||||||||||||||||||||||
Bank of America - (BAC-H Preferred) | Banking, Finance, Insurance & Real Estate | Perpetual | 25 | $ | 547 | $ | 547 | 6.7 | % | |||||||||||||
Sub Total Equity/Other | 547 | 547 | 6.7 | % | ||||||||||||||||||
TOTAL INVESTMENTS - 173.9% (b) | $ | 14,294 | $ | 14,271 | 173.9 | % | ||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS - 73.9% | (6,064 | ) | 73.9 | % | ||||||||||||||||||
NET ASSETS - 100% | $ | 8,207 | 100 | % | ||||||||||||||||||
(a) All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except OPI International Ltd., Southern Pacific Resource Corp. and Avis Budget Car Rental.
(b) Percentages are based on net assets of $8,207 thousand as of December 31, 2011.
(c) Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith by the Company's board of directors as required by the Investment Company Act of 1940. (See Note 3 to the financial statements).
(d) Non-U.S. company. The principal place of business for OPI International Ltd. is Bermuda and for Southern Pacific Resource Corp. is Canada.
(e) Terms of loan include PIK interest. Company has paid interest currently since February 2011.
8
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Note 1 — Organization and Basis of Presentation
Business Development Corporation of America (the “Company”), incorporated in Maryland on May 5, 2010, is an externally managed, non-diversified closed-end investment company that elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2011 and that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is, therefore, required to comply with certain regulatory requirements as promulgated under the 1940 Act. The Company is managed by BDCA Adviser, LLC (the “Adviser”) pursuant to the terms of the Investment Advisory and Management Services Agreement, as amended (the “Advisory Agreement”). The Adviser was formed in Delaware as a private investment management firm and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser oversees the management of its activities and is responsible for making investment decisions for its portfolio.
On January 25, 2011, the Company commenced its initial public offering (the “IPO”) on a “reasonable best efforts basis” of up to 150.0 million shares of common stock, $0.001 par value per share, at an initial offering price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form N-2 (File No. 333-166636) (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. The Company sold 22,222 shares of common stock to its Adviser, an entity wholly owned by AR Capital, LLC (formerly known as American Realty Capital II, LLC) (the “Sponsor”) on July 8, 2010, at $9.00 per share, which represents the initial public offering price of $10.00 per share minus selling commissions of $0.70 per share and dealer manager fees of $0.30 per share. On August 25, 2011, the Company had raised sufficient funds to break escrow on its IPO and commenced operations as of that date. As of March 31, 2012, the Company had issued 2.7 million shares of common stock for gross proceeds of $27.1 million including the purchase made by the Adviser and shares issued under the Company's distribution reinvestment plan ("DRIP").
The Company anticipates that during its offering period it will invest largely in first and second lien senior secured loans and mezzanine debt issued by middle market companies. The Company may also purchase interests in loans through secondary market transactions in the "over-the-counter" market for institutional loans. First and second lien secured loans generally are senior debt instruments that rank ahead of subordinated debt and equity in bankruptcy priority and are generally secured by liens on the operating assets of a borrower which may include inventory, receivables, plant, property and equipment. Mezzanine debt is subordinated to senior loans and is generally unsecured. The Company defines middle market companies as those with annual revenues between $10 million and $1 billion. The Company expects that each investment will range between approximately $1 million and $25 million, although this investment size will vary proportionately with the size of its capital base. As the Company increases its capital base during the offering period, it will begin investing in, and ultimately intends to have a substantial portion of its assets invested in, customized direct loans to and equity securities of middle market companies. In most cases, companies to whom the Company provides customized financing solutions will be privately held at the time the Company invests in them.
The Company has entered into a fund administration servicing agreement and a fund accounting servicing agreement with US Bancorp Fund Services, LLC (the “Administrator”). The Administrator provides services, such as accounting, financial reporting, legal and compliance support and investor relations support, necessary for the Company to operate. Realty Capital Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, serves as the dealer manager of the Company’s IPO. The Adviser and the Dealer Manager are related parties and will receive compensation and fees for services related to the IPO and for the investment and management of the Company’s assets. The Adviser and Dealer Manager will receive fees during the offering, acquisition, operational and liquidation stages.
9
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Note 2 — Summary of Significant Accounting Policies
The consolidated financial statements of the Company included herein were prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2011 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 19, 2012.
The Company's significant accounting policies are described in Note 2 to the financial statements as of December 31, 2011 and for the year then ended, which are included in the Form 10-K filed with the SEC on March 19, 2012. There have been no significant changes to these policies during the three months ended March 31, 2012, other than the updates described below.
New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (the "FASB") issued guidance that expands the existing disclosure requirements for fair value measurements, primarily for Level 3 measurements, which are measurements based on unobservable inputs such as the Company's own data. This guidance is largely consistent with current fair value measurement principles with few exceptions that do not result in a change in general practice. The guidance was applied prospectively and was effective for interim and annual reporting periods ending after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's financial position or results of operations as the guidance relates only to disclosure requirements.
Note 3 — Fair Value of Financial Instruments
Accounting guidance establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, if any, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
• | Level 1—Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. |
• | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability. |
• | Level 3—Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques. |
The determination of where an asset or liability falls in the above hierarchy requires significant judgment and factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
10
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The Company’s investment portfolio at March 31, 2012 was comprised primarily of debt instruments for which quoted prices within the categories of Level 1 and Level 2 inputs are not available. Therefore, at March 31, 2012, the majority of investments were valued at fair value as determined in good faith using the valuation policy approved by the board of directors using Level 3 inputs. The Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value. Due to the inherent uncertainty in the valuation process, the estimate of fair value of the Company’s investment portfolio at March 31, 2012 may differ materially from values that would have been used had a ready market for the securities existed.
In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors. The Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.
The following table presents fair value measurements of investments, by major class, as of March 31, 2012 according to the fair value hierarchy (dollars in thousands):
Fair Value Measurements | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured First Lien Debt | $ | — | $ | — | $ | 20,787 | $ | 20,787 | |||||||
Senior Secured Second Lien Debt | — | — | 9,256 | 9,256 | |||||||||||
Senior Unsecured Debt | — | — | 947 | 947 | |||||||||||
Equity/Other | — | 1,840 | 1,840 | ||||||||||||
Total | $ | — | $ | — | $ | 32,830 | $ | 32,830 | |||||||
The following table presents fair value measurements of investments, by major class, as of December 31, 2011 according to the fair value hierarchy (dollars in thousands):
Fair Value Measurements | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured First Lien Debt | $ | — | $ | — | $ | 9,611 | $ | 9,611 | |||||||
Senior Secured Second Lien Debt | — | — | 2,996 | 2,996 | |||||||||||
Senior Unsecured Debt | — | — | 887 | 887 | |||||||||||
Subordinated Debt | — | — | 230 | 230 | |||||||||||
Equity/Other | 547 | — | — | 547 | |||||||||||
Total | $ | 547 | $ | — | $ | 13,724 | $ | 14,271 | |||||||
11
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended March 31, 2012 (dollars in thousands):
Senior Secured First Lien Debt | Senior Secured Second Lien Debt | Senior Unsecured Debt | Subordinated Debt | Equity/Other | Total | ||||||||||||||||||
Balance as of December 31, 2011 | $ | 9,611 | $ | 2,996 | $ | 887 | $ | 230 | $ | — | $ | 13,724 | |||||||||||
Net unrealized gains | 59 | 216 | 58 | — | — | 333 | |||||||||||||||||
Purchases and other adjustments to cost | 14,705 | 7,516 | 2 | — | 1,840 | 24,063 | |||||||||||||||||
Sales and redemptions | (3,627 | ) | (1,464 | ) | — | (230 | ) | — | (5,321 | ) | |||||||||||||
Net realized gains (losses) | 39 | (8 | ) | — | — | — | 31 | ||||||||||||||||
Net transfers in and/or out | — | — | — | — | — | — | |||||||||||||||||
Balance as of March 31, 2012 | $ | 20,787 | $ | 9,256 | $ | 947 | $ | — | $ | 1,840 | $ | 32,830 | |||||||||||
Purchases represent the acquisition of new investments at cost. Redemptions represent principal payments received during the period.
The composition of the Company’s investments as of March 31, 2012, at amortized cost and fair value, were as follows (dollars in thousands):
Investments at Amortized Cost | Investments at Fair Value | Fair Value Percentage of Total Portfolio | ||||||||
Senior Secured First Lien Debt | $ | 20,754 | $ | 20,787 | 63.3 | % | ||||
Senior Secured Second Lien Debt | 9,041 | 9,256 | 28.2 | % | ||||||
Senior Unsecured Debt | 885 | 947 | 2.9 | % | ||||||
Equity/Other | 1,840 | 1,840 | 5.6 | % | ||||||
Total | $ | 32,520 | $ | 32,830 | 100.0 | % | ||||
The composition of the Company’s investments as of December 31, 2011, at amortized cost and fair value, were as follows (dollars in thousands):
Investments at Amortized Cost | Investments at Fair Value | Fair Value Percentage of Total Portfolio | ||||||||
Senior Secured First Lien Debt | $ | 9,637 | $ | 9,611 | 67.4 | % | ||||
Senior Secured Second Lien Debt | 2,996 | 2,996 | 21.0 | % | ||||||
Senior Unsecured Debt | 884 | 887 | 6.2 | % | ||||||
Subordinated Debt | 230 | 230 | 1.6 | % | ||||||
Equity/Other | 547 | 547 | 3.8 | % | ||||||
Total | $ | 14,294 | $ | 14,271 | 100.0 | % | ||||
Note 4 — Related Party Transactions and Arrangements
The Adviser and Sponsor own 0.02 million and 0.1 million shares of the Company’s outstanding common stock as of March 31, 2012, respectively.
12
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Management and Incentive Fee Compensation to the Adviser
The Adviser and its affiliates receive fees for services relating to the investment and management of the Company’s assets. The Adviser is entitled to an annual base management fee calculated at an annual rate of 1.5% of the Company’s average gross assets. The management fee is payable quarterly in arrears, and is calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters. All or any part of the management fee not taken as to any quarter is deferred without interest and may be taken in such other quarter as the Adviser will determine. The management fee for any partial month or quarter will be appropriately prorated.
The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based on 20% of “pre-incentive fee net investment income” but only after the payment of a certain preferred return rate to investors, as defined in the Advisory Agreement, for the immediately preceding quarter of 1.75% per quarter, or an annualized rate of 7.0% subject to a "catch-up" feature. The second part of the incentive fee, which is referred to as the incentive fee on capital gains during operations, is an incentive fee on capital gains earned on liquidated investments from the Company’s portfolio during operations prior to a liquidation of the Company and is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, equals 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation.
For the three months ended March 31, 2012, the Adviser waived $0.2 million of compensation earned for management and incentive fees to provide additional liquidity to the Company and enable the Company to cover distributions from income from operations. No fees were earned to the Adviser for the three months ended March 31, 2011.
Expense Support Agreement
The Adviser and its affiliates may incur and pay costs and fees on behalf of the Company. The Company and its Adviser have entered into the Expense Support Agreement whereby the Adviser may pay the Company up to 100% of all offering and operating expenses (“Expense Support Payment”) for any period beginning on the effective date of the Registration Statement, until the Adviser and the Company mutually agree otherwise. The Expense Support Payment for any month shall be paid by the Adviser to the Company in any combination of cash or other immediately available funds, and/or offsets against amounts due from the Company to the Adviser.
Offering and operating expenses subject to this agreement include offering costs incurred in connection with the Company’s ongoing offering of common stock, which are recorded as a component of equity, and expenses as defined by U.S. GAAP, including, without limitation, advisory fees payable and interest on indebtedness for such period, if any.
Pursuant to the terms of the Expense Support Agreement, the Company has agreed if requested, to reimburse the Adviser for Expense Support Payments within three years from the end of the fiscal year in which such Expense Support Payment is made by the Adviser. Reimbursement shall be made as promptly as possible, but only to the extent it does not cause the Company’s operating expenses, excluding organization and offering expenses, management fees and incentive fees payable to the Adviser, financing fees and interest, brokerage commissions and extraordinary expenses to exceed 1.5% of net assets attributable to shares of common stock after taking such payment into account.
If an Expense Support Payment has not been reimbursed prior to the end of the third fiscal year following the date such Expense Support Payment was made, the Company’s obligation to pay such Expense Support Payment shall automatically terminate, and be of no further effect.
As of March 31, 2012, the Adviser had assumed on a cumulative basis, $0.1 million of offering costs and $0.8 million of operating expenses pursuant to the Expense Support Agreement.
13
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Offering Costs
Pursuant to the Advisory Agreement, the Company and the Adviser have agreed that the Company will not be liable for offering expenses to the extent that, together with all prior offering expenses, the amounts exceed 1.5% of the aggregate gross proceeds from the Company’s on-going offering. As of March 31, 2012, offering costs in the amount of $2.1 million have been incurred in excess of the 1.5% limit and are the responsibility of the Adviser.
Note 5 — Borrowings
In January 2011, the Company entered into an agreement to obtain a revolving line of credit in the amount of $10.0 million with Main Street Capital Corp. The line of credit bears a variable interest rate based on the London Interbank Offered Rate plus 3.50%. As of March 31, 2012, the variable rate was 3.74%, which was comprised of the London Interbank Offered Rate of 0.24%. As of December 31, 2011, the variable rate was 3.69%, which was comprised of the London Interbank Offered Rate of 0.19%. The line will be available to the Company until January 2013 and permits the Company to periodically draw on the available funds to purchase securities or pay certain expenses. All unpaid principal is due at maturity. The line of credit agreement requires the Company to pay a maximum commitment fee of $0.1 million payable based on 1% of each draw of the available funds. This commitment fee is included in deferred financing costs on the Company's balance sheet and is being amortized over the term of the agreement, which is two years. As of March 31, 2012, the Company had deferred financing costs of $0.1 million, net of accumulated amortization of $0.06 million. Borrowings under the line of credit are secured by the assets of the Company including cash, securities, investments, property, fixtures and equipment among other assets. At March 31, 2012, $10.0 million was drawn on this facility. For the three months ended March 31, 2012, the Company incurred interest expense related to the outstanding borrowings of $0.1 million. For the three months ended March 31, 2011, the Company incurred no interest expense since there were no outstanding borrowings during the period.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, due to affiliates and accounts payable approximate their carrying value on the accompanying statements of assets and liabilities due to their short-term nature. The fair values of the Company’s remaining financial instruments that are not reported at fair value on the accompanying statements of assets and liabilities are reported below. (amounts in thousands):
Level | Carrying Amount at March 31, 2012 | Fair Value at March 31, 2012 | ||||||||
Senior secured revolving credit facility | 3 | $ | 10,000 | $ | 10,000 | |||||
The interest rate of the revolving line of credit is determined by a variable market rate and the Company's leverage ratio, and has terms commensurate with the market; as such the outstanding balance on the facility approximates fair value.
Note 6 — Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company.
Indemnifications
In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote.
Note 7 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Adviser and its affiliates to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, the
14
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Adviser and its affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.
Note 8 — Common Stock
On August 25, 2011, the Company had raised sufficient funds to break escrow on its IPO and through March 31, 2012, the Company sold 2.7 million shares of common stock for gross proceeds of $27.1 million, including shares issued to the Adviser and Sponsor and shares issued under the DRIP.
See Note 10 — Distributions regarding a common stock distribution declared on March 29, 2012.
Note 9 — Net Increase (Decrease) in Net Assets
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company had no potentially dilutive securities as of March 31, 2012 and 2011.
The following information sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the three months ended March 31, 2012, and March 31, 2011 (dollars in thousands except share and per share amounts):
For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||
2012 | 2011 | |||||||
Basic and diluted | ||||||||
Net increase (decrease) in net assets from operations | $ | 770 | $ | (63 | ) | |||
Weighted average shares outstanding * | 1,739,161 | 22,223 | ||||||
Earnings (loss) per share-basic and diluted * | $ | 0.44 | $ | (2.82 | ) | |||
*Per share information - basic and diluted and weighted average common shares outstanding for the three months ended March 31, 2012 and 2011 have been adjusted to reflect a stock dividend of $0.05 per share declared on March 29, 2012.
On May 1, 2012, the Company announced that it was increasing its public offering price per share from $10.26 to $10.44.
Note 10 — Distributions
The Company has declared and paid cash distributions to stockholders on a monthly basis since it commenced operations. From time to time, the Company may also pay interim distributions at the discretion of its board of directors. The Company may fund its cash distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets and non-capital gains proceeds from the sale of assets. The Company’s distributions may exceed its earnings, especially during the period before the Company has substantially invested the proceeds from its IPO. As a result, a portion of the distributions the Company will make may represent a return of capital for tax purposes. As of March 31, 2012, the Company has accrued $0.2 million in stockholder distributions that were unpaid.
15
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The following table reflects the cash distributions per share paid on the Company's common stock to date (dollars in thousands except share and per share amounts):
Payment Date | Per share | Distributions Paid in Cash | Distributions Paid Through the DRIP | Total Distributions Paid | ||||||||||||
2011: | ||||||||||||||||
October 3, 2011 | $ | 0.07 | $ | 13 | $ | 13 | $ | 26 | ||||||||
November 1, 2011 | 0.07 | 20 | 14 | 34 | ||||||||||||
December 1, 2011 | 0.06 | 25 | 17 | 42 | ||||||||||||
2012: | ||||||||||||||||
January 3, 2012 | 0.06 | 35 | 21 | 56 | ||||||||||||
February 1, 2012 | 0.06 | 47 | 26 | 73 | ||||||||||||
March 1, 2012 | 0.06 | 80 | 34 | 114 | ||||||||||||
April 2, 2012 | 0.06 | 118 | 48 | 166 | ||||||||||||
May 1, 2012 | 0.06 | 157 | 65 | 222 | ||||||||||||
$ | 495 | $ | 238 | $ | 733 | |||||||||||
The following table reflects the stock distributions per share that we declared on our common stock to date:
Date Declared | Record Date | Payment Date | Per Share | Distribution Percentage | Shares Issued | |||||||||
March 29, 2012 | May 1, 2012 | May 2, 2012 | $ | 0.05 | 0.49 | % | 25,721 | |||||||
The Company has not established any limit on the extent to which it may use borrowings, if any, or proceeds from its IPO to fund distributions (which may reduce the amount of capital it ultimately invests in assets). There can be no assurance that the Company will be able to sustain distributions at any particular level.
On March 1, 2012 the price for which newly-issued shares under the DRIP will be issued to stockholders was changed from 95% to 90% of the stock price that the shares are sold in the offering as of the date the distribution is made.
16
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Note 11 — Financial Highlights
The following is a schedule of financial highlights for the three months ended March 31, 2012 and March 31, 2011:
For the Three Months Ended March 31, 2012 | For the Three Months Ended March 31, 2011 | ||||||
Per share data*: | |||||||
Net asset value, beginning of period | $ | 9.00 | $ | 8.61 | |||
Results of operations (1) Net investment income (loss) | 0.21 | (2.82 | ) | ||||
Net realized and unrealized gain on investments | 0.23 | — | |||||
Net increase (decrease) in net assets resulting from operations | 0.44 | (2.82 | ) | ||||
Stockholder distributions (2) Distributions from net investment income | (0.20 | ) | — | ||||
Net decrease in net assets resulting from stockholder distributions | (0.20 | ) | — | ||||
Capital share transactions Issuance of common stock (3) | 0.10 | ||||||
Offering costs | (0.16 | ) | — | ||||
Net decrease in net assets resulting from capital share transactions | (0.06 | ) | — | ||||
Net asset value, end of period | $ | 9.18 | $ | 5.79 | |||
Shares outstanding at end of period | 2,726,639 | 22,331 | |||||
Total return (5) | 4.08 | % | — | ||||
Ratio/Supplemental data: | |||||||
Net assets, end of period (in thousands) | $ | 25,036 | $ | 129 | |||
Ratio of net investment income to average net assets (4)(6) | 15.62 | % | (148.51 | )% | |||
Ratio of operating expenses to average net assets (4)(6) | 11.10 | % | 148.51 | % | |||
Ratio of incentive fees to average net assets (6) | 6.54 | % | — | ||||
Ratio of credit facility related expenses to average net assets (6) | 4.63 | % | 29.60 | % | |||
Portfolio turnover ratio | 23.63 | % | — | ||||
*Per share information and weighted average common shares outstanding for the three months ended March 31, 2012 and 2011 have been adjusted to reflect a stock dividend of $0.05 per share declared on March 29, 2012.
_________________________
(1) | The per share data was derived by using the weighted average shares outstanding during the period. Net investment income per share excluding the expense waivers and reimbursements equals $0.26 for the three months ended March 31, 2012. There was no expense waiver and reimbursement for the three months ended March 31, 2011. |
(2) | The per share data for distributions reflects the actual amount of distributions declared per share during the period. |
(3) | The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous offering. |
(4) | For the three months ended March 31, 2012, excluding the expense waiver and reimbursement, the ratio of net investment income and operating expenses to average net assets is 1.4% and 25.33%, respectively. For the three months ended March 31, 2011, there was no expense waiver and reimbursement. |
17
BUSINESS DEVELOPMENT CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
(5) | Total return is calculated assuming a purchase of shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return based on net asset value for the three months ended March 31, 2012, includes the effect of the expense waiver and reimbursement which equaled 3.54%. For the three months ended March 31, 2011, there was no expense waiver and reimbursement. |
(6) | Ratios are annualized. |
Note 12 – Subsequent Events
The Company has evaluated subsequent events through the filing of this Form 10-Q and determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the financial statements except for the following:
Subsequent to March 31, 2012 through the date of issuance of the financial statements included herein, the Company has purchased eight debt investments with an aggregate face value of $16.5 million for $16.3 million in cash and sold six debt investments with an aggregate carrying value of $4.3 million for an aggregate redemption value of $4.6 million in cash resulting in a realized gain of $0.3 million.
From April 1, 2012 to May 11, 2012, the Company has issued 2.6 million shares of common stock including shares issued pursuant to the DRIP. Total gross proceeds from these issuances including proceeds from shares issued pursuant to the DRIP were $25.2 million.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the accompanying unaudited financial statements of Business Development Corporation of America and the notes thereto, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. As used herein, the terms “we,” “our” and “us” refer to Business Development Corporation of America, a Maryland corporation, and, as required by context, to BDCA Adviser, LLC (the “Adviser”) and its subsidiaries. Business Development Corporation of America is externally managed by the Adviser.
The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the impact of the investments that we expect to make;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio companies;
• actual and potential conflicts of interest with our Adviser and its affiliates;
• the dependence of our future success on the general economy and its effect on the industries in which we invest;
• the ability to qualify and maintain our qualification as a RIC and a BDC; and
• the impact on our business of Dodd-Frank and the rules and regulations issued thereunder.
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement,
although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. Other factors that could cause actual results to differ materially include:
• changes in the economy;
• risks associated with possible disruption in our operations or the economy generally due to terrorism or natural
disasters; and
• future changes in laws or regulations and conditions in our operating areas.
You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
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Overview
We incorporated in Maryland on May 5, 2010, as an externally managed, non-diversified closed-end investment company that has elected to be regulated as a RIC for U.S. federal income tax purposes for the taxable year ending December 31, 2012 and that has elected to be treated as a BDC, under the 1940 Act. We, therefore, are required to comply with certain regulatory requirements as promulgated under the 1940 Act. We are managed by the Adviser. The Adviser was formed in Delaware as a private investment management firm and is registered as an investment adviser under the Advisers Act. Our Adviser oversees the management of our activities and is responsible for making investment decisions for our portfolio.
On January 25, 2011, we commenced our IPO on a “reasonable best efforts basis” of up to 150.0 million shares of common stock, $0.001 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form N-2 (File No. 333-166636) (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended. We sold 22,222 shares of common stock to the Adviser, an entity wholly owned by AR Capital, LLC (formerly known as American Realty Capital II, LLC) (the “Sponsor”) on July 8, 2010, at $9.00 per share, which represents the initial public offering price of $10.00 per share minus selling commissions of $0.70 per share and dealer manager fees of $0.30 per share. On August 25, 2011, we had raised sufficient funds to break escrow on our IPO and commenced operations as of that date. As of March 31, 2012, we had issued 2.7 million shares of our common stock for gross proceeds of $27.1 million including the purchase made by the Adviser and shares issued under the DRIP.
We anticipate that during our offering period we will invest largely in first and second lien senior secured loans and mezzanine debt issued by middle market companies. We may also purchase interests in loans through secondary market transactions in the "over-the-counter" market for institutional loans. First and second lien secured loans generally are senior debt instruments that rank ahead of subordinated debt and equity in bankruptcy priority and are generally secured by liens on the operating assets of a borrower which may include inventory, receivables, plant, property and equipment. Mezzanine debt is subordinated to senior loans and is generally unsecured. We define middle market companies as those with annual revenues between $10 million and $1 billion. We expect that our investments will generally range between approximately $1 million and $25 million, although this investment size will vary proportionately with the size of our capital base. As we increase our capital base during our offering period, we will begin investing in, and ultimately intend to have a substantial portion of our assets invested in, customized direct loans to and equity securities of middle market companies. In most cases, companies to whom we provide customized financing solutions will be privately held at the time we invest in them.
We have entered into a fund administration servicing agreement and a fund accounting servicing agreement with the Administrator. The Administrator provides services, such as accounting, financial reporting, legal and compliance support and investor relations support, necessary to operate. The Dealer Manager, an affiliate of the Sponsor, serves as the dealer manager of the IPO. The Adviser and the Dealer Manager are related parties and will receive compensation and fees for services related to the IPO and for the investment and management of our assets. The Adviser and Dealer Manager will receive fees during the offering, acquisition, operational and liquidation stages. The Adviser will pay to the Administrator a portion of the fees payable to the Adviser for the performance of these support services.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in “qualifying assets,” including securities of U.S. operating companies whose securities are not listed on a national securities exchange, U.S. operating companies with listed securities that have equity market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, which, as defined in the 1940 Act, measures the ratio of total assets less total liabilities (excluding borrowings) to total borrowings, equals at least 200% after such borrowing, with certain limited exceptions.
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Significant Accounting Estimates and Critical Accounting Policies
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires us 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 revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating plans occur we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include:
Valuation of Portfolio Investments
Portfolio investments are reported on the balance sheet at fair value. On a quarterly basis we perform an analysis of each investment to determine fair value as follows:
Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded but are traded through broker networks are valued using information including, but not limited to, indicative dealer quotes, values of like securities, and other available market information.
Investments in securities for which no active market exists are generally valued using either an enterprise value methodology and/or using debt fair value techniques. The enterprise value methodology determines the total value of a portfolio company, which is then allocated to individual securities in order of liquidation preference. To determine enterprise value we may use discounted cash flow techniques, comparisons to valuations of similar publicly traded companies, or comparisons to market transactions for comparable companies among other techniques where appropriate. Debt fair value techniques, such as market yield analysis where a discounted cash flow analysis is performed using estimated current market yield required on the debt instrument, may be applied to individual debt instruments.
In determining the fair value of investments, we may look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies, net income, revenues or, in limited instances, book value or liquidation value of a portfolio company, or other industry practices. We may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors we deem relevant in assessing the value. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security, if there is one.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we will incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors will consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
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As part of our quarterly valuation process our Adviser may be assisted by an independent valuation firm engaged by our board of directors. The audit committee of our board of directors reviews each preliminary valuation and our Adviser and an independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee. Our board of directors then discusses