FS Investment Corp--Prospectus Supplement
Table of Contents

Filed pursuant to Rule 497
File No. 333-174784

LOGO

FS INVESTMENT CORPORATION

 

 

Supplement dated November 14, 2011

to

Prospectus dated November 1, 2011

 

 

This supplement contains information that amends, supplements or modifies certain information contained in the Prospectus of FS Investment Corporation dated November 1, 2011, as supplemented and amended (as so supplemented and amended, the “Prospectus”).

You should carefully consider the “Risk Factors” beginning on page 30 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 November 11, 2011, we have sold 142,553,249 shares (as adjusted for stock distributions) of our common stock for gross proceeds of approximately $1,493.5 million. As of November 11, 2011, we had raised total gross proceeds of approximately $1,494.5 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 August 16, 2011 through and including our semi-monthly closing on November 1, 2011:

 

Date of Semi–Monthly Closing

   Shares Sold      Average Price
Per Share
     Gross Proceeds  

August 16, 2011

     5,547,807       $ 10.68       $ 59,275,683   

September 1, 2011(1)

     7,092,813         10.66         75,585,246   

September 16, 201

     5,501,645         10.67         58,722,518   

October 3, 2011(2)

     5,532,469         10.55         58,372,742   

October 17, 2011

     4,768,603         10.57         50,415,735   

November 1, 2011(3)

     7,215,040         10.54         76,042,434   
  

 

 

    

 

 

    

 

 

 
     35,658,377       $ 10.61       $ 378,414,358   
  

 

 

    

 

 

    

 

 

 

 

(1) The number of shares sold and gross proceeds for our September 1, 2011 semi-monthly closing include 347,024 shares purchased through our distribution reinvestment plan at an average price per share of $10.21, for gross proceeds of $3,543,985.

 

(2) The number of shares sold and gross proceeds for our October 3, 2011 semi-monthly closing include 393,613 shares purchased through our distribution reinvestment plan at an average price per share of $10.12, for gross proceeds of $3,982,382. Pursuant to our share repurchase program, we purchased a total of approximately 121,089 shares of our common stock on October 3, 2011 at a price of $9.585 per share (an amount equal to 90% of our October 3, 2011 public offering price of $10.65 per share) for aggregate consideration totaling approximately $1,160,634.

 

(3) The number of shares sold and gross proceeds for our November 1, 2011 semi-monthly closing include 562,484 shares purchased through our distribution reinvestment plan at an average price per share of $10.12, for gross proceeds of $5,690,930.

 

1


Table of Contents

Portfolio Update

As of September 30, 2011, our investment portfolio consisted of interests in 164 portfolio companies with an average annual EBITDA of approximately $413.0 million. As of September 30, 2011, the investments in our portfolio were purchased at an average price of 94.0% of par or stated value, as applicable, the weighted average credit rating of our portfolio was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.7% based upon the purchase price of our investments. We intend to continue to add securities to our portfolio as our offering progresses. Our investment portfolio as of September 30, 2011 can be found in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, a copy of which has been included in this supplement.

 

2


Table of Contents

The tables below show portfolio investments that were sold or experienced a repayment in excess of 1% of a position’s value between July 1, 2011 and September 30, 2011.

 

Security

  Original Cost     Disposition
Price
    Transaction
Type
 

Academy, Ltd., 9.3%, 8/1/19

  $ 330,000      $ 336,600        Sale   

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

  $ 2,810,863      $ 2,803,765        Sale   

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

  $ 2,125,902      $ 2,895,661        Sale   

Cengage Learning Acquisitions, Inc., L+225, 7/3/14

  $ 797,500      $ 840,000        Sale   

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

  $ 1,700,533      $ 1,702,680        Sale   

HCA Inc., 7.3%, 9/15/20

  $ 3,066,313      $ 3,075,000        Sale   

Houghton International Inc., L+400, 2.0% LIBOR Floor, 3/1/16

  $ 1,764,725      $ 1,756,514        Sale   

NRG Energy, Inc., 8.3%, 9/1/20

  $ 2,850,000      $ 3,000,000        Sale   

OSI Restaurant Partners, LLC, L+225, 6/14/14

  $ 4,842,604      $ 5,083,689        Sale   

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

  $ 2,209,438      $ 2,002,103        Sale   

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

  $ 1,960,000      $ 2,000,000        Sale   

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

  $ 3,750,000      $ 3,000,000        Sale   

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

  $ 4,716,250      $ 4,740,313        Sale   

 

Security

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

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

    74.0     100.0   $ 10,999,999        Paydown   

Airborne Tactical Advantage Co., Common Equity

    100.0     100.0   $ 250,000        Paydown   

Airborne Tactical Advantage Co., Common Equity

    100.0     100.0   $ 1,249,999        Paydown   

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

    98.2     100.0   $ 2,092,437        Paydown   

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

    98.8     101.0   $ 401,108        Paydown   

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

    100.0     100.0   $ 250,000        Paydown   

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

    99.0     100.0   $ 227,368        Paydown   

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

    99.5     100.0   $ 4,974,996        Paydown   

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

    100.5     100.0   $ 201,947        Paydown   

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

    89.5     100.0   $ 6,751,731        Paydown   

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

    95.6     100.0   $ 125,011        Paydown   

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

    99.3     100.0   $ 397,727        Paydown   

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

    98.7     100.0   $ 269,231        Paydown   

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

    99.1     100.0   $ 55,212        Paydown   

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

    99.8     100.0   $ 149,790        Paydown   

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

    99.3     100.0   $ 180,626        Paydown   

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

    99.2     100.0   $ 112,121        Paydown   

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

    95.8     100.0   $ 3,996,231        Paydown   

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

    99.1     100.0   $ 101,796        Paydown   

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

    98.2     100.0   $ 45,455        Paydown   

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

    100.0     103.0   $ 15,515,826        Paydown   

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

    99.0     100.0   $ 125,000        Paydown   

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

    100.0     100.0   $ 175,363        Paydown   

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

    99.6     100.0   $ 315,333        Paydown   

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

    98.6     100.0   $ 250,000        Paydown   

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

    98.8     100.0   $ 86,333        Paydown   

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

    92.5     100.0   $ 12,509,166        Paydown   

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

    99.1     100.0   $ 142,625        Paydown   

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

    97.8     100.0   $ 7,344,500        Paydown   

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

    96.5     100.0   $ 673,991        Paydown   

Star West Generation LLC, 11.0% PIK, 5/17/18

    102.0     102.0   $ 49,351,578        Paydown   

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

    99.5     100.0   $ 769,231        Paydown   

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

    98.7     100.0   $ 436,773        Paydown   

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

    99.1     100.0   $ 318,607        Paydown   

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

    100.0     100.0   $ 10,684,494        Paydown   

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

    65.0     78.0   $ 13,700,152        Paydown   

 

(1) As a percentage of par value (for debt investments) or a percentage of cost (for equity investments).

 

3


Table of Contents

Prospectus Summary

This supplement supplements and amends the section of the Prospectus entitled “Prospectus Summary—Distribution Reinvestment Plan” by adding the following after the sixth sentence of such section:

On November 8, 2011, we amended and restated our distribution reinvestment plan. Under the amended and restated distribution reinvestment plan, your reinvested distributions will purchase shares at a price equal to 90% of the price at which shares are sold in the offering at the semi-monthly closing immediately following the distribution payment date. The amended and restated distribution reinvestment plan will be effective as of, and will first apply to the reinvestment of cash distributions paid on or after, January 1, 2012.

Investment Objectives and Strategy

This supplement supplements and amends the section of the Prospectus entitled “Investment Objectives and Strategy—Operating and Regulatory Structure” by replacing the second sentence of the second paragraph of such section in its entirety with the following:

FB Advisor has contracted with State Street Bank and Trust Company to provide various accounting and administrative services.

Management

This supplement supplements and amends the section of the Prospectus entitled “Management—Board of Directors and Executive Officers” by replacing the first sentence of the first paragraph of such section in its entirety with the following:

Our board of directors consists of ten members, six of whom are not “interested persons” of us or FB Advisor as defined in Section 2(a)(19) of the 1940 Act.

This supplement further supplements and amends the section of the Prospectus entitled “Management—Board of Directors and Executive Officers” by adding the following immediately after the second paragraph of such section:

On November 8, 2011, our board of directors elected Governor Thomas J. Ridge as a new member of our board of directors, effective as of such date. Governor Ridge was appointed to serve for a term expiring at our 2012 annual meeting of stockholders. Governor Ridge has not been elected to serve as a member of our board of directors pursuant to any agreement or understanding with us or any other person.

This supplement supplements and amends the section of the Prospectus entitled “Management—Board of Directors and Executive Officers—Directors” by adding the following to the table of such section at the end of the subheading “Independent Directors”:

 

NAME

   AGE      DIRECTOR SINCE     EXPIRATION OF TERM  

Thomas J. Ridge

     66         2011     2012   

 

* Effective November 8, 2011.

This supplement supplements and amends the section of the Prospectus entitled “Management—Board of Directors and Executive Officers—Independent Directors” by adding the following at the end of such section:

Thomas J. Ridge is President and Chief Executive Officer of Ridge Global LLC, a global strategic consulting company. He has held that position since July 2006. He served as Secretary of the United States Department of Homeland Security from January 2003 through January 2005, and Assistant to the President for Homeland Security (an Executive Office created by President George W. Bush) from October 2001 through

 

4


Table of Contents

December 2002. He served as Governor of the Commonwealth of Pennsylvania from January 1995 through October 2001 and in the U.S. House of Representatives from January 1983 through January 1995. He is also a director of The Hershey Company since November 2007, serving on the finance and risk management and governance committees, Exelon Corporation since May 2005, serving on the energy delivery oversight committee and the risk oversight committee, Brightpoint, Inc. since September 2009, serving on the strategy committee, and Geospatial Holdings, Inc. since April 2010. Governor Ridge previously served as a director of Vonage Holdings Corp. from August 2005 through April 2010, where he served on the nominating and governance and compensation committees. He also previously served as a director of Home Depot Corporation from May 2005 to May 2007, where he served on the nominating and corporate governance committee and on the information technology advisory council. Governor Ridge holds a bachelor’s degree, cum laude, from Harvard University and a Juris Doctor degree from The Dickinson School of Law of The Pennsylvania State University.

Governor Ridge has significant experience in governmental service at the federal and state level, has served as a member of various boards for publicly-traded companies and is a recognized leader in both government and industry. This experience has provided Governor Ridge, in the opinion of our board of directors, with experience and insight which is beneficial to us.

This supplement supplements and amends the section of the Prospectus entitled “Management—Board of Directors and Executive Officers—Compensation of Directors” by replacing the third sentence of the second paragraph of such section in its entirety with the following:

These directors are Messrs. Chandler, Frank, Gravina, Hagan, Harrow, Heller, Mendelson and Ridge.

Investment Advisory and Administrative Services Agreement

This supplement supplements and amends the section of the Prospectus entitled “Investment Advisory and Administrative Services Agreement—Board Approval of the Investment Advisory and Sub-Advisory Agreements” by replacing the third sentence of such section in its entirety with the following:

In November 2011, the board of directors re-approved both the investment advisory and administrative services agreement and the investment sub-advisory agreement and extended their respective terms for a period of twelve months commencing January 1, 2012, subject to earlier termination in accordance with their terms.

Distribution Reinvestment Plan

This supplement supplements and amends the section of the Prospectus entitled “Distribution Reinvestment Plan” by adding the following after the third paragraph of such section:

On November 8, 2011, we amended and restated our distribution reinvestment plan. Under the amended and restated distribution reinvestment plan, your reinvested distributions will purchase shares at a price equal to 90% of the price at which shares are sold in the offering at the semi-monthly closing immediately following the distribution payment date. The amended and restated distribution reinvestment plan will be effective as of, and will first apply to the reinvestment of cash distributions paid on or after, January 1, 2012.

Description of Our Securities

This supplement supplements and amends the section of the Prospectus entitled “Description of Our Securities—Number of Directors; Vacancies; Removal” by replacing the first sentence of the third paragraph of such section in its entirety with the following:

We currently have a total of ten members of the board of directors, six of whom are independent directors.

 

5


Table of Contents

Custodian, Transfer and Distribution Paying Agent and Registrar

This supplement supplements and amends the section of the Prospectus entitled “Custodian, Transfer and Distribution Paying Agent and Registrar” by replacing such section in its entirety with the following:

Our securities are held under a custody agreement by State Street Bank and Trust Company. The address of the custodian is: One Lincoln Street, Boston, Massachusetts 02111. DST Systems, Inc. acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 1055 Broadway, Ninth Floor, Kansas City, Missouri 64105-1594, telephone number: (877) 628-8575.

 

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 SEPTEMBER 30, 2011.

 

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

COMMISSION FILE NUMBER: 814-00757

 

 

FS Investment Corporation

(Exact name of registrant as specified in its charter)

 

 

 

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

Cira Centre

2929 Arch Street, Suite 675

Philadelphia, Pennsylvania 19104

(Address of principal executive office)

(215) 495-1150

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer     ¨    Accelerated filer     ¨
Non-accelerated filer     x (Do not check if a smaller reporting company)    Smaller reporting company     ¨

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

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

The issuer has 142,002,321 shares of common stock outstanding as of November 11, 2011.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS

     1   
 

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

     1   
 

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010

     2   
 

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

     3   
 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September  30, 2011 and 2010

     4   
 

Consolidated Schedules of Investments as of September 30, 2011 (Unaudited) and December 31, 2010

     5   
 

Notes to Unaudited Consolidated Financial Statements

     14   

ITEM 2.

 

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

     36   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     60   

ITEM 4.

 

CONTROLS AND PROCEDURES

     61   

PART II—OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     62   

ITEM 1A.

 

RISK FACTORS

     62   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     62   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     62   

ITEM 4.

 

RESERVED

     62   

ITEM 5.

 

OTHER INFORMATION

     62   

ITEM 6.

 

EXHIBITS

     63   
 

SIGNATURES

     66   


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)

 

 

 

     September 30, 2011
(Unaudited)
    December 31, 2010  

Assets

    

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

   $ 1,333,937      $ 733,580   

Cash

     270,171        38,790   

Due from counterparty

     69,673        —     

Receivable for investments sold and repaid

     3,295        5,162   

Interest receivable

     14,050        3,632   

Deferred financing costs

     800        835   

Receivable due on total return swap(1)

     374        —     

Prepaid expenses and other assets

     22        6   
  

 

 

   

 

 

 

Total assets

   $ 1,692,322      $ 782,005   
  

 

 

   

 

 

 

Liabilities

    

Unrealized loss on total return swap(1)

   $ 7,600      $ —     

Payable for investments purchased

     76,352        81,800   

Credit facility payable

     340,000        297,201   

Repurchase agreement payable

     109,286        —     

Stockholder distributions payable

     8,179        2,556   

Management fee payable

     7,421        3,298   

Capital gains incentive fee payable(2)

     —          5,459   

Administrative services expense payable

     794        310   

Reimbursements payable

     —          641   

Interest payable

     1,724        883   

Other accrued expenses and liabilities

     1,690        625   
  

 

 

   

 

 

 

Total liabilities

     553,046        392,773   
  

 

 

   

 

 

 

Stockholders’ equity

    

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

   $ —        $ —     

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

     125        41   

Capital in excess of par value

     1,176,534        374,637   

Accumulated undistributed net realized gains on investments

     21,620        1,290   

Accumulated distributions in excess of net investment income(3)

     (4,742     (4,802

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

     (54,261     18,066   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,139,276        389,232   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,692,322      $ 782,005   
  

 

 

   

 

 

 

Net asset value per common share at period end

   $ 9.14      $ 9.42   

 

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

 

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

 

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

See notes to unaudited consolidated financial statements.

 

1


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

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

Investment income

       

Interest income

  $ 33,295      $ 8,678      $ 76,209      $ 17,872   

Operating expenses

       

Management fees

    7,432        2,318        18,216        4,605   

Capital gains incentive fees(1)

    (7,974     373        (4,063     373   

Administrative services expenses

    915        285        1,903        635   

Stock transfer agent fees

    448        226        1,138        598   

Accounting and administrative fees

    298        105        692        436   

Interest expense

    2,922        1,343        7,382        2,213   

Other general and administrative expenses

    945        469        2,309        1,203   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    4,986        5,119        27,577        10,063   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    28,309        3,559        48,632        7,809   
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain/loss

       

Net realized gain on investments

    2,433        294        22,456        3,383   

Net realized gain on total return swap(2)

    1,895        —          1,895        —     

Net change in unrealized appreciation (depreciation) on investments

    (63,164     7,902        (64,728     1,811   

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

    (8,887     —          (7,600     —     

Net change in unrealized gain/loss on foreign currency

    (72     93        1        (3
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain/loss on investments

    (67,795     8,289        (47,976     5,191   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ (39,486   $ 11,848      $ 656      $ 13,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per share information—basic and diluted

       

Net increase (decrease) in net assets resulting from operations

  $ (0.37   $ 0.47      $ 0.01      $ 0.67   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding(3)

    106,877,357        25,426,504        77,057,690        19,287,292   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

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

See notes to unaudited consolidated financial statements.

 

2


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Nine Months Ended
September 30,
 
             2011                     2010          

Operations

    

Net investment income

   $ 48,632      $ 7,809   

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

     24,351        3,383   

Net change in unrealized appreciation (depreciation) on investments

     (64,728     1,811   

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

     (7,600     —     

Net change in unrealized gain/loss on foreign currency

     1        (3
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     656        13,000   
  

 

 

   

 

 

 

Stockholder distributions(2)

    

Distributions from net investment income

     (48,572     (7,872

Distributions from net realized gain on investments

     (4,021     (2,923
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (52,593     (10,795
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock

     787,570        166,456   

Reinvestment of stockholder distributions

     21,661        2,967   

Repurchases of common stock

     (3,253     (1,123

Offering costs

     (3,997     (629

Reimbursement of investment adviser(3)

     —          (1,678

Capital contributions of investment adviser

     —          486   
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     801,981        166,479   
  

 

 

   

 

 

 

Total increase in net assets

     750,044        168,684   

Net assets at beginning of period

     389,232        93,197   
  

 

 

   

 

 

 

Net assets at end of period

   $ 1,139,276      $ 261,881   
  

 

 

   

 

 

 

 

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

 

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

 

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

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

    Nine Months Ended
September 30,
 
            2011                     2010          

Cash flows from operating activities

   

Net increase in net assets resulting from operations

  $ 656      $ 13,000   

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

   

Purchases of investments

    (1,416,863     (501,690

Paid-in-kind interest

    (1,316     (103

Proceeds from sales and repayments of investments

    783,196        130,063   

Net change in unrealized appreciation (depreciation) on investments

    64,728        (1,811

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

    7,600        —     

Net change in unrealized gain/loss on foreign currency

    (1     3   

Net realized gain on investments

    (22,456     (3,383

Accretion of discount

    (7,645     (3,366

Amortization of deferred financing costs

    653        331   

Increase in due from counterparty

    (69,673     —     

Decrease/increase in receivable for investments sold and repaid

    1,867        (15,261

Decrease/increase in payable for investments purchased

    (5,448     53,379   

Increase in interest receivable

    (10,418     (3,058

Increase in receivable due on total return swap(1)

    (374     —     

Increase in prepaid expenses and other assets

    (16     (1

Increase in management fee payable

    4,123        1,879   

Decrease/increase in capital gains incentive fee payable

    (5,459     200   

Increase in interest payable

    841        682   

Increase in administrative services expense payable

    484        139   

Increase in other accrued expenses and liabilities

    1,065        139   
 

 

 

   

 

 

 

Net cash used in operating activities

    (674,456     (328,858
 

 

 

   

 

 

 

Cash flows from financing activities

   

Issuance of common stock

    787,570        166,456   

Reinvestment of stockholder distributions

    21,661        2,967   

Repurchases of common stock

    (3,253     (1,123

Offering costs

    (3,997     (629

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

    (641     (1,678

Capital contributions of investment adviser

    —          486   

Stockholder distributions

    (46,970     (6,647

Borrowings under credit facility

    42,799        197,267   

Borrowings under repurchase agreement

    109,286        —     

Deferred financing costs paid

    (618     (1,319
 

 

 

   

 

 

 

Net cash provided by financing activities

    905,837        355,780   
 

 

 

   

 

 

 

Total increase in cash

    231,381        26,922   

Cash at beginning of period

    38,790        9,035   
 

 

 

   

 

 

 

Cash at end of period

  $ 270,171      $ 35,957   
 

 

 

   

 

 

 

 

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

 

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

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

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

Senior Secured Loans—First Lien—60.9%

       

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

  Healthcare   $ 5,462      $ 5,236      $ 5,380   

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

  Consumer Discretionary     5,000        4,951        4,797   

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

  Consumer Staples     4,875        4,793        4,875   

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

  Telecommunication Services     6,403        6,290        6,443   

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

  Industrials     5,860        5,790        5,752   

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

  Consumer Discretionary     26,500        26,500        26,128   

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

  Consumer Discretionary     8,856        8,844        8,712   

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

  Financials     941        833        899   

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

  Healthcare     10,390        10,283        10,110   

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

  Information Technology     1,970        1,955        1,950   

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

  Information Technology     10,000        9,910        9,667   

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

  Information Technology     10,861        9,760        9,396   

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

  Consumer Discretionary     7,222        7,078        7,191   

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

  Consumer Discretionary     18,000        17,100        17,454   

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

  Information Technology     40,385        37,154        37,638   

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

  Industrials     4,975        4,943        4,698   

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

  Consumer Discretionary     8,384        8,424        8,230   

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

  Healthcare     9,950        9,904        8,387   

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

  Information Technology     1,570        1,557        1,542   

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

  Consumer Discretionary     6,617        6,559        6,449   

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

  Industrials     9,394        8,581        8,208   

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

  Consumer Discretionary     2,000        1,738        1,785   

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

  Industrials     19,699        18,582        17,222   

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

  Energy     8,863        8,825        9,071   

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

  Healthcare     2,297        2,287        2,200   

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

  Information Technology     1,234        1,186        1,173   

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

  Materials     2,432        2,415        2,300   

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

  Industrials     8,731        8,616        8,414   

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

  Healthcare     1,990        1,997        1,937   

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

  Energy     249        249        254   

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

  Utilities     1,572        1,558        1,530   

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

  Consumer Discretionary     21,646        21,593        20,510   

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

  Information Technology     12,907        11,162        10,713   

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

  Energy     6,185        6,174        6,324   

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

  Consumer Discretionary     13,000        12,763        12,285   

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

  Energy     4,963        4,835        4,878   

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

  Industrials     1,896        1,780        1,742   

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

  Telecommunication Services     6,252        6,214        6,072   

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

  Consumer Discretionary     1,692        1,678        1,680   

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

  Consumer Discretionary     9,778        9,690        9,680   

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

  Industrials     4,423        3,804        3,742   

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

  Healthcare     3,164        3,127        2,735   

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

  Healthcare     3,500        3,438        3,487   

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

  Healthcare     7,843        7,534        7,751   

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

  Healthcare     11,970        11,617        11,441   

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

  Information Technology     4,813        4,769        4,704   

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

  Information Technology     1,047        884        1,016   

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

  Healthcare     5,098        5,049        4,886   

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

  Information Technology     14,679        14,330        13,871   

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

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

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

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

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

  Industrials     59,000        57,585        58,858   

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

  Energy     5,799        5,514        5,506   

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

  Information Technology     11,145        11,115        10,477   

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

  Telecommunication Services     7,406        7,307        7,374   

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

  Information Technology     4,963        4,898        4,231   

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

  Consumer Discretionary     3,667        3,633        3,413   

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

  Consumer Discretionary     875        725        831   

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

  Information Technology     7,534        7,503        7,372   

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

  Industrials     3,077        3,032        3,027   

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

  Healthcare     15,434        15,327        14,894   

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

  Industrials     3,952        3,952        3,524   

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

  Consumer Discretionary     6,010        6,013        5,740   

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

  Industrials     9,500        9,368        9,310   

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

  Consumer Discretionary     2,259        2,232        2,230   

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

  Consumer Discretionary     4,063        3,965        3,931   

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

  Consumer Discretionary     4,963        4,876        4,814   

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

  Consumer Discretionary     11,872        11,708        11,550   

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

  Consumer Discretionary     2,658        2,634        2,585   

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

  Industrials     7,772        7,617        7,786   

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

  Energy     10,342        10,259        10,126   

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

  Telecommunication Services     5,966        5,695        5,697   

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

  Healthcare     5,921        5,842        5,729   

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

  Information Technology     4,676        4,653        4,571   

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

  Telecommunication Services     14,558        14,100        13,495   

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

  Information Technology     10,845        10,724        10,583   

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

  Consumer Discretionary     9,935        9,684        9,397   

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

  Industrials     18,144        17,257        16,829   

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

  Energy     4,231        4,211        4,026   

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

  Materials     4,100        4,100        3,712   

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

  Consumer Discretionary     13,887        13,708        13,609   

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

  Materials     3,970        3,897        3,844   

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

  Healthcare     995        1,008        940   

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

  Industrials     3,969        3,935        3,856   

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

  Industrials     538        512        515   

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

  Telecommunication Services     8,748        8,767        8,719   

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

  Utilities     16,867        13,475        11,483   

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

  Telecommunication Services     1,247        1,247        1,246   

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

  Consumer Discretionary     6,683        6,650        6,428   

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

  Materials     6,592        6,592        6,200   

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

  Consumer Discretionary     10,000        8,613        8,440   

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

  Consumer Discretionary     785        688        257   
     

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

        708,346        693,289   
     

 

 

   

 

 

 

Senior Secured Loans—Second Lien—29.8%

       

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

  Consumer Staples     12,000        12,048        12,000   

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

  Industrials     19,244        19,304        18,575   

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

  Healthcare     10,000        9,805        9,900   

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

  Consumer Discretionary     16,800        16,114        13,440   

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

  Healthcare     10,000        9,753        9,500   

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

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

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

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

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

  Financials     27,429        27,297        26,240   

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

  Information Technology     12,000        11,961        11,736   

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

  Industrials     7,000        6,966        6,895   

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

  Information Technology     9,000        9,026        9,000   

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

  Industrials     6,923        6,796        6,323   

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

  Industrials     3,500        2,293        2,503   

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

  Information Technology     10,783        10,757        10,722   

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

  Healthcare     3,333        3,302        3,317   

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

  Consumer Discretionary     9,500        9,111        9,314   

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

  Consumer Discretionary     46,800        45,898        45,396   

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

  Industrials     13,000        11,913        9,998   

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

  Consumer Discretionary     7,000        6,878        7,058   

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

  Telecommunication Services     1,429        1,415        1,402   

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

  Industrials     6,000        5,548        5,094   

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

  Materials     20,714        14,425        16,779   

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

  Industrials     3,000        2,932        2,841   

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

  Industrials     12,028        11,857        12,449   

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

  Consumer Discretionary     15,000        14,942        13,925   

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

  Consumer Staples     13,000        13,138        12,783   

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

  Industrials     500        500        486   

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

  Industrials     8,571        8,580        8,325   

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

  Energy     13,868        13,699        13,972   

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

  Consumer Discretionary     5,000        4,952        4,963   

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

  Energy     8,170        7,550        7,425   

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

  Information Technology     12,000        11,910        11,550   

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

  Consumer Staples     14,029        14,117        13,792   
     

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

        346,523        339,522   
     

 

 

   

 

 

 

Senior Secured Bonds—10.6%

       

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

  Information Technology     8,723        8,805        8,330   

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

  Information Technology     4,000        4,000        4,047   

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

  Information Technology     1,500        1,500        1,276   

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

  Industrials     5,000        5,000        4,538   

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

  Energy     5,600        5,600        4,453   

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

  Information Technology     7,500        7,408        5,325   

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

  Telecommunication Services     2,000        2,000        1,947   

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

  Information Technology     6,300        6,348        6,108   

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

  Healthcare     2,500        2,500        2,498   

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

  Consumer Discretionary     14,100        14,138        13,129   

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

  Telecommunication Services     665        665        652   

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

  Telecommunication Services     5,000        4,973        4,996   

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

  Telecommunication Services     4,680        4,804        5,068   

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

  Consumer Discretionary     2,400        2,400        2,262   

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

  Industrials     800        800        773   

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

  Financials     16,000        16,200        16,186   

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

  Healthcare     15,460        15,244        13,993   

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

  Utilities     10,000        9,908        8,038   

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

  Industrials     14,500        15,474        15,660   

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

  Energy     1,185        1,145        1,164   
     

 

 

   

 

 

 

Total Senior Secured Bonds

        128,912        120,443   
     

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

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

Subordinated Debt—8.5%

       

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

  Materials   $ 4,000      $ 4,000      $ 3,774   

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

  Consumer Discretionary     2,900        2,900        3,016   

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

  Energy     10,000        9,726        4,627   

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

  Consumer Discretionary     8,271        8,190        620   

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

  Healthcare     8,000        8,000        7,950   

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

  Telecommunication Services     5,000        5,000        5,036   

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

  Consumer Discretionary     2,334        2,187        2,010   

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

  Energy     5,800        5,800        5,655   

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

  Consumer Discretionary     1,200        1,200        1,034   

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

  Telecommunication Services     11,000        10,840        10,298   

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

  Telecommunication Services     4,000        4,000        3,929   

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

  Consumer Discretionary     5,000        4,381        4,244   

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

  Consumer Staples     2,500        2,500        2,148   

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

  Telecommunication Services     1,310        1,310        1,274   

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

  Industrials     2,689        2,328        2,028   

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

  Information Technology     15,000        14,927        14,700   

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

  Industrials     7,000        6,875        6,921   

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

  Information Technology     2,000        1,789        1,875   

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

  Consumer Discretionary     4,375        4,375        3,988   

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

  Industrials     2,667        2,667        2,703   

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

  Information Technology     2,000        2,000        1,875   

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

  Materials     3,000        2,946        2,970   

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

  Industrials     3,930        3,930        3,911   
     

 

 

   

 

 

 

Total Subordinated Debt

        111,871        96,586   
     

 

 

   

 

 

 

Collateralized Securities—6.1%

       

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

  Financials     2,000        1,104        1,253   

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

  Financials     4,775        3,087        3,234   

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

  Financials     2,252        1,767        1,620   

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

  Financials   1,500        1,010        1,401   

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

  Financials   $ 2,000        907        1,152   

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

  Financials     28,000        17,583        16,287   

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

  Financials     1,919        1,173        1,263   

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

  Financials     2,000        1,463        1,508   

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

  Financials     6,500        3,169        3,836   

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

  Financials     4,000        2,252        2,372   

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

  Financials     9,225        6,311        6,865   

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

  Financials     4,000        2,567        3,899   

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

  Financials     4,375        3,242        4,156   

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

  Financials     10,000        7,779        8,075   

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

  Financials     5,000        4,133        4,296   

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

  Financials     12,500        8,962        8,383   
     

 

 

   

 

 

 

Total Collateralized Securities

        66,509        69,600   
     

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2011

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Industry   Number of
Shares
    Cost     Fair
Value(c)
 

Equity/Other—1.3%

       

East Cameron Partners, LP, 8.5% Preferred Equity

  Energy     887      $ 100      $ 37   

East Cameron Partners, LP, Common Equity

  Energy     14,757        600        —     

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

  Consumer Discretionary     71        —          530   

Florida Gaming Corp., Strike: $25.00, Warrants

  Consumer Discretionary     226,635        —          —     

Ipreo Holdings LLC, Common Equity

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

JW Aluminum Co., Common Equity

  Materials     37,500        3,225        —     

Klune Industries, Inc., Preferred Equity

  Industrials     52,101        1,500        1,459   

Milagro Holdings, LLC, Common Equity

  Energy     648        25        —     

Milagro Holdings, LLC, Common Equity

  Energy     573        25        —     

Milagro Holdings, LLC, Preferred Equity

  Energy     283,947        11,962        11,471   
     

 

 

   

 

 

 

Total Equity/Other

        18,437        14,497   
     

 

 

   

 

 

 

TOTAL INVESTMENTS—117.2%

      $ 1,380,598        1,333,937   
     

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(17.2%)

          (194,661
       

 

 

 

NET ASSETS—100.0%

        $ 1,139,276   
       

 

 

 

Total Return Swap

      Notional
Amount
          Unrealized
Depreciation
 

Citibank TRS Facility (Note 8)(g)

    $ 297,281        $ (7,600
       

 

 

 

 

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

 

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

 

(c) Fair value determined by the Company’s 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 10 and 11).

 

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

 

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

 

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

See notes to unaudited consolidated financial statements.

 

9


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   

 

See notes to unaudited consolidated financial statements.

 

10


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)
 

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   

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   

 

See notes to unaudited consolidated financial statements.

 

11


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)
 

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, 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   
     

 

 

   

 

 

 

Senior Secured Bonds—9.2%

       

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

  Information Technology     7,348        7,383        7,458   

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

  Information Technology     4,000        4,000        4,137   

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

        34,265        35,796   
     

 

 

   

 

 

 

Subordinated Debt—13.1%

       

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

  Consumer Discretionary     8,000        7,908        7,253   

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

  Healthcare     8,000        8,000        8,001   

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

  Telecommunication Services     5,000        5,000        5,175   

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

  Telecommunication Services     8,000        8,000        7,682   

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

  Telecommunication Services     2,000        2,072        2,070   

 

See notes to unaudited consolidated financial statements.

 

12


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)
 

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

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

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

  Industrials     7,000        6,867        6,980   

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

  Consumer Staples     4,700        4,700        5,036   

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

  Telecommunication Services     4,000        3,868        4,030   

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

  Materials     3,000        2,940        2,940   
     

 

 

   

 

 

 

Total Subordinated Debt

        51,384        51,178   
     

 

 

   

 

 

 

Collateralized Securities—6.8%

       

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

  Financials     2,000        1,051        1,375   

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   

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(f)

  Financials   $ 2,000        869        1,195   

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

  Financials     1,919        1,133        1,219   

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

  Financials     6,500        3,012        3,920   

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

  Financials     4,000        2,182        2,390   

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

  Financials     8,975        7,272        7,135   

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

  Financials     4,000        2,774        2,900   
     

 

 

   

 

 

 

Total Collateralized Securities

        24,024        26,539   
     

 

 

   

 

 

 

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 10 and 11).

 

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

 

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

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

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 September 30, 2011, the Company had four wholly-owned financing subsidiaries, Broad Street Funding LLC, or Broad Street, which was established on February 2, 2010, Arch Street Funding LLC, or Arch Street, which was established on March 1, 2011, Locust Street Funding LLC, or Locust Street, which was established on July 5, 2011, and Race Street Funding LLC, or Race Street, which was established on July 5, 2011. The consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned financing subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Since commencing its initial public offering and through November 11, 2011, the Company has sold 142,553,249 shares (as adjusted for stock distributions) of common stock for gross proceeds of $1,493,510. As of November 11, 2011, the Company had raised total gross proceeds of $1,494,510 including approximately $1,000 contributed by the principals of the Company’s investment adviser in February 2008. During the nine months ended September 30, 2011 and 2010, the Company sold 83,613,294 and 18,117,485 shares for gross proceeds of $890,497 and $187,252 at an average price per share of $10.65 and $10.34, respectively. The gross proceeds received during the nine months ended September 30, 2011 and 2010 include reinvested stockholder distributions of $21,661 and $2,967, respectively. During the period from October 1, 2011 to November 11, 2011, the Company sold 17,514,596 shares of common stock for gross proceeds of $185,129 at an average price per share of $10.57.

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

Note 2. Summary of Significant Accounting Policies

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

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

 

14


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)

 

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

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

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

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

Note 3. Recently Issued Accounting Standards

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

 

15


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 3. Recently Issued Accounting Standards (continued)

 

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

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

Note 4. Related Party Transactions

The Company has entered into an investment advisory and administrative services agreement with FB Advisor. Pursuant to the investment advisory and administrative services agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company’s gross assets and an incentive fee based on the Company’s performance. The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subordinated to a preferred return on adjusted capital, as defined in the Company’s investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized rate of 8.0%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains during operations, is an incentive fee on capital gains earned on liquidated investments from the Company’s portfolio during operations prior to a liquidation of the Company and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, equals 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation.

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

 

16


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)

 

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 September 30, 2011, the Company reversed $7,974 in capital gains incentive fees accrued by the Company as of June 30, 2011 as a result of the unrealized losses incurred in the Company’s portfolio during the three months ended September 30, 2011. During each of the three and nine months ended September 30, 2010, the Company accrued $373 in capital gains incentive fees. During the nine months ended September 30, 2011, the Company reversed $4,063 in capital gains incentive fees accrued by the Company during the year ended December 31, 2010 as a result of the unrealized losses incurred in the Company’s portfolio during the nine months ended September 30, 2011.

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

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

The dealer manager for the Company’s public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Company’s affiliates. During the nine months ended September 30, 2011 and 2010, FS2 retained $15,622 and $3,063, respectively, for selling commissions and dealer manager fees in connection with the sale of the Company’s common stock.

Under the terms of the investment advisory and administrative services agreement, when the Company’s Registration Statement was declared effective by the SEC and the Company was successful in raising gross

 

17


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)

 

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

FB Advisor’s senior management team is comprised of the same personnel as the senior management team of FS Investment Advisor, LLC, the investment adviser to Franklin Square Holdings’ other affiliated BDC, FS Energy and Power Fund. As a result, such personnel provide investment advisory services to both the Company and FS Energy and Power Fund. While neither FB Advisor nor FS Investment Advisor, LLC is currently making private corporate debt investments for clients other than the Company and FS Energy and Power Fund, respectively, either one, or both, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund rather than to the Company.

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

 

18


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 nine months ended September 30, 2011 and 2010:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2010

     

March 31, 2010(1)

   $ 0.1860       $ 2,443   

June 30, 2010

   $ 0.1875       $ 3,589   

September 30, 2010

   $ 0.1875       $ 4,763   

Fiscal 2011

     

March 31, 2011

   $ 0.1929       $ 9,948   

June 30, 2011

   $ 0.2787       $ 20,529   

September 30, 2011

   $ 0.2016       $ 22,116   

 

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

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

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

 

19


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 Company has not established limits on the amount of funds it may use from available sources to make distributions. The following table reflects, for tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the nine months ended September 30, 2011 and 2010:

 

     Nine Months Ended September 30,  
     2011     2010  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     48,572         92     7,872         73

Capital gains proceeds from the sale of assets

     4,021         8     2,923         27

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 52,593         100   $ 10,795         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

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

 

20


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 difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is due to the tax-basis amortization of organization and start-up costs incurred prior to the commencement of the Company’s operations, interest income earned on a tax basis due to the required accretion of discount on non-performing loans, and the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by 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 nine months ended September 30, 2011 and 2010:

 

     Nine Months  Ended
September 30,
 
     2011     2010  

GAAP-basis net investment income

   $ 48,632      $ 7,809   

Amortization of organizational costs

     (32     (33

Tax accretion of discount on investments

     4,035        93   

Reversal of incentive fee accrual on unrealized gains

     (4,063     —     
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 48,572      $ 7,869   
  

 

 

   

 

 

 

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

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

 

Date Declared

   Record Date    Payment Date    Distribution
Percentage
    Shares
Issued
 

Fiscal 2009

          

March 31, 2009

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

April 30, 2009

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

May 29, 2009

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

June 30, 2009

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

July 30, 2009

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

August 31, 2009

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

December 31, 2009

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

Fiscal 2010

          

January 28, 2010

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

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

 

21


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 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.

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

 

     September 30,
2011
    December 31,
2010
 

Distributable ordinary income

   $ 17,403      $ 1,290   

Incentive fee accrual on unrealized gains

     —          (4,063

Unamortized organizational costs

     (525     (558

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

     (54,261     17,885   
  

 

 

   

 

 

 
   $ (37,383   $ 14,554   
  

 

 

   

 

 

 

 

(1) As of September 30, 2011 and December 31, 2010, the gross unrealized appreciation on the Company’s investments was $14,449 and $20,136, respectively. As of September 30, 2011 and December 31, 2010, the gross unrealized depreciation on the Company’s investments and total return swap was $68,710 and $2,251, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2011 and December 31, 2010:

 

    September 30, 2011     December 31, 2010  
    Amortized
Cost (1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost (1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 708,346      $ 693,289        52   $ 473,881      $ 484,105        66

Senior Secured Loans—Second Lien

    346,523        339,522        26     131,960        135,962        19

Senior Secured Bonds

    128,912        120,443        9     34,265        35,796        4

Subordinated Debt

    111,871        96,586        7     51,384        51,178        7

Collateralized Securities

    66,509        69,600        5     24,024        26,539        4

Equity/Other

    18,437        14,497        1     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,380,598      $ 1,333,937        100   $ 715,514      $ 733,580        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on debt investments.

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.

 

22


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 6. Investment Portfolio (continued)

 

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2011, the Company had 3 such investments with an aggregate unfunded commitment of $15,709.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011     December 31, 2010  

Industry Classification

   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Consumer Discretionary

   $ 323,055         24.2   $ 129,749         17.6

Consumer Staples

     54,423         4.1     56,184         7.7

Energy

     88,989         6.7     69,048         9.4

Financials

     114,744         8.6     59,431         8.1

Healthcare

     127,035         9.5     63,460         8.7

Industrials

     264,965         19.9     96,762         13.2

Information Technology

     216,448         16.2     117,499         16.0

Materials

     39,579         3.0     46,832         6.4

Telecommunication Services

     83,648         6.4     81,675         11.1

Utilities

     21,051         1.4     12,940         1.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,333,937         100.0   $ 733,580         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

23


Table of Contents

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 September 30, 2011 and December 31, 2010, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   September 30, 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

     1,333,937         (7,600     733,580   
  

 

 

    

 

 

   

 

 

 
   $ 1,333,937       $ (7,600   $ 733,580   
  

 

 

    

 

 

   

 

 

 

The Company’s investments as of September 30, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its collateralized loan obligations, or CLOs, collateralize debt obligations, or CDOs, and its subordinated debt investments by obtaining bid and ask prices from independent dealers and the Company valued all of its other debt investments, including its senior secured bond investments, by using an independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end. Seven senior secured loan investments and two subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the value of such investments by considering the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Company’s equity investments were valued by the same independent valuation firm, which determined the value of such investments by considering various factors, such as multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. The Company valued its total return swap, or TRS, for a portfolio of senior secured floating rate loans in accordance with the agreements governing such arrangement. Pursuant to those agreements, the loans underlying the TRS are valued based on quotes received from third-party dealers. The value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS.

The Company’s investments as of December 31, 2010 consisted primarily of debt securities that traded on a private over-the-counter market for institutional investors. The Company valued its CLOs and CDOs 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 received from its 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 its 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.

 

24


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

The following is a reconciliation for the nine months ended September 30, 2011 and 2010 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Nine Months Ended September 30, 2011  
    Senior Secured
Loans - First
Lien
    Senior Secured
Loans - Second

Lien
    Senior
Secured  Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/
Other
    Total  

Fair value at beginning of period

  $ 484,105      $ 135,962      $ 35,796      $ 51,178      $ 26,539      $ —        $ 733,580   

Accretion of discount (Amortization of premium)

    4,361        2,113        (29     115        496        589        7,645   

Net realized gain/loss

    9,015        12,645        1,535        419        342        (1,500     22,456   

Net change in unrealized appreciation (depreciation)

    (25,281     (11,003     (10,000     (15,079     576        (3,940     (64,727

Purchases

    864,197        262,708        130,156        84,557        54,662        20,583        1,416,863   

Paid-in-kind interest

    232        28        —          1,056        —          —          1,316   

Sales and redemptions

    (643,340     (62,931     (37,015     (25,660     (13,015     (1,235     (783,196

Net transfers in or out of
Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 693,289      $ 339,522      $ 120,443      $ 96,586      $ 69,600      $ 14,497      $ 1,333,937   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains/losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

  $ (25,723   $ (7,816   $ (8,940   $ (15,954   $ 3,091      $ (3,447   $ (58,789
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine Months Ended September 30, 2010  
    Senior Secured
Loans - First
Lien
    Senior Secured
Loans - Second

Lien
    Senior
Secured Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/
Other
    Total  

Fair value at beginning of period

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

Accretion of discount

    2,020        1,252        1        19        74        —          3,366   

Net realized gain/loss

    1,729        2,226        (1,106     534        —          —          3,383   

Net change in unrealized appreciation (depreciation)

    1,575        (1,265     885        (68     681        —          1,808   

Purchases

    324,637        82,839        54,865        23,695        15,654        —          501,690   

Paid-in-kind interest

    —          61        —          42        —          —          103   

Sales and redemptions

    (69,798     (24,773     (25,651     (9,841     —          —          (130,063

Net transfers in or out of
Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 305,943      $ 105,861      $ 28,994      $ 23,672      $ 16,409      $ —        $ 480,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of total gains/losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date

  $ 2,245      $ 755      $ 885      $ (68   $ 681      $ —        $ 4,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 8. Total Return Swap

On March 18, 2011, Arch Street entered into a TRS for senior secured floating rate loans with Citibank, N.A., or Citibank. On June 9, 2011, Arch Street entered into an amendment to the TRS to increase the maximum market value of the portfolio of loans subject to the TRS.

 

25


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)

 

A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

The TRS with Citibank enables the Company, through its ownership of Arch Street, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Arch Street borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Arch Street under the TRS are non-recourse to the Company and the Company’s exposure under the TRS is limited to the value of the Company’s investment in Arch Street, which generally will equal the value of cash collateral provided by Arch Street under the TRS. Pursuant to the terms of the TRS, Arch Street may select a portfolio of loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $300,000. Arch Street is required to initially cash collateralize a specified percentage of each loan (generally between 20% and 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, Arch Street has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Arch Street are available to pay the debts of the Company.

Pursuant to the terms of an investment management agreement that the Company has entered into with Arch Street, the Company acts as the manager of the rights and obligations of Arch Street under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS. Accordingly, the loans selected by Arch Street for purposes of the TRS are selected by the Company in accordance with its investment objectives and strategy to generate current income and, to a lesser extent, long-term capital appreciation. In addition, pursuant to the terms of the TRS, Arch Street may select any loan or obligation available in the market to be included in the portfolio of loans that meets the obligation criteria set forth in the agreements between Arch Street and Citibank which collectively establish the TRS and are collectively referred to herein as the TRS Agreement.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Arch Street receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Arch Street pays to Citibank interest at a rate equal to one-month LIBOR + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arch Street will either receive from Citibank the appreciation in the value of such loan, or pay to Citibank any depreciation in the value of such loan.

Under the terms of the TRS, Arch Street may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Arch Street may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the

 

26


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)

 

amount of cash collateral already posted by Arch Street. The amount of collateral required to be posted by Arch Street is determined primarily on the basis of the aggregate value of the underlying loans.

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its equity investment in Arch Street for the purpose of funding any additional collateral or payment obligations for which Arch Street may become obligated during the term of the TRS. If the Company does not make any such additional investment in Arch Street and Arch Street fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Arch Street under the TRS. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee.

Citibank may terminate the TRS on or after March 18, 2013, the second anniversary of the effectiveness of the TRS. Arch Street may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank. Any termination prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments which would be owed by Arch Street to Citibank for the period from the termination date through and including the earlier of (i) the one year anniversary of the termination date and (ii) March 18, 2013. Such monthly payments will equal the product of (x) 90%, multiplied by (y) the aggregate notional amount of the TRS ($300,000), multiplied by (z) 1.25% per annum. If the TRS had been terminated as of September 30, 2011, Arch Street would have been required to pay an early termination fee of approximately $3,422. Arch Street is required to pay a minimum usage fee in connection with the TRS. Arch Street will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to Arch Street. Each of the loans underlying the TRS is required to be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. As of September 30, 2011, the fair value of the TRS was $(7,600). The fair value of the TRS is reflected as an unrealized loss on total return swap on the consolidated balance sheet. The change in value of the TRS is reflected in the statement of operations as net change in unrealized appreciation (depreciation) on total return swap. As of September 30, 2011, Arch Street had selected 65 underlying loans with a total notional amount of $297,281 and posted $69,673 in cash collateral held by Citibank (of which only $61,221 was required to be posted), which is reflected in due from counterparty on the consolidated balance sheet.

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company has agreed with the staff of the SEC to treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Arch Street under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further, for purposes of Section 55(a) under the 1940 Act, the Company has agreed with the staff of the SEC to treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

 

27


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)

 

The following is a summary of the underlying loans subject to the TRS as of September 30, 2011:

 

Underlying Loan(1)

  Industry   Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
 

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

  Consumer Discretionary   $ 4,792      $ 4,720      $ (72

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

  Financials     1,949        1,922        (27

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

  Healthcare     3,096        3,033        (63

Asurion, LLC, L+400, 1.5% LIBOR Floor, 5/20/18

  Financials     4,849        4,604        (245

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

  Consumer Discretionary     3,785        3,790        5   

Avis Budget Car Rental, LLC, L+500, 1.3% LIBOR Floor, 9/22/18(2)

  Consumer Discretionary     5,444        5,519        75   

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

  Healthcare     9,896        8,791        (1,105

Bass Pro Group, LLC, L+400, 1.3% LIBOR Floor, 6/10/17

  Consumer Discretionary     6,818        6,721        (97

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

  Information Technology     1,766        1,704        (62

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

  Consumer Discretionary     4,275        4,347        72   

Blackboard Inc., L+600, 1.5% LIBOR Floor, 10/4/18(2)

  Information Technology     4,128        4,162        34   

Capsugel Holdings Inc., L+400, 1.3% LIBOR Floor, 7/31/18

  Healthcare     3,618        3,571        (47

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

  Healthcare     4,818        4,161        (657

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

  Industrials     7,494        6,619        (875

Clement Pappas & Co., Inc., L+525, 1.3% LIBOR Floor, 7/31/17

  Consumer Discretionary     2,970        2,929        (41

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

  Industrials     1,854        1,760        (94

Del Monte Foods Co., L+300, 1.5% LIBOR Floor, 3/8/18

  Consumer Staples     2,833        2,760        (73

Dole Food Co., L+375, 1.3% LIBOR Floor, 7/8/18(2)

  Consumer Staples     1,910        1,966        56   

Emergency Medical Services Corp., L+375, 1.5% LIBOR Floor, 5/25/18

  Healthcare     6,755        6,424        (331

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

  Materials     7,380        7,266        (114

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

  Energy     6,039        6,012        (27

Gemini Holdings Inc., L+450, 1.5% LIBOR Floor, 6/16/17

  Consumer Discretionary     3,667        3,618        (49

Gibson Energy ULC, L+450, 1.3% LIBOR Floor, 6/15/18(2)

  Energy     7,150        7,060        (90

Golden Living (Drumm Investors LLC), L+375, 1.3% LIBOR Floor, 3/15/18

  Healthcare     7,920        6,980        (940

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

  Healthcare     4,355        4,249        (106

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

  Financials     10,600        10,442        (158

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

  Telecommunication Services     1,382        1,333        (49

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

  Information Technology     3,980        3,834        (146

IASIS Healthcare LLC, L+375, 1.3% LIBOR Floor, 5/3/18

  Healthcare     7,513        7,053        (460

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

  Healthcare     3,765        3,858        93   

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

  Healthcare     4,850        4,733        (117

Infogroup, Inc., L+425, 1.5% LIBOR Floor, 5/25/17

  Consumer Discretionary     4,197        4,144        (53

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

  Telecommunication Services     3,005        2,865        (140

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

  Industrials     2,530        2,438        (92

Kar Holdings, Inc., L+375, 1.3% LIBOR Floor, 5/20/17

  Industrials     4,933        4,874        (59

LabelCorp Holdings, Inc., L+475, 1.5% LIBOR Floor, 5/27/17

  Industrials     5,775        5,746        (29

MedAssets, Inc., L+375, 1.5% LIBOR Floor, 11/22/16(2)

  Healthcare     1,532        1,491        (41

Mondrian Investment Partners Ltd., L+425, 1.3% LIBOR Floor, 7/5/18

  Financials     4,486        4,498        12   

Mood Media Corp., L+550, 1.5% LIBOR Floor, 5/4/18(2)

  Consumer Discretionary     5,096        4,739        (357

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

  Consumer Staples     3,775        3,868        93   

Norit Holding BV, L+525, 1.5% LIBOR Floor, 7/8/17(2)

  Industrials     3,834        3,835        1   

NuSil Technology LLC, L+400, 1.3% LIBOR Floor, 3/28/17

  Materials     3,924        3,761        (163

OpenLink Financial Inc., L+400, 1.3% LIBOR Floor, 4/27/18

  Information Technology     5,627        5,556        (71

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

  Consumer Discretionary     1,762        1,710        (52

Ranpak Corp., L+350, 1.3% LIBOR Floor, 4/20/17

  Industrials     2,539        2,424        (115

RBS Holding Co. LLC, L+500, 1.5% LIBOR Floor, 3/21/17

  Consumer Discretionary     9,776        8,878        (898

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

  Financials     1,542        1,474        (68

 

28


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)

 

Underlying Loan(1)

  Industry   Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
 

Reynolds Group Holdings Inc., L+460, 1.2% LIBOR Floor, 7/31/18(2)

  Consumer Discretionary   $ 7,079      $ 7,109      $ 30   

Sealed Air Corp., L+375, 1.0% LIBOR Floor, 10/3/18(2)

  Industrials     3,808        3,884        76   

SemGroup Corp., L+450, 1.3% LIBOR Floor, 6/17/18(2)

  Energy     5,281        5,281        —     

Sensus USA Inc., L+350, 1.3% LIBOR Floor, 5/9/17

  Industrials     4,943        4,814        (129

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

  Healthcare     1,213        1,200        (13

Sprouts Farmers Markets, LLC, L+475, 1.3% LIBOR Floor, 4/15/17

  Consumer Discretionary     4,798        4,596        (202

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

  Industrials     6,268        6,081        (187

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

  Energy     5,893        5,578        (315

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

  Healthcare     7,684        7,240        (444

SymphonyIRI Group Inc., L+375, 1.3% LIBOR Floor, 12/1/17

  Information Technology     2,095        2,040        (55

Terex Corp., L+400, 1.5% LIBOR Floor, 4/28/17(2)

  Industrials     1,856        1,838        (18

Totes Isotoner Corp., L+575, 1.5% LIBOR Floor, 7/8/17

  Consumer Discretionary     3,259        3,184        (75

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

  Industrials     7,876        7,637        (239

US Security Associates, Inc., L+475, 1.5% LIBOR Floor, 7/26/17

  Consumer Discretionary     2,475        2,419        (56

Verint Systems, Inc., L+325, 1.3% LIBOR Floor, 10/6/17(2)

  Information Technology     2,719        2,654        (65

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

  Information Technology     7,722        7,410        (312

Wall Street Systems Inc., L+400, 1.5% LIBOR Floor, 2/2/17

  Information Technology     2,573        2,509        (64

Waste Industries USA, Inc., L+350, 1.3% LIBOR Floor, 3/18/17

  Industrials     3,755        3,750        (5
   

 

 

   

 

 

   

 

 

 

TOTAL

    $ 297,281      $ 287,466        (9,815
   

 

 

   

 

 

   
 

Total TRS Accrued Income and Liabilities:

     

    2,215   
       

 

 

 
 

Total TRS Market Value:

  

  $ (7,600
       

 

 

 

 

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

 

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

Note 9. Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares and under what terms:

 

   

the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);

 

   

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;

 

29


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’s history in repurchasing shares or portions thereof; and

 

   

the condition of the securities markets.

The Company currently intends to limit the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the sale of shares under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase shares. In addition, the Company will not repurchase shares in any calendar year in excess of 10% of the weighted average number of shares outstanding in the prior calendar year, or 2.5% in each quarter. The Company will offer to repurchase such shares on each date of repurchase at a price equal to 90% of the current offering price in effect on each date of repurchase. The Company’s board of directors may amend, suspend or terminate the repurchase program at any time upon 30 days’ notice. The first such tender offer commenced in March 2010, and the repurchase occurred in connection with the Company’s April 1, 2010 closing. On such date, 11,142 shares were repurchased at a price per share of $9.36 for aggregate consideration of approximately $104. During the nine months ended September 30, 2011, the Company repurchased 337,141 shares at $9.65 per share for aggregate consideration totaling $3,253. On October 3, 2011, the Company repurchased 121,089 shares at $9.585 per share for aggregate consideration totaling $1,161.

Note 10. Revolving Credit Facility

On January 28, 2011, Broad Street and Deutsche Bank AG, New York Branch, or Deutsche Bank, entered into an amended and restated multi-lender, syndicated revolving credit facility, or the credit facility, which amended and restated the revolving credit facility Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto, or the original credit facility. Deutsche Bank is a lender and serves as administrative agent under the credit facility.

The credit facility provides for borrowings in an aggregate amount up to $340,000. Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $240,000 (referred to herein as the Tranche A Commitment) or as Tranche C borrowings in an amount up to $100,000 (referred to herein as the Tranche C Commitment). The credit facility also provides for Tranche B borrowings in an amount up to $100,000 (referred to herein as the Tranche B Commitment), but there are currently no Tranche B Commitments outstanding. All Tranche A Commitments bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. All Tranche C Commitments bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. In connection with the amendment and restatement of the original credit facility, a $100,000 Tranche B Commitment that was provided under the original credit facility by Deutsche Bank to Broad Street on an uncommitted basis was converted into a $100,000 Tranche C Commitment provided by a new lender on a committed basis.

In connection with entering into the original credit facility, and from time to time thereafter, the Company has transferred debt securities to Broad Street as a contribution to capital and retains a residual interest in the contributed debt securities through the Company’s ownership of Broad Street. The Company may contribute additional debt securities to Broad Street from time to time and Broad Street may purchase additional debt securities from various sources. Broad Street has appointed the Company to manage its portfolio of debt

 

30


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)

 

securities pursuant to the terms of an investment management agreement. Broad Street’s obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities. The obligations of Broad Street under the credit facility are non-recourse to the Company and the Company’s exposure under the credit facility is limited to the value of the Company’s investment in Broad Street.

As of September 30, 2011, $340,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. The Company incurred costs of $1,554 in connection with obtaining and amending the credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the credit facility. As of September 30, 2011, $396 of such deferred financing costs have yet to be amortized to interest expense.

The effective interest rate under the credit facility was 2.43% as of September 30, 2011. Interest is paid quarterly in arrears and commenced August 20, 2010. The Company recorded interest expense of $2,293 and $1,343 for the three months ended September 30, 2011 and 2010, respectively, of which $225 and $170 related to the amortization of deferred financing costs. The Company recorded interest expense of $6,753 and $2,213 for the nine months ended September 30, 2011 and 2010, respectively, of which $653 and $331 related to the amortization of deferred financing costs. The Company paid $5,867 in interest expense for the nine months ended September 30, 2011. The average borrowings under the credit facility for the nine months ended September 30, 2011 and 2010 were $337,793 and $130,931, with a weighted average interest rate of 2.41% and 2.78%, respectively.

Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Street’s portfolio. The occurrence of certain events described as “Super-Collateralization Events” in the credit agreement that governs the credit facility, or a decline in the Company’s net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO / Blackstone Debt Funds Management LLC, or GDFM, the sub-adviser to FB Advisor; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as the Company’s sub-adviser or FB Advisor ceasing to act as the Company’s investment adviser; (iv) the Company ceasing to act as Broad Street’s investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) the Company or GDFM or FB Advisor committing fraud or other illicit acts in its or their investment advisory capacities.

In connection with the credit facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (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.

 

31


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)

 

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 BDCs.

Note 11. Broad Street Funding LLC

The financial statements of Broad Street are maintained separately 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 September 30, 2011 and December 31, 2010:

 

     September 30, 2011
(Unaudited)
     December 31, 2010  

Assets

     

Investments, at fair value (amortized cost—$611,138 and $527,964, respectively)

   $ 592,531       $ 540,186   

Cash

     29,576         9,534   

Receivable for investments sold and repaid

     2,885         5,162   

Interest receivable

     3,897         2,360   

Deferred financing costs

     396         835   
  

 

 

    

 

 

 

Total assets

   $ 629,285       $ 558,077   
  

 

 

    

 

 

 

Liabilities

     

Payable for investments purchased

   $ 26,076       $ 48,947   

Credit facility payable

     340,000         297,201   

Due to FS Investment Corporation

     924         992   

Interest payable

     1,116         883   

Accrued expenses

     32         43   
  

 

 

    

 

 

 

Total liabilities

     368,148         348,066   
  

 

 

    

 

 

 

Member’s equity

     261,137         210,011   
  

 

 

    

 

 

 

Total liabilities and member’s equity

   $ 629,285       $ 558,077   
  

 

 

    

 

 

 

Note 12. Repurchase Transaction

On July 21, 2011, the Company entered into a conventional debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, through two wholly-owned subsidiaries, pursuant to which up to $300,000 will be made available to the Company to fund investments in new securities and for other general corporate purposes. Pricing under the facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing transaction, loans in the Company’s portfolio having an aggregate market value of up to $600,000 may be sold by the Company from time to time to Locust Street, a newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an asset transfer agreement the Company entered into with Locust Street on July 21, 2011, or the Asset Transfer Agreement. Under the Asset Transfer Agreement, on July 21, 2011, the Company sold loans to Locust Street for a purchase price of approximately $365,396, all of which consisted of equity interests in Locust Street that Locust Street issued to the Company. The Company owns all of the equity in Locust Street.

 

32


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 12. Repurchase Transaction (continued)

 

The loans purchased by Locust Street will secure the obligations of Locust Street under Class A Floating Rate Notes, or the Class A Notes, to be issued by Locust Street from time to time to Race Street, another newly-formed, special-purpose bankruptcy-remote subsidiary of the Company, pursuant to an indenture dated as of July 21, 2011 with Citibank, N.A., as trustee, or the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420,000 and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value and intends to purchase $420,000 in aggregate principal amount of such Class A Notes within 180 days of July 21, 2011. The Company owns all of the equity in Race Street.

Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of a master repurchase agreement and the related annex and confirmation to such agreement, each dated as of July 21, 2011, or collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than July 15, 2015. The repurchase price paid by Race Street to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at the applicable pricing rate under the JPM Facility, as described below.

As of September 30, 2011, Class A Notes in the aggregate principal amount of $153,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $109,286. On October 3, 2011, an additional Class A Note in the principal amount of $70,000 was purchased by Race Street from Locust Street and subsequently sold to JPM for proceeds of $50,000. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2011, the amount accrued upon maturity under the repurchase agreement was $109,286, plus $608 of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Company’s financial statements.

If at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than 27% of their initial aggregate purchase price, or the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from the Company pursuant to a revolving credit agreement the Company entered into, as lender, with Race Street, as borrower, on July 21, 2011, or the Revolving Credit Agreement. The Company may, in its sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

Pricing under the JPM Facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. Commencing January 2013, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions will be subject to breakage fees calculated as the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

 

33


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 12. Repurchase Transaction (continued)

 

The Company incurred costs of $425 in connection with obtaining the JPM Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the JPM Facility. As of September 30, 2011, $404 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility was 3.50% as of September 30, 2011. The Company recorded interest expense of $629 for the three and nine months ended September 30, 2011, of which $21 related to the amortization of deferred financing costs. The average borrowings under the JPM Facility for the nine months ended September 30, 2011 were $86,650 with a weighted average interest rate of 3.50%.

Interest on the Class A Notes will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal on the Class A Notes will be due and payable on the stated maturity date of July 15, 2021. Pursuant to the Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date, or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the loans securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-advisor to FB Advisor.

In connection with the Class A Notes and the Indenture, Locust Street also entered into (i) a collateral management agreement with the Company, as collateral manager, dated as of July 21, 2011, pursuant to which the Company will manage the assets of Locust Street, and (ii) a collateral administration agreement with Virtus Group, LP, or Virtus, as collateral administrator, dated as of July 21, 2011, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street.

 

34


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share information)

 

 

 

Note 13. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2011 and the year ended December 31, 2010:

 

     Nine Months Ended
September 30, 2011
    Year Ended
December 31, 2010
 

Per Share Data(1):

    

Net asset value, beginning of period

   $ 9.42      $ 9.10   

Results of operations(2)

    

Net investment income

     0.63        0.40   

Net realized and unrealized appreciation (depreciation) on investments, total return swap and foreign currency

     (0.62     0.81   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.01        1.21   
  

 

 

   

 

 

 

Stockholder distributions(3)

    

Distributions from net investment income

     (0.62     (0.55

Distributions from net realized gain on investments

     (0.05     (0.32
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.67     (0.87
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(4)

     0.43        0.10   

Offering costs(2)

     (0.05     (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

     0.38        (0.02
  

 

 

   

 

 

 

Net asset value, end of period

   $ 9.14      $ 9.42   
  

 

 

   

 

 

 

Shares outstanding, end of period

     124,608,814        41,332,661   
  

 

 

   

 

 

 

Total return(5)

     4.14     13.08
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 1,139,276      $ 389,232   
  

 

 

   

 

 

 

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

     6.61     4.37
  

 

 

   

 

 

 

Ratio of operating expenses to average net assets(6)

     3.75     9.89
  

 

 

   

 

 

 

Portfolio turnover (6)

     75.58     67.48
  

 

 

   

 

 

 

 

(1) The share information utilized to determine per share data has been retroactively adjusted to reflect the stock distributions discussed in Note 5.

 

(2) The per share data was derived by using the weighted average shares outstanding during the period.

 

(3) The per share data for distributions reflects the actual amount of distributions paid per share during the period.

 

(4) The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous offering.

 

(5) The total return for the nine months ended September 30, 2011 was calculated by taking the net asset value per share as of September 30, 2011, adding the cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2010. The 2010 total return was calculated by taking the net asset value per share as of December 31, 2010, adding the cash distributions per share which were declared during the calendar year and dividing the total by the net asset value per share on December 31, 2009. The total return does not consider the effect of the sales load from the sale of the Company’s common stock.

 

(6) Weighted average net assets are used for this calculation. Ratios and portfolio turnover are not annualized.

 

35


Table of Contents

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except share and per share information)

Forward-Looking Statements

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of the investments that we expect to make;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our current and expected financings and investments;

 

   

the adequacy of our cash resources, financing sources and working capital;

 

   

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

 

   

our contractual arrangements and relationships with third parties;

 

   

actual and potential conflicts of interest with FB Advisor or GDFM or either of their affiliates;

 

   

the dependence of our future success on the general economy and its effect on the industries in which we invest;

 

   

the use of borrowed money to finance a portion of our investments;

 

   

the ability of FB Advisor to locate suitable investments for us and to monitor and administer our investments;

 

   

the ability of FB Advisor or its affiliates to attract and retain highly talented professionals;

 

   

our ability to qualify and maintain our qualification as a RIC and as a BDC;

 

   

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; and

 

   

the effect of changes to tax legislation and our tax position.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:

 

   

changes in the economy;

 

   

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

 

   

future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no

 

36


Table of Contents

obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and commenced operations on January 2, 2009 upon raising gross proceeds in excess of $2,500 from persons who are not affiliated with us or FB Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes as a RIC under the Code.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. Our portfolio is comprised primarily of investments in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies. We may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities. However, such investments are not expected to comprise a significant portion of our portfolio.

The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans that we invest in are often rated by a nationally recognized statistical ratings organization (NRSRO), and generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service or lower than “BBB-” by Standard & Poor’s Corporation). However, we may also invest in non-rated debt securities.

Revenues

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.

We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. We also generate revenues in the form of dividends on the equity or other securities we hold.

In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based

 

37


Table of Contents

fees. Any such fees generated in connection with our investments will be recognized as earned. No such fees were earned during the three and nine months ended September 30, 2011 or 2010.

Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FB Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FB Advisor is responsible for compensating our investment sub-adviser.

We also reimburse FB Advisor for its performance of services related to our administration and operation, provided that such reimbursement must be the lower of FB Advisor’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse FB Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FB Advisor. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

 

   

corporate and organizational expenses relating to offerings of our common stock, subject to limitations included in the investment advisory and administrative services agreement;

 

   

the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services;

 

   

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

   

investment advisory fees;

 

   

fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

 

   

interest payments on our debt or related obligations;

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

federal and state registration fees;

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

costs of proxy statements, stockholders’ reports and notices;

 

   

fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

 

   

direct costs such as printing, mailing, long distance telephone and staff;

 

   

fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002;

 

   

costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;

 

   

brokerage commissions for the purchase and sale of our investments; and

 

38


Table of Contents
   

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.

As the size of our asset base and number of investors have grown, our general and administrative expenses have increased accordingly. Printing fees have increased as the number of filings has increased and the volume of each printing has increased in conjunction with an increase in the number of stockholders. In addition, the fees payable to our directors who do not also serve in an executive officer capacity for us or FB Advisor are determined by reference to a sliding scale based on our net asset value.

Over the next several quarters, we expect our operating expenses related to our ongoing operations to continue to increase because of the anticipated growth in the size of our asset base.

Portfolio Investment Activity For The Nine Months Ended September 30, 2011 and for the year ended December 31, 2010

During the nine months ended September 30, 2011, we made investments in portfolio companies totaling $1,416,863. During the same period we sold investments totaling $413,694 and received principal repayments of $369,502.

As of September 30, 2011 and December 31, 2010, our investment portfolio consisted of interests in 164 and 144 portfolio companies, respectively, for a total fair value of $1,333,937 and $733,580, respectively. The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2011 and December 31, 2010:

 

    September 30, 2011
(Unaudited)
    December 31, 2010  
    Amortized
Cost (1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost (1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 708,346      $ 693,289        52   $ 473,881      $ 484,105        66

Senior Secured Loans—Second Lien

    346,523        339,522        26     131,960        135,962        19

Senior Secured Bonds

    128,912        120,443        9     34,265        35,796        4

Subordinated Debt

    111,871        96,586        7     51,384        51,178        7

Collateralized Securities

    66,509        69,600        5     24,024        26,539        4

Equity/Other

    18,437        14,497        1     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,380,598      $ 1,333,937        100   $ 715,514      $ 733,580        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on debt investments.

As of September 30, 2011, the portfolio companies that comprised our portfolio had an average annual EBITDA of approximately $413,000. The investments in our portfolio were purchased at an average price of 94.0% of par or stated value, as applicable, the weighted average credit rating of our portfolio was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.7% based upon the purchase price of our investments.

We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the

 

39


Table of Contents

terms of the underlying loan agreements. As of September 30, 2011, we held 3 such investments with an aggregate unfunded commitment of $15,709. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011
(Unaudited)
    December 31, 2010  

Industry Classification

   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Consumer Discretionary

   $ 323,055         24.2   $ 129,749         17.6

Consumer Staples

     54,423         4.1     56,184         7.7

Energy

     88,989         6.7     69,048         9.4

Financials

     114,744         8.6     59,431         8.1

Healthcare

     127,035         9.5     63,460         8.7

Industrials

     264,965         19.9     96,762         13.2

Information Technology

     216,448         16.2     117,499         16.0

Materials

     39,579         3.0     46,832         6.4

Telecommunication Services

     83,648         6.4     81,675         11.1

Utilities

     21,051         1.4     12,940         1.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,333,937         100.0   $ 733,580         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

 

Investment
    Rating
  

Summary Description

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.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011
(Unaudited)
    December 31, 2010  

Investment Rating

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

1

   $ —           —        $ 38,899         5

2

     1,282,142         96     682,861         93

3

     46,291         4     11,384         2

4

     4,884         —          436         —     

5

     620         —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,333,937         100   $ 733,580         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

40


Table of Contents

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations

Comparison of the three months ended September 30, 2011 and September 30, 2010

Revenues

We generated investment income of $33,295 and $8,678 for the three months ended September 30, 2011 and 2010, respectively, in the form of interest earned on senior secured loans, subordinated debt, CLOs, CDOs and corporate bonds in our portfolio and dividends earned on preferred equity securities. Such revenues represent $28,187 and $7,318 of cash interest earned as well as $5,108 and $1,360 in non-cash portions relating to accretion of discount and PIK interest for the three months ended September 30, 2011 and 2010, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

Expenses

Our total operating expenses were $4,986 and $5,119 for the three months ended September 30, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $7,432 and $2,318 for the three months ended September 30, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $915 and $285 for the three months ended September 30, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. During the three months ended September 30, 2011, we reversed $7,974 in capital gains incentive fees accrued by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended September 30, 2011. During the three months ended September 30, 2010, we accrued $373 in capital gains incentive fees.

We recorded interest expense of $2,922 and $1,343 for the three months ended September 30, 2011 and 2010, respectively, in connection with our credit facility and the JPM Facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $298 and $105 for the three months ended September 30, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $448 and $226 for the three months ended September 30, 2011 and 2010, respectively.

Our other general and administrative expenses totaled $945 and $469 for the three months ended September 30, 2011 and 2010, respectively, and consisted of the following:

 

    Three Months  Ended
September 30,
 
            2011                     2010          

Expenses associated with our independent audit and related fees

  $ 150      $ 75   

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

    21        40   

Legal fees

    86        62   

Printing fees

    146        110   

Fees paid to our independent directors

    215        50   

Other

    327        132   
 

 

 

   

 

 

 

Total

  $ 945      $ 469   
 

 

 

   

 

 

 

 

41


Table of Contents

 

(1) On March 14, 2011, William Goebel was appointed as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item will not include compensation paid to our chief financial officer and will only represent compensation paid to our chief compliance officer.

During the three months ended September 30, 2011 and 2010, the ratio of our operating expenses to our average net assets was 0.49% and 2.21%, respectively. We generally expect our operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. The lower ratio of operating expenses to average net assets during the three months ended September 30, 2011 compared to the three months ended September 30, 2010 can primarily be attributed to (i) the spreading of our operating expenses over a larger asset base and (ii) the reversal during the quarter of capital gains incentive fees that had been accrued as of June 30, 2011. Without such reversal, our ratio of operating expenses to our average net assets would have been 1.28% during the three months ended September 30, 2011.

Expense Reimbursement

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

Net Investment Income

Our net investment income totaled $28,309 ($0.26 per share) and $3,559 ($0.14 per share) for the three months ended September 30, 2011 and 2010, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $29,582 and $144,409, respectively, during the three months ended September 30, 2011, from which we realized net gains of $2,433. We also realized a net gain on our TRS of $1,895 during the three months ended September 30, 2011. We sold investments and received principal repayments of $53,128 and $16,616, respectively, during the three months ended September 30, 2010, from which we realized net gains of $294.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain/Loss on Foreign Currency

For the three months ended September 30, 2011, the net change in unrealized appreciation (depreciation) on investments totaled $(63,164) and the net change in unrealized gain/loss on foreign currency totaled $(72). The

 

42


Table of Contents

change in unrealized appreciation (depreciation) on our TRS was $(8,887) during this period. For the three months ended September 30, 2010, the net change in unrealized appreciation (depreciation) on investments totaled $7,902 and the net change in unrealized gain/loss on foreign currency totaled $93. The change in unrealized appreciation (depreciation) on our investments and our TRS during the three months ended September 30, 2011 was primarily driven by a general widening of credit spreads during such period resulting from, among other things, uncertainty surrounding European sovereign debt. The change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2010 was primarily driven by a general strengthening in the credit markets during the third quarter of 2010.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended September 30, 2011, the net decrease in net assets resulting from operations was $39,486 ($0.37 per share) compared to a net increase in net assets resulting from operations of $11,848 ($0.47 per share) during the three months ended September 30, 2010.

Comparison of the nine months ended September 30, 2011 and September 30, 2010

Revenues

We generated investment income of $76,209 and $17,872 for the nine months ended September 30, 2011 and 2010, respectively, in the form of interest earned on senior secured loans, subordinated debt, CLOs, CDOs and corporate bonds in our portfolio and dividends earned on preferred equity securities. Such revenues represent $67,248 and $14,403 of cash interest earned as well as $8,961 and $3,469 in non-cash portions relating to accretion of discount and PIK interest for the nine months ended September 30, 2011 and 2010, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

Expenses

Our total operating expenses were $27,577 and $10,063 for the nine months ended September 30, 2011 and 2010, respectively. Our operating expenses include base management fees attributed to FB Advisor of $18,216 and $4,605 for the nine months ended September 30, 2011 and 2010, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $1,903 and $635 for the nine months ended September 30, 2011 and 2010, respectively.

FB Advisor is eligible to receive incentive fees based on performance. During the nine months ended September 30, 2011, we reversed $4,063 in capital gains incentive fees accrued by us during the year ended December 31, 2010 as a result of the unrealized losses incurred in our portfolio during the nine months ended September 30, 2011. During the nine months ended September 30, 2010, we accrued $373 in capital gains incentive fees.

We recorded interest expense of $7,382 and $2,213 for the nine months ended September 30, 2011 and 2010, respectively, in connection with our credit facility and the JPM Facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $692 and $436 for the nine months ended September 30, 2011 and 2010, respectively. We incurred expenses with our stock transfer agent of $1,138 and $598 for the nine months ended September 30, 2011 and 2010, respectively.

 

43


Table of Contents

Our other general and administrative expenses totaled $2,309 and $1,203 for the nine months ended September 30, 2011 and 2010, respectively, and consisted of the following:

 

     Nine Months  Ended
September 30,
 
             2011                      2010          

Expenses associated with our independent audit and related fees

   $ 390       $ 230   

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

     74         117   

Legal fees

     192         251   

Printing fees

     363         219   

Fees paid to our independent directors

     479         141   

Other

     811         245   
  

 

 

    

 

 

 

Total

   $ 2,309       $ 1,203   
  

 

 

    

 

 

 

 

(1) On March 14, 2011, William Goebel was appointed as our chief financial officer. Mr. Goebel is employed by Franklin Square Holdings and will not receive any direct compensation from us in this capacity. As a result, for periods after March 31, 2011, this line item will not include compensation paid to our chief financial officer and will only represent compensation paid to our chief compliance officer.

During the nine months ended September 30, 2011 and 2010, the ratio of our operating expenses to our average net assets was 3.75% and 5.71%, respectively. We generally expect our operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. The lower ratio of operating expenses to average net assets during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 can primarily be attributed to (i) the spreading of our operating expenses over a larger asset base and (ii) the reversal during the period of capital gains incentive fees that had been accrued as of December 31, 2010. Without such reversal, our ratio of operating expenses to our average net assets would have been 4.30% during the nine months ended September 30, 2011.

Expense Reimbursement

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

Net Investment Income

Our net investment income totaled $48,632 ($0.63 per share) and $7,809 ($0.40 per share) for the nine months ended September 30, 2011 and 2010, respectively.

 

44


Table of Contents

Net Realized Gains or Losses

We sold investments and received principal repayments of $413,694 and $369,502, respectively, during the nine months ended September 30, 2011, from which we realized net gains of $22,456. We also realized a net gain on our TRS of $1,895 during the nine months ended September 30, 2011. We sold investments and received principal repayments of $81,958 and $48,105, respectively, during the nine months ended September 30, 2010, from which we realized net gains of $3,383.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain/Loss on Foreign Currency

For the nine months ended September 30, 2011, the net change in unrealized appreciation (depreciation) on investments totaled $(64,728) and the net change in unrealized gain/loss on foreign currency totaled $1. The change in unrealized appreciation (depreciation) on our TRS was $(7,600) during this period. For the nine months ended September 30, 2010, the net change in unrealized appreciation (depreciation) on investments totaled $1,811 and the net change in unrealized gain/loss on foreign currency totaled $(3). The change in unrealized appreciation (depreciation) on our investments and our TRS during the nine months ended September 30, 2011 was primarily driven by a general widening of credit spreads during the third quarter of 2011 resulting from, among other things, uncertainty surrounding European sovereign debt. The change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2010 was primarily driven by a general strengthening in the credit markets during the third quarter of 2010.

Net Increase in Net Assets Resulting from Operations

For the nine months ended September 30, 2011, the net increase in net assets resulting from operations was $656 ($0.01 per share) compared to a net increase in net assets resulting from operations of $13,000 ($0.67 per share) during the nine months ended September 30, 2010.

Financial Condition, Liquidity and Capital Resources

During the nine months ended September 30, 2011, we sold 83,613,294 shares of our common stock for gross proceeds of $890,497. The gross proceeds received during the nine months ended September 30, 2011 include reinvested stockholder distributions of $21,661. During the nine months ended September 30, 2011, we also incurred offering costs of $3,997 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $81,266 for the nine months ended September 30, 2011. These sales commissions and fees include $15,622 retained by the dealer manager, FS2, which is one of our affiliates.

As of November 11, 2011, we have sold 142,553,249 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $1,493,510 since commencing our continuous public offering. Including the seed capital contributed by Messrs. Forman and Adelman, we have raised gross proceeds of $1,494,510 as of November 11, 2011.

We generate cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous offering of shares of our common stock. We accept subscriptions on a continuous basis and issue shares at semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.

Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

 

45


Table of Contents

As of September 30, 2011, we had $270,171 in cash, which we have invested in interest bearing accounts, and $69,673 in cash held as collateral by Citibank under the terms of the TRS.

To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The following table reflects certain information regarding the quarterly tender offers that we have conducted since December 31, 2010:

 

For the Three Months Ended

   Repurchase Date    Shares
Repurchased
     Repurchase
Price Per
Share
     Aggregate
Consideration
for
Repurchased
Shares

(in thousands)
 

December 31, 2010

   January 3, 2011      99,633       $ 9.585       $ 955   

March 31, 2011

   April 1, 2011      158,258         9.675         1,531   

June 30, 2011

   July 1, 2011      79,250         9.675         767   

September 30, 2011

   October 3, 2011      121,089         9.585         1,161   

Revolving Credit Facility

On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated multi-lender, syndicated revolving credit facility, or the credit facility, which amended and restated the revolving credit facility Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto, or the original credit facility. Deutsche Bank is a lender and serves as administrative agent under the credit facility.

The credit facility provides for borrowings in an aggregate amount up to $340,000. Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $240,000 (referred to herein as the Tranche A Commitment) or as Tranche C borrowings in an amount up to $100,000 (referred to herein as the Tranche C Commitment). The credit facility also provides for Tranche B borrowings in an amount up to $100,000 (referred to herein as the Tranche B Commitment), but there are currently no Tranche B Commitments outstanding. All Tranche A Commitments bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. All Tranche C Commitments bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. In connection with the amendment and restatement of the original credit facility, a $100,000 Tranche B Commitment that was provided under the original credit facility by Deutsche Bank to Broad Street on an uncommitted basis was converted into a $100,000 Tranche C Commitment provided by a new lender on a committed basis.

In connection with entering into the original credit facility, and from time to time thereafter, we transferred debt securities to Broad Street as a contribution to capital and retain a residual interest in the contributed debt securities through our ownership of Broad Street. We may contribute additional debt securities to Broad Street from time to time and Broad Street may purchase additional debt securities from various sources. Broad Street has appointed us to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Broad Street’s obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities. The obligations of Broad Street under the credit facility are non-recourse to us and our exposure under the credit facility is limited to the value of our investment in Broad Street.

As of September 30, 2011, $340,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. We incurred costs of $1,554 in connection with obtaining and amending the credit facility, which we recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the credit facility. As of September 30, 2011, $396 of such deferred financing costs have yet to be amortized to interest expense.

 

46


Table of Contents

The effective interest rate under the credit facility was 2.43% as of September 30, 2011. Interest is paid quarterly in arrears and commenced August 20, 2010. We recorded interest expense of $6,753 and $2,213 for the nine months ended September 30, 2011 and 2010, respectively, of which $653 and $331 related to the amortization of deferred financing costs. We paid $5,867 in interest expense for the nine months ended September 30, 2011. The average borrowings under the credit facility for the nine months ended September 30, 2011 and 2010 were $337,793 and $130,931, respectively, with a weighted average interest rate of 2.41% and 2.78%, respectively.

Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Broad Street varies depending upon the types of assets in Broad Street’s portfolio. The occurrence of certain events described as “Super-Collateralization Events” in the credit agreement that governs the credit facility, or a decline in our net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM, the sub-adviser to FB Advisor; (ii) the bankruptcy or insolvency of GDFM or FB Advisor; (iii) GDFM ceasing to act as our sub-adviser or FB Advisor ceasing to act as our investment adviser; (iv) our ceasing to act as Broad Street’s investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value at least equal to $50,000; and (v) us, GDFM or FB Advisor committing fraud or other illicit acts in our or their investment advisory capacities.

In connection with the credit facility, Broad Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (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, FB Advisor or GDFM in our 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 September 30, 2011.

Borrowings of Broad Street will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Total Return Swap

On March 18, 2011, Arch Street entered into a TRS for senior secured floating rate loans with Citibank. On June 9, 2011, Arch Street entered into an amendment to the TRS to increase the maximum market value of the portfolio of loans subject to the TRS.

The TRS with Citibank enables us, through our ownership of Arch Street, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Arch Street borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Arch Street under the TRS are non-recourse to us and our exposure under the TRS is limited to the value of our investment in Arch Street, which generally will equal the value of cash collateral provided by Arch Street under the TRS. Pursuant to the terms of the TRS, Arch Street may select a portfolio of loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $300,000. Arch Street is required to initially cash collateralize a specified percentage of each loan (generally between 20% and 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, Arch Street

 

47


Table of Contents

has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Arch Street are available to pay our debts.

Pursuant to the terms of an investment management agreement that we have entered into with Arch Street, we act as the manager of the rights and obligations of Arch Street under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS. Accordingly, the loans selected by Arch Street for purposes of the TRS are selected by us in accordance with our investment objectives and strategy to generate current income and, to a lesser extent, long-term capital appreciation. In addition, pursuant to the terms of the TRS, Arch Street may select any loan or obligation available in the market to be included in the portfolio of loans that meets the obligation criteria set forth in the TRS Agreement.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS Agreement. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Arch Street receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Arch Street pays to Citibank interest at a rate equal to one-month LIBOR + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Arch Street will either receive from Citibank the appreciation in the value of such loan, or pay to Citibank any depreciation in the value of such loan.

Under the terms of the TRS, Arch Street may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Arch Street may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Arch Street. The amount of collateral required to be posted by Arch Street is determined primarily on the basis of the aggregate value of the underlying loans.

We have no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. We may, but are not obligated to, increase our equity investment in Arch Street for the purpose of funding any additional collateral or payment obligations for which Arch Street may become obligated during the term of the TRS. If we do not make any such additional investment in Arch Street and Arch Street fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Arch Street under the TRS. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee.

Citibank may terminate the TRS on or after March 18, 2013, the second anniversary of the effectiveness of the TRS. Arch Street may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank. Any termination prior to the second anniversary of the effectiveness of the TRS will result in payment of an early termination fee to Citibank. In the event of an early termination of the TRS, Arch Street would be required to pay an early termination fee based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments which would be owed by Arch Street to Citibank for the period from the termination date through and including the earlier of (i) the one year anniversary of the termination date and (ii) March 18, 2013. Such monthly payments will equal the product of (x) 90%, multiplied by (y) the aggregate notional amount of the TRS ($300,000), multiplied by (z) 1.25% per annum. If the TRS had been terminated as of September 30, 2011, Arch Street would have been required to pay an early termination fee of approximately $3,422. Arch Street is required to pay a minimum usage fee in connection with the TRS. Arch Street will also pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in

 

48


Table of Contents

the open market. Citibank reports the mark-to-market values of the underlying loans to Arch Street. Each of the loans underlying the TRS is required to be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. As of September 30, 2011, the fair value of the TRS was $(7,600). The fair value of the TRS is reflected as an unrealized loss on total return swap on our consolidated balance sheet. The change in value of the TRS is reflected in our statement of operations as net change in unrealized appreciation (depreciation) on total return swap. As of September 30, 2011, Arch Street had selected 65 underlying loans with a total notional amount of $297,281 and posted $69,673 in cash collateral held by Citibank (of which only $61,221 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheet.

For purposes of the asset coverage ratio test applicable to us as a BDC, we have agreed with the staff of the SEC to treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Arch Street under the TRS, as a senior security for the life of that instrument. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further, for purposes of Section 55(a) under the 1940 Act, we have agreed with the staff of the SEC to treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

JPM Financing

On July 21, 2011, we entered into a conventional debt financing arrangement with JPM, through two wholly-owned subsidiaries, pursuant to which up to $300,000 will be made available to us to fund investments in new securities and for other general corporate purposes. Pricing under the facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. We elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing transaction, loans in our portfolio having an aggregate market value of up to $600,000 may be sold by us from time to time to Locust Street, a newly-formed, special-purpose bankruptcy-remote subsidiary of ours, pursuant to the Asset Transfer Agreement. Under the Asset Transfer Agreement, on July 21, 2011, we sold loans to Locust Street for a purchase price of approximately $365,396, all of which consisted of equity interests in Locust Street that Locust Street issued to us. We own all of the equity in Locust Street.

The loans purchased by Locust Street will secure the obligations of Locust Street under the Class A Notes to be issued by Locust Street from time to time to Race Street, another newly-formed, special-purpose bankruptcy-remote subsidiary of ours, pursuant to the Indenture. The Class A Notes may be issued in an aggregate principal amount of up to $420,000 and mature on July 15, 2021. Race Street will purchase the issued Class A Notes from time to time at a purchase price equal to their par value and intends to purchase $420,000 in aggregate principal amount of such Class A Notes within 180 days of July 21, 2011. We own all of the equity in Race Street.

Race Street, in turn, has entered into a repurchase transaction with JPM pursuant to the terms of the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 71% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $420,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility will not exceed $300,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to

 

49


Table of Contents

JPM. The final repurchase transaction must occur no later than July 15, 2015. The repurchase price paid by Race Street to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at the applicable pricing rate under the JPM Facility, as described below.

As of September 30, 2011, Class A Notes in the aggregate principal amount of $153,000 had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $109,286. On October 3, 2011, an additional Class A Note in the principal amount of $70,000 was purchased by Race Street from Locust Street and subsequently sold to JPM for proceeds of $50,000. We funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2011, the amount accrued upon maturity under the repurchase agreement was $109,286, plus $608 of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on our financial statements.

If at any time during the term of the JPM Facility the market value of the underlying loans held by Locust Street securing the Class A Notes declines by an amount greater than the Margin Threshold, Race Street will be required to post cash collateral with JPM in an amount at least equal to the amount by which the market value of such loans at such time is less than the Margin Threshold. In such event, in order to satisfy these margin-posting requirements, Race Street intends to borrow funds from us pursuant to the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Race Street pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

Pricing under the JPM Facility is based on three-month LIBOR plus a spread of 3.25% per annum for the relevant period. Commencing January 2013, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions will be subject to breakage fees calculated as the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

We incurred costs of $425 in connection with obtaining the JPM Facility, which we have recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the JPM Facility. As of September 30, 2011 $404 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility is 3.50% as of September 30, 2011. We recorded interest expense of $629 for the three and nine months ended September 30, 2011, of which $21 related to the amortization of deferred financing costs. The average borrowings under the JPM Facility for the nine months ended September 30, 2011 were $86,650 with a weighted average interest rate of 3.50%.

Interest on the Class A Notes will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal on the Class A Notes will be due and payable on the stated maturity date of July 15, 2021. Pursuant to the Indenture, Locust Street has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. In addition to customary events of default included in similar transactions, the Indenture contains the following events of default: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date, or to make interest payments on the Class A Notes within five business days of when due; (b) the failure of the aggregate outstanding principal balance (subject to certain reductions) of the loans securing the Class A Notes to be at least 130% of the outstanding principal amount of the Class A Notes; and (c) GDFM ceasing to be the sub-advisor to FB Advisor.

 

50


Table of Contents

In connection with the Class A Notes and the Indenture, Locust Street also entered into (i) a collateral management agreement with us, as collateral manager, dated as of July 21, 2011, pursuant to which we will manage the assets of Locust Street, and (ii) a collateral administration agreement with Virtus, as collateral administrator, dated as of July 21, 2011, pursuant to which Virtus will perform certain administrative services with respect to the assets of Locust Street.

RIC Status and Distributions

We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must distribute at least 90% of our “Investment Company Taxable Income,” as defined by the Code, each year. As long as the distributions are declared by the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which we paid no federal income taxes.

Following commencement of our operations, we declared our first distribution on January 29, 2009. Subject to the board of directors’ discretion and applicable legal restrictions, our board of directors intends to authorize and declare distributions on either a semi-monthly or monthly basis and pay distributions on either a monthly or quarterly basis. While we historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, we began to pay distributions on a monthly rather than quarterly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date we accept each stockholder’s subscription for shares of our common stock. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. Each year a statement on Form 1099-DIV identifying the source of the distributions will be mailed to our stockholders. No portion of the distributions paid during the nine months ended September 30, 2011 or 2010 represented a return of capital for tax purposes.

We make our ordinary distributions in the form of cash, out of assets legally available, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to the U.S. stockholder.

The following table reflects the cash distributions per share that we have declared and paid on our common stock during the nine months ended September 30, 2011 and 2010:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2010

     

March 31, 2010(1)

   $ 0.1860       $ 2,443   

June 30, 2010

   $ 0.1875       $ 3,589   

September 30, 2010

   $ 0.1875       $ 4,763   

Fiscal 2011

     

March 31, 2011

   $ 0.1929       $ 9,948   

June 30, 2011

   $ 0.2787       $ 20,529   

September 30, 2011

   $ 0.2016       $ 22,116   

 

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

 

51


Table of Contents

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

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock.

We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. The following table reflects, for tax purposes, the sources of the cash distributions that we have paid on our common stock during the nine months ended September 30, 2011, and 2010:

 

     Nine Months Ended September 30,  
     2011     2010  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     48,572         92     7,872         73

Capital gains proceeds from the sale of assets

     4,021         8     2,923         27

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 52,593         100   $ 10,795         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the nine months ended September 30, 2011 and 2010, 88% and 81%, respectively, of our gross investment income was attributable to cash interest earned and 12% and 19%, respectively, was attributable to non-cash accretion of discount and PIK interest.

The aggregate cost of our investments for federal income tax purposes totaled $1,380,598 and $715,695 as of September 30, 2011 and December 31, 2010, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $(54,261) and $17,885 as of September 30, 2011 and December 31, 2010, respectively. Our net investment income on a tax basis for the nine months ended September 30, 2011 and 2010 was $48,572 and $7,869, respectively. We distributed all of our net investment income earned as of September 30, 2011 and 2010.

 

52


Table of Contents

The difference between our GAAP-basis net investment income and our tax-basis net investment income is due to the tax-basis amortization of organization and start-up costs incurred prior to the commencement of our operations, interest income earned on a tax basis due to the required accretion of discount on non-performing loans, and the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by us. See “—Critical Accounting Policies—Capital Gains Incentive Fee.” The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the nine months ended September 30, 2011 and 2010:

 

     Nine Months  Ended
September 30,
 
     2011     2010  

GAAP-basis net investment income

   $ 48,632      $ 7,809   

Amortization of organizational costs

     (32     (33

Tax accretion of discount on investments

     4,035        93   

Reversal of incentive fee accrual on unrealized gains

     (4,063     —     
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 48,572      $ 7,869   
  

 

 

   

 

 

 

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

The following table reflects the stock distributions per share that we have declared on our common stock to date:

 

Date Declared

   Record Date    Payment Date    Distribution
Percentage
    Shares
Issued
 

Fiscal 2009

          

March 31, 2009

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

April 30, 2009

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

May 29, 2009

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

June 30, 2009

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

July 30, 2009

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

August 31, 2009

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

December 31, 2009

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

Fiscal 2010

          

January 28, 2010

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

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

The stock distributions increased the number of shares outstanding, thereby reducing our net asset value per share. However, because the stock distributions were issued to all stockholders in proportion to their current holdings, the reduction in net asset value per share as a result of the stock 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, 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.

 

53


Table of Contents

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

 

     September 30, 2011
(Unaudited)
    December 31,
2010
 

Distributable ordinary income

   $ 17,403      $ 1,290   

Incentive fee accrual on unrealized gains

     —          (4,063

Unamortized organizational costs

     (525     (558

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

     (54,261     17,885   
  

 

 

   

 

 

 
   $ (37,383   $ 14,554   
  

 

 

   

 

 

 

 

(1) As of September 30, 2011 and December 31, 2010, the gross unrealized appreciation on our investments was $14,449 and $20,136, respectively. As of September 30, 2011 and December 31, 2010, the gross unrealized depreciation on our investments and total return swap was $68,710 and $2,251, respectively.

Critical Accounting Policies

Our financial statements are prepared in conformity with 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 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.

 

54


Table of Contents

With respect to investments for which market quotations are not readily available, we have undertaken a multi-step valuation process each quarter, as described below:

 

   

our quarterly valuation process begins with each portfolio company or investment being initially valued by FB Advisor’s management team, with such valuation potentially taking into account information received from any of our sub-advisers or an independent valuation firm, if applicable;

 

   

preliminary valuation conclusions are then documented and discussed with our valuation committee;

 

   

our valuation committee reviews the preliminary valuation and FB Advisor’s management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and

 

   

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FB Advisor, the valuation committee and any third-party valuation firm, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations on our financial statements. Below is a description of factors that our board of directors may consider when valuing our equity and debt investments.

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we will incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors will consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our investments as of September 30, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our CLOs, CDOs and subordinated debt investments by obtaining bid and ask prices from independent dealers and we valued all of our other debt investments, including our senior secured bond investments, by using an independent third-party pricing service,

 

55


Table of Contents

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. Seven of our senior secured loan investments and two subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the value of such investments by considering the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of our equity investments were valued by the same independent valuation firm, which determined the value of such investments by considering various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. We valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the loans underlying the TRS are valued based on quotes received from third-party dealers. The value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS.

Our investments as of December 31, 2010 consisted primarily of debt securities that traded on a private over-the-counter market for institutional investors. We valued our CLOs, CDOs and subordinated debt investments by obtaining bid and ask prices from independent dealers. We valued all of our other investments, including our senior secured bond investments, by using an independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end.

We periodically benchmark the bid and ask prices we receive from independent dealers and the third-party pricing service against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and our experience in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing service or independent dealers, including the use of an independent valuation firm. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan. Upon the prepayment of a loan or security, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and securities as interest income when we receive such amounts.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in portfolio investment values during the reporting period due to the impact of foreign currency fluctuations.

 

56


Table of Contents

Capital Gains Incentive Fee

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

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

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 September 30, 2011 and 2010, we incurred $7,432 and $2,318, respectively, in base management fees and $915 and $285, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the nine months ended September 30, 2011 and 2010, we incurred $18,216 and $4,605, respectively, in base management fees and $1,903 and $635, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FB Advisor is eligible to receive incentive fees based on performance. During the three months ended September 30, 2011, we reversed $7,974 in capital gains incentive fees accrued by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended September 30, 2011. During each of the three and nine months ended September 30, 2010, we accrued $373 in capital gains incentive fees. During the nine months ended September 30, 2011, we reversed $4,063 in capital gains incentive fees accrued by us during the year ended December 31, 2010 as a result of the unrealized losses incurred in our portfolio during the nine months ended September 30, 2011. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

 

57


Table of Contents

As of September 30, 2011, $340,000 was outstanding under the credit facility between Broad Street and Deutsche Bank. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 10, 2012. As of September 30, 2011, Race Street had sold $153,000 in aggregate principal amount of Class A Notes to JPM under the JPM Facility for aggregate proceeds of $109,286. Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than July 15, 2015.

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the credit facility between Broad Street and Deutsche Bank and the JPM Facility between Race Street and JPM at September 30, 2011 is as follows:

 

     Payments Due By Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

Borrowings of Broad Street(1)

   $ 340,000       $ 340,000         —           —           —     

Borrowings of Race Street(2)

     109,286         109,286         —           —           —     

 

(1) At September 30, 2011, no amounts remained unused under the credit facility.

 

(2) At September 30, 2011, $190,714 remained unused under the JPM Facility.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which provides additional guidance to improve disclosures regarding fair value measurements. This guidance requires two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers and (2) a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of this guidance is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of this guidance, including the gross presentation of Level 3 roll forward information, did not have a significant impact on our consolidated financial statements or disclosures.

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

 

58


Table of Contents

Related Party Transactions

We have entered into an investment advisory and administrative services agreement with FB Advisor. Pursuant to the investment advisory and administrative services agreement, FB Advisor is paid a base management fee of 2% of average gross assets and an incentive fee of 20% of net investment income, subject to an annualized 8% hurdle, and 20% of net realized capital gains, if applicable. We commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon the commencement of our operations. During the three months ended September 30, 2011 and 2010, FB Advisor earned $7,432 and $2,318, respectively, in base management fees. During the nine months ended September 30, 2011 and 2010, FB Advisor earned $18,216 and $4,605, respectively, in base management fees. Management fees are paid on a quarterly basis in arrears. We paid $14,093 and $2,726 of these fees during the nine months ended September 30, 2011 and 2010, respectively.

We accrue for the capital gains incentive fee, which, if earned, is paid annually. We accrue the incentive fee based on net realized and unrealized gains. However, under the terms of our investment advisory and administrative services agreement, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. During the three months ended September 30, 2011, we reversed $7,974 in capital gains incentive fees accrued by us as of June 30, 2011 as a result of the unrealized losses incurred in our portfolio during the three months ended September 30, 2011. During each of the three and nine months ended September 30, 2010, we accrued $373 in capital gains incentive fees. During the nine months ended September 30, 2011, we reversed $4,063 in capital gains incentive fees accrued by us during the year ended December 31, 2010 as a result of the unrealized losses incurred in our portfolio during the nine months ended September 30, 2011.

We also reimburse FB Advisor for expenses necessary for its performance of services related to our administration and operation, provided that such reimbursement is equal to the lower of FB Advisor’s actual costs or the amount that we would be required to pay for comparable services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. During the nine months ended September 30, 2011 and 2010, we incurred administrative services charges of $1,903 and $635, respectively, attributable to FB Advisor. Of these charges, $1,366 and $635, respectively, related to the allocation of costs of administrative personnel for services provided to us by employees of FB Advisor and the remainder related to other reimbursable expenses. We paid FB Advisor $1,419 and $496, respectively, for the services incurred under this arrangement during the nine months ended September 30, 2011 and 2010.

Franklin Square Holdings funded offering costs and other expenses in the amount of $486 for the nine months ended September 30, 2010. The offering costs and other expenses funded by Franklin Square Holdings during the nine months ended September 30, 2010 were recorded 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. All offering costs for the nine months ended September 30, 2011 have been funded directly by us.

The dealer manager for our public offering is FS2 , which is one of our affiliates. During the nine months ended September 30, 2011 and 2010, FS2 retained $15,622 and $3,063, respectively, for selling commissions and dealer manager fees in connection with the sale of our common stock.

Under the terms of the investment advisory and administrative services agreement, when our registration statement was declared effective by the SEC and we were successful in raising gross proceeds from unrelated outside investors of at least $2,500, or the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On January 2, 2009, we exceeded the minimum offering requirement. We paid total reimbursements of $641 and $1,678 to FB Advisor and its affiliates during

 

59


Table of Contents

the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, no amounts were payable to FB Advisor and its affiliates under this arrangement. The reimbursements are recorded as a reduction of capital.

FB Advisor’s senior management team is comprised of the same personnel as the senior management team of FS Investment Advisor, LLC, the investment adviser to Franklin Square Holdings’ other affiliated BDC, FS Energy and Power Fund. As a result, such personnel provide investment advisory services to both us and FS Energy and Power Fund. While neither FB Advisor nor FS Investment Advisor, LLC is currently making private corporate debt investments for clients other than us and FS Energy and Power Fund, respectively, either one, or both, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FB Advisor or its management team. In addition, even in the absence of FB Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Energy and Power Fund rather than to us.

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

 

Item  3. Quantitative and Qualitative Disclosures about Market Risk.

We are subject to financial market risks, including changes in interest rates. As of September 30, 2011, 24.6% of our portfolio investments (based on fair value) paid fixed interest rates and the remainder paid variable interest rates. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we predominantly hold variable rate investments, and to declines in the value of any fixed rate investments we hold. Accordingly, an increase in interest rates would make it easier for us to meet or exceed our incentive fee preferred return, as defined in the investment advisory and administrative services agreement we have entered into with FB Advisor, and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to FB Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the $340,000 credit facility which Broad Street maintains with Deutsche Bank, Broad Street borrows at a floating rate based on LIBOR. Under the terms of the TRS between Arch Street and Citibank, Arch Street pays fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of a pool of loans having a maximum notional amount of $300,000. Pursuant to the terms of the financing arrangement with JPM, borrowings under the Revolving Credit Agreement, pricing of repurchase transactions under the JPM Facility and interest on the Class A Notes are all subject to a floating rate based on LIBOR. We expect any future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

 

60


Table of Contents

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 September 30, 2011:

 

LIBOR Basis Point Change

   Interest
Income(1)
     Interest
Expense
    Net Interest
Income
 

Down 35 basis points

   $  148,478       $ (11,108   $  137,370   

Up 100 basis points

     149,137         (16,939     132,198   

Up 200 basis points

     158,396         (21,259     137,136   

Up 300 basis points

     170,539         (25,578     144,961   

 

(1) Includes the net effect of the change in interest rates on the unrealized appreciation/depreciation on the TRS. Assumes no change in defaults or prepayments by portfolio companies.

We expect that our long-term investments will be financed primarily with equity and long-term debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the nine months ended September 30, 2011 and the year ended December 31, 2010, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

 

Item  4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

61


Table of Contents

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 Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 and our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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

During the three months ended September 30, 2011, we issued 921,932 shares of common stock under our distribution reinvestment plan pursuant to an exemption from the registration requirements of the Securities Act.

 

Item  3. Defaults upon Senior Securities.

Not applicable.

 

Item  4. Reserved.

 

Item  5. Other Information.

Custody Agreement

On November 14, 2011, we entered into a custodian agreement with State Street Bank and Trust Company, or SSBT, effective as of November 16, 2011. Under the custodian agreement, SSBT will hold all of our portfolio securities and cash, and transfer such securities or cash pursuant to our instructions. The custodian agreement has an initial term ending November 14, 2014, which shall automatically renew for successive one-year terms unless a written notice of non-renewal is delivered by the non-renewing party no later than ninety (90) days prior to the expiration of the term.

 

62


Table of Contents
Item  6. Exhibits.

 

  3.1    Articles of Amendment and Restatement of FS Investment Corporation, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K (File No. 814-00757), filed on March 31, 2009)
  3.2    Amended and Restated Bylaws of FS Investment Corporation. (Incorporated by reference to Exhibit (b)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008)
  4.1    Form of Subscription Agreement. (Incorporated by reference to Appendix A filed with the Company’s final prospectus filed pursuant to Rule 497 (File No. 333-174784) filed on November 1, 2011)
  4.2    Amended and Restated Distribution Reinvestment Plan, effective as of May 13, 2008. (Incorporated by reference to Exhibit (e)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008)
  4.3    Amended and Restated Distribution Reinvestment Plan, effective as of January 1, 2012. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on November 14, 2011)
10.1    Investment Advisory and Administrative Services Agreement by and between the Company and FB Income Advisor, LLC. (Incorporated by reference to Exhibit (g) filed with the Company’s registration statement on Form N-2 (File No. 333-149374), filed on February 25, 2008)
10.2    First Amendment to the Investment Advisory and Administrative Services Agreement by and between the Company and FB Income Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008)
10.3    Investment Sub-advisory Agreement by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on June 19, 2008)
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 Amendment to Form of Dealer Manager Agreement by and between the Compnay and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784), filed on October 20, 2011)
10.6    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)
10.7    Form of Amendment to Form of Selected Dealer Agreement. (Included as Exhibit A to the Form of Amendment to Form of Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(4) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784), filed on October 20, 2011)
10.8    Custodian Services Agreement by and between the Company and The Bank of New York Mellon (f/k/a PFPC Trust Company). (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)
10.9*    Custodian Agreement, dated as of November 14, 2011, by and between State Street Bank and Trust Company and FS Investment Corporation.

 

63


Table of Contents
10.10    Form of Escrow Agreement by and between the Company and UMB Bank, N.A. (Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374), filed on September 17, 2008)
10.11    Amended and Restated Credit Agreement by and among Broad Street Funding LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto, dated as of January 28, 2011. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on February 1, 2011
10.12    Asset Contribution Agreement by and between the Company and Broad Street Funding LLC, dated March 10, 2010. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on March 16, 2010)
10.13    First Amendment to Asset Contribution Agreement by and between the Company and Broad Street Funding LLC, dated as of June 17, 2010. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 19, 2010)
10.14    Investment Management Agreement by and between the Company and Broad Street Funding LLC, dated March 10, 2010. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on March 16, 2010)
10.15    Amended and Restated Security Agreement by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch, dated as of January 28, 2011. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on February 1, 2011 (Items 1.01, 2.03 and 9.01))
10.16    ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, by and between Arch Street Funding LLC and Citibank, N.A., each dated as of March 18, 2011. (Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K (File No. 814-00757), filed on March 24, 2011)
10.17    Amended and Restated Confirmation Letter Agreement by and between Arch Street Funding LLC and Citibank, N.A., dated as of June 9, 2011. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on June 13, 2011)
10.18    Investment Management Agreement by and between the Company and Arch Street Funding LLC, dated as of March 18, 2011. (Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K (File No. 814-00757), filed on March 24, 2011)
10.19    Asset Transfer Agreement by and between the Company and Locust Street Funding LLC, dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
10.20    Indenture by and between Locust Street Funding LLC and Citibank, N.A., as trustee, dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
10.21    Locust Street Funding LLC Class A Floating Rate Secured Note due 2021. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
10.22    TBMA/ISMA 2000 Global Master Repurchase Agreement between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Confirmation thereto, each dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
10.23    Revolving Credit Agreement by and between the Company and Race Street Funding LLC, dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)

 

64


Table of Contents
10.24    Collateral Management Agreement by and between Locust Street Funding LLC and the Company, dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
10.24    Collateral Administration Agreement by and among Locust Street Funding LLC, the Company and Virtus Group, LP, dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K (File No. 814-00757), filed on July 27, 2011)
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.

 

65


Table of Contents

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 November 14, 2011.

 

FS INVESTMENT CORPORATION
By:   /s/    Michael C. Forman
 

Michael C. Forman

Chief Executive Officer

(Principal Executive Officer)

By:   /s/    William Goebel
 

William Goebel

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

66