FS Investment Corp--Prospectus Supplement
Table of Contents

Filed pursuant to Rule 497
File No. 333-149374

LOGO

FS INVESTMENT CORPORATION

 

 

Supplement dated May 17, 2011

to

Prospectus dated May 12, 2011

 

 

This supplement contains information which amends, supplements or modifies certain information contained in the Prospectus of FS Investment Corporation dated May 12, 2011, as supplemented and amended (as supplemented and amended, the “Prospectus”).

You should carefully consider the “Risk Factors” beginning on page 33 of the Prospectus before you decide to invest in shares of our common stock.

Status of Our Ongoing Public Offering

Since commencing our initial public offering and through May 13, 2011, we have sold 73,461,431 shares (as adjusted for stock distributions) of our common stock for gross proceeds of approximately $757.1 million. As of May 13, 2011, we had raised total gross proceeds of approximately $758.1 million, including approximately $1 million contributed by principals of our investment adviser in February 2008.

The following table summarizes the sales of our common stock beginning with our semi-monthly closing on March 16, 2011 through and including our semi-monthly closing on May 2, 2011:

 

Date of Semi–Monthly Closing

   Shares Sold      Average Price
Per  Share
     Gross Proceeds  

March 16, 2011

     3,829,084       $ 10.66       $ 40,809,160   

April 1, 2011(1)

     4,835,749         10.66         51,534,273   

April 18, 2011

     4,039,792         10.67         43,103,060   

May 2, 2011(2)

     4,265,137         10.63         45,325,144   
                          
     16,969,762       $ 10.65       $ 180,771,637   
                          

 

(1) The number of shares sold and gross proceeds for our April 1, 2011 semi-monthly closing include 163,648 shares purchased through our distribution reinvestment plan at an average price per share of $10.32, for gross proceeds of $1,671,256. Pursuant to our share repurchase program, we purchased a total of approximately 158,258 shares of our common stock on April 1, 2011 at a price of $9.675 per share (an amount equal to 90% of our April 1, 2011 public offering price of $10.75 per share) for an aggregate purchase price of approximately $1,531,146.
(2) The number of shares sold and gross proceeds for our May 2, 2011 semi-monthly closing include 398,664 shares purchased through our distribution reinvestment plan at an average price per share of $10.21, for gross proceeds of $4,071,349.

 

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Table of Contents

Portfolio Update

As of March 31, 2011, our investment portfolio consisted of interests in 143 portfolio companies with an average annual EBITDA of approximately $273.3 million. As of March 31, 2011, the investments in our portfolio were purchased at an average price of 94.1% of par value, 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 10.4% based upon the purchase price of our investments. We intend to continue to add securities to our portfolio as our offering progresses. The following is our investment portfolio as of March 31, 2011:

 

Portfolio Company(a)

 

Industry

  Date of Most
Recent
Purchase
    Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

Senior Secured Loans - First Lien - 57.6%

       

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

  Healthcare     May-10      $ 5,493      $ 5,234   

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

  Consumer Staples     Sep-10        4,900        4,809   

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

  Industrials     Mar-11        12,500        9,250   

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

  Telecommunication Services     Mar-11        10,588        10,377   

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

  Industrials     Aug-10        7,345        7,248   

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

  Consumer Discretionary     Jan-11        8,901        8,888   

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

  Financials     Oct-09        949        812   

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

  Industrials     Feb-10        3,270        3,243   

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

  Healthcare     Oct-10        7,284        7,215   

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

  Information Technology     May-10        1,980        1,963   

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

  Information Technology     Feb-11        10,000        9,901   

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

  Information Technology     Nov-10        7,910        7,134   

Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17(c)

  Industrials     Mar-11        5,000        4,963   

Burger King Corp., L+300, 1.5% LIBOR Floor, 10/19/16(c)

  Consumer Staples     Feb-11        6,513        6,513   

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

  Industrials     Feb-11        4,988        4,963   

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

  Energy     Aug-10        2,812        2,635   

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

  Consumer Discretionary     Mar-11        4,000        3,990   

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

  Consumer Discretionary     Nov-10        7,484        7,417   

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

  Healthcare     Feb-11        10,000        9,950   

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

  Information Technology     Dec-10        1,578        1,563   

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

  Consumer Discretionary     Dec-10        6,650        6,586   

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

  Industrials     Oct-10        7,437        6,804   

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

  Energy     Aug-10        6,948        6,864   

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

  Telecommunication Services     Dec-10        6,772        6,149   

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

  Telecommunication Services     May-09        1,937        1,670   

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

  Healthcare     Dec-10        2,308        2,297   

Corel Corp., L+400, 5/2/12

  Information Technology     Aug-09        1,359        1,265   

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

  Telecommunication Services     Oct-10        3,937        3,656   

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

  Materials     Mar-10        2,830        2,808   

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

  Industrials     Dec-10        9,115        8,985   

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

  Consumer Discretionary     Mar-11        7,766        7,396   

Digital Cinema Implementation Partners, LLC, L+375, 1.3% LIBOR Floor, 3/25/17

  Consumer Discretionary     Mar-11        4,898        4,874   

East Cameron Partners, LP, 18.0%, 7/11/11

  Energy     Mar-11        381        381   

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

  Utilities     Jan-11        1,631        1,615   

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

  Consumer Discretionary     Mar-11        3,750        3,713   

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

  Financials     Oct-10        3,722        3,687   

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

  Information Technology     May-10        7,621        6,685   

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

  Energy     Sep-10        4,429        4,347   

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

  Industrials     Oct-10        7,413        7,068   

General Chemical Corp., L+350, 1.5% LIBOR Floor, 3/9/18(c)

  Materials     Mar-11        7,509        7,509   

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

  Consumer Discretionary     Nov-10        2,435        2,413   

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

  Telecommunication Services     Mar-11        8,305        8,263   

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

  Consumer Discretionary     Oct-10        1,809        1,792   

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

  Financials     Jul-10        4,287        4,138   

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

  Consumer Discretionary     Dec-10        9,904        9,809   

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

  Industrials     Jul-10        2,436        2,129   

HCR Manor Care, Inc., L+350, 1.5% LIBOR Floor, 04/6/18

  Healthcare     Mar-11        3,172        3,140   

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

  Materials     Jan-11        1,778        1,769   

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

  Healthcare     Dec-10        3,591        3,522   

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

  Consumer Discretionary     May-10        4,635        4,555   

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

  Information Technology     Feb-11        5,000        4,951   

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

  Information Technology     May-09        1,448        1,184   

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

  Consumer Staples     Mar-10        4,936        4,421   

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

  Information Technology     Jan-11        6,874        6,775   

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

  Telecommunication Services     Mar-11        7,500        7,389   

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

  Information Technology     Dec-10        4,988        4,916   

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

  Consumer Discretionary     Oct-09        880        685   

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

  Information Technology     Jan-11        8,050        8,010   

 

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Table of Contents

Portfolio Company(a)

 

Industry

  Date of Most
Recent
Purchase
    Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

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

  Healthcare     Feb-11      $ 10,500      $ 10,329   

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

  Consumer Discretionary     Jul-10        5,621        5,000   

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

  Industrials     Aug-10        6,215        6,184   

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

  Consumer Discretionary     Feb-11        3,488        3,419   

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

  Industrials     Mar-11        10,000        9,850   

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

  Consumer Discretionary     Aug-10        2,418        2,386   

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

  Consumer Discretionary     Dec-10        2,078        2,059   

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

  Energy     Apr-10        3,742        3,463   

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

  Consumer Discretionary     Dec-10        4,988        4,892   

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

  Consumer Discretionary     Jul-10        6,341        6,253   

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

  Information Technology     May-10        4,723        4,692   

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

  Consumer Discretionary     Aug-10        2,942        2,914   

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

  Information Technology     Aug-10        7,363        7,219   

Sedgwick CMS Holdings, L+350, 1.5% LIBOR Floor, 10/28/16(c)

  Industrials     Feb-11        4,075        4,075   

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

  Energy     Feb-11        10,249        10,283   

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

  Energy     Jan-11        10,342        10,252   

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

  Telecommunication Services     Dec-10        5,966        5,641   

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

  Healthcare     Dec-10        5,951        5,865   

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

  Telecommunication Services     Feb-11        8,970        8,705   

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

  Information Technology     Dec-10        5,888        5,924   

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

  Consumer Discretionary     Dec-10        7,980        7,772   

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

  Materials     Jan-11        4,120        4,120   

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

  Consumer Discretionary     Mar-11        14,691        14,400   

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

  Materials     Dec-10        3,990        3,990   

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

  Industrials     Dec-10        4,288        4,247   

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

  Information Technology     Dec-10        4,906        4,811   

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

  Telecommunication Services     Nov-10        7,984        8,003   

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

  Utilities     Jan-11        13,350        11,193   

The Gymboree Corp., L+350, 1.5% LIBOR Floor, 4/11/18

  Consumer Discretionary     Feb-11        1,688        1,688   

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

  Telecommunication Services     Sep-10        1,300        1,300   

TowerCo Finance LLC, L+375, 1.5% LIBOR Floor, 2/2/17

  Telecommunication Services     Jan-11        1,400        1,393   

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

  Consumer Discretionary     Oct-10        6,716        6,681   

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

  Energy     Nov-10        6,741        6,703   

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

  Materials     Feb-11        6,625        6,625   

Vertafore, Inc., L+375, 1.5% LIBOR Floor, 7/29/16

  Information Technology     Feb-11        6,849        6,849   

Yell Group Plc, L+300, 7/31/14

  Consumer Discretionary     Oct-09        804        685   
                   

Total Senior Secured Loans - First Lien

        519,228        502,153   
                   

Senior Secured Loans - Second Lien - 22.0%

       

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

  Consumer Staples     Jan-11        12,000        12,052   

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

  Industrials     Jan-11        12,000        11,895   

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

  Healthcare     Aug-10        10,000        9,728   

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

  Financials     May-10        1,992        1,693   

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

  Information Technology     Jan-10        5,000        4,412   

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

  Information Technology     Feb-11        10,000        9,901   

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

  Consumer Discretionary     Oct-09        2,940        2,382   

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

  Information Technology     Dec-10        6,000        5,928   

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

  Industrials     Mar-11        6,923        6,785   

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

  Industrials     Mar-11        3,500        2,152   

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

  Information Technology     Mar-11        10,783        10,754   

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

  Consumer Discretionary     Mar-11        9,500        9,025   

FR Brand Acquisition Corp., L+615, 2/7/15(c)

  Industrials     Jan-11        13,000        11,765   

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

  Consumer Discretionary     Oct-10        7,000        6,868   

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

  Materials     Mar-11        20,714        13,464   

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

  Industrials     Nov-10        3,000        2,923   

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

  Consumer Discretionary     Mar-11        5,000        3,750   

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

  Consumer Staples     Jan-11        12,000        12,140   

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

  Industrials     Aug-10        500        500   

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

  Energy     Jan-11        12,968        12,754   

TPF Generation Holdings (Tenaska Power Fund), LLC, L+425, 12/15/14(c)

  Energy     Dec-10        9,170        8,380   

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

  Information Technology     Oct-10        10,000        9,906   

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

  Consumer Staples     Feb-11        11,079        11,132   

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

  Materials     Jan-11        11,873        11,650   
                   

Total Senior Secured Loans - Second Lien

        206,942        191,939   
                   

Senior Secured Bonds - 4.8%

       

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

  Information Technology     Jan-11        8,723        8,810   

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

  Information Technology     Feb-11        1,500        1,500   

Eastman Kodak Co., 10.6%, 3/15/19

  Information Technology     Mar-11        7,500        7,402   

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

  Information Technology     Aug-10        4,300        4,233   

Grifols, SA, 8.3%, 2/1/18(c)

  Healthcare     Jan-11        2,500        2,500   

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

  Consumer Discretionary     Mar-11        2,600        2,600   

Kabel BW, 7.5%, 3/15/19(c)

  Telecommunication Services     Mar-11        665        665   

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

  Telecommunication Services     Apr-10        5,000        4,971   

 

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Table of Contents

Portfolio Company(a)

 

Industry

  Date of Most
Recent
Purchase
    Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

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

  Telecommunication Services     Apr-10      $ 4,680      $ 4,812   

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

  Consumer Discretionary     Feb-11        2,400        2,400   

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

  Industrials     Nov-10        800        800   

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

  Energy     Feb-11        1,185        1,143   
                   

Total Senior Secured Bonds

        41,853        41,836   
                   

Subordinated Debt/Other - 15.6%

       

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

  Financials     May-10        2,000        1,067   

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

  Financials     Sep-10        4,775        3,046   

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

  Financials     Nov-10        2,252        1,750   

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

  Information Technology     Apr-10        4,000        4,000   

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

  Consumer Discretionary     Jan-10        8,000        7,912   

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

  Healthcare     Dec-10        8,000        8,000   

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

  Financials     Mar-10      1,500        980   

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

  Financials     May-10      $ 2,000        881   

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

  Telecommunication Services     Dec-10        5,000        5,000   

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

  Consumer Discretionary     Feb-11        680        680   

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

  Consumer Discretionary     Mar-11        1,200        1,200   

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

  Telecommunication Services     Oct-10        8,000        8,000   

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

  Telecommunication Services     Jan-11        4,000        4,000   

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

  Consumer Staples     Feb-11        2,500        2,500   

Foothill CLO I Class Subord., 16.7%, 2/22/21

  Financials     Feb-11        4,000        4,477   

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

  Financials     Oct-10        1,919        1,146   

Galaxy VII CLO Class Subord., 12.1%, 10/13/18

  Financials     Jan-11        2,000        1,726   

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

  Healthcare     Feb-11        15,000        15,000   

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

  Financials     Sep-10        6,500        3,062   

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

  Financials     Sep-10        4,000        2,204   

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

  Financials     Jan-11        9,225        6,838   

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

  Industrials     Mar-10        7,000        6,870   

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

  Information Technology     Jan-11        2,000        1,745   

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

  Financials     Oct-10        4,000        2,529   

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

  Financials     Mar-11        4,375        3,962   

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

  Financials     Mar-11        10,000        8,977   

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

  Financials     Mar-11        5,000        4,745   

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

  Energy     Mar-11        10,592        10,592   

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

  Financials     Feb-11        12,500        10,216   

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

  Materials     Dec-10        3,000        2,941   
                   

Total Subordinated Debt/Other

        155,018        136,046   
                   

TOTAL INVESTMENTS - 100.0%

      $ 923,041      $ 871,974   
                   

 

Total Return Swap

   Notional
Amount
     Unrealized
Appreciation
 

Citibank TRS Facility

   $ 88,441       $ 208   
           

 

(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) Security is held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the amended and restated revolving credit facility with Deutsche Bank AG, New York Branch.

The tables below show portfolio investments that were sold or experienced a repayment in excess of 1% of a position’s value between March 1, 2011 and March 31, 2011.

 

Security

  Original Cost     Disposition Price     Transaction Type

Acosta, Inc., L+325, 1.5% LIBOR Floor, 1/27/18

  $ 3,902,439      $ 3,912,195      Sale

Alliant Holdings LLC, L+500, 1.8% LIBOR Floor, 8/16/14

  $ 1,968,402      $ 1,948,913      Sale

Atlantic Broadband Finance, LLC, L+300, 1.0% LIBOR Floor, 11/29/15

  $ 1,337,624      $ 1,340,968      Sale

Axcan Intermediate Holdings Inc., L+400, 1.5% LIBOR Floor, 2/10/17

  $ 9,925,125      $ 9,920,936      Sale

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

  $ 1,766,305      $ 1,775,226      Sale

Calpine Corp., 7.9% 1/15/23

  $ 8,500,000      $ 8,744,375      Sale

Cambium Learning, Inc., 9.8%, 2/15/17

  $ 2,983,260      $ 3,037,500      Sale

Canwest LP, L+500, 1.3% LIBOR Floor, 7/23/16

  $ 3,475,205      $ 3,492,624      Sale

 

4


Table of Contents

Security

  Original Cost     Disposition Price     Transaction Type

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

  $ 4,975,000      $ 4,842,700      Sale

Cedar Fair LP, L+300, 1.0% LIBOR Floor, 2/22/18

  $ 1,500,000      $ 1,511,250      Sale

CPG International Inc., L+450, 1.5% LIBOR Floor, 2/18/17

  $ 1,847,763      $ 1,858,218      Sale

Datatel, Inc., L+350, 1.5% LIBOR Floor, 2/18/17

  $ 1,546,392      $ 1,550,258      Sale

DineEquity, Inc., L+300, 1.3% LIBOR Floor, 10/19/17

  $ 2,004,313      $ 2,021,851      Sale

Dunkin’ Brands, Inc., L+300, 1.3% LIBOR Floor, 11/23/17

  $ 2,500,000      $ 2,503,125      Sale

Fairmount Minerals, Ltd., L+400, 1.3% LIBOR Floor, 3/10/17

  $ 7,911,822      $ 7,935,676      Sale

General Nutrition Centers, Inc., L+300, 1.3% LIBOR Floor, 3/4/18

  $ 5,365,040      $ 5,391,932      Sale

Grifols, SA, L+425, 1.8% LIBOR Floor, 6/4/16

  $ 4,292,920      $ 4,355,493      Sale

Hanger Orthopedic Group, Inc., L+300, 1.0% LIBOR Floor, 12/1/16

  $ 1,944,444      $ 1,949,306      Sale

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

  $ 11,096,773      $ 11,264,906      Sale

Hughes Network Systems, LLC, 9.5%, 4/15/14

  $ 2,080,000      $ 2,070,000      Sale

Hyland Software, Inc., L+425, 1.5% LIBOR Floor, 12/17/16

  $ 3,990,000      $ 3,990,000      Sale

Intelsat Jackson Holdings SA, L+375, 1.5% LIBOR Floor, 4/2/18

  $ 2,985,000      $ 3,012,180      Sale

Interactive Data Corp., L+350, 1.3% LIBOR Floor, 2/8/18

  $ 10,000,000      $ 10,012,500      Sale

inVentiv Health, Inc., L+325, 1.5% LIBOR Floor, 8/4/16

  $ 671,141      $ 671,141      Sale

JMC Steel Group, Inc., L+325, 1.5% LIBOR Floor, 3/10/17

  $ 9,239,286      $ 9,262,500      Sale

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16

  $ 1,645,876      $ 1,667,355      Sale

Mediacom Broadband LLC, 8.5%, 10/15/15

  $ 2,030,000      $ 2,075,000      Sale

MEMC Electronic Materials, Inc., 7.8%, 4/1/19

  $ 3,420,000      $ 3,471,300      Sale

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

  $ 4,700,000      $ 5,099,500      Sale

NBTY, Inc., L+325, 1.0% LIBOR Floor, 10/1/17

  $ 1,028,735      $ 1,032,592      Sale

NXP BV, L+325, 1.3% LIBOR Floor, 3/4/17

  $ 7,960,000      $ 8,054,500      Sale

Paetec Holding Corp., 9.9%, 12/1/18

  $ 3,866,960      $ 4,230,000      Sale

Petco Animal Supplies, Inc., L+325, 1.3% LIBOR Floor, 11/25/17

  $ 3,654,323      $ 3,661,391      Sale

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

  $ 3,693,750      $ 3,712,500      Sale

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

  $ 1,874,052      $ 1,881,054      Sale

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

  $ 1,523,077      $ 1,542,308      Sale

Reynolds Group Holdings Inc., L+325, 1.0% LIBOR Floor, 2/9/18

  $ 3,657,993      $ 3,671,710      Sale

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

  $ 4,000,000      $ 4,280,000      Sale

Rock-Tenn Co., L+275, 0.8% LIBOR Floor, 6/15/18

  $ 1,474,201      $ 1,481,572      Sale

Savers, Inc., L+300, 1.3% LIBOR Floor, 3/4/17

  $ 1,398,333      $ 1,403,577      Sale

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

  $ 6,745,769      $ 6,830,943      Sale

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

  $ 3,665,965      $ 3,867,850      Sale

TransUnion LLC, L+325, 1.5% LIBOR Floor, 2/9/18

  $ 2,500,000      $ 2,509,375      Sale

TravelCLICK, Inc., L+450, 1.5% LIBOR Floor, 3/16/16

  $ 7,895,502      $ 7,895,502      Sale

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

  $ 665,464      $ 687,125      Sale

Walter Energy Inc., L+300, 1.0% LIBOR Floor, 3/4/18

  $ 3,092,784      $ 3,115,979      Sale

 

5


Table of Contents

Security

  Weighted
Average
Purchase
Price(1)
    Weighted
Average
Disposition
Price(1)
    Paydown
Amount
    Transaction
Type

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

    99.5     100.0   $ 2,250,000      Paydown

Alliant Holdings LLC, L+500, 1.8% LIBOR Floor 8/16/14

    101.0     100.0   $ 51,087      Paydown

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

    99.5     100.0   $ 1,337,925      Paydown

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

    100.4     100.0   $ 6,529,412      Paydown

CDW Corp., L+500, 7/10/17

    88.3     100.0   $ 5,583,925      Paydown

Clopay Ames True Temper Holding Corp., L+600, 1.8% LIBOR Floor, 9/30/16

    99.9     101.0   $ 8,020,557      Paydown

CMP Susquehanna Corp., L+200, 5/5/13

    89.3     100.0   $ 208,424      Paydown

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

    91.5     100.0   $ 122,974      Paydown

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

    98.5     100.0   $ 115,385      Paydown

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

    93.5     100.0   $ 231,344      Paydown

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

    99.5     101.0   $ 6,530,524      Paydown

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

    100.4     102.0   $ 7,677,979      Paydown

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

    98.3     101.0   $ 8,387,533      Paydown

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

    95.0     100.0   $ 77,102      Paydown

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

    99.5     101.0   $ 1,963,889      Paydown

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

    99.0     100.0   $ 287,407      Paydown

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

    98.0     100.0   $ 45,455      Paydown

Lantiq Deutschland GmbH, L+700, 2.0% LIBOR Floor, 11/16/15

    99.4     100.0   $ 104,852      Paydown

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

    99.7     101.0   $ 5,614,024      Paydown

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

    99.0     101.0   $ 2,234,513      Paydown

NCO Group, L+500, 2.5% LIBOR Floor, 5/15/13

    99.5     100.0   $ 253,050      Paydown

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

    99.4     100.0   $ 53,552      Paydown

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

    89.0     100.0   $ 183,066      Paydown

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

    99.9     101.3   $ 99,750      Paydown

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

    98.8     100.0   $ 105,264      Paydown

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

    99.0     100.0   $ 151,092      Paydown

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

    98.0     100.0   $ 93,750      Paydown

TNS, Inc., L+400, 2.0% LIBOR Floor, 11/18/15

    100.0     100.0   $ 16,667      Paydown

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

    101.8     104.9   $ 2,328,674      Paydown

Univar Inc., L+450, 1.8% LIBOR Floor, 9/20/16

    99.0     101.0   $ 4,029,900      Paydown

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

    99.4     101.0   $ 2,678,204      Paydown

 

(1) As a percentage of par value.

 

6


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.

 

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

COMMISSION FILE NUMBER: 0-53424

 

 

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 72,974,591 shares of Common Stock outstanding as of May 13, 2011.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

  

ITEM 1.

 

FINANCIAL STATEMENTS

     1   
 

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

     1   
 

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010

     2   
 

Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March  31, 2011 and 2010

     3   
 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010

     4   
 

Consolidated Schedule of Investments as of March 31, 2011 (Unaudited) and December 31, 2010

     5   
 

Notes to Unaudited Consolidated Financial Statements

     12   

ITEM 2.

 

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

     30   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     49   

ITEM 4.

 

CONTROLS AND PROCEDURES

     49   

PART II—OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     51   

ITEM 1A.

 

RISK FACTORS

     51   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     51   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     51   

ITEM 4.

 

RESERVED

     51   

ITEM 5.

 

OTHER INFORMATION

     51   

ITEM 6.

 

EXHIBITS

     51   
 

SIGNATURES

     53   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

FS Investment Corporation

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

     March 31,
2011
(Unaudited)
    December 31,
2010
 

Assets

    

Investments, at fair value (amortized cost—$871,974 and $715,514, respectively)

   $ 900,484      $ 733,580   

Cash

     87,448        38,790   

Receivable for investments sold and repaid

     125,027        5,162   

Interest receivable

     8,074        3,632   

Deferred financing costs

     842        835   

Unrealized gain on total return swap(1)

     208        —     

Prepaid expenses and other assets

     66        6   
                

Total assets

   $ 1,122,149      $ 782,005   
                

Liabilities

    

Payable for investments purchased

   $ 185,287      $ 81,800   

Credit facility payable

     337,606        297,201   

Stockholder distributions payable

     3,734        2,556   

Management fees payable

     4,762        3,298   

Capital gains incentive fee payable(2)

     7,334        5,459   

Administrative services fees payable

     417        310   

Reimbursements payable

     —          641   

Interest payable

     1,093        883   

Other accrued expenses and liabilities

     1,193        625   
                

Total liabilities

     541,426        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, 59,992,884 and 41,332,661 shares issued and outstanding, respectively

   $ 60      $ 41   

Capital in excess of par value

     553,735        374,637   

Accumulated undistributed net realized gains on investments

     4,960        1,290   

Accumulated distributions in excess of net investment income(3)

     (6,751     (4,802

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

     28,719        18,066   
                

Total stockholders’ equity

     580,723        389,232   
                

Total liabilities and stockholders’ equity

   $ 1,122,149      $ 782,005   
                

Net asset value per common share at period end

   $ 9.68      $ 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.

 

1


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

     Three Months Ended
March 31,
 
     2011      2010  

Investment income

     

Interest income

   $ 17,924       $ 3,134   

Operating expenses

     

Management fees

     4,761         795   

Capital gains incentive fees(1)

     3,271         386   

Administrative services expenses

     584         175   

Stock transfer agent fees

     295         179   

Accounting and administrative fees

     222         155   

Interest expense

     2,193         33   

Other general and administrative expenses

     582         296   
                 

Total expenses

     11,908         2,019   
                 

Net investment income

     6,016         1,115   
                 

Realized and unrealized gain

     

Net realized gain on investments

     5,653         1,989   

Net change in unrealized appreciation on investments

     10,393         1,776   

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

     208         —     

Net change in unrealized gain/loss on foreign currency

     52         (11
                 

Total net realized and unrealized gain on investments

     16,306         3,754   
                 

Net increase in net assets resulting from operations

   $ 22,322       $ 4,869   
                 

Per share information—basic and diluted

     

Net increase in net assets resulting from operations

   $ 0.45       $ 0.37   
                 

Weighted average shares outstanding(3)

     50,013,065         13,221,929   
                 

 

(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 in net assets resulting from operations reflect these stock distributions on a retroactive basis.

See notes to unaudited consolidated financial statements.

 

2


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Three Months Ended
March 31,
 
     2011     2010  

Operations

    

Net investment income

   $ 6,016      $ 1,115   

Net realized gain on investments

     5,653        1,989   

Net change in unrealized appreciation on investments

     10,393        1,776   

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

     208        —     

Net change in unrealized gain/loss on foreign currency

     52        (11
                

Net increase in net assets resulting from operations

     22,322        4,869   
                

Stockholder distributions(2)

    

Distributions from net investment income

     (7,965     (1,134

Distributions from net realized gain on investments

     (1,983     (1,309
                

Net decrease in net assets resulting from stockholder distributions

     (9,948     (2,443
                

Capital share transactions

    

Issuance of common stock

     177,328        39,649   

Reinvestment of stockholder distributions

     3,828        616   

Repurchases of common stock

     (955     —     

Offering costs

     (1,084     (181

Reimbursement of investment adviser (Note 4)

     —          (668

Capital contributions of investment adviser

     —          181   
                

Net increase in net assets resulting from capital share transactions

     179,117        39,597   
                

Total increase in net assets

     191,491        42,023   

Net assets at beginning of period

     389,232        93,197   
                

Net assets at end of period

   $ 580,723      $ 135,220   
                

 

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

 

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

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

    Three Months Ended
March 31,
 
    2011     2010  

Cash flows from operating activities

   

Net increase in net assets resulting from operations

  $ 22,322      $ 4,869   

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

   

Purchases of investments

    (548,074     (125,067

Payment-in-kind interest

    —          (62

Proceeds from sales and repayments of investments

    398,684        34,344   

Net change in unrealized appreciation on investments

    (10,393     (1,776

Net change in unrealized appreciation on total return swap

    (208     —     

Net change in unrealized gain/loss on foreign currency

    (52     11   

Net realized gain on investments

    (5,653     (1,989

Accretion of discount

    (1,416     (929

Amortization of deferred financing costs

    205        31   

Increase in interest receivable

    (4,442     (404

Increase in prepaid expenses and other assets

    (60     (6

Increase in payable for investments purchased

    103,487        48,991   

Increase in receivable for investments sold and repaid

    (119,865     (6,700

Increase in management fees payable

    1,464        358   

Increase in capital gain incentive fee payable

    1,875        213   

Increase in interest payable

    210        —     

Increase in administrative services fees payable

    107        4   

Increase in other accrued expenses and liabilities

    568        104   
               

Net cash used in operating activities

    (161,241     (48,008
               

Cash flows from financing activities

   

Issuance of common stock

    177,328        39,649   

Reinvestment of stockholder distributions

    3,828        616   

Repurchases of common stock

    (955     —     

Offering costs

    (1,084     (181

Payments to investment adviser for offering and organization costs (Note 4)

    (641     (668

Capital contributions of investment adviser

    —          181   

Stockholder distributions

    (8,770     (616

Borrowings under credit facility

    40,405        4,400   

Deferred financing costs paid

    (212     (663
               

Net cash provided by financing activities

    209,899        42,718   
               

Total increase (decrease) in cash

    48,658        (5,290

Cash at beginning of period

    38,790        9,035   
               

Cash at end of period

  $ 87,448      $ 3,745   
               

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of March 31, 2011

(in thousands)

 

 

          Principal     Amortized     Fair  

Portfolio Company(a)

  Industry     Amount(b)     Cost     Value(c)  

Senior Secured Loans—First Lien—88.2%

       

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

    Healthcare      $ 5,493      $ 5,234      $ 5,520   

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

    Consumer Staples        4,900        4,809        4,930   

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

    Industrials        12,500        9,250        9,250   

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

    Telecommunication Services        10,588        10,377        10,588   

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

    Industrials        7,345        7,248        7,399   

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

    Consumer Discretionary        8,901        8,888        8,969   

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

    Financials        949        812        944   

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

    Industrials        3,270        3,243        3,306   

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

    Healthcare        7,284        7,215        7,317   

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

    Information Technology        1,980        1,963        2,002   

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

    Information Technology        10,000        9,901        9,946   

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

    Information Technology        7,910        7,134        7,706   

Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17(d)

    Industrials        5,000        4,963        5,009   

Burger King Corp., L+300, 1.5% LIBOR Floor, 10/19/16(d)

    Consumer Staples        6,513        6,513        6,515   

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

    Industrials        4,988        4,963        5,004   

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

    Energy        2,812        2,635        2,802   

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

    Consumer Discretionary        4,000        3,990        4,022   

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

    Consumer Discretionary        7,484        7,417        7,484   

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

    Healthcare        10,000        9,950        9,830   

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

    Information Technology        1,578        1,563        1,585   

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

    Consumer Discretionary        6,650        6,586        6,708   

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

    Industrials        7,437        6,804        7,262   

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

    Energy        6,948        6,864        7,319   

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

    Telecommunication Services        6,772        6,149        6,680   

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

    Telecommunication Services        1,937        1,670        1,774   

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

    Healthcare        2,308        2,297        2,317   

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

    Information Technology        1,359        1,265        1,334   

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

    Telecommunication Services        3,937        3,656        3,911   

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

    Materials        2,830        2,808        2,861   

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

    Industrials        9,115        8,985        9,124   

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

    Consumer Discretionary        7,766        7,396        7,436   

Digital Cinema Implementation Partners, LLC, L+375, 1.3% LIBOR Floor, 3/25/17

    Consumer Discretionary        4,898        4,874        4,904   

East Cameron Partners, LP, 18.0%, 7/11/11

    Energy        381        381        381   

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

    Utilities        1,631        1,615        1,649   

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

    Consumer Discretionary        3,750        3,713        3,745   

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

    Financials        3,722        3,687        3,743   

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

    Information Technology        7,621        6,685        7,315   

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

    Energy        4,429        4,347        4,551   

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

    Industrials        7,413        7,068        7,386   

General Chemical Corp., L+350, 1.5% LIBOR Floor, 3/9/18(d)

    Materials        7,509        7,509        7,543   

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

    Consumer Discretionary        2,435        2,413        2,458   

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

    Telecommunication Services        8,305        8,263        8,315   

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

    Consumer Discretionary        1,809        1,792        1,819   

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

    Financials        4,287        4,138        4,313   

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

    Consumer Discretionary        9,904        9,809        10,034   

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

    Industrials        2,436        2,129        2,325   

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

    Healthcare        3,172        3,140        3,130   

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

    Materials        1,778        1,769        1,795   

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

    Healthcare        3,591        3,522        3,627   

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

    Consumer Discretionary        4,635        4,555        4,681   

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

    Information Technology        5,000        4,951        4,981   

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

    Information Technology        1,448        1,184        1,457   

See notes to unaudited consolidated financial statements

 

5


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2011

(in thousands)

 

 

 

        Principal     Amortized     Fair  

Portfolio Company(a)

  Industry   Amount(b)     Cost     Value(c)  

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

  Consumer Staples   $ 4,936      $ 4,421      $ 4,313   

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

  Information Technology     6,874        6,775        7,011   

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

  Telecommunication Services     7,500        7,389        7,470   

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

  Information Technology     4,988        4,916        5,009   

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

  Consumer Discretionary     880        685        809   

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

  Information Technology     8,050        8,010        7,896   

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

  Healthcare     10,500        10,329        10,461   

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

  Consumer Discretionary     5,621        5,000        5,479   

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

  Industrials     6,215        6,184        6,282   

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

  Consumer Discretionary     3,488        3,419        3,448   

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

  Industrials     10,000        9,850        9,950   

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

  Consumer Discretionary     2,418        2,386        2,422   

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

  Consumer Discretionary     2,078        2,059        2,109   

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

  Energy     3,742        3,463        3,462   

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

  Consumer Discretionary     4,988        4,892        4,994   

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

  Consumer Discretionary     6,341        6,253        6,372   

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

  Information Technology     4,723        4,692        4,728   

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

  Consumer Discretionary     2,942        2,914        2,955   

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

  Information Technology     7,363        7,219        7,422   

Sedgwick CMS Holdings, L+350, 1.5% LIBOR Floor, 10/28/16(d)

  Industrials     4,075        4,075        4,086   

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

  Energy     10,249        10,283        10,095   

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

  Energy     10,342        10,252        10,423   

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

  Telecommunication Services     5,966        5,641        5,927   

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

  Healthcare     5,951        5,865        5,975   

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

  Consumer Discretionary     8,970        8,705        8,575   

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

  Information Technology     5,888        5,924        5,944   

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

  Consumer Discretionary     7,980        7,772        8,060   

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

  Materials     4,120        4,120        4,152   

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

  Consumer Discretionary     14,691        14,400        14,470   

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

  Materials     3,990        3,990        3,983   

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

  Industrials     4,288        4,247        4,320   

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

  Information Technology     4,906        4,811        4,968   

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

  Telecommunication Services     7,984        8,003        8,002   

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

  Utilities     13,350        11,193        11,259   

The Gymboree Corp., L+350, 1.5% LIBOR Floor, 4/11/18

  Consumer Discretionary     1,688        1,688        1,690   

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

  Telecommunication Services     1,300        1,300        1,306   

TowerCo Finance LLC, L+375, 1.5% LIBOR Floor, 2/2/17

  Telecommunication Services     1,400        1,393        1,411   

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

  Consumer Discretionary     6,716        6,681        6,768   

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

  Energy     6,741        6,703        7,188   

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

  Materials     6,625        6,625        6,658   

Vertafore, Inc., L+375, 1.5% LIBOR Floor, 7/29/16

  Information Technology     6,849        6,849        6,877   

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

  Consumer Discretionary     804        685        330   
                   

Total Senior Secured Loans—First Lien

        502,153        512,065   
                   

Senior Secured Loans—Second Lien—34.6%

       

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

  Consumer Staples     12,000        12,052        12,315   

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

  Industrials     12,000        11,895        12,255   

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

  Healthcare     10,000        9,728        9,850   

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

  Financials     1,992        1,693        1,825   

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

  Information Technology     5,000        4,412        4,996   

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

  Information Technology     10,000        9,901        10,021   

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

  Consumer Discretionary     2,940        2,382        2,808   

See notes to unaudited consolidated financial statements

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2011

(in thousands)

 

 

 

Portfolio Company(a)

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

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

  Information Technology   $ 6,000      $ 5,928      $ 6,180   

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

  Industrials     6,923        6,785        7,165   

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

  Industrials     3,500        2,152        2,425   

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

  Information Technology     10,783        10,754        10,944   

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

  Consumer Discretionary     9,500        9,025        9,386   

FR Brand Acquisition Corp., L+615, 2/7/15(d)

  Industrials     13,000        11,765        12,317   

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

  Consumer Discretionary     7,000        6,868        7,217   

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

  Materials     20,714        13,464        15,743   

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

  Industrials     3,000        2,923        2,989   

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

  Consumer Discretionary     5,000        3,750        4,073   

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

  Consumer Staples     12,000        12,140        12,188   

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

  Industrials     500        500        505   

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

  Energy     12,968        12,754        13,297   

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

  Energy     9,170        8,380        8,809   

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

  Information Technology     10,000        9,906        10,175   

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

  Consumer Staples     11,079        11,132        11,235   

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

  Materials     11,873        11,650        11,910   
                   

Total Senior Secured Loans—Second Lien

        191,939        200,628   
                   

Senior Secured Bonds—7.5%

       

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

  Information Technology     8,723        8,810        8,984   

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

  Information Technology     1,500        1,500        1,478   

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

  Information Technology     7,500        7,402        7,558   

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

  Information Technology     4,300        4,233        4,735   

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

  Healthcare     2,500        2,500        2,569   

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

  Consumer Discretionary     2,600        2,600        2,657   

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

  Telecommunication Services     665        665        683   

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

  Telecommunication Services     5,000        4,971        5,439   

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

  Telecommunication Services     4,680        4,812        5,061   

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

  Consumer Discretionary     2,400        2,400        2,478   

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

  Industrials     800        800        847   

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

  Energy     1,185        1,143        1,184   
                   

Total Senior Secured Bonds

        41,836        43,673   
                   

Subordinated Debt/Other—24.8%

       

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

  Financials     2,000        1,067        1,593   

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

  Financials     4,775        3,046        3,818   

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

  Financials     2,252        1,750        1,790   

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

  Information Technology     4,000        4,000        4,281   

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

  Consumer Discretionary     8,000        7,912        7,360   

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

  Healthcare     8,000        8,000        8,302   

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

  Financials   1,500        980        1,554   

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

  Financials   $ 2,000        881        1,394   

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

  Telecommunication Services     5,000        5,000        5,310   

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

  Consumer Discretionary     680        680        663   

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

  Consumer Discretionary     1,200        1,200        1,183   

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

  Telecommunication Services     8,000        8,000        7,955   

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

  Telecommunication Services     4,000        4,000        4,185   

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

  Consumer Staples     2,500        2,500        2,542   

Foothill CLO I Class Subord., 16.7%, 2/22/21(f)

  Financials     4,000        4,477        4,360   

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

  Financials     1,919        1,146        1,508   

Galaxy VII CLO Class Subord., 12.1%, 10/13/18(f)

  Financials     2,000        1,726        1,806   

See notes to unaudited consolidated financial statements

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2011

(in thousands)

 

 

 

Portfolio Company(a)

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

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

  Healthcare   $ 15,000      $ 15,000      $ 15,000   

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

  Financials     6,500        3,062        4,697   

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

  Financials     4,000        2,204        2,828   

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

  Financials     9,225        6,838        7,495   

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

  Industrials     7,000        6,870        7,210   

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

  Information Technology     2,000        1,745        1,785   

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

  Financials     4,000        2,529        3,940   

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

  Financials     4,375        3,962        4,155   

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

  Financials     10,000        8,977        8,800   

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

  Financials     5,000        4,745        4,450   

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

  Energy     10,592        10,592        10,592   

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

  Financials     12,500        10,216        10,562   

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

  Materials     3,000        2,941        3,000   
                   

Total Subordinated Debt/Other

        136,046        144,118   
                   

TOTAL INVESTMENTS—155.1%

      $ 871,974        900,484   
                   

LIABILITIES IN EXCESS OF OTHER ASSETS—(55.1%)

          (319,761

NET ASSETS—100.0%

        $ 580,723   
             

Total Return Swap

      Notional
Amount
          Unrealized
Appreciation
 

Citibank TRS Facility (Note 8)

    $ 88,441        $ 208   
             

 

(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 Board of Directors (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 9 and 10).

 

(e) Position or portion thereof unsettled as of March 31, 2011.

 

(f) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended (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.

 

8


Table of Contents

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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

See notes to unaudited consolidated financial statements

 

9


Table of Contents

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)
 

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   
                   

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   

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

  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   

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

  Financials     1,992        1,672        1,712   

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

  Information Technology     5,000        4,358        4,951   

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

  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   

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

  Healthcare     8,000        7,723        7,892   

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

  Industrials     250        199        180   

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

  Information Technology     5,000        4,915        5,070   

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

  Energy     7,405        6,980        7,411   

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

  Industrials     2,305        2,062        2,201   

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

  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   

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

  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   

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

  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   

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

  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   

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

  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   
                   

Total Senior Secured Loans—Second Lien

        131,960        135,962   
                   

See notes to unaudited consolidated financial statements

 

10


Table of Contents

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)
 

Senior Secured Bonds—8.1%

       

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

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

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

  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   

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

  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   

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

  Industrials     800        800        817   

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

  Energy     4,000        4,070        4,219   
                   

Total Senior Secured Bonds

        30,265        31,659   
                   

Subordinated Debt/Other—21.0%

       

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

  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   

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

  Financials     2,252        1,743        1,633   

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

  Information Technology     4,000        4,000        4,137   

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

  Consumer Discretionary     8,000        7,908        7,253   

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

  Healthcare     8,000        8,000        8,001   

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

  Financials   1,500        960        1,207   

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

  Financials   $ 2,000        869        1,195   

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

  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   

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

  Financials     1,919        1,133        1,219   

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

  Telecommunication Services     2,000        2,072        2,070   

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

  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   

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

  Consumer Discretionary     2,000        2,029        2,011   

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

  Financials     8,975        7,272        7,135   

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   

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

  Financials     4,000        2,774        2,900   

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/Other

        79,408        81,854   
                   

TOTAL INVESTMENTS—188.4%

      $ 715,514        733,580   
             

LIABILITIES IN EXCESS OF OTHER ASSETS—(88.4%)

          (344,348
             

NET ASSETS—100.0%

        $ 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 Board of Directors (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 9 and 10).

 

(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.

 

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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 March 31, 2011, the Company had two 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. 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 May 13, 2011, the Company has sold 73,461,431 shares (as adjusted for stock distributions) of common stock for gross proceeds of $757,142. As of May 13, 2011, the Company had raised total gross proceeds of $758,142, including approximately $1,000 contributed by the principals of the Company’s investment adviser in February 2008. During the three months ended March 31, 2011 and 2010, the Company sold 18,759,131 and 4,331,680 shares for gross proceeds of $199,296 and $44,524 at an average price per share of $10.62 and $10.28, respectively. The gross proceeds received during the three months ended March 31, 2011 and 2010 include reinvested stockholder distributions of $3,828 and $616, respectively. During the period from April 1, 2011 to May 13, 2011, the Company sold 13,140,678 shares of common stock for gross proceeds of $139,962 at an average price per share of $10.65.

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 of $18,140 and $4,259 for the three months ended March 31, 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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The December 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of

 

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Table of Contents

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)

 

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.

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 will be 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 three months ended March 31, 2011, the Company accrued an additional $3,271 in capital gains incentive fees based on the performance of its portfolio during such period, of which $1,129 was based on realized gains.

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 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.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

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 March 31, 2011 and 2010, FB Advisor earned $4,761 and $795, respectively, in base management fees. Management fees are paid on a quarterly basis in arrears. The Company paid $3,297 and $437, respectively, of these fees during the three months ended March 31, 2011 and 2010.

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 March 31, 2011, the Company accrued a capital gains incentive fee of $3,271 based on the performance of the Company’s portfolio, of which only $1,129 was based on realized gains. During the three months ended March 31, 2010, the Company accrued $386 in capital gains incentive fees, all of which were based on realized gains. During the three months ended March 31, 2011, the Company paid FB Advisor $1,396 in capital gains incentive fees earned during the year ended December 31, 2010.

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 shall be 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 be reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. During the three months ended March 31, 2011 and 2010, the Company incurred administrative services charges of $584 and $175, respectively, attributable to FB Advisor. Of these charges, $578 and $175, 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 $477 and $171, respectively, for the services incurred under this arrangement during the three months ended March 31, 2011 and 2010.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 4. Related Party Transactions (continued)

 

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 $1,084 and $181 for the three months ended March 31, 2011 and 2010, respectively. These costs have been 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.

The dealer manager for the Company’s public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Company’s affiliates. During the three months ended March 31, 2011 and 2010, FS2 retained $3,568 and $692, 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 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 $668, respectively, to FB Advisor and its affiliates during the three months ended March 31, 2011 and 2010, respectively. As of March 31, 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 provide investment advisory services to both the Company and FB Capital Partners, L.P. FB Capital Partners, L.P., which is owned by Mr. Forman, the Company’s chairman, president and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions and high net worth individuals. While neither FB Capital Partners, L.P. nor FB Advisor is making private corporate debt investments for clients other than the Company currently, FB Advisor 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.

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 months ended March 31, 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.

 

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Table of Contents

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 three months ended March 31, 2011 and 2010:

 

For the Three Months Ended

   Distribution  
   Per Share      Amount  

Fiscal 2010

     

March 31, 2010(1)

   $ 0.1860       $ 2,443   

Fiscal 2011

     

March 31, 2011

   $ 0.1929       $ 9,948   

 

(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 April 13, 2011, the Company’s board of directors declared two regular semi-monthly cash distributions of $0.032156 per share each, which were paid on April 29, 2011 to stockholders of record on April 14, 2011 and April 28, 2011, respectively. The Company’s board of directors also declared two special one-time cash distributions of $0.04 per share and $0.03 per share that were both paid on April 29, 2011, the first to stockholders of record on April 14, 2011 and the second to stockholders of record on April 29, 2011. On April 13, 2011, the Company’s board of directors determined to increase the amount of the regular semi-monthly cash distributions from $0.032156 per share to $0.033594 per share. The increase in the regular semi-monthly cash distributions commenced with the semi-monthly distributions declared on May 10, 2011, which are expected to be paid on May 31, 2011 to stockholders of record as of May 13, 2011 and May 30, 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.

 

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Table of Contents

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 following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the three months ended March 31, 2011 and 2010:

 

Source of Distribution

   Three Months Ended
March 31,
 
   2011     2010  
   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     7,965         80     1,134         46

Capital gains proceeds from the sale of assets

     1,983         20     1,309         54

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
                                  

Total

   $ 9,948         100   $ 2,443         100
                                  

 

(1) During the three months ended March 31, 2011 and 2010, 92% and 80%, respectively, of the Company’s gross investment income was attributable to cash interest earned and 8% and 20%, respectively, was attributable to non-cash accretion of discount and PIK interest.

The aggregate cost of the Company’s investments for federal income tax purposes totaled $871,974 and $715,695 as of March 31, 2011 and December 31, 2010, respectively. The aggregate net unrealized appreciation on a tax basis was $28,719 and $17,885 as of March 31, 2011 and December 31, 2010, respectively. The Company’s net investment income on a tax basis for the three months ended March 31, 2011 and 2010 was $7,965 and $1,134, respectively. The Company distributed all of its net investment income earned as of March 31, 2011 and 2010.

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, the reversal of interest income earned on a tax basis due to the required accretion of discount on a non-performing loan which was sold during the period, 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 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 three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
         2011             2010      

GAAP basis net investment income

   $ 6,016      $ 1,115   

Amortization of organizational costs

     (11     (11

Reversal of tax accretion of discount on investment due to sale

     (182     30   

Reversal of incentive fee accrual on unrealized gains

     2,142        —     
                

Tax basis net investment income

   $ 7,965      $ 1,134   
                

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 5. Distributions (continued)

 

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 declared on its 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 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.

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 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.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 5. Distributions (continued)

 

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

 

     March 31,
2011
    December, 31
2010
 

Distributable ordinary income

   $ 4,960      $ 1,290   

Incentive fee accrual on unrealized gains

     (6,205     (4,063

Unamortized organizational costs

     (546     (558

Unrealized appreciation on investments(1)

     28,719        17,885   
                
   $ 26,928      $ 14,554   
                

 

(1) As of March 31, 2011 and December 31, 2010, the gross unrealized appreciation on the Company’s investments was $30,995 and $20,136, respectively. As of March 31, 2011 and December 31, 2010, the gross unrealized depreciation on the Company’s investments was $2,276 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 March 31, 2011 and December 31, 2010:

 

     March 31, 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

   $ 502,153       $ 512,065         57   $ 473,881       $ 484,105         66

Senior Secured Loans—Second Lien

     191,939         200,628         22     131,960         135,962         19

Senior Secured Bonds

     41,836         43,673         5     30,265         31,659         4

Subordinated Debt/Other

     136,046         144,118         16     79,408         81,854         11
                                                    
   $ 871,974       $ 900,484         100   $ 715,514       $ 733,580         100
                                                    

 

(1) Amortized cost represents the original cost adjusted for the accretion of discounts 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.

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 March 31, 2011, the Company had four such investments, three of which have been fully funded and one with an unfunded commitment of $12,500.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 6. Investment Portfolio (continued)

 

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 March 31, 2011 and December 31, 2010:

 

Industry Classification

   March 31, 2011     December 31, 2010  
   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Consumer Discretionary

   $ 168,566         18.7   $ 129,749         17.6

Consumer Staples

     54,038         6.0     56,184         7.7

Energy

     80,103         8.9     69,048         9.4

Financials

     75,575         8.4     59,431         8.1

Healthcare

     83,898         9.3     63,460         8.7

Industrials

     126,416         14.0     96,762         13.2

Information Technology

     157,318         17.5     117,499         16.0

Materials

     57,645         6.4     46,832         6.4

Telecommunication Services

     84,017         9.3     81,675         11.1

Utilities

     12,908         1.5     12,940         1.8
                                  

Total

   $ 900,484         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.

 

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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 March 31, 2011 and December 31, 2010, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2011      December 31, 2010  
     Investments      Total Return Swap      Investments  

Level 1—Price quotations in active markets

   $ —         $ —         $ —     

Level 2—Significant other observable inputs

     —           —           —     

Level 3—Significant unobservable inputs

     900,484         208         733,580   
                          
   $ 900,484       $ 208       $ 733,580   
                          

The Company’s investments as of March 31, 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 and debt obligations and its subordinated debt investments by obtaining bid and ask prices from independent dealers. Except as described below, 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. Two subordinated debt investments, for which broker quotes were not available, were priced by an independent valuation firm who 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. One subordinated debt investment and two first lien senior secured loans, all of which were purchased near March 31, 2011, were valued at cost, as the Company’s board of directors determined that the cost of the respective investments was the best indication of fair value of such investments. 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 loan and debt obligations 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 receives from independent dealers and the 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 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 the 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.

 

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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 three months ended March 31, 2011 and 2010 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Three Months Ended March 31, 2011  
    Senior Secured
Loans—First Lien
    Senior Secured
Loans—Second Lien
    Senior Secured Bonds     Subordinated
Debt/Other
    Total  

Fair value at beginning of period

  $ 484,105      $ 135,962      $ 31,659      $ 81,854      $ 733,580   

Accretion of discount

    921        303        —          192        1,416   

Net realized gain (loss)

    3,259        999        516        879        5,653   

Net change in unrealized appreciation (depreciation)

    (325     4,705        442        5,623        10,445   

Purchases

    366,268        81,489        20,305        80,012        548,074   

Paid-in-kind interest

    —          —          —          —          —     

Sales and redemptions

    (342,163     (22,830     (9,249     (24,442     (398,684

Net transfers in or out of Level 3

    —          —          —          —          —     
                                       

Fair value at end of period

  $ 512,065      $ 200,628      $ 43,673      $ 144,118      $ 900,484   
                                       

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

         
  $ 2,127      $ 5,014      $ 913      $ 5,764      $ 13,818   
                                       
    For the Three Months Ended March 31, 2010  
    Senior Secured
Loans—First Lien
    Senior Secured
Loans—Second Lien
    Senior Secured Bonds     Subordinated
Debt/Other
    Total  

Fair value at beginning of period

  $ 45,780      $ 45,521      $ —        $ 9,291      $ 100,592   

Accretion of discount

    487        435        —          —          922   

Net realized gain

    854        690        —          393        1,937   

Net change in unrealized appreciation

    1,161        396        —          (73     1,484   

Purchases

    80,898        21,348        —          10,766        113,012   

Paid-in-kind interest

    —          20        —          42        62   

Sales and redemptions

    (16,179     (9,571     —          (4,659     (30,409

Net transfers in or out of Level 3

    —          —          —          —          —     
                                       

Fair value at end of period

  $ 113,001      $ 58,839      $ —        $ 15,760      $ 187,600   
                                       

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

  $ 1,652      $ 880      $ —        $ (73   $ 2,459   
                                       

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 8. Total Return Swap

On March 18, 2011, Arch Street, the Company’s newly-formed, wholly-owned financing subsidiary, entered into a total return swap, or TRS, for senior secured floating rate loans with Citibank, N.A., or Citibank.

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 market value of $200,000. 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.

A TRS is a commonly used form of financing arrangement that provides economic exposure similar to the exposure under Broad Street’s credit facility. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

Generally, pursuant to a TRS, 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 may effectively add leverage to the Company’s portfolio because, in addition to the Company’s total net assets, the Company would be subject to investment exposure on the amount of securities subject to the TRS.

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.

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. The terms of the TRS are governed by a set of agreements between Arch Street and Citibank, which collectively establish the TRS, and are collectively referred to herein as the TRS Agreement.

Pursuant to the terms of the TRS Agreement, Arch Street may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $200,000. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. 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. Arch Street may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS.

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

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 8. Total Return Swap (continued)

 

payment of an early termination fee to Citibank. 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.

As of March 31, 2011, the fair value of the TRS was $208. The fair value of the TRS is reflected as an unrealized gain 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 on total return swap. As of March 31, 2011, Arch Street had selected 17 underlying loans with a total notional amount of $88,441 and posted $24,131 in cash collateral held by Citibank, which is included in cash in the consolidated balance sheet. The following is a summary of the underlying loans subject to the TRS:

 

Underlying Loan

   Industry      Notional
Amount
 

Alliant Holdings LLC, L+500, 1.8% LIBOR Floor, 8/16/14

     Financials       $ 1,949   

Axcan Intermediate Holdings Inc. , L+400, 1.5% LIBOR Floor, 2/11/17

     Healthcare         9,921   

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

     Information Technology         1,775   

Carestream Health, Inc., L+350, 1.5% LIBOR Floor, 2/23/17

     Healthcare         4,843   

CPG International I Inc., L+450, 1.5% LIBOR Floor, 2/18/17

     Industrials         1,858   

Fairmount Minerals, Ltd., L+400, 1.3% LIBOR Floor, 3/11/17

     Materials         7,936   

Grifols, SA, L+425, 1.8% LIBOR Floor, 6/4/16

     Healthcare         4,355   

HarbourVest Partners L.P., L+475, 1.5% LIBOR Floor, 12/17/16

     Financials         11,265   

Hyland Software, L+425, 1.5% LIBOR Floor, 12/19/16

     Information Technology         3,990   

Intelsat Jackson Holdings S.A., L+375, 1.5% LIBOR Floor, 4/2/18

     Telecommunication Services         3,012   

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16

     Healthcare         1,667   

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

     Consumer Discretionary         1,881   

RBS Holdings, L+500, 1.5% LIBOR Floor, 3/21/17

     Consumer Discretionary         9,800   

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

     Financials         1,542   

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

     Industrials         6,831   

TravelCLICK Holdings, L+450, 1.5% LIBOR Floor, 2/11/17

     Industrials         7,896   

Vision Solutions, Inc., L+450, 1.5% LIBOR Floor, 9/20/16

     Information Technology         7,920   
           

TOTAL NOTIONAL AMOUNT

      $ 88,441   
           

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);

 

   

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;

 

   

the Company’s history in repurchasing shares or portions thereof; and

 

   

the condition of the securities markets.

 

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Table of Contents

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 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 three months ended March 31, 2011, the Company repurchased 99,633 shares at $9.59 per share for aggregate consideration totaling $955. On April 1, 2011, the Company repurchased 158,258 shares at $9.68 per share for aggregate consideration totaling $1,531.

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 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.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 10. Revolving Credit Facility (continued)

 

As of March 31, 2011, $337,606 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 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 March 31, 2011, $842 of such deferred financing costs have yet to be amortized to interest expense.

The effective interest rate under the credit facility was 2.42% on March 31, 2011. Interest is paid quarterly in arrears, and commenced August 20, 2010. The Company recorded interest expense of $2,193 and $33 for the three months ended March 31, 2011 and 2010, respectively, of which $206 and $31 related to the amortization of deferred financing costs. The Company paid $1,777 in interest expense for the three months ended March 31, 2011. The average borrowings under the credit facility for the three months ended March 31, 2011 were $331,696, with a weighted average interest rate of 2.40%.

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, (b) borrowings under the credit facility exceeding the applicable advance rates, (c) the purchase by Broad Street of certain ineligible assets, (d) the insolvency or bankruptcy of Broad Street or the Company, (e) the Company ceases to act as investment manager of Broad Street’s assets, (f) the decline of the Company’s net asset value below $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.

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.

 

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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 separate 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 March 31, 2011 and December 31, 2010:

 

Assets

   March 31, 2011
(Unaudited)
     December 31, 2010  

Investments, at fair value (amortized cost—$533,627 and $527,964, respectively)

   $ 547,554       $ 540,186   

Cash

     27,063         9,534   

Receivable for investments sold and repaid

     40,391         5,162   

Interest receivable

     3,210         2,360   

Deferred financing costs

     842         835   
                 

Total assets

   $ 619,060       $ 558,077   
                 
     

Liabilities

     

Payable for investments purchased

   $ 56,489       $ 48,947   

Credit facility payable

     337,606         297,201   

Due to FS Investment Corporation

     937         992   

Interest payable

     1,093         883   

Accrued expenses

     39         43   
                 

Total liabilities

     396,164         348,066   
                 

Member’s equity

     222,896         210,011   
                 

Total liabilities and member’s equity

   $ 619,060       $ 558,077   
                 

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 12. Financial Highlights

The following is a schedule of financial highlights for the quarter ended March 31, 2011 and the year ended December 31, 2010:

 

     Three Months Ended
March 31, 2011
    Year Ended
December 31, 2010
 

Per Share Data(1):

    

Net asset value, beginning of period

   $ 9.42      $ 9.10   

Results of operations(2)

    

Net investment income

     0.12        0.40   

Net realized and unrealized appreciation on investments and loss on foreign currency

     0.33        0.81   
                

Net increase in net assets resulting from operations

     0.45        1.21   
                

Stockholder distributions(3)

    

Distributions from net investment income

     (0.15     (0.55

Distributions from net realized gain on investments

     (0.04     (0.32
                

Net decrease in net assets resulting from stockholder distributions

     (0.19     (0.87
                

Capital share transactions

    

Issuance of common stock(4)

     0.02        0.10   

Offering costs(2)

     (0.02     (0.07

Reimbursement to investment adviser(2)

     —          (0.10

Capital contributions of investment adviser(2)

     —          0.05   
                

Net increase (decrease) in net assets resulting from capital share transactions

     —          (0.02
                

Net asset value, end of period

   $ 9.68      $ 9.42   
                

Shares outstanding, end of period

     59,992,884        41,332,661   
                

Total return(5)

     4.81     13.08
                

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 580,723      $ 389,232   
                

Ratio of net investment income to average net assets(6)

     1.25     4.37
                

Ratio of operating expenses to average net assets(6)

     2.48     9.89
                

Portfolio turnover

     47.42     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.

 

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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 three months ended March 31, 2011 was calculated by taking the net asset value per share as of March 31, 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 monthly net assets are used for this calculation.

 

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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 and working capital; and

 

   

the timing of cash flows, if any, from the operations of our portfolio companies.

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.

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 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.

 

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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 Three Months Ended March 31, 2011 and 2010

During the three months ended March 31, 2011, we made investments in portfolio companies totaling $548,074. During the same period we sold positions totaling $252,903 and received principal repayments of $145,781. During the three months ended March 31, 2010, we made investments in portfolio companies totaling $125,067. During the same period we sold positions totaling $16,707 and received principal repayments of $17,637.

As of March 31, 2011 and December 31, 2010, our investment portfolio consisted of interests in 143 and 144 portfolio companies, respectively, for a total fair value of $900,484 and $733,580, respectively. The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2011 and December 31, 2010:

 

     March 31, 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

   $ 502,153       $ 512,065         57   $ 473,881       $ 484,105         66

Senior Secured Loans—Second Lien

     191,939         200,628         22     131,960         135,962         19

Senior Secured Bonds

     41,836         43,673         5     30,265         31,659         4

Subordinated Debt/Other

     136,046         144,118         16     79,408         81,854         11
                                                    
   $ 871,974       $ 900,484         100   $ 715,514       $ 733,580         100
                                                    

 

(1) Amortized cost represents the original cost adjusted for the accretion of discounts on debt investments.

As of March 31, 2011, the portfolio companies that comprise our portfolio had an average annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $273.3 million. The investments in our portfolio were purchased at an average price of 94.1% of par value, 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 10.4% 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.

 

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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 March 31, 2011, we held four such investments, three of which have been fully funded and one of which has an unfunded commitment of $12,500. We maintain sufficient cash on hand to fund such unfunded loan commitment 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 March 31, 2011 and December 31, 2010:

 

Industry Classification

   March 31, 2011     December 31, 2010  
   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Consumer Discretionary

   $ 168,566         18.7   $ 129,749         17.6

Consumer Staples

     54,038         6.0     56,184         7.7

Energy

     80,103         8.9     69,048         9.4

Financials

     75,575         8.4     59,431         8.1

Healthcare

     83,898         9.3     63,460         8.7

Industrials

     126,416         14.0     96,762         13.2

Information Technology

     157,318         17.5     117,499         16.0

Materials

     57,645         6.4     46,832         6.4

Telecommunication Services

     84,017         9.3     81,675         11.1

Utilities

     12,908         1.5     12,940         1.8
                                  

Total

   $ 900,484         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

1

   Investment exceeding expectations and/or capital gain expected.

2

   Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.

3

   Performing investment requiring closer monitoring.

4

   Underperforming investment—some loss of interest or dividend expected, but still expecting a positive return on investment.

5

   Underperforming investment with expected loss of interest and some principal.

 

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The following table shows the distribution of our debt investments on the 1 to 5 investment rating scale at fair value as of March 31, 2011 and December 31, 2010:

 

     March 31, 2011     December 31, 2010  

Investment Rating

   Investments
at Fair
Value
     Percentage
of Portfolio
    Investments
at Fair
Value
     Percentage
of Portfolio
 

1

   $ 7,188         1   $ 38,899         5

2

     875,265         97     682,861         93

3

     18,031         2     11,384         2

4

                    436           

5

                              
                                  
   $ 900,484         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

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 March 31, 2011 and March 31, 2010

Revenues

We generated investment income of $17,924 and $3,134 for the three months ended March 31, 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. Such revenues represent $16,508 and $2,143 of cash interest earned as well as $1,416 and $991 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 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 may also generate revenues in the form of dividends on the equity or other securities we may hold. Since commencing operations, we have not owned any equity interests in our portfolio companies and, therefore, did not receive dividend payments or other fees from our portfolio companies.

In addition, we may generate revenues in the form of commitment, 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 months ended March 31, 2011 or 2010.

 

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Expenses

Our primary operating expenses are the payment of advisory fees and other expenses under the investment advisory and administrative services agreement 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 shall 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 will be 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, nor 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;

 

   

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.

 

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Our total operating expenses were $11,908 and $2,019 for the three months ended March 31, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $4,761 and $795 for the three months ended March 31, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $584 and $175 for the three months ended March 31, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. We have recorded incentive fee expense of $3,271 and $386 for the three months ended March 31, 2011 and 2010, respectively. The incentive fee expense for the three months ended March 31, 2011 includes $2,142 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 $2,193 and $33 for the three months ended March 31, 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 $222 and $155 for the three months ended March 31, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $295 and $179 for the three months ended March 31, 2011 and 2010, respectively.

Our other general and administrative expenses totaled $582 and $296 for the three months ended March 31, 2011 and 2010, respectively, and consisted of the following:

 

     Three Months Ended
March 31,
 
         2011              2010      

Expenses associated with our independent audit and related fees

   $ 90       $ 80   

Compensation of our chief financial officer and our chief compliance officer(1)

     42         38   

Legal fees

     53         74   

Printing fees

     83         3   

Fees paid to our independent directors

     132         46   

Other

     182         55   
                 

Total

   $ 582       $ 296   
                 

 

(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 future periods, 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 general and administrative 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 three months ended March 31, 2011 and 2010, the ratio of our operating expenses to our average net assets was 2.48% and 2.00%, respectively. We generally expect our general and administrative 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

 

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such as LIBOR and offerings of our securities, among other factors. The higher ratio of operating expenses to average net assets during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 can primarily be attributed to (i) a change in our methodology during the fourth quarter 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 the first quarter of 2010. Without such expenses, our ratio of operating expenses to average net assets would have been approximately 1.58% during the three months ended March 31, 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 March 31, 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 $6,016 ($0.12 per share) and $1,115 ($0.08 per share) for the three months ended March 31, 2011 and 2010, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $252,903 and $145,781, respectively, during the three months ended March 31, 2011, from which we realized net gains of $5,653. We sold investments and received principal repayments of $16,707 and $17,637, respectively, during the three months ended March 31, 2010, from which we realized net gains of $1,989.

Net Change in Unrealized Appreciation on Investments and Unrealized Gain/Loss on Foreign Currency

For the three months ended March 31, 2011, the net change in unrealized appreciation on investments totaled $10,393 and the net change in unrealized gain/loss on foreign currency totaled $52. The change in unrealized appreciation on our TRS was $208 during this period. For the three months ended March 31, 2010, the net change in unrealized appreciation on investments totaled $1,776 and the net change in unrealized gain/loss on foreign currency totaled ($11). The unrealized appreciation on our investments during both periods was primarily driven by general improvement in the credit markets. In addition, the increase in our unrealized appreciation between the first quarter of 2010 and the first quarter of 2011 can be attributed to the growth of our portfolio since commencing operations in 2009.

Net Increase in Net Assets Resulting from Operations

For the three months ended March 31, 2011, the net increase in net assets resulting from operations was $22,322 ($0.45 per share) compared to a net increase in net assets resulting from operations of $4,869 ($0.37 per share) during the three months ended March 31, 2010.

 

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Financial Condition, Liquidity and Capital Resources

During the three months ended March 31, 2011, we sold 18,759,131 shares of our common stock for gross proceeds of $199,296. The gross proceeds received during the three months ended March 31, 2011 include reinvested stockholder distributions of $3,828. During the three months ended March 31, 2011, we also incurred offering costs of $1,084 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. The sales commissions and dealer manager fees related to the sale of our common stock were $18,140 for the three months ended March 31, 2011. These sales commissions and fees include $3,568 retained by the dealer manager, FS2 Capital Partners, LLC, or FS2, which is one of our affiliates.

As of May 13, 2011, we have sold 73,461,431 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $757,142 since commencing our continuous public offering. Including the seed capital contributed by Messrs. Forman and Adelman, we have raised gross proceeds of $758,142 to date.

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 debt securities of private U.S. 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 company election and our election to be taxed as a RIC.

As of March 31, 2011, we had $87,448 in cash, which we have invested in interest bearing accounts. As of March 31, 2011, $24,131 of the cash balance was 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. During the three months ended March 31, 2011, we repurchased 99,633 shares at $9.59 per share for aggregate consideration totaling $955. On April 1, 2011, we repurchased 158,258 shares at $9.68 per share for aggregate consideration totaling $1,531.

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.

 

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In connection with entering into the original credit facility, and from time to time thereafter, we have 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.

As of March 31, 2011, $337,606 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 in connection with obtaining and amending the credit facility, which we have recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the credit facility. As of March 31, 2011, $842 of such deferred financing costs have yet to be amortized to interest expense.

The effective interest rate under the credit facility was 2.42% on March 31, 2011. Interest is paid quarterly in arrears and commenced August 20, 2010. We recorded interest expense of $2,193 and $33 for the three months ended March 31, 2011 and 2010, respectively, of which $206 and $31 related to the amortization of deferred financing costs. We paid $1,777 in interest expense for the three months ended March 31, 2011. The average borrowings under the credit facility for the three months ended March 31, 2011 were $331,696, with a weighted average interest rate of 2.40%.

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 or 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, (b) borrowings under the credit facility exceeding the applicable advance rates, (c) the purchase by Broad Street of certain ineligible assets, (d) the insolvency or bankruptcy of Broad Street or us, (e) we cease to act as investment manager of Broad Street’s assets, (f) the decline of our net asset value below $50,000 and (g) fraud or other illicit acts by us or 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. Broad Street was in compliance with the terms of the credit facility as of March 31, 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.

Total Return Swap

On March 18, 2011, Arch Street, our newly-formed, wholly-owned financing subsidiary, entered into a total return swap, or TRS, for senior secured floating rate loans with Citibank.

 

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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 market value of $200,000. 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.

A TRS is a commonly used form of financing arrangement that provides economic exposure similar to the exposure under Broad Street’s credit facility. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

Generally, pursuant to a TRS, 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 may effectively add leverage to our portfolio because, in addition to our total net assets, we would be subject to investment exposure on the amount of securities 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.

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. The terms of the TRS are governed by a set of agreements between Arch Street and Citibank, which collectively establish the TRS, and are collectively referred to herein as the TRS Agreement.

Pursuant to the terms of the TRS Agreement, Arch Street may select a portfolio of loans with a maximum market value (determined at the time each such loan becomes subject to the TRS) of $200,000. Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. 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. Arch Street may be required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS.

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. 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.

As of March 31, 2011, the fair value of the TRS was $208. The fair value of the TRS is reflected as an unrealized gain 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 on total return swap. As of March 31, 2011, Arch Street had selected 17 underlying loans with a total notional amount of $88,441 and posted $24,131 in cash collateral held by Citibank, which is included in cash in the consolidated balance sheet.

 

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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.

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 distribution will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 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 three months ended March 31, 2011 and 2010:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2010

     

March 31, 2010(1)

   $ 0.1860       $ 2,443   

Fiscal 2011

     

March 31, 2011

   $ 0.1929       $ 9,948   

 

(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 April 13, 2011, our board of directors declared two regular semi-monthly cash distributions of $0.032156 per share each, which were paid on April 29, 2011 to stockholders of record on April 14, 2011 and April 28, 2011, respectively. Our board of directors also declared two special one-time cash distributions of $0.04 per share and $0.03 per share that were both paid on April 29, 2011, the first to stockholders of record on April 14, 2011 and the second to stockholders of record on April 29, 2011. On April 13, 2011, our board of directors determined to increase the amount of the regular semi-monthly cash distributions from $0.032156 per share to $0.033594 per share. The increase in the regular semi-monthly cash distributions commenced with the semi-monthly distributions declared on May 10, 2011, which are expected to be paid on May 31, 2011 to stockholders of record as of May 13, 2011 and May 30, 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.

 

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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. The following table reflects, for tax purposes, the sources of the cash distributions that we have paid on our common stock during the three months ended March 31, 2011, and 2010:

 

     Three Months Ended March 31,  
     2011     2010  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —                $ —             

Borrowings

     —                  —             

Net investment income(1)

     7,965         80     1,134         46

Capital gains proceeds from the sale of assets

     1,983         20     1,309         54

Non-capital gains proceeds from the sale of assets

     —                  —             

Expense reimbursement from sponsor

     —                  —             
                                  

Total

   $ 9,948         100   $ 2,443         100
                                  

 

(1) During the three months ended March 31, 2011 and 2010, 92% and 80%, respectively, of our gross investment income was attributable to cash interest earned and 8% and 20%, respectively, was attributable to non-cash accretion of discount and PIK interest.

The aggregate cost of our investments for federal income tax purposes totaled $871,974 and $715,695 as of March 31, 2011 and December 31, 2010, respectively. The aggregate net unrealized appreciation on a tax basis was $28,719 and $17,885 as of March 31, 2011 and December 31, 2010, respectively. Our net investment income on a tax basis for the three months ended March 31, 2011 and 2010 was $7,965 and $1,134, respectively. We distributed all of our net investment income earned as of March 31, 2011 and December 31, 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, the reversal of interest income earned on a tax basis due to the required accretion of discount on a non-performing loan which was sold during the period, 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 three months ended March 31, 2011 and 2010:

 

     Three Months Ended March 31,  
         2011             2010      

GAAP basis net investment income

   $ 6,016      $ 1,115   

Amortization of organizational costs

     (11     (11

Reversal of tax accretion of discount on investment due to sale

     (182     30   

Reversal of incentive fee accrual on unrealized gains

     2,142        —     
                

Tax basis net investment income

   $ 7,965      $ 1,134   
                

 

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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 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 distribution 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 March 31, 2011 and December 31, 2010, the components of accumulated earnings on a tax basis were as follows:

 

     March 31,
2011
    December, 31
2010
 

Distributable ordinary income

   $ 4,960      $ 1,290   

Incentive fee accrual on unrealized gains

     (6,205     (4,063

Unamortized organizational costs

     (546     (558

Unrealized appreciation on investments(1)

     28,719        17,885   
                
   $ 26,928      $ 14,554   
                

 

(1) As of March 31, 2011 and December 31, 2010, the gross unrealized appreciation on our investments was $30,995 and $20,136, respectively. As of March 31, 2011 and December 31, 2010, the gross unrealized depreciation on our investments was $2,276 and $2,251, respectively.

 

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Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating plans occur we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below:

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.

 

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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 March 31, 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 loan and debt obligations and our subordinated debt investments by obtaining bid and ask prices from independent dealers. Except as described below, 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. Two subordinated debt investments, for which broker quotes were not available, were priced by an independent valuation firm who 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. One subordinated debt investment and two first lien senior secured loans, all of which were purchased near March 31, 2011, were valued at cost, as our board of directors determined that the cost of the respective investments was the best indication of fair value of such investments. 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 loan 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

 

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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 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 will be 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. During the three months ended March 31, 2011, we accrued an additional $3,271 in capital gains incentive fees based on the performance of our portfolio during such period, of which $1,129 was based on realized gains.

 

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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 March 31, 2011 and 2010, we incurred $4,761 and $795, respectively, in base management fees and $584 and $175, 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 March 31, 2011 and 2010, we accrued $1,129 and $386, respectively, in capital gains incentive fees based on realized gains in our investment portfolio that are payable to FB Advisor under the investment advisory and administrative services agreement. We have also recorded $2,142 in incentive fees based on the unrealized gains in our investment portfolio as of March 31, 2011; however, such fees are not due and payable to FB Advisor unless and until such time as the gains become realized.

As of March 31, 2011, $337,606 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.

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 at March 31, 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)

   $ 337,606       $ 337,606        —           —           —     

 

(1) At March 31, 2011, $2,394 remained unused under the revolving credit 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

 

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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.

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 gains, if applicable. We commenced accruing fees under the agreement on January 2, 2009, upon the commencement of operations. During the three months ended March 31, 2011 and 2010, FB Advisor earned $4,761 and $795, respectively, in base management fees. Management fees are paid on a quarterly basis in arrears. We paid $3,297 and $437 of these fees during the three months ended March 31, 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 March 31, 2011, we accrued a capital gains incentive fee of $3,271 based on the performance of our portfolio, of which $1,129 was based on realized gains. During the three months ended March 31, 2010, we accrued a capital gains incentive fee of $386 based on the performance of our portfolio, all of which was based on realized gains. We did not accrue a capital gains incentive fee on unrealized gains during the three months ended March 31, 2010. During the three months ended March 31, 2011, we paid FB Advisor $1,396 in capital gains incentive fees earned during the year ended December 31, 2010. We also reimburse FB Advisor for expenses necessary for its performance of services related to our administration and operation, provided that such reimbursement shall be 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 will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. During the three months ended March 31, 2011 and 2010, we incurred administrative services charges of $584 and $175, respectively, attributable to FB Advisor. Of these charges, $578 and $175, 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 $477 and $171, respectively, for the services incurred under this arrangement during the three months ended March 31, 2011 and 2010.

Franklin Square Holdings funded offering costs and other expenses in the amount of $1,084 and $181 for the three months ended March 31, 2011 and 2010, respectively. We recorded these costs as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statement and the other expenses were charged to expense as incurred.

The dealer manager for our public offering is FS2, which is one of our affiliates. During the three months ended March 31, 2011 and 2010, FS2 retained $3,568 and $692, 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 $2.5 million, 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 $688, respectively, to FB Advisor and its affiliates during the three months ended March 31, 2011 and 2010. As of March 31, 2011, no amounts were payable to FB Advisor and its affiliates under this arrangement. The reimbursements are recorded as a reduction of capital.

 

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Members of FB Advisor’s senior management team 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, president and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions and high net worth individuals. While neither FB Capital Partners, L.P. nor FB Advisor is making private corporate debt investments for clients other than us currently, FB Advisor 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.

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 three months ended March 31, 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.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are subject to financial market risks, including changes in interest rates. As of March 31, 2011, all but 24 of our portfolio investments 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 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. Pursuant to 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 $200,000. We expect any future credit facilities or total return swap agreements 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 March 31, 2011:

 

LIBOR Basis Point Change

   Interest
Income(1)
     Interest
Expense
    Net Interest
Income
 

Down 30 basis points

   $
87,545
  
   $ (8,147   $ 79,398   

Up 100 basis points

     89,112         (12,567     76,545   

Up 200 basis points

     94,146         (15,967     78,179   

Up 300 basis points

     101,788         (19,367     82,421   

 

(1) Includes the net effect of the change in interest rates on the unrealized appreciation/depreciation on the TRS.

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 materially adverse effect on our business, financial condition and results of operations. During the three months ended March 31, 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

 

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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 SEC Rule 13a-15(b), 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 March 31, 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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended March 31, 2011, we issued 376,389 shares of common stock under our distribution reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act of 1933.

 

Item 3. Defaults upon Senior Securities.

Not applicable.

 

Item 4. Reserved.

 

Item 5. Other Information.

Not applicable.

 

Item 6. Exhibits.

 

  3.1   Articles of Amendment and Restatement of FS Investment Corporation. (Incorporated by reference to Exhibit (a)(2) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
  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.)
  4.1   Form of Subscription Agreement. (Incorporated by reference to Appendix A filed with final prospectus filed pursuant to Rule 497 (File No. 333-149374) filed on May 12, 2011.)
  4.2   Amended and Restated Distribution Reinvestment Plan. (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.)
 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.)
 10.2   First Amendment to the Investment Advisory and Administrative Services Agreement. (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.)

 

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 10.3   Investment Sub-advisory Agreement 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.)
 10.4   Form of Dealer Manager Agreement by and between the Company and FS2 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.)
 10.5   Form of Selected Dealer Agreement (Included as Appendix A to the Form of Dealer Manager Agreement). (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.)
 10.6   Custodian Agreement by and between the Company and PFPC Trust 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.)
 10.7   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.)
 10.8   Amended and Restated Credit Agreement by and among Broad Street Funding LLC, Deutsche Bank AG, New York Branch and the other lender 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 filed on February 1, 2011.)
 10.9   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 filed on March 16, 2010.)
10.10   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 filed on July 19, 2010.)
10.11   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 filed on March 16, 2010.)
10.12   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 filed on February 1, 2011.)
10.13   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.A. (Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on March 24, 2011.)
10.14   Confirmation Letter Agreement, dated as of March 18, 2011, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on March 24, 2011.)
10.15   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 filed on March 24, 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.

 

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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 May 16, 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)

 

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