UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2011.

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-00757

 

 

FS Investment Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland 26-1630040
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

Cira Centre

2929 Arch Street, Suite 675

Philadelphia, Pennsylvania 19104

(Address of principal executive office)

(215) 495-1150

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 x (Do not check if a smaller reporting company)  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The issuer has 106,460,708142,002,321 shares of Common Stockcommon stock outstanding as of August 12,November 11, 2011.

 

 

 


TABLE OF CONTENTS

 

     Page 

PART I—FINANCIAL INFORMATION

  

ITEM 1.

FINANCIAL STATEMENTS

   1  
 

Consolidated Balance Sheets as of JuneSeptember 30, 2011 (Unaudited) and December 31, 2010

   1  
 

Unaudited Consolidated Statements of Operations for the three and sixnine months ended JuneSeptember 30, 2011 and 2010

   2  
 

Unaudited Consolidated Statements of Changes in Net Assets for the sixnine months ended JuneSeptember 30, 2011 and 2010

   3  
 

Unaudited Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember  30, 2011 and 2010

   4  
 

Consolidated ScheduleSchedules of Investments as of JuneSeptember 30, 2011 (Unaudited) and December 31, 2010

   5  
 

Notes to Unaudited Consolidated Financial Statements

   14  

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   3436  

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   5760  

ITEM 4.

 

CONTROLS AND PROCEDURES

   5861  

PART II—OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

   5962  

ITEM 1A.

 

RISK FACTORS

   5962  

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   6362  

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

   6362  

ITEM 4.

 

RESERVED

   6362  

ITEM 5.

 

OTHER INFORMATION

   6362  

ITEM 6.

 

EXHIBITS

   6463  
 

SIGNATURES

   66  


PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

FS Investment Corporation

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

 June 30, 2011
(Unaudited)
 December 31, 2010   September 30, 2011
(Unaudited)
 December 31, 2010 

Assets

     

Investments, at fair value (amortized cost—$1,070,897 and $715,514, respectively)

 $1,087,472   $733,580  

Investments, at fair value (amortized cost—$1,380,598 and $715,514, respectively)

  $1,333,937   $733,580  

Cash

  138,098    38,790     270,171    38,790  

Due from counterparty

  43,391    —       69,673    —    

Receivable for investments sold and repaid

  11,981    5,162     3,295    5,162  

Interest receivable

  10,006    3,632     14,050    3,632  

Deferred financing costs

  634    835     800    835  

Unrealized gain on total return swap(1)

  1,287    —    

Receivable due on total return swap(1)

   374    —    

Prepaid expenses and other assets

  45    6     22    6  
 

 

  

 

   

 

  

 

 

Total assets

 $1,292,914   $782,005    $1,692,322   $782,005  
 

 

  

 

   

 

  

 

 

Liabilities

     

Unrealized loss on total return swap(1)

  $7,600   $—    

Payable for investments purchased

 $65,217   $81,800     76,352    81,800  

Credit facility payable

  340,000    297,201     340,000    297,201  

Repurchase agreement payable

   109,286    —    

Stockholder distributions payable

  5,815    2,556     8,179    2,556  

Management fees payable

  6,025    3,298  

Management fee payable

   7,421    3,298  

Capital gains incentive fee payable(2)

  7,974    5,459     —      5,459  

Administrative services fees payable

  484    310  

Administrative services expense payable

   794    310  

Reimbursements payable

  —      641     —      641  

Interest payable

  1,095    883     1,724    883  

Other accrued expenses and liabilities

  975    625     1,690    625  
 

 

  

 

   

 

  

 

 

Total liabilities

  427,585    392,773     553,046    392,773  
 

 

  

 

   

 

  

 

 

Stockholders’ equity

     

Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding

  —      —      $—     $—    

Common stock, $0.001 par value, 450,000,000 shares authorized, 89,775,091 and 41,332,661 shares issued and outstanding, respectively

 $90   $41  

Common stock, $0.001 par value, 450,000,000 shares authorized, 124,608,814 and 41,332,661 shares issued and outstanding, respectively

   125    41  

Capital in excess of par value

  841,020    374,637     1,176,534    374,637  

Accumulated undistributed net realized gains on investments

  16,406    1,290     21,620    1,290  

Accumulated distributions in excess of net investment income(3)

  (10,049  (4,802   (4,742  (4,802

Net unrealized appreciation on investments and gain/loss on foreign currency

  17,862    18,066  

Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency

   (54,261  18,066  
 

 

  

 

   

 

  

 

 

Total stockholders’ equity

  865,329    389,232     1,139,276    389,232  
 

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

 $1,292,914   $782,005    $1,692,322   $782,005  
 

 

  

 

   

 

  

 

 

Net asset value per common share at period end

 $9.64   $9.42    $9.14   $9.42  

 

(1)See Note 8 for a discussion of the Company’s total return swap agreement.

 

(2)See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.

 

(3)See Note 5 for a discussion of the source of distributions paid by the Company.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

  Three Months Ended June 30, Six Months Ended June 30,  Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
  2011 2010 2011 2010  2011 2010 2011 2010 

Investment income

         

Interest income

  $24,990   $6,060   $42,914   $9,194   $33,295   $8,678   $76,209   $17,872  

Operating expenses

         

Management fees

   6,023    1,492    10,784    2,287    7,432    2,318    18,216    4,605  

Capital gains incentive fees(1)

   640    (386  3,911    —      (7,974  373    (4,063  373  

Administrative services expenses

   404    175    988    350    915    285    1,903    635  

Stock transfer agent fees

   395    193    690    372    448    226    1,138    598  

Accounting and administrative fees

   172    176    394    331    298    105    692    436  

Interest expense

   2,267    837    4,460    870    2,922    1,343    7,382    2,213  

Other general and administrative expenses

   782    438    1,364    734    945    469    2,309    1,203  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total operating expenses

   10,683    2,925    22,591    4,944    4,986    5,119    27,577    10,063  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net investment income

   14,307    3,135    20,323    4,250    28,309    3,559    48,632    7,809  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Realized and unrealized gain/loss

         

Net realized gain on investments

   14,370    1,100    20,023    3,089    2,433    294    22,456    3,383  

Net realized gain on total return swap(2)

  1,895    —      1,895    —    

Net change in unrealized appreciation (depreciation) on investments

   (11,957  (7,867  (1,564  (6,091  (63,164  7,902    (64,728  1,811  

Net change in unrealized appreciation on total return swap(2)

   1,079    —      1,287    —    

Net change in unrealized appreciation (depreciation) on total return swap(2)

  (8,887  —      (7,600  —    

Net change in unrealized gain/loss on foreign currency

   21    (85  73    (96  (72  93    1    (3
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total net realized and unrealized gain/loss on investments

   3,513    (6,852  19,819    (3,098  (67,795  8,289    (47,976  5,191  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net increase (decrease) in net assets resulting from operations

  $17,820   $(3,717 $40,142   $1,152   $(39,486 $11,848   $656   $13,000  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Per share information—basic and diluted

         

Net increase (decrease) in net assets resulting from operations

  $0.24   $(0.19 $0.65   $0.07   $(0.37 $0.47   $0.01   $0.67  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Weighted average shares outstanding(3)

   73,657,765    19,627,548    61,900,732    16,442,434    106,877,357    25,426,504    77,057,690    19,287,292  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.

 

(2)See Note 8 for a discussion of the Company’s total return swap agreement.

 

(3)As discussed in Note 5, between March 31, 2009 and January 31, 2010, the Company issued eight stock distributions. The weighted average shares used in the per share computation of the net increase (decrease) in net assets resulting from operations reflect these stock distributions on a retroactive basis.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2011 2010           2011                 2010         

Operations

      

Net investment income

  $20,323   $4,250    $48,632   $7,809  

Net realized gain on investments

   20,023    3,089  

Net realized gain on investments and total return swap(1)

   24,351    3,383  

Net change in unrealized appreciation (depreciation) on investments

   (1,564  (6,091   (64,728  1,811  

Net change in unrealized appreciation on total return swap(1)

   1,287    —    

Net change in unrealized appreciation (depreciation) on total return swap(1)

   (7,600  —    

Net change in unrealized gain/loss on foreign currency

   73    (96   1    (3
  

 

  

 

   

 

  

 

 

Net increase in net assets resulting from operations

   40,142    1,152     656    13,000  
  

 

  

 

 
  

 

  

 

 

Stockholder distributions(2)

      

Distributions from net investment income

   (25,570  (4,290   (48,572  (7,872

Distributions from net realized gain on investments

   (4,907  (1,742   (4,021  (2,923
  

 

  

 

   

 

  

 

 

Net decrease in net assets resulting from stockholder distributions

   (30,477  (6,032   (52,593  (10,795
  

 

  

 

 
  

 

  

 

 

Capital share transactions

      

Issuance of common stock

   458,967    106,166     787,570    166,456  

Reinvestment of stockholder distributions

   12,248    1,527     21,661    2,967  

Repurchases of common stock

   (2,486  (104   (3,253  (1,123

Offering costs

   (2,297  (461   (3,997  (629

Reimbursement of investment adviser(3)

   —      (1,608   —      (1,678

Capital contributions of investment adviser

   —      461     —      486  
  

 

  

 

   

 

  

 

 

Net increase in net assets resulting from capital share transactions

   466,432    105,981     801,981    166,479  
  

 

  

 

   

 

  

 

 

Total increase in net assets

   476,097    101,101     750,044    168,684  

Net assets at beginning of period

   389,232    93,197     389,232    93,197  
  

 

  

 

   

 

  

 

 

Net assets at end of period

  $865,329   $194,298    $1,139,276   $261,881  
  

 

  

 

   

 

  

 

 

 

(1)See Note 8 for a discussion of the Company’s total return swap agreement.

 

(2)See Note 5 for a discussion of the sourcesources of distributions paid by the Company.

 

(3)See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

  Six Months Ended
June 30,
  Nine Months Ended
September 30,
 
  2011 2010          2011                 2010         

Cash flows from operating activities

     

Net increase in net assets resulting from operations

  $40,142   $1,152   $656   $13,000  

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

     

Purchases of investments

   (940,712  (305,268  (1,416,863  (501,690

Paid-in-kind interest

   (351  (82  (1,316  (103

Proceeds from sales and repayments of investments

   609,205    60,319    783,196    130,063  

Net change in unrealized appreciation (depreciation) on investments

   1,564    6,091    64,728    (1,811

Net change in unrealized appreciation on total return swap

   (1,287  —    

Net change in unrealized appreciation (depreciation) on total return swap(1)

  7,600    —    

Net change in unrealized gain/loss on foreign currency

   (73  96    (1  3  

Net realized gain on investments

   (20,023  (3,089  (22,456  (3,383

Accretion of discount

   (3,502  (2,027  (7,645  (3,366

Amortization of deferred financing costs

   428    161    653    331  

Increase in due from counterparty

   (43,391  —      (69,673  —    

Increase in receivable for investments sold and repaid

   (6,819  (5

Decrease/increase in receivable for investments sold and repaid

  1,867    (15,261

Decrease/increase in payable for investments purchased

   (16,583  35,222    (5,448  53,379  

Increase in interest receivable

   (6,374  (1,370  (10,418  (3,058

Increase in receivable due on total return swap(1)

  (374  —    

Increase in prepaid expenses and other assets

   (39  (6  (16  (1

Increase in management fees payable

   2,727    1,055  

Increase/decrease in capital gains incentive fee payable

   2,515    (173

Increase in management fee payable

  4,123    1,879  

Decrease/increase in capital gains incentive fee payable

  (5,459  200  

Increase in interest payable

   212    709    841    682  

Increase/decrease in administrative services fees payable

   174    (14

Increase in administrative services expense payable

  484    139  

Increase in other accrued expenses and liabilities

   350    66    1,065    139  
  

 

  

 

  

 

  

 

 

Net cash used in operating activities

   (381,837  (207,163  (674,456  (328,858
  

 

  

 

 
 

 

  

 

 

Cash flows from financing activities

     

Issuance of common stock

   458,967    106,166    787,570    166,456  

Reinvestment of stockholder distributions

   12,248    1,527    21,661    2,967  

Repurchases of common stock

   (2,486  (104  (3,253  (1,123

Offering costs

   (2,297  (461  (3,997  (629

Payments to investment adviser for offering and organization costs(1)(2)

   (641  (1,608  (641  (1,678

Capital contributions of investment adviser

   —      461    —      486  

Stockholder distributions

   (27,218  (5,210  (46,970  (6,647

Borrowings under credit facility

   42,799    140,000    42,799    197,267  

Borrowings under repurchase agreement

  109,286    —    

Deferred financing costs paid

   (227  (681  (618  (1,319
  

 

  

 

  

 

  

 

 

Net cash provided by financing activities

   481,145    240,090    905,837    355,780  
  

 

  

 

  

 

  

 

 

Total increase in cash

   99,308    32,927    231,381    26,922  

Cash at beginning of period

   38,790    9,035    38,790    9,035  
  

 

  

 

  

 

  

 

 

Cash at end of period

  $138,098   $41,962   $270,171   $35,957  
  

 

  

 

  

 

  

 

 

 

(1)See Note 8 for a discussion of the Company’s total return swap agreement.

(2)See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of JuneSeptember 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
  Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
 

Senior Secured Loans—First Lien—62.6%

     

Senior Secured Loans—First Lien—60.9%

    

1-800 Contacts, Inc., L+395, 3.8% LIBOR Floor, 3/4/15(e)

  Healthcare $5,477   $5,236   $5,491   Healthcare $5,462   $5,236   $5,380  

Academy, Ltd., L+450, 1.5% LIBOR Floor, 8/3/18(d)

 Consumer Discretionary  5,000    4,951    4,797  

Advance Pierre Foods, Inc., L+525, 1.8% LIBOR Floor, 9/29/16(d)

  Consumer Staples  4,887    4,801    4,945   Consumer Staples  4,875    4,793    4,875  

Airborne Tactical Advantage Co., LLC, L+500, 7/2/12

  Industrials  12,500    9,771    11,375  

Airvana Network Solutions Inc., L+800, 2.0% LIBOR Floor, 3/18/15(e)

  Telecommunication Services  8,496    8,335    8,618   Telecommunication Services  6,403    6,290    6,443  

Altegrity, Inc., L+600, 1.8% LIBOR Floor, 2/21/15(d)

  Industrials  6,257    6,180    6,296   Industrials  5,860    5,790    5,752  

American Racing & Entertainment, LLC, 7.8%, 6/30/14(e)

  Consumer Discretionary  26,750    26,750    26,051   Consumer Discretionary  26,500    26,500    26,128  

Amscan Holdings, Inc., L+525, 1.5% LIBOR Floor, 12/2/17(d)

  Consumer Discretionary  8,878    8,866    8,927   Consumer Discretionary  8,856    8,844    8,712  

AmWINS Group, Inc., L+250, 6/8/13(d)

  Financials  941    819    933   Financials  941    833    899  

Anchor Glass Container Corp., L+400, 2.0% LIBOR Floor, 3/1/16(d)

  Industrials  3,067    3,043    3,090  

Ardent Health Services LLC, L+500, 1.5% LIBOR Floor, 9/15/15(d)

  Healthcare  7,266    7,200    7,275   Healthcare  10,390    10,283    10,110  

Aspect Software, Inc., L+450, 1.8% LIBOR Floor, 5/7/16(d)

  Information Technology  1,975    1,959    1,982   Information Technology  1,970    1,955    1,950  

Attachmate Corp., L+500, 1.5% LIBOR Floor, 4/27/17(d)

  Information Technology  10,000    9,905    10,027   Information Technology  10,000    9,910    9,667  

Avaya Inc., L+392, 10/24/14(d)

  Information Technology  7,889    7,153    7,608  

Avaya Inc., L+408, 10/24/14(d)

 Information Technology  10,861    9,760    9,396  

Avis Budget Car Rental, LLC, L+500, 1.3% LIBOR Floor, 9/22/18(d)(f)(g)

 Consumer Discretionary  7,222    7,078    7,191  

BJ’s Wholesale Club, Inc., L+575, 1.3% LIBOR Floor, 9/29/18(d)(f)

 Consumer Discretionary  18,000    17,100    17,454  

Blackboard Inc., L+600, 1.5% LIBOR Floor, 10/4/18(d)(e)(f)(g)

 Information Technology  40,385    37,154    37,638  

Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/14/17(d)

  Industrials  4,988    4,952    5,021   Industrials  4,975    4,943    4,698  

C.H.I. Overhead Doors, Inc., L+550, 2.0% LIBOR Floor, 4/21/15

  Industrials  4,975    4,953    4,992  

Canwest LP, L+500, 1.3% LIBOR Floor, 7/23/16(d)(e)(f)

  Consumer Discretionary  8,586    8,630    8,661  

Canwest LP, L+500, 1.3% LIBOR Floor, 7/23/16(d)(g)

 Consumer Discretionary  8,384    8,424    8,230  

Carestream Health, Inc., L+350, 1.5% LIBOR Floor, 2/25/17

  Healthcare  9,975    9,928    9,338   Healthcare  9,950    9,904    8,387  

CCC Information Services Inc., L+400, 1.5% LIBOR Floor, 11/11/15(d)

  Information Technology  1,570    1,556    1,581   Information Technology  1,570    1,557    1,542  

Cenveo Corp., L+475, 1.5% LIBOR Floor, 12/21/16(d)(f)

  Consumer Discretionary  6,633    6,573    6,696  

Cenveo Corp., L+475, 1.5% LIBOR Floor, 12/21/16(d)(g)

 Consumer Discretionary  6,617    6,559    6,449  

Ceridian Corp., L+300, 11/9/14(d)

  Industrials  7,418    6,829    7,132   Industrials  9,394    8,581    8,208  

J. Crew Group, Inc., L+350, 1.3% LIBOR Floor, 3/7/18

 Consumer Discretionary  2,000    1,738    1,785  

Chrysler Group LLC, L+475, 1.3% LIBOR Floor, 5/17/18(d)

  Industrials  9,748    9,651    9,541   Industrials  19,699    18,582    17,222  

Citgo Petroleum Corp., L+700, 2.0% LIBOR Floor, 6/24/17(d)(f)

  Energy  6,930    6,850    7,242  

CMP Susquehanna Corp., L+200, 5/5/13(d)

  Telecommunication Services  6,752    6,202    6,706  

Citgo Petroleum Corp., L+700, 2.0% LIBOR Floor, 6/24/17(d)(e)(g)

 Energy  8,863    8,825    9,071  

ConvaTec Inc., L+425, 1.5% LIBOR Floor, 12/22/16(d)

  Healthcare  2,302    2,292    2,304   Healthcare  2,297    2,287    2,200  

Corel Corp., L+400, 5/2/12(f)

  Information Technology  1,359    1,287    1,335  

Corel Corp., L+400, 5/2/12(e)(g)

 Information Technology  1,234    1,186    1,173  

Custom Building Products, Inc., L+400, 1.8% LIBOR Floor, 3/1/15(d)

  Materials  2,830    2,809    2,849   Materials  2,432    2,415    2,300  

Data Device Corp., L+550, 1.8% LIBOR Floor, 12/23/16

  Industrials  9,000    8,877    9,008  

Decision Resources LLC, L+550, 1.5% LIBOR Floor, 12/6/16(d)(e)

  Healthcare  1,995    2,002    1,994  

East Cameron Partners, LP, 18.0%, 10/11/11

  Energy  249    249    254  

Data Device Corp., L+550, 1.8% LIBOR Floor, 12/23/16(e)

 Industrials  8,731    8,616    8,414  

Decision Resources LLC, L+550, 1.5% LIBOR Floor, 12/6/16(d)

 Healthcare  1,990    1,997    1,937  

East Cameron Partners, LP, 18.0% PIK, 10/11/12

 Energy  249    249    254  

Equipower Resources Holdings, LLC, L+425, 1.5% LIBOR Floor, 1/26/18

  Utilities  1,627    1,612    1,632   Utilities  1,572    1,558    1,530  

Fairway Group Acquisition Co., L+600, 1.5% LIBOR Floor, 3/3/17(d)(e)

  Consumer Discretionary  19,750    19,805    19,717   Consumer Discretionary  21,646    21,593    20,510  

Fifth Third Processing Solutions LLC, L+325, 1.3% LIBOR Floor, 11/3/16(d)

  Financials  1,718    1,707    1,718  

First Data Corp., L+388, 3/26/18(d)

  Information Technology  7,153    6,121    6,602  

First Data Corp., L+367, 3/24/18(d)

 Information Technology  12,907    11,162    10,713  

First Reserve Crestwood Holdings LLC, L+850, 2.0% LIBOR Floor, 10/3/16(e)

  Energy  6,335    6,323    6,525   Energy  6,185    6,174    6,324  

Florida Gaming Centers, Inc., 15.8%, 4/25/16(e)

  Consumer Discretionary  13,000    12,750    12,674   Consumer Discretionary  13,000    12,763    12,285  

Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16(d)

  Energy  3,143    3,113    3,143   Energy  4,963    4,835    4,878  

Freescale Semiconductor, Inc., L+425, 12/1/16(f)(g)

  Industrials  1,902    1,780    1,894   Industrials  1,896    1,780    1,742  

Global Tel Link Corp., L+400, 1.0% LIBOR Floor, 11/10/16(d)

  Telecommunication Services  6,268    6,229    6,253   Telecommunication Services  6,252    6,214    6,072  

Goodman Global, Inc., L+400, 1.8% LIBOR Floor, 10/28/16(d)

  Consumer Discretionary  1,805    1,788    1,813   Consumer Discretionary  1,692    1,678    1,680  

Green Tree Credit Solutions LLC, L+575, 2.3% LIBOR Floor, 12/18/15(d)

  Financials  3,996    3,864    4,006  

Harbor Freight Tools USA, Inc., L+500, 1.5% LIBOR Floor, 12/22/17(d)

  Consumer Discretionary  9,879    9,788    10,068   Consumer Discretionary  9,778    9,690    9,680  

Harland Clarke Holdings Corp., L+250, 6/30/14(d)(f)

  Industrials  2,435    2,150    2,185  

HCR Manor Care, Inc., LLC, L+350, 1.5% LIBOR Floor, 4/6/18

  Healthcare  3,164    3,133    3,113  

Houghton International Inc., L+500, 1.8% LIBOR Floor, 1/31/16(d)

  Materials  1,774    1,765    1,789  

iHealth Technologies, Inc., L+600, 1.8% LIBOR Floor, 12/28/16

  Healthcare  3,545    3,480    3,599  

Harland Clarke Holdings Corp., L+250, 6/30/14(d)(g)

 Industrials  4,423    3,804    3,742  

HCR Manor Care, Inc., L+350, 1.5% LIBOR Floor, 4/6/18(e)

 Healthcare  3,164    3,127    2,735  

iHealth Technologies, Inc., L+600, 1.8% LIBOR Floor, 12/28/16(e)

 Healthcare  3,500    3,438    3,487  

Immucor, Inc., L+575, 1.5% LIBOR Floor, 8/19/18(d)

 Healthcare  7,843    7,534    7,751  

INC Research, LLC, L+575, 1.3% LIBOR Floor, 7/12/18(e)

 Healthcare  11,970    11,617    11,441  

Intelligrated, Inc., L+575, 1.8% LIBOR Floor, 2/18/17(e)

  Information Technology  4,938    4,891    4,931   Information Technology  4,813    4,769    4,704  

Intralinks, Inc., L+425, 1.5% LIBOR Floor, 6/15/14(f)(g)

  Information Technology  1,049    872    1,049   Information Technology  1,047    884    1,016  

KIK Custom Products Inc., L+225, 5/31/14(d)(e)(f)

  Consumer Staples  10,436    9,319    9,230  

Lantiq Deutschland GmbH, L+700, 2.0% LIBOR Floor, 11/16/15(d)(e)(f)

  Information Technology  11,321    11,290    11,434  

inVentiv Health, Inc., L+525, 1.5% LIBOR Floor, 8/4/18(d)(f)

 Healthcare  5,098    5,049    4,886  

Ipreo Holdings LLC, L+650, 1.5% LIBOR Floor, 8/7/17(e)

 Information Technology  14,679    14,330    13,871  

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of JuneSeptember 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

Maritime Telecommunications Network, Inc., L+600, 1.5% LIBOR Floor, 3/4/16

  Telecommunication Services $7,453   $7,348   $7,479  

MDA Info Products Ltd., L+550, 1.5% LIBOR Floor, 1/4/17

  Information Technology  4,975    4,907    4,925  

Mood Media Corp., L+550, 1.5% LIBOR Floor, 5/4/18(d)

  Consumer Discretionary  3,676    3,640    3,642  

Mosaic US Holdings Inc., L+275, 4/3/13

  Consumer Discretionary  877    705    825  

NCO Group, Inc., L+500, 2.5% LIBOR Floor, 5/15/13(d)

  Information Technology  7,849    7,813    7,770  

NSH Merger Sub, Inc., L+650, 1.8% LIBOR Floor, 2/3/17(e)

  Healthcare  15,467    15,353    15,506  

OSI Restaurant Partners, LLC, L+225, 6/14/14(d)

  Consumer Discretionary  5,604    5,031    5,374  

Ozburn Hessey Holding Co., LLC, L+550, 2.0% LIBOR Floor, 4/8/16(d)

  Industrials  6,199    6,170    6,234  

Playboy Enterprises, Inc., L+650, 1.8% LIBOR Floor, 3/4/17

  Consumer Discretionary  8,026    7,988    8,046  

Presidio Inc., L+550, 1.8% LIBOR Floor, 3/31/17

  Industrials  9,750    9,609    9,768  

Protection One, Inc., L+425, 1.8% LIBOR Floor, 6/4/16(d)

  Consumer Discretionary  2,345    2,316    2,354  

Remy International, Inc., L+450, 1.8% LIBOR Floor, 12/17/13(d)

  Consumer Discretionary  2,073    2,056    2,086  

RepconStrickland, Inc., L+458, 3.3% LIBOR Floor, 2/19/13(e)

  Energy  12,509    11,765    11,755  

Res-Care, Inc., L+550, 1.8% LIBOR Floor, 12/22/16

  Consumer Discretionary  4,975    4,884    4,994  

Sagittarius Restaurants LLC, L+550, 2.0% LIBOR Floor, 5/18/15

  Consumer Discretionary  2,800    2,774    2,765  

Savvis, Inc., L+500, 1.8% LIBOR Floor, 8/4/16(d)(f)

  Information Technology  7,345    7,207    7,393  

Sheridan Production Co., LLC, L+550, 2.0% LIBOR Floor, 4/20/17(d)

  Energy  10,342    10,255    10,375  

Sitel, LLC, L+675, 1/30/17(d)

  Telecommunication Services  5,966    5,667    5,951  

Smile Brands Group Inc., L+525, 1.8% LIBOR Floor, 12/21/17(d)

  Healthcare  5,936    5,853    5,951  

Sophos Plc, L+563, 2.0% LIBOR Floor, 6/30/17(e)(f)

  Information Technology  4,688    4,664    4,723  

Sorenson Communication, Inc., L+400, 2.0% LIBOR Floor, 8/16/13(d)(e)

  Telecommunication Services  13,232    12,861    12,836  

Spansion, LLC, L+550, 2.0% LIBOR Floor, 2/9/15(d)(f)

  Information Technology  5,873    5,907    5,900  

Sports Authority, Inc., L+600, 1.5% LIBOR Floor, 11/16/17(d)

  Consumer Discretionary  7,960    7,760    8,050  

Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18(d)

  Energy  5,000    4,975    4,975  

Styron Sarl, L+450, 1.5% LIBOR Floor, 6/14/16(d)

  Materials  4,110    4,110    4,112  

Summit Entertainment, LLC, L+600, 1.5% LIBOR Floor, 8/28/16(d)

  Consumer Discretionary  14,323    14,052    14,207  

Summit Materials Companies I, LLC, L+500, 1.5% LIBOR Floor, 12/31/15(d)

  Materials  3,980    3,980    3,982  

Surgery Center Holdings, Inc., L+500, 1.5% LIBOR Floor, 2/4/17(d)

  Healthcare  998    1,011    1,006  

Swift Transportation Co., Inc., L+450, 1.5% LIBOR Floor, 12/21/16(d)(f)

  Industrials  4,288    4,249    4,317  

Targus Information Corp., L+525, 1.8% LIBOR Floor, 12/28/16

  Information Technology  4,813    4,724    4,885  

Telcordia Technologies Inc., L+500, 1.8% LIBOR Floor, 4/30/16(d)

  Telecommunication Services  8,748    8,768    8,765  

Texas Competitive Electric Holdings Co. LLC, L+350, 10/10/14(d)

  Utilities  12,867    10,362    10,095  

TNS, Inc., L+400, 2.0% LIBOR Floor, 11/18/15(d)(f)

  Telecommunication Services  1,033    1,033    1,039  

Toys“R”Us, Inc., L+450, 1.5% LIBOR Floor, 8/17/16(d)

  Consumer Discretionary  6,699    6,666    6,706  

Univar Inc., L+350, 1.5% LIBOR Floor, 4/28/17(d)

  Materials  6,608    6,608    6,605  

West World Media, LLC, 12.0%, 4.0% PIK, 12/30/11

  Consumer Discretionary  17,511    11,662    15,060  

Yell Group Plc, L+300, 7/31/14(f)

  Consumer Discretionary  785    679    313  
    

 

 

  

 

 

 

Total Senior Secured Loans—First Lien

     530,850    541,416  
    

 

 

  

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

KIK Custom Products Inc., L+225, 5/31/14(d)(g)

 Consumer Staples $10,409   $9,386   $8,825  

Klune Industries, Inc., L+700, 2.0% LIBOR Floor, 8/31/17(e)

 Industrials  59,000    57,585    58,858  

La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 8/25/17

 Energy  5,799    5,514    5,506  

Lantiq Deutschland GmbH, L+700, 2.0% LIBOR Floor, 11/16/15(d)(e)(g)

 Information Technology  11,145    11,115    10,477  

Maritime Telecommunications Network, Inc., L+600, 1.5% LIBOR Floor, 3/4/16(e)

 Telecommunication Services  7,406    7,307    7,374  

MDA Info Products Ltd., L+550, 1.5% LIBOR Floor, 1/4/17

 Information Technology  4,963    4,898    4,231  

Mood Media Corp., L+550, 1.5% LIBOR Floor, 5/4/18(d)(g)

 Consumer Discretionary  3,667    3,633    3,413  

Mosaic US Holdings Inc., L+275, 4/3/13(e)

 Consumer Discretionary  875    725    831  

NCO Group Inc., L+500, 2.5% LIBOR Floor, 5/15/13(d)

 Information Technology  7,534    7,503    7,372  

Norit Holding BV, L+525, 1.5% LIBOR Floor, 7/8/17(d)(g)

 Industrials  3,077    3,032    3,027  

NSH Merger Sub, Inc., L+650, 1.8% LIBOR Floor, 2/3/17(e)(f)

 Healthcare  15,434    15,327    14,894  

Ozburn Hessey Holding Co., LLC, L+550, 2.0% LIBOR Floor, 4/8/16(d)

 Industrials  3,952    3,952    3,524  

Playboy Enterprises, Inc., L+650, 1.8% LIBOR Floor, 3/4/17

 Consumer Discretionary  6,010    6,013    5,740  

Presidio Inc., L+550, 1.8% LIBOR Floor, 3/31/17(e)

 Industrials  9,500    9,368    9,310  

Protection One, Inc., L+425, 1.8% LIBOR Floor, 6/4/16(d)

 Consumer Discretionary  2,259    2,232    2,230  

Remy International, Inc., L+450, 1.8% LIBOR Floor, 12/17/13(d)

 Consumer Discretionary  4,063    3,965    3,931  

Res-Care, Inc., L+550, 1.8% LIBOR Floor, 12/22/16(e)

 Consumer Discretionary  4,963    4,876    4,814  

Reynolds Group Holdings Inc., L+491, 1.2% LIBOR Floor, 7/31/18(d)(g)

 Consumer Discretionary  11,872    11,708    11,550  

Sagittarius Restaurants LLC, L+550, 2.0% LIBOR Floor, 5/18/15(e)

 Consumer Discretionary  2,658    2,634    2,585  

Sealed Air Corp., L+375, 1.0% LIBOR Floor, 10/3/18(d)

 Industrials  7,772    7,617    7,786  

Sheridan Production Co., LLC, L+550, 2.0% LIBOR Floor, 4/20/17(d)

 Energy  10,342    10,259    10,126  

Sitel, LLC, L+675, 1/30/17(d)

 Telecommunication Services  5,966    5,695    5,697  

Smile Brands Group Inc., L+525, 1.8% LIBOR Floor, 12/21/17(d)

 Healthcare  5,921    5,842    5,729  

Sophos Plc, L+563, 2.0% LIBOR Floor, 6/30/17(e)(g)

 Information Technology  4,676    4,653    4,571  

Sorenson Communication, Inc., L+400, 2.0% LIBOR Floor, 8/16/13(d)

 Telecommunication Services  14,558    14,100    13,495  

Spansion, LLC, L+550, 2.0% LIBOR Floor, 2/9/15(d)(g)

 Information Technology  10,845    10,724    10,583  

Sports Authority, Inc., L+600, 1.5% LIBOR Floor, 11/16/17(d)

 Consumer Discretionary  9,935    9,684    9,397  

SRA International, Inc., L+525, 1.3% LIBOR Floor, 7/20/18(d)(e)

 Industrials  18,144    17,257    16,829  

Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18(d)

 Energy  4,231    4,211    4,026  

Styron Sarl, L+450, 1.5% LIBOR Floor, 6/14/16(d)

 Materials  4,100    4,100    3,712  

Summit Entertainment, LLC, L+600, 1.5% LIBOR Floor, 8/28/16(d)

 Consumer Discretionary  13,887    13,708    13,609  

Summit Materials Companies I, LLC, L+500, 1.5% LIBOR Floor, 12/31/15(d)

 Materials  3,970    3,897    3,844  

Surgery Center Holdings, Inc., L+500, 1.5% LIBOR Floor, 2/4/17(d)

 Healthcare  995    1,008    940  

Swift Transportation Co., Inc., L+450, 1.5% LIBOR Floor, 12/21/16(d)(g)

 Industrials  3,969    3,935    3,856  

TASC, Inc., L+325, 1.3% LIBOR Floor, 12/18/15

 Industrials  538    512    515  

Telcordia Technologies Inc., L+500, 1.8% LIBOR Floor, 4/30/16(d)

 Telecommunication Services  8,748    8,767    8,719  

Texas Competitive Electric Holdings Co. LLC, L+350, 10/10/14(d)

 Utilities  16,867    13,475    11,483  

TNS, Inc., L+400, 2.0% LIBOR Floor, 11/18/15(d)(g)

 Telecommunication Services  1,247    1,247    1,246  

Toys”R”Us, Inc., L+450, 1.5% LIBOR Floor, 8/17/16(d)

 Consumer Discretionary  6,683    6,650    6,428  

Univar Inc., L+350, 1.5% LIBOR Floor, 4/28/17(d)(f)

 Materials  6,592    6,592    6,200  

Univision Communications Inc., L+425, 9/29/14(d)

 Consumer Discretionary  10,000    8,613    8,440  

Yell Group Plc, L+300, 7/31/14(g)

 Consumer Discretionary  785    688    257  
   

 

 

  

 

 

 

Total Senior Secured Loans—First Lien

    708,346    693,289  
   

 

 

  

 

 

 

Senior Secured Loans—Second Lien—29.8%

    

Advance Pierre Foods, Inc., L+950, 1.8% LIBOR Floor, 9/29/17(d)(e)

 Consumer Staples  12,000    12,048    12,000  

Advantage Sales & Marketing Inc., L+775, 1.5% LIBOR Floor, 6/17/18(d)

 Industrials  19,244    19,304    18,575  

Alkermes, Inc., L+800, 1.5% LIBOR Floor, 9/16/18(g)

 Healthcare  10,000    9,805    9,900  

American Racing & Entertainment, LLC, 12.0%, 6/30/18

 Consumer Discretionary  16,800    16,114    13,440  

AMN Healthcare Services, Inc., L+1000, 1.8% LIBOR Floor, 9/1/16(e)(g)

 Healthcare  10,000    9,753    9,500  

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of JuneSeptember 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

Senior Secured Loans—Second Lien—32.7%

     

Advance Pierre Foods, Inc., L+950, 1.8% LIBOR Floor, 9/29/17(d)

  Consumer Staples $12,000   $12,050   $12,315  

Advantage Sales & Marketing Inc., L+775, 1.5% LIBOR Floor, 6/17/18(d)(e)

  Industrials  19,244    19,306    19,598  

American Racing & Entertainment, LLC, 12.0%, 6/30/18

  Consumer Discretionary  16,800    16,114    11,507  

AMN Healthcare Services, Inc., L+1000, 1.8% LIBOR Floor, 9/1/16(f)

  Healthcare  10,000    9,740    9,850  

AmWINS Group, Inc., L+550, 6/8/14

  Financials  1,992    1,714    1,838  

Asurion Corp., L+750, 1.5% LIBOR Floor, 5/20/19(d)

  Financials  27,429    27,293    27,583  

Attachmate Corp., L+800, 1.5% LIBOR Floor, 10/27/17(d)

  Information Technology  12,000    11,959    12,190  

Awesome Acquisition Co., L+500, 6/4/14

  Consumer Discretionary  2,940    2,421    2,910  

BNY ConvergEx Group, LLC, L+700, 1.8% LIBOR Floor, 12/17/17(d)

  Information Technology  9,000    9,027    9,180  

Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)

  Industrials  6,923    6,790    7,122  

Central Parking Systems, Inc., L+450, 11/22/14

  Industrials  3,500    2,218    2,551  

Datatel, Inc., L+725, 1.5% LIBOR Floor, 2/18/18(d)

  Information Technology  10,783    10,756    10,971  

Decision Resources, LLC, L+850, 1.5% LIBOR Floor, 12/6/17

  Healthcare  3,333    3,301    3,317  

Deluxe Entertainment Services Group Inc., L+900, 2.0% LIBOR Floor, 5/11/13

  Consumer Discretionary  9,500    9,055    9,417  

FR Brand Acquisition Corp., L+623, 2/7/15(d)

  Industrials  13,000    11,839    11,978  

Goodman Global, Inc., L+700, 2.0% LIBOR Floor, 10/27/17(d)

  Consumer Discretionary  7,000    6,873    7,194  

Hubbard Radio, LLC, L+725, 1.5% LIBOR Floor, 4/29/18(d)

  Telecommunication Services  1,429    1,415    1,455  

JHCI Holdings, Inc., L+550, 12/19/14(d)(e)

  Industrials  6,000    5,514    5,348  

JW Aluminum Co., L+675, 12/15/13

  Materials  20,714    13,856    16,261  

Kronos Inc., L+575, 6/11/15(d)

  Industrials  3,000    2,928    2,981  

LabelCorp Holdings, Inc., L+1050, 1.0% PIK, 11/27/17

  Industrials  12,000    11,822    12,150  

Mood Media Corp., L+875, 1.5% LIBOR Floor, 11/6/18(f)

  Consumer Discretionary  10,000    9,965    9,925  

QCE LLC (Quiznos), L+575, 11/5/13

  Consumer Discretionary  5,000    3,813    3,895  

Roundy’s Supermarkets, Inc., L+800, 2.0% LIBOR Floor, 4/16/16(d)(e)

  Consumer Staples  13,000    13,146    13,175  

Sedgwick CMS Holdings, L+750, 1.5% LIBOR Floor, 5/30/17

  Industrials  500    500    502  

Sensus USA Inc., L+725, 1.3% LIBOR Floor, 5/9/18(d)(e)

  Industrials  6,571    6,585    6,673  

Southern Pacific Resource Co., L+850, 2.0% LIBOR Floor, 12/22/15(d)(f)

  Energy  13,903    13,724    14,076  

SRAM, LLC, L+750, 1.5% LIBOR Floor, 5/3/18

  Consumer Discretionary  5,000    4,951    5,006  

TPF Generation Holdings, LLC, L+425, 12/15/14(d)

  Energy  8,170    7,503    7,902  

Vertafore, Inc., L+825, 1.5% LIBOR Floor, 10/29/17(d)

  Information Technology  10,000    9,909    10,144  

Wm. Bolthouse Farms, Inc., L+750, 2.0% LIBOR Floor, 8/11/16(d)(e)

  Consumer Staples  14,029    14,121    14,224  
    

 

 

  

 

 

 

Total Senior Secured Loans—Second Lien

     280,208    283,238  
    

 

 

  

 

 

 

Senior Secured Bonds—10.1%

     

Allen Systems Group, Inc., 10.5%, 11/15/16

  Information Technology  8,723    8,807    8,694  

Aspect Software, Inc., 10.6%, 5/15/17(d)

  Information Technology  4,000    4,000    4,274  

Avaya Inc., 7.0%, 4/1/19(d)

  Information Technology  1,500    1,500    1,445  

BakerCorp. International, Inc., 8.3%, 6/1/19

  Industrials  5,000    5,000    4,969  

Connacher Oil & Gas Ltd., 8.5%, 8/1/19(f)

  Energy  5,600    5,600    5,255  

Eastman Kodak Co., 10.6%, 3/15/19(f)

  Information Technology  7,500    7,404    7,288  

Echostar Corp., 6.5%, 6/15/19(d)(f)

  Telecommunication Services  2,000    2,000    2,035  

First Data Corp., 8.9%, 8/15/20(d)

  Information Technology  6,300    6,349    6,657  

Grifols, SA, 8.3%, 2/1/18(d)(f)

  Healthcare  2,500    2,500    2,582  

HOA Restaurant Group, LLC, 11.3%, 4/1/17

  Consumer Discretionary  2,600    2,600    2,600  

Kabel BW, 7.5%, 3/15/19(d)(f)

  Telecommunication Services  665    665    680  

Nexstar Broadcasting Group, Inc., 8.9%, 4/15/17(d)

  Telecommunication Services  5,000    4,972    5,262  

Paetec Holding Corp., 8.9%, 6/30/17(d)(f)

  Telecommunication Services  4,680    4,808    4,928  

Palace Entertainment Holdings, LLC, 8.9%, 4/15/17(d)

  Consumer Discretionary  2,400    2,400    2,393  

Roofing Supply Group LLC, 8.6%, 12/1/17(d)

  Industrials  800    800    792  

Speedy Cash Intermediate Holdings Corp., 10.8%, 10/15/18

  Financials  8,000    8,000    8,168  

Symbion, Inc., 8.0%, 6/15/16(d)(e)

  Healthcare  13,460    13,253    13,190  

Texas Competitive Electric Holdings Co. LLC, 11.5%, 10/1/20(e)

  Utilities  5,000    4,956    4,956  

United Refining, Co., 10.5%, 2/28/18

  Energy  1,185    1,145    1,176  
    

 

 

  

 

 

 

Total Senior Secured Bonds

     86,759    87,344  
    

 

 

  

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

AmWINS Group, Inc., L+550, 6/8/14(e)

 Financials $1,992   $1,736   $1,819  

Asurion Corp., L+750, 1.5% LIBOR Floor, 5/20/19(d)

 Financials  27,429    27,297    26,240  

Attachmate Corp., L+800, 1.5% LIBOR Floor, 10/27/17(d)

 Information Technology  12,000    11,961    11,736  

Autoparts Holdings Ltd., L+900, 1.5% LIBOR Floor, 1/29/18(d)

 Industrials  7,000    6,966    6,895  

BNY ConvergEx Group, LLC, L+700, 1.8% LIBOR Floor, 12/17/17(d)

 Information Technology  9,000    9,026    9,000  

Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)

 Industrials  6,923    6,796    6,323  

Central Parking Systems, Inc., L+450, 11/22/14(e)

 Industrials  3,500    2,293    2,503  

Datatel, Inc., L+725, 1.5% LIBOR Floor, 2/18/18(d)

 Information Technology  10,783    10,757    10,722  

Decision Resources LLC, L+850, 1.5% LIBOR Floor, 12/6/17(e)

 Healthcare  3,333    3,302    3,317  

Deluxe Entertainment Services Group Inc., L+900, 2.0% LIBOR Floor, 5/11/13(e)

 Consumer Discretionary  9,500    9,111    9,314  

DEI Sales, Inc., L+850, 1.5% LIBOR Floor, 1/15/18(e)

 Consumer Discretionary  46,800    45,898    45,396  

FR Brand Acquisition Corp., L+623, 2/7/15(d)

 Industrials  13,000    11,913    9,998  

Goodman Global, Inc., L+700, 2.0% LIBOR Floor, 10/27/17(d)

 Consumer Discretionary  7,000    6,878    7,058  

Hubbard Radio, LLC, L+725, 1.5% LIBOR Floor, 4/29/18(d)

 Telecommunication Services  1,429    1,415    1,402  

JHCI Holdings, Inc., L+550, 12/19/14(d)

 Industrials  6,000    5,548    5,094  

JW Aluminum Co., L+675, 12/15/13(e)

 Materials  20,714    14,425    16,779  

Kronos Inc., L+575, 6/11/15(d)

 Industrials  3,000    2,932    2,841  

LabelCorp Holdings, Inc., L+1050, 1.0% PIK, 11/27/17(e)

 Industrials  12,028    11,857    12,449  

Mood Media Corp., L+875, 1.5% LIBOR Floor, 11/6/18(e)

 Consumer Discretionary  15,000    14,942    13,925  

Roundy’s Supermarkets, Inc., L+800, 2.0% LIBOR Floor, 4/16/16(d)

 Consumer Staples  13,000    13,138    12,783  

Sedgwick CMS Holdings, L+750, 1.5% LIBOR Floor, 5/30/17

 Industrials  500    500    486  

Sensus USA Inc., L+725, 1.3% LIBOR Floor, 5/9/18(d)

 Industrials  8,571    8,580    8,325  

Southern Pacific Resource Co., L+850, 2.0% LIBOR Floor, 12/22/15(d)(e)(g)

 Energy  13,868    13,699    13,972  

SRAM, LLC, L+750, 1.5% LIBOR Floor, 12/7/18

 Consumer Discretionary  5,000    4,952    4,963  

TPF Generation Holdings, LLC, L+425, 12/15/14(d)

 Energy  8,170    7,550    7,425  

Vertafore, Inc., L+825, 1.5% LIBOR Floor, 10/29/17(d)

 Information Technology  12,000    11,910    11,550  

Wm. Bolthouse Farms, Inc., L+750, 2.0% LIBOR Floor, 8/11/16(d)

 Consumer Staples  14,029    14,117    13,792  
   

 

 

  

 

 

 

Total Senior Secured Loans—Second Lien

    346,523    339,522  
   

 

 

  

 

 

 

Senior Secured Bonds—10.6%

    

Allen Systems Group, Inc., 10.5%, 11/15/16(e)

 Information Technology  8,723    8,805    8,330  

Aspect Software, Inc., 10.6%, 5/15/17(d)

 Information Technology  4,000    4,000    4,047  

Avaya Inc., 7.0%, 4/1/19(d)

 Information Technology  1,500    1,500    1,276  

BakerCorp. International Inc., 8.3%, 6/1/19(e)

 Industrials  5,000    5,000    4,538  

Connacher Oil & Gas Ltd., 8.5%, 8/1/19(e)(g)

 Energy  5,600    5,600    4,453  

Eastman Kodak Co., 10.6%, 3/15/19(e)(g)

 Information Technology  7,500    7,408    5,325  

Echostar Corp., 6.5%, 6/15/19(d)

 Telecommunication Services  2,000    2,000    1,947  

First Data Corp., 8.9%, 8/15/20(d)(e)

 Information Technology  6,300    6,348    6,108  

Grifols, SA, 8.3%, 2/1/18(d)(g)

 Healthcare  2,500    2,500    2,498  

HOA Restaurant Group, LLC, 11.3%, 4/1/17(e)

 Consumer Discretionary  14,100    14,138    13,129  

Kabel BW, 7.5%, 3/15/19(d)(g)

 Telecommunication Services  665    665    652  

Nexstar Broadcasting Group, Inc., 8.9%, 4/15/17(d)(g)

 Telecommunication Services  5,000    4,973    4,996  

Paetec Holding Corp., 8.9%, 6/30/17(d)(g)

 Telecommunication Services  4,680    4,804    5,068  

Palace Entertainment Holdings, LLC, 8.9%, 4/15/17(d)

 Consumer Discretionary  2,400    2,400    2,262  

Roofing Supply Group LLC, 8.6%, 12/1/17(d)

 Industrials  800    800    773  

Speedy Cash Intermediate Holding Corp., 10.8%, 10/15/18(e)

 Financials  16,000    16,200    16,186  

Symbion Corp., 8.0%, 6/15/16(d)(e)

 Healthcare  15,460    15,244    13,993  

Texas Competitive Electric Holdings Co. LLC, 11.5%, 10/1/20(e)

 Utilities  10,000    9,908    8,038  

Titlemax Finance Corp., 13.3%, 7/15/15(e)

 Industrials  14,500    15,474    15,660  

United Refining, Co., 10.5%, 2/28/18(e)

 Energy  1,185    1,145    1,164  
   

 

 

  

 

 

 

Total Senior Secured Bonds

    128,912    120,443  
   

 

 

  

 

 

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of JuneSeptember 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

Subordinated Debt—12.1%

     

Alpha Natural Resources, Inc., 6.3%, 6/1/21(f)

  Materials $4,000   $4,000   $4,023  

AMC Networks Inc., 7.8%, 7/15/21

  Consumer Discretionary  2,900    2,900    2,925  

Aquilex Corp, 11.1%, 12/15/16

  Energy  5,000    4,865    4,842  

ATI Enterprises Inc., L+1100, 2.3% LIBOR Floor, 12/30/16

  Consumer Discretionary  8,000    7,915    7,420  

Aurora Diagnostics, LLC, 10.8%, 1/15/18

  Healthcare  8,000    8,000    8,220  

Bresnan Broadband Holdings LLC, 8.0%, 12/15/18(d)(f)

  Telecommunication Services  5,000    5,000    5,178  

Burlington Coat Factory Holdings Inc., 10.0%, 2/15/19

  Consumer Discretionary  680    680    673  

Calumet Lubricants Co., LP, 9.4%, 5/1/19(f)

  Energy  5,800    5,800    5,883  

Chinos Acquisition Corp., 8.1%, 3/1/19

  Consumer Discretionary  1,200    1,200    1,155  

Cincinnati Bell Inc., 8.4%, 10/15/20(d)(f)

  Telecommunication Services  8,000    8,000    7,994  

Commscope Inc., 8.3%, 1/15/19(d)

  Telecommunication Services  4,000    4,000    4,087  

Del Monte Foods Co., 7.6%, 2/15/19(d)

  Consumer Staples  2,500    2,500    2,529  

Echostar Corp., 7.6%, 6/15/21(d)(f)

  Telecommunication Services  1,310    1,310    1,336  

Insight Pharmaceuticals LLC, 13.0%, 2.0% PIK, 12/15/17

  Healthcare  15,062    15,062    15,212  

N.E.W. Customer Service Cos., Inc., L+750, 2.0% LIBOR Floor, 3/22/17(d)

  Industrials  7,000    6,872    7,298  

NCO Group, Inc., L+488, 11/15/13

  Information Technology  2,000    1,766    1,780  

R.R. Donnelley & Sons Co., 7.3%, 5/15/18(d)(f)

  Consumer Discretionary  4,375    4,375    4,358  

Sensata Technologies, Inc., 6.5%, 5/15/19(f)

  Information Technology  2,000    2,000    2,000  

Thermo Fluids Inc., 12.0%, 3.5% PIK, 6/15/14

  Energy  10,684    10,684    10,725  

Univar Inc., 12.0%, 6/30/18

  Materials  3,000    2,944    3,030  

WCA Waste Corp., 7.5%, 6/15/19

  Industrials  3,930    3,930    3,913  
    

 

 

  

 

 

 

Total Subordinated Debt

     103,803    104,581  
    

 

 

  

 

 

 

Collateralized Securities—6.8%

     

Apidos CDO IV Class E, L+360, 10/27/18(f)

  Financials  2,000    1,085    1,513  

Ares 2007 CLO 11A Class E, L+600, 10/11/21(f)

  Financials  4,775    3,066    3,680  

Ares 2007 CLO 12X Class E, L+575, 11/25/20(f)

  Financials  2,252    1,759    1,786  

Base CLO I Class E, EURIBOR+500, 10/17/18(f)

  Financials 1,500    999    1,620  

Blue Mountain CLO III Class E, L+355, 3/17/21(f)

  Financials $2,000    894    1,367  

Franklin CLO 6A Class E, L+425, 8/9/19(f)

  Financials  1,919    1,159    1,471  

Galaxy VII CLO Class Subord., 17.3%, 10/13/18(f)

  Financials  2,000    1,595    1,689  

Lightpoint CLO 2006 V Class D, L+365, 8/5/19(f)

  Financials  6,500    3,115    4,444  

Lightpoint CLO 2007 VII Class D, L+400, 5/15/21(f)

  Financials  4,000    2,228    2,780  

Mountain View CLO II Class Pref., 21.0%, 1/12/21(f)

  Financials  9,225    6,606    7,418  

Octagon CDO 2007 1A Class Income, 38.1%, 8/25/21(f)

  Financials  4,000    2,659    4,063  

Octagon CLO 2006 10A Class Income, 20.6%, 10/18/20(f)

  Financials  4,375    3,552    4,288  

Rampart CLO 2007 1A Class Subord., 16.0%, 10/25/21(f)

  Financials  10,000    8,423    8,833  

Stone Tower CLO VI Class Subord., 19.0%, 4/17/21(f)

  Financials  5,000    4,368    4,537  

Trimaran CLO IV Ltd. Class Pref., 15.5%, 12/1/17(f)

  Financials  12,500    9,686    9,296  
    

 

 

  

 

 

 

Total Collateralized Securities

     51,194    58,785  
    

 

 

  

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

Subordinated Debt—8.5%

    

Alpha Natural Resources, Inc., 6.3%, 6/1/21(g)

 Materials $4,000   $4,000   $3,774  

AMC Networks Inc., 7.8%, 7/15/21

 Consumer Discretionary  2,900    2,900    3,016  

Aquilex Corp., 11.1%, 12/15/16(e)

 Energy  10,000    9,726    4,627  

ATI Enterprises Inc., L+1100, 2.3% LIBOR Floor, 12/30/16(e)

 Consumer Discretionary  8,271    8,190    620  

Aurora Diagnostics, LLC, 10.8%, 1/15/18

 Healthcare  8,000    8,000    7,950  

Bresnan Broadband Holdings LLC, 8.0%, 12/15/18(d)(g)

 Telecommunication Services  5,000    5,000    5,036  

Burlington Coat Factory Holdings Inc., 10.0%, 2/15/19

 Consumer Discretionary  2,334    2,187    2,010  

Calumet Lubricants Co., LP, 9.4%, 5/1/19(g)

 Energy  5,800    5,800    5,655  

J. Crew Group, Inc., 8.1%, 3/1/19

 Consumer Discretionary  1,200    1,200    1,034  

Cincinnati Bell Inc., 8.4%, 10/15/20(d)(g)

 Telecommunication Services  11,000    10,840    10,298  

Commscope Inc., 8.3%, 1/15/19(d)

 Telecommunication Services  4,000    4,000    3,929  

Cumulus Media Inc., 7.8%, 5/1/19

 Consumer Discretionary  5,000    4,381    4,244  

Del Monte Foods Co., 7.6%, 2/15/19(d)

 Consumer Staples  2,500    2,500    2,148  

Echostar Corp., 7.6%, 6/15/21(d)(g)

 Telecommunication Services  1,310    1,310    1,274  

Harland Clarke Holdings Corp., 9.5%, 5/15/15

 Industrials  2,689    2,328    2,028  

Ipreo Holdings LLC, 11.5%, 8/15/18(e)

 Information Technology  15,000    14,927    14,700  

N.E.W. Customer Service Cos., Inc., L+750, 2.0% LIBOR Floor, 3/22/17(d)

 Industrials  7,000    6,875    6,921  

NCO Group Inc., L+488, 11/15/13

 Information Technology  2,000    1,789    1,875  

R.R. Donnelley & Sons Co., 7.3%, 5/15/18(d)(g)

 Consumer Discretionary  4,375    4,375    3,988  

Sealed Air Corp., 8.4%, 9/15/21(d)(f)(g)

 Industrials  2,667    2,667    2,703  

Sensata Technologies, Inc., 6.5%, 5/15/19(g)

 Information Technology  2,000    2,000    1,875  

Univar Inc., 12.0%, 6/30/18(e)

 Materials  3,000    2,946    2,970  

WCA Waste Corp., 7.5%, 6/15/19

 Industrials  3,930    3,930    3,911  
   

 

 

  

 

 

 

Total Subordinated Debt

    111,871    96,586  
   

 

 

  

 

 

 

Collateralized Securities—6.1%

    

Apidos CDO IV Class E, L+360, 10/27/18(g)

 Financials  2,000    1,104    1,253  

Ares 2007 CLO 11A Class E, L+600, 10/11/21(g)

 Financials  4,775    3,087    3,234  

Ares 2007 CLO 12X Class E, L+575, 11/25/20(g)

 Financials  2,252    1,767    1,620  

Base CLO I Class E, EURIBOR+500, 10/17/18(g)

 Financials 1,500    1,010    1,401  

Blue Mountain CLO III Class E, L+355, 3/17/21(g)

 Financials $2,000    907    1,152  

Carlyle Azure CLO Class Income, 15.9%, 5/27/20(g)

 Financials  28,000    17,583    16,287  

Franklin CLO 6A Class E, L+425, 8/9/19(g)

 Financials  1,919    1,173    1,263  

Galaxy VII CLO Class Subord., 17.3%, 10/13/18(g)

 Financials  2,000    1,463    1,508  

Lightpoint CLO 2006 V Class D, L+365, 8/5/19(g)

 Financials  6,500    3,169    3,836  

Lightpoint CLO 2007 VII Class D, L+400, 5/15/21(g)

 Financials  4,000    2,252    2,372  

Mountain View CLO II Class Pref., 21.3%, 1/12/21(g)

 Financials  9,225    6,311    6,865  

Octagon CDO 2007 1A Class Income, 38.9%, 8/25/21(g)

 Financials  4,000    2,567    3,899  

Octagon CLO 2006 10A Class Income, 23.9%, 10/18/20(g)

 Financials  4,375    3,242    4,156  

Rampart CLO 2007 1A Class Subord., 16.5%, 10/25/21(g)

 Financials  10,000    7,779    8,075  

Stone Tower CLO VI Class Subord., 17.7%, 4/17/21(g)

 Financials  5,000    4,133    4,296  

Trimaran CLO IV Ltd. Class Pref., 13.2%, 12/1/17(g)

 Financials  12,500    8,962    8,383  
   

 

 

  

 

 

 

Total Collateralized Securities

    66,509    69,600  
   

 

 

  

 

 

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of JuneSeptember 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry Number of
Shares
 Cost Fair
Value(c)
  Industry Number of
Shares
 Cost Fair
Value(c)
 

Equity/Other—1.4%

     

Airborne Tactical Advantage Co., LLC, Common Equity

  Industrials  2,568,106   $250   $385  

Airborne Tactical Advantage Co., LLC, Common Equity

  Industrials  3,945,705    1,250    592  

Equity/Other—1.3%

    

East Cameron Partners, LP, 8.5% Preferred Equity

  Energy  887    600    395   Energy  887   $100   $37  

East Cameron Partners, LP, Common Equity

  Energy  14,757    100    —     Energy  14,757    600    —    

Florida Gaming Centers, Inc., Strike: $0.01, Warrants

  Consumer Discretionary  71    —      981   Consumer Discretionary  71    —      530  

Florida Gaming Corp., Strike: $25.00, Warrants

  Consumer Discretionary  226,635    —      2   Consumer Discretionary  226,635    —      —    

Ipreo Holdings LLC, Common Equity

 Information Technology  1,000,000    1,000    1,000  

JW Aluminum Co., Common Equity

  Materials  37,500    3,225    —     Materials  37,500    3,225    —    

Klune Industries, Inc., Preferred Equity

 Industrials  52,101    1,500    1,459  

Milagro Holdings, LLC, Common Equity

  Energy  648    25    —     Energy  648    25    —    

Milagro Holdings, LLC, Common Equity

  Energy  573    25    —     Energy  573    25    —    

Milagro Holdings, LLC, Preferred Equity

  Energy  283,947    11,108    8,746   Energy  283,947    11,962    11,471  

West World Media, LLC, Common Equity

  Consumer Discretionary  231,420    1,500    1,007  
    

 

  

 

    

 

  

 

 

Total Equity/Other

     18,083    12,108      18,437    14,497  
    

 

  

 

    

 

  

 

 

TOTAL INVESTMENTS—125.7%

    $1,070,897    1,087,472  

TOTAL INVESTMENTS—117.2%

   $1,380,598    1,333,937  
    

 

     

 

  

LIABILITIES IN EXCESS OF OTHER ASSETS—(25.7%)

      (222,143

LIABILITIES IN EXCESS OF OTHER ASSETS—(17.2%)

     (194,661
     

 

     

 

 

NET ASSETS—100.0%

     $865,329      $1,139,276  
     

 

     

 

 

Total Return Swap

   Notional
Amount
   Unrealized
Appreciation
  Notional
Amount
   Unrealized
Depreciation
 

Citibank TRS Facility (Note 8)(f)

   $202,435    $1,287  

Citibank TRS Facility (Note 8)(g)

  $297,281    $(7,600
     

 

     

 

 

 

(a)Security may be an obligation of one or more entities affiliated with the named company.

 

(b)Denominated in U.S. Dollars unless otherwise noted.

 

(c)Fair value determined by the Company’s Boardboard of Directorsdirectors (see Note 7).

 

(d)Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Notes 10 and 11).

 

(e)Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 12).

(f)Position or portion thereof unsettled as of JuneSeptember 30, 2011.

 

(f)(g)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Consolidated Schedule of Investments

As of December 31, 2010

(in thousands)

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
  Amortized
Cost
  Fair
Value(c)
 

Senior Secured Loans—First Lien—124.4%

    

1-800 Contacts, Inc., L+395, 3.8% LIBOR Floor, 3/4/15

 Healthcare $5,508   $5,233   $5,494  

Advance Pierre Foods, Inc., L+525, 1.8% LIBOR Floor, 9/29/16(d)

 Consumer Staples  4,924    4,829    4,934  

Airvana Network Solutions Inc., L+900, 2.0% LIBOR Floor, 8/27/14

 Telecommunication Services  2,367    2,356    2,378  

Alaska Communications Systems Holdings, Inc., L+400, 1.5% LIBOR Floor, 10/21/16(f)

 Telecommunication Services  3,683    3,647    3,701  

Alliant Holdings LLC, L+500, 1.8% LIBOR Floor, 8/16/14(d)(e)

 Financials  2,000    2,020    2,015  

Altegrity, Inc., L+600, 1.8% LIBOR Floor, 2/21/15(d)

 Industrials  7,363    7,260    7,455  

Amscan Holdings, Inc., L+525, 1.5% LIBOR Floor, 12/2/17(d)

 Consumer Discretionary  6,923    6,869    6,942  

AmWINS Group, Inc., L+250, 6/8/13(d)

 Financials  949    797    902  

Anchor Glass Container Corp., L+400, 2.0% LIBOR Floor, 3/1/16(d)

 Industrials  3,416    3,386    3,430  

Ardent Health Services LLC, L+500, 1.5% LIBOR Floor, 9/15/15(d)

 Healthcare  7,302    7,229    7,321  

Armstrong World Industries, Inc., L+350, 1.5% LIBOR Floor, 5/23/17(d)(f)

 Industrials  1,687    1,678    1,702  

Aspect Software, Inc., L+450, 1.8% LIBOR Floor, 5/7/16(d)

 Information Technology  1,985    1,967    2,000  

Atlantic Broadband Finance, LLC, L+350, 1.5% LIBOR Floor, 11/29/15(d)

 Telecommunication Services  1,338    1,331    1,350  

Avaya Inc., L+350, 0.8% LIBOR Floor, 10/24/14(d)

 Information Technology  9,925    9,170    9,598  

BBHI Acquisition LLC, L+300, 1.5% LIBOR Floor, 12/14/17(d)

 Telecommunication Services  2,064    2,043    2,078  

Bentley Systems Inc., L+425, 1.5% LIBOR Floor, 11/24/16(e)

 Information Technology  1,789    1,771    1,804  

Burger King Corp., L+450, 1.8% LIBOR Floor, 10/19/16(d)

 Consumer Staples  6,529    6,547    6,638  

Calumet Lubricants Co., LP, L+400, 1/3/15(d)(f)

 Energy  2,819    2,630    2,727  

Canwest LP, L+700, 2.0% LIBOR Floor, 7/23/16(d)(e)(f)

 Consumer Discretionary  7,828    7,754    7,960  

CCC Information Services Inc., L+400, 1.5% LIBOR Floor, 11/11/15(d)

 Information Technology  1,578    1,562    1,593  

CDW Corp., L+500, 7/10/17(d)

 Information Technology  5,584    4,978    5,551  

Cedar Fair, LP, L+400, 1.5% LIBOR Floor, 12/15/16(d)(f)

 Consumer Discretionary  2,954    2,927    2,989  

Cenveo Corp., L+475, 1.5% LIBOR Floor, 12/21/16(d)(f)

 Consumer Discretionary  6,667    6,600    6,728  

Ceridian Corp., L+300, 11/9/14(d)

 Industrials  7,456    6,780    7,115  

Citgo Petroleum Corp., L+700, 2.0% LIBOR Floor, 6/24/17(d)(f)

 Energy  6,965    6,878    7,289  

Clopay Ames True Temper Holding Corp., L+600, 1.8% LIBOR Floor, 9/30/16(d)(e)(f)

 Consumer Discretionary  7,941    7,903    8,021  

CMP Susquehanna Corp., L+200, 5/5/13(d)(e)

 Telecommunication Services  6,980    6,267    6,319  

Contec LLC, L+475, 3.0% LIBOR Floor, 7/28/14(d)

 Telecommunication Services  1,942    1,656    1,767  

ConvaTec Inc., L+425, 1.5% LIBOR Floor, 12/22/16(d)

 Healthcare  2,314    2,303    2,342  

Corel Corp., L+400, 5/2/12(f)

 Information Technology  1,434    1,313    1,369  

Cumulus Media Inc., L+375, 6/11/14(d)

 Telecommunication Services  4,060    3,748    3,787  

Custom Building Products, Inc., L+400, 1.8% LIBOR Floor, 3/1/15(d)

 Materials  2,830    2,806    2,851  

Data Device Corp., L+550, 1.8% LIBOR Floor, 12/23/16

 Industrials  9,231    9,092    9,144  

DEI Sales, Inc., L+550, 2.0% LIBOR Floor, 9/22/13

 Consumer Discretionary  2,348    2,201    2,160  

DineEquity, Inc., L+450, 1.5% LIBOR Floor, 10/7/17(d)(f)

 Consumer Staples  2,436    2,412    2,476  

Dunkin’ Brands, Inc., L+425, 1.5% LIBOR Floor, 11/23/17(d)

 Consumer Staples  2,500    2,488    2,534  

Fairmount Minerals, Ltd., L+450, 1.8% LIBOR Floor, 8/5/16(d)

 Materials  6,759    6,701    6,885  

Fifth Third Processing Solutions LLC, L+400, 1.5% LIBOR Floor, 11/3/16(d)

 Financials  3,731    3,695    3,769  

First Data Corp., L+275, 9/24/14(d)

 Information Technology  7,621    6,622    7,063  

First Reserve Crestwood Holdings LLC, L+850, 2.0% LIBOR Floor, 10/3/16

 Energy  4,500    4,413    4,596  

Freescale Semiconductor, Inc., L+425, 12/1/16(d)

 Industrials  7,437    7,076    7,224  

General Chemical Corp., L+500, 1.8% LIBOR Floor, 10/6/15(d)(e)

 Materials  7,527    7,557    7,637  

Getty Images, Inc., L+375, 1.5% LIBOR Floor, 11/7/16(d)

 Consumer Discretionary  2,441    2,418    2,466  

Global Tel Link Corp., L+550, 1.8% LIBOR Floor, 11/10/16(d)

 Telecommunication Services  8,304    8,151    8,206  

Goodman Global, Inc., L+400, 1.8% LIBOR Floor, 10/28/16(d)

 Consumer Discretionary  1,814    1,796    1,826  

Green Mountain Coffee Roasters, Inc., L+400, 1.5% LIBOR Floor, 12/16/16(d)(f)

 Consumer Staples  1,754    1,737    1,757  

Green Tree Credit Solutions LLC, L+575, 2.3% LIBOR Floor, 12/18/15(d)

 Financials  4,466    4,303    4,459  

Grifols, SA , L+425, 1.8% LIBOR Floor, 6/4/16(d)(e)(f)

 Healthcare  4,336    4,295    4,392  

Hanger Orthopedic Group, Inc., L+375, 1.5% LIBOR Floor, 12/1/16(d)(f)

 Healthcare  1,944    1,935    1,962  

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2010

(in thousands)

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
  Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
 

Harbor Freight Tools USA, Inc., L+500, 1.5% LIBOR Floor, 12/22/17(d)

 Consumer Discretionary $9,929   $9,830   $9,931   Consumer Discretionary $9,929   $9,830   $9,931  

HarbourVest Partners LP, L+475, 1.5% LIBOR Floor, 12/17/16(d)

 Financials  11,642    11,526    11,671   Financials  11,642    11,526    11,671  

Harland Clarke Holdings Corp., L+250, 6/30/14(d)(f)

 Industrials  2,448    2,121    2,223   Industrials  2,448    2,121    2,223  

iHealth Technologies, Inc., L+600, 1.8% LIBOR Floor, 12/28/16(e)

 Healthcare  3,636    3,564    3,618   Healthcare  3,636    3,564    3,618  

Infogroup, Inc., L+450, 1.8% LIBOR Floor, 7/1/16(d)

 Consumer Discretionary  4,647    4,563    4,695   Consumer Discretionary  4,647    4,563    4,695  

Intelsat Jackson Holdings SA, L+375, 1.5% LIBOR Floor, 4/2/18(d)(e)(f)

 Telecommunication Services  5,638    5,609    5,702   Telecommunication Services  5,638    5,609    5,702  

Interactive Data Corp., L+500, 1.8% LIBOR Floor, 1/29/17(d)(e)(f)

 Financials  6,716    6,651    6,813   Financials  6,716    6,651    6,813  

Intralinks, Inc., L+425, 1.5% LIBOR Floor, 6/15/14

 Information Technology  1,451    1,169    1,437   Information Technology  1,451    1,169    1,437  

KIK Custom Products Inc., L+225, 5/31/14(d)(f)

 Consumer Staples  4,949    4,394    4,248   Consumer Staples  4,949    4,394    4,248  

Knology, Inc., L+400, 1.5% LIBOR Floor, 10/15/16(d)(f)

 Consumer Discretionary  1,950    1,931    1,964   Consumer Discretionary  1,950    1,931    1,964  

Lantiq Deutschland GmbH, L+700, 2.0% LIBOR Floor, 11/16/15(d)(f)

 Information Technology  5,993    5,879    6,008   Information Technology  5,993    5,879    6,008  

MDA Info Products Ltd., L+550, 1.5% LIBOR Floor, 1/4/17(e)

 Information Technology  5,000    4,925    4,950   Information Technology  5,000    4,925    4,950  

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16(d)(f)

 Healthcare  1,667    1,650    1,677   Healthcare  1,667    1,650    1,677  

Michael Foods Group, Inc., L+450, 1.8% LIBOR Floor, 6/29/16(d)

 Consumer Staples  2,536    2,490    2,575   Consumer Staples  2,536    2,490    2,575  

Mosaic US Holdings Inc., L+275, 4/3/13

 Consumer Discretionary  882    666    789   Consumer Discretionary  882    666    789  

NBTY, Inc., L+450, 1.8% LIBOR Floor, 10/1/17(d)

 Consumer Staples  2,212    2,191    2,248   Consumer Staples  2,212    2,191    2,248  

NCO Group, Inc., L+500, 2.5% LIBOR Floor, 5/15/13(d)

 Information Technology  3,303    3,283    3,270   Information Technology  3,303    3,283    3,270  

New Development Holdings, LLC (Calpine), L+550, 1.5% LIBOR Floor, 7/3/17(d)(f)

 Utilities  5,558    5,486    5,662   Utilities  5,558    5,486    5,662  

OSI Restaurant Partners, LLC, L+225, 6/14/14(d)

 Consumer Discretionary  5,638    4,968    5,397   Consumer Discretionary  5,638    4,968    5,397  

Ozburn Hessey Holding Co., LLC, L+550, 2.0% LIBOR Floor, 4/8/16(d)

 Industrials  6,230    6,198    6,316   Industrials  6,230    6,198    6,316  

Petco Animal Supplies, Inc., L+450, 1.5% LIBOR Floor, 11/24/17(d)

 Consumer Discretionary  2,930    2,901    2,958   Consumer Discretionary  2,930    2,901    2,958  

Protection One, Inc., L+425, 1.8% LIBOR Floor, 6/4/16(d)

 Consumer Discretionary  4,402    4,375    4,424   Consumer Discretionary  4,402    4,375    4,424  

RBS Worldpay, Inc., L+450, 1.8% LIBOR Floor, 10/15/17(e)

 Financials  1,538    1,523    1,551   Financials  1,538    1,523    1,551  

Remy International, Inc., L+450, 1.8% LIBOR Floor, 12/17/13(d)(e)

 Consumer Discretionary  2,083    2,063    2,099   Consumer Discretionary  2,083    2,063    2,099  

RepconStrickland, Inc., L+525, 3.3% LIBOR Floor, 2/19/13

 Energy  3,925    3,595    3,572   Energy  3,925    3,595    3,572  

Res-Care, Inc., L+550, 1.8% LIBOR Floor, 12/22/16(e)(f)

 Consumer Discretionary  5,000    4,900    4,925   Consumer Discretionary  5,000    4,900    4,925  

Revlon Consumer Products Corp., L+400, 2.0% LIBOR Floor, 3/11/15(d)(f)

 Consumer Discretionary  6,357    6,263    6,393   Consumer Discretionary  6,357    6,263    6,393  

Reynolds & Reynolds Co., L+350, 1.8% LIBOR Floor, 4/21/17(d)

 Information Technology  4,969    4,936    5,011   Information Technology  4,969    4,936    5,011  

Reynolds Group Holdings Inc., L+446, 1.8% LIBOR Floor, 5/5/16(d)(f)

 Industrials  7,950    7,934    8,043   Industrials  7,950    7,934    8,043  

Rural/Metro Corp., L+425, 1.8% LIBOR Floor, 11/24/16(d)(f)

 Industrials  1,474    1,466    1,491   Industrials  1,474    1,466    1,491  

Sagittarius Restaurants LLC, L+550, 2.0% LIBOR Floor, 5/18/15

 Consumer Discretionary  3,084    3,052    3,090   Consumer Discretionary  3,084    3,052    3,090  

Savvis, Inc., L+500, 1.8% LIBOR Floor, 8/4/16(d)(f)

 Information Technology  7,382    7,230    7,513   Information Technology  7,382    7,230    7,513  

SemGroup Corp., L+700, 1.5% LIBOR Floor, 11/30/12(d)(f)

 Energy  3,492    3,458    3,457   Energy  3,492    3,458    3,457  

Sheridan Production Co., LLC, L+550, 2.0% LIBOR Floor, 4/20/17(d)

 Energy  7,948    7,824    8,021   Energy  7,948    7,824    8,021  

Sitel, LLC, L+550, 1/30/14(d)

 Telecommunication Services  5,966    5,614    5,707   Telecommunication Services  5,966    5,614    5,707  

Six Flags Theme Parks, Inc., L+400, 1.5% LIBOR Floor, 6/30/16(d)(f)

 Consumer Discretionary  2,737    2,724    2,765   Consumer Discretionary  2,737    2,724    2,765  

Smile Brands Group Inc., L+525, 1.8% LIBOR Floor, 12/21/17(d)(e)

 Healthcare  5,966    5,877    5,932   Healthcare  5,966    5,877    5,932  

Smurfit-Stone Container Enterprises, Inc., L+475, 2.0% LIBOR Floor, 2/10/16(f)

 Industrials  6,965    6,905    7,093   Industrials  6,965    6,905    7,093  

Spansion, LLC, L+550, 2.0% LIBOR Floor, 2/9/15(d)(f)

 Information Technology  5,903    5,942    5,991   Information Technology  5,903    5,942    5,991  

Sports Authority, Inc., L+600, 1.5% LIBOR Floor, 11/16/17(d)

 Consumer Discretionary  8,000    7,783    8,020   Consumer Discretionary  8,000    7,783    8,020  

Styron Sarl, L+575, 1.8% LIBOR Floor, 6/14/16(d)

 Materials  7,897    7,812    8,027   Materials  7,897    7,812    8,027  

Summit Materials Companies I, LLC, L+500, 1.5% LIBOR Floor, 12/31/15(d)

 Materials  4,000    4,000    4,002   Materials  4,000    4,000    4,002  

Swift Transportation Co., Inc., L+450, 1.5% LIBOR Floor, 12/21/16(d)(e)(f)

 Industrials  4,545    4,500    4,568   Industrials  4,545    4,500    4,568  

Syniverse Holdings, Inc., L+375, 1.5% LIBOR Floor, 9/8/14(d)(e)(f)

 Telecommunication Services  2,029    2,009    2,055   Telecommunication Services  2,029    2,009    2,055  

Targus Information Corp., L+525, 1.8% LIBOR Floor, 12/28/16(e)

 Information Technology  5,000    4,900    4,950   Information Technology  5,000    4,900    4,950  

Telcordia Technologies Inc., L+500, 1.8% LIBOR Floor, 4/30/16(d)

 Telecommunication Services  8,004    8,024    8,018   Telecommunication Services  8,004    8,024    8,018  

Texas Competitive Electric Holdings Co. LLC, L+350, 10/10/14(d)

 Utilities  9,384    7,737    7,278   Utilities  9,384    7,737    7,278  

The Gymboree Corp., L+400, 1.5% LIBOR Floor, 11/23/17(d)

 Consumer Discretionary  2,139    2,128    2,154   Consumer Discretionary  2,139    2,128    2,154  

TNS, Inc., L+400, 2.0% LIBOR Floor, 11/18/15(d)(f)

 Telecommunication Services  1,317    1,317    1,324   Telecommunication Services  1,317    1,317    1,324  

Toys“R”Us, Inc., L+450, 1.5% LIBOR Floor, 8/17/16(d)

 Consumer Discretionary  6,733    6,696    6,806  

Trident Exploration Corp., L+950, 3.0% LIBOR Floor, 6/10/14(d)(f)

 Energy  8,960    8,904    9,464  

Univar Inc., L+450, 1.8% LIBOR Floor, 6/30/17(d)

 Materials  6,642    6,589    6,640  

Universal Health Services, Inc., L+400, 1.5% LIBOR Floor, 11/15/16(f)

 Healthcare  5,000    4,930    5,079  

Vertafore, Inc., L+500, 1.8% LIBOR Floor, 7/29/16(d)

 Information Technology  6,910    6,827    6,969  

WCP Exposition Services Operating Co. LLC, L+600, 3.0% LIBOR Floor, 8/29/11

 Consumer Discretionary  539    244    436  

Yell Group Plc, L+300, 7/31/14(f)

 Consumer Discretionary  804    675    379  
   

 

  

 

 

Total Senior Secured Loans—First Lien

    473,881    484,105  
   

 

  

 

 

Toys”R”Us, Inc., L+450, 1.5% LIBOR Floor, 8/17/16(d)

 Consumer Discretionary  6,733    6,696    6,806  

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2010

(in thousands)

 

 

 

Portfolio Company(a)

 Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
  Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
 

Trident Exploration Corp., L+950, 3.0% LIBOR Floor, 6/10/14(d)(f)

 Energy $8,960   $8,904   $9,464  

Univar Inc., L+450, 1.8% LIBOR Floor, 6/30/17(d)

 Materials  6,642    6,589    6,640  

Universal Health Services, Inc., L+400, 1.5% LIBOR Floor, 11/15/16(f)

 Healthcare  5,000    4,930    5,079  

Vertafore, Inc., L+500, 1.8% LIBOR Floor, 7/29/16(d)

 Information Technology  6,910    6,827    6,969  

WCP Exposition Services Operating Co. LLC, L+600, 3.0% LIBOR Floor, 8/29/11

 Consumer Discretionary  539    244    436  

Yell Group Plc, L+300, 7/31/14(f)

 Consumer Discretionary  804    675    379  
   

 

  

 

 

Total Senior Secured Loans—First Lien

    473,881    484,105  
   

 

  

 

 

Senior Secured Loans—Second Lien—34.9%

        

Advance Pierre Foods, Inc., L+950, 1.8% LIBOR Floor, 9/29/17

 Consumer Staples $5,000   $4,864   $5,072   Consumer Staples  5,000    4,864    5,072  

Advantage Sales & Marketing Inc., L+775, 1.5% LIBOR Floor, 6/17/18(d)

 Industrials  10,000    9,850    10,083   Industrials  10,000    9,850    10,083  

AMN Healthcare Services, Inc., L+1000, 1.8% LIBOR Floor, 9/1/16

 Healthcare  10,000    9,716    9,750   Healthcare  10,000    9,716    9,750  

AmWINS Group, Inc., L+550, 6/8/14

 Financials  1,992    1,672    1,712   Financials  1,992    1,672    1,712  

Attachmate Corp., L+675, 10/13/13(d)

 Information Technology  5,000    4,358    4,951   Information Technology  5,000    4,358    4,951  

Awesome Acquisition Co., L+500, 6/4/14

 Consumer Discretionary  2,940    2,343    2,616   Consumer Discretionary  2,940    2,343    2,616  

BNY ConvergEx Group, LLC, L+700, 1.8% LIBOR Floor, 12/17/17(d)(e)

 Information Technology  6,000    5,925    6,158   Information Technology  6,000    5,925    6,158  

Carestream Health, Inc., L+525, 10/30/13(d)

 Healthcare  8,000    7,723    7,892   Healthcare  8,000    7,723    7,892  

Central Parking Systems, Inc., L+450, 11/22/14

 Industrials  250    199    180   Industrials  250    199    180  

Datatel, Inc., L+825, 2.0% LIBOR Floor, 12/10/16

 Information Technology  5,000    4,915    5,070   Information Technology  5,000    4,915    5,070  

Dresser, Inc., L+575, 5/4/15(d)

 Energy  7,405    6,980    7,411   Energy  7,405    6,980    7,411  

Edwards Ltd., L+575, 11/30/14(d)(f)

 Industrials  2,305    2,062    2,201   Industrials  2,305    2,062    2,201  

FR Brand Acquisition Corp., L+625, 2/7/15(d)

 Industrials  8,000    6,948    7,256   Industrials  8,000    6,948    7,256  

Goodman Global, Inc., L+700, 2.0% LIBOR Floor, 10/27/17(d)

 Consumer Discretionary  7,000    6,863    7,230   Consumer Discretionary  7,000    6,863    7,230  

Kronos Inc., L+575, 6/11/15(d)

 Industrials  3,000    2,919    2,941   Industrials  3,000    2,919    2,941  

Roundy’s Supermarkets, Inc., L+800, 2.0% LIBOR Floor, 4/16/16(d)

 Consumer Staples  10,000    10,106    10,169   Consumer Staples  10,000    10,106    10,169  

Sedgwick CMS Holdings, L+750, 1.5% LIBOR Floor, 5/30/17

 Industrials  500    500    500   Industrials  500    500    500  

Southern Pacific Resource Co., L+850, 2.0% LIBOR Floor, 12/22/15(e)(f)

 Energy  10,000    9,700    9,850   Energy  10,000    9,700    9,850  

TPF Generation Holdings, LLC, L+425, 12/15/14(d)

 Energy  9,170    8,329    8,442   Energy  9,170    8,329    8,442  

Vertafore, Inc., L+825, 1.5% LIBOR Floor, 10/19/17(d)

 Information Technology  10,000    9,902    10,131   Information Technology  10,000    9,902    10,131  

Wm. Bolthouse Farms, Inc., L+750, 2.0% LIBOR Floor, 8/11/16(d)

 Consumer Staples  8,384    8,385    8,497   Consumer Staples  8,384    8,385    8,497  

Xerium Technologies, Inc., L+625, 2.0% LIBOR Floor, 5/25/15(d)(e)

 Materials  7,960    7,701    7,850   Materials  7,960    7,701    7,850  
   

 

  

 

    

 

  

 

 

Total Senior Secured Loans—Second Lien

    131,960    135,962      131,960    135,962  
   

 

  

 

    

 

  

 

 

Senior Secured Bonds—9.2%

        

Allen Systems Group, Inc., 10.5%, 11/15/16

 Information Technology  7,348    7,383    7,458   Information Technology  7,348    7,383    7,458  

Aspect Software, Inc., 10.6%, 5/15/17(d)

 Information Technology  4,000    4,000    4,137   Information Technology  4,000    4,000    4,137  

First Data Corp., 8.9%, 8/15/20(d)

 Information Technology  4,300    4,232    4,517   Information Technology  4,300    4,232    4,517  

Logan’s Roadhouse, Inc., 10.8%, 10/15/17

 Consumer Discretionary  4,000    4,000    4,322   Consumer Discretionary  4,000    4,000    4,322  

Nexstar Broadcasting Group, Inc., 8.9%, 4/15/17(d)

 Telecommunication Services  5,000    4,971    5,318   Telecommunication Services  5,000    4,971    5,318  

Paetec Holding Corp., 8.9%, 6/30/17(d)

 Telecommunication Services  4,680    4,809    5,008   Telecommunication Services  4,680    4,809    5,008  

Roofing Supply Group LLC, 8.6%, 12/1/17(d)

 Industrials  800    800    817   Industrials  800    800    817  

Stallion Oilfield Services Ltd., 10.5%, 2/15/15

 Energy  4,000    4,070    4,219   Energy  4,000    4,070    4,219  
   

 

  

 

    

 

  

 

 

Total Senior Secured Bonds

    34,265    35,796      34,265    35,796  
   

 

  

 

    

 

  

 

 

Subordinated Debt—13.1%

        

ATI Enterprises Inc., L+1100, 2.3% LIBOR Floor, 12/30/16

 Consumer Discretionary  8,000    7,908    7,253   Consumer Discretionary  8,000    7,908    7,253  

Aurora Diagnostics, LLC, 10.8%, 1/15/18

 Healthcare  8,000    8,000    8,001   Healthcare  8,000    8,000    8,001  

Bresnan Broadband Holdings LLC, 8.0%, 12/15/18(d)(f)

 Telecommunication Services  5,000    5,000    5,175   Telecommunication Services  5,000    5,000    5,175  

Cincinnati Bell Inc., 8.4%, 10/15/20(d)(f)

 Telecommunication Services  8,000    8,000    7,682   Telecommunication Services  8,000    8,000    7,682  

Hughes Network Systems, LLC, 9.5%, 4/15/14(f)

 Telecommunication Services  2,000    2,072    2,070   Telecommunication Services  2,000    2,072    2,070  

Mediacom Broadband LLC, 8.5%, 10/15/15(f)

 Consumer Discretionary  2,000    2,029    2,011  

N.E.W. Customer Service Cos., Inc., L+750, 2.0% LIBOR Floor, 3/22/17(d)

 Industrials  7,000    6,867    6,980  

NBTY, Inc., 9.0%, 10/1/18

 Consumer Staples  4,700    4,700    5,036  

Paetec Holding Corp., 9.9%, 12/1/18(f)

 Telecommunication Services  4,000    3,868    4,030  

Univar Inc., 12.0%, 6/30/18

 Materials  3,000    2,940    2,940  
   

 

  

 

 

Total Subordinated Debt

    51,384    51,178  
   

 

  

 

 

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2010

(in thousands)

 

 

 

Portfolio Company(a)

 

Industry

 Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
  Industry Principal
Amount(b)
 Amortized
Cost
 Fair
Value(c)
 

Mediacom Broadband LLC, 8.5%, 10/15/15(f)

 Consumer Discretionary $2,000   $2,029   $2,011  

N.E.W. Customer Service Cos., Inc., L+750, 2.0% LIBOR Floor, 3/22/17(d)

 Industrials  7,000    6,867    6,980  

NBTY, Inc., 9.0%, 10/1/18

 Consumer Staples  4,700    4,700    5,036  

Paetec Holding Corp., 9.9%, 12/1/18(f)

 Telecommunication Services  4,000    3,868    4,030  

Univar Inc., 12.0%, 6/30/18

 Materials  3,000    2,940    2,940  
   

 

  

 

 

Total Subordinated Debt

    51,384    51,178  
   

 

  

 

 

Collateralized Securities—6.8%

        

Apidos CDO IV Class E, L+360, 10/27/18(f)

 Financials $2,000   $1,051   $1,375   Financials  2,000    1,051    1,375  

Ares 2007 CLO 11A Class E, L+600, 10/11/21(f)

 Financials  4,775    3,028    3,565   Financials  4,775    3,028    3,565  

Ares 2007 CLO 12X Class E, L+575, 11/25/20(f)

 Financials  2,252    1,743    1,633   Financials  2,252    1,743    1,633  

Base CLO I Class E, EURIBOR+500, 10/17/18(f)

 Financials 1,500    960    1,207   Financials 1,500    960    1,207  

Blue Mountain CLO III Class E, L+355, 3/17/21(f)

 Financials $2,000    869    1,195   Financials $2,000    869    1,195  

Franklin CLO 6A Class E, L+425, 8/9/19(f)

 Financials  1,919    1,133    1,219   Financials  1,919    1,133    1,219  

Lightpoint CLO 2006 V Class D, L+365, 8/5/19(f)

 Financials  6,500    3,012    3,920   Financials  6,500    3,012    3,920  

Lightpoint CLO 2007 VII Class D, L+400, 5/15/21(f)

 Financials  4,000    2,182    2,390   Financials  4,000    2,182    2,390  

Mountain View CLO II Class Pref, 17.4%, 1/12/21(e)(f)

 Financials  8,975    7,272    7,135   Financials  8,975    7,272    7,135  

Octagon CDO 2007 1A Class Income, 38.1%, 8/25/21(f)

 Financials  4,000    2,774    2,900   Financials  4,000    2,774    2,900  
   

 

  

 

    

 

  

 

 

Total Collateralized Securities

    24,024    26,539      24,024    26,539  
   

 

  

 

    

 

  

 

 

TOTAL INVESTMENTS—188.4%

   $715,514    733,580     $715,514    733,580  
   

 

     

 

  

LIABILITIES IN EXCESS OF OTHER ASSETS—(88.4%)

     (344,348     (344,348
    

 

     

 

 

NET ASSETS—100.0%

    $389,232      $389,232  
    

 

     

 

 

 

(a)Security may be an obligation of one or more entities affiliated with the named company.

 

(b)Denominated in U.S. Dollars unless otherwise noted.

 

(c)Fair value determined by the Company’s Boardboard of Directorsdirectors (see Note 7).

 

(d)Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Notes 10 and 11).

 

(e)Position or portion thereof unsettled as of December 31, 2010.

 

(f)The investment is not a qualifying asset under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets.

See notes to unaudited consolidated financial statements.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share information)

 

 

Note 1. Principal Business and Organization

FS Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced operations on January 2, 2009. The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of JuneSeptember 30, 2011, the Company had twofour wholly-owned financing subsidiaries, Broad Street Funding LLC, or Broad Street, which was established on February 2, 2010, and Arch Street Funding LLC, or Arch Street, which was established on March 1, 2011, Locust Street Funding LLC, or Locust Street, which was established on July 5, 2011, and Race Street Funding LLC, or Race Street, which was established on July 5, 2011. The consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned financing subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Since commencing its initial public offering and through August 12,November 11, 2011, the Company has sold 106,890,546142,553,249 shares (as adjusted for stock distributions) of common stock for gross proceeds of $1,115,048.$1,493,510. As of August 12,November 11, 2011, the Company had raised total gross proceeds of $1,116,048$1,494,510 including approximately $1,000 contributed by the principals of the Company’s investment adviser in February 2008. During the sixnine months ended JuneSeptember 30, 2011 and 2010, the Company sold 48,700,32083,613,294 and 11,530,58618,117,485 shares for gross proceeds of $518,405$890,497 and $119,107$187,252 at an average price per share of $10.64$10.65 and $10.33,$10.34, respectively. The gross proceeds received during the sixnine months ended JuneSeptember 30, 2011 and 2010 include reinvested stockholder distributions of $12,248$21,661 and $1,527,$2,967, respectively. During the period from JulyOctober 1, 2011 to August 12,November 11, 2011, the Company sold 16,764,93017,514,596 shares of common stock for gross proceeds of $178,759$185,129 at an average price per share of $10.66.$10.57.

The proceeds from the issuance of common stock as presented on the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $47,190$81,266 and $11,414$17,829 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2010 included in the Company’s annual report on Form 10-K. Operating results for the three and sixnine months ended JuneSeptember 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The December 31, 2010 balance sheet and schedule of investments are derived from the 2010 audited financial statements. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.

Use of Estimates: The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share information.

Reclassifications: Certain amounts in the 2010 financial statements have been reclassified to conform to the classifications used to prepare the 2011 financial statements. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Capital Gains Incentive Fee:Pursuant to the terms of the investment advisory and administrative services agreement the Company entered into with FB Income Advisor, LLC, or FB Advisor, the incentive fee on capital gains earned on liquidated investments of the Company’s portfolio during operations prior to a liquidation of the Company is determined and payable in arrears as of the end of each calendar year. Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement with FB Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, the Company changed its methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FB Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the year ended December 31, 2010, the Company accrued a capital gains incentive fee of $5,459 based on the performance of its portfolio, of which $1,396 was based on realized gains and was payable to FB Advisor as of December 31, 2010. During the sixnine months ended JuneSeptember 30, 2011, the Company accrued an additional $3,911reversed $4,063 in capital gains incentive fees based onaccrued by the performanceCompany during the year ended December 31, 2010 as a result of itsthe unrealized losses incurred in the Company’s portfolio during such period, of which $1,168 was based on realized gains.the nine months ended September 30, 2011.

Note 3. Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2010-06, which provides additional guidance to improve disclosures regarding fair value measurements. This guidance requires two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers and (2) a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of this guidance is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of this guidance, including the gross presentation of

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 3. Recently Issued Accounting Standards (continued)

 

interim reporting periods within those years. The adoption of this guidance, including the gross presentation of Level 3 roll forward information, did not have a significant impact on the Company’s consolidated financial statements or disclosures. See “Note 7. Fair Value of Financial Instruments” for a discussion of the three-level fair value hierarchy employed by the Company under existing accounting guidance.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of the FASB and the International Accounting Standards Boards, or collectively, the Accounting Boards, on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this guidance are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

Note 4. Related Party Transactions

The Company has entered into an investment advisory and administrative services agreement with FB Advisor. Pursuant to the investment advisory and administrative services agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company’s gross assets and an incentive fee based on the Company’s performance. 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 and equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subordinated to a preferred return on adjusted capital, as defined in the Company’s investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized rate of 8.0%. 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 investment advisory and administrative services 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.

The Company commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon the commencement of the Company’s operations. During the three months ended JuneSeptember 30, 2011 and 2010, FB Advisor earned $6,023$7,432 and $1,492,$2,318, respectively, in base management fees. During the sixnine months ended JuneSeptember 30, 2011 and 2010, FB Advisor earned $10,784$18,216 and $2,287,$4,605, respectively, in base management fees. Management fees are paid on a quarterly basis in arrears. The Company paid $8,168$14,093 and $1,232,$2,726, respectively, of these fees during the sixnine months ended JuneSeptember 30, 2011 and 2010.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 4. Related Party Transactions (continued)

 

The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee based on net realized and unrealized gains. However, under the terms of the investment advisory and administrative services agreement, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. During the three months ended JuneSeptember 30, 2011, the Company accrued a capital gains incentive fee of $640 based on the performance of the Company’s portfolio, of which only $39 was based on realized gains. During the three months ended June 30, 2010, the Company reversed $386$7,974 in capital gains incentive fees accrued by the Company during the three months ended March 31, 2010,as of June 30, 2011 as a result of the unrealized losses incurred in the Company’s portfolio during the three months ended JuneSeptember 30, 2010.2011. During each of the three and nine months ended September 30, 2010, the Company accrued $373 in capital gains incentive fees. During the sixnine months ended JuneSeptember 30, 2011, the Company accrued areversed $4,063 in capital gains incentive feefees accrued by the Company during the year ended December 31, 2010 as a result of $3,911 based on the performance ofunrealized losses incurred in the Company’s portfolio of which only $1,168 was based on realized gains.during the nine months ended September 30, 2011.

The Company also reimburses FB Advisor for expenses necessary for its performance of services related to administering and operating the Company, provided that such reimbursement is equal to the lower of FB Advisor’s actual costs or the amount that the Company would be required to pay for comparable services in the same geographic location, and provided further that such costs will beare reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. During the three months ended JuneSeptember 30, 2011 and 2010, the Company incurred administrative services charges of $404$915 and $175,$285, respectively, attributable to FB Advisor. Of these charges, for the three months ended JuneSeptember 30, 2011 and 2010, $222$566 and $175,$285, respectively, related to the allocation of costs of administrative personnel for services provided to the Company by employees of FB Advisor and the remainder related to other reimbursable expenses. The Company paid FB Advisor $337$605 and $193,$132, respectively, for the services incurred under this arrangement during the three months ended JuneSeptember 30, 2011 and 2010. During the sixnine months ended JuneSeptember 30, 2011 and 2010, the Company incurred administrative services charges of $988$1,903 and $350,$635, respectively, attributable to FB Advisor. Of these charges, for the sixnine months ended JuneSeptember 30, 2011 and 2010, $800$1,366 and $350,$635, respectively, related to the allocation of costs of administrative personnel for services provided to the Company by employees of FB Advisor and the remainder related to other reimbursable expenses. The Company paid FB Advisor $814$1,419 and $364,$496, respectively, for the services incurred under this arrangement during the sixnine months ended JuneSeptember 30, 2011 and 2010.

Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company’s sponsor and an affiliate of FB Advisor, funded offering costs and other expenses in the amount of $461$486 for the sixnine months ended JuneSeptember 30, 2010. All offering costs for the six months ended June 30, 2011 have been funded directly by the Company. The offering costs and other expenses funded by Franklin Square Holdings during the sixnine months ended JuneSeptember 30, 2010 were recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statements and the other expenses were charged to expense as incurred by the Company. All offering costs for the nine months ended September 30, 2011 have been funded directly by the Company.

The dealer manager for the Company’s public offering is FS2Capital Partners, LLC, or FS2, which is one of the Company’s affiliates. During the sixnine months ended JuneSeptember 30, 2011 and 2010, FS2retained $9,115$15,622 and $1,912,$3,063, respectively, for selling commissions and dealer manager fees in connection with the sale of the Company’s common stock.

Under the terms of the investment advisory and administrative services agreement, when the Company’s Registration Statement was declared effective by the SEC and the Company was successful in raising gross proceeds from unrelated outside investors of at least $2.5 million, or the minimum offering requirement, FB

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 4. Related Party Transactions (continued)

 

proceeds from unrelated outside investors of at least $2,500, or the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On January 2, 2009, the Company exceeded the minimum offering requirement. The Company paid total reimbursements of $641 and $1,608,$1,678 to FB Advisor and its affiliates during the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. As of JuneSeptember 30, 2011, no amounts were payable to FB Advisor and its affiliates under this arrangement. The reimbursements are recorded as a reduction of capital.

Members of FB Advisor’s senior management team is comprised of the same personnel as the senior management team of FS Investment Advisor, LLC, the investment adviser to Franklin Square Holdings’ other affiliated BDC, FS Energy and Power Fund. As a result, such personnel provide investment advisory services to both the Company and FB Capital Partners, L.P. FB Capital Partners, L.P., which is controlled by Mr. Forman, the Company’s chairman, presidentFS Energy and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions and high net worth individuals.Power Fund. While neither FB Capital Partners, L.P.Advisor nor FBFS Investment Advisor, LLC is currently making private corporate debt investments for clients other than the Company currently,and FS Energy and Power Fund, respectively, either one, or both, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund rather than to the Company.

Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that, for tax purposes, the Company’s net investment income and net capital gains are equal to or greater than the cumulative distributions paid to the Company’s stockholders in each quarter. This arrangement is designed to ensure that no portion of the Company’s distributions will represent a return of capital for the Company’s stockholders. Franklin Square Holdings has no obligation to reimburse any portion of the Company’s expenses. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. During the three and sixnine months ended JuneSeptember 30, 2011 and 2010, the Company received no reimbursements from Franklin Square Holdings. The Company does not expect that conditions will require Franklin Square Holdings to provide reimbursements in the future. To the extent reimbursements may be needed in the future, there can be no assurance that Franklin Square Holdings will provide any such reimbursements. Franklin Square Holdings is controlled by the Company’s chairman, president and chief executive officer, Michael Forman, and its vice-chairman, David Adelman.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common stock during the sixnine months ended JuneSeptember 30, 2011 and 2010:

 

  Distribution   Distribution 

For the Three Months Ended

  Per Share   Amount   Per Share   Amount 

Fiscal 2010

        

March 31, 2010(1)

  $0.1860    $2,443    $0.1860    $2,443  

June 30, 2010

  $0.1875    $3,589    $0.1875    $3,589  

September 30, 2010

  $0.1875    $4,763  

Fiscal 2011

        

March 31, 2011

  $0.1929    $9,948    $0.1929    $9,948  

June 30, 2011

  $0.2787    $20,529    $0.2787    $20,529  

September 30, 2011

  $0.2016    $22,116  

 

(1)The amount of the per share distributions during the three months ended March 31, 2010 has been retroactively adjusted to reflect the stock distribution declared in January 2010 as discussed below.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

On July 12,October 14, 2011, the Company’s board of directors declared two regular semi-monthly cash distributions of $0.033594 per share each, which were paid on July 29,October 31, 2011 to stockholders of record on July 15,October 14, 2011 and JulyOctober 28, 2011, respectively. On August 9,October 28, 2011, the Company’s board of directors approved a special cash distribution of $0.02 per share, which was paid on October 31, 2011 to stockholders of record on October 28, 2011. On November 8, 2011, the Company’s board of directors declared two regular semi-monthly cash distributions of $0.033594 per share each, which are expected to be paid on August 31,November 30, 2011 to stockholders of record on AugustNovember 15, 2011 and August 30,November 29, 2011, respectively. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

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, non-capital gains proceeds from the sale of assets and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions. The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the sixnine months ended JuneSeptember 30, 2011 and 2010:

 

  Six Months Ended June 30,   Nine Months Ended September 30, 
  2011 2010   2011 2010 

Source of Distribution

  Distribution
Amount
   Percentage Distribution
Amount
   Percentage   Distribution
Amount
   Percentage Distribution
Amount
   Percentage 

Offering proceeds

  $—          $—           $—       —     $—       —    

Borrowings

   —           —            —       —      —       —    

Net investment income(1)

   25,570     84  4,290     71   48,572     92  7,872     73

Capital gains proceeds from the sale of assets

   4,907     16  1,742     29   4,021     8  2,923     27

Non-capital gains proceeds from the sale of assets

   —           —            —       —      —       —    

Expense reimbursement from sponsor

   —           —            —       —      —       —    
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $30,477     100 $6,032     100  $52,593     100 $10,795     100
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

 

(1)During the sixnine months ended JuneSeptember 30, 2011 and 2010, 91%88% and 77%81%, respectively, of the Company’s gross investment income was attributable to cash interest earned and 9%12% and 23%19%, respectively, was attributable to non-cash accretion of discount and paid-in-kind, or PIK, interest.

The aggregate cost of the Company’s investments for federal income tax purposes totaled $1,072,009$1,380,598 and $715,695 as of JuneSeptember 30, 2011 and December 31, 2010, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $16,750$(54,261) and $17,885 as of JuneSeptember 30, 2011 and December 31, 2010, respectively. The Company’s net investment income on a tax basis for the sixnine months ended JuneSeptember 30, 2011 and 2010 was $25,570$48,572 and $4,290,$7,869, respectively. The Company distributed all of its net investment income earned as of JuneSeptember 30, 2011 and 2010.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is due to the tax-basis amortization of organization and start-up costs incurred prior to the commencement of the Company’s operations, interest income earned on a tax basis due to the required accretion of discount on a non-performing loan,loans, and the required accrual for GAAP purposes of incentive fees on

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

unrealized gains even though no such incentive fees on unrealized gains are payable by the Company. See “Note 2. Summary of Significant Accounting PoliciesCapital Gains Incentive Fee.” The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the sixnine months ended JuneSeptember 30, 2011 and 2010:

 

   Six Months Ended June 30, 
       2011          2010     

GAAP basis net investment income

  $20,323   $4,250  

Amortization of organizational costs

   (21  (21

Tax accretion of discount on investment

   2,525    61  

Reversal of incentive fee accrual on unrealized gains

   2,743    —    
  

 

 

  

 

 

 

Tax basis net investment income

  $25,570   $4,290  
  

 

 

  

 

 

 
   Nine Months  Ended
September 30,
 
   2011  2010 

GAAP-basis net investment income

  $48,632   $7,809  

Amortization of organizational costs

   (32  (33

Tax accretion of discount on investments

   4,035    93  

Reversal of incentive fee accrual on unrealized gains

   (4,063  —    
  

 

 

  

 

 

 

Tax-basis net investment income

  $48,572   $7,869  
  

 

 

  

 

 

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on a Form 1099-DIV.

The following table reflects the stock distributions per share that the Company has declared on its common stock to date:

 

Date Declared

  Record Date  Payment Date  Distribution
Percentage
 Shares
Issued
   Record Date  Payment Date  Distribution
Percentage
 Shares
Issued
 

Fiscal 2009

              

March 31, 2009

  March 31, 2009  March 31, 2009   1.4  13,818    March 31, 2009  March 31, 2009   1.4  13,818  

April 30, 2009

  April 30, 2009  April 30, 2009   3.0  42,661    April 30, 2009  April 30, 2009   3.0  42,661  

May 29, 2009

  May 29, 2009  May 29, 2009   3.7  79,125    May 29, 2009  May 29, 2009   3.7  79,125  

June 30, 2009

  June 30, 2009  June 30, 2009   3.5  96,976    June 30, 2009  June 30, 2009   3.5  96,976  

July 30, 2009

  July 31, 2009  July 31, 2009   3.1  117,219    July 31, 2009  July 31, 2009   3.1  117,219  

August 31, 2009

  August 31, 2009  August 31, 2009   3.0  148,072    August 31, 2009  August 31, 2009   3.0  148,072  

December 31, 2009

  December 31, 2009  December 31, 2009   0.5  49,710    December 31, 2009  December 31, 2009   0.5  49,710  

Fiscal 2010

              

January 28, 2010

  January 31, 2010  January 31, 2010   2.5  283,068    January 31, 2010  January 31, 2010   2.5  283,068  

The purpose of these special stock distributions was to maintain a net asset value per share that was below the then-current net offering price, as required by the 1940 Act, subject to certain limited exceptions. The Company’s board of directors determined that its portfolio performance sufficiently warranted taking these actions.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

The stock distributions increased the number of shares outstanding, thereby reducing the Company’s net asset value per share. However, because the stock distributions were issued to all stockholders in proportion to their current holdings, the reduction in net asset value per share as a result of the stock distributions was offset exactly by the increase in the number of shares owned by each investor. As overall value to an investor was not reduced as a result of the special stock distributions, the Company’s board of directors determined that these

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 5. Distributions (continued)

issuances would not be dilutive to existing stockholders. As the stock distributions did not change any stockholder’s proportionate interest in the Company, they did not represent taxable distributions. Specific tax characteristics of all distributions are reported to stockholders annually on Form 1099-DIV.

As of JuneSeptember 30, 2011 and December 31, 2010, the components of accumulated earnings on a tax basis were as follows:

 

  June 30,
2011
 December 31,
2010
   September 30,
2011
 December 31,
2010
 

Distributable ordinary income

  $14,811   $1,290    $17,403   $1,290  

Incentive fee accrual on unrealized gains

   (6,806  (4,063   —      (4,063

Unamortized organizational costs

   (536  (558   (525  (558

Unrealized appreciation on investments(1)

   16,750    17,885  

Unrealized appreciation (depreciation) on investments and total return swap(1)

   (54,261  17,885  
  

 

  

 

   

 

  

 

 
  $24,219   $14,554    $(37,383 $14,554  
  

 

  

 

   

 

  

 

 

 

(1)As of JuneSeptember 30, 2011 and December 31, 2010, the gross unrealized appreciation on the Company’s investments was $32,812$14,449 and $20,136, respectively. As of JuneSeptember 30, 2011 and December 31, 2010, the gross unrealized depreciation on the Company’s investments and total return swap was $16,062$68,710 and $2,251, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of JuneSeptember 30, 2011 and December 31, 2010:

 

 June 30, 2011 December 31, 2010  September 30, 2011 December 31, 2010 
 Amortized
Cost(1)
 Fair Value Percentage
of Portfolio
 Amortized
Cost(1)
 Fair Value Percentage
of Portfolio
  Amortized
Cost (1)
 Fair Value Percentage
of Portfolio
 Amortized
Cost (1)
 Fair Value Percentage
of Portfolio
 

Senior Secured Loans—First Lien

 $530,850   $541,416    50 $473,881   $484,105    66 $708,346   $693,289    52 $473,881   $484,105    66

Senior Secured Loans—Second Lien

  280,208    283,238    26  131,960    135,962    19  346,523    339,522    26  131,960    135,962    19

Senior Secured Bonds

  86,759    87,344    8  34,265    35,796    4  128,912    120,443    9  34,265    35,796    4

Subordinated Debt

  103,803    104,581    10  51,384    51,178    7  111,871    96,586    7  51,384    51,178    7

Collateralized Securities

  51,194    58,785    5  24,024    26,539    4  66,509    69,600    5  24,024    26,539    4

Equity/Other

  18,083    12,108    1  —      —          18,437    14,497    1  —      —      —    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 $1,070,897   $1,087,472    100 $715,514   $733,580    100 $1,380,598   $1,333,937    100 $715,514   $733,580    100
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on debt investments.

The Company does not “control” and is not an “affiliate” of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if it owned 5% or more of its voting securities.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 6. Investment Portfolio (continued)

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of JuneSeptember 30, 2011, the Company had 23 such investments with an aggregate unfunded commitment of $14,802.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 6. Investment Portfolio (continued)

$15,709.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as Juneof September 30, 2011 and December 31, 2010:

 

  June 30, 2011 December 31, 2010   September 30, 2011 December 31, 2010 

Industry Classification

  Fair Value   Percentage
of Portfolio
 Fair Value   Percentage
of Portfolio
   Fair Value   Percentage
of Portfolio
 Fair Value   Percentage
of Portfolio
 

Consumer Discretionary

  $242,397     22.3 $129,749     17.6  $323,055     24.2 $129,749     17.6

Consumer Staples

   56,418     5.2  56,184     7.7   54,423     4.1  56,184     7.7

Energy

   103,269     9.5  69,048     9.4   88,989     6.7  69,048     9.4

Financials

   103,031     9.5  59,431     8.1   114,744     8.6  59,431     8.1

Healthcare

   107,948     9.9  63,460     8.7   127,035     9.5  63,460     8.7

Industrials

   167,705     15.4  96,762     13.2   264,965     19.9  96,762     13.2

Information Technology

   156,768     14.4  117,499     16.0   216,448     16.2  117,499     16.0

Materials

   42,651     3.9  46,832     6.4   39,579     3.0  46,832     6.4

Telecommunication Services

   90,602     8.4  81,675     11.1   83,648     6.4  81,675     11.1

Utilities

   16,683     1.5  12,940     1.8   21,051     1.4  12,940     1.8
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $1,087,472     100.0 $733,580     100.0  $1,333,937     100.0 $733,580     100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

As of JuneSeptember 30, 2011 and December 31, 2010, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

  June 30, 2011   December 31, 2010   September 30, 2011 December 31, 2010 
  Investments   Total Return Swap   Investments   Investments   Total Return Swap Investments 

Level 1—Price quotations in active markets

  $—      $—      $—      $—      $—     $—    

Level 2—Significant other observable inputs

   —       —       —       —       —      —    

Level 3—Significant unobservable inputs

   1,087,472     1,287     733,580     1,333,937     (7,600  733,580  
  

 

   

 

   

 

   

 

   

 

  

 

 
  $1,087,472    $1,287    $733,580    $1,333,937    $(7,600 $733,580  
  

 

   

 

   

 

   

 

   

 

  

 

 

The Company’s investments as of JuneSeptember 30, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its collateralized loan andobligations, or CLOs, collateralize debt obligations, or CDOs, and its subordinated debt investments by obtaining bid and ask prices from independent dealers and the Company valued all of its other debt investments, including its senior secured bond investments, by using an independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end. SixSeven senior secured loan investments and threetwo subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the value of such investments by considering the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. TheAll of the Company’s equity investments were valued by the same independent valuation firm, which determined the value of such investments by considering various factors, such as multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan, which was purchased near June 30, 2011, was valued at cost, as the Company’s board of directors determined that the cost of the investment was the best indication of its fair value. The Company valuesvalued its total return swap, or TRS, for a portfolio of senior secured floating rate loans in accordance with the agreements governing such arrangement. Pursuant to those agreements, the counterparty to the TRS, Citibank, N.A., or Citibank, values the loans underlying the TRS are valued based on quotes received from third-party dealers. The value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS.

The Company’s investments as of December 31, 2010 consisted primarily of debt securities that traded on a private over-the-counter market for institutional investors. The Company valued its collateralized loanCLOs and debt obligationsCDOs and its subordinated debt investments by obtaining bid and ask prices from independent dealers. The Company valued all of its other investments, including its senior secured bond investments, by using an independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end.

The Company periodically benchmarks the bid and ask prices it receivesreceived from independent dealers and theits third-party pricing service against the actual prices at which it purchases and sells its investments. Based on the results of the benchmark analysis and the Company’s experience in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 7. Fair Value of Financial Instruments (continued)

valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through theits third-party pricing service or independent dealers, including the use of an independent valuation firm. The Company’s valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

The following is a reconciliation for the six months ended June 30, 2011 and 2010 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

  For the Six Months Ended June 30, 2011 
  Senior Secured
Loans - First

Lien
  Senior Secured
Loans - Second

Lien
  Senior
Secured  Bonds
  Subordinated
Debt
  Collateralized
Securities
  Equity/
Other
  Total 

Fair value at beginning of period

 $484,105   $135,962   $35,796   $51,178   $26,539   $—     $733,580  

Accretion of discount

  1,994    1,124    (1  55    330    —      3,502  

Net realized gain

  4,167    13,747    958    809    342    —      20,023  

Net change in unrealized appreciation (depreciation)

  342    (972  (946  984    5,076    (5,975  (1,491

Purchases

  542,648    191,229    87,981    64,876    35,895    18,083    940,712  

Paid-in-kind interest

  173    —      —      178    —      —      351  

Sales and redemptions

  (492,013  (57,852  (36,444  (13,499  (9,397  —      (609,205

Net transfers in or out of Level 3

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fair value at end of period

 $541,416   $283,238   $87,344   $104,581   $58,785   $12,108   $1,087,472  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

 $5,870   $2,308   $114   $298   $7,591   $(5,974 $10,207  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  For the Six Months Ended June 30, 2010 
  Senior Secured
Loans - First
Lien
  Senior Secured
Loans - Second

Lien
  Senior
Secured Bonds
  Subordinated
Debt
  Collateralized
Securities
  Equity/
Other
  Total 

Fair value at beginning of period

 $45,780   $45,521   $—     $9,291   $—     $—     $100,592  

Accretion of discount

  1,170    809    6    14    28    —      2,027  

Net realized gain

  1,380    2,096    (783  396    —      —      3,089  

Net change in unrealized appreciation (depreciation)

  (2,903  (1,845  (1,011  (116  (312  —      (6,187

Purchases

  205,216    50,883    32,482    13,923    2,764    —      305,268  

Paid-in-kind interest

  —      40    —      42    —      —      82  

Sales and redemptions

  (31,021  (15,571  (6,083  (7,644  —      —      (60,319

Net transfers in or out of Level 3

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fair value at end of period

 $219,622   $81,933   $24,611   $15,906   $2,480   $—     $344,552  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

 $(2,360 $264   $1,021   $(665 $—     $—     $(1,740
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 7. Fair Value of Financial Instruments (continued)

The following is a reconciliation for the nine months ended September 30, 2011 and 2010 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

  For the Nine Months Ended September 30, 2011 
  Senior Secured
Loans - First
Lien
  Senior Secured
Loans - Second

Lien
  Senior
Secured  Bonds
  Subordinated
Debt
  Collateralized
Securities
  Equity/
Other
  Total 

Fair value at beginning of period

 $484,105   $135,962   $35,796   $51,178   $26,539   $—     $733,580  

Accretion of discount (Amortization of premium)

  4,361    2,113    (29  115    496    589    7,645  

Net realized gain/loss

  9,015    12,645    1,535    419    342    (1,500  22,456  

Net change in unrealized appreciation (depreciation)

  (25,281  (11,003  (10,000  (15,079  576    (3,940  (64,727

Purchases

  864,197    262,708    130,156    84,557    54,662    20,583    1,416,863  

Paid-in-kind interest

  232    28    —      1,056    —      —      1,316  

Sales and redemptions

  (643,340  (62,931  (37,015  (25,660  (13,015  (1,235  (783,196

Net transfers in or out of
Level 3

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fair value at end of period

 $693,289   $339,522   $120,443   $96,586   $69,600   $14,497   $1,333,937  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains/losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

 $(25,723 $(7,816 $(8,940 $(15,954 $3,091   $(3,447 $(58,789
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  For the Nine Months Ended September 30, 2010 
  Senior Secured
Loans - First
Lien
  Senior Secured
Loans - Second

Lien
  Senior
Secured Bonds
  Subordinated
Debt
  Collateralized
Securities
  Equity/
Other
  Total 

Fair value at beginning of period

 $45,780   $45,521   $—     $9,291   $—     $—     $100,592  

Accretion of discount

  2,020    1,252    1    19    74    —      3,366  

Net realized gain/loss

  1,729    2,226    (1,106  534    —      —      3,383  

Net change in unrealized appreciation (depreciation)

  1,575    (1,265  885    (68  681    —      1,808  

Purchases

  324,637    82,839    54,865    23,695    15,654    —      501,690  

Paid-in-kind interest

  —      61    —      42    —      —      103  

Sales and redemptions

  (69,798  (24,773  (25,651  (9,841  —      —      (130,063

Net transfers in or out of
Level 3

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fair value at end of period

 $305,943   $105,861   $28,994   $23,672   $16,409   $—     $480,879  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains/losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

 $2,245   $755   $885   $(68 $681   $—     $4,498  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Note 8. Total Return Swap

On March 18, 2011, Arch Street the Company’s newly-formed, wholly-owned financing subsidiary, entered into a TRS for senior secured floating rate loans with Citibank, N.A., or Citibank. On June 9, 2011, Arch Street entered into an amendment to the TRS to increase the maximum market value of the portfolio of loans subject to the TRS.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 8. Total Return Swap (continued)

A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

The TRS with Citibank enables the Company, through its ownership of Arch Street, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Arch Street borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Arch Street under the TRS are non-recourse to the Company and the Company’s exposure under the TRS is limited to the value of the Company’s investment in Arch Street, which generally will equal the value of cash collateral provided by Arch Street under the TRS. Pursuant to the terms of the TRS, Arch Street may select a portfolio of loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $300,000. Arch Street is required to initially cash collateralize a specified percentage of each loan (generally between 20% and 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, Arch Street has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Arch Street are available to pay the debts of the Company.

Pursuant to the terms of an investment management agreement that the Company has entered into with Arch Street, the Company acts as the manager of the rights and obligations of Arch Street under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS. Accordingly, the loans selected by Arch Street for purposes of the TRS are selected by the Company in accordance with its investment objectives and strategy to generate current income and, to a lesser extent, long-term capital appreciation. In addition, pursuant to the terms of the TRS, Arch Street may select any loan or obligation available in the market to be included in the portfolio of loans that meets the obligation criteria set forth in the agreements between Arch Street and Citibank which collectively establish the TRS and are collectively referred to herein as the TRS Agreement.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Arch Street receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Arch Street pays to Citibank interest at a rate equal to one-month LIBOR + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arch Street will either receive from Citibank the appreciation in the value of such loan, or pay to Citibank any depreciation in the value of such loan.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 8. Total Return Swap (continued)

Under the terms of the TRS, Arch Street may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Arch Street may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 8. Total Return Swap (continued)

amount of cash collateral already posted by Arch Street. The amount of collateral required to be posted by Arch Street is determined primarily on the basis of the aggregate value of the underlying loans.

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its equity investment in Arch Street for the purpose of funding any additional collateral or payment obligations for which Arch Street may become obligated during the term of the TRS. If the Company does not make any such additional investment in Arch Street and Arch Street fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Arch Street under the TRS. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee.

Citibank may terminate the TRS on or after March 18, 2013, the second anniversary of the effectiveness of the TRS. Arch Street may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank. Any termination prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank.Citibank based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments which would be owed by Arch Street to Citibank for the period from the termination date through and including the earlier of (i) the one year anniversary of the termination date and (ii) March 18, 2013. Such monthly payments will equal the product of (x) 90%, multiplied by (y) the aggregate notional amount of the TRS ($300,000), multiplied by (z) 1.25% per annum. If the TRS had been terminated as of September 30, 2011, Arch Street would have been required to pay an early termination fee of approximately $3,422. Arch Street is required to pay a minimum usage fee in connection with the TRS. Arch Street will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to Arch Street. Each of the loans underlying the TRS is required to be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. As of JuneSeptember 30, 2011, the fair value of the TRS was $1,287.$(7,600). The fair value of the TRS is reflected as an unrealized gainloss on total return swap on the consolidated balance sheet. The change in value of the TRS is reflected in the statement of operations as net change in unrealized appreciation (depreciation) on total return swap. As of JuneSeptember 30, 2011, Arch Street had selected 4165 underlying loans with a total notional amount of $202,435$297,281 and posted $43,391$69,673 in cash collateral held by Citibank (of which only $61,221 was required to be posted), which is reflected in due from counterparty inon the consolidated balance sheet. Neither

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company has agreed with the staff of the SEC to treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral nor any other assets ofrequired to be posted by Arch Street are availableunder the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to pay the debtsTRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the Company.SEC.

Further, for purposes of Section 55(a) under the 1940 Act, the Company has agreed with the staff of the SEC to treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 8. Total Return Swap (continued)

 

The following is a summary of the underlying loans subject to the TRS as of JuneSeptember 30, 2011:

 

Underlying Loan(1)

  Industry  Notional
Amount
  Industry Notional
Amount
 Market
Value
 Unrealized
Appreciation/
(Depreciation)
 

Academy, Ltd., L+450, 1.5% LIBOR Floor, 8/3/18

 Consumer Discretionary $4,792   $4,720   $(72

Alliant Holdings LLC, L+500, 1.8% LIBOR Floor, 8/16/14

  Financials  $1,949   Financials  1,949    1,922    (27

Asurion Corp., L+400, 1.5% LIBOR Floor, 5/20/18

  Financials   4,950  

Ardent Health Services LLC, L+500, 1.5% LIBOR Floor, 9/15/15

 Healthcare  3,096    3,033    (63

Asurion, LLC, L+400, 1.5% LIBOR Floor, 5/20/18

 Financials  4,849    4,604    (245

Atlantic Broadband Finance, LLC, L+350, 1.5% LIBOR Floor, 11/29/15

 Consumer Discretionary  3,785    3,790    5  

Avis Budget Car Rental, LLC, L+500, 1.3% LIBOR Floor, 9/22/18(2)

 Consumer Discretionary  5,444    5,519    75  

Axcan Intermediate Holdings Inc., L+400, 1.5% LIBOR Floor, 2/11/17

  Healthcare   9,896   Healthcare  9,896    8,791    (1,105

Bass Pro Group, LLC, L+400, 1.3% LIBOR Floor, 6/10/17

  Consumer Discretionary   4,950   Consumer Discretionary  6,818    6,721    (97

Bentley Systems Inc., L+425, 1.5% LIBOR Floor, 11/24/16

  Information Technology   1,771   Information Technology  1,766    1,704    (62

BJ’s Wholesale Club, Inc., L+575, 1.3% LIBOR Floor, 9/29/18

 Consumer Discretionary  4,275    4,347    72  

Blackboard Inc., L+600, 1.5% LIBOR Floor, 10/4/18(2)

 Information Technology  4,128    4,162    34  

Capsugel Holdings Inc., L+400, 1.3% LIBOR Floor, 7/31/18

 Healthcare  3,618    3,571    (47

Carestream Health, Inc., L+350, 1.5% LIBOR Floor, 2/25/17

  Healthcare   4,831   Healthcare  4,818    4,161    (657

Chrysler Group LLC, L+475, 1.3% LIBOR Floor, 5/17/18

  Industrials   7,494   Industrials  7,494    6,619    (875

Clement Pappas & Co., Inc., L+525, 1.3% LIBOR Floor, 7/31/17

 Consumer Discretionary  2,970    2,929    (41

CPG International I Inc., L+450, 1.5% LIBOR Floor, 2/18/17

  Industrials   1,854   Industrials  1,854    1,760    (94

Drumm Investors LLC, L+375, 1.3% LIBOR Floor, 3/15/18

  Healthcare   7,920  

Del Monte Foods Co., L+300, 1.5% LIBOR Floor, 3/8/18

 Consumer Staples  2,833    2,760    (73

Dole Food Co., L+375, 1.3% LIBOR Floor, 7/8/18(2)

 Consumer Staples  1,910    1,966    56  

Emergency Medical Services Corp., L+375, 1.5% LIBOR Floor, 5/25/18

  Healthcare   6,755   Healthcare  6,755    6,424    (331

Fairmount Minerals, Ltd., L+400, 1.3% LIBOR Floor, 3/11/17

  Materials   7,380   Materials  7,380    7,266    (114

Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16

  Energy   4,357   Energy  6,039    6,012    (27

Gemini Holdings Inc., L+450, 1.5% LIBOR Floor, 6/16/17

  Consumer Discretionary   3,667   Consumer Discretionary  3,667    3,618    (49

Gibson Energy ULC, L+450, 1.3% LIBOR Floor, 6/15/18

  Energy   7,150  

Gibson Energy ULC, L+450, 1.3% LIBOR Floor, 6/15/18(2)

 Energy  7,150    7,060    (90

Golden Living (Drumm Investors LLC), L+375, 1.3% LIBOR Floor, 3/15/18

 Healthcare  7,920    6,980    (940

Grifols, SA, L+425, 1.8% LIBOR Floor, 6/4/16

  Healthcare   4,355   Healthcare  4,355    4,249    (106

HarbourVest Partners LP, L+475, 1.5% LIBOR Floor, 12/17/16

  Financials   10,805   Financials  10,600    10,442    (158

Hubbard Radio, LLC, L+725, 1.5% LIBOR Floor, 4/29/18

  Telecommunication Services   1,382   Telecommunication Services  1,382    1,333    (49

Hyland Software, Inc., L+425, 1.5% LIBOR Floor, 12/19/16

  Information Technology   3,980   Information Technology  3,980    3,834    (146

IASIS Healthcare LLC, L+375, 1.3% LIBOR Floor, 5/3/18

  Healthcare   7,513   Healthcare  7,513    7,053    (460

Infogroup, Inc., L+375, 1.5% LIBOR Floor, 5/27/18

  Consumer Discretionary   4,723  

Intelsat Jackson Holdings S.A., L+375, 1.5% LIBOR Floor, 4/2/18

  Telecommunication Services   3,012  

Immucor, Inc., L+575, 1.5% LIBOR Floor, 8/19/18

 Healthcare  3,765    3,858    93  

INC Research, LLC, L+575, 1.3% LIBOR Floor, 7/12/18

 Healthcare  4,850    4,733    (117

Infogroup, Inc., L+425, 1.5% LIBOR Floor, 5/25/17

 Consumer Discretionary  4,197    4,144    (53

Intelsat Jackson Holdings SA, L+375, 1.5% LIBOR Floor, 4/2/18(2)

 Telecommunication Services  3,005    2,865    (140

inVentiv Health, Inc., L+525, 1.5% LIBOR Floor, 8/4/18

 Industrials  2,530    2,438    (92

Kar Holdings, Inc., L+375, 1.3% LIBOR Floor, 5/20/17

  Industrials   3,036   Industrials  4,933    4,874    (59

LabelCorp Holdings, Inc., L+475, 1.5% LIBOR Floor, 5/27/17

  Industrials   5,775   Industrials  5,775    5,746    (29

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16

  Healthcare   1,597  

Mood Media Corp,, L+550, 1.5% LIBOR Floor, 5/4/18

  Consumer Discretionary   5,096  

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16(2)

 Healthcare  1,532    1,491    (41

Mondrian Investment Partners Ltd., L+425, 1.3% LIBOR Floor, 7/5/18

 Financials  4,486    4,498    12  

Mood Media Corp., L+550, 1.5% LIBOR Floor, 5/4/18(2)

 Consumer Discretionary  5,096    4,739    (357

NBTY, Inc., L+325, 1.0% LIBOR Floor, 10/1/17

 Consumer Staples  3,775    3,868    93  

Norit Holding BV, L+525, 1.5% LIBOR Floor, 7/8/17(2)

 Industrials  3,834    3,835    1  

NuSil Technology LLC, L+400, 1.3% LIBOR Floor, 3/28/17

  Materials   3,994   Materials  3,924    3,761    (163

OpenLink Financial Inc., L+400, 1.3% LIBOR Floor, 4/27/18

  Information Technology   5,627   Information Technology  5,627    5,556    (71

Protection One, Inc., L+425, 1.8% LIBOR Floor, 6/4/16

  Consumer Discretionary   1,824   Consumer Discretionary  1,762    1,710    (52

Ranpak Corp., L+350, 1.3% LIBOR Floor, 4/20/17

  Industrials   2,647   Industrials  2,539    2,424    (115

RBS Holding Company, LLC, L+500, 1.5% LIBOR Floor, 3/21/17

  Consumer Discretionary   9,776  

RBS Holding Co. LLC, L+500, 1.5% LIBOR Floor, 3/21/17

 Consumer Discretionary  9,776    8,878    (898

RBS Worldpay, Inc., L+450, 1.8% LIBOR Floor, 10/15/17

  Financials   1,542   Financials  1,542    1,474    (68

SemGroup Corp., L+450, 1.3% LIBOR Floor, 6/17/18

  Energy   5,281  

Sensus USA Inc., L+350, 1.3% LIBOR Floor, 5/9/17

  Industrials   3,008  

Sprouts Farmers Markets, LLC, L+475, 1.3% LIBOR Floor, 4/15/17

  Consumer Discretionary   4,798  

Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18

  Energy   6,965  

Surgery Center Holdings, Inc., L+500, 1.5% LIBOR Floor, 2/4/17

  Healthcare   7,684  

SymphonyIRI Group Inc., L+375, 1.3% LIBOR Floor, 12/1/17

  Information Technology   2,095  

TravelCLICK Holdings, Inc., L+450, 1.5% LIBOR Floor, 2/11/17

  Industrials   7,876  

Verint Systems, Inc., L+325, 1.3% LIBOR Floor, 10/6/17

  Information Technology   2,726  

Vision Solutions, Inc., L+450, 1.5% LIBOR Floor, 9/20/16

  Information Technology   7,821  

Wall Street Systems Inc., L+400, 1.5% LIBOR Floor, 2/2/17

  Information Technology   2,573  
    

 

 

TOTAL NOTIONAL AMOUNT

    $202,435  
    

 

 

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 8. Total Return Swap (continued)

Underlying Loan(1)

 Industry Notional
Amount
  Market
Value
  Unrealized
Appreciation/
(Depreciation)
 

Reynolds Group Holdings Inc., L+460, 1.2% LIBOR Floor, 7/31/18(2)

 Consumer Discretionary $7,079   $7,109   $30  

Sealed Air Corp., L+375, 1.0% LIBOR Floor, 10/3/18(2)

 Industrials  3,808    3,884    76  

SemGroup Corp., L+450, 1.3% LIBOR Floor, 6/17/18(2)

 Energy  5,281    5,281    —    

Sensus USA Inc., L+350, 1.3% LIBOR Floor, 5/9/17

 Industrials  4,943    4,814    (129

Smile Brands Group Inc., L+525, 1.8% LIBOR Floor, 12/21/17

 Healthcare  1,213    1,200    (13

Sprouts Farmers Markets, LLC, L+475, 1.3% LIBOR Floor, 4/15/17

 Consumer Discretionary  4,798    4,596    (202

SRA International, Inc., L+525, 1.3% LIBOR Floor, 7/20/18

 Industrials  6,268    6,081    (187

Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18

 Energy  5,893    5,578    (315

Surgery Center Holdings, Inc., L+500, 1.5% LIBOR Floor, 2/4/17

 Healthcare  7,684    7,240    (444

SymphonyIRI Group Inc., L+375, 1.3% LIBOR Floor, 12/1/17

 Information Technology  2,095    2,040    (55

Terex Corp., L+400, 1.5% LIBOR Floor, 4/28/17(2)

 Industrials  1,856    1,838    (18

Totes Isotoner Corp., L+575, 1.5% LIBOR Floor, 7/8/17

 Consumer Discretionary  3,259    3,184    (75

TravelCLICK Holdings, Inc., L+450, 1.5% LIBOR Floor, 2/11/17

 Industrials  7,876    7,637    (239

US Security Associates, Inc., L+475, 1.5% LIBOR Floor, 7/26/17

 Consumer Discretionary  2,475    2,419    (56

Verint Systems, Inc., L+325, 1.3% LIBOR Floor, 10/6/17(2)

 Information Technology  2,719    2,654    (65

Vision Solutions, Inc., L+450, 1.5% LIBOR Floor, 9/20/16

 Information Technology  7,722    7,410    (312

Wall Street Systems Inc., L+400, 1.5% LIBOR Floor, 2/2/17

 Information Technology  2,573    2,509    (64

Waste Industries USA, Inc., L+350, 1.3% LIBOR Floor, 3/18/17

 Industrials  3,755    3,750    (5
  

 

 

  

 

 

  

 

 

 

TOTAL

  $297,281   $287,466    (9,815
  

 

 

  

 

 

  
 

Total TRS Accrued Income and Liabilities:

     

  2,215  
    

 

 

 
 

Total TRS Market Value:

  

 $(7,600
    

 

 

 

(1)Security may be an obligation of one or more entities affiliated with the named company.

(2)The investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets.

Note 9. Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares and under what terms:

 

the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 9. Share Repurchase Program (continued)

 

the liquidity of its assets (including fees and costs associated with disposing of assets);

 

the Company’s investment plans and working capital requirements;

 

the relative economies of scale with respect to the Company’s size;

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 9. Share Repurchase Program (continued)

 

the Company’s history in repurchasing shares or portions thereof; and

 

the condition of the securities markets.

The Company currently intends to limit the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the sale of shares under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase shares. In addition, the Company will not repurchase shares in any calendar year in excess of 10% of the weighted average number of shares outstanding in the prior calendar year, or 2.5% in each quarter. The Company will offer to repurchase such shares on each date of repurchase at a price equal to 90% of the current offering price in effect on each date of repurchase. The Company’s board of directors may amend, suspend or terminate the repurchase program at any time upon 30 days’ notice. The first such tender offer commenced in March 2010, and the repurchase occurred in connection with the Company’s April 1, 2010 closing. On such date, 11,142 shares were repurchased at a price per share of $9.36 for aggregate consideration of approximately $104. During the sixnine months ended JuneSeptember 30, 2011, the Company repurchased 257,891337,141 shares at $9.64$9.65 per share for aggregate consideration totaling $2,486.$3,253. On July 1,October 3, 2011, the Company repurchased 79,250121,089 shares at $9.68$9.585 per share for aggregate consideration totaling $767.$1,161.

Note 10. Revolving Credit Facility

On January 28, 2011, Broad Street and Deutsche Bank AG, New York Branch, or Deutsche Bank, entered into an amended and restated multi-lender, syndicated revolving credit facility, or the credit facility, which amended and restated the revolving credit facility Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto, or the original credit facility. Deutsche Bank is a lender and serves as administrative agent under the credit facility.

The credit facility provides for borrowings in an aggregate amount up to $340,000. Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $240,000 (referred to herein as the Tranche A Commitment) or as Tranche C borrowings in an amount up to $100,000 (referred to herein as the Tranche C Commitment). The credit facility also provides for Tranche B borrowings in an amount up to $100,000 (referred to herein as the Tranche B Commitment), but there are currently no Tranche B Commitments outstanding. All Tranche A Commitments bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. All Tranche C Commitments bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. In connection with the amendment and restatement of the original credit facility, a $100,000 Tranche B Commitment that was provided under the original credit facility by Deutsche Bank to Broad Street on an uncommitted basis was converted into a $100,000 Tranche C Commitment provided by a new lender on a committed basis.

In connection with entering into the original credit facility, and from time to time thereafter, the Company has transferred debt securities to Broad Street as a contribution to capital and retains a residual interest in the contributed debt securities through the Company’s ownership of Broad Street. The Company may contribute additional debt securities to Broad Street from time to time and Broad Street may purchase additional debt securities from various sources. Broad Street has appointed the Company to manage its portfolio of debt

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 10. Revolving Credit Facility (continued)

 

securities from various sources. Broad Street has appointed the Company to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Broad Street’s obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities. The obligations of Broad Street under the credit facility are non-recourse to the Company and the Company’s exposure under the credit facility is limited to the value of the Company’s investment in Broad Street.

As of JuneSeptember 30, 2011, $340,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. The Company incurred costs of $1,546$1,554 in connection with obtaining and amending the credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the credit facility. As of JuneSeptember 30, 2011, $634$396 of such deferred financing costs have yet to be amortized to interest expense.

The effective interest rate under the credit facility was 2.41% on June2.43% as of September 30, 2011. Interest is paid quarterly in arrears and commenced August 20, 2010. The Company recorded interest expense of $2,267$2,293 and $837$1,343 for the three months ended JuneSeptember 30, 2011 and 2010, respectively, of which $223$225 and $130$170 related to the amortization of deferred financing costs. The Company recorded interest expense of $4,460$6,753 and $870$2,213 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, of which $428$653 and $161$331 related to the amortization of deferred financing costs. The Company paid $4,248$5,867 in interest expense for the sixnine months ended JuneSeptember 30, 2011. The average borrowings under the credit facility for the sixnine months ended JuneSeptember 30, 2011 and 2010 were $337,434$337,793 and $90,178,$130,931, with a weighted average interest rate of 2.35%2.41% and 2.95%2.78%, respectively.

Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Street’s portfolio. The occurrence of certain events described as “Super-Collateralization Events” in the credit agreement that governs the credit facility, or a decline in the Company’s net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO / Blackstone Debt Funds Management LLC, or GDFM, the sub-adviser to FB Advisor; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as the Company’s sub-adviser or FB Advisor ceasing to act as the Company’s investment adviser; (iv) the Company ceasing to act as Broad Street’s investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) the Company or GDFM or FB Advisor committing fraud or other illicit acts in its or their investment advisory capacities.

In connection with the credit facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due,due; (b) borrowings under the credit facility exceeding the applicable advance rates,rates; (c) the purchase by Broad Street of certain ineligible assets,assets; (d) the insolvency or bankruptcy of Broad Street or the Company,Company; (e) the Company ceases to act as investment manager of Broad Street’s assets,assets; (f) the decline of the Company’s net asset value below $50,000$50,000; and (g) fraud or other illicit acts by the Company, FB Advisor or GDFM in its or their investment advisory capacities. During the continuation of an event of default, Broad Street must pay interest at a default rate.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 10. Revolving Credit Facility (continued)

Borrowings of Broad Street will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to business development companies.BDCs.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 11. Broad Street Funding LLC

The financial statements of Broad Street are maintained separateseparately from those of the Company. The assets of Broad Street are pledged as collateral supporting the amounts outstanding under the credit facility and as such are not available to pay the debts of the Company. The following is the balance sheet of Broad Street as of JuneSeptember 30, 2011 and December 31, 2010:

 

  June 30, 2011     
  (Unaudited)   December 31, 2010   September 30, 2011
(Unaudited)
   December 31, 2010 

Assets

        

Investments, at fair value (amortized cost—$541,034 and $527,964, respectively)

  $550,417    $540,186  

Investments, at fair value (amortized cost—$611,138 and $527,964, respectively)

  $592,531    $540,186  

Cash

   28,047     9,534     29,576     9,534  

Receivable for investments sold and repaid

   10,037     5,162     2,885     5,162  

Interest receivable

   2,844     2,360     3,897     2,360  

Deferred financing costs

   620     835     396     835  
  

 

   

 

   

 

   

 

 

Total assets

  $591,965    $558,077    $629,285    $558,077  
  

 

   

 

 
      

 

   

 

 

Liabilities

        

Payable for investments purchased

  $21,911    $48,947    $26,076    $48,947  

Credit facility payable

   340,000     297,201     340,000     297,201  

Due to FS Investment Corporation

   930     992     924     992  

Interest payable

   1,095     883     1,116     883  

Accrued expenses

   36     43     32     43  
  

 

   

 

   

 

   

 

 

Total liabilities

   363,972     348,066     368,148     348,066  
  

 

   

 

   

 

   

 

 

Member’s equity

   227,993     210,011     261,137     210,011  
  

 

   

 

   

 

   

 

 

Total liabilities and member’s equity

  $591,965    $558,077    $629,285    $558,077  
  

 

   

 

   

 

   

 

 

Note 12. Repurchase Transaction

On July 21, 2011, the Company entered into a conventional debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, through two wholly-owned subsidiaries, pursuant to which up to $300,000 will be made available to the Company to fund investments in new securities and for other general corporate purposes. Pricing under the facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing transaction, loans in the Company’s portfolio having an aggregate market value of up to $600,000 may be sold by the Company from time to time to Locust Street, a newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an asset transfer agreement the Company entered into with Locust Street on July 21, 2011, or the Asset Transfer Agreement. Under the Asset Transfer Agreement, on July 21, 2011, the Company sold loans to Locust Street for a purchase price of approximately $365,396, all of which consisted of equity interests in Locust Street that Locust Street issued to the Company. The Company owns all of the equity in Locust Street.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 12. Repurchase Transaction (continued)

The loans purchased by Locust Street will secure the obligations of Locust Street under Class A Floating Rate Notes, or the Class A Notes, to be issued by Locust Street from time to time to Race Street, another newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an indenture dated as of July 21, 2011 with Citibank, N.A., as trustee, or the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420,000 and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value and intends to purchase $420,000 in aggregate principal amount of such Class A Notes within 180 days of July 21, 2011. The Company owns all of the equity in Race Street.

Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of a master repurchase agreement and the related annex and confirmation to such agreement, each dated as of July 21, 2011, or collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than July 15, 2015. The repurchase price paid by Race Street to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at the applicable pricing rate under the JPM Facility, as described below.

As of September 30, 2011, Class A Notes in the aggregate principal amount of $153,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $109,286. On October 3, 2011, an additional Class A Note in the principal amount of $70,000 was purchased by Race Street from Locust Street and subsequently sold to JPM for proceeds of $50,000. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2011, the amount accrued upon maturity under the repurchase agreement was $109,286, plus $608 of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Company’s financial statements.

If at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than 27% of their initial aggregate purchase price, or the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from the Company pursuant to a revolving credit agreement the Company entered into, as lender, with Race Street, as borrower, on July 21, 2011, or the Revolving Credit Agreement. The Company may, in its sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

Pricing under the JPM Facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. Commencing January 2013, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions will be subject to breakage fees calculated as the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 12. Repurchase Transaction (continued)

The Company incurred costs of $425 in connection with obtaining the JPM Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the JPM Facility. As of September 30, 2011, $404 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility was 3.50% as of September 30, 2011. The Company recorded interest expense of $629 for the three and nine months ended September 30, 2011, of which $21 related to the amortization of deferred financing costs. The average borrowings under the JPM Facility for the nine months ended September 30, 2011 were $86,650 with a weighted average interest rate of 3.50%.

Interest on the Class A Notes will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal on the Class A Notes will be due and payable on the stated maturity date of July 15, 2021. Pursuant to the Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date, or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the loans securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-advisor to FB Advisor.

In connection with the Class A Notes and the Indenture, Locust Street also entered into (i) a collateral management agreement with the Company, as collateral manager, dated as of July 21, 2011, pursuant to which the Company will manage the assets of Locust Street, and (ii) a collateral administration agreement with Virtus Group, LP, or Virtus, as collateral administrator, dated as of July 21, 2011, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 12.13. Financial Highlights

The following is a schedule of financial highlights of the Company for the sixnine months ended JuneSeptember 30, 2011 and the year ended December 31, 2010:

 

  Six Months Ended
June 30, 2011
 Year Ended
December 31,  2010
   Nine Months Ended
September 30, 2011
 Year Ended
December 31, 2010
 

Per Share Data(1):

      

Net asset value, beginning of period

  $9.42   $9.10    $9.42   $9.10  

Results of operations(2)

      

Net investment income

   0.33    0.40     0.63    0.40  

Net realized and unrealized appreciation on investments and on foreign currency

   0.32    0.81  

Net realized and unrealized appreciation (depreciation) on investments, total return swap and foreign currency

   (0.62  0.81  
  

 

  

 

   

 

  

 

 

Net increase in net assets resulting from operations

   0.65    1.21     0.01    1.21  
  

 

  

 

   

 

  

 

 

Stockholder distributions(3)

      

Distributions from net investment income

   (0.39  (0.55   (0.62  (0.55

Distributions from net realized gain on investments

   (0.08  (0.32   (0.05  (0.32
  

 

  

 

   

 

  

 

 

Net decrease in net assets resulting from stockholder distributions

   (0.47  (0.87   (0.67  (0.87
  

 

  

 

   

 

  

 

 

Capital share transactions

      

Issuance of common stock(4)

   0.07    0.10     0.43    0.10  

Offering costs(2)

   (0.03  (0.07   (0.05  (0.07

Reimbursement to investment adviser(2)

   —      (0.10   —      (0.10

Capital contributions of investment adviser(2)

   —      0.05     —      0.05  
  

 

  

 

   

 

  

 

 

Net increase (decrease) in net assets resulting from capital share transactions

   0.04    (0.02   0.38    (0.02
  

 

  

 

   

 

  

 

 

Net asset value, end of period

  $9.64   $9.42    $9.14   $9.42  
  

 

  

 

   

 

  

 

 

Shares outstanding, end of period

   89,775,091    41,332,661     124,608,814    41,332,661  
  

 

  

 

   

 

  

 

 

Total return(5)

   7.32  13.08   4.14  13.08
  

 

  

 

   

 

  

 

 

Ratio/Supplemental Data:

      

Net assets, end of period

  $865,329   $389,232    $1,139,276   $389,232  
  

 

  

 

   

 

  

 

 

Ratio of net investment income to average net assets(6)

   3.41  4.37   6.61  4.37
  

 

  

 

   

 

  

 

 

Ratio of operating expenses to average net assets(6)

   3.79  9.89   3.75  9.89
  

 

  

 

   

 

  

 

 

Portfolio turnover(6)

   67.42  67.48   75.58  67.48
  

 

  

 

   

 

  

 

 

 

(1)The share information utilized to determine per share data has been retroactively adjusted to reflect the stock distributions discussed in Note 5.

 

(2)The per share data was derived by using the weighted average shares outstanding during the period.

 

(3)The per share data for distributions reflects the actual amount of distributions paid per share during the period.

 

(4)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.

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

Note 12. Financial Highlights (continued)

 

(5)The total return for the sixnine months ended JuneSeptember 30, 2011 was calculated by taking the net asset value per share as of JuneSeptember 30, 2011, adding the cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2010. The 2010 total return was calculated by taking the net asset value per share as of December 31, 2010, adding the cash distributions per share which were declared during the calendar year and dividing the total by the net asset value per share on December 31, 2009. The total return does not consider the effect of the sales load from the sale of the Company’s common stock.

 

(6)Average monthlyWeighted average net assets are used for this calculation. Ratios and portfolio turnover are not annualized.

Note 13. Subsequent Events

On July 21, 2011, the Company entered into a conventional debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, through two wholly-owned subsidiaries, pursuant to which up to $300,000 will be made available to the Company to fund investments in new securitiesItem  2. Management’s Discussion and for other general corporate purposes. Pricing under the facility is based on three-month LIBOR plus a spreadAnalysis of 3.25% per annum for the relevant period. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing transaction, loans in the Company’s portfolio having an aggregate market valueFinancial Condition and Results of up to $600,000 may be sold by the Company from time to time to Locust Street Funding LLC, or Locust Street, a newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an asset transfer agreement the Company entered into with Locust Street on July 21, 2011, or the Asset Transfer Agreement. Under the Asset Transfer Agreement, on July 21, 2011, the Company sold loans to Locust Street for a purchase price of approximately $365,396, all of which consisted of equity interests in Locust Street that Locust Street issued to the Company. The Company owns all of the equity in Locust Street.

The loans purchased by Locust Street will secure the obligations of Locust Street under Class A Floating Rate Notes, or the Class A Notes, to be issued by Locust Street from time to time to Race Street Funding LLC, or Race Street, another newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an indenture dated as of July 21, 2011 with Citibank, N.A., as trustee, or the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420,000 and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value. On July 21, 2011, Race Street purchased a Class A Note in the principal amount of $63,000. The Company funded this purchase through a capital contribution of $63,000 to Race Street. The Company owns all of the equity in Race Street.

Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of a master repurchase agreement and the related annex and confirmation to such agreement, each dated as of July 21, 2011, or collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300,000. On July 21, 2011, a Class A Note in the

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)Operations.

(in thousands, except share and per share information)

Note 13. Subsequent Events (continued)

principal amount of $63,000 was purchased by JPM from Race Street pursuant to the JPM Facility for $45,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than July 15, 2015. The repurchase price paid by Race Street to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at the applicable pricing rate under the JPM Facility, as described below.

During the 180-day period following the initial transaction under the JPM Facility, Race Street intends to enter into additional repurchase transactions thereunder with respect to an additional $357,000 in principal amount of Class A Notes. If at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than 27% of their initial aggregate purchase price, or the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from the Company pursuant to a revolving credit agreement the Company entered into, as lender, with Race Street, as borrower, on July 21, 2011, or the Revolving Credit Agreement. The Company may, in its sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

Pricing under the JPM Facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. Commencing January 2013, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions will be subject to breakage fees calculated as the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

Interest on the Class A Notes will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal on the Class A Notes will be due and payable on the stated maturity date of July 15, 2021. Pursuant to the Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date, or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the loans securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-advisor to FB Advisor.

In connection with the Class A Notes and the Indenture, Locust Street also entered into (i) a collateral management agreement with the Company, as collateral manager, dated as of July 21, 2011, pursuant to which the Company will manage the assets of Locust Street, and (ii) a collateral administration agreement with Virtus Group, LP, or Virtus, as collateral administrator, dated as of July 21, 2011, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share information)

Forward-Looking Statements

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. 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 current and expected financings and investments;

 

the adequacy of our cash resources, financing sources and working capital;

 

the timing of cash flows, if any, from the operations of our portfolio companies.

 

our contractual arrangements and relationships with third parties;

 

actual and potential conflicts of interest with FB Advisor or GDFM or either of their affiliates;

the dependence of our future success on the general economy and its impacteffect on the industries in which we invest;

 

our abilitythe use of borrowed money to source favorable privatefinance a portion of our investments;

 

the ability of FB Advisor to locate suitable investments for us and to monitor and administer our useinvestments;

the ability of financial leverage;FB Advisor or its affiliates to attract and retain highly talented professionals;

 

our tax status;ability to qualify and maintain our qualification as a RIC and as a BDC;

 

the tax statusimpact on our business of our portfolio companies;the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; and

 

the timingeffect of changes to tax legislation and amount of distributions and dividends from our portfolio companies.tax position.

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. 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.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no

obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections

contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and commenced operations on January 2, 2009 upon raising gross proceeds in excess of $2.5 million$2,500 from persons who are not affiliated with us or FB Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes as a RIC under the Code.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. Our portfolio is comprised primarily of investments in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. We may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities. However, such investments are not expected to comprise a significant portion of our portfolio.

The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans that we invest in are often rated by a nationally recognized statistical ratings organization (NRSRO), and generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service or lower than “BBB-” by Standard & Poor’s Corporation). However, we may also invest in non-rated debt securities.

Portfolio Investment Activity For The Six Months Ended June 30, 2011 and 2010

During the six months ended June 30, 2011, we made investments in portfolio companies totaling $940,712. During the same period we sold positions totaling $384,112 and received principal repayments of $225,093. During the six months ended June 30, 2010, we made investments in portfolio companies totaling $305,268. During the same period we sold positions totaling $28,830 and received principal repayments of $31,489.

As of June 30, 2011 and December 31, 2010, our investment portfolio consisted of interests in 156 and 144 portfolio companies, respectively, for a total fair value of $1,087,472 and $733,580, respectively. The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2011 and December 31, 2010:

  June 30, 2011  December 31, 2010 
  Amortized
Cost(1)
  Fair Value  Percentage
of Portfolio
  Amortized
Cost(1)
  Fair Value  Percentage
of Portfolio
 

Senior Secured Loans—First Lien

 $530,850   $541,416    50 $473,881   $484,105    66

Senior Secured Loans—Second Lien

  280,208    283,238    26  131,960    135,962    19

Senior Secured Bonds

  86,759    87,344    8  34,265    35,796    4

Subordinated Debt

  103,803    104,581    10  51,384    51,178    7

Collateralized Securities

  51,194    58,785    5  24,024    26,539    4

Equity/Other

  18,083    12,108    1  —      —        
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $1,070,897   $1,087,472    100 $715,514   $733,580    100
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Amortized cost represents the original cost adjusted for the accretion of discounts on debt investments.

As of June 30, 2011, the portfolio companies that comprise our portfolio had an average annual earnings EBITDA of approximately $330,700. The investments in our portfolio were purchased at an average price of 93.4% of par or stated value, as applicable, the weighted average credit rating of our portfolio was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.6% based upon the purchase price of our investments.

We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2011, we held 2 such investments with an aggregate unfunded commitment of $14,802. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2011 and December 31, 2010:

   June 30, 2011  December 31, 2010 

Industry Classification

  Fair Value   Percentage
of Portfolio
  Fair Value   Percentage
of Portfolio
 

Consumer Discretionary

  $242,397     22.3 $129,749     17.6

Consumer Staples

   56,418     5.2  56,184     7.7

Energy

   103,269     9.5  69,048     9.4

Financials

   103,031     9.5  59,431     8.1

Healthcare

   107,948     9.9  63,460     8.7

Industrials

   167,705     15.4  96,762     13.2

Information Technology

   156,768     14.4  117,499     16.0

Materials

   42,651     3.9  46,832     6.4

Telecommunication Services

   90,602     8.4  81,675     11.1

Utilities

   16,683     1.5  12,940     1.8
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $1,087,472     100.0 $733,580     100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment
Rating

Summary Description

1Investment exceeding expectations and/or capital gain expected.
2Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3Performing investment requiring closer monitoring.
4Underperforming investment—some loss of interest or dividend expected, but still expecting a positive return on investment.
5Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2011 and December 31, 2010:

   June 30, 2011  December 31, 2010 

Investment Rating

  Investments at
Fair Value
   Percentage
of Portfolio
  Investments at
Fair Value
   Percentage
of Portfolio
 

1

  $66,534     6 $38,899     5

2

   992,684     91  682,861     93

3

   16,939     2  11,384     2

4

   —           436       

5

   11,315     1  —         
  

 

 

   

 

 

  

 

 

   

 

 

 
  $1,087,472     100 $733,580     100
  

 

 

   

 

 

  

 

 

   

 

 

 

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of OperationsRevenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain, net unrealized appreciation and depreciation and net unrealized gains and losses on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation and depreciation on total return swap is the net change in fair value of our total return swap. Net unrealized gains and losses on foreign currency is the net change in the fair value of our investments due to the impact of foreign currency fluctuations.

Comparison of the three months ended June 30, 2011 and June 30, 2010

Revenues

We generated investment income of $24,990 and $6,060 for the three months ended June 30, 2011 and 2010, respectively, in the form of interest earned on senior secured loans, subordinated debt, collateralized loan and debt obligations and corporate bonds in our portfolio and dividends earned on preferred equity securities. Such revenues represent $22,553 and $4,942 of cash interest earned as well as $2,437 and $1,118 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2011 and 2010, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. We also generate revenues in the form of dividends on the equity or other securities we hold.

In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based

fees. Any such fees generated in connection with our investments will be recognized as earned. No such fees were earned during the three and nine months ended JuneSeptember 30, 2011 or 2010.

Expenses

Our primary operating expenses areinclude the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FB Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FB Advisor is responsible for compensating our investment sub-adviser.

We also reimburse FB Advisor for its performance of services related to our administration and operation, provided that such reimbursement shallmust be the lower of FB Advisor’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse FB Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FB Advisor. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

 

corporate and organizational expenses relating to offerings of our common stock, subject to limitations included in the investment advisory and administrative services agreement;

 

the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services;

 

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

investment advisory fees;

 

fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

 

interest payments on our debt or related obligations;

 

transfer agent and custodial fees;

fees and expenses associated with marketing efforts;

 

federal and state registration fees;

 

federal, state and local taxes;

 

independent directors’ fees and expenses;

 

costs of proxy statements, stockholders’ reports and notices;

 

fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

 

direct costs such as printing, mailing, long distance telephone and staff;

 

fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002;

 

costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;

 

brokerage commissions for the purchase and sale of our investments; and

all other expenses incurred by FB Advisor, our sub-adviser or us in connection with administering our business, including expenses incurred by FB Advisor or our sub-adviser in performing administrative services for us, and the reimbursement of the compensation of our chief compliance officer and other administrative personnel paid by FB Advisor, to the extent they are not controlling persons of FB Advisor or any of its affiliates, subject to the limitations included in the investment advisory and administrative services agreement.

Our total operating expenses were $10,683 and $2,925 for the three months ended June 30, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $6,023 and $1,492 for the three months ended June 30, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $404 and $175 for the three months ended June 30, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. We recorded incentive fee expense of $640 for the three months ended June 30, 2011. During the three months ended June 30, 2010, we reversed $386 in incentive fees accrued during the three months ended March 31, 2010 as a result of the unrealized losses incurred during that period. The incentive fee expense for the three months ended June 30, 2011 includes $601 accrued with respect to unrealized gains in our investment portfolio, although no such incentive fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

We recorded interest expense of $2,267 and $837 for the three months ended June 30, 2011 and 2010, respectively, in connection with our revolving credit facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $172 and $176 for the three months ended June 30, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $395 and $193 for the three months ended June 30, 2011 and 2010, respectively.

Our other general and administrative expenses totaled $782 and $438 for the three months ended June 30, 2011 and 2010, respectively, and consisted of the following:

   Three Months Ended
June 30,
 
     2011       2010   

Expenses associated with our independent audit and related fees

  $150    $75  

Compensation of our chief financial officer and our chief compliance officer(1)

   11     39  

Legal fees

   53     115  

Printing fees

   134     107  

Fees paid to our independent directors

   132     45  

Other

   302     57  
  

 

 

   

 

 

 

Total

  $782    $438  
  

 

 

   

 

 

 

(1)On March 14, 2011, William Goebel was appointed as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item will not include compensation paid to our chief financial officer and will only represent compensation paid to our chief compliance officer.

As the size of our asset base and number of investors have grown, our general and administrative expenses have increased accordingly. Printing fees have increased as the number of filings has increased and the volume of each printing has increased in conjunction with an increase in the number of stockholders. In addition, the fees payable to our directors who do not also serve in an executive officer capacity for us or FB Advisor are determined by reference to a sliding scale based on our net asset value.

Over the next several quarters, we expect our operating expenses related to our ongoing operations to continue to increase because of the anticipated growth in the size of our asset base.

Portfolio Investment Activity For The Nine Months Ended September 30, 2011 and for the year ended December 31, 2010

During the nine months ended September 30, 2011, we made investments in portfolio companies totaling $1,416,863. During the same period we sold investments totaling $413,694 and received principal repayments of $369,502.

As of September 30, 2011 and December 31, 2010, our investment portfolio consisted of interests in 164 and 144 portfolio companies, respectively, for a total fair value of $1,333,937 and $733,580, respectively. The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2011 and December 31, 2010:

  September 30, 2011
(Unaudited)
  December 31, 2010 
  Amortized
Cost (1)
  Fair Value  Percentage
of Portfolio
  Amortized
Cost (1)
  Fair Value  Percentage
of Portfolio
 

Senior Secured Loans—First Lien

 $708,346   $693,289    52 $473,881   $484,105    66

Senior Secured Loans—Second Lien

  346,523    339,522    26  131,960    135,962    19

Senior Secured Bonds

  128,912    120,443    9  34,265    35,796    4

Subordinated Debt

  111,871    96,586    7  51,384    51,178    7

Collateralized Securities

  66,509    69,600    5  24,024    26,539    4

Equity/Other

  18,437    14,497    1  —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $1,380,598   $1,333,937    100 $715,514   $733,580    100
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on debt investments.

As of September 30, 2011, the portfolio companies that comprised our portfolio had an average annual EBITDA of approximately $413,000. The investments in our portfolio were purchased at an average price of 94.0% of par or stated value, as applicable, the weighted average credit rating of our portfolio was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.7% based upon the purchase price of our investments.

We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the

terms of the underlying loan agreements. As of September 30, 2011, we held 3 such investments with an aggregate unfunded commitment of $15,709. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2011 and December 31, 2010:

   September 30, 2011
(Unaudited)
  December 31, 2010 

Industry Classification

  Fair Value   Percentage
of Portfolio
  Fair Value   Percentage
of Portfolio
 

Consumer Discretionary

  $323,055     24.2 $129,749     17.6

Consumer Staples

   54,423     4.1  56,184     7.7

Energy

   88,989     6.7  69,048     9.4

Financials

   114,744     8.6  59,431     8.1

Healthcare

   127,035     9.5  63,460     8.7

Industrials

   264,965     19.9  96,762     13.2

Information Technology

   216,448     16.2  117,499     16.0

Materials

   39,579     3.0  46,832     6.4

Telecommunication Services

   83,648     6.4  81,675     11.1

Utilities

   21,051     1.4  12,940     1.8
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $1,333,937     100.0 $733,580     100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment
    Rating

Summary Description

1Investment exceeding expectations and/or capital gain expected.
2Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3Performing investment requiring closer monitoring.
4Underperforming investment—some loss of interest or dividend expected, but still expecting a positive return on investment.
5Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2011 and December 31, 2010:

   September 30, 2011
(Unaudited)
  December 31, 2010 

Investment Rating

  Investments at
Fair Value
   Percentage
of Portfolio
  Investments at
Fair Value
   Percentage
of Portfolio
 

1

  $—       —     $38,899     5

2

   1,282,142     96  682,861     93

3

   46,291     4  11,384     2

4

   4,884     —      436     —    

5

   620     —      —       —    
  

 

 

   

 

 

  

 

 

   

 

 

 
  $1,333,937     100 $733,580     100
  

 

 

   

 

 

  

 

 

   

 

 

 

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations

Comparison of the three months ended September 30, 2011 and September 30, 2010

Revenues

We generated investment income of $33,295 and $8,678 for the three months ended September 30, 2011 and 2010, respectively, in the form of interest earned on senior secured loans, subordinated debt, CLOs, CDOs and corporate bonds in our portfolio and dividends earned on preferred equity securities. Such revenues represent $28,187 and $7,318 of cash interest earned as well as $5,108 and $1,360 in non-cash portions relating to accretion of discount and PIK interest for the three months ended September 30, 2011 and 2010, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

Expenses

Our total operating expenses were $4,986 and $5,119 for the three months ended September 30, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $7,432 and $2,318 for the three months ended September 30, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $915 and $285 for the three months ended September 30, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. During the three months ended September 30, 2011, we reversed $7,974 in capital gains incentive fees accrued by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended September 30, 2011. During the three months ended September 30, 2010, we accrued $373 in capital gains incentive fees.

We recorded interest expense of $2,922 and $1,343 for the three months ended September 30, 2011 and 2010, respectively, in connection with our credit facility and the JPM Facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $298 and $105 for the three months ended September 30, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $448 and $226 for the three months ended September 30, 2011 and 2010, respectively.

Our other general and administrative expenses totaled $945 and $469 for the three months ended September 30, 2011 and 2010, respectively, and consisted of the following:

  Three Months  Ended
September 30,
 
          2011                  2010         

Expenses associated with our independent audit and related fees

 $150   $75  

Compensation of our chief financial officer and our chief compliance officer(1)

  21    40  

Legal fees

  86    62  

Printing fees

  146    110  

Fees paid to our independent directors

  215    50  

Other

  327    132  
 

 

 

  

 

 

 

Total

 $945   $469  
 

 

 

  

 

 

 

(1)On March 14, 2011, William Goebel was appointed as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item will not include compensation paid to our chief financial officer and will only represent compensation paid to our chief compliance officer.

During the three months ended September 30, 2011 and 2010, the ratio of our operating expenses to our average net assets was 1.50%0.49% and 1.70%2.21%, respectively. We generally expect our operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. The lower ratio of operating expenses to average net assets during the three months ended September 30, 2011 compared to the three months ended September 30, 2010 can primarily be attributed to (i) the spreading of our operating expenses over a larger asset base and (ii) the reversal during the quarter of capital gains incentive fees that had been accrued as of June 30, 2011. Without such reversal, our ratio of operating expenses to our average net assets would have been 1.28% during the three months ended September 30, 2011.

Expense Reimbursement

Beginning on February 26, 2009, our affiliate and sponsor, Franklin Square Holdings, agreed to reimburse us for expenses in an amount that is sufficient to ensure that, for tax purposes, our net investment income and net capital gains are equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement is designed to ensure that no portion of our distributions will represent a return of capital for our stockholders. Franklin Square Holdings has no obligation to reimburse any portion of our expenses. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. During each of the three months ended JuneSeptember 30, 2011 and 2010, respectively, we received no reimbursements from Franklin Square Holdings. We do not expect that conditions will require Franklin Square Holdings to provide reimbursements in the future. To the extent reimbursements may be needed in the future, there can be no assurance that Franklin Square Holdings will provide any such reimbursements. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael Forman, and our vice-chairman, David Adelman.

Net Investment Income

Our net investment income totaled $14,307$28,309 ($0.190.26 per share) and $3,135$3,559 ($0.160.14 per share) for the three months ended JuneSeptember 30, 2011 and 2010, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $131,209$29,582 and $79,312,$144,409, respectively, during the three months ended JuneSeptember 30, 2011, from which we realized net gains of $14,370.$2,433. We also realized a net gain on our TRS of $1,895 during the three months ended September 30, 2011. We sold investments and received principal repayments of $12,123$53,128 and $13,852,$16,616, respectively, during the three months ended JuneSeptember 30, 2010, from which we realized net gains of $1,100.$294.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain/Loss on Foreign Currency

For the three months ended JuneSeptember 30, 2011, the net change in unrealized appreciation (depreciation) on investments totaled ($11,957)$(63,164) and the net change in unrealized gain/loss on foreign currency totaled $21.$(72). The

change in unrealized appreciation (depreciation) on our TRS was $1,079$(8,887) during this period. For the three months ended JuneSeptember 30, 2010, the net change in unrealized appreciation (depreciation) on investments totaled ($7,867)$7,902 and the net change in unrealized gain/loss on foreign currency totaled ($85).$93. The change in unrealized appreciation (depreciation) on our investments and our TRS during the three months ended September 30, 2011 was primarily driven by a general widening of credit spreads during such period resulting from, among other things, uncertainty surrounding European sovereign debt. The change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2011 was primarily driven by sales of investments that resulted in the conversion of unrealized gains on such investments to realized gains, thereby reducing unrealized appreciation. The change in unrealized appreciation (depreciation) on our investments during the three months ended JuneSeptember 30, 2010 was primarily driven by a general wideningstrengthening in the credit markets during the third quarter of credit spreads during such period.2010.

Net Increase/DecreaseIncrease (Decrease) in Net Assets Resulting from Operations

For the three months ended JuneSeptember 30, 2011, the net decrease in net assets resulting from operations was $39,486 ($0.37 per share) compared to a net increase in net assets resulting from operations was $17,820of $11,848 ($0.24 per share) compared to a net decrease in net assets resulting from operations of $3,717 (($0.19)0.47 per share) during the three months ended JuneSeptember 30, 2010.

Comparison of the sixnine months ended JuneSeptember 30, 2011 and JuneSeptember 30, 2010

Revenues

We generated investment income of $42,914$76,209 and $9,194$17,872 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, in the form of interest earned on senior secured loans, subordinated debt, collateralized loan and debt obligationsCLOs, CDOs and corporate bonds in our portfolio and dividends earned on preferred equity securities. Such revenues represent $39,061$67,248 and $7,085$14,403 of cash interest earned as well as $3,853$8,961 and $2,109$3,469 in non-cash portions relating to accretion of discount and PIK interest for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

Expenses

Our total operating expenses were $22,591$27,577 and $4,944$10,063 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $10,784$18,216 and $2,287$4,605 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $988$1,903 and $350$635 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. We recorded incentive fee expense of $3,911 forDuring the sixnine months ended JuneSeptember 30, 2011, we reversed $4,063 in capital gains incentive fees accrued by us during the year ended December 31, 2010 as a result of the unrealized losses incurred in our portfolio during the nine months ended September 30, 2011. The incentive fee expense forDuring the sixnine months ended JuneSeptember 30, 2011 includes $2,7432010, we accrued with respect to unrealized$373 in capital gains in our investment portfolio, although no such incentive fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”fees.

We recorded interest expense of $4,460$7,382 and $870$2,213 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, in connection with our revolving credit facility.facility and the JPM Facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $394$692 and $331$436 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $690$1,138 and $372$598 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Our other general and administrative expenses totaled $1,364$2,309 and $734$1,203 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, and consisted of the following:

 

  Six Months Ended
June 30,
   Nine Months  Ended
September 30,
 
     2011         2010              2011                   2010         

Expenses associated with our independent audit and related fees

  $240    $155    $390    $230  

Compensation of our chief financial officer and our chief compliance officer(1)

   53     77     74     117  

Legal fees

   106     189     192     251  

Printing fees

   217     109     363     219  

Fees paid to our independent directors

   264     91     479     141  

Other

   484     113     811     245  
  

 

   

 

   

 

   

 

 

Total

  $1,364    $734    $2,309    $1,203  
  

 

   

 

   

 

   

 

 

 

(1)On March 14, 2011, William Goebel was appointed as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item will not include compensation paid to our chief financial officer and will only represent compensation paid to our chief compliance officer.

As the size of our asset base and number of investors have grown, our general and administrative expenses have increased accordingly. Printing fees have increased as the number of filings has increased and the volume of each printing has increased in conjunction with an increase in the number of stockholders. In addition, the fees payable to our directors who do not also serve in an executive officer capacity for us or FB Advisor are determined by reference to a sliding scale based on our net asset value.

Over the next several quarters, we expect our operating expenses related to our ongoing operations to continue to increase because of the anticipated growth in the size of our asset base. During the sixnine months ended JuneSeptember 30, 2011 and 2010, the ratio of our operating expenses to our average net assets was 3.79%3.75% and 3.30%5.71%, respectively. We generally expect our operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. The higherlower ratio of operating expenses to average net assets during the sixnine months ended JuneSeptember 30, 2011 compared to the sixnine months ended JuneSeptember 30, 2010 can primarily be attributed to (i) the spreading of our operating expenses over a change in our methodologylarger asset base and (ii) the reversal during the fourth quarterperiod of 2010 for accruing for incentive fees to include unrealized gains in the calculation of our capital gains incentive fee expense, even though no such incentive fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized (see “—Critical Accounting Policies—Capital Gains Incentive Fee”), and (ii) interest expense related to the revolving credit

facility between Broad Street and Deutsche Bank which was established during Marchfees that had been accrued as of December 31, 2010. Without such expenses,reversal, our ratio of operating expenses to our average net assets would have been approximately 2.58%4.30% during the sixnine months ended JuneSeptember 30, 2011.

Expense Reimbursement

Beginning on February 26, 2009, our affiliate and sponsor, Franklin Square Holdings, agreed to reimburse us for expenses in an amount that is sufficient to ensure that, for tax purposes, our net investment income and net capital gains are equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement is designed to ensure that no portion of our distributions will represent a return of capital for our stockholders. Franklin Square Holdings has no obligation to reimburse any portion of our expenses. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. During each of the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, we received no reimbursements from Franklin Square Holdings. We do not expect that conditions will require Franklin Square Holdings to provide reimbursements in the future. To the extent reimbursements may be needed in the future, there can be no assurance that Franklin Square Holdings will provide any such reimbursements. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael Forman, and our vice-chairman, David Adelman.

Net Investment Income

Our net investment income totaled $20,323$48,632 ($0.330.63 per share) and $4,250$7,809 ($0.260.40 per share) for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $384,112$413,694 and $225,093,$369,502, respectively, during the sixnine months ended JuneSeptember 30, 2011, from which we realized net gains of $20,023.$22,456. We also realized a net gain on our TRS of $1,895 during the nine months ended September 30, 2011. We sold investments and received principal repayments of $28,830$81,958 and $31,489,$48,105, respectively, during the sixnine months ended JuneSeptember 30, 2010, from which we realized net gains of $3,089.$3,383.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain/Loss on Foreign Currency

For the sixnine months ended JuneSeptember 30, 2011, the net change in unrealized appreciation (depreciation) on investments totaled ($1,564)$(64,728) and the net change in unrealized gain/loss on foreign currency totaled $73.$1. The change in unrealized appreciation (depreciation) on our TRS was $1,287$(7,600) during this period. For the sixnine months ended JuneSeptember 30, 2010, the net change in unrealized appreciation (depreciation) on investments totaled ($6,091)$1,811 and the net change in unrealized gain/loss on foreign currency totaled ($96)$(3). The change in unrealized appreciation (depreciation) on our investments and our TRS during the sixnine months ended JuneSeptember 30, 2011 was primarily driven by sales of investments that resulted in the conversion of unrealized gains on such investments to realized gains, thereby reducing unrealized appreciation. The change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2010 was primarily driven by a general widening of credit spreads during the secondthird quarter of 2011 resulting from, among other things, uncertainty surrounding European sovereign debt. The change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2010 was primarily driven by a general strengthening in the credit markets during the third quarter of 2010.

Net Increase in Net Assets Resulting from Operations

For the sixnine months ended JuneSeptember 30, 2011, the net increase in net assets resulting from operations was $40,142$656 ($0.650.01 per share) compared to a net increase in net assets resulting from operations of $1,152$13,000 ($0.070.67 per share) during the sixnine months ended JuneSeptember 30, 2010.

Financial Condition, Liquidity and Capital Resources

During the sixnine months ended JuneSeptember 30, 2011, we sold 48,700,32083,613,294 shares of our common stock for gross proceeds of $518,405.$890,497. The gross proceeds received during the sixnine months ended JuneSeptember 30, 2011 include reinvested stockholder distributions of $12,248.$21,661. During the sixnine months ended JuneSeptember 30, 2011, we also incurred offering costs of $2,297$3,997 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par in our consolidated financial statement and the other expenses were charged to expense as incurred.statements. The sales commissions and dealer manager fees related to the sale of our common stock were $47,190$81,266 for the sixnine months ended JuneSeptember 30, 2011. These sales commissions and fees include $9,115$15,622 retained by the dealer manager, FS2 Capital Partners, LLC, or FS2, which is one of our affiliates.

As of August 12,November 11, 2011, we have sold 106,890,546142,553,249 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $1,115,048$1,493,510 since commencing our continuous public offering. Including the seed capital contributed by Messrs. Forman and Adelman, we have raised gross proceeds of $1,116,048$1,494,510 as of August 12,November 11, 2011.

We generate cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous offering of shares of our common stock. We accept subscriptions on a continuous basis and issue shares at semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.

Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our business development companyBDC election and our election to be taxed as a RIC.

As of JuneSeptember 30, 2011, we had $138,098$270,171 in cash, which we have invested in interest bearing accounts, and $43,391$69,673 in cash held as collateral by Citibank under the terms of the TRS.

To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The following table reflects certain information regarding the quarterly tender offers that we have conducted since December 31, 2010:

 

For the Three Months Ended

  Repurchase Date  Shares
Repurchased
   Repurchase
Price Per
Share
   Aggregate
Consideration
for
Repurchased
Shares
(in thousands)
   Repurchase Date  Shares
Repurchased
   Repurchase
Price Per
Share
   Aggregate
Consideration
for
Repurchased
Shares

(in thousands)
 

December 31, 2010

  January 3, 2011   99,633    $9.590    $955    January 3, 2011   99,633    $9.585    $955  

March 31, 2011

  April 1, 2011   158,258     9.675     1,531    April 1, 2011   158,258     9.675     1,531  

June 30, 2011

  July 1, 2011   79,250     9.675     767    July 1, 2011   79,250     9.675     767  

September 30, 2011

  October 3, 2011   121,089     9.585     1,161  

Revolving Credit Facility

On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated multi-lender, syndicated revolving credit facility, or the credit facility, which amended and restated the revolving credit facility Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto, or the original credit facility. Deutsche Bank is a lender and serves as administrative agent under the credit facility.

The credit facility provides for borrowings in an aggregate amount up to $340,000. Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $240,000 (referred to herein as the Tranche A Commitment) or as Tranche C borrowings in an amount up to $100,000 (referred to herein as the Tranche C Commitment). The credit facility also provides for Tranche B

borrowings in an amount up to $100,000 (referred to herein as the Tranche B Commitment), but there are currently no Tranche B Commitments outstanding. All Tranche A Commitments bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. All Tranche C Commitments bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. In connection with the amendment and restatement of the original credit facility, a $100,000 Tranche B Commitment that was provided under the original credit facility by Deutsche Bank to Broad Street on an uncommitted basis was converted into a $100,000 Tranche C Commitment provided by a new lender on a committed basis.

In connection with entering into the original credit facility, and from time to time thereafter, we transferred debt securities to Broad Street as a contribution to capital and retain a residual interest in the contributed debt securities through our ownership of Broad Street. We may contribute additional debt securities to Broad Street from time to time and Broad Street may purchase additional debt securities from various sources. Broad Street has appointed us to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Broad Street’s obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities. The obligations of Broad Street under the credit facility are non-recourse to us and our exposure under the credit facility is limited to the value of our investment in Broad Street.

As of JuneSeptember 30, 2011, $340,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. We incurred costs of $1,546$1,554 in connection with obtaining and amending the credit facility, which we recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the credit facility. As of JuneSeptember 30, 2011, $634$396 of such deferred financing costs have yet to be amortized to interest expense.

The effective interest rate under the credit facility was 2.41% on June2.43% as of September 30, 2011. Interest is paid quarterly in arrears and commenced August 20, 2010. We recorded interest expense of $4,460$6,753 and $870$2,213 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively, of which $428$653 and $161$331 related to the amortization of deferred financing costs. We paid $4,248$5,867 in interest expense for the sixnine months ended JuneSeptember 30, 2011. The average borrowings under the credit facility for the sixnine months ended JuneSeptember 30, 2011 and 2010 were $337,434$337,793 and $90,178,$130,931, respectively, with a weighted average interest rate of 2.35%2.41% and 2.95%2.78%, respectively.

Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Street’s portfolio. The occurrence of certain events described as “Super-Collateralization Events” in the credit agreement that governs the credit facility, or a decline in our net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM, the sub-adviser to FB Advisor; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as our sub-adviser or FB Advisor ceasing to act as our investment adviser; (iv) our ceasing to act as Broad Street’s investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) us, GDFM or FB Advisor committing fraud or other illicit acts in our or their investment advisory capacities.

In connection with the credit facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due,due; (b) borrowings under the credit facility exceeding the applicable advance rates,rates; (c) the purchase by Broad Street of certain ineligible assets,assets; (d) the insolvency or bankruptcy of Broad Street or us,us; (e) we cease to act as investment manager of Broad Street’s assets,assets; (f) the decline of our net asset value below $50,000$50,000; and (g) fraud or other illicit acts by us, FB Advisor or GDFM in itsour or their investment advisory capacities. During the continuation of an event of default, Broad Street must pay interest at a default rate. Broad Street was in compliance with the terms of the credit facility as of JuneSeptember 30, 2011.

Borrowings of Broad Street will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to business development companies.BDCs.

Total Return Swap

On March 18, 2011, Arch Street our newly-formed, wholly-owned financing subsidiary, entered into a TRS for senior secured floating rate loans with Citibank. On June 9, 2011, Arch Street entered into an amendment to the TRS to increase the maximum market value of the portfolio of loans subject to the TRS.

The TRS with Citibank enables us, through our ownership of Arch Street, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Arch Street borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Arch Street under the TRS are non-recourse to us and our exposure under the TRS is limited to the value of our investment in Arch Street, which generally will equal the value of cash collateral provided by Arch Street under the TRS. Pursuant to the terms of the TRS, Arch Street may select a portfolio of loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $300,000. Arch Street is required to initially cash collateralize a specified percentage of each loan (generally between 20% and 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, Arch Street

has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Arch Street are available to pay our debts.

Pursuant to the terms of an investment management agreement that we have entered into with Arch Street, we act as the manager of the rights and obligations of Arch Street under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS. Accordingly, the loans selected by Arch Street for purposes of the TRS are selected by us in accordance with our investment objectives and strategy to generate current income and, to a lesser extent, long-term capital appreciation. In addition, pursuant to the terms of the TRS, Arch Street may select any loan or obligation available in the market to be included in the portfolio of loans that meets the obligation criteria set forth in the TRS Agreement.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Arch Street receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Arch Street pays to Citibank interest at a rate equal to one-month LIBOR + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arch Street will either receive from Citibank the appreciation in the value of such loan, or pay to Citibank any depreciation in the value of such loan.

Under the terms of the TRS, Arch Street may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Arch Street may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Arch Street. The amount of collateral required to be posted by Arch Street is determined primarily on the basis of the aggregate value of the underlying loans.

We have no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. We may, but are not obligated to, increase our equity investment in Arch Street for the purpose of funding any additional collateral or payment obligations for which Arch Street may become obligated during the term of the TRS. If we do not make any such additional investment in Arch Street and Arch Street fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Arch Street under the TRS. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee.

Citibank may terminate the TRS on or after March 18, 2013, the second anniversary of the effectiveness of the TRS. Arch Street may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank. Any termination prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments which would be owed by Arch Street to Citibank for the period from the termination date through and including the earlier of (i) the one year anniversary of the termination date and (ii) March 18, 2013. Such monthly payments will equal the product of (x) 90%, multiplied by (y) the aggregate notional amount of the TRS ($300,000), multiplied by (z) 1.25% per annum. If the TRS had been terminated as of September 30, 2011, Arch Street would have been required to pay an early termination fee of approximately $3,422. Arch Street is required to pay a minimum usage fee in connection with the TRS. Arch Street will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in

the open market. Citibank reports the mark-to-market values of the underlying loans to Arch Street. Each of the loans underlying the TRS is required to be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. As of JuneSeptember 30, 2011, the fair value of the TRS was $1,287.$(7,600). The fair value of the TRS is reflected as an unrealized gainloss on total return swap on our consolidated balance sheet. The change in value of the TRS is reflected in our statement of operations as net change in unrealized appreciation (depreciation) on total return swap. As of JuneSeptember 30, 2011, Arch Street had selected 4165 underlying loans with a total notional amount of $202,435$297,281 and posted $43,391$69,673 in cash collateral held by Citibank (of which only $61,221 was required to be posted), which is reflected in due from counterparty inon our consolidated balance sheet. Neither

For purposes of the asset coverage ratio test applicable to us as a BDC, we have agreed with the staff of the SEC to treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral nor any other assets ofrequired to be posted by Arch Street are availableunder the TRS, as a senior security for the life of that instrument. We may, however, accord different treatment to pay our debts.the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further, for purposes of Section 55(a) under the 1940 Act, we have agreed with the staff of the SEC to treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

JPM Financing

On July 21, 2011, we entered into a conventional debt financing arrangement with JPM, through two wholly-owned subsidiaries, pursuant to which up to $300,000 will be made available to us to fund investments in new securities and for other general corporate purposes. Pricing under the facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. We elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing transaction, loans in our portfolio having an aggregate market value of up to $600,000 may be sold by us from time to time to Locust Street, a newly-formed, special-purpose bankruptcy-remote subsidiary of ours, pursuant to the Asset Transfer Agreement. Under the Asset Transfer Agreement, on July 21, 2011, we sold loans to Locust Street for a purchase price of approximately $365,396, all of which consisted of equity interests in Locust Street that Locust Street issued to us. We own all of the equity in Locust Street.

The loans purchased by Locust Street will secure the obligations of Locust Street under the Class A Notes to be issued by Locust Street from time to time to Race Street, another newly-formed, special-purpose bankruptcy-remote subsidiary of ours, pursuant to the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420,000 and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value. On July 21, 2011, Race Street purchased a Class A Notevalue and intends to purchase $420,000 in theaggregate principal amount of $63,000. We funded this purchase through a capital contributionsuch Class A Notes within 180 days of $63,000 to Race Street.July 21, 2011. We own all of the equity in Race Street.

Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300,000. On July 21, 2011, a Class A Note in the principal amount of $63,000 was purchased by JPM from Race Street pursuant to the JPM Facility for $45,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to

JPM. The final repurchase transaction must occur no later than July 15, 2015. The repurchase price paid by Race Street to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at the applicable pricing rate under the JPM Facility, as described below.

DuringAs of September 30, 2011, Class A Notes in the 180-day period following the initial transactionaggregate principal amount of $153,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility Race Street intends to enter into additional repurchase transactions thereunder with respect tofor aggregate proceeds of $109,286. On October 3, 2011, an additional $357,000Class A Note in the principal amount of $70,000 was purchased by Race Street from Locust Street and subsequently sold to JPM for proceeds of $50,000. We funded each purchase of Class A Notes. Notes by Race Street through a capital contribution to Race Street. As of September 30, 2011, the amount accrued upon maturity under the repurchase agreement was $109,286, plus $608 of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on our financial statements.

If at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than the Margin Threshold,

Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from us pursuant to the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

Pricing under the JPM Facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. Commencing January 2013, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions will be subject to breakage fees calculated as the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

We incurred costs of $425 in connection with obtaining the JPM Facility, which we have recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the JPM Facility. As of September 30, 2011 $404 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility is 3.50% as of September 30, 2011. We recorded interest expense of $629 for the three and nine months ended September 30, 2011, of which $21 related to the amortization of deferred financing costs. The average borrowings under the JPM Facility for the nine months ended September 30, 2011 were $86,650 with a weighted average interest rate of 3.50%.

Interest on the Class A Notes will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal on the Class A Notes will be due and payable on the stated maturity date of July 15, 2021. Pursuant to the Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date, or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the loans securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-advisor to FB Advisor.

In connection with the Class A Notes and the Indenture, Locust Street also entered into (i) a collateral management agreement with us, as collateral manager, dated as of July 21, 2011, pursuant to which we will manage the assets of Locust Street, and (ii) a collateral administration agreement with Virtus, as collateral administrator, dated as of July 21, 2011, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street.

RIC Status and Distributions

We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must distribute at least 90% of our “Investment Company Taxable Income,” as defined by the Code, each year. As long as the distributions are declared by the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which we paid no federal income taxes.

WeFollowing commencement of our operations, we declared our first distribution on January 29, 2009. Subject to the board of directors’ discretion and applicable legal restrictions, our board of directors intends to authorize and declare distributions on either a semi-monthly or monthly basis and pay distributions on either a monthly or quarterly basis. While we historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, we began to pay distributions on a monthly rather than quarterly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date we accept each stockholder’s subscription for shares of our common stock. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. Each year a statement on Form 1099-DIV identifying the source of the distributiondistributions will be mailed to our stockholders. No portion of the distributions paid during the sixnine months ended JuneSeptember 30, 2011 or 2010 represented a return of capital for tax purposes.

We make our ordinary distributions in the form of cash, out of assets legally available, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to the U.S. stockholder.

The following table reflects the cash distributions per share that we have declared and paid on our common stock during the sixnine months ended JuneSeptember 30, 2011 and 2010:

 

  Distribution   Distribution 

For the Three Months Ended

  Per Share   Amount   Per Share   Amount 

Fiscal 2010

        

March 31, 2010(1)

  $0.1860    $2,443    $0.1860    $2,443  

June 30, 2010

  $0.1875    $3,589    $0.1875    $3,589  

September 30, 2010

  $0.1875    $4,763  

Fiscal 2011

        

March 31, 2011

  $0.1929    $9,948    $0.1929    $9,948  

June 30, 2011

  $0.2787    $20,529    $0.2787    $20,529  

September 30, 2011

  $0.2016    $22,116  

 

(1)The amount of the per share distributions during the three months ended March 31, 2010 has been retroactively adjusted to reflect the stock distribution declared in January 2010 as discussed below.

On July 12,October 14, 2011, our board of directors declared two regular semi-monthly cash distributions of $0.033594 per share each, which were paid on July 29,October 31, 2011 to stockholders of record on July 15,October 14, 2011 and JulyOctober 28, 2011, respectively. On August 9,October 28, 2011, our board of directors approved a special cash distribution of $0.02 per share, which was paid on October 31, 2011 to stockholders of record on October 28, 2011. On November 8, 2011, our board of directors declared two regular semi-monthly cash distributions of $0.033594 per share each, which are expected to be paid on August 31,November 30, 2011 to stockholders of record on AugustNovember 15, 2011 and August 30,November 29, 2011, respectively. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock.

We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. The following table reflects, for tax purposes, the sources of the cash distributions that we have paid on our common stock during the sixnine months ended JuneSeptember 30, 2011, and 2010:

 

  Six Months Ended June 30,   Nine Months Ended September 30, 
  2011 2010   2011 2010 

Source of Distribution

  Distribution
Amount
   Percentage Distribution
Amount
   Percentage   Distribution
Amount
   Percentage Distribution
Amount
   Percentage 

Offering proceeds

  $—          $—           $—       —     $—       —    

Borrowings

   —           —            —       —      —       —    

Net investment income(1)

   25,570     84  4,290     71   48,572     92  7,872     73

Capital gains proceeds from the sale of assets

   4,907     16  1,742     29   4,021     8  2,923     27

Non-capital gains proceeds from the sale of assets

   —           —            —       —      —       —    

Expense reimbursement from sponsor

   —           —            —       —      —       —    
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $30,477     100 $6,032     100  $52,593     100 $10,795     100
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

 

(1)During the sixnine months ended JuneSeptember 30, 2011 and 2010, 91%88% and 77%81%, respectively, of our gross investment income was attributable to cash interest earned and 9%12% and 23%19%, respectively, was attributable to non-cash accretion of discount and PIK interest.

The aggregate cost of our investments for federal income tax purposes totaled $1,072,009$1,380,598 and $715,695 as of JuneSeptember 30, 2011 and December 31, 2010, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $16,750$(54,261) and $17,885 as of JuneSeptember 30, 2011 and December 31, 2010, respectively. Our net investment income on a tax basis for the sixnine months ended JuneSeptember 30, 2011 and 2010 was $25,570$48,572 and $4,290,$7,869, respectively. We distributed all of our net investment income earned as of JuneSeptember 30, 2011 and 2010.

The difference between our GAAP-basis net investment income and our tax-basis net investment income is due to the tax-basis amortization of organization and start-up costs incurred prior to the commencement of our operations, interest income earned on a tax basis due to the required accretion of discount on a non-performing loan,loans, and the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by us. See “—Critical Accounting Policies—Capital Gains Incentive Fee.” The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the sixnine months ended JuneSeptember 30, 2011 and 2010:

 

   Six Months Ended
June 30,
 
   2011  2010 

GAAP basis net investment income

  $20,323   $4,250  

Amortization of organizational costs

   (21  (21

Tax accretion of discount on investment

   2,525    61  

Reversal of incentive fee accrual on unrealized gains

   2,743    —    
  

 

 

  

 

 

 

Tax basis net investment income

  $25,570   $4,290  
  

 

 

  

 

 

 
   Nine Months  Ended
September 30,
 
   2011  2010 

GAAP-basis net investment income

  $48,632   $7,809  

Amortization of organizational costs

   (32  (33

Tax accretion of discount on investments

   4,035    93  

Reversal of incentive fee accrual on unrealized gains

   (4,063  —    
  

 

 

  

 

 

 

Tax-basis net investment income

  $48,572   $7,869  
  

 

 

  

 

 

 

The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on a Form 1099-DIV.

The following table reflects the stock distributions per share that we have declared on our common stock to date:

 

Date Declared

  Record Date  Payment Date  Distribution
Percentage
  Shares
Issued
 

Fiscal 2009

       

March 31, 2009

  March 31, 2009  March 31, 2009   1.4  13,818  

April 30, 2009

  April 30, 2009  April 30, 2009   3.0  42,661  

May 29, 2009

  May 29, 2009  May 29, 2009   3.7  79,125  

June 30, 2009

  June 30, 2009  June 30, 2009   3.5  96,976  

July 30, 2009

  July 31, 2009  July 31, 2009   3.1  117,219  

August 31, 2009

  August 31, 2009  August 31, 2009   3.0  148,072  

December 31, 2009

  December 31, 2009  December 31, 2009   0.5  49,710  

Fiscal 2010

       

January 28, 2010

  January 31, 2010  January 31, 2010   2.5  283,068  

The purpose of these special stock distributions was to maintain a net asset value per share that was below the then-current net offering price, as required by the 1940 Act, subject to certain limited exceptions. Our board of directors determined that our portfolio performance sufficiently warranted taking these actions.

The stock distributions increased the number of shares outstanding, thereby reducing our net asset value per share. However, because the stock distributions were issued to all stockholders in proportion to their current holdings, the reduction in net asset value per share as a result of the stock distributiondistributions was offset exactly by the

increase in the number of shares owned by each investor. As overall value to an investor was not reduced as a result of the special stock distributions, our board of directors determined that these issuances would not be dilutive to existing stockholders. As the stock distributions did not change any stockholder’s proportionate interest in us, they did not represent taxable distributions. Specific tax characteristics of all distributions will be reported to stockholders annually on Form 1099-DIV.

As of JuneSeptember 30, 2011 and December 31, 2010, the components of accumulated earnings on a tax basis were as follows:

 

  June 30,
2011
 December 31,
2010
   September 30, 2011
(Unaudited)
 December 31,
2010
 

Distributable ordinary income

  $14,811   $1,290    $17,403   $1,290  

Incentive fee accrual on unrealized gains

   (6,806  (4,063   —      (4,063

Unamortized organizational costs

   (536  (558   (525  (558

Unrealized appreciation on investments(1)

   16,750    17,885  

Unrealized appreciation (depreciation) on investments and total return swap(1)

   (54,261  17,885  
  

 

  

 

   

 

  

 

 
  $24,219   $14,554    $(37,383 $14,554  
  

 

  

 

   

 

  

 

 

 

(1)As of JuneSeptember 30, 2011 and December 31, 2010, the gross unrealized appreciation on our investments was $32,812$14,449 and $20,136, respectively. As of JuneSeptember 30, 2011 and December 31, 2010, the gross unrealized depreciation on our investments and total return swap was $16,062$68,710 and $2,251, respectively.

Critical Accounting Policies

Our financial statements are prepared in conformity with U.S. generally accepted accounting principles, or 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:

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB Advisor prepares portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

Accounting Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, or FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that

would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

With respect to investments for which market quotations are not readily available, we have undertaken a multi-step valuation process each quarter, as described below:

 

our quarterly valuation process begins with each portfolio company or investment being initially valued by FB Advisor’s management team, with such valuation potentially taking into account information received from any of our sub-advisers or an independent valuation firm, if applicable;

 

preliminary valuation conclusions are then documented and discussed with our valuation committee;

 

our valuation committee reviews the preliminary valuation and FB Advisor’s management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and

 

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any third-party valuation firm, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations on our financial statements. Below is a description of factors that our board of directors may consider when valuing our equity and debt investments.

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.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

Our board of directors may also 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 or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our investments as of JuneSeptember 30, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our collateralized loanCLOs, CDOs and debt obligations and our subordinated debt investments by obtaining bid and ask prices from independent dealers and we valued all of our other debt investments, including our senior secured bond investments, by using an independent third-party pricing service,

which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end. SixSeven of our senior secured loan investments and threetwo subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the value of such investments by considering the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. OurAll of our equity investments were valued by the same independent valuation firm, which determined the value of such investments by considering various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan, which was purchased near June 30, 2011, wasWe valued at cost, as our board of directors determined that the cost of the investment was the best indication of its fair value. We value the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, Citibank values the loans underlying the TRS are valued based on quotes received from third-party dealers. The value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS.

Our investments as of December 31, 2010 consisted primarily of debt securities that traded on a private over-the-counter market for institutional investors. We valued our collateralized loanCLOs, CDOs and debt obligations and our subordinated debt investments by obtaining bid and ask prices from independent dealers. We valued all of our other investments, including our senior secured bond investments, by using an independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end.

We periodically benchmark the bid and ask prices we receive from independent dealers and the third-party pricing service against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and our experience in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing service or independent dealers, including the use of an independent valuation firm. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan. Upon the prepayment of a loan or security, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and securities as interest income when we receive such amounts.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in portfolio investment values during the reporting period due to the impact of foreign currency fluctuations.

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FB Advisor, the incentive fee on capital gains earned on liquidated investments of our portfolio during operations prior to our liquidation is determined and payable in arrears as of the end of each calendar year. Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement with FB Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants, or AICPA Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, we changed our methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FB Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the year ended December 31, 2010, we accrued a capital gains incentive fee of $5,459 based on the performance of our portfolio, of which $1,396 was based on realized gains and was payable to FB Advisor as of December 31, 2010. During the sixnine months ended JuneSeptember 30, 2011, we accrued an additional $3,911reversed $4,063 in capital gains incentive fees based onaccrued by us during the performanceyear ended December 31, 2010 as a result of the unrealized losses incurred in our portfolio during such period, of which $1,168 was based on realized gains.the nine months ended September 30, 2011.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations.

Contractual Obligations

We have entered into an agreement with FB Advisor to provide investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FB Advisor, and to the extent it is required to provide such

services, our sub-adviser, will be reimbursed for administrative expenses incurred on our behalf. For the three months ended JuneSeptember 30, 2011 and 2010, we incurred $6,023$7,432 and $1,492,$2,318, respectively, in base management fees and $404$915 and $175,$285, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the sixnine months ended JuneSeptember 30, 2011 and 2010, we incurred $10,784$18,216 and $2,287,$4,605, respectively, in base management fees and $988$1,903 and $350,$635, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FB Advisor is eligible to receive incentive fees based on performance. During the three months ended September 30, 2011, we reversed $7,974 in capital gains incentive fees accrued by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended September 30, 2011. During each of the three and nine months ended September 30, 2010, we accrued $640$373 in capital gains incentive fees. During the threenine months ended JuneSeptember 30, 2010,2011, we reversed $386$4,063 in capital gains incentive fees accrued by us during the three monthsyear ended MarchDecember 31, 2010 as a result of the unrealized losses incurred in our portfolio during that period. The incentive fee expense for the threenine months ended JuneSeptember 30, 2011 includes $601 accrued with respect to unrealized gains in our investment portfolio, although no such incentive fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. During the six months ended June 30, 2011, we accrued $3,911 in capital gains incentive fees. The incentive fee expense for the six months ended June 30, 2011 includes $2,743 accrued with respect to unrealized gains in our investment portfolio, although no such incentive fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized.2011. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

As of JuneSeptember 30, 2011, $340,000 was outstanding under the revolving credit facility between Broad Street and Deutsche Bank. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 10, 2012. As of September 30, 2011, Race Street had sold $153,000 in aggregate principal amount of Class A Notes to JPM under the JPM Facility for aggregate proceeds of $109,286. Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than July 15, 2015.

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the revolving credit facility between Broad Street and Deutsche Bank and the JPM Facility between Race Street and JPM at JuneSeptember 30, 2011 is as follows:

 

   Payments Due By Period
   Total   Less than 1 year   1-3 years  3-5 years  More than 5 years

Borrowings(1)

  $340,000    $340,000        
   Payments Due By Period 
   Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 

Borrowings of Broad Street(1)

  $340,000    $340,000     —       —       —    

Borrowings of Race Street(2)

   109,286     109,286     —       —       —    

 

(1)At JuneSeptember 30, 2011, no amounts remained unused under the revolving credit facility.

(2)At September 30, 2011, $190,714 remained unused under the JPM Facility.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which provides additional guidance to improve disclosures regarding fair value measurements. This guidance requires two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers and (2) a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of this guidance is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of this guidance, including the gross presentation of Level 3 roll forward information, did not have a significant impact on our consolidated financial statements or disclosures.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of the Accounting Boards on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance have resulted in

common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this guidance are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We are currently assessing the impact of this guidance on our consolidated financial statements.

Related Party Transactions

We have entered into an investment advisory and administrative services agreement with FB Advisor. Pursuant to the investment advisory and administrative services agreement, FB Advisor is paid a base management fee of 2% of average gross assets and an incentive fee of 20% of net investment income, subject to an annualized 8% hurdle, and 20% of net realized capital gains, if applicable. We commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon the commencement of our operations. During the three months ended JuneSeptember 30, 2011 and 2010, FB Advisor earned $6,023$7,432 and $1,492,$2,318, respectively, in base management fees. During the sixnine months ended JuneSeptember 30, 2011 and 2010, FB Advisor earned $10,784$18,216 and $2,287,$4,605, respectively, in base management fees. Management fees are paid on a quarterly basis in arrears. We paid $8,168$14,093 and $1,232$2,726 of these fees during the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

We accrue for the capital gains incentive fee, which, if earned, is paid annually. We accrue the incentive fee based on net realized and unrealized gains. However, under the terms of our investment advisory and administrative services agreement, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. During the three months ended JuneSeptember 30, 2011, we accrued a capital gains incentive fee of $640 based on the performance of our portfolio, of which only $39 was based on realized gains. During the three months ended June 30, 2010, we reversed $386$7,974 in capital gains incentive fees accrued during the three months ended March 31, 2010,by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended JuneSeptember 30, 2010.2011. During each of the three and nine months ended September 30, 2010, we accrued $373 in capital gains incentive fees. During the sixnine months ended JuneSeptember 30, 2011, we accrued areversed $4,063 in capital gains incentive feefees accrued by us during the year ended December 31, 2010 as a result of $3,911 based on the performance ofunrealized losses incurred in our portfolio of which only $1,168 was based on realized gains.during the nine months ended September 30, 2011.

We also reimburse FB Advisor for expenses necessary for its performance of services related to our administration and operation, provided that such reimbursement is equal to the lower of FB Advisor’s actual costs or the amount that we would be required to pay for comparable services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. During the sixnine months ended JuneSeptember 30, 2011 and 2010, we incurred administrative services charges of $988$1,903 and $350,$635, respectively, attributable to FB Advisor. Of these charges, $800$1,366 and $350,$635, respectively, related to the allocation of costs of administrative personnel for services provided to us by employees of FB Advisor and the remainder related to other reimbursable expenses. We paid FB Advisor $814$1,419 and $364,$496, respectively, for the services incurred under this arrangement during the sixnine months ended JuneSeptember 30, 2011 and 2010.

Franklin Square Holdings funded offering costs and other expenses in the amount of $461$486 for the sixnine months ended JuneSeptember 30, 2010. All offering costs for the six months ended June 30, 2011 have been funded directly by the Company. The offering costs and other expenses funded by Franklin Square Holdings during the sixnine months ended JuneSeptember 30, 2010 were recorded as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statementstatements and the other expenses were charged to expense as incurred. All offering costs for the nine months ended September 30, 2011 have been funded directly by us.

The dealer manager for our public offering is FS2, which is one of our affiliates. During the sixnine months ended JuneSeptember 30, 2011 and 2010, FS2 retained $9,115$15,622 and $1,912,$3,063, respectively, for selling commissions and dealer manager fees in connection with the sale of our common stock.

Under the terms of the investment advisory and administrative services agreement, when our registration statement was declared effective by the SEC and we were successful in raising gross proceeds from unrelated outside investors of at least $2,500, or the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On January 2, 2009, we exceeded the minimum offering requirement. We paid total reimbursements of $641 and $1,608,$1,678 to FB Advisor and its affiliates during

the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively. As of JuneSeptember 30, 2011, no amounts were payable to FB Advisor and its affiliates under this arrangement. The reimbursements are recorded as a reduction of capital.

Members of FB Advisor’s senior management team is comprised of the same personnel as the senior management team of FS Investment Advisor, LLC, the investment adviser to Franklin Square Holdings’ other affiliated BDC, FS Energy and Power Fund. As a result, such personnel provide investment advisory services to both us and FB Capital Partners, L.P. FB Capital Partners, L.P., which is owned by Mr. Forman, our chairman, presidentFS Energy and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions and high net worth individuals.Power Fund. While neither FB Capital Partners, L.P.Advisor nor FBFS Investment Advisor, LLC is currently making private corporate debt investments for clients other than us currently,and FS Energy and Power Fund, respectively, either one, or both, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund rather than to us.

Beginning on February 26, 2009, our affiliate and sponsor, Franklin Square Holdings, agreed to reimburse us for expenses in an amount that is sufficient to ensure that, for tax purposes, our net investment income and net capital gains are equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement is designed to ensure that no portion of our distributions will represent a return of capital for our stockholders. Franklin Square Holdings has no obligation to reimburse any portion of our expenses. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. During the sixnine months ended JuneSeptember 30, 2011 and 2010, we received no reimbursements from Franklin Square Holdings. We do not expect that conditions will require Franklin Square Holdings to provide reimbursements in the future. To the extent reimbursements may be needed in the future, there can be no assurance that Franklin Square Holdings will provide any such reimbursements. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael Forman, and our vice-chairman, David Adelman.

 

Item  3.Quantitative and Qualitative Disclosures about Market Risk.

We are subject to financial market risks, including changes in interest rates. As of JuneSeptember 30, 2011, 5324.6% of our portfolio investments (based on fair value) paid fixed interest rates and the remainder paid variable interest rates. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we predominantly hold variable rate investments, and to declines in the value of any fixed rate investments we hold. Accordingly, an increase in interest rates would make it easier for us to meet or exceed our incentive fee preferred return, as defined in the investment advisory and administrative services agreement we have entered into with FB Advisor, and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to FB Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the $340,000 revolving credit facility which Broad Street maintains with Deutsche Bank, Broad Street borrows at a floating rate based on LIBOR. Under the terms of the TRS between Arch Street and Citibank, Arch Street pays fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of a pool of loans having a maximum notional amount of $300,000. Pursuant to the terms of the financing arrangement with JPM, borrowings under the Revolving Credit Agreement, pricing of repurchase transactions under the JPM Facility and interest on the Class A Notes are all subject to a floating rate based on LIBOR. We expect any future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of JuneSeptember 30, 2011:

 

LIBOR Basis Point Change

  Interest
Income(1)
   Interest
Expense
 Net Interest
Income
   Interest
Income(1)
   Interest
Expense
 Net Interest
Income
 

Down 30 basis points

  $119,418    $(8,112 $111,305  

Down 35 basis points

  $ 148,478    $(11,108 $ 137,370  

Up 100 basis points

   120,208     (12,532  107,676     149,137     (16,939  132,198  

Up 200 basis points

   126,182     (15,932  110,250     158,396     (21,259  137,136  

Up 300 basis points

   134,828     (19,332  115,496     170,539     (25,578  144,961  

 

(1)Includes the net effect of the change in interest rates on the unrealized appreciation/depreciation on the TRS. Assumes no change in defaults or prepayments by portfolio companies.

We expect that our long-term investments will be financed primarily with equity and long-term debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a materiallymaterial adverse effect on our business, financial condition and results of operations. During the sixnine months ended JuneSeptember 30, 2011 and the year ended December 31, 2010, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

 

Item  4.Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act 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 for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes 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 is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of JuneSeptember 30, 2011. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended JuneSeptember 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item  1.Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be 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 any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.

 

Item  1A.Risk Factors.

Investing in our common stock involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q andThere have been no material changes from the risk factors set forth in our annual reportQuarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 and our Annual Report on Form 10-K for the year ended December 31, 2010, you should consider carefully the following information before making an investment in our common stock. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value of our common stock could decline, and you may lose all or part of your investment.

We may enter into total return swap agreements or other derivative transactions which expose us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage.

Arch Street has entered into a TRS for a portfolio of senior secured floating rate loans with Citibank. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of the TRS between Arch Street and Citibank.

A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS is typically used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. A TRS effectively adds leverage to our portfolio because, in addition to our total net assets, we are subject to investment exposure on the amount of securities subject to the TRS.

The TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the loans underlying the TRS. In addition, we may incur certain costs in connection with the TRS that could in the aggregate be significant.

A TRS is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In the case of the TRS with Citibank, Arch Street is required to post cash collateral amounts to secure its obligations to Citibank under the TRS. Citibank, however, is not required to collateralize any of its obligations to Arch Street under the TRS. Arch Street bears the risk of depreciation with respect to the value of the loans underlying the TRS and is required under the terms of the TRS to post additional collateral on a dollar-for-dollar basis in the event the value of the loans underlying the TRS depreciate more than the amount of any cash collateral previously posted by Arch Street. Arch Street’s maximum liability under the TRS is the amount of any decline in the aggregate value of the loans subject to the TRS, less the amount of the cash collateral previously posted by Arch Street. Therefore, the absolute risk of loss with respect to the TRS is the notional amount of the TRS.

In addition to customary events of default and termination events, the agreements governing the TRS with Citibank contain the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days;

(b) a failure to post initial cash collateral or additional collateral as required by the agreements; (c) a default by Arch Street or us with respect to indebtedness in an amount equal to or greater than the lesser of $10.0 million and 2% of our net asset value at such time; (d) a merger of Arch Street or us meeting certain criteria; (e) either us or Arch Street amending its constituent documents to alter our investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; and (f) our ceasing to be the investment manager of Arch Street or having authority to enter into transactions under the TRS on behalf of Arch Street, and not being replaced by an entity reasonably acceptable to Citibank.

In addition to the rights of Citibank to terminate the TRS following an event of default or termination event as described above, Citibank may terminate the TRS on or after the second anniversary of the effectiveness of the TRS. Arch Street may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank. Any termination prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. Upon any termination of the TRS, Arch Street will be required to pay Citibank the amount of any decline in the aggregate value of the loans subject to the TRS or, alternatively, will be entitled to receive the amount of any appreciation in the aggregate value of such loans. In the event that Citibank chooses to exercise its termination rights, it is possible that Arch Street will owe more to Citibank or, alternatively, will be entitled to receive less from Citibank than it would have if Arch Street controlled the timing of such termination due to the existence of adverse market conditions at the time of such termination.

In addition, because a TRS is a form of synthetic leverage, such arrangements are subject to risks similar to those associated with the use of leverage.

We are subject to risks associated with our debt securitization facility.

On July 21, 2011, we entered into a debt financing arrangement with JPM, through two wholly-owned subsidiaries, pursuant to which up to $300 million will be made available to us to fund investments in new securities and for other general corporate purposes. The financing transaction with JPM is structured as a debt securitization. We use the term “debt securitization” to describe a form of secured borrowing under which an operating company, sometimes referred to as an originator, acquires or originates loans or other assets that earn income, whether on a one-time or recurring basis (collectively referred to herein as income producing assets), and borrows money on a non-recourse basis against a legally separate pool of income producing assets. In a typical debt securitization, the originator transfers the income producing assets to a special-purpose, bankruptcy-remote subsidiary, also referred to as a special purpose entity, which is established solely for the purpose of holding income producing assets and issuing debt secured by these income producing assets. The special purpose entity completes the borrowing through the issuance of notes secured by the income producing assets.

Pursuant to the financing transaction, loans in our portfolio having an aggregate market value of up to $600 million may be sold by us from time to time to Locust Street, a newly-formed, special purpose entity and a subsidiary of ours, pursuant to the Asset Transfer Agreement. The loans purchased by Locust Street will secure the obligations of Locust Street under the Class A Notes, to be issued by Locust Street from time to time to Race Street, another special purpose entity and a subsidiary of ours, pursuant to the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420 million and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value.

Race Street, in turn, has entered into a repurchase transaction with JPM, pursuant to the terms of the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420 million. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300 million.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of this debt securitization facility.

As a result of this debt securitization facility, we are subject to certain risks, including those set forth below.

Our equity investment in Locust Street is subordinated to the secured debt obligations of Locust Street.

Under the Asset Transfer Agreement, we sold loans to Locust Street for a purchase price of approximately $365.4 million, all of which consisted of equity interests in Locust Street that Locust Street issued to us. Any dividends or other payments in respect of our equity interest in Locust Street is subordinated in priority of payment to the Class A Notes. In addition, Locust Street is subject to certain payment restrictions in respect of its equity interests set forth in the Indenture.

We will receive cash distributions based on our investment in Locust Street only if Locust Street has made all required cash interest payments on the Class A Notes. We cannot assure you that distributions on the assets held by Locust Street will be sufficient to make any distributions to us or that the yield on our investment in Locust Street will meet our expectations.

Our equity investment in Locust Street is unsecured and ranks behind all of the secured creditors, known or unknown, of Locust Street, including the holders of the Class A Notes. Consequently, if the value of Locust Street’s portfolio of loan investments decreases as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying assets or prepayment or changes in interest rates generally, the value of our equity investment in Locust Street could be reduced. Accordingly, our investment in Locust Street may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment.

In addition, if the value of Locust Street’s portfolio of loan investments decreases and Locust Street is unable to make any required payments to Race Street pursuant to the terms of the Class A Notes, Race Street may, in turn, be unable to make any required payments to JPM on the Class A Notes purchased by JPM pursuant to the terms of the JPM Facility. In such event, we may be required to loan or otherwise provide additional funds to Race Street to cover Race Street’s payment obligations to JPM, or otherwise be subject to a loss in an amount up to the entire amount of our equity investment in Race Street.

Our equity investment in Locust Street has a high degree of leverage.

As of July 25, 2011, the outstanding principal amount of the Class A Notes was approximately $63 million and the fair value of the assets held by Locust Street was approximately $365.4 million. The market value of our equity investment in Locust Street may be significantly affected by a variety of factors, including changes in the market value of the investments held by Locust Street, changes in distributions on the investments held by Locust Street, defaults and recoveries on those investments, capital gains and losses on those investments, prepayments on those investments and other risks associated with those investments. Our investment in Locust Street may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment. The leveraged nature of our equity investment may magnify the adverse impact of any loss on our equity investment.

The interests of JPM, as the holder of the Class A Notes, may not be aligned with our interests, and we will not have control over remedies in respect of the Class A Notes.

The Class A Notes rank senior in right of payment to any equity securities issued by Locust Street. As a result, there are circumstances in which the interests of JPM, as the holder of the Class A Notes, may not be aligned with our interests. For example, under the terms of the Class A Notes, JPM has the right to receive payments of principal and interest prior to Locust Street making any distributions or dividends to holders of its equity securities.

For as long as the Class A Notes remain outstanding, JPM has the right to act in certain circumstances with respect to the portfolio of loans that secure the obligations of Locust Street under the Class A Notes in ways that may benefit their interests but not ours, including by exercising remedies or directing the Indenture trustee to declare events of default under or accelerate the Class A Notes in accordance with the terms of the Indenture. JPM has no obligation to consider any possible adverse effect that actions taken may have on our equity interests. For example, upon the occurrence of an event of default with respect to the Class A Notes, the trustee, which is currently Citibank, may declare the outstanding principal amount of all of the Class A Notes, together with any accrued interest thereon, to be immediately due and payable. This would have the effect of accelerating the outstanding principal amount of the Class A Notes and triggering a repayment obligation on the part of Locust Street. Locust Street may not have proceeds sufficient to make required payments on the Class A Notes and make any distributions to us. Any failure of Locust Street to make distributions on the equity interests we hold could have a material adverse effect on our business, financial condition, results of operations and cash flows, and may result in our inability to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all.

Locust Street may fail to meet certain asset coverage tests, which would have an adverse effect on the timing of payments to us.

Under the Indenture, there are two coverage tests applicable to the collateral securing the Class A Notes. The first such test compares the amount of interest received on the portfolio of loans held by Locust Street to the amount of interest payable in respect of the Class A Notes. To meet this test, the aggregate amount of interest received on the portfolio of loans held by Locust Street must equal at least 150% of the interest payable in respect of the Class A Notes. The second test compares the aggregate principal amount of the portfolio of loans held by Locust Street to the aggregate outstanding principal amount of the Class A Notes. To meet this test, the aggregate principal amount of the portfolio of loans held by Locust Street must equal at least 135% of the aggregate outstanding principal amount of the Class A Notes. If the coverage tests are not satisfied on any date on which compliance is measured, Locust Street is required to apply available amounts to the repayment of the outstanding principal of the Class A Notes to satisfy the applicable coverage tests.

In addition, if at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from us pursuant to the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum. To the extent we loan additional funds to Race Street to satisfy the Margin Threshold, such event could have a material adverse effect on our business, financial condition, results of operations and cash flows, and may result in our inability to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all. There is no assurance that loans made pursuant to the Revolving Credit Agreement will be repaid.

Restructurings of investments held by Locust Street, if any, may decrease their value and reduce the value of our equity interest in Locust Street.

As collateral manager, we have broad authority to direct and supervise the investment and reinvestment of the investments held by Locust Street, which may require from time to time the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the related collateral management agreement we have entered into with Locust Street. During periods of economic uncertainty and recession, the necessity for amendments, waivers, modifications and restructurings of investments may increase. Such amendments, waivers, modifications and other restructurings may change the terms of the investments and, in some cases, may result in Locust Street holding assets that do not meet certain

specified criteria for the investments made by it. This could adversely impact the coverage tests under the Indenture. Any amendment, waiver, modification or other restructuring that reduces Locust Street’s compliance with the coverage tests under the Indenture will make it more likely that Locust Street will need to pay cash to reduce the unpaid principal amount of the Class A Notes so as to cure any breach of such tests. Any such use of cash would reduce distributions available to us or delay the timing of distributions to us.

We may not receive cash from Locust Street.

We receive cash from Locust Street only to the extent that Locust Street makes distributions to us. Locust Street may make distributions to us, in turn, only to the extent permitted by the Indenture. The Indenture generally provides that distributions by Locust Street may not be made unless all amounts owing with respect to the Class A Notes have been paid in full. If we do not receive cash from Locust Street, we may be unable to make distributions to our stockholders in amounts sufficient to maintain our qualification as a RIC, or at all. We also could be forced to sell investments in our portfolio at less than their fair value in order to continue making such distributions.

We are subject to the credit risk of JPM.

If JPM fails to sell the Class A Notes back to Race Street at the end of the applicable period, Race Street’s recourse will be limited to an unsecured claim against JPM for the difference between the value of such Class A Notes at such time and the amount that would be owing by Race Street to JPM had JPM performed under the JPM Facility. The ability of JPM to satisfy such a claim will be subject to JPM’s creditworthiness at that time.2010.

 

Item  2.Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended JuneSeptember 30, 2011, we issued 824,551921,932 shares of common stock under our distribution reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933.Act.

 

Item  3.Defaults upon Senior Securities.

Not applicable.

 

Item  4.Reserved.

 

Item  5.Other Information.

Custody Agreement

On July 15,November 14, 2011, we entered into a custodian agreement with State Street Bank and The Bank of New York Mellon, together with its affiliates,Trust Company, or BNYM, agreed to terminate,SSBT, effective as of October 31, 2011 or such later date as the parties mutually agree, the custodian services agreement, dated as of September 9, 2008, between BNYM, as assignee of PFPC Trust Company, and us and the administration and accounting services agreement between the parties. We and BNYM have commenced a transition process and we are currently in discussions with a number of reputable financial institutions that we expect will be able to fulfill our needs in providing the services currently provided by BNYM without disruption. The termination of the custodian services agreement and the administration and accounting services agreement followed a determination by the parties that the arrangement was no longer mutually beneficial. We do not believe that such termination will have a material adverse impact on our operations or financial condition.

November 16, 2011. Under the custodian services agreement, BNYM holdsSSBT will hold all of our portfolio securities and cash, and transferstransfer such securities or cash pursuant to instructions providedour instructions. The custodian agreement has an initial term ending November 14, 2014, which shall automatically renew for successive one-year terms unless a written notice of non-renewal is delivered by us. Under the administration and accounting services agreement, BNYM assists us in performing certain of our administrative and accounting functions, including corporate governance matters and accounting services relatingnon-renewing party no later than ninety (90) days prior to management of our portfolio. No termination or other fees are payable in connection with the terminationexpiration of the custodian services agreement and the administration and accounting services agreement.term.

Item  6.Exhibits.

 

  3.1  Articles of Amendment and Restatement of FS Investment Corporation.Corporation, as amended.(Incorporated by reference to Exhibit (a)(2) filed with Amendment No. 33.1 to the Company’s registration statementAnnual Report on Form N-210-K (File No. 333-149374)814-00757), filed on September 17, 2008.)March 31, 2009)
  3.2  Amended and Restated Bylaws of FS Investment Corporation.(Incorporated by reference to Exhibit (b)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.)2008)
  4.1  Form of Subscription Agreement.(Incorporated by reference to Appendix A filed with the Company’s final prospectus filed pursuant to Rule 497 (File No. 333-149374)333-174784) filed on May 12, 2011.)November 1, 2011)
  4.2  Amended and Restated Distribution Reinvestment Plan.Plan, effective as of May 13, 2008. ((Incorporated by reference to Exhibit (e)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.2008)
  4.3Amended and Restated Distribution Reinvestment Plan, effective as of January 1, 2012. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on November 14, 2011)
10.1  Investment Advisory and Administrative Services Agreement by and between the Company and FB Income Advisor, LLC.(Incorporated by reference to Exhibit (g) filed with the Company’s registration statement on Form N-2 (File No. 333-149374), filed on February 25, 2008.)2008)
10.2  First Amendment to the Investment Advisory and Administrative Services Agreement.Agreement by and between the Company and FB Income Advisor, LLC.(Incorporated by reference to Exhibit (g)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.)2008)
10.3  Investment Sub-advisory Agreement by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC.(Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on June 19, 2008.)2008)
10.4  Form of Dealer Manager Agreement by and between the Company and FS2FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.)2008)
10.5  Form of Amendment to Form of Dealer Manager Agreement by and between the Compnay and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784), filed on October 20, 2011)
10.6Form of Selected Dealer AgreementAgreement. (Included as Appendix A to the Form of Dealer Manager Agreement).(Incorporated (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.)2008)
10.610.7Form of Amendment to Form of Selected Dealer Agreement. (Included as Exhibit A to the Form of Amendment to Form of Dealer Manager Agreement).(Incorporated by reference to Exhibit (h)(4) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784), filed on October 20, 2011)
10.8  Custodian Services Agreement by and between the Company and The Bank of New York Mellon (f/k/a PFPC Trust Company.Company).(Incorporated by reference to Exhibit (j)(1) filed with Post-Effective Amendment No. 1 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on November 13, 2008.)2008)
10.710.9*Custodian Agreement, dated as of November 14, 2011, by and between State Street Bank and Trust Company and FS Investment Corporation.

10.10  Form of Escrow Agreement by and between the Company and UMB Bank, N.A.(Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008.)2008)
10.810.11  Amended and Restated Credit Agreement by and among Broad Street Funding LLC, Deutsche Bank AG, New York Branch and the other lenderlenders party thereto, dated as of January 28, 2011.(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on February 1, 2011.)2011
10.910.12  Asset Contribution Agreement by and between the Company and Broad Street Funding LLC, dated March 10, 2010.(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on March 16, 2010.)2010)
10.1010.13  First Amendment to Asset Contribution Agreement by and between the Company and Broad Street Funding LLC, dated as of June 17, 2010.(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 19, 2010.)2010)
10.1110.14  Investment Management Agreement by and between the Company and Broad Street Funding LLC, dated March 10, 2010.(Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on March 16, 2010.)2010)

10.1210.15  Amended and Restated Security Agreement by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch, dated as of January 28, 2011.(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on February 1, 2011.2011 (Items 1.01, 2.03 and 9.01))
10.1310.16  ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of March 18, 2011, by and between Arch Street Funding LLC and Citibank, N.AN.A., each dated as of March 18, 2011.. (Incorporated(Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K (File No. 814-00757), filed on March 24, 2011.)2011)
10.1410.17  Amended and Restated Confirmation Letter Agreement dated as of June 9, 2011, by and between Arch Street Funding LLC and Citibank, N.A., dated as of June 9, 2011.(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on June 13, 2011.)2011)
10.1510.18  Investment Management Agreement by and between the Company and Arch Street Funding LLC, dated as of March 18, 2011.(Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K (File No. 814-00757), filed on March 24, 2011.)2011)
10.1610.19  Asset Transfer Agreement by and between the Company and Locust Street Funding LLC, dated as of July 21, 2011, by and between FS Investment Corporation and Locust Street Funding LLC.2011.(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
10.1710.20  Indenture dated as of July 21, 2011, by and between Locust Street Funding LLC and Citibank, N.A., as trustee.trustee, dated as of July 21, 2011.(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
10.1810.21  Locust Street Funding LLC Class A Floating Rate Secured Note due 2021.(Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
10.1910.22  TBMA/ISMA 2000 Global Master Repurchase Agreement between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Confirmation thereto, each dated as of July 21, 2011.(Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
10.2010.23  Revolving Credit Agreement by and between the Company and Race Street Funding LLC, dated as of July 21, 2011, by and between FS Investment Corporation and Race Street Funding LLC.2011.(Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.2011)

10.2110.24  Collateral Management Agreement dated as of July 21, 2011, by and between Locust Street Funding LLC and FS Investment Corporation.the Company, dated as of July 21, 2011.(Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
10.2210.24  Collateral Administration Agreement dated as of July 21, 2011, by and among Locust Street Funding LLC, FS Investment Corporationthe Company and Virtus Group, LP.LP, dated as of July 21, 2011.(Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011.)2011)
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 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*  Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*Filed herewith.

SIGNATURES

Pursuant to the requirements 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 on August 12,November 14, 2011.

 

FS INVESTMENT CORPORATION
By: 

/s/    Michael C. Forman

 

Michael C. Forman

Chief Executive Officer

(Principal Executive Officer)

By: 

/s/    William Goebel

 

William Goebel

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

66