Prospectus - FS Investment Corporation
Table of Contents
PROSPECTUS   

Filed Pursuant to Rule 497

File No. 333-149374

Maximum Offering of 150,000,000 Shares of Common Stock

LOGO

We are a specialty finance company that invests primarily in the debt securities of private companies. Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation.

We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. We have elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code of 1986, as amended. We are managed by FB Income Advisor, LLC, a private investment firm that is registered as an investment adviser with the Securities and Exchange Commission and is an affiliate of ours. FB Advisor oversees the management of our activities and is responsible for making investment decisions for our portfolio. FB Advisor has engaged GSO / Blackstone Debt Funds Management LLC, a subsidiary of GSO Capital Partners LP, to act as a sub-adviser.

Through our affiliate, FS2 Capital Partners, LLC, or the dealer manager, we are offering up to 150,000,000 shares of common stock in this offering at a current offering price of $10.70 per share. The dealer manager is not required to sell any specific number or dollar amount of shares but will use its best efforts to sell the shares offered. The minimum permitted purchase is $5,000 in shares of our common stock. As of January 31, 2011, we have sold an aggregate of 46,457,573 shares of our common stock for gross proceeds of approximately $471 million.

We are offering our shares on a continuous basis at a current offering price of $10.70 per share; however, to the extent that our net asset value increases, we will sell at a price necessary to ensure that shares are not sold at a price per share, after deduction of selling commissions and dealer manager fees, that is below net asset value per share. In the event of a material decline in our net asset value per share, which we consider to be a 5% decrease below our current net offering price, and subject to certain conditions, we will reduce our offering price accordingly. Therefore, persons who tender subscriptions for shares of our common stock in this offering must submit subscriptions for a certain dollar amount, rather than a number of shares of common stock and, as a result, may receive fractional shares of our common stock. We have filed and will continue to file post-effective amendments to the registration statement of which this prospectus is a part, that are subject to SEC review, to allow us to continue this offering for three years.

We do not intend to list our shares on any securities exchange during the offering period, and we do not expect a secondary market in the shares to develop. As a result, you should not expect to be able to resell your shares regardless of how we perform. If you are able to sell your shares, you will likely receive less than your purchase price. We have implemented a share repurchase program, but only a limited number of shares are eligible for repurchase by us. Accordingly, you should consider that you may not have access to the money you invest for at least five years, or until we complete a liquidity event, which we intend to seek to complete between five and seven years following the completion of our offering stage. There is no assurance that we will complete a liquidity event within such timeframe or at all. As a result of the foregoing, an investment in our shares is not suitable for investors that require short-term liquidity. See “Share Repurchase Program” and “Liquidity Strategy.”

 

 

Investing in our common stock may be considered speculative and involves a high degree of risk, including the risk of a substantial loss of investment. See “Risk Factors” beginning on page 33 to read about the risks you should consider before buying shares of our common stock, including the risk of leverage.

An investment in our shares is not suitable for all investors. See “Suitability Standards” for information on the suitability standards that investors must meet in order to purchase shares of our common stock in this offering.

We intend to continue to issue shares of our common stock in this offering. As a result, your ownership in us is subject to dilution. See “Risk Factors—Risks Relating to an Investment in Our Common Stock—A stockholder’s interest in us will be diluted if we issue additional shares, which could reduce the overall value of an investment in us.”

This prospectus contains important information about us that a prospective investor should know before investing in our common stock. Please read this prospectus before investing and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or SEC. This information will be available free of charge by contacting us at 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104-2867 or by telephone at (215) 495-1150 or on our website at www.fsinvestmentcorp.com. The SEC also maintains a website at www.sec.gov that contains such information.

Neither the SEC, the Attorney General of the State of New York nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Except as specifically required by the Investment Company Act of 1940, as amended, and the rules and regulations thereunder, the use of forecasts is prohibited and any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in our common stock is not permitted.

 

 

 

     Per Share      Total Maximum  

Price to Public(1)

   $ 10.70       $ 1,605,000,000   

Sales Load(2)

   $ 1.07       $ 160,500,000   

Net Proceeds (Before Expenses)(3)

   $ 9.63       $ 1,444,500,000   
(1) Assumes all shares are sold at the current offering price of $10.70 per share, which is subject to adjustment based upon, among other things, our net asset value per share. Prior to February 1, 2011, our offering price was $10.65 per share; prior to January 3, 2011, our offering price was $10.50 per share; prior to November 1, 2010, our offering price was $10.40 per share; and prior to October 1, 2009, our offering price was $10.00 per share.
(2) “Sales Load” includes selling commissions of 7.0% and dealer manager fees of 3.0%.
(3) We estimate that we will incur approximately $24.1 million of expenses if the maximum number of common shares is sold.

Because you will pay a sales load of up to 10% and offering expenses of up to 1.5%, if you invest $100 in the Company’s shares and pay the full sales load, between $88.50 and $90.00 will actually be used by us for investments. See “Estimated Use of Proceeds.”

The date of this prospectus is February 8, 2011.

 

 

FS2 Capital Partners, LLC


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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the SEC, using a continuous offering process. Periodically, as we make material investments or have other material developments, we will provide a prospectus supplement that may add, update or change information contained in this prospectus. We will endeavor to avoid interruptions in the continuous offering of our shares of common stock, including, to the extent permitted under the rules and regulations of the SEC, by filing an amendment to the registration statement with the SEC if our net asset value declines more than ten percent from our net asset value as of the effective date of this registration statement. There can be no assurance, however, that our continuous offering will not be suspended while the SEC reviews such amendment, until it is declared effective.

Any statement that we make in this prospectus will be modified or superseded by any inconsistent statement made by us in a subsequent prospectus supplement. The registration statement we filed with the SEC includes exhibits that provide more detailed descriptions of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC and any prospectus supplement, together with additional information described below under “Available Information.” In this prospectus, we use the term “day” to refer to a calendar day, and we use the term “business day” to refer to any day other than Saturday, Sunday, a legal holiday or a day on which banks in New York City are authorized or required to close.

You should rely only on the information contained in this prospectus. Neither we, nor the dealer manager have authorized any other person to provide you with different information from that contained in this prospectus. The information contained in this prospectus is complete and accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or sale of our common stock. If there is a material change in the affairs of our company, we will amend or supplement this prospectus.

For information on the suitability standards that investors must meet in order to purchase shares of our common stock in this offering, see “Suitability Standards.”

 

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TABLE OF CONTENTS

 

     PAGE  

ABOUT THIS PROSPECTUS

     i   

PROSPECTUS SUMMARY

     1   

FEES AND EXPENSES

     21   

COMPENSATION OF THE DEALER MANAGER AND THE INVESTMENT ADVISER

     24   

QUESTIONS AND ANSWERS ABOUT THIS OFFERING

     28   

SELECTED FINANCIAL DATA

     32   

RISK FACTORS

     33   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     54   

ESTIMATED USE OF PROCEEDS

     55   

DISTRIBUTIONS

     56   

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

     60   

SENIOR SECURITIES

     82   

INVESTMENT OBJECTIVES AND STRATEGY

     84   

DETERMINATION OF NET ASSET VALUE

     107   

MANAGEMENT

     110   

PORTFOLIO MANAGEMENT

     118   

PORTFOLIO COMPANIES

     120   

INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENT

     131   

ADMINISTRATIVE SERVICES

     140   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     141   

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

     143   

DISTRIBUTION REINVESTMENT PLAN

     145   

DESCRIPTION OF OUR SECURITIES

     146   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     154   

REGULATION

     160   

PLAN OF DISTRIBUTION

     164   

SUITABILITY STANDARDS

     169   

LIQUIDITY STRATEGY

     171   

SHARE REPURCHASE PROGRAM

     172   

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR

     174   

BROKERAGE ALLOCATION AND OTHER PRACTICES

     174   

LEGAL MATTERS

     174   

EXPERTS

     174   

AVAILABLE INFORMATION

     174   

PRIVACY NOTICE

     175   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A: FORM OF SUBSCRIPTION AGREEMENT

     A-1   


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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. To understand this offering fully, you should read the entire prospectus carefully, including the section entitled “Risk Factors,” before making a decision to invest in our common stock.

Unless otherwise noted, the terms “we,” “us,” “our,” the “Company” and “FS Investment Corporation” refer to FS Investment Corporation. In addition, the term “FB Advisor” refers to FB Income Advisor, LLC, the term “GDFM” refers to GSO / Blackstone Debt Funds Management LLC, a subsidiary of GSO Capital Partners LP and the term “GSO” refers to GSO Capital Partners LP.

FS Investment Corporation

We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. As such, we are required to comply with certain regulatory requirements. We are managed by FB Advisor, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, which oversees the management of our activities and is responsible for making investment decisions for our portfolio. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor with identifying investment opportunities and makes investment recommendations for approval by FB Advisor, according to asset allocation and other guidelines set by FB Advisor. GDFM, a registered investment adviser under the Advisers Act, is a subsidiary of GSO, which oversees approximately $29.6 billion in assets under management as of September 30, 2010. GSO is the global credit platform of The Blackstone Group L.P., or Blackstone. We have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We will seek to meet our investment objectives by:

 

   

utilizing the experience and expertise of FB Advisor and GDFM, along with the broader resources of GSO which includes its access to the relationships and human capital of its parent, Blackstone, in sourcing, evaluating and structuring transactions;

 

   

employing a defensive investment approach focused on long-term credit performance and principal protection;

 

   

focusing primarily on debt investments in a broad array of private U.S. companies, including small and middle market companies, which we define as companies with annual revenue of $10 million to $2.5 billion at the time of investment. In many environments, we believe such a focus offers an opportunity for superior risk adjusted returns;

 

   

focusing primarily on investing in established, stable companies with positive cash flow; and

 

   

maintaining rigorous portfolio monitoring, in an attempt to anticipate and pre-empt negative credit events within our portfolio.

Our portfolio is comprised primarily of investments in senior secured loans, second lien secured loans and, to a lesser extent, long-term subordinated loans, which we refer to as mezzanine 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 as primary market investments. 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.

 

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As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, we generally will not be permitted to co-invest with certain entities affiliated with GDFM in transactions originated by GSO or its affiliates unless we obtain an exemptive order from the SEC or co-invest alongside GSO or its affiliates in accordance with existing regulatory guidance. However, at any time, we may co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point. We are seeking an exemptive order from the SEC. Even if we receive exemptive relief, GSO and its affiliates are not obligated to offer GDFM or us the right to participate in any transactions originated by them. Prior to obtaining exemptive relief, we intend to co-invest alongside GSO or its affiliates only in accordance with existing regulatory guidance.

On March 10, 2010, Deutsche Bank AG, New York Branch, or Deutsche Bank, agreed to provide a $140,000,000 revolving credit facility to Broad Street Funding LLC, or Broad Street, our wholly-owned financing subsidiary. We transferred a portfolio of our debt securities to Broad Street as a contribution to capital and retain a residual interest in the loans contributed 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 Deutsche Bank are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities.

On July 13, 2010, in exchange for an amendment fee paid to Deutsche Bank, Broad Street and Deutsche Bank entered into an amendment to the facility, or the first facility amendment, to increase the maximum borrowing amount from $140,000,000 to $240,000,000 and to lower the overall borrowing cost thereunder from LIBOR + 2.50% to LIBOR + 2.23% per annum. No other material terms of the facility changed in connection with the first facility amendment. In addition, in connection with the closing of the first facility amendment, we contributed additional loans to Broad Street as collateral for the amended facility.

On November 10, 2010, Broad Street and Deutsche Bank entered into a second amendment to the facility, or the second facility amendment, to increase the maximum borrowing amount under the facility by $100,000,000 (referred to herein as the Tranche B Commitment), from $240,000,000 (referred to herein as the Tranche A Commitment) to $340,000,000. Borrowings under the Tranche B Commitment will bear interest at the rate of LIBOR + 1.50% per annum and will mature and be due and payable upon sixty days notice from Deutsche Bank. Subject to certain conditions set forth in the second facility amendment, all or a portion of the Tranche B Commitment may be converted by Deutsche Bank into a Tranche C Commitment, subject to the payment by Broad Street of a conversion fee. All converted borrowings characterized as a Tranche C Commitment will bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. All borrowings under the Tranche A Commitment bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. No other material terms of the facility changed in connection with the second facility amendment.

On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated credit facility, or the credit facility restatement, to convert the facility from a single-lender facility to a multi-lender, syndicated facility and name Deutsche Bank as administrative agent thereunder; to convert all of the outstanding Tranche B Commitment into a Tranche C Commitment in exchange for a conversion fee paid to Deutsche Bank; to join a new lender to the facility to be the sole lender under the Tranche C Commitment; and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the facility changed in connection with the credit facility restatement.

On January 28, 2011, Broad Street and Deutsche Bank also entered into an amended and restated security agreement, or the security agreement restatement, to provide that Deutsche Bank will serve as administrative agent thereunder and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the security agreement changed in connection with the security agreement restatement.

 

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As of September 30, 2010, approximately $197,267,000 was outstanding under this facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of the facility.

While a BDC may list its shares for trading in the public markets, we have currently elected not to do so. We believe that a non-traded structure is more appropriate for the long-term nature of the assets in which we invest. This structure allows us to operate with a long-term view, similar to that of other types of private investment funds—instead of managing to quarterly market expectations—and to pursue our investment objectives without subjecting our investors to the daily share price volatility associated with the public markets. To provide our stockholders with limited liquidity, we intend to conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in March 2010, and the repurchase occurred in connection with our April 1, 2010 closing. We also commenced scheduled tender offers in May 2010, August 2010 and November 2010, for which repurchases occurred in connection with our July 1, 2010, October 1, 2010 and January 3, 2011 closings, respectively. This will be the only method of liquidity that we offer prior to a liquidity event. See “Share Repurchase Program.”

Although we do not currently intend to list our securities on an exchange and do not expect a public market to develop for them in the foreseeable future, we intend to seek to complete a liquidity event between five and seven years following the completion of our offering stage. We will view our offering stage as complete as of the termination date of our most recent public equity offering, if we have not conducted a public equity offering in any continuous two year period. See “—Liquidity Strategy” for a discussion of what constitutes a liquidity event. Therefore, stockholders may not be able to sell their shares promptly or at a desired price.

Status of Our Ongoing Public Offering

Since commencing our initial public offering and through January 31, 2011, we have sold 46,457,573 shares (as adjusted for stock distributions) of our common stock for gross proceeds of approximately $471 million. As of January 31, 2011, we had raised total gross proceeds of approximately $472 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 on a quarterly basis during 2009, 2010 and 2011. Dollar amounts are presented in thousands, except per share data:

 

     Shares
Sold(1)(2)
     Average Price
per Share(2)
     Gross
Proceeds
 

Fiscal 2009

        

March 31

     1,074,045       $ 7.76       $ 8,330   

June 30

     1,926,763         8.44         16,271   

September 30

     3,544,170         9.35         33,129   

December 31(3)

     3,560,315         10.04         35,734   
                          
     10,105,293         9.25         93,464   

Fiscal 2010

        

March 31(3)

     4,331,680         10.28         44,524   

June 30(3)

     7,198,906         10.36         74,583   

September 30(3)

     6,586,899         10.35         68,145   

December 31(4)

     13,202,581         10.39         137,168   
                          
     31,320,066         10.36         324,420   

Fiscal 2011

        

March 31 (through January 31, 2011)(5)

     5,032,214         10.56         53,162   
                          
     5,032,214         10.56         53,162   
                          
     46,457,573       $ 10.14       $ 471,046   
                          

 

(1) The number of shares sold includes 53,444 shares, 834,021 shares and 108,552 shares purchased through our distribution reinvestment plan during 2009, 2010 and 2011, respectively.

 

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(2) The number of shares sold and the average sales price per share have been retroactively adjusted to reflect the stock distributions issued subsequent to the date at which the shares were sold. All shares were sold at prices between $9.00 and $10.65 per share, depending on the offering price then in effect and the amount of discounts or commissions waived by us or the dealer manager.

 

(3) We announced an increase in our public offering price to $10.40 per share beginning with the closing that occurred on October 1, 2009. The purpose of this action was to ensure that our net asset value per share did not exceed our net offering price per share, as required by the 1940 Act.

 

(4) We announced an increase in our public offering price to $10.50 per share beginning with the closing that occurred on November 1, 2010. The purpose of this action was to ensure that our net asset value per share did not exceed our net offering price per share, as required by the 1940 Act.

 

(5) We announced an increase in our public offering price to $10.65 per share beginning with the closing that occurred on January 3, 2011. We announced a further increase in our public offering price to $10.70 per share beginning with the closing that occurred on February 1, 2011. None of the shares reflected in the table above were sold at the $10.70 per share public offering price. The purpose of each of these actions was to ensure that our net asset value per share did not exceed our net offering price per share, as required by the 1940 Act.

Capital Contribution by FB Advisor and GDFM

In February 2008, pursuant to a private placement, Michael C. Forman and David J. Adelman, the principals of FB Advisor, contributed an aggregate of approximately $1 million. As of September 30, 2010, employees of GSO held an aggregate of approximately 130,731 shares of our common stock.

Distributions

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 have historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, subject to the board of directors’ discretion and applicable legal restrictions, 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. No portion of the distributions paid during the twelve months ended December 31, 2009 or December 31, 2010 represented a return of capital for tax purposes. Each year a statement on Form 1099-DIV identifying the source of the distribution will be mailed to our stockholders. There can be no assurance that we will be able to pay distributions at a specific rate or at all. See “Material U.S. Federal Income Tax Considerations.”

We intend to continue to make our ordinary distributions in the form of cash, out of assets legally available, unless stockholders elect to receive their distributions and/or long-term capital gains distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder. If stockholders hold shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive distributions in additional shares of our common stock.

Portfolio Update

During the nine months ended September 30, 2010, we invested approximately $501.7 million in 100 portfolio companies. During the same period, we sold our positions totaling approximately $82.0 million in 27 portfolio companies and received principal repayments of approximately $48.1 million. As of September 30, 2010, our investment portfolio, with a total fair value of approximately $480.9 million, consisted of interests in 106 portfolio companies (64% in first lien senior secured loans, 22% in

 

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second lien senior secured loans, 4% in senior secured bonds and 10% in mezzanine debt) with an average annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $314.6 million. As of September 30, 2010, the investments in our portfolio were purchased at an average price of 92.6% of par value, the weighted average credit rating of our portfolio was B2 based upon the Moody’s scale, and our estimated gross annual portfolio yield was 9.0% based upon the purchase price of our investments.

As of December 31, 2010, our investment portfolio consisted of interests in 144 portfolio companies with an average annual EBITDA of approximately $294.5 million. As of December 31, 2010, the investments in our portfolio were purchased at an average price of 94.9% of par value, the weighted average credit rating of our portfolio was B2 based upon the Moody’s scale, and our estimated gross annual portfolio yield, prior to leverage, was 8.5% based upon the purchase price of our investments. We intend to continue to add securities to our portfolio as our offering progresses. The following is our investment portfolio as of December 31, 2010:

 

Portfolio Company(a)

 

Industry

 

Date of Most

Most Recent

Purchase

  Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

Senior Secured Loans—First Lien—66.2%

       

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

  Healthcare   May-10   $     5,508      $     5,233   

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

  Consumer Staples   Sep-10     4,924        4,829   

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

  Telecommunication Services   Aug-10     2,367        2,356   

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

  Telecommunication Services   Oct-10     3,683        3,647   

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

  Financials   Dec-10     2,000        2,020   

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

  Industrials   Aug-10     7,363        7,260   

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

  Consumer Discretionary   Nov-10     6,923        6,869   

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

  Financials   Oct-09     949        797   

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

  Industrials   Feb-10     3,416        3,386   

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

  Healthcare   Oct-10     7,302        7,229   

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

  Industrials   Nov-10     1,687        1,678   

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

  Information Technology   May-10     1,985        1,967   

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

  Telecommunication Services   Nov-10     1,338        1,331   

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

  Information Technology   Nov-10     9,925        9,170   

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

  Telecommunication Services   Dec-10     2,064        2,043   

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

  Information Technology   Dec-10     1,789        1,771   

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

  Consumer Staples   Nov-10     6,529        6,547   

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

  Energy   Aug-10     2,819        2,630   

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

  Consumer Discretionary   Nov-10     7,828        7,754   

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

  Information Technology   Dec-10     1,578        1,562   

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

  Information Technology   Aug-10     5,584        4,978   

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

  Consumer Discretionary   Jul-10     2,954        2,926   

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

  Consumer Discretionary   Dec-10     6,667        6,600   

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

  Industrials   Oct-10     7,456        6,780   

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

  Energy   Aug-10     6,965        6,878   

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

  Consumer Discretionary   Dec-10     7,941        7,903   

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

  Telecommunication Services   Dec-10     6,980        6,267   

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

  Telecommunication Services   May-09     1,942        1,656   

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

  Healthcare   Dec-10     2,314        2,303   

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

  Information Technology   Aug-09     1,434        1,313   

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

  Telecommunication Services   Oct-10     4,060        3,748   

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

  Materials   Mar-10     2,830        2,806   

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

  Industrials   Dec-10     9,231        9,092   

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

  Consumer Discretionary   Nov-10     2,348        2,201   

DineEquity, Inc., L+450, 1.5% LIBOR Floor, 10/19/17(c)

  Consumer Staples   Oct-10     2,436        2,412   

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

  Consumer Staples   Nov-10     2,500        2,488   

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

  Materials   Oct-10     6,759        6,701   

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

  Financials   Oct-10     3,731        3,695   

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

  Information Technology   May-10     7,621        6,622   

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

  Energy   Sep-10     4,500        4,413   

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

  Industrials   Oct-10     7,437        7,076   

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

  Materials   Nov-10     7,527        7,557   

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

  Consumer Discretionary   Nov-10     2,441        2,418   

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

  Telecommunication Services   Dec-10     8,304        8,151   

 

5


Table of Contents

Portfolio Company(a)

 

Industry

 

Date of Most

Most Recent

Purchase

  Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

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

  Consumer Discretionary   Oct-10   $     1,814      $     1,796   

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

  Consumer Staples   Nov-10     1,754        1,737   

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

  Financials   Jul-10     4,466        4,303   

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

  Healthcare   Oct-10     4,336        4,294   

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

  Healthcare   Nov-10     1,944        1,935   

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

  Consumer Discretionary   Dec-10     9,929        9,830   

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

  Financials   Dec-10     11,642        11,526   

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

  Industrials   Jul-10     2,448        2,121   

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

  Healthcare   Dec-10     3,636        3,564   

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

  Consumer Discretionary   May-10     4,647        4,563   

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

  Telecommunication Services   Dec-10     5,638        5,609   

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

  Financials   Aug-10     6,716        6,651   

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

  Information Technology   May-09     1,451        1,169   

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

  Consumer Staples   Mar-10     4,949        4,394   

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

  Consumer Discretionary   Sep-10     1,950        1,931   

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

  Information Technology   Nov-10     5,993        5,879   

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

  Information Technology   Dec-10     5,000        4,925   

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

  Healthcare   Nov-10     1,667        1,650   

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

  Consumer Staples   Jun-10     2,536        2,490   

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

  Consumer Discretionary   Oct-09     882        666   

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

  Consumer Staples   Sep-10     2,212        2,191   

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

  Information Technology   Apr-10     3,303        3,283   

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

  Utilities   Aug-10     5,558        5,486   

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

  Consumer Discretionary   Jul-10     5,638        4,968   

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

  Industrials   Aug-10     6,230        6,198   

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

  Consumer Discretionary   Nov-10     2,930        2,901   

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

  Consumer Discretionary   Aug-10     4,402        4,375   

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

  Financials   Oct-10     1,538        1,523   

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

  Consumer Discretionary   Dec-10     2,083        2,063   

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

  Energy   Apr-10     3,925        3,595   

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

  Consumer Discretionary   Dec-10     5,000        4,900   

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

  Consumer Discretionary   Jul-10     6,357        6,263   

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

  Information Technology   May-10     4,969        4,936   

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

  Industrials   Nov-10     7,950        7,934   

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

  Industrials   Nov-10     1,474        1,466   

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

  Consumer Discretionary   Aug-10     3,084        3,052   

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

  Information Technology   Aug-10     7,382        7,230   

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

  Energy   May-10     3,492        3,458   

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

  Energy   Aug-10     7,948        7,824   

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

  Telecommunication Services   Dec-10     5,966        5,614   

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

  Consumer Discretionary   Dec-10     2,737        2,724   

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

  Healthcare   Dec-10     5,966        5,877   

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

  Industrials   Feb-10     6,965        6,905   

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

  Information Technology   Dec-10     5,903        5,941   

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

  Consumer Discretionary   Dec-10     8,000        7,783   

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

  Materials   Dec-10     7,897        7,812   

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

  Materials   Dec-10     4,000        4,000   

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

  Industrials   Dec-10     4,545        4,500   

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

  Telecommunication Services   Dec-10     2,029        2,009   

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

  Information Technology   Dec-10     5,000        4,900   

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

  Telecommunication Services   Nov-10     8,004        8,024   

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

  Utilities   May-10     9,384        7,737   

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

  Consumer Discretionary   Nov-10     2,139        2,128   

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

  Telecommunication Services   Sep-10     1,317        1,317   

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

  Consumer Discretionary   Oct-10     6,733        6,696   

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

  Energy   Nov-10     8,960        8,904   

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

  Materials   Oct-10     6,642        6,589   

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

  Healthcare   Jul-10     5,000        4,930   

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

  Information Technology   Aug-10     6,910        6,827   

 

6


Table of Contents

Portfolio Company(a)

 

Industry

 

Date of Most

Most Recent

Purchase

  Principal
Amount
(in thousands)(b)
    Amortized
Cost
(in thousands)
 

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

  Consumer Discretionary   Jun-09   $     539      $     244   

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

  Consumer Discretionary   Oct-09     804        675   
                   

Total Senior Secured Loans—First Lien

        488,255        473,881   
                   

Senior Secured Loans—Second Lien—18.5%

       

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

  Consumer Staples   Sep-10     5,000        4,864   

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

  Industrials   Dec-10     10,000        9,850   

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

  Healthcare   Aug-10     10,000        9,716   

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

  Financials   May-10     1,992        1,672   

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

  Information Technology   Jan-10     5,000        4,358   

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

  Consumer Discretionary   Oct-09     2,940        2,343   

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

  Information Technology   Dec-10     6,000        5,925   

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

  Healthcare   Nov-10     8,000        7,723   

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

  Industrials   May-10     250        199   

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

  Information Technology   Dec-09     5,000        4,915   

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

  Energy   Oct-10     7,405        6,980   

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

  Industrials   May-10     2,305        2,062   

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

  Industrials   Nov-10     8,000        6,948   

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

  Consumer Discretionary   Oct-10     7,000        6,863   

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

  Industrials   Nov-10     3,000        2,919   

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

  Consumer Staples   Dec-10     10,000        10,106   

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

  Industrials   Aug-10     500        500   

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

  Energy   Dec-10     10,000        9,700   

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

  Energy   Dec-10     9,170        8,329   

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

  Information Technology   Oct-10     10,000        9,902   

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

  Consumer Staples   Nov-10     8,384        8,384   

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

  Materials   Dec-10     7,960        7,701   
                   

Total Senior Secured Loans—Second Lien

        137,906        131,960   
                   

Senior Secured Bonds—4.2%

       

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

  Information Technology   Dec-10     7,348        7,383   

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

  Information Technology   Aug-10     4,300        4,232   

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

  Consumer Discretionary   Sep-10     4,000        4,000   

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

  Telecommunication Services   Apr-10     5,000        4,971   

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

  Telecommunication Services   Apr-10     4,680        4,809   

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

  Industrials   Nov-10     800        800   

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

  Energy   Aug-10     4,000        4,070   
                   

Total Senior Secured Bonds

        30,128        30,265   
                   

Mezzanine Debt/Other—11.1%

       

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

  Financials   May-10     2,000        1,051   

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

  Financials   Sep-10     4,775        3,028   

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

  Financials   Nov-10     2,252        1,743   

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

  Information Technology   Apr-10     4,000        4,000   

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

  Consumer Discretionary   Jan-10     8,000        7,908   

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

  Healthcare   Dec-10     8,000        8,000   

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

  Financials   Mar-10   1,500        960   

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

  Financials   May-10   $ 2,000        869   

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

  Telecommunication Services   Dec-10     5,000        5,000   

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

  Telecommunication Services   Oct-10     8,000        8,000   

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

  Financials   Oct-10     1,919        1,133   

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

  Telecommunication Services   Jul-10     2,000        2,072   

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

  Financials   Sep-10     6,500        3,012   

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

  Financials   Sep-10     4,000        2,182   

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

  Consumer Discretionary   Aug-10     2,000        2,028   

Mountain View CLO II Class Preferred 17.4%, 1/12/21

  Financials   Dec-10     8,975        7,272   

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

  Industrials   Mar-10     7,000        6,867   

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

  Consumer Staples   Sep-10     4,700        4,700   

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

  Financials   Oct-10     4,000        2,774   

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

  Telecommunication Services   Nov-10     4,000        3,868   

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

  Materials   Dec-10     3,000        2,940   
                   

Total Mezzanine Debt/Other

        93,621        79,408   
                   

TOTAL INVESTMENTS—100.0%

        $ 715,514   
             

 

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

 

7


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

 

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

The tables below show portfolio investments that were sold or experienced a repayment in excess of 1% of a position’s value between October 1, 2010 and December 31, 2010.

 

Security

   Original Cost      Disposition Price      Transaction Type

Brickman Group Holdings, Inc., L+550, 1.8% LIBOR Floor, 10/8/16

   $ 6,930,000       $ 7,052,500       Sale

Cedar Fair, LP, 9.1%, 8/1/18

   $ 1,972,260       $ 2,137,500       Sale

Cincinnati Bell Inc., L+500, 1.5% LIBOR Floor, 6/10/17

   $ 2,830,010       $ 2,921,183       Sale

DaVita Inc., L+300, 1.5% LIBOR Floor, 9/20/16

   $ 3,444,231       $ 3,491,827       Sale

Dresser, Inc., L+575, 5/4/15

   $ 1,380,000       $ 1,997,500       Sale

Edwards Ltd., L+200, 5/31/14

   $ 1,238,400       $ 1,881,788       Sale

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

   $ 3,044,936       $ 3,605,000       Sale

Michael Foods Group, Inc., 9.8%, 7/15/2018

   $ 1,100,000       $ 1,193,500       Sale

Nalco Co., L+300, 1.5% LIBOR Floor, 11/1/17

   $ 1,817,865       $ 1,840,703       Sale

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

   $ 2,626,728       $ 2,926,875       Sale

Novelis Inc., L+375, 1.5% LIBOR Floor, 12/17/16

   $ 3,255,049       $ 3,312,588       Sale

Paetec Holding Corp., 8.9%, 6/30/17

   $ 2,021,656       $ 2,100,000       Sale

SI Organization, Inc., 4.0%, 1.8% LIBOR Floor, 11/19/16

   $ 2,475,000       $ 2,501,500       Sale

Transdigm, Inc., L+350, 1.5% LIBOR Floor, 12/1/16

   $ 1,812,622       $ 1,844,502       Sale

Windstream Corp., 8.1%, 9/1/18

   $ 1,687,216       $ 1,814,750       Sale

 

Security

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

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

     93.3     100.0   $ 532,656         Paydown   

Advantage Sales & Marketing, Inc., L+700, 1.5% LIBOR Floor, 5/5/17

     99.3     100.0   $ 7,000,000         Paydown   

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

     99.5     100.0   $ 350,000         Paydown   

Allen Systems Group, Inc., L+550, 3.0% LIBOR Floor, 10/19/13

     101.3     100.0   $ 1,443,750         Paydown   

Allen Systems Group, Inc., L+800, 3.0% LIBOR Floor, 2.0% PIK, 4/19/14

     94.9     109.0   $ 4,076,375         Paydown   

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

     99.5     100.0   $ 48,214         Paydown   

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

     99.0     100.0   $ 277,921         Paydown   

Caritor, Inc. (Keane Inc.), L+225, 6/4/13

     76.4     100.0   $ 1,962,225         Paydown   

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

     87.8     100.0   $ 2,383,310         Paydown   

Cedar Fair, LP, L+400, 1.5% LIBOR Floor, 12/15/16

     99.0     100.0   $ 38,298         Paydown   

Cincinnati Bell Inc., L+500, 1.5% LIBOR Floor, 6/10/17

     97.8     100.0   $ 4,052,451         Paydown   

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

     99.5     100.0   $ 100,521         Paydown   

Columbian Chemicals Co., L+600, 3/16/13

     62.0     100.0   $ 1,197,656         Paydown   

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

     91.5     100.0   $ 76,879         Paydown   

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

     99.0     100.0   $ 170,454         Paydown   

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

     93.5     100.0   $ 151,977         Paydown   

DineEquity, Inc., L+450, 1.5% LIBOR Floor, 10/19/17

     99.0     100.0   $ 161,616         Paydown   

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

     58.5     100.0   $ 45,887         Paydown   

Harrington Holdings, Inc., L+600, 7/11/14

     64.0     100.0   $ 1,000,000         Paydown   

ILC Holdings, Inc., 11.5%, 6/30/14

     100.0     100.0   $ 4,000,000         Paydown   

Intergraph Corp., L+825, 2.0% LIBOR Floor, 11/28/14

     95.3     100.0   $ 3,000,000         Paydown   

Intergraph Corp., L+400, 2.0% LIBOR Floor, 5/29/14

     99.0     100.0   $ 4,500,000         Paydown   

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

     98.1     100.0   $ 90,049         Paydown   

Lincoln Industrial Corp., L+575, 1/9/15

     91.0     100.0   $ 2,000,000         Paydown   

LyondellBasell Industries NV, L+400, 1.5% LIBOR Floor, 4/30/16

     99.0     100.0   $ 1,356,600         Paydown   

 

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Security

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

McKechnie Aerospace Holdings, Inc., L+500, 5/11/15

     92.3     100.0   $ 3,499,332         Paydown   

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

     98.0     100.0   $ 26,013         Paydown   

National Processing Co., L+500, 2.5% LIBOR Floor, 9/29/13

     94.4     100.0   $ 1,176,973         Paydown   

National Processing Co., L+875, 2.0% LIBOR Floor, 9/29/14

     91.8     100.0   $ 5,000,000         Paydown   

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

     98.6     100.0   $ 57,486         Paydown   

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

     86.4     100.0   $ 337,281         Paydown   

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

     99.4     100.0   $ 807,244         Paydown   

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

     89.0     100.0   $ 760,968         Paydown   

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

     99.3     100.0   $ 184,615         Paydown   

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

     98.9     100.0   $ 382,813         Paydown   

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

     98.4     100.0   $ 3,260,080         Paydown   

Sirius Computer Solutions, Inc., L+600, 5/30/13

     80.6     100.0   $ 5,000,000         Paydown   

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

     100.1     100.0   $ 3,049,981         Paydown   

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

     98.8     100.0   $ 101,245         Paydown   

Swift Transportation Co., Inc., L+600, 2.3% LIBOR Floor, 5/10/14

     99.9     100.0   $ 5,000,000         Paydown   

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

     100.0     100.0   $ 16,667         Paydown   

West Corp., L+500, 3.5% LIBOR Floor, 10/24/13

     87.3     100.0   $ 489,916         Paydown   

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

     76.3     100.0   $ 41,091         Paydown   

 

(1) As a percentage of par value.

About FB Advisor

FB Advisor is registered as an investment adviser with the SEC under the Advisers Act. Our chief executive officer, Michael C. Forman, has led FB Advisor since its inception. In 2005, Mr. Forman co-founded FB Capital Partners, L.P., an investment firm that invests in private equity, senior and mezzanine debt, and real estate, and has served as managing general partner since its inception. In 2007, he co-founded Franklin Square Holdings, L.P., or Franklin Square Holdings, a national sponsor and distributor of alternative investment products designed for the individual investor. In managing its funds, Franklin Square Holdings seeks to partner with what it believes to be best-in-class institutional asset managers.

Mr. Forman and the other members of FB Advisor’s senior management team, including David J. Adelman, the vice chairman of our board of directors and the co-founder of Franklin Square Holdings, have extensive experience in private lending, private equity and real estate investing, and have developed an expertise in using all levels of a firm’s capital structure to produce income-generating investments, while focusing on risk management. FB Advisor is presently staffed with ten employees and may retain additional investment personnel as our activities expand. See “Management” for biographical information regarding Mr. Forman, Mr. Adelman and the other members of FB Advisor’s senior management team.

All investment decisions require the unanimous approval of FB Advisor’s investment committee, which is led by Mr. Forman. Our board of directors, including a majority of independent directors, oversees and monitors our investment performance and, beginning with the second anniversary of the date of the investment advisory and administrative services agreement, will annually review the compensation we pay to FB Advisor to determine that the provisions of the investment advisory and administrative services agreement are carried out. See “Investment Advisory and Administrative Services Agreement.”

About GDFM

From time to time, FB Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills that FB Advisor believes will aid it in achieving our investment objectives. FB

 

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Advisor has engaged GDFM to act as our investment sub-adviser. GDFM will assist FB Advisor in identifying investment opportunities for us and will make investment recommendations for approval by FB Advisor, according to asset allocation, return expectations and other guidelines set by FB Advisor. GDFM is a Delaware limited liability company with principal offices located at 280 Park Avenue, New York, New York 10017.

GDFM is a wholly-owned subsidiary of GSO. GSO is the credit platform affiliate of Blackstone, a leading global alternative asset manager. As of September 30, 2010, GSO and its affiliates managed approximately $29.6 billion of assets across multiple strategies within the leveraged finance marketplace, including leveraged loans, high-yield bonds, distressed, mezzanine and private equity. As sub-adviser, GDFM will make recommendations to FB Advisor in a manner that is consistent with its existing investment and monitoring processes.

Blackstone is a leading global alternative asset manager and provider of financial advisory services. It is one of the largest independent managers of private capital in the world, with assets under management of $119.1 billion as of September 30, 2010. Blackstone’s alternative asset management businesses include the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles, separately managed accounts and publicly-traded closed-end mutual funds. Blackstone is a publicly traded limited partnership that has common units which trade on the New York Stock Exchange under the symbol “BX.” Information about Blackstone and its various affiliates, including certain ownership, governance and financial information, is disclosed in Blackstone’s periodic filings with the SEC, which can be obtained from Blackstone’s website at http://ir.blackstone.com or the SEC’s website at www.sec.gov.

Market Opportunity

We believe that there are and will continue to be significant investment opportunities in senior secured and second lien secured loans as well as investments in debt securities of small and middle market companies.

Attractive Opportunities in Senior Secured and Second Lien Secured Loans

Since the beginning of 2009, there have been signs that global credit and other financial market conditions have improved markedly as stability has increased throughout the international financial system. Concentrated policy initiatives undertaken by central banks and governments appear to have curtailed the incidence of large-scale failures within the global financial system. Concurrently, investor confidence, financial indicators, capital markets activity and asset prices have shown signs of marked improvement. While financial conditions have improved, economic activity continues to be somewhat subdued as unemployment rates remain high. Corporate interest rate risk premiums, otherwise known as credit spreads, remain above historical averages, particularly in the loan and high yield bond markets. Given current market conditions, it is our view that, at this time, there are and will continue to be significant investment opportunities in senior secured and second lien secured loans as well as investments in debt securities of small and middle market companies.

We feel that opportunities in senior secured and second lien secured loans are significant not only because of the potential returns available, but also because of the strong defensive characteristics of this investment class. Because these loans have priority in payment among an issuer’s security holders, they carry the least potential risk among investments in the issuer’s capital structure. Further, these investments are secured by the issuer’s assets, which may be seized in the event of a default if necessary, and generally carry restrictive covenants aimed at ensuring repayment before unsecured creditors, such as most types of public bondholders, and other security holders and preserving collateral to protect against credit deterioration. In addition, most senior secured debt issues carry variable interest rate structures, meaning the securities are generally less susceptible to declines in value experienced by fixed-rate securities in a rising interest rate environment. However, in declining interest rate environments, variable interest rate structures decrease the income we would receive from our debt securities.

 

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Opportunity in Small and Middle Market Private Companies

In addition to investing in senior secured and second lien secured loans generally, we believe that the market for lending to private companies, particularly small and middle market private companies within the U.S., may at times present a compelling investment opportunity. We believe that the following characteristics support our belief:

Large target market. According to The U.S. Census Bureau, in its most recently released economic census in 2002, there were approximately 153,000 small and middle market companies in the U.S. with annual revenues between $10 million and $2.5 billion, compared with 900 companies with revenues greater than $2.5 billion. These smaller and middle market companies represent a significant portion of the growth segment of the U.S. economy and often require substantial capital investment to grow their businesses. Small and middle market companies have generated a significant number of investment opportunities for investment programs managed by FB Advisor and GDFM over the past several years, and we believe that this market segment will continue to produce significant investment opportunities for us.

Limited investment competition. Despite the size of the market, we believe that financial difficulties and a widespread consolidation in the financial services industry have substantially reduced the number of investment firms and financial institutions lending to small and middle market companies. We believe that lending to small and middle market private U.S. companies generally requires a greater dedication of the lender’s time and resources compared to lending to larger companies, due in part to the smaller size of each investment and the often fragmented nature of information available for disclosure from these companies. In addition, small and middle market companies may require more active monitoring and participation on the lender’s part. We believe that many large financial organizations, with relatively high cost structures, are not equipped to deal with these factors and instead emphasize services to larger corporate clients and transactions with a consequent reduction in the availability of debt financing to small and middle market companies.

Attractive market segment. We believe that the underserved nature of such a large segment of the market can at times create a significant opportunity for investment. In many environments, we believe that small and middle market companies are more likely to offer attractive economics in terms of transaction pricing, up-front and ongoing fees, prepayment penalties and more attractive security features in the form of stricter covenants and quality collateral. Additionally, as compared to larger companies, small and middle market companies often have simpler capital structures and carry less leverage, thus aiding the structuring and negotiation process and allowing us greater flexibility in structuring favorable transactions. We believe that these factors often result in advantageous conditions in which to pursue our investment objectives of generating current income and, to a lesser extent, long-term capital appreciation.

Characteristics of and Risks Related to Investments in Private Companies

We intend to invest primarily in the debt of privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress. Second, the investments themselves may often be illiquid. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. In addition, little public information generally exists about private companies. Finally, these companies often do not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of FB Advisor and/or GDFM to obtain adequate information through their due diligence efforts to evaluate the creditworthiness of, and risks involved in, investing in these companies. These companies and their financial information will also generally not be subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other rules and regulations that govern public companies that are designed to protect investors.

Investment Strategy

When identifying prospective portfolio companies, we intend to focus primarily on the following attributes, which we believe will help us generate higher total returns with an acceptable level of risk. While these criteria

 

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provide general guidelines for our investment decisions, we caution you that, if we believe the benefits of investing are sufficiently strong, not all of these criteria necessarily will be met by each prospective portfolio company in which we choose to invest. These attributes are:

 

   

Leading, defensible market positions. We intend to invest in companies that have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service our debt in a range of economic environments. We will seek companies that we believe possess advantages in scale, scope, customer loyalty, product pricing, or product quality versus their competitors, thereby minimizing business risk and protecting profitability.

 

   

Investing in stable companies with positive cash flow. We intend to invest in established, stable companies with strong profitability and cash flows. Such companies, we believe, are well-positioned to maintain consistent cash flow to service and repay our loans and maintain growth in their businesses or market share. We do not intend to invest in start-up companies, turnaround situations or companies with speculative business plans.

 

   

Proven management teams. We intend to focus on investments in which the target company has an experienced management team with an established track record of success. We will typically require the portfolio companies to have in place proper incentives to align management’s goals with ours.

 

   

Private equity sponsorship. Often we will seek to participate in transactions sponsored by what we believe to be high-quality private equity firms. FB Advisor’s management team believes that a private equity sponsor’s willingness to invest significant sums of equity capital into a company is an implicit endorsement of the quality of the investment. Further, by co-investing with quality private equity firms which commit significant sums of equity capital with junior priority to our debt investments, we may benefit from having due diligence on our investments performed by both parties. Further, strong private equity sponsors with significant investments at risk have the ability and a strong incentive to contribute additional capital in difficult economic times should operational issues arise.

 

   

Diversification. We will seek to diversify our portfolio broadly among issuers and industries, thereby potentially reducing the risk of a downturn in any one company or industry having a disproportionate impact on the value of our portfolio. We cannot assure you that we will be successful in this regard.

 

   

Viable exit strategy. Many of our current investments are tradable in a privately negotiated over-the-counter market, providing us a means by which we may exit our positions. We expect that a large portion of our portfolio will continue to be tradable on this secondary market for the foreseeable future, depending upon market conditions. For any investments that are not traded within a secondary market, we intend to focus primarily in investing in companies whose business models and growth prospects offer other attractive exit possibilities, including repayment of our investments, with the potential for capital gain on any equity interests we hold, through an initial public offering of common stock, merger, sale or recapitalization.

Competitive Advantages

We believe that we offer to our investors the following competitive advantages:

Global platform with seasoned investment professionals. FB Advisor’s management team believes that the breadth and depth of its experience, together with the wider resources of GSO’s investment team which is dedicated to sourcing, structuring, executing, monitoring and realizing upon a broad range of private investments, as well as the specific expertise of GDFM, provides us with a significant competitive advantage in sourcing and analyzing attractive investment opportunities worldwide.

Long-term investment horizon. Unlike most private equity and venture capital funds, we are not required to return capital to our stockholders once we exit a portfolio investment. Such funds typically can only be invested once and must be returned to investors after a specific time period. These provisions often force private equity and venture capital funds to seek liquidity events, including initial public offerings, mergers, or recapitalizations

 

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more quickly than they otherwise might, potentially resulting in a lower return to investors. We believe that freedom from such capital return requirements, which allows us to invest using a longer-term focus, will provide us with the opportunity to increase total returns on invested capital, compared to other private company investment vehicles.

GDFM transaction sourcing capability. FB Advisor will seek to leverage GDFM’s significant access to transaction flow. GDFM seeks to generate investment opportunities through syndicate and club deals and, subject to regulatory constraints as discussed under “—FS Investment Corporation”, also through GSO’s proprietary origination channels. With respect to syndicate and club deals, GDFM has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result of the long track record of its investment professionals in the leveraged finance marketplace. With respect to GDFM’s origination channel, FB Advisor will seek to leverage the global presence of GSO to generate access to a substantial amount of originated transactions with attractive investment characteristics. We believe that the broad network of GDFM will produce a significant amount of investment opportunities for us. GDFM also has a significant trading platform allowing us access to the secondary loan market for investment opportunities.

Disciplined, income-oriented investment philosophy. FB Advisor and GDFM employ a defensive investment approach focused on long-term credit performance and principal protection. This investment approach involves a multi-stage selection process for each investment opportunity, as well as ongoing monitoring of each investment made, with particular emphasis on early detection of credit deterioration. This strategy is designed to maximize current yield and minimize the risk of capital loss while maintaining potential for long-term capital appreciation.

Expertise across all levels of the corporate capital structure. FB Advisor and GDFM believe that their broad expertise and experience investing at all levels of a company’s capital structure will afford us numerous approaches to managing risk while preserving the opportunity for significant returns on our investments. We will attempt to capitalize on this expertise in an effort to produce and maintain an investment portfolio that will perform in a broad range of economic conditions.

Plan of Distribution

This is a continuous offering of our shares as permitted by the federal securities laws. We have filed and will continue to file post-effective amendments to the registration statement of which this prospectus is a part, that are subject to SEC review, to allow us to continue this offering for three years. The dealer manager is not required to sell any specific number or dollar amount of shares but will use its best efforts to sell the shares offered. The minimum permitted purchase is $5,000.

We are offering our shares on a continuous basis at a current offering price of $10.70 per share; however, to the extent that our net asset value increases, we will sell at a price necessary to ensure that shares are not sold at a price per share, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share. In the event of a material decline in our net asset value per share, which we consider to be a 5% decrease from our current net offering price, and subject to certain conditions, we will reduce our offering price accordingly. Promptly following any such adjustment to the offering price per share, we will file a prospectus supplement with the SEC disclosing the adjusted offering price, and we will also post the updated information on our website at www.fsinvestmentcorp.com. Prior to February 1, 2011, we sold shares at an offering price of $10.65 per share; prior to January 3, 2011, we sold shares at an offering price of $10.50 per share; prior to November 1, 2010, we sold shares at an offering price of $10.40 per share; and prior to October 1, 2009, we sold shares at an offering price of $10.00 per share.

A decline in our net asset value per share to an amount more than 5% below our current offering price, net of selling commissions and dealer manager fees, creates a rebuttable presumption that there has been a material change in the value of our assets such that a reduction in the offering price per share is warranted. This presumption may only be rebutted if our board of directors, in consultation with our management, reasonably and in good faith

 

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determines that the decline in net asset value per share is the result of a temporary movement in the credit markets or the value of our assets, rather than a more fundamental shift in the valuation of our portfolio. In the event that (i) net asset value per share decreases to more than 5% below our current net offering price and (ii) our board of directors believes that such decrease in net asset value per share is the result of a non-temporary movement in the credit markets or the value of our assets, our board of directors will undertake to establish a new net offering price that is not more than 5% above our net asset value per share. If our board of directors determines that the decline in our net asset value per share is the result of a temporary movement in the credit markets or the value of our assets, investors will purchase shares at an offering price per share, net of selling commissions and dealer manager fees, which represents a premium to the net asset value per share of greater than 5%.

FS2 Capital Partners, LLC acts as the dealer manager in connection with the sale of shares registered in this offering. The dealer manager was formed in 2007 and is an affiliate of FB Advisor.

To purchase shares in this offering, you must complete and sign a subscription agreement (in the form attached to this prospectus as Appendix A) for a specific dollar amount equal to or greater than $5,000 and pay such amount at the time of subscription. You should make your check payable to “UMB Bank, N.A., as agent for FS Investment Corporation.” Subscriptions will be effective only upon our acceptance, and we reserve the right to reject any subscription in whole or in part. Pending acceptance of your subscription, proceeds will be deposited into an account for your benefit. See “How to Subscribe.”

Suitability Standards

Pursuant to applicable state securities laws, shares of common stock offered through this prospectus are suitable only as a long-term investment for persons of adequate financial means who have no need for liquidity in this investment. Initially, there is not expected to be any public market for the shares, which means that it may be difficult to sell shares. As a result, we have established suitability standards which require investors to have either (i) a net worth (not including home, furnishings, and personal automobiles) of at least $70,000 and an annual gross income of at least $70,000, or (ii) a net worth (not including home, furnishings and personal automobiles) of at least $250,000. Our suitability standards also require that a potential investor (1) can reasonably benefit from an investment in us based on such investor’s overall investment objectives and portfolio structuring; (2) is able to bear the economic risk of the investment based on the prospective stockholder’s overall financial situation; and (3) has apparent understanding of (a) the fundamental risks of the investment, (b) the risk that such investor may lose his or her entire investment, (c) the lack of liquidity of the shares, (d) the background and qualifications of FB Advisor and GDFM, and (e) the tax consequences of the investment. For additional information, including special suitability standards for residents of Alabama, Arizona, Iowa, Kansas, Kentucky, Massachusetts, Michigan, Nebraska, Ohio and Oregon, see “Suitability Standards.”

How to Subscribe

Investors who meet the suitability standards described herein may purchase shares of our common stock. Investors seeking to purchase shares of our common stock should proceed as follows:

 

   

Read this entire prospectus and any appendices and supplements accompanying this prospectus.

 

   

Complete the execution copy of the subscription agreement provided by your financial representative. A specimen copy of the subscription agreement, including instructions for completing it, is included in this prospectus as Appendix A.

 

   

Deliver a check for the full purchase price of the shares of our common stock being subscribed for along with the completed subscription agreement to the selected broker-dealer. You should make your check payable to “UMB Bank, N.A., as agent for FS Investment Corporation.” After you have satisfied the applicable minimum purchase requirement, additional purchases must be in increments of $500, except for purchases made pursuant to our distribution reinvestment plan.

 

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By executing the subscription agreement and paying the total purchase price for the shares of our common stock subscribed for, each investor attests that he meets the suitability standards as stated in the subscription agreement and agrees to be bound by all of its terms.

Subscriptions will be effective only upon our acceptance, and we reserve the right to reject any subscription in whole or in part. Subscriptions will be accepted or rejected within 15 days of receipt by us and, if rejected, all funds shall be returned to subscribers without deduction for any expenses within ten business days from the date the subscription is rejected. We are not permitted to accept a subscription for shares of our common stock until at least five business days after the date you receive this prospectus.

An approved trustee must process and forward to us subscriptions made through IRAs, Keogh plans and 401(k) plans. In the case of investments through IRAs, Keogh plans and 401(k) plans, we will send the confirmation and notice of our acceptance to the trustee.

Estimated Use of Proceeds

We intend to use substantially all of the proceeds from this offering, net of expenses, to make investments in private, U.S. companies in accordance with our investment objectives and using the strategies described in this prospectus. The remainder will be used for working capital and general corporate purposes. There can be no assurance we will be able to sell all the shares we are registering. If we sell only a portion of the shares we are registering, we may be unable to achieve our investment objectives or provide diversification of our portfolio. Pending investment of the proceeds raised in this offering, we will invest the net proceeds primarily in short-term securities consistent with our business development company election and our election to be taxed as a RIC. During this time, we may employ a portion of the net proceeds to pay operating expenses, distributions to stockholders, and for general corporate purposes. See “Estimated Use of Proceeds.”

Share Repurchase Program

We do not currently intend to list our securities on any securities exchange and do not expect a public market for them to develop in the foreseeable future. Therefore, stockholders should not expect to be able to sell their shares promptly or at a desired price. See “Share Repurchase Program.”

To provide our stockholders with limited liquidity, we intend to conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in March 2010 and the repurchase occurred in connection with our April 1, 2010 closing. The following table reflects certain information regarding the quarterly tender offers that we have conducted during 2010:

 

For the Three Months Ended

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

(in thousands)
 

March 31, 2010

   April 1, 2010      11,142       $ 9.36       $ 104   

June 30, 2010

   July 1, 2010      108,904         9.36         1,019   

September 30, 2010

   October 1, 2010      108,904         9.36         1,019   

December 31, 2010

   January 3, 2011      99,633         9.59         955   

Our quarterly repurchases will be conducted on such terms as may be determined by our board of directors unless, in the judgment of the independent directors of our board of directors, such repurchases would not be in the best interests of our stockholders or would violate applicable law. We will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the 1940 Act. In months in which we repurchase shares, we will conduct repurchases on the same date that we hold our first semi-monthly closing for the sale of shares in this offering. The offer to repurchase shares is conducted solely through tender offer materials mailed to each stockholder and is not being made through this prospectus.

 

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We currently intend to limit the number of shares to be repurchased during any calendar year to the number of shares we can repurchase with the proceeds we receive from the sale of shares of our common stock under our distribution reinvestment plan. At the discretion of our board of directors, we 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, we will limit the number of shares to be repurchased in any calendar year to 10% of the weighted average number of shares outstanding in the prior calendar year, or 2.5% in each quarter. We will offer to repurchase such shares at a price equal to 90% of the offering price on each date of repurchase.

In connection with its consideration of whether to conduct such tender offers, our board of directors will consider any requests it has received from stockholders. If you wish to tender your shares to be repurchased you must either tender at least 25% of the shares you purchased in the offering or all of the shares that you own. If you choose to tender only a portion of your shares, you must maintain a minimum balance of $5,000 worth of shares following a tender of shares for repurchase. If the amount of repurchase requests exceeds the number of shares we seek to repurchase, we will repurchase shares on a pro-rata basis. As a result, we may repurchase less than the full amount of shares that you request to have repurchased. If we do not repurchase the full amount of your shares that you have requested to be repurchased, or we determine not to make repurchases of our shares, you may not be able to dispose of your shares, even if we under-perform. Any periodic repurchase offers will be subject in part to our available cash and compliance with the RIC qualification and diversification rules promulgated under the Code and the 1940 Act.

We have received exemptive relief from Regulation M under the Exchange Act from the Division of Trading and Markets of the SEC in connection with our proposed share repurchase program. See “Share Repurchase Program.”

Liquidity Strategy

We intend to seek to complete a liquidity event for our stockholders between five and seven years following the completion of our offering stage although, we may determine to complete a liquidity event earlier. We will view our offering stage as complete as of the termination date of our most recent public equity offering if we have not conducted a public equity offering in any continuous two year period. We may determine not to pursue a liquidity event if we believe that then-current market conditions are not favorable for a liquidity event, and that such conditions will improve in the future. A liquidity event could include (1) the sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation, (2) a listing of our shares on a national securities exchange or (3) a merger or another transaction approved by our board of directors in which our stockholders will receive cash or shares of a publicly traded company. We refer to the above scenarios as “liquidity events.” While our intention is to seek to complete a liquidity event between five and seven years following the completion of our offering stage, there can be no assurance that a suitable transaction will be available or that market conditions for a liquidity event will be favorable during that timeframe. In making a determination of what type of liquidity event is in the best interest of our stockholders, our board of directors, including our independent directors, may consider a variety of criteria, including, but not limited to, portfolio diversification, portfolio performance, our financial condition, potential access to capital as a listed company, market conditions for the sale of our assets or listing of our securities, internal management considerations and the potential for stockholder liquidity. If we determine to pursue a listing of our securities on a national securities exchange in the future, at that time we may consider either an internal or an external management structure.

Prior to the completion of a liquidity event, our share repurchase program may provide a limited opportunity for you to have your shares of common stock repurchased, subject to certain restrictions and limitations, at a price which may reflect a discount from the purchase price you paid for the shares being repurchased. See “Share Repurchase Program” for a detailed description of our share repurchase program.

Advisory Fees

FB Advisor and GDFM are compensated for their services. Under the investment advisory and administrative services agreement, FB Advisor is entitled to a fee consisting of two components—a base

 

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management fee and an incentive fee. The base management fee is payable quarterly in arrears, and is calculated at an annual rate of 2.0% of the average value of our gross assets.

The incentive fee consists of three parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter and will be subordinated to a preferred return on adjusted capital equal to 2.0% per quarter, or an annualized rate of 8.0%.

The second part of the incentive fee, which we refer to as the incentive fee on capital gains during operations, will be an incentive fee on capital gains earned on liquidated investments from the portfolio during operations prior to a liquidation of the Company and will be 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 will equal 20.0% of our incentive fee capital gains, which will equal our 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 we refer to as the subordinated liquidation incentive fee, will equal 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation. See “Investment Advisory and Administrative Services Agreement—Overview of FB Advisor—Advisory Fees.”

See “Investment Advisory and Administration Services Agreement—Overview of GDFM” for a description of the investment sub-advisory agreement and the fees payable to GDFM by FB Advisor pursuant to such agreement.

Administration

FB Advisor is reimbursed for administrative expenses it incurs on our behalf. See “Administrative Services.”

Conflicts of Interest

FB Advisor, GDFM and certain of their affiliates may experience conflicts of interest in connection with the management of our business affairs, including, but not limited to, the following:

 

   

The directors, officers and other personnel of FB Advisor allocate their time between advising us and managing other investment activities and business activities in which they may be involved;

 

   

The compensation payable by us to FB Advisor and other affiliates will be approved by our board of directors consistent with the exercise of the requisite standard of care applicable to directors under Maryland law. Such compensation is payable, in most cases, whether or not our stockholders receive distributions;

 

   

We may compete with certain affiliates for investments, subjecting FB Advisor and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions on our behalf;

 

   

Regardless of the quality of the assets acquired, the services provided to us or whether we make distributions to our stockholders, FB Advisor and GDFM will receive certain fees in connection with the management of our portfolio and sale of our portfolio companies;

 

   

Because the dealer manager, FS2 Capital Partners, LLC, is an affiliate of FB Advisor, its due diligence review and investigation of us and this prospectus cannot be considered to be an independent review;

 

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The personnel of GDFM allocate their time between assisting FB Advisor in connection with identifying investment opportunities and making investment recommendations and performing similar functions for other business activities in which they may be involved;

 

   

We may compete with other funds managed by affiliates of GDFM for investment opportunities, subjecting GDFM and its affiliates to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions to FB Advisor;

 

   

From time to time, to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, we and other clients for which FB Advisor or GDFM provide investment management services or carry on investment activities may make investments at different levels of an investment entity’s capital structure or otherwise in different classes of an issuer’s securities. These investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by us and such other clients;

 

   

FB Advisor, GDFM and their respective affiliates may give advice and recommend securities to other clients which may differ from advice given to, or securities recommended or bought for, us, even though their investment objectives may be similar to ours;

 

   

GSO and its affiliates may have existing business relationships or access to material, non-public information that would prevent GDFM from recommending certain investment opportunities that would otherwise fit within our investment objectives;

 

   

FB Advisor, GDFM and their respective affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in competition with us and/or may involve substantial time and resources of FB Advisor and GDFM. Affiliates of GDFM, whose primary business includes the origination of investments, engage in investment advisory business with accounts that compete with us. Affiliates of GDFM have no obligation to make their originated investment opportunities available to us; and

 

   

To the extent permitted by the 1940 Act and staff interpretations, FB Advisor may determine it appropriate for us and one or more other investment accounts managed by FB Advisor, GDFM or any of their respective affiliates to participate in an investment opportunity. We are seeking exemptive relief from the SEC to engage in co-investment opportunities with GDFM and/or its affiliates. There can be no assurance that we will obtain such exemptive relief. These co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. To mitigate these conflicts, FB Advisor will seek to execute such transactions for all of the participating investment accounts, including us, on a fair and equitable basis, taking into account such factors as the relative amounts of capital available for new investments and the investment programs and portfolio positions of us, the clients for which participation is appropriate and any other factors deemed appropriate.

Risk Factors

An investment in our common stock involves a high degree of risk and may be considered speculative. You should carefully consider the information found in “Risk Factors” before deciding to invest in shares of our common stock. The following are some of the risks an investment in us involves:

 

   

We are a relatively new company and have a limited operating history and are subject to the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives.

 

   

FB Advisor has not previously managed a business development company or a regulated investment company. Therefore, FB Advisor may not be able to successfully operate our business or achieve our investment objectives.

 

   

Economic activity in the United States was impacted by the global financial crisis of 2008 and has yet to fully recover. These conditions may make it more difficult for us to achieve our investment objectives.

 

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Because there is no public trading market for shares of our common stock and we are not obligated to effectuate a liquidity event by a specified date, it will be difficult for you to sell your shares.

 

   

The amount of any distributions we may make is uncertain. Our distribution proceeds have exceeded and in the future may exceed our net investment income, particularly during the period before we have substantially invested the net proceeds from our public offering. Therefore, portions of the distributions that we make may represent a return of capital to you for tax purposes.

 

   

We have elected to be treated as a RIC for federal income tax purposes. Failure to maintain our qualification as a RIC would subject us to federal income tax on all of our income, which would have a material adverse effect on our financial performance.

 

   

As a result of the annual distribution requirement to maintain our qualification as a RIC, we will likely need to continually raise cash or make borrowings to fund new investments. At times, these sources of funding may not be available to us on acceptable terms, if at all.

 

   

We are subject to financial market risks, including changes in interest rates, which may have a substantial negative impact on our investments.

 

   

A significant portion of our portfolio is recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty as to the value of our portfolio investments.

 

   

We invest primarily in senior secured term loans, second lien secured loans and, to a lesser extent, mezzanine debt and selected equity investments issued by private U.S. companies, including small and middle market companies. For our senior secured and second lien secured loans, the collateral securing these investments may decrease in value or lose its entire value over time or may fluctuate based on the performance of the portfolio company which may lead to a loss in principal. Mezzanine debt investments are typically unsecured, and this may involve a heightened level of risk, including a loss of principal or the loss of the entire investment.

 

   

The potential for FB Advisor to earn incentive fees under the investment advisory and administrative services agreement may create an incentive for it to enter into investments that are riskier or more speculative than would otherwise be in our best interests, and, since the base management fee is based on gross assets, FB Advisor may have an incentive to increase portfolio leverage in order to earn higher base management fees. In addition, since GDFM will receive a portion of the advisory fees paid to FB Advisor, GDFM may have an incentive to recommend investments that are riskier or more speculative.

 

   

This is a “best efforts” offering and if we are unable to raise substantial funds then we will be more limited in the number and type of investments we may make.

 

   

FB Advisor, its affiliates and GDFM face conflicts of interest as a result of compensation arrangements, time constraints and competition for investments, which they will attempt to resolve in a fair and equitable manner, but which may result in actions that are not in your best interests.

 

   

The purchase price at which you purchase shares will be determined at each semi-monthly closing date. As a result, your purchase price may be higher than the prior semi-monthly closing price per share, and therefore you may receive a smaller number of shares than if you had subscribed at the prior semi-monthly closing price.

 

   

In the event of a decline in our net asset value, the board of directors may elect not to reduce our net offering price per share. As a result, your purchase price may be higher than the Company’s current net asset value per share.

 

   

The agreements governing Broad Street’s revolving credit facility contain various covenants which, if not complied with, could accelerate repayment under the facility, which would materially and adversely affect our liquidity, financial condition and our ability to pay distributions to our stockholders. In addition, the facility exposes us to the risks of borrowing, also known as leverage, which may be considered a speculative investment technique. Leverage increases the volatility of investments by magnifying the potential for gain and loss on amounts invested, therefore increasing the risks associated with investing in our securities.

 

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See “Risk Factors” beginning on page 33 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

Reports to Stockholders

Within 60 days after the end of each fiscal quarter, we will distribute our quarterly report on Form 10-Q to all stockholders of record. In addition, we will distribute our annual report on Form 10-K to all stockholders within 120 days after the end of each fiscal year. These reports will also be available on our website at www.fsinvestmentcorp.com and on the SEC’s website at www.sec.gov. These reports should not be considered a part of or as incorporated by reference in the prospectus, or the registration statement of which the prospectus is a part.

Promptly following the payment of distributions to all stockholders of record residing in Maryland, we will send information to stockholders regarding the source of such distributions.

Distribution Reinvestment Plan

We have adopted an “opt in” distribution reinvestment plan pursuant to which you may elect to have the full amount of your cash distributions reinvested in additional shares of our common stock. Participants in our distribution reinvestment plan are free to elect or revoke reinstatement in the distribution reinvestment plan within a reasonable time as specified in the plan. If you do not elect to participate in the plan you will automatically receive any distributions we declare in cash. For example, if our board of directors authorizes, and we declare, a cash distribution, then if you have “opted in” to our distribution reinvestment plan you will have your cash distributions reinvested in additional shares of our common stock, rather than receiving the cash distributions. We expect to coordinate distribution payment dates so that the same price that is used for the semi-monthly closing date immediately following such distribution payment date will be used to calculate the purchase price for purchasers under the distribution reinvestment plan. In such case, your reinvested distributions will purchase shares at a price equal to 95% of the price that shares are sold in the offering at the semi-monthly closing immediately following the distribution payment date. See “Distribution Reinvestment Plan.” No commissions or fees will be assessed pursuant to our distribution reinvestment plan.

Taxation

We have elected, effective as of the date of our formation, to be treated for federal income tax purposes, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Material U.S. Federal Income Tax Considerations.”

Corporate Information

Our principal executive offices are located at 2929 Arch Street, Suite 675, Philadelphia, Pennsylvania 19104-2867. We maintain a website at www.fsinvestmentcorp.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us” or “FS Investment Corporation,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us.

Stockholder Transaction Expenses:

 

Expenses (as a percentage of offering price)(1)

      

Sales load to dealer manager(2)

     10.00

Offering expenses(3)

     1.50

Total stockholder transaction expenses

     11.5

Annual expenses (as a percentage of average net assets

attributable to common stock)(1)

      

Base management fee(4)

     3.43

Incentive fees payable under our investment advisory and administrative services agreement(5)

     0.77

Interest payments on borrowed funds(6)

     1.91

Other expenses(7)

     1.30

Acquired fund fees and expenses(8)

     0.00

Total Annual Expenses

     7.41

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed our annual operating expenses would remain at the percentage levels set forth in the table above and that stockholders would pay a sales load of 10% with respect to common stock sold by us in this offering.

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 investment,
assuming a 5.0% annual return:
(1)

   $ 180       $ 306       $ 427       $ 703   

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. In addition, while the example assumes reinvestment of all distributions at net asset value, participants in our distribution reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the greater of 95% of the most recent offering price or at such price necessary to ensure that shares are not sold at a price that is below net asset value. See “Distribution Reinvestment Plan” for additional information regarding our distribution reinvestment plan. See “Plan of Distribution” for additional information regarding stockholder transaction expenses.

 

(1)

Amount assumes that we sell $480 million worth of our common stock during the twelve months following September 30, 2010, which represents the average monthly rate of capital raising during the six months ended January 31, 2011, annualized over twelve months. As of September 30, 2010, the Company had net assets of approximately $261.9 million. Assuming the Company raises an additional $480 million over the twelve months following September 30, 2010, the Company would receive net proceeds of approximately $424.8 million, resulting in estimated net assets of approximately $686.7 million, and average net assets of

 

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approximately $474.3 million. The amount also assumes inclusion of $340 million in proceeds from the credit facility with Deutsche Bank, which results in average total assets of approximately $814.3 million. We may draw down less than the full amount available under the credit facility with Deutsche Bank. Actual expenses will depend on the number of shares we sell in this offering and the amount of leverage we employ. For example, if we were to raise proceeds significantly less than this amount over the twelve months following September 30, 2010, our expenses as a percentage of our average net assets would be significantly higher.

There can be no assurance that we will sell $480 million worth of our common stock during the twelve months following September 30, 2010.

 

(2) “Sales load” includes selling commissions of 7.0% and dealer manager fees of 3.0%.

 

(3) Amount reflects estimated offering expenses to be paid by us of up to $7.2 million if we raise $480 million in gross proceeds.

 

(4) Our base management fee under the investment advisory and administrative services agreement will be payable quarterly in arrears, and will be calculated at an annual rate of 2.0% of the average value of our gross assets, which are assumed to equal 171.7% of our average net assets as described in Note (6) below. See “Investment Advisory and Administrative Services Agreement—Overview of FB Advisor—Advisory Fee.” The base management fee shown in the table above is higher than the contractual rate because the base management fee in the table is required to be calculated as a percentage of our average net assets, rather than our gross assets.

 

(5) Based on our current business plan, we anticipate that we may have capital gains and interest income that could result in the payment of an incentive fee to FB Advisor in the following twelve months. However, the incentive fee payable to FB Advisor is based on our performance and will not be paid unless we achieve certain performance targets.

 

     The incentive fee will consist of three parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter and will be subordinated to a preferred return on adjusted capital equal to 2.0% per quarter, or an annualized rate of 8.0%. Because the example above assumes a 5.0% annual return, as required by the SEC, no subordinated incentive fee on income would be payable in the following twelve months.

 

     The second part of the incentive fee, which we refer to as the incentive fee on capital gains during operations, will be an incentive fee on capital gains earned on liquidated investments from the portfolio during operations prior to a liquidation of the Company and will be 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 will equal 20.0% of our incentive fee capital gains, which will equal our 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 amount in the table assumes that the incentive fee on capital gains during operations will be approximately 0.77% of net assets and is based on the actual realized capital gains for the nine months ended September 30, 2010 and the unrealized appreciation of our investments as of such date and assumes that all such unrealized appreciation is converted to realized capital gains on such date. Such amounts are annualized for the full year and expressed as a percentage of the estimated average net assets of approximately $474.3 million for the following twelve months.

 

     The third part of the incentive fee, which we refer to as the subordinated liquidation incentive fee, will equal 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation. For purposes of the example above, we have assumed that the subordinated liquidation incentive fee is zero. See “Investment Advisory and Administrative Services Agreement—Overview of FB Advisor—Advisory Fees” for a full explanation of how this incentive fee is calculated.

 

(6)

On March 10, 2010, Deutsche Bank agreed to provide a $140 million revolving credit facility to Broad Street, our wholly-owned financing subsidiary. We transferred a portfolio of our debt securities to Broad Street as a contribution to capital and retain a residual interest in the loans contributed through our ownership of Broad

 

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Street. 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 Deutsche Bank are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities.

 

  On July 13, 2010, in exchange for an amendment fee paid to Deutsche Bank, Broad Street and Deutsche Bank entered into an amendment to the facility, or the first facility amendment, to increase the maximum borrowing amount from $140 million to $240 million and to lower the overall borrowing cost thereunder from LIBOR + 2.50% to LIBOR + 2.23% per annum. No other material terms of the facility changed in connection with the first facility amendment. In addition, in connection with the closing of the first facility amendment, we contributed additional loans to Broad Street as collateral for the amended facility.

 

  On November 10, 2010, Broad Street and Deutsche Bank entered into a second amendment to the facility, or the second facility amendment, to increase the maximum borrowing amount under the facility by $100 million (referred to herein as the Tranche B Commitment), from $240 million (referred to herein as the Tranche A Commitment) to $340 million. Borrowings under the Tranche B Commitment will bear interest at the rate of LIBOR + 1.50% per annum and will mature and be due and payable upon sixty days notice from Deutsche Bank. Subject to certain conditions set forth in the second facility amendment, all or a portion of the Tranche B Commitment may be converted by Deutsche Bank into a Tranche C Commitment, subject to the payment by Broad Street of a conversion fee. All converted borrowings characterized as a Tranche C Commitment will bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. All borrowings under the Tranche A Commitment bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. No other material terms of the facility changed in connection with the second facility amendment.

 

  On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated credit facility, or the credit facility restatement, to convert the facility from a single-lender facility to a multi-lender, syndicated facility and name Deutsche Bank as administrative agent thereunder; to convert all of the outstanding Tranche B Commitment into a Tranche C Commitment in exchange for a conversion fee paid to Deutsche Bank; to join a new lender to the facility to be the sole lender under the Tranche C Commitment; and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the facility changed in connection with the credit facility restatement.

 

  On January 28, 2011, Broad Street and Deutsche Bank also entered into an amended and restated security agreement, or the security agreement restatement, to provide that Deutsche Bank will serve as administrative agent thereunder and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the security agreement changed in connection with the security agreement restatement.

 

  As of September 30, 2010, approximately $197.3 million was outstanding under this facility. The figure in the table assumes we borrow the full amount available under the amended facility and that the annualized borrowing costs under such facility, including amortized costs and expenses, is 2.67%. Because the assumed borrowing ($340 million) represents 71.7% of our assumed average net assets over the twelve months following September 30, 2010 ($474.3 million), the borrowing costs as a percentage of net assets set forth in the table above is 1.91% (or 71.7% of 2.67%).

 

(7) Other expenses include accounting, legal and auditing fees as well as the reimbursement of the compensation of our chief financial officer and chief compliance officer and fees payable to our independent directors. The amount presented in the table does not include preferred pricing arrangements we have received from certain parties as a newly-formed entity but instead reflects estimated amounts we will pay during the twelve months following September 30, 2010 assuming we raise $480 million during such time.

 

(8) We have no current intention during the following twelve months to invest in the securities or other investment instruments of public investment companies or BDCs or private investment companies. If we were to make such investments, we would incur fees and our stockholders would pay two levels of fees. As we have no current intention of making any such investments, any estimate of the amount of such fees would be highly speculative.

 

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COMPENSATION OF THE DEALER MANAGER AND THE INVESTMENT ADVISER

The dealer manager receives compensation and reimbursement for services relating to this offering, and we compensate FB Advisor for the investment and management of our assets. The most significant items of compensation, fees, expense reimbursements and other payments that we expect to pay to these entities and their affiliates are included in the table below. The selling commissions and dealer manager fee may vary for different categories of purchasers. See “Plan of Distribution.” This table assumes the shares are sold through distribution channels associated with the highest possible selling commissions and dealer manager fees. For illustrations of how the base management fee, the subordinated incentive fee on income, the incentive fee on capital gains during operations and the subordinated liquidation incentive fee are calculated, see “Investment Advisory and Administrative Services Agreement—Overview of FB Advisor—Advisory Fees.”

 

Type of Compensation

  

Determination of Amount

  

Estimated Amount for

Maximum Offering
(150,000,000 Shares)(1)

   Fees to the Dealer Manager   

Sales Load

     

Selling commissions(2)

   7.0% of gross offering proceeds from the offering; all selling commissions are expected to be reallowed to selected broker-dealers.    $112,350,000

Dealer manager fee(2)

   Up to 3.0% of gross proceeds, all or a portion of which may be reallowed to selected broker-dealers.    $48,150,000

Reimbursement to Our Investment Adviser

Other organization and offering expenses(3)

  

We reimburse FB Advisor for the organizational and offering costs it has incurred on our behalf only to the extent that the reimbursement would not cause the selling commissions, dealer manager fee, accountable due diligence expenses and the other organizational and offering expenses borne by us to exceed 15.0% of the gross offering proceeds as the amount of proceeds increases. Based on our current estimate, we estimate that these expenses would be approximately $24.1 million, or 1.5% of the gross offering proceeds, if we use the maximum amount offered.

  

$24,075,000

   Investment Adviser Fees   

Base management fee

   The base management fee is calculated at an annual rate of 2.0% of our average gross assets and payable quarterly in arrears. The base management fee may or may not be taken in whole or in part at the    $28,408,500

 

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Type of Compensation

  

Determination of Amount

  

Estimated Amount for

Maximum Offering
(150,000,000 Shares)(1)

   discretion of FB Advisor. All or any part of the base management fee not taken as to any quarter shall be deferred without interest and may be taken in any such other quarter prior to the occurrence of a liquidity event as FB Advisor shall determine.   

Subordinated Incentive Fee on Income

  

The subordinated incentive fee on income is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter, and will be subordinated to a preferred return on adjusted capital equal to 2.0% per quarter (an annualized rate of 8.0%).(4) No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed the preferred quarterly return of 2.0%, or the preferred quarterly return, on adjusted capital. For any calendar quarter in which pre-incentive fee net investment income is greater than the preferred quarterly return, but less than 2.5%, the subordinated incentive fee on income shall equal the amount of pre-incentive fee net investment income in excess of the preferred quarterly return. This fee is referred to as the catch-up(5) and provides an increasing fee, but is in no event greater than the 20.0% of the pre-incentive fee net investment income, as the pre-incentive fee net investment income increases from a 2.0% to a 2.5% quarterly return on adjusted capital. For any calendar quarter in which the pre-incentive fee net investment income exceeds 2.5% of adjusted capital, the subordinated incentive fee on income shall equal 20.0% of pre-incentive fee net investment income. For purposes of this fee, adjusted capital shall mean cumulative gross proceeds generated from sales of our common stock (including our distribution reinvestment plan) reduced for distributions to

  

These amounts cannot be estimated since they are based upon the performance of the assets held by the Company. The Company has not achieved performance sufficient to realize subordinated incentive fee on income to date.

 

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Type of Compensation

  

Determination of Amount

  

Estimated Amount for

Maximum Offering
(150,000,000 Shares)(1)

   investors of proceeds from non- liquidating dispositions of our investments and amounts paid for share repurchases pursuant to our share repurchase program.   

Incentive Fee on Capital Gains During Operations

  

An incentive fee on capital gains earned on liquidated investments of the portfolio during operations prior to a liquidation of the Company will be determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement) and will equal 20.0% of our incentive fee capital gains, which will equal our 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.

  

These amounts cannot be estimated since they are based upon the performance of the assets held by the Company. The amount of any incentive fee on capital gains earned on liquidated investments will be reported by the Company in its quarterly and annual financial statements filed with the SEC under the Exchange Act.

Subordinated Liquidation Incentive Fee

  

The subordinated liquidation incentive fee will equal 20.0% of the net proceeds from a liquidation of the company in excess of adjusted capital, as measured immediately prior to liquidation.

  

These amounts cannot be estimated since they are based upon the performance of the assets held by the Company and the amount ultimately realized by the Company upon a liquidation.

Other Expenses

Other Operating Expenses

   We will reimburse the expenses incurred by FB Advisor in connection with its provision of administrative services provided to us, including the compensation payable by FB Advisor to our chief financial officer and chief compliance officer and other administrative personnel of FB Advisor. We will not reimburse FB Advisor for personnel costs in    We have estimated these annual expenses to be approximately $8,000,000. Actual amounts may be lower or higher than this.

 

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Type of Compensation

  

Determination of Amount

  

Estimated Amount for

Maximum Offering
(150,000,000 Shares)(1)

   connection with services for which FB Advisor receives a separate fee. In addition, we will not reimburse FB Advisor for (i) rent or depreciation, capital equipment or other costs of its own administrative items, or (ii) salaries, fringe benefits, travel expenses and other administrative items incurred or allocated to any controlling person of FB Advisor.   

 

(1) Assumes all shares are sold at the current offering price of $10.70 per share with no reduction in selling commissions or dealer manager fees. Prior to February 1, 2011, we sold shares at an offering price of $10.65 per share; prior to January 3, 2011, we sold shares at an offering price of $10.50 per share; prior to November 1, 2010, we sold shares at an offering price of $10.40 per share; and prior to October 1, 2009, we sold shares at an offering price of $10.00 per share. The offering price is subject to increase or decrease depending, in part, on our net asset value.

 

(2) The selling commission and dealer manager fee may be reduced or waived in connection with certain categories of sales, such as sales for which a volume discount applies, sales through investment advisers or banks acting as trustees or fiduciaries and sales to our affiliates. No selling commission or dealer manager fee will be paid in connection with sales under our distribution reinvestment plan.

 

(3) The organizational and offering expense reimbursement consists of costs incurred by FB Advisor and its affiliates on our behalf for legal, accounting, printing and other offering expenses, including costs associated with technology integration between our systems and those of our selected broker-dealers, marketing expenses, salaries and direct expenses of FB Advisor’s employees, employees of its affiliates and others while engaged in registering and marketing the shares of our common stock, which shall include development of marketing and marketing presentations and training and educational meetings and generally coordinating the marketing process for us. Any such reimbursements will not exceed actual expenses incurred by FB Advisor. FB Advisor is responsible for the payment of our cumulative organizational and offering expenses to the extent they exceed 1.5% of the aggregate proceeds from the offering, without recourse against or reimbursement by us.

 

(4) A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee preferred return and may result in an increase in the amount of incentive fees payable to FB Advisor.

 

(5) As the quarterly pre-incentive fee net investment income rises from 2.0% to 2.5%, the “catch-up” feature allows FB Advisor to recoup the fees foregone as a result of the existence of the investor’s preferred quarterly return.

Certain of the advisory fees payable to FB Advisor are not based on the performance of our investments. See “Investment Advisory and Administrative Services Agreement” and “Certain Relationships and Related Party Transactions” for a more detailed description of the fees and expenses payable to FB Advisor, the dealer manager and their affiliates and the conflicts of interest related to these arrangements.

 

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QUESTIONS AND ANSWERS ABOUT THIS OFFERING

Set forth below are some of the more frequently asked questions and answers relating to our structure, our management, our business and an offering of this type. See “Prospectus Summary” and the remainder of this prospectus for more detailed information about our structure, our business and this offering.

 

Q: What is a “BDC”?

 

A: BDCs are closed-end funds that elect to be treated as business development companies under the 1940 Act. As such, BDCs are subject to only certain provisions of the 1940 Act, as well as the Securities Act of 1933, as amended, or the Securities Act, and the Exchange Act. BDCs make investments in private or thinly-traded public companies in the form of long-term debt or equity capital, with the goal of generating current income and/or capital growth. BDCs can be internally or externally managed and qualify to elect to be taxed as “regulated investment companies” for federal tax purposes.

 

Q: What is a “RIC”?

 

A: A “RIC” is a regulated investment company under Subchapter M of the Code. A RIC generally does not have to pay corporate level federal income taxes on any income that it distributes to its stockholders from its tax earnings and profits. To qualify as a RIC, a company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to obtain RIC tax treatment, a company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income,” which is generally its net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. See “Material U.S. Federal Income Tax Considerations” for more information regarding RICs.

 

Q: Who will choose which investments to make?

 

A: All investment decisions made by FB Advisor will require the unanimous approval of its investment committee. FB Advisor’s investment committee is led by Michael C. Forman. Our board of directors, including a majority of independent directors, oversees and monitors our investment performance and, beginning with the second anniversary of the date of the investment advisory and administrative services agreement, will annually review the compensation we pay to FB Advisor and determine that the provisions of the investment advisory and administrative services agreement are carried out. Pursuant to an investment sub-advisory agreement with FB Advisor, GDFM acts as our investment sub-advisor, and will make investment recommendations for our benefit to FB Advisor.

 

Q: What is the experience of FB Advisor and GDFM?

 

A: Our investment activities are managed by FB Advisor, who oversees the management of our activities, and GDFM, who assists with the day-to-day management of our investment operations. FB Advisor is led by its senior management team who have significant experience across private lending, private equity and real estate investing. See “Management” for the experience of these individuals. FB Advisor’s sub-advisor, GDFM, is a subsidiary of GSO.

 

Q: How does a “best efforts” offering work?

 

A: When shares of common stock are offered to the public on a “best efforts” basis, the broker-dealers participating in the offering are only required to use their best efforts to sell the shares of our common stock. Broker-dealers do not have a firm commitment or obligation to purchase any of the shares of common stock.

 

Q: How long will this offering last?

 

A: This is a continuous offering of our shares as permitted by the federal securities laws. We have filed and will continue to file post-effective amendments to the registration statement of which this prospectus is a part, that are subject to SEC review, to allow us to continue this offering for three years. Your ability to purchase shares and submit shares for repurchase will not be affected by the expiration of this offering and the commencement of a new one.

 

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Q: Will I receive a stock certificate?

 

A: No. Our board of directors has authorized the issuance of shares of our capital stock without certificates. We expect that we will not issue shares in certificated form, although we may decide to issue certificates at such time, if ever, as we list our shares on a national securities exchange. We anticipate that all shares of our common stock will be issued in book-entry form only. The use of book-entry registration protects against loss, theft or destruction of stock certificates and reduces the offering costs.

 

Q: Who can buy shares of common stock in this offering?

 

A: In general, you may buy shares of our common stock pursuant to this prospectus if you have either (1) a net worth of at least $70,000 and an annual gross income of at least $70,000, or (2) a net worth of at least $250,000. For this purpose, net worth does not include your home, home furnishings and personal automobiles. Our suitability standards also require that a potential investor (i) can reasonably benefit from an investment in us based on such investor’s overall investment objectives and portfolio structuring; (ii) is able to bear the economic risk of the investment based on the prospective stockholder’s overall financial situation; and (iii) has apparent understanding of (a) the fundamental risks of the investment, (b) the risk that such investor may lose his or her entire investment, (c) the lack of liquidity of the shares, (d) the background and qualifications of FB Advisor and GDFM, and (e) the tax consequences of the investment.

 

     Generally, you must purchase at least $5,000 in shares of our common stock. Certain volume discounts may be available for large purchases. See “Plan of Distribution.” After you have satisfied the applicable minimum purchase requirement, additional purchases must be in increments of at least $500, except for purchases made pursuant to our distribution reinvestment plan. These minimum net worth and investment levels may be higher in certain states, so you should carefully read the more detailed description under “Suitability Standards.”

 

     Our affiliates may also purchase shares of our common stock. The selling commission and the dealer manager fee that are payable by other investors in this offering will be reduced or waived for certain purchasers, including our affiliates.

 

Q: How do I subscribe for shares of common stock?

 

A: If you meet the suitability standards and choose to purchase shares in this offering, you will need to (1) complete a subscription agreement, the form of which is attached to this prospectus as Appendix A, and (2) pay for the shares at the time you subscribe. We reserve the right to reject any subscription in whole or in part. Subscriptions will be accepted or rejected by us within 15 days of receipt by us and, if rejected, all funds will be returned to subscribers without deduction for any expenses within ten business days from the date the subscription is rejected.

 

Q: Is there any minimum initial investment required?

 

A: Yes. To purchase shares in this offering, you must make an initial purchase of at least $5,000. Once you have satisfied the minimum initial purchase requirement, any additional purchases of our shares in this offering must be in amounts of at least $500 except for additional purchases pursuant to our distribution reinvestment plan. See “Plan of Distribution.”

 

Q: Can I invest through my IRA, Keogh or after-tax deferred account?

 

A:

Yes, subject to the suitability standards. An approved trustee must process and forward to us subscriptions made through IRAs, Keogh plans and 401(k) plans. In the case of investments through IRAs, Keogh plans and 401(k) plans, we will send the confirmation and notice of our acceptance to the trustee. Please be aware that in purchasing shares, custodians or trustees of employee pension benefit plans or IRAs may be subject to the fiduciary duties imposed by the Employee Retirement Income Security Act of 1974, or ERISA, or other applicable laws and to the prohibited transaction rules prescribed by ERISA and related provisions of

 

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the Code. In addition, prior to purchasing shares, the trustee or custodian of an employee pension benefit plan or an IRA should determine that such an investment would be permissible under the governing instruments of such plan or account and applicable law. See “Suitability Standards” for more information.

 

Q: How will the payment of fees and expenses affect my invested capital?

 

A: The payment of fees and expenses will reduce the funds available to us for investment in portfolio companies and the income generated by the portfolio as well as funds available for distribution to stockholders. The payment of fees and expenses will also reduce the book value of your shares of common stock.

 

Q: Will the distributions I receive be taxable?

 

A: Cash distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions, or Qualifying Dividends, may be eligible for a maximum tax rate of 15%. In this regard, it is anticipated that distributions paid by us generally will not be attributable to dividends and, therefore, generally will not qualify for the 15% maximum rate applicable to Qualifying Dividends. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains that are currently taxable at a current maximum rate of 15% in the case of individuals, trusts or estates, regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder. We do not expect that special stock distributions that we pay ratably to all investors from time to time, if any, will be taxable.

 

Q: When will I get my detailed tax information?

 

A: We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain.

 

Q: Will I be notified on how my investment is doing?

 

A: Within 60 days after the end of each fiscal quarter, we will distribute our quarterly report on Form 10-Q to all stockholders of record. In addition, we will distribute our annual report on Form 10-K to all stockholders within 120 days after the end of each fiscal year. These reports will also be available on our website at www.fsinvestmentcorp.com and on the SEC’s website at www.sec.gov. These reports should not be considered a part of or as incorporated by reference in the prospectus, or the registration statement of which the prospectus is a part.

 

Q: Will I be able to sell my shares of common stock in a secondary market?

 

A: We do not currently intend to list our shares on an exchange and do not expect a public trading market to develop for them in the foreseeable future. Because of the lack of a trading market for our shares, stockholders may not be able to sell their shares promptly or at a desired price. If you are able to sell your shares, you may have to sell them at a discount to the purchase price of your shares.

 

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Q: Are there any restrictions on the transfer of shares?

 

A: No. Shares of our common stock will have no preemptive, exchange, conversion or redemption rights and will be freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. However, we do not currently intend to list our shares on an exchange and do not expect a public trading market to develop for them in the foreseeable future. We have instituted a share repurchase program, but we have limited the number of shares that we will offer to repurchase. As a result, your ability to sell your shares will be limited and you may not receive a full return of invested capital upon selling your shares. We will not charge for transfers of our shares except for necessary and reasonable costs actually incurred by us. See “Risk Factors—Risks Related to an Investment in Our Common Stock.”

 

Q: Will I otherwise be able to liquidate my investment?

 

A: We intend to seek to complete a liquidity event for our stockholders between five and seven years following the completion of our offering stage, although we may determine to complete a liquidity event earlier. We will view our offering stage as complete as of the termination date of our most recent public equity offering, if we have not conducted a public equity offering in any continuous two year period. We may determine not to pursue a liquidity event if we believe that then-current market conditions are not favorable for a liquidity event, and that such conditions will improve in the future. A liquidity event could include (1) the sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation, (2) a listing of our shares on a national securities exchange or (3) a merger or another transaction approved by our board of directors in which our stockholders will receive cash or shares of a publicly traded company. While our intention is to seek to complete a liquidity event between five and seven years following the completion of our offering stage, there can be no assurance that a suitable transaction will be available or that market conditions for a liquidity event will be favorable during that timeframe.

 

Q: Who can help answer my questions?

 

A: If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or the dealer manager at:

FS2 Capital Partners, LLC

Cira Centre

2929 Arch Street, Suite 675

Philadelphia, PA 19104-2867

(215) 495-1150

Attention: Investor Services

 

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SELECTED FINANCIAL DATA

You should read this selected consolidated financial data in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The selected financial data as of and for the nine months ended September 30, 2010 and 2009 has been derived from our unaudited financial statements and the selected financial data as of and for the year ended December 31, 2009 and 2008 and for the period from December 21, 2007 (Inception) to December 31, 2007 has been derived from our audited financial statements.

Dollar amounts are presented in thousands, except for per share data.

 

    Nine Months Ended
September 30,
    Year Ended
December 31,
    Period from
December 21, 2007
(Inception) to
December 31, 2007
 
    2010     2009     2009     2008    
    (Unaudited)                    

Statement of operations data:

         

Investment income

  $ 17,872      $ 2,081      $ 4,420      $ 25      $ —     

Operating expenses

         

Total expenses

    10,063        1,515        2,509        605        37   

Less: Expense reimbursement from sponsor

    —          (240     (240     —          —     
                                       

Net expenses

    10,063        1,275        2,269        605        37   
                                       

Net investment income (loss)

    7,809        806        2,151        (580     (37

Realized and unrealized gain

    5,191        7,181        9,305        —          —     
                                       

Net increase (decrease) in net assets resulting from operations

  $ 13,000      $ 7,987      $ 11,456      $ (580   $ (37
                                       

Per share data:

         

Net investment income (loss)—basic and diluted

  $ 0.40      $ 0.28      $ 0.48      $ (4.72  
                                 

Net increase (decrease) in net assets resulting from operations—basic and diluted

  $ 0.67      $ 2.74      $ 2.57      $ (4.72  
                                 

Distributions declared

  $ 0.56      $ 0.49      $ 0.67      $ 0.18     
                                 

Balance sheet data:

         

Total assets

  $ 536,585      $ 64,843      $ 110,068      $ 1,000     
                                 

Total net assets

  $ 261,881      $ 59,528      $ 93,197      $ 999     
                                 

Other data:

         

Total return(1)

    8.02 %     28.3     33.33     2.40  

Number of portfolio company investments at period end

    106        37        50        —       

Total portfolio investments for the period

  $ 501,690      $ 53,644      $ 106,098      $ —       

Investment sales and prepayments for the period

  $ 130,063      $ 7,192      $ 16,717      $ —       

 

(1) The 2008 total return is based on an initial investment at $7.32 per share, which represents the initial offering price per share, net of commissions and discounts, after taking into account the stock distributions to stockholders described in “Distributions”. Our net loss in 2008 did not reduce net asset value as all expenses were funded by Franklin Square Holdings. The 2009 total return was calculated by taking the net asset value per share as of December 31, 2009, 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, 2008. The total return for the nine months ended September 30, 2009 was calculated by taking the net asset value per share as of September 30, 2009, adding the cash distributions per share which were declared during the nine months ended September 30, 2009 and dividing the total by the net asset value per share on December 31, 2008. The total return for the nine months ended September 30, 2010 was calculated by taking the net asset value per share as of September 30, 2010, adding the cash distributions per share which were declared during the nine months ended September 30, 2010 and dividing the total by the net asset value per share on December 31, 2009.

 

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RISK FACTORS

Investing in our common stock involves a number of significant risks. In addition to the other information contained in this Prospectus, you should consider carefully the following information before making an investment in our common stock. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Structure

We are a relatively new company and have limited operating history.

We were formed on December 21, 2007 and commenced operations on January 2, 2009 after meeting our minimum offering requirement of selling, in aggregate, $2.5 million in common stock to persons not affiliated with us. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of our common stock could decline substantially.

Economic activity in the United States was impacted by the global financial crisis of 2008 and has yet to fully recover.

Beginning in the third quarter of 2007, global credit and other financial markets suffered substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic uncertainty.

Economic activity continues to be somewhat subdued as unemployment rates remain high. Despite this, capital has steadily flowed into the financial markets since the nadir of the credit crisis, as general risk aversion has subsided. As a result, corporate interest rate risk premiums, otherwise known as credit spreads, have declined significantly throughout most of 2009 and 2010. However, credit spreads remain above historical averages, particularly in the loan market. The improving economic and market conditions which have driven these declines in credit spreads may reverse themselves if uncertainty returns to the markets. Such a reversal could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.

Price declines in the large corporate leveraged loan market may adversely affect the fair value of our syndicated loan portfolio, reducing our net asset value through increased net unrealized depreciation.

Prior to the onset of the financial crisis, collateralized loan obligations, or CLOs, a type of leveraged investment vehicle holding corporate loans, hedge funds and other highly leveraged investment vehicles, comprised the majority of the market for purchasing and holding senior secured and second lien secured loans. As the secondary market pricing of the loans underlying these portfolios deteriorated during the fourth quarter of 2008, it is our understanding that many investors, as a result of their generally high degrees of leverage, were forced to raise cash by selling their interests in performing loans in order to satisfy margin requirements or the equivalent of margin requirements imposed by their lenders. This resulted in a forced deleveraging cycle of price declines, compulsory sales, and further price declines, with widespread redemption requests and other constraints

 

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resulting from the credit crisis generating further selling pressure. The pervasive forced selling and the resultant price declines led to the elimination or significant impairment of many of our leveraged competitors for investment opportunities, especially those having built their investment portfolios prior to the financial crisis.

While prices have appreciated measurably since the end of 2008, conditions in the large corporate leveraged loan market may deteriorate again, which may cause pricing levels to decline. As a result, we may suffer unrealized depreciation and could incur realized losses in connection with the sale of our syndicated loans, which could have a material adverse impact on our business, financial condition and results of operations.

Our ability to achieve our investment objectives depends on FB Advisor’s and GDFM’s ability to manage and support our investment process. If either FB Advisor or GDFM were to lose any members of their respective senior management teams, our ability to achieve our investment objectives could be significantly harmed.

Since we have no employees, we will depend on the investment expertise, skill and network of business contacts of FB Advisor and GDFM. FB Advisor, with the assistance of GDFM, will evaluate, negotiate, structure, execute, monitor and service our investments. Our future success will depend to a significant extent on the continued service and coordination of FB Advisor and its senior management team. The departure of any members of FB Advisor’s senior management team could have a material adverse effect on our ability to achieve our investment objectives. Likewise, the departure of any key employees of GDFM may impact its ability to render services to us under the terms of its sub-advisory agreement with FB Advisor.

Our ability to achieve our investment objectives depends on FB Advisor’s ability, with the assistance of GDFM, to identify, analyze, invest in, finance and monitor companies that meet our investment criteria. FB Advisor’s capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objectives, FB Advisor may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. FB Advisor may not be able to find investment professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations. In addition, both the investment advisory and administrative services agreement and the sub-advisory agreement that FB Advisor has entered into with GDFM have termination provisions that allow the parties to terminate the agreements without penalty. The investment advisory and administrative services agreement may be terminated at any time, without penalty, by FB Advisor, upon 120 days notice to us. The sub-advisory agreement may be terminated at any time, without the payment of any penalty, upon 60 days written notice by GDFM or, if our board of directors or the holders of a majority of our outstanding voting securities determine that the sub-advisory agreement with GDFM should be terminated, by FB Advisor. If either agreement is terminated, it may adversely affect the quality of our investment opportunities. In addition, in the event such agreements are terminated, it may be difficult for us to replace FB Advisor or for FB Advisor to replace GDFM. Furthermore, the termination of either of these agreements may adversely impact the terms of our credit facility. See “—Risks Related to Debt Financing.”

Because our business model depends to a significant extent upon relationships with private equity sponsors, investment banks, and commercial banks, the inability of FB Advisor and GDFM to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.

We expect that FB Advisor and GDFM will depend on their relationships with private equity sponsors, investment banks, and commercial banks, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If FB Advisor or GDFM fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom FB Advisor and GDFM have

 

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relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.

We may face increasing competition for investment opportunities, which could delay deployment of our capital, reduce returns and result in losses.

We compete for investments with other business development companies and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas they have not traditionally invested in, including making investments in small- to mid-sized private, U.S. companies. As a result of these new entrants, competition for investment opportunities in small and middle market private U.S. companies may intensify. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in small and middle market private U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act will impose on us as a business development company.

A significant portion of our investment portfolio will be recorded at fair value as determined in good faith by our board of directors and, as a result, there is and will be uncertainty as to the value of our portfolio investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value, as determined by our board of directors. However, the majority of our investments are not publicly traded or actively traded on a secondary market but are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. As a result, we will value these securities quarterly at fair value as determined in good faith by our board of directors.

Certain factors that may be considered in determining the fair value of our investments include dealer quotes for securities traded on the secondary market for institutional investors, the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more of our investments.

There is a risk that investors in our equity securities may not receive distributions or that our distributions may not grow over time.

We intend to make distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash

 

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distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.

The amount of any distributions we may make is uncertain. Our distribution proceeds have exceeded and in the future may exceed our net investment income, particularly during the period before we have substantially invested the net proceeds from our public offering. Therefore, portions of the distributions that we make may represent a return of capital to you for tax purposes, which will lower your tax basis in your shares and reduce the amount of funds we have for investment in targeted assets. We may not be able to pay you distributions, and our distributions may not grow over time. We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flow from operations, net investment income or earnings are not sufficient to fund declared distributions.

We intend to declare distributions on either a semi-monthly or monthly basis and pay distributions on either a monthly or quarterly basis. We will pay these distributions to our stockholders out of assets legally available for distribution. We may fund distributions from the uninvested proceeds of this offering and borrowings. We have paid and may continue to pay distributions from the sale of assets to the extent distributions exceed our net investment income or cash flows from operations.

While Franklin Square Holdings has, in the past, limited our expenses to ensure that such expenses were reasonable in relation to our income, we cannot assure you that we will achieve investment results that will allow us to make a targeted level of cash distributions or year-to-year increases in cash distributions. We do not expect that conditions will require Franklin Square Holdings to provide reimbursements in the future. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described in this prospectus. In addition, the inability to satisfy the asset coverage test applicable to us as a business development company may limit our ability to pay distributions. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our net investment income, our financial condition, maintenance of our RIC status, compliance with applicable business development company regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future. In the event that we encounter delays in locating suitable investment opportunities, we may pay all or a substantial portion of our distributions from the proceeds of our public offering or from borrowings in anticipation of future cash flow, which may constitute a return of your capital and will lower your tax basis in your shares. Distributions from the proceeds of our public offering or from borrowings also could reduce the amount of capital we ultimately invest in our portfolio companies.

Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our board of directors has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment. Moreover, we will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from our public offering in ways with which investors may not agree or for purposes other than those contemplated at the time of our public offering.

If we internalize our management functions, your interest in us could be diluted, and we could incur other significant costs associated with being self-managed.

Our board of directors may decide in the future to internalize our management functions. If we do so, we may elect to negotiate to acquire FB Advisor’s assets and personnel. At this time, we cannot anticipate the form or amount of consideration or other terms relating to any such acquisition. Such consideration could take many

 

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forms, including cash payments, promissory notes and shares of our common stock. The payment of such consideration could result in dilution of your interests as a stockholder and could reduce the earnings per share attributable to your investment.

In addition, while we would no longer bear the costs of the various fees and expenses we expect to pay to FB Advisor under the existing investment advisory and administrative services agreement, we would incur the compensation and benefits costs of our officers and other employees and consultants that are now being paid by FB Advisor or its affiliates. In addition, we may issue equity awards to officers, employees and consultants. These awards would decrease net income and may further dilute your investment. We cannot reasonably estimate the amount of fees we would save or the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to FB Advisor, our earnings per share would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our shares. As we are currently organized, we will not have any employees. If we elect to internalize our operations, we would employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims and other employee-related liabilities and grievances.

If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity. Currently, individuals employed by FB Advisor and its affiliates perform asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. These personnel have a great deal of know-how and experience. We may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and/or suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from effectively managing our investments.

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

We and our portfolio companies will be subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect.

Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans as set forth in this prospectus and may result in our investment focus shifting from the areas of expertise of FB Advisor and GDFM to other types of investments in which FB Advisor and GDFM may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

The impact of recent financial reform legislation on us is uncertain.

In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration and regulators have increased their focus on the regulation of the financial services industry. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, institutes a wide range of reforms that will have an impact on all financial institutions. Many of the requirements called for in the Dodd-Frank Act will be implemented over time, most of which will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies

 

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and through regulations, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations and financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of the Dodd-Frank Act, these changes could be materially adverse to us and our stockholders.

As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect us.

We are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act and the related rules and regulations promulgated by the SEC. Under current SEC rules, beginning with our fiscal year ending December 31, 2009, our management is required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. As a result, we expect to incur significant additional expenses which may negatively impact our financial performance and our ability to make distributions. In the event that we are unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules and regulations, we may be adversely affected.

We may experience fluctuations in our quarterly results.

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

Risks Related to FB Advisor and Its Affiliates

FB Advisor has limited experience managing a business development company or a regulated investment company, or RIC.

FB Advisor has limited experience managing a BDC or a RIC and may not be able to successfully operate our business or achieve our investment objectives. As a result, an investment in our shares of common stock may entail more risk than the shares of common stock of a comparable company with a substantial operating history.

The 1940 Act and the Code impose numerous constraints on the operations of business development companies and RICs that do not apply to the other types of investment vehicles previously managed by FB Advisor. For example, under the 1940 Act, business development companies are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly traded companies. Moreover, qualification for RIC tax treatment under subchapter M of the Code requires satisfaction of source-of-income, diversification and other requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a business development company or RIC or could force us to pay unexpected taxes and penalties, which could be material. FB Advisor’s limited experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.

 

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FB Advisor and its affiliates, including our officers and some of our directors, face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our stockholders.

FB Advisor and its affiliates receive substantial fees from us in return for their services, and these fees could influence the advice provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to public offerings of equity by us, which allow the dealer manager to earn additional dealer manager fees and FB Advisor to earn increased asset management fees. In addition, the decision to utilize leverage has increased our assets and, as a result, has increased the amount of management fees payable to FB Advisor.

We may be obligated to pay FB Advisor incentive compensation even if we incur a net loss due to a decline in the value of our portfolio.

Our investment advisory and administrative services agreement entitles FB Advisor to receive incentive compensation on income regardless of any capital losses. In such case, we may be required to pay FB Advisor incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or if we incur a net loss for that quarter.

Any incentive fee payable by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued but not yet received. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. FB Advisor is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in our paying an incentive fee on income we never received.

For federal income tax purposes, we may be required to recognize taxable income (such as deferred interest that is accrued as original issue discount) in circumstances in which we do not receive a corresponding payment in cash and to make distributions with respect to such income to maintain our status as a RIC even though we will not have received any corresponding cash amount. Under such circumstances, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that we are required to pay an incentive fee with respect to such accrued income for which we have not received a corresponding cash payment. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, see “Federal Income Tax Risks—We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.”

The time and resources that individuals employed by FB Advisor and GDFM devote to us may be diverted and we may face additional competition due to the fact that individuals employed by FB Advisor and GDFM are not prohibited from raising money for or managing another entity that makes the same types of investments that we target.

Neither FB Advisor nor GSO are prohibited from raising money for and managing another investment entity that makes the same types of investments as those we target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities. If we are able to obtain exemptive relief from the SEC, we also intend to co-invest with any such investment entity to the extent permitted by the 1940 Act, or the rules and regulations thereunder. There is no assurance that we will obtain such relief. In the event the SEC does not grant

 

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us relief, we could be limited in our ability to invest in certain portfolio companies in which GDFM or any of its affiliates are investing or are invested. Even if we are able to receive exemptive relief, we will be unable to participate in certain transactions originated by GSO or its affiliates prior to receipt of such relief. Affiliates of GDFM, whose primary business include the origination of investments, engage in investment advisory business with accounts that compete with us. Affiliates of GDFM have no obligation to make their originated investment opportunities available to GDFM or to us.

Our incentive fee may induce FB Advisor to make, and GDFM to recommend, speculative investments.

The incentive fee payable by us to FB Advisor may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to FB Advisor is determined may encourage it to use leverage to increase the return on our investments. In addition, the fact that our base management fee is payable based upon our gross assets, which would include any borrowings for investment purposes, may encourage FB Advisor to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of our common stock. Such a practice could result in our investing in more speculative securities than would otherwise be in our best interests, which could result in higher investment losses, particularly during cyclical economic downturns. In addition, since GDFM will receive a portion of the advisory fees paid to FB Advisor, GDFM may have an incentive to recommend investments that are riskier or more speculative.

Risks Related to Business Development Companies

The requirement that we invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a business development company.

As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Regulation.” Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and result of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.

Failure to maintain our status as a business development company would reduce our operating flexibility.

If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

Regulations governing our operation as a business development company and RIC will affect our ability to raise, and the way in which we raise additional capital or borrow for investment purposes, which may have a negative effect on our growth.

As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue “senior securities,” including borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. Our ability to issue different types of securities

 

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is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we intend to continuously issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution.

We expect to borrow for investment purposes. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which would prohibit us from paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

Under the 1940 Act, we generally are prohibited from issuing or selling our common stock at a price below net asset value per share, which may be a disadvantage as compared with other public companies. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders as well as those stockholders that are not affiliated with us approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closely approximates the fair value of such securities.

Our ability to enter into transactions with our affiliates will be restricted.

We will be prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the independent members of our board of directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we will generally be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of our board of directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our board of directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by FB Advisor without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

We are uncertain of our sources for funding our future capital needs; if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.

The net proceeds from the sale of shares will be used for our investment opportunities, operating expenses and for payment of various fees and expenses such as base management fees, incentive fees and other fees. Any working capital reserves we maintain may not be sufficient for investment purposes, and we may require debt or equity financing to operate. Accordingly, in the event that we develop a need for additional capital in the future for investments or for any other reason, these sources of funding may not be available to us. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected. As a result, we would be less able to achieve portfolio diversification and our investment objectives, which may negatively impact our results of operations and reduce our ability to make distributions to our stockholders.

 

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Risks Related to Our Investments

Our investments in prospective portfolio companies may be risky, and we could lose all or part of our investment.

We expect to continue to invest primarily in senior secured term loans, second lien secured loans and, to a lesser extent, mezzanine debt and selected equity investments issued by private U.S. companies, including small and middle market companies.

Senior Secured Loans and Second Lien Secured Loans. When we invest in senior secured term loans and second lien secured loans, we will generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries. We expect this security interest to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Also, in some circumstances, our security interest could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.

Mezzanine Debt. Our mezzanine debt investments will generally be subordinated to senior loans and will generally be unsecured. This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our stockholders to non-cash income. Since we will not receive any principal repayments prior to the maturity of some of our mezzanine debt investments, such investments will be of greater risk than amortizing loans.

Equity Investments. We expect to make selected equity investments. In addition, when we invest in senior secured and second lien secured loans or mezzanine debt, we may acquire warrants to purchase equity securities. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

In addition, investing in small and middle market companies involves a number of significant risks, including that they:

 

   

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

 

   

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

 

   

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

 

   

generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and members of FB Advisor

 

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may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and

 

   

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

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

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

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

Even though we intend to generally structure certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, our legal rights may be subordinated to other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower.

We generally will not control our portfolio companies.

We do not expect to control most of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements with such portfolio companies may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

We will be exposed to risks associated with changes in interest rates.

We are subject to financial market risks, including changes in interest rates. While the majority of our investments are floating-rate debt instruments, to the extent that we invest in fixed-rate securities or loans, general interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, have a material adverse effect on our investment objectives and our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt for our financing needs, if any.

 

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

Certain loans that we will make to portfolio companies may be secured on a second priority basis by the same collateral securing first priority debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

A covenant breach by our portfolio companies may harm our operating results.

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

We may not realize gains from our equity investments.

Certain investments that we may make could include warrants or other equity securities. In addition, we may make direct equity investments in companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We intend to seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.

 

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An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.

Our investments are primarily in privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and the ability to withstand financial distress. Second, the investments themselves tend to be less liquid. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. As a result, the relative lack of liquidity and the potential diminished capital resources of our target portfolio companies may affect our investment returns. Finally, little public information generally exists about private companies. Further, these companies may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of FB Advisor and/or GDFM to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules and regulations that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

A lack of liquidity in certain of our investments may adversely affect our business.

We intend to invest in certain companies whose securities are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of certain of our investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

We may not have the funds or ability to make additional investments in our portfolio companies.

We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.

Risks Relating to Debt Financing

The agreements governing Broad Street’s revolving credit facility contain various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and our ability to pay distributions to our stockholders.

Our wholly-owned financing subsidiary, Broad Street, has entered into a revolving credit facility with Deutsche Bank. The agreements governing this facility contain default provisions such as (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates; (c) the purchase by Broad Street of certain ineligible assets; (d) the insolvency or bankruptcy of us or Broad Street; (e) our ceasing to act as investment manager of Broad Street’s assets; (f) the decline of our net asset value below $50,000,000; and (g) fraud or other illicit acts by us or FB Advisor or GDFM in our or their investment advisory capacities. An event of default under the facility would result, among other things, in the termination of the availability of further funds under the facility and an accelerated maturity date for all amounts outstanding under the facility. This could disrupt our business, reduce

 

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our revenues and, by delaying any dividends allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business, make distribution payments to our stockholders and maintain our status as a RIC.

The agreements governing the facility also require Broad Street to comply with certain operational covenants. These covenants require Broad Street to, among other things, maintain eligible assets with an aggregate value equal to or exceeding a specified multiple of the borrowings under the facility. The occurrence of certain “Super-Collateralization Events” results in an increase of the minimum aggregate value of eligible assets that Broad Street is required to maintain. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GDFM; (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 in certain material agreements or failing to maintain a net asset value at least equal to $50,000,000; and (v) us or GDFM or FB Advisor committing fraud or other illicit acts in our or their investment advisory capacities. A decline in the value of assets owned by Broad Street or the occurrence of a Super-Collateralization Event under the facility could result in us being required to contribute additional assets to Broad Street, which would likely disrupt our business and impact our ability to meet our investment objectives and pay distributions to our stockholders.

The failure to meet collateral requirements under the facility or the occurrence of any other event of default which results in the termination of the facility may force Broad Street or us to liquidate positions at a time and/or at a price which is disadvantageous to us and could result in losses. In addition, upon the occurrence of an event of default under the facility, Deutsche Bank would have the right to the assets pledged as collateral supporting the amounts outstanding under the facility and could sell such assets in order to satisfy amounts due under the facility.

Each borrowing under the facility is subject to the satisfaction of certain conditions. We cannot assure you that Broad Street will be able to borrow funds under the facility at any particular time or at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of the facility.

If we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. If we use leverage to partially finance our investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our common stock. If the value of our assets increases, leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distribution payments. Leverage is generally considered a speculative investment technique.

At September 30, 2010, we had approximately $197.3 million of indebtedness outstanding under Broad Street’s revolving credit facility with Deutsche Bank.

Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $814.3 million in total assets, (ii) a weighted average cost of funds of 2.67%, (iii) $340.0 million in debt

 

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outstanding (i.e., assumes that our wholly-owned financing subsidiary, Broad Street, borrows the full amount available under its revolving credit facility with Deutsche Bank) and (iv) $474.3 million in stockholders’ equity. In order to compute the “Corresponding return to shareholders,” the “Assumed Return on Our Portfolio (net of expenses)” is multiplied by the assumed total assets to obtain an assumed return to us. From this amount, the interest expense is calculated by multiplying the assumed weighted average cost of funds times the assumed debt outstanding, and the product is subtracted from the assumed return to us in order to determine the return available to stockholders. The return available to stockholders is then divided by our stockholders’ equity to determine the “Corresponding return to stockholders.” Actual interest payments may be different.

Assumed Return on Our Portfolio

(net of expenses)

 

     -10%     -5%     0%     5%     10%  

Corresponding return to stockholders

     -19.08     -10.50     -1.91     6.67     15.25

Changes in interest rates may affect our cost of capital and net investment income.

Since we intend to use debt to finance investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. 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. Also, we have limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise.

You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee preferred return and may result in a substantial increase of the amount of incentive fees payable to FB Advisor with respect to pre-incentive fee net investment income.

Risks Relating to an Investment in Our Common Stock

Investors will not know the purchase price per share at the time they submit their subscription agreements and could receive fewer shares of common stock than anticipated if our board of directors determines to increase the offering price to comply with the requirement that we avoid selling shares below net asset value.

The purchase price at which you purchase shares will be determined at each semi-monthly closing date to ensure that the sales price is equal to or greater than the net asset value of our shares, after deducting selling commissions and dealer manager fees. As a result, in the event of an increase in our net asset value per share, your purchase price may be higher than the prior semi-monthly closing price per share, and therefore you may receive a smaller number of shares than if you had subscribed at the prior semi-monthly closing price.

 

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Investors will not know the purchase price per share at the time they submit their subscription agreements and could pay a premium for their shares of common stock if our board of directors does not decrease the offering price in the event of a decline to our net asset value per share.

The purchase price at which you purchase shares will be determined at each semi-monthly closing date to ensure that the sales price is equal to or greater than the net asset value of our shares, after deducting selling commissions and dealer manager fees. In the event of a decrease to our net asset value per share, you could pay a premium of more than 5% for your shares of common stock if our board of directors does not decrease the offering price. A decline in our net asset value per share to an amount more than 5% below our current offering price, net of selling commissions and dealer manager fees, creates a rebuttable presumption that there has been a material change in the value of our assets such that a reduction in the offering price per share is warranted. This presumption may only be rebutted if our board of directors, in consultation with our management, reasonably and in good faith determines that the decline in net asset value per share is the result of a temporary movement in the credit markets or the value of our assets, rather than a more fundamental shift in the valuation of our portfolio. In the event that (i) net asset value per share decreases to more than 5% below our current net offering price and (ii) our board of directors believes that such decrease in net asset value per share is the result of a non-temporary movement in the credit markets or the value of our assets, our board of directors will undertake to establish a new net offering price that is not more than 5% above our net asset value per share. If our board of directors determines that the decline in our net asset value per share is the result of a temporary movement in the credit markets or the value of our assets, investors will purchase shares at an offering price per share, net of selling commissions and dealer manager fees, which represents a premium to the net asset value per share of greater than 5%. See “Plan of Distribution.”

If we are unable to raise substantial funds in our ongoing, continuous “best efforts” offering, we will be limited in the number and type of investments we may make, and the value of your investment in us may be reduced in the event our assets under-perform.

Our continuous offering is being made on a best efforts basis, whereby the dealer manager and broker-dealers participating in the offering are only required to use their best efforts to sell our shares and have no firm commitment or obligation to purchase any of the shares. To the extent that less than the maximum number of shares is subscribed for, the opportunity for diversification of our investments may be decreased and the returns achieved on those investments may be reduced as a result of allocating all of our expenses among a smaller capital base.

Our shares are not listed on an exchange or quoted through a quotation system, and will not be for the foreseeable future, if ever. Therefore, our stockholders have limited liquidity and may not receive a full return of invested capital upon selling shares.

Our shares are illiquid assets for which there is not a secondary market, and it is not expected that any will develop in the future. We intend to seek to complete a liquidity event for our stockholders between five and seven years following the completion of our offering stage. However, there can be no assurance that we will complete a liquidity event within such time or at all. We expect that our board of directors, in the exercise of its fiduciary duty to our stockholders, will determine to pursue a liquidity event when it believes that then-current market conditions are favorable for a liquidity event, and that such an event is in the best interests of our stockholders. A liquidity event could include (1) the sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation, (2) a listing of our shares on a national securities exchange or (3) a merger or another transaction approved by our board in which our stockholders will receive cash or shares of a publicly traded company.

Prior to the completion of a liquidity event, our share repurchase program may provide a limited opportunity for investors to achieve liquidity, subject to certain restrictions and limitations, at a price which may reflect a discount from the purchase price you paid for the shares being repurchased.

 

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In making the decision to apply for listing of our shares, our directors will try to determine whether listing our shares or liquidating our assets will result in greater value for our stockholders. In making a determination of what type of liquidity event is in the best interest of our stockholders, our board of directors, including our independent directors, may consider a variety of criteria, including, but not limited to, market conditions, portfolio diversification, portfolio performance, our financial condition, potential access to capital as a listed company, market conditions for the sale of our assets or listing of our common stock, internal management requirements to become a perpetual life company and the potential for stockholder liquidity. If our shares are listed, we cannot assure you a public trading market will develop. Further, even if we do complete a liquidity event, you may not receive a return of all of your invested capital.

We are not obligated to complete a liquidity event by a specified date; therefore, it will be difficult for an investor to sell his or her shares.

We intend to seek to complete a liquidity event for our stockholders between five to seven years following the completion of our offering stage. We expect that our board of directors, in the exercise of the requisite standard of care applicable to directors under Maryland law, will determine to pursue a liquidity event when it believes that then-current market conditions are favorable for a liquidity event, and that such a transaction is in the best interests of our stockholders. A liquidity event could include (1) the sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation, (2) a listing of our shares on a national securities exchange or (3) a merger or another transaction approved by our board in which our stockholders will receive cash or shares of a publicly traded company. However, there can be no assurance that we will complete a liquidity event within such time or at all. If we do not successfully complete a liquidity event, liquidity for an investor’s shares will be limited to our share repurchase program, which we have no obligation to maintain.

The dealer manager in our continuous offering may be unable to sell a sufficient number of shares of common stock for us to achieve our investment objectives.

The dealer manager for our public offering is FS2 Capital Partners, LLC, or our dealer manager. Our dealer manager has limited experience selling shares on behalf of a BDC. There is no assurance that it will be able to sell a sufficient number of shares to allow us to have adequate funds to purchase a diversified portfolio of investments and generate income sufficient to cover our expenses. As a result, we may be unable to achieve our investment objectives, and you could lose some or all of the value of your investment.

Because the dealer manager is one of our affiliates, you will not have the benefit of an independent due diligence review of us, which is customarily performed in firm commitment underwritten offerings; the absence of an independent due diligence review increases the risks and uncertainty you face as a stockholder.

The dealer manager, FS2 Capital Partners, LLC, is one of our affiliates. As a result, its due diligence review and investigation of us and this prospectus cannot be considered to be an independent review. Therefore, you do not have the benefit of an independent review and investigation of this offering of the type normally performed by an unaffiliated, independent underwriter in a firm commitment underwritten public securities offering.

Our ability to successfully conduct our continuous offering is dependent, in part, on the ability of the dealer manager to successfully establish, operate and maintain a network of broker-dealers.

Other than serving as dealer manager for our public offering, the dealer manager has no prior experience acting as a dealer manager for a public offering. The success of our public offering, and correspondingly our ability to implement our business strategy, is dependent upon the ability of the dealer manager to establish and maintain a network of licensed securities broker-dealers and other agents to sell our shares. If the dealer manager fails to perform, we may not be able to raise adequate proceeds through our public offering to implement our investment strategy. If we are unsuccessful in implementing our investment strategy, you could lose all or a part of your investment.

 

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We intend to offer to repurchase your shares on a quarterly basis. As a result, you will have limited opportunities to sell your shares and, to the extent you are able to sell your shares under the repurchase program, you may not be able to recover the amount of your investment in our shares.

We intend to conduct tender offers to allow you to tender your shares on a quarterly basis at a price equal to 90% of our public offering price on the date of repurchase. The first such tender offer commenced in March 2010 and the repurchase occurred in connection with our April 1, 2010 closing. The share repurchase program will include numerous restrictions that limit your ability to sell your shares. We intend to limit the number of shares repurchased pursuant to our proposed share repurchase program as follows: (1) we currently intend to limit the number of shares to be repurchased during any calendar year to the number of shares we can repurchase with the proceeds we receive from the sale of shares of our common stock under our distribution reinvestment plan, although at the discretion of our board of directors, we 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; (2) we 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; (3) unless you tender all of your shares, you must tender at least 25% of the amount of shares you have purchased in the offering and must maintain a minimum balance of $5,000 subsequent to submitting a portion of your shares for repurchase by us; and (4) to the extent that the number of shares put to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, not on a first-come, first-served basis. Further, we will have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under federal law or Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. These limits may prevent us from accommodating all repurchase requests made in any year. Our board of directors may amend, suspend or terminate the repurchase program upon 30 days notice. We will notify you of such developments (1) in our quarterly reports or (2) by means of a separate mailing to you, accompanied by disclosure in a current or periodic report under the Exchange Act. In addition, although we have adopted a share repurchase program, we have discretion to not repurchase your shares, to suspend the plan, and to cease repurchases. Further, the plan has many limitations and should not be relied upon as a method to sell shares promptly and at a desired price.

The timing of our repurchase offers pursuant to our share repurchase program may be at a time that is disadvantageous to our stockholders.

When we make quarterly repurchase offers pursuant to the share repurchase program, we may offer to repurchase shares at a price that is lower than the price that investors paid for shares in our offering. As a result, to the extent investors have the ability to sell their shares to us as part of our share repurchase program, the price at which an investor may sell shares, which will be 90% of the offering price on the date of repurchase, may be lower than what an investor paid in connection with the purchase of shares in our offering.

In addition, in the event an investor chooses to participate in our share repurchase program, the investor will be required to provide us with notice of intent to participate prior to knowing what the net asset value per share will be on the repurchase date. Although an investor will have the ability to withdraw a repurchase request prior to the repurchase date, to the extent an investor seeks to sell shares to us as part of our periodic share repurchase program, the investor will be required to do so without knowledge of what the repurchase price of our shares will be on the repurchase date.

We may be unable to invest a significant portion of the net proceeds of our offering on acceptable terms in an acceptable timeframe.

Delays in investing the net proceeds of our offering may impair our performance. We cannot assure you that we will be able to identify any investments that meet our investment objectives or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of our offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

 

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In addition, even if we are able to raise significant proceeds, we will not be permitted to use such proceeds to co-invest with certain entities affiliated with GDFM in transactions originated by GSO or its affiliates unless we first obtain an exemptive order from the SEC. We are seeking an exemptive order. However, there can be no assurance that we will obtain such relief.

Before making investments, we will invest the net proceeds of our public 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, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objectives. As a result, any distributions that we pay while our portfolio is not fully invested in securities meeting our investment objectives may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objectives.

A stockholder’s interest in us will be diluted if we issue additional shares, which could reduce the overall value of an investment in us.

Our investors do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 450,000,000 shares of common stock. Pursuant to our charter, a majority of our entire board of directors may amend our charter to increase the number of authorized shares of stock without stockholder approval. After an investor purchases shares, our board may elect to sell additional shares in the future, issue equity interests in private offerings or issue share-based awards to our independent directors or employees of FB Advisor. To the extent we issue additional equity interests after an investor purchases our shares, an investor’s percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, an investor may also experience dilution in the book value and fair value of your shares.

Certain provisions of our charter and bylaws as well as provisions of the Maryland General Corporation Law could deter takeover attempts and have an adverse impact on the value of our common stock.

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from attempting to acquire us. Under the Maryland General Corporation Law, “control shares” acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror, by officers or by directors who are employees of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act under the Maryland General Corporation Law any and all acquisitions by any person of our shares of stock. Our board may amend the bylaws to remove that exemption in whole or in part without stockholder approval. The Control Share Acquisition Act (if we amend our bylaws to be subject to that Act) may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Under the Maryland General Corporation Law, specified “business combinations,” including certain mergers, consolidations, issuances of equity securities and other transactions, between a Maryland corporation and any person who owns 10% or more of the voting power of the corporation’s outstanding shares, and certain other parties (each an “interested stockholder”), or an affiliate of the interested stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter any of the specified business combinations must be approved by a super majority vote of the stockholders unless, among other conditions, the corporation’s common stockholders receive a minimum price for their shares. We are subject to the Maryland Business Combination Act.

Under the Maryland General Corporation Law, certain statutory provisions permit a corporation that is subject to the Exchange Act and that has at least three outside directors to be subject to certain corporate governance provisions that may be inconsistent with the corporation’s charter and bylaws. Among other provisions, a board of directors may classify itself without the vote of stockholders. Further, the board of directors, by electing into certain statutory provisions and notwithstanding the charter or bylaws, may (i) provide that a special meeting of stockholders will be called only at the request of stockholders entitled to cast at least a

 

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majority of the votes entitled to be cast at the meeting, (ii) reserve for itself the right to fix the number of directors, and (iii) retain for itself sole authority to fill vacancies created by the death, removal or resignation of a director. A corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute. We are not prohibited from implementing any or all of the statute.

Additionally, our board of directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock; and our board of directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. These anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the value of our common stock.

Federal Income Tax Risks

We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.

To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements. See “Material U.S. Federal Income Tax Considerations.”

 

   

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

 

   

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

 

   

The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

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

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

For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in

 

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income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discounts and include such amounts in our taxable income in the current year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.

Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, see “Material U.S. Federal Income Tax Considerations—Taxation as a Regulated Investment Company.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of the investments that we expect to make;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital; and

 

   

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

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this prospectus. Other factors that could cause actual results to differ materially include:

 

   

changes in the economy;

 

   

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

 

   

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

We have based the forward-looking statements included in this prospectus on information available to us on the date of this prospectus, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act.

 

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ESTIMATED USE OF PROCEEDS

The following table sets forth our estimates of how we intend to use the gross proceeds from this offering. Information is provided assuming that we sell: (1) $500,000,000 worth of shares of common stock and (2) the maximum number of shares registered in this offering, or 150,000,000 shares. The amount of net proceeds may be more or less than the amount depicted in the table below depending on the public offering price of the common stock and the actual number of shares of common stock we sell in the offering. The table below assumes that shares of common stock are sold at the current offering price of $10.70 per share. Such amount is subject to increase or decrease based upon, among other things, our net asset value per share.

We intend to use substantially all of the proceeds from this offering, net of expenses, to make investments in private, U.S. companies in accordance with our investment objectives and using the strategies described in this prospectus. The remainder will be used for working capital and general corporate purposes. There can be no assurance we will be able to sell all the shares we are registering. If we sell only a portion of the shares we are registering, we may be unable to achieve our investment objectives or provide diversification of our portfolio.

Pending such use, we will invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our business development company election and our election to be taxed as a RIC.

The amounts in this table assume that the full fees and commissions are paid on all shares of our common stock offered to the public on a best efforts basis. All or a portion of the selling commission and dealer manager fee may be reduced or eliminated in connection with certain categories of sales such as sales for which a volume discount applies, sales through investment advisers or banks acting as trustees or fiduciaries and sales to our affiliates. The reduction in these fees will be accompanied by a corresponding reduction in the per share purchase price but will not affect the amounts available to us for investments. Because amounts in the following table are estimates, they may not accurately reflect the actual receipt or use of the offering proceeds.

 

     $500 Million Raised     Maximum Offering  
     Amount      %     Amount      %  

Gross Proceeds

   $ 500,000,000         100.0   $ 1,605,000,000         100.0

Less:

          

Selling Commission

   $ 35,000,000         7.0   $ 112,350,000         7.0

Dealer Manager Fee

   $ 15,000,000         3.0   $ 48,150,000         3.0

Offering Expenses

   $ 7,500,000         1.5   $ 24,075,000         1.5
                                  

Net Proceeds/Amount Available for Investments

   $ 442,500,000         88.5   $ 1,420,425,000         88.5
                                  

 

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DISTRIBUTIONS

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 have historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, subject to the board of directors’ discretion and applicable legal restrictions, 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 interim special distributions in the form of cash or shares of common stock at the discretion of our board of directors. Each year a statement on Form 1099-DIV, identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in capital surplus, which is a nontaxable distribution) will be mailed to our stockholders. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. No portion of the distributions paid during the years ended December 31, 2009 or December 31, 2010 represented a return of capital for tax purposes.

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 year ended December 31, 2009, these reimbursements totaled $240. During the nine months ended September 30, 2010, we did not receive any 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 chief executive officer, Michael Forman, and our director, David Adelman.

We intend to continue to make our ordinary distributions in the form of cash, out of assets legally available, unless stockholders elect to receive their distributions and/or long-term capital gains distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder. If stockholders hold shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive distributions in additional shares of our common stock.

To maintain RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

Promptly following the payment of distributions to all stockholders of record, we will send information to stockholders residing in Maryland regarding the source of such distributions.

 

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The following table reflects the cash distributions per share that we have declared and paid on our common stock during the years ended December 31, 2008, December 31, 2009 and December 31, 2010. Dollar amounts are presented in thousands, except per share data:

 

     Distribution  

For the Three Months Ended

   Per Share(1)      Amount  

Fiscal 2008

     

December 31, 2008

   $ 0.1835       $ 25   

Fiscal 2009

     

March 31, 2009

     0.1529         138   

June 30, 2009

     0.1601         396   

September 30, 2009

     0.1767         950   

December 31, 2009

     0.1820         1,651   

Fiscal 2010

     

March 31, 2010

     0.1860         2,443   

June 30, 2010

     0.1875         3,589   

September 30, 2010

     0.1875         4,764   

December 31, 2010

     0.3119         10,593   

 

(1) The amount of each per share distribution has been retroactively adjusted to reflect the stock distributions declared throughout 2009 and 2010 as discussed below.

On September 13, 2010, we declared a special one-time cash distribution in an aggregate amount of $300,000 ($0.00954 per share), which was paid on October 29, 2010 to stockholders of record on October 29, 2010. On October 13, 2010, we declared a special one-time cash distribution of $0.04 per share, which was paid on October 22, 2010 to stockholders of record on October 14, 2010. On November 9, 2010, we declared a special one-time cash distribution of $0.07 per share, which was paid on November 30, 2010 to stockholders of record on November 14, 2010.

On October 13, 2010, we determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.03125 per share to $0.03185 per share, effective October 1, 2010. On October 29, 2010, we determined to increase the amount of semi-monthly distributions payable to stockholders of record from $0.03185 per share to $0.032156 per share, effective November 1, 2010.

On January 13, 2011, we declared two regular semi-monthly cash distributions of $0.032156 per share each, which were paid on January 31, 2011 to stockholders of record on January 14, 2011 and January 28, 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 common stockholders. As a result, if we make a distribution, then 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. See “Distribution Reinvestment Plan.”

 

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We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and expense reimbursements from Franklin Square Holdings. The following table reflects, for tax purposes, the sources of the cash distributions that we have paid on our common stock during the nine months ended September 30, 2010 and 2009 and the years ended December 31, 2009 and 2008. Dollar amounts are presented in thousands, except per share data:

 

    Nine Months Ended September 30,     Year Ended December 31,  
    2010     2009     2009     2008  

Source of Distribution

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

Offering proceeds

  $ —          —        $ —          —        $ —          —        $ —          —     

Borrowings

    —          —          —          —          —          —          —          —     

Net investment income(1)

    7,872        73 %     566        38     1,917        61     25        100

Capital gains proceeds from the sale of assets

    2,923        27 %     678        46 %     977        31     —          —     

Non-capital gains proceeds from the sale of assets

    —          —          —          —          —          —          —          —     

Expense reimbursement from sponsor

    —          —          240        16 %     240        8     —          —     
                                                               
  $ 10,795        100 %   $ 1,484        100 %   $ 3,134        100   $ 25        100
                                                               

 

(1) During the nine months ended September 30, 2010 and 2009, 81% and 55%, respectively, of our gross investment income was attributable to cash interest earned and 19% and 45%, respectively, was attributable to non-cash accretion of discount and PIK interest. For the year ended December 31, 2009, 57% of our gross investment income was attributable to cash interest earned and 43% was attributable to non-cash accretion of discount and PIK interest.

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

 

Date Declared

   Record Date      Payment Date      Distribution
Percentage
    Shares
Issued
 

Fiscal 2009

          

March 31, 2009

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

April 30, 2009

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

May 29, 2009

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

June 30, 2009

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

July 30, 2009

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

August 31, 2009

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

December 31, 2009

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

Fiscal 2010

          

January 28, 2010

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

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

 

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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 are not expected to represent taxable distributions. Specific tax characteristics of all distributions are reported to stockholders annually on Form 1099-DIV.

The aggregate cost of our investments for federal income tax purposes totaled $470,941 and $92,366 as of September 30, 2010 and December 31, 2009, respectively. The aggregate gross unrealized appreciation on a tax basis was $9,938 and $8,226 as of September 30, 2010 and December 31, 2009, respectively. Our net investment income on a tax basis for the nine months ended September 30, 2010 and 2009 was $7,869 and $800, respectively. We distributed all of our net investment income earned as of September 30, 2010 and 2009.

The difference between our GAAP-basis net investment income and our tax-basis net investment income for the nine months ended September 30, 2010 and 2009 is due to the following: (i) tax-basis amortization expense of organization and start-up costs incurred prior to the commencement of our operations totaling $33 and $33, respectively; and (ii) interest income earned on a tax-basis on our investment in WCP Exposition Services Operating Co., for which we accrete the discount for tax purposes but not for book purposes, totaling $93 and $27, respectively.

The tax character of the distributions made for the years ended December 31, 2009 and 2008 was that of ordinary income. The difference between our GAAP-basis net investment income and our tax-basis net investment income for the year ended December 31, 2009 is due to the following: (i) tax-basis amortization expense of organization and start-up costs incurred prior to the commencement of our operations totaling $43; and (ii) interest income earned on a tax-basis due to the accretion of discount on one of our investments. As of December 31, 2009, the components of accumulated earnings on a tax basis were as follows:

 

(Dollar amounts are presented in thousands)

      

Distributable ordinary income

   $ 46   

Amortization of organization and start-up costs

     (43

Unrealized appreciation

     50   
        
   $ 53   
        

 

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

The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this prospectus. Many of the amounts and percentages presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been rounded for convenience of presentation, and all dollar amounts are presented in thousands, except per share data.

Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007, and commenced operations on January 2, 2009 upon raising gross proceeds in excess of $2.5 million from persons who are not affiliated with us or FB Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes as a RIC under the Code.

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, long-term subordinated loans, referred to as mezzanine 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 mezzanine investments that we make generally will have stated terms of up to ten years, but the expected average life of such loans 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.

Current Market Conditions

Beginning in the third quarter of 2007, global credit and other financial markets suffered substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic uncertainty.

 

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Economic activity continues to be somewhat subdued as unemployment rates remain high. Despite this, capital has steadily flowed into the financial markets since the nadir of the credit crisis, as general risk aversion has subsided. As a result, corporate interest rate risk premiums, otherwise known as credit spreads, have declined significantly throughout most of 2009 and 2010. However, credit spreads remain above historical averages, particularly in the loan market. The improving economic and market conditions which have driven these declines in credit spreads may reverse themselves if uncertainty returns to the markets. Such a reversal could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.

In the second quarter of 2010, we witnessed just such a reversal as renewed market volatility led to a sharp sell-off in both equities and credit. Broad-based selling of risk assets was driven by wavering investor confidence in virtually all major global institutions—sovereign, financial and corporate. Specific issues, such as a heightened awareness of unsustainable sovereign debt levels, particularly in Southern Europe, the Gulf of Mexico oil spill, and weaker than expected job creation, all weighed on the equity and credit markets. The reversal in credit spreads appeared to be temporary, however, as credit markets improved in the third quarter, retracing much of their losses from the second quarter.

Credit Facility

On March 10, 2010, Deutsche Bank agreed to provide a $140,000 revolving credit facility to Broad Street, our wholly-owned financing subsidiary. On July 13, 2010, Broad Street and Deutsche Bank entered into an amendment to the facility to increase the maximum borrowing amount from $140,000 to $240,000 and to lower the overall borrowing costs thereunder from LIBOR + 2.50% to LIBOR + 2.23% per annum. No other material terms of the facility changed in connection with this amendment.

On November 10, 2010, Broad Street and Deutsche Bank entered into a second amendment to the facility, or the second facility amendment, to increase the maximum borrowing amount under the facility by $100,000 (referred to herein as the Tranche B Commitment), from $240,000 (referred to herein as the Tranche A Commitment) to $340,000. Borrowings under the Tranche B Commitment will bear interest at the rate of LIBOR + 1.50% per annum and will mature and be due and payable upon sixty days notice from Deutsche Bank. Subject to certain conditions set forth in the second facility amendment, all or a portion of the Tranche B Commitment may be converted by Deutsche Bank into a Tranche C Commitment, subject to the payment by Broad Street of a conversion fee. All converted borrowings characterized as a Tranche C Commitment will bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. All borrowings under the Tranche A Commitment bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. No other material terms of the facility changed in connection with the second facility amendment.

On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated credit facility, or the credit facility restatement, to convert the facility from a single-lender facility to a multi-lender, syndicated facility and name Deutsche Bank as administrative agent thereunder; to convert all of the outstanding Tranche B Commitment into a Tranche C Commitment in exchange for a conversion fee paid to Deutsche Bank; to join a new lender to the facility to be the sole lender under the Tranche C Commitment; and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the facility changed in connection with the credit facility restatement.

On January 28, 2011, Broad Street and Deutsche Bank also entered into an amended and restated security agreement, or the security agreement restatement, to provide that Deutsche Bank will serve as administrative agent thereunder and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the security agreement changed in connection with the security agreement restatement.

We have transferred certain of our debt securities to Broad Street as a contribution to capital and retain a residual interest in the loans contributed through our ownership of Broad Street. The Company may contribute

 

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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 Deutsche Bank are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities. See “—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of the facility.

Portfolio Investment Activity For the Nine Months Ended September 30, 2010 and For the Year Ended December 31, 2009

During the nine months ended September 30, 2010, we invested $501,690 in 100 portfolio companies. During the same period we sold our positions totaling $81,958 in 27 portfolio companies and received principal repayments of $48,105. As of September 30, 2010, our investment portfolio, with a total fair value of $480,879, consisted of interests in 106 portfolio companies (64% in first lien senior secured loans, 22% in second lien senior secured loans, 4% in senior secured bonds and 10% in mezzanine debt) with an average annual EBITDA of approximately $314.6 million. As of September 30, 2010, the investments in our portfolio were purchased at an average price of 92.6% of par value, the weighted average credit rating of our portfolio was B2 based upon the Moody’s scale, and our estimated gross annual portfolio yield was 9.0% based upon the purchase price of our investments.

During the year ended December 31, 2009, we invested $106,098 in 62 portfolio companies. During the same period we exited positions totaling $11,779 in 12 portfolio companies and received principal repayments of $4,938. As of December 31, 2009, our investment portfolio, with a total fair value of $100,592, consisted of interests in 50 portfolio companies (46% in first lien senior secured loans, 45% in second lien senior secured loans and 9% in mezzanine debt) with an average annual EBITDA of approximately $269.4 million. As of December 31, 2010, the investments in our portfolio were purchased at an average price of 82.5% of par value, the weighted average credit rating of our portfolio was B3 based upon the Moody’s scale, and our estimated gross annual portfolio yield was 13.2% based upon the purchase price of our investments.

The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2010 and December 31, 2009:

 

     September 30, 2010
(Unaudited)
    December 31, 2009  
     Cost(1)      Fair Value      Percentage
of Portfolio
    Cost(1)      Fair Value      Percentage
of Portfolio
 

Senior Secured Loans—First Lien

   $ 300,426       $ 305,943         64   $ 41,835       $ 45,780         46 %

Senior Secured Loans—Second Lien

     102,956         105,861         22     41,351         45,521         45 %

Senior Secured Bonds

     20,036         20,754         4     —           —           —     

Mezzanine Debt/Other

     47,378         48,321         10     9,131         9,291         9 %
                                                    
   $ 470,796       $ 480,879         100   $ 92,317       $ 100,592         100 %
                                                    

 

(1) Cost represents the original cost adjusted for the accretion of discounts on debt 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 loan securities that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2010, we had three such investments, all of which have been fully funded.

 

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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, 2010 and December 31, 2009:

 

     September 30, 2010
(Unaudited)
    December 31, 2009  

Industry Classification

   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Consumer Discretionary

   $ 64,355         13.4   $ 10,739         10.7 %

Consumer Staples

     38,554         8.0     4,615         4.6 %

Energy

     58,855         12.2     9,388         9.3 %

Financials

     25,215         5.2     6,876         6.8 %

Healthcare

     30,897         6.4     3,927         3.9 %

Industrials

     89,222         18.6     10,943         10.9 %

Information Technology

     99,372         20.7     32,030         31.8 %

Materials

     18,147         3.8     5,762         5.7 %

Telecommunication Services

     43,221         9.0     12,671         12.7 %

Utilities

     13,041         2.7     3,641         3.6 %
                                  

Total

   $ 480,879         100.0   $ 100,592         100.0 %
                                  

Portfolio Asset Quality

In addition to various risk management and monitoring tools, our investment adviser uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The investment adviser 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 debt investments on the 1 to 5 investment rating scale at fair value as of September 30, 2010 and December 31, 2009:

 

     September 30, 2010
(Unaudited)
    December 31, 2009  

Investment Rating

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

1

   $ 27,646         6   $ —           —  

2

     449,179         93     98,848         98 %

3

     4,054         1     —           —  

4

     —           —          1,744         2 %

5

     —           —          —           —  
                                  
   $ 480,879         100   $ 100,592         100 %
                                  

The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment, and exit

 

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activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain, net unrealized appreciation and depreciation and net unrealized gains and losses on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized gains and losses on foreign currency is the net change in the fair value of our investments due to the impact of foreign currency fluctuations.

Comparison of the nine months ended September 30, 2010 and September 30, 2009

Revenues

We generated investment income of $17,872 and $2,081 for the nine months ended September 30, 2010 and 2009, respectively, in the form of interest earned on senior secured loans, mezzanine debt, collateralized loan and debt obligations and corporate bonds in our portfolio. Such revenues represent $14,403 and $1,153 of cash interest earned as well as $3,469 and $928 in non-cash portions relating to accretion of discount and PIK interest for the nine months ended September 30, 2010 and 2009, respectively. We did not earn any PIK interest income during the corresponding period of 2009. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due to the growth of our portfolio since commencing operations in 2009. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments.

We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. We may also generate revenues in the form of dividends on the equity or other securities we may hold. Since commencing operations, we have not owned any equity interests in our portfolio companies and, therefore, did not receive dividend payments or other fees from our portfolio companies.

In addition, we may generate revenues in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

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

We also reimburse FB Advisor for its performance of services related to our administration and operation, provided that such reimbursement shall be the lower of FB Advisor’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location, and provided further that such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse FB Advisor for any services for which it receives a separate fee, nor for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FB Advisor. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

 

   

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

 

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

 

   

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

 

   

investment advisory fees;

 

   

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

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

federal and state registration fees;

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

costs of proxy statements, stockholders’ reports and notices;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

all other expenses incurred by FB Advisor, our sub-adviser or us in connection with administering our business, including expenses incurred by FB Advisor or our sub-adviser in performing administrative services for us, and the reimbursement of the compensation of our chief financial officer and chief compliance officer paid by FB Advisor, to the extent they are not controlling persons of FB Advisor or any of its affiliates, subject to the limitations included in the investment advisory and administrative services agreement.

Our total operating expenses were $10,063 and $1,515 for the nine months ended September 30, 2010 and 2009, respectively. Our operating expenses include base management fees attributed to FB Advisor of $4,605 and $392 for the nine months ended September 30, 2010 and 2009, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $635 and $172 for the nine months ended September 30, 2010 and 2009, respectively. FB Advisor is eligible to receive incentive fees based on performance. We accrued incentive fee expenses during the nine months ended September 30, 2010 and 2009 of $373 and $136, respectively. We recorded interest expense of $2,213 for the nine months ended September 30, 2010 in connection with our revolving credit facility. Fees incurred with BNY Mellon Asset Servicing (formerly PNC Global Investment Services), which provides various accounting and administrative services to us, totaled $436 and $218 for the nine months ended September 30, 2010 and 2009, respectively. We incurred expenses with our stock transfer agent of $598 and $152 for the nine months ended September 30, 2010 and 2009, respectively.

 

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Our other general and administrative expenses totaled $1,203 and $445 for the nine months ended September 30, 2010 and 2009, respectively, and consisted of the following:

 

     Nine Months Ended September 30,  
             2010                      2009          

Expenses associated with our independent audit and related fees

   $ 230       $ 83   

Compensation of our chief financial officer and our chief compliance officer

     117         115   

Legal fees

     251         99   

Printing fees

     219         56   

Fees paid to our independent directors

     141         26   

Other

     245         66   
                 

Total

   $ 1,203       $ 445   
                 

After the first half of 2009, our other general and administrative expenses increased as initial pricing arrangements that we negotiated with certain vendors, due to our relatively small scale, ceased. In addition, our independent directors began receiving fees in connection with their service as independent directors in the second half of 2009. Prior to the third quarter of 2009, our independent directors had agreed to waive all fees payable in connection with their service as members of our board of directors.

Over the next several quarters, we expect our general and administrative operating expenses related to our ongoing operations to continue to increase because of the anticipated growth in the size of our asset base. During the nine months ended September 30, 2010 and 2009, the ratio of our operating expenses to our average net assets was 5.71% and 6.34%, respectively. We generally expect our general and administrative operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors.

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 the nine months ended September 30, 2010, we received no reimbursements from Franklin Square Holdings. During the nine months ended September 30, 2009, reimbursements from Franklin Square Holdings totaled $240. 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 chief executive officer, Michael Forman, and our director, David Adelman.

Net Investment Income

Our net investment income totaled $7,809 ($0.40 per share) and $806 ($0.28 per share) for the nine months ended September 30, 2010 and 2009, respectively.

Net Realized Gains or Losses

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. During January 2010, we

 

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sold our position in American Safety Razor and realized a loss of $307. During June 2010 and September 2010, we sold our positions in ATP Oil & Gas Corporation and realized losses of $838 and $559, respectively. We sold investments and received principal repayments of $5,816 and $1,376, respectively, during the nine months ended September 30, 2009, from which we realized net gains of $678. The principal repayments we received were at par value during the nine months ended September 30, 2010 and 2009.

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

For the nine months ended September 30, 2010, the net change in unrealized appreciation on investments totaled $1,811 and the net change in unrealized loss on foreign currency totaled $3. For the nine months ended September 30, 2009, the net change in unrealized appreciation on investments totaled $6,503. We did not hold any investment denominated in a foreign currency during the nine months ended September 30, 2009. The unrealized appreciation on our investments during the nine months ended September 30, 2010 was primarily driven by general improvement in the credit markets. The increase in unrealized appreciation for the nine months ended September 30, 2009 was due primarily to general increases in prices for senior secured debt as the loan market partially recovered from its historical lows reached in the fourth quarter of 2008.

Net Increase in Net Assets Resulting from Operations

For the nine months ended September 30, 2010, the net increase in net assets resulting from operations was $13,000 ($0.67 per share) compared to a net increase in net assets resulting from operations of $7,987 ($2.74 per share) during the corresponding period in 2009.

Comparison of the year ended December 31, 2009 and December 31, 2008

We commenced operations on January 2, 2009, when we raised in excess of $2.5 million from persons who are not affiliated with us or FB Advisor. As a result, no comparisons with the year ended December 31, 2008 have been included.

Revenues

Since commencing operations on January 2, 2009, we have generated investment income of $4,420 for the year ended December 31, 2009, in the form of interest earned on senior secured loans and corporate bonds in our portfolio. Such revenues represent cash interest earned as well as non-cash portions relating to accretion of discount and PIK interest. 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 level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. We also plan to generate revenues in the form of dividends on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned. During the year ended December 31, 2009, we did not own any equity interests in our portfolio companies and, therefore, did not receive dividend payments or other fees from our portfolio companies.

Expenses

Our total operating expenses were $2,509 for the year ended December 31, 2009. Our operating expenses included base management fees attributed to FB Advisor of $829 for the year ended December 31, 2009. Our operating expenses also included administrative services expenses attributed to FB Advisor of $261 and $173 in incentive fees based on performance for the year ended December 31, 2009.

 

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Our other general and administrative expenses totaled $1,246 for the year ended December 31, 2009 and consisted of the following:

 

Fees paid to PNC Global Investment Servicing, which provides various accounting and administrative services

   $ 326   

Expenses associated with our independent audit

     114   

Compensation of our chief financial officer and our chief compliance officer

     153   

Fees paid to our stock transfer agent

     265   

Legal fees

     151   

Fees paid for insurance

     74   

Fees paid to our independent directors

     81   

Other

     82   
        
   $ 1,246   
        

During the second half of 2009, our other general and administrative expenses increased as initial pricing arrangements that we negotiated with certain vendors, due to our relatively small scale, ceased. We expect these increases to continue over the next several quarters. In addition, our independent directors began receiving fees in connection with their service as independent directors in the second half of 2009. Prior to June 30, 2009, our independent directors had agreed to waive all fees payable in connection with their service as members of our board of directors. Through December 31, 2009, the fees paid to our independent directors totaled $81.

Over the next several quarters, we expect our general and administrative operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. We expect our general and administrative operating expenses to decline as a percentage of our total assets during periods of asset growth and increase as a percentage of our total assets during periods of asset declines. Incentive fees, interest expense and costs relating to our continuous offering, among other things, may also increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors.

For the year ended December 31, 2008 and for the period from December 21, 2007 (Inception) to December 31, 2007, we incurred organization costs of $605 and $37, respectively, included in other general and administrative expenses, which represented our only operating activities at that time. These organization costs included, among other items, the cost of legal services pertaining to our organization and the incorporation of our business. These costs were paid on our behalf by an affiliate and were treated as capital contributions. No such costs were incurred during the year ended December 31, 2009.

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 the three months ended December 31, 2009, we received no reimbursements from Franklin Square Holdings. During the year ended December 31, 2009, reimbursements from Franklin Square Holdings totaled $240. 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 chief executive officer, Michael Forman, and our director, David Adelman.

 

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Net Investment Income

Our net investment income totaled $2,151 or $0.48 per share for the year ended December 31, 2009.

Net Realized Gains or Losses

Certain of our investments were purchased at a discount to par. We sold investments and received principal repayments of $11,779 and $4,938, respectively, during the year ended December 31, 2009, from which we realized net gains of $621 and $409, respectively. The principal repayments we received were at par value. Our realized gains were primarily comprised of the sales of our first lien loans with BNY ConvergEx and N.E.W. Customer Service Cos., Inc., the sale of senior unsecured bonds of OSI Restaurant Partners, LLC and the sale of senior secured bonds of Protection One, Inc. In addition to the sales noted above, we realized gains as a result of the partial repayments at par of the outstanding amount of our investment tranches of senior secured loans primarily with Apptis (DE), Inc., Corel Corp., Headwaters, Inc., King Pharmaceuticals, Inc. and Yell Group Plc.

Net Change in Unrealized Appreciation on Investments

For the year ended December 31, 2009, the net change in unrealized appreciation on investments totaled $8,275. The unrealized appreciation on our investments was driven by a general increase in prices for senior secured debt as the loan market partially recovered from its historical lows reached in the fourth quarter of 2008. During the year ended December 31, 2009, we recorded unrealized depreciation of $44 on our first lien loans with InfrastruX Group, Inc. and Yell Group Plc. Additionally, we recorded unrealized depreciation of $120 on a second lien loan with American Safety Razor.

Net Increase in Net Assets Resulting from Operations

For the year ended December 31, 2009, the net increase in net assets resulting from operations was $11,456 or $2.57 per share.

Financial Condition, Liquidity and Capital Resources

During the nine months ended September 30, 2010, we sold 18,117,485 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $187,252. The gross proceeds received during the nine months ended September 30, 2010 include reinvested stockholder distributions of $2,967. During the nine months ended September 30, 2010, we also incurred offering costs of $629 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. FB Advisor funded $486 of these offering costs. We recorded these costs as a contribution to capital. The offering costs were offset against capital in excess of par in our consolidated financial statement and the other expenses were charged to expense as incurred. The sales commissions and dealer manager fees related to the sale of our common stock were $17,829 for the nine months ended September 30, 2010. These sales commissions and fees include $3,063 retained by the dealer manager, FS2 Capital Partners, LLC, or FS2, which is one of our affiliates.

During the year ended December 31, 2009, we sold 10,105,293 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $93,464 and incurred related offering costs of $8,574. These offering costs consisted primarily of sales commissions of $8,187, which includes $1,295 retained by FS2 as dealer manager, and other offering costs such as legal and printing fees of $387. FB Advisor funded these other offering costs.

 

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As of January 31, 2011, we have sold 46,457,573 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $471,046 since commencing our continuous public offering. Including the seed capital contributed by Messrs. Forman and Adelman, we have raised gross proceeds of $472,046 to date. The following table summarizes the sales of common stock on a monthly basis since December 31, 2009:

 

For the Month Ended

   Shares
Sold
     Average Price
per Share
     Gross
Proceeds
 

January 31, 2010

     1,364,245       $ 10.10       $ 13,783   

February 28, 2010

     1,588,127         10.34         16,422   

March 31, 2010

     1,379,308         10.38         14,319   

April 30, 2010

     2,786,257         10.35         28,847   

May 31 ,2010

     2,420,274         10.36         25,066   

June 30, 2010

     1,992,375         10.37         20,670   

July 31, 2010

     2,040,185         10.32         21,062   

August 31, 2010

     2,179,408         10.33         22,518   

September 30, 2010

     2,367,306         10.38         24,565   

October 31, 2010

     3,313,408         10.32         34,188   

November 30, 2010

     4,305,044         10.42         44,844   

December 31, 2010

     5,584,129         10.41         58,136   

January 31, 2011

     5,032,214         10.56         53,162   
                          
     36,352,280       $ 10.39       $ 377,582   
                          

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

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

As of September 30, 2010, we had $35,957 in cash, which we have invested in an interest bearing account.

We may borrow funds to make investments, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. Any borrowings we make are required to be in compliance with the provisions of the 1940 Act. We do not currently anticipate issuing any preferred stock. See “—Revolving Credit Facility” for a discussion of our outstanding indebtedness.

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 conducted during 2010:

 

For the Three Months Ended

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

March 31, 2010

   April 1, 2010      11,142       $ 9.36       $ 104   

June 30, 2010

   July 1, 2010      108,904         9.36         1,019   

September 30, 2010

   October 1, 2010      108,904         9.36         1,019   

December 31, 2010

   January 3, 2011      99,633         9.59         955   

 

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Revolving Credit Facility

On March 10, 2010, Deutsche Bank agreed to provide a $140,000 revolving credit facility to Broad Street, our wholly-owned financing subsidiary. We transferred a portfolio of our debt securities with an estimated market value of $99,304 to Broad Street as a contribution to capital and retain a residual interest in the loans contributed 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 Deutsche Bank are secured by a first priority security interest in substantially all of the assets of Broad Street, including its portfolio of debt securities.

On July 13, 2010, in exchange for an amendment fee paid to Deutsche Bank, Broad Street and Deutsche Bank entered into an amendment to the facility, or the first facility amendment, to increase the maximum borrowing amount from $140,000 to $240,000 and to lower the overall borrowing cost thereunder from LIBOR + 2.50% to LIBOR + 2.23% per annum. No other material terms of the facility changed in connection with the first facility amendment. In addition, in connection with the closing of the first facility amendment, we contributed additional loans with an estimated market value of $11,817 to Broad Street as collateral for the amended facility.

On November 10, 2010, Broad Street and Deutsche Bank entered into a second amendment to the facility, or the second facility amendment, to increase the maximum borrowing amount under the facility by $100,000 (referred to herein as the Tranche B Commitment), from $240,000 (referred to herein as the Tranche A Commitment) to $340,000. Borrowings under the Tranche B Commitment will bear interest at the rate of LIBOR + 1.50% per annum and will mature and be due and payable upon sixty days notice from Deutsche Bank. Subject to certain conditions set forth in the second facility amendment, all or a portion of the Tranche B Commitment may be converted by Deutsche Bank into a Tranche C Commitment, subject to the payment by Broad Street of a conversion fee. All converted borrowings characterized as a Tranche C Commitment will bear interest at the rate of LIBOR + 1.85% per annum and will mature and be due and payable on March 10, 2012. All borrowings under the Tranche A Commitment bear interest at the rate of LIBOR + 2.23% per annum and will mature and be due and payable on March 10, 2012. No other material terms of the facility changed in connection with the second facility amendment.

On January 28, 2011, Broad Street and Deutsche Bank entered into an amended and restated credit facility, or the credit facility restatement, to convert the facility from a single-lender facility to a multi-lender, syndicated facility and name Deutsche Bank as administrative agent thereunder; to convert all of the outstanding Tranche B Commitment into a Tranche C Commitment in exchange for a conversion fee paid to Deutsche Bank; to join a new lender to the facility to be the sole lender under the Tranche C Commitment; and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the facility changed in connection with the credit facility restatement.

On January 28, 2011, Broad Street and Deutsche Bank also entered into an amended and restated security agreement, or the security agreement restatement, to provide that Deutsche Bank will serve as administrative agent thereunder and to set forth the relative rights and obligations of the administrative agent and the lenders thereunder. No other material terms of the security agreement changed in connection with the security agreement restatement.

As of September 30, 2010, $197,267 was outstanding under the facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $1,332 in connection with obtaining the facility, which we have recorded as deferred financing costs on our consolidated balance sheet. As of September 30, 2010, $1,002 of such deferred financing costs have yet to be amortized.

The effective interest rate under the facility was 2.51% on September 30, 2010. Interest is payable quarterly in arrears, commencing August 20, 2010. We recorded interest expense of $1,343 and $2,213 for the three and nine months ended September 30, 2010, of which $170 and $331 related to the amortization of deferred financing costs, respectively.

 

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

In connection with the 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 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 facility exceeding the applicable advance rates, (c) the purchase by Broad Street of certain ineligible assets, (d) the insolvency or bankruptcy of Broad Street or us, (e) we cease to act as investment manager of Broad Street’s assets, (f) the decline of our net asset value below $50,000 and (g) fraud or other illicit acts by us or FB Advisor or GDFM in our or their investment advisory capacities. During the continuation of an event of default, Broad Street must pay interest at a default rate.

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

RIC Status and Distributions

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

We declared our first distribution on January 29, 2009. Subject to the board of directors’ discretion and applicable legal restrictions, our board of directors intends to authorize and declare distributions on either a semi-monthly or monthly basis and pay distributions on either a monthly or quarterly basis. While we have historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, we began to pay distributions on a monthly rather than quarterly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date we accept each stockholder’s subscription for shares of our common stock. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. Each year a statement on Form 1099-DIV identifying the source of the distribution will be mailed to our stockholders.

We make our ordinary distributions in the form of cash, out of assets legally available, unless stockholders elect to receive their distributions and/or long-term capital gains 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.

 

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The following table reflects the cash distributions per share that we have declared and paid on our common stock during the years ended December 31, 2008, December 31, 2009 and December 31, 2010:

 

For the Three Months Ended