FS Investment Corp - Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013.

 

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

COMMISSION FILE NUMBER: 814-00757

 

 

FS Investment Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1630040

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Cira Centre

2929 Arch Street, Suite 675

Philadelphia, Pennsylvania 19104

(Address of principal executive office)

(215) 495-1150

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

The issuer had 257,448,160 shares of common stock outstanding as of October 29, 2013.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

  
ITEM 1.   

FINANCIAL STATEMENTS

     1   
  

Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012

     1   
  

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012

     2   
  

Unaudited Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2013 and 2012

     3   
  

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

     4   
  

Consolidated Schedules of Investments as of September 30, 2013 (Unaudited) and December 31, 2012

     5   
  

Notes to Unaudited Consolidated Financial Statements

     26   
ITEM 2.   

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

     52   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     80   
ITEM 4.   

CONTROLS AND PROCEDURES

     81   

PART II—OTHER INFORMATION

  
ITEM 1.   

LEGAL PROCEEDINGS

     82   
ITEM 1A.   

RISK FACTORS

     82   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     82   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     82   
ITEM 4.   

MINE SAFETY DISCLOSURES

     82   
ITEM 5.   

OTHER INFORMATION

     82   
ITEM 6.   

EXHIBITS

     83   
  

SIGNATURES

     88   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

FS Investment Corporation

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

     September 30, 2013
(Unaudited)
     December 31,
2012
 

Assets

     

Investments, at fair value (amortized cost—$4,132,160 and $3,825,244, respectively)

   $ 4,200,801       $ 3,934,722   

Cash

     290,439         338,895   

Receivable for investments sold and repaid

     85,341         20,160   

Interest receivable

     51,075         44,711   

Deferred financing costs

     5,757         7,735   

Prepaid expenses and other assets

     172         530   
  

 

 

    

 

 

 

Total assets

   $ 4,633,585       $ 4,346,753   
  

 

 

    

 

 

 

Liabilities

     

Payable for investments purchased

   $ 44,648       $ 79,420   

Credit facilities payable

     986,421         973,046   

Repurchase agreement payable(1)

     906,083         676,667   

Stockholder distributions payable

     17,939         17,003   

Management fees payable

     22,808         21,507   

Accrued capital gains incentive fees(2)

     27,339         39,751   

Subordinated income incentive fees payable(2)

     16,555         13,393   

Administrative services expense payable

     1,361         947   

Interest payable

     10,545         10,242   

Directors’ fees payable

     229         —     

Other accrued expenses and liabilities

     1,967         3,039   
  

 

 

    

 

 

 

Total liabilities

     2,035,895         1,835,015   
  

 

 

    

 

 

 

Stockholders’ equity

     

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

     —           —     

Common stock, $0.001 par value, 450,000,000 shares authorized, 257,190,300 and 251,890,821 shares issued and outstanding, respectively

     257         252   

Capital in excess of par value

     2,451,662         2,397,826   

Accumulated undistributed net realized gains on investments and gain/loss on foreign currency(3)

     5,014         —     

Accumulated undistributed (distributions in excess of) net investment income(3)

     72,116         4,307   

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

     68,641         109,353   
  

 

 

    

 

 

 

Total stockholders’ equity

     2,597,690         2,511,738   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 4,633,585       $ 4,346,753   
  

 

 

    

 

 

 

Net asset value per share of common stock at period end

   $ 10.10       $ 9.97   

  

 

(1) See Note 8 for a discussion of the Company’s repurchase transaction.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

 

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

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Investment income

       

Interest income

  $ 109,886      $ 82,011      $ 317,603      $ 191,382   

Fee income

    11,975        2,004        30,181        6,166   

Dividend income

    1,446        —          9,916        56   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    123,307        84,015        357,700        197,604   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

       

Management fees

    22,720        19,021        67,541        46,570   

Capitals gains incentive fees(1)

    (1,548     17,421        (621     33,920   

Subordinated income incentive fees(1)

    16,555        —          47,950        —     

Administrative services expenses

    1,243        1,782        4,034        4,116   

Stock transfer agent fees

    610        910        2,400        2,731   

Accounting and administrative fees

    343        280        1,063        1,126   

Interest expense

    13,098        7,744        37,110        18,271   

Directors’ fees

    241        212        689        633   

Other general and administrative expenses

    2,273        1,889        4,978        4,066   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    55,535        49,259        165,144        111,433   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    67,772        34,756        192,556        86,171   
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain/loss

       

Net realized gain (loss) on investments

    6,602        10,259        37,220        14,853   

Net realized gain (loss) on total return swap(2)

    —          9,729        —          19,596   

Net realized gain (loss) on foreign currency

    70        521        (32     534   

Net change in unrealized appreciation (depreciation) on investments

    (14,857     69,216        (40,837     126,095   

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

    —          (2,453     —          1,996   

Net change in unrealized gain (loss) on foreign currency

    30        (261     125        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss) on investments

    (8,155     87,011        (3,524     163,074   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 59,617      $ 121,767      $ 189,032      $ 249,245   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per share information—basic and diluted

       

Net increase (decrease) in net assets resulting from operations (Earnings per Share)

  $ 0.23      $ 0.49      $ 0.75      $ 1.13   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

    256,108,444        248,310,640        254,322,277        219,768,484   
 

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

 

(2) On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A.

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Nine Months Ended
September 30,
 
     2013     2012  

Operations

    

Net investment income

   $ 192,556      $ 86,171   

Net realized gain (loss) on investments, total return swap and foreign currency(1)

     37,188        34,983   

Net change in unrealized appreciation (depreciation) on investments

     (40,837     126,095   

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

     —          1,996   

Net change in unrealized gain (loss) on foreign currency

     125        —     
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     189,032        249,245   
  

 

 

   

 

 

 

Stockholder distributions(2)

    

Distributions from net investment income

     (124,747     (128,781

Distributions from net realized gain on investments

     (32,174     (18,296
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (156,921     (147,077
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock

     —          803,348   

Reinvestment of stockholder distributions

     80,950        72,417   

Repurchases of common stock

     (27,109     (11,670

Offering costs

     —          (3,234
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     53,841        860,861   
  

 

 

   

 

 

 

Total increase in net assets

     85,952        963,029   

Net assets at beginning of period

     2,511,738        1,498,892   
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,597,690      $ 2,461,921   
  

 

 

   

 

 

 

Accumulated undistributed (distributions in excess of) net investment income(2)

   $ 72,116      $ (41,326
  

 

 

   

 

 

 

 

(1) On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A.

 

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

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ 189,032      $ 249,245   

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

    

Purchases of investments

     (2,204,560     (2,837,344

Paid-in-kind interest

     (5,437     (2,432

Proceeds from sales and repayments of investments

     1,974,977        937,138   

Net realized (gain) loss on investments

     (37,220     (14,853

Net change in unrealized (appreciation) depreciation on investments

     40,837        (126,095

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

     —          (1,996

Accretion of discount

     (34,676     (12,674

Amortization of deferred financing costs

     1,978        1,192   

(Increase) decrease in due from counterparty

     —          69,684   

(Increase) decrease in receivable for investments sold and repaid

     (65,181     (97,234

(Increase) decrease in interest receivable

     (6,364     (31,302

(Increase) decrease in receivable due on total return swap(1)

     —          548   

(Increase) decrease in prepaid expenses and other assets

     358        250   

Increase (decrease) in payable for investments purchased

     (34,772     134,273   

Increase (decrease) in management fees payable

     1,301        9,542   

Increase (decrease) in accrued capital gains incentive fees

     (12,412     33,920   

Increase (decrease) in subordinated income incentive fees payable

     3,162        —     

Increase (decrease) in administrative services expense payable

     414        1,455   

Increase (decrease) in interest payable

     303        3,186   

Increase (decrease) in directors’ fees payable

     229        16   

Increase (decrease) in other accrued expenses and liabilities

     (1,072     412   
  

 

 

   

 

 

 

Net cash used in operating activities

     (189,103     (1,683,069
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of common stock

     —          803,348   

Reinvestment of stockholder distributions

     80,950        72,417   

Repurchases of common stock

     (27,109     (11,670

Offering costs

     —          (3,234

Stockholder distributions

     (155,985     (140,752

Borrowings under credit facilities(2)

     13,375        645,130   

Borrowings under repurchase agreement(3)

     229,416        307,381   

Deferred financing costs paid

     —          (9,088
  

 

 

   

 

 

 

Net cash provided by financing activities

     140,647        1,663,532   
  

 

 

   

 

 

 

Total increase (decrease) in cash

     (48,456     (19,537

Cash at beginning of period

     338,895        210,714   
  

 

 

   

 

 

 

Cash at end of period

   $ 290,439      $ 191,177   
  

 

 

   

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 1,298      $ 761   
  

 

 

   

 

 

 

  

 

(1) On August 29, 2012, the Company terminated its total return swap agreement with Citibank, N.A.

 

(2) See Note 8 for a discussion of the Company’s credit facilities. During the nine months ended September 30, 2013 and 2012, the Company paid $17,844 and $6,104, respectively, in interest expense on the credit facilities.

 

(3) See Note 8 for a discussion of the Company’s repurchase transaction. During the nine months ended September 30, 2013 and 2012, the Company paid $16,985 and $7,789, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

 

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Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  

Footnotes

  

Industry

  

Rate

   Floor    Maturity    Principal
Amount(b)
     Amortized
Cost
     Fair
Value(c)
 

Senior Secured Loans—First Lien—82.7%

                       

A.P. Plasman Inc.

  

(f)(h)(j)

  

Capital Goods

  

L+850

   1.5%    12/29/16    $ 50,629       $ 49,913       $ 52,401   

AccentCare, Inc.

  

(d)

  

Health Care Equipment & Services

  

L+500

   1.5%    12/22/16      2,017         1,859         1,251   

Alcatel-Lucent USA Inc.

  

(d)(e)(j)

  

Technology Hardware & Equipment

  

L+475

   1.0%    1/30/19      8,159         8,121         8,232   

Amaya Holdings Corp.

  

(d)(h)(j)

  

Consumer Services

  

L+775

   1.3%    11/5/15      24,063         23,799         24,183   

American Racing and Entertainment, LLC

  

(f)

  

Consumer Services

  

L+700

      6/30/14      14,000         14,000         14,000   

American Racing and Entertainment, LLC

  

(f)

  

Consumer Services

  

9.0%

      6/30/14      7,750         7,750         7,808   

Ardent Medical Services, Inc.

  

(d)(e)

  

Health Care Equipment & Services

  

L+525

   1.5%    5/23/18      8,425         8,350         8,477   

Aspect Software, Inc.

  

(d)

  

Software & Services

  

L+525

   1.8%    5/6/16      6,518         6,376         6,545   

Attachmate Corp.

  

(d)(e)

  

Software & Services

  

L+575

   1.5%    11/22/17      10,617         10,450         10,657   

Audio Visual Services Group, Inc.

  

(d)

  

Technology Hardware & Equipment

  

L+550

   1.3%    11/9/18      3,958         3,970         4,017   

Avaya Inc.

  

(d)(e)

  

Technology Hardware & Equipment

  

L+450

      10/26/17      8,934         8,239         8,020   

Avaya Inc.

  

(d)

  

Technology Hardware & Equipment

  

L+675

   1.3%    3/31/18      14,870         14,938         14,119   

Barrington Broadcasting Group LLC

  

(f)

  

Media

  

L+600

   1.5%    6/14/17      2,323         2,275         2,325   

BlackBrush TexStar L.P.

  

(d)(f)

  

Energy

  

L+650

   1.3%    6/4/19      14,214         14,079         14,427   

Boomerang Tube, LLC

  

(d)(h)

  

Energy

  

L+950

   1.5%    10/11/17      19,122         18,631         18,644   

Burleigh Point, Ltd.

  

(f)(g)(j)

  

Retailing

  

12.0%

      12/31/13      112,000         109,998         114,106   

Bushnell Inc.

  

(d)

  

Consumer Durables & Apparel

  

L+425

   1.5%    8/24/15      7,581         7,403         7,602   

Caesars Entertainment Operating Co.

  

(d)(e)(f)(j)

  

Consumer Services

  

L+425

      1/26/18      19,302         17,057         17,213   

Capital Vision Services, LLC

  

(f)(h)

  

Health Care Equipment & Services

  

L+725

   1.3%    12/3/17      17,067         17,067         17,323   

Capital Vision Services, LLC

     

Health Care Equipment & Services

  

1.0%

      12/3/17      2,804         2,804         2,846   

Cenveo Corp.

  

(d)

  

Commercial & Professional Services

  

L+500

   1.3%    2/13/17      3,949         3,931         3,980   

Citgo Petroleum Corp.

  

(e)(j)

  

Energy

  

L+600

   2.0%    6/24/15      2,661         2,679         2,691   

Citgo Petroleum Corp.

  

(e)(f)(j)

  

Energy

  

L+700

   2.0%    6/23/17      7,593         7,579         7,764   

Clear Channel Communications, Inc.

  

(d)(e)(f)

  

Media

  

L+365

      1/29/16      19,927         16,786         18,824   

Clover Technologies Group, LLC

  

(d)

  

Commercial & Professional Services

  

L+550

   1.3%    5/7/18      6,359         6,329         6,365   

Collective Brands, Inc.

  

(d)(f)

  

Consumer Durables & Apparel

  

L+600

   1.3%    10/9/19      12,814         12,751         12,814   

Corel Corp.

  

(d)(f)(h)(j)

  

Software & Services

  

L+825

      6/7/19      118,500         118,500         119,685   

Corel Corp.

  

(j)

  

Software & Services

  

Prime+725

      6/7/18      10,000         10,000         10,000   

Corner Investment PropCo, LLC

  

(d)(f)(j)

  

Consumer Services

  

L+975

   1.3%    11/2/19      24,000         23,566         24,600   

CoSentry.Net, LLC

  

(g)(h)

  

Software & Services

  

L+800

   1.3%    7/24/19      30,000         30,000         30,000   

Crestwood Holdings LLC

  

(d)

  

Energy

  

L+600

   1.0%    6/19/19      5,803         5,775         5,923   

DAE Aviation Holdings, Inc.

  

(h)(j)

  

Capital Goods

  

L+500

   1.3%    11/2/18      1,876         1,843         1,891   

Dent Wizard International Corp.

  

(d)(f)(g)(h)

  

Commercial & Professional Services

  

L+800

      4/25/19      138,542         137,250         138,542   

Dent Wizard International Corp.

     

Commercial & Professional Services

  

L+425

      4/25/19      15,000         15,000         15,000   

Drumm Investors LLC

  

(d)

  

Health Care Equipment & Services

  

L+375

   1.3%    5/4/18      2,920         2,822         2,805   

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  

Footnotes

  

Industry

   Rate    Floor    Maturity    Principal
Amount(b)
     Amortized
Cost
     Fair
Value(c)
 

Eastman Kodak Co.

  

(d)(j)

  

Consumer Durables & Apparel

   L+625    1.0%    9/3/19    $ 10,882       $ 10,666       $ 10,825   

Education Management LLC

  

(f)(j)

  

Consumer Services

   L+400       6/1/16      3,946         3,353         3,706   

Education Management LLC

  

(e)(j)

  

Consumer Services

   L+700    1.3%    3/29/18      15,740         15,678         15,478   

ERC Ireland Holdings Ltd.

  

(j)

  

Telecommunication Services

   EURIBOR+300, 1.0% PIK       9/30/17    11,269         11,186         15,224   

FairPoint Communications, Inc.

  

(d)(e)

  

Telecommunication Services

   L+625    1.3%    2/14/19    $ 21,766         21,564         21,967   

Flanders Corp.

  

(f)(h)

  

Capital Goods

   L+950    1.5%    5/14/18      38,393         37,622         39,256   

Fleetgistics Holdings, Inc.

  

(f)

  

Transportation

   L+588    2.0%    3/23/15      1,760         1,751         1,654   

Florida Gaming Centers, Inc.

  

(f)

  

Consumer Services

   16.5%       4/25/16      12,848         12,710         13,105   

Fram Group Holdings Inc.

  

(d)

  

Automobiles & Components

   L+500    1.5%    7/29/17      1,944         1,912         1,913   

Gymboree Corp.

  

(d)

  

Consumer Durables & Apparel

   L+350    1.5%    2/23/18      3,702         3,505         3,587   

Halifax Media Holdings LLC

  

(f)(h)

  

Media

   L+1050    0.8%    6/30/16      4,200         4,132         4,326   

HBC Solutions, Inc.

  

(d)(f)(g)(h)

  

Media

   L+875    1.5%    2/4/18      84,871         84,871         84,871   

Ikaria Acquisition Inc.

  

(d)

  

Pharmaceuticals, Biotechnology & Life Sciences

   L+600    1.3%    7/3/18      5,872         5,787         5,909   

ILC Industries, LLC

  

(d)(h)

  

Capital Goods

   L+650    1.5%    7/11/18      9,865         9,701         9,668   

Infiltrator Systems, Inc.

  

(f)(g)(h)

  

Capital Goods

   L+843    1.3%    6/27/18      170,000         170,000         170,000   

Infiltrator Systems, Inc.

     

Capital Goods

   Prime+625       6/27/18      30,000         30,000         30,000   

Infogroup Inc.

  

(d)

  

Software & Services

   L+600    1.5%    5/25/18      3,004         2,686         2,709   

Insight Equity A.P. X, L.P.

  

(f)(g)(h)

  

Household & Personal Products

   L+850    1.0%    10/26/18      65,000         63,884         66,300   

Intralinks, Inc.

  

(f)(j)

  

Software & Services

   L+425    1.5%    6/15/14      1,025         976         1,025   

inVentiv Health, Inc.

  

(d)

  

Health Care Equipment & Services

   L+600    1.5%    8/4/16      1,066         1,008         1,034   

inVentiv Health, Inc.

  

(e)

  

Health Care Equipment & Services

   L+625    1.5%    5/15/18      2,725         2,707         2,669   

Lantiq Deutschland GmbH

  

(f)(j)

  

Software & Services

   L+900    2.0%    11/16/15      12,105         11,447         11,076   

Larchmont Resources, LLC

  

(d)

  

Energy

   L+725    1.0%    8/7/19      11,115         11,006         11,129   

Leading Edge Aviation Services, Inc.

  

(d)(g)(h)

  

Capital Goods

   L+850    1.5%    4/5/18      26,103         25,683         26,103   

Leading Edge Aviation Services, Inc.

  

(g)

  

Capital Goods

   L+850    1.5%    4/5/18      10,000         10,000         10,000   

Leedsworld Inc.

  

(d)

  

Retailing

   L+450    1.3%    6/27/19      9,791         9,697         9,754   

Maritime Telecommunications Network, Inc.

  

(f)

  

Telecommunication Services

   L+600    1.5%    3/3/16      4,109         4,077         3,636   

McGraw-Hill Global Education Holdings, LLC

  

(d)(e)

  

Media

   L+775    1.3%    3/22/19      20,729         20,146         21,014   

MetoKote Corp.

  

(h)

  

Materials

   L+800    1.3%    9/30/19      20,000         20,000         20,000   

MetoKote Corp.

     

Materials

   L+800    1.3%    9/30/19      3,810         3,810         3,810   

Micronics, Inc.

  

(d)(h)

  

Capital Goods

   L+800    1.3%    3/28/19      22,885         22,458         22,885   

MMI International Ltd.

  

(d)(j)

  

Technology Hardware & Equipment

   L+600    1.3%    11/2/18      10,891         10,580         10,564   

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  

Footnotes

  

Industry

   Rate    Floor    Maturity    Principal
Amount(b)
     Amortized
Cost
     Fair
Value(c)
 

MMM Holdings, Inc.

  

(h)

  

Health Care Equipment & Services

   L+825    1.5%    12/12/17    $ 12,430       $ 12,217       $ 12,508   

MModal Inc.

  

(d)

  

Health Care Equipment & Services

   L+625    1.3%    8/15/19      7,182         7,065         7,015   

Mood Media Corp.

  

(d)(j)

  

Media

   L+550    1.5%    5/7/18      3,022         2,996         3,032   

MSO of Puerto Rico, Inc.

  

(h)

  

Health Care Equipment & Services

   L+825    1.5%    12/12/17      9,040         8,886         9,097   

National Mentor Holdings, Inc.

  

(d)

  

Health Care Equipment & Services

   L+525    1.3%    2/9/17      4,942         4,942         5,000   

National Vision, Inc.

  

(d)

  

Health Care Equipment & Services

   L+575    1.3%    8/2/18      4,740         4,749         4,764   

NCO Group, Inc.

  

(e)(h)

  

Software & Services

   L+675    1.3%    4/3/18      11,565         11,379         11,796   

New HB Acquisition, LLC

  

(d)

  

Food, Beverage & Tobacco

   L+550    1.3%    4/9/20      3,896         3,859         4,007   

Nova Wildcat Amerock, LLC

  

(h)

  

Consumer Durables & Apparel

   L+825    1.3%    9/10/19      20,000         20,000         20,000   

Panda Sherman Power, LLC

  

(d)(f)

  

Energy

   L+750    1.5%    9/14/18      9,273         9,200         9,412   

Panda Temple Power, LLC (TLA)

  

(f)

  

Energy

   L+700    1.5%    7/17/18      3,000         3,000         3,066   

Patheon Inc.

  

(d)(j)

  

Pharmaceuticals, Biotechnology & Life Sciences

   L+600    1.3%    12/6/18      10,182         9,905         10,283   

Pelican Products, Inc.

  

(d)

  

Capital Goods

   L+550    1.5%    7/11/18      2,950         2,925         2,948   

Princeton Review, Inc.

  

(g)

  

Consumer Services

   L+550    1.5%    12/7/14      1,097         1,038         905   

Protection One, Inc.

  

(d)

  

Consumer Services

   L+325    1.0%    3/21/19      1,527         1,531         1,537   

PRV Aerospace, LLC

  

(d)

  

Capital Goods

   L+525    1.3%    5/9/18      4,939         4,929         4,961   

RBS Holding Co. LLC

  

(d)

  

Commercial & Professional Services

   L+800    1.5%    3/23/17      9,782         6,183         3,619   

Reddy Ice Holdings, Inc.

  

(d)

  

Food & Staples Retailing

   L+550    1.3%    5/1/19      1,185         1,173         1,183   

Roundy’s Supermarkets, Inc.

  

(d)(j)

  

Food & Staples Retailing

   L+450    1.3%    2/13/19      2,754         2,640         2,704   

Safariland, LLC

  

(d)(f)(h)

  

Capital Goods

   L+800    1.3%    9/20/19      158,400         158,400         158,400   

SESAC Holdings Inc.

  

(d)

  

Media

   L+475    1.3%    2/7/19      3,503         3,471         3,527   

Shell Topco L.P.

  

(d)(h)

  

Energy

   L+750    1.5%    9/28/18      33,000         32,576         33,495   

Sirius Computer Solutions, Inc.

  

(d)

  

Software & Services

   L+575    1.3%    11/30/18      8,558         8,482         8,697   

Six3 Systems, Inc.

  

(d)

  

Software & Services

   L+575    1.3%    10/4/19      4,639         4,599         4,732   

Smarte Carte, Inc.

  

(d)(f)(h)

  

Commercial & Professional Services

   L+650    1.3%    11/30/17      58,713         58,125         59,593   

Smile Brands Group Inc.

  

(d)(e)(h)

  

Health Care Equipment & Services

   L+625    1.3%    8/15/19      30,550         29,873         30,178   

Sorenson Communication, Inc.

  

(d)(e)(f)(h)

  

Telecommunication Services

   L+825    1.3%    10/31/14      65,877         65,876         66,600   

Sports Authority, Inc.

  

(d)(e)(f)

  

Consumer Durables & Apparel

   L+600    1.5%    11/16/17      22,247         22,090         22,386   

Stallion Oilfield Holdings, Inc.

  

(d)

  

Energy

   L+675    1.3%    6/19/18      4,988         4,940         5,040   

Swiss Watch International, Inc.

  

(d)(f)(h)

  

Consumer Durables & Apparel

   L+725    1.3%    11/8/18      48,875         48,025         49,364   

Technicolor SA

  

(d)(e)(j)

  

Media

   L+600    1.3%    7/10/20      34,314         33,302         33,674   

Tervita Corp.

  

(d)(j)

  

Commercial & Professional Services

   L+500    1.3%    5/15/18      8,055         7,982         7,898   

Therakos, Inc.

  

(d)(f)

  

Pharmaceuticals, Biotechnology & Life Sciences

   L+625    1.3%    12/27/17      27,128         26,528         27,179   

ThermaSys Corp.

  

(d)

  

Capital Goods

   L+400    1.3%    5/3/19      9,938         9,843         9,925   

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  

Footnotes

  

Industry

 

Rate

  Floor    Maturity    Principal
Amount(b)
     Amortized
Cost
    Fair
Value(c)
 

Totes Isotoner Corp.

  

(d)

  

Consumer Durables & Apparel

 

L+575

  1.5%    7/7/17    $ 6,656       $ 6,574      $ 6,687   

Toys “R” Us-Delaware, Inc.

  

(e)

  

Consumer Durables & Apparel

 

L+450

  1.5%    9/1/16      1,524         1,529        1,486   

TravelCLICK, Inc.

  

(d)

  

Consumer Services

 

L+450

  1.3%    3/16/16      7,796         7,726        7,835   

Tri-Northern Acquisition, Inc.

  

(f)(h)

  

Retailing

 

L+800

  1.3%    7/1/19      54,863         54,863        54,863   

Tri-Northern Acquisition, Inc.

  

(f)

  

Retailing

 

L+800

  1.3%    7/1/19      11,379         11,379        11,379   

Virtual Radiologic Corp.

  

(g)

  

Health Care Equipment & Services

 

Prime+450

     12/22/16      3,501         3,451        2,258   

Vision Solutions, Inc.

  

(d)

  

Software & Services

 

L+450

  1.5%    7/22/16      6,463         6,426        6,479   

VPG Group Holdings LLC

  

(d)(f)(h)

  

Materials

 

L+900

  1.0%    10/4/16      64,945         64,228        65,919   

Willbros Group, Inc.

  

(h)(j)

  

Energy

 

L+975

  1.3%    8/7/19      16,000         15,445        16,104   
                  

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                     2,190,843        2,221,812   

Unfunded Loan Commitments

                     (72,743     (72,743
                  

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                     2,118,100        2,149,069   
                  

 

 

   

 

 

 

Senior Secured Loans—Second Lien—35.2%

                    

Advance Pierre Foods, Inc.

  

(e)(f)(g)

  

Food & Staples Retailing

 

L+825

  1.3%    10/10/17      22,556         22,235        23,007   

Advantage Sales & Marketing Inc.

  

(e)

  

Commercial & Professional Services

 

L+725

  1.0%    6/12/18      14,844         14,844        15,071   

Affordable Care, Inc.

  

(d)(e)(f)(g)(h)

  

Health Care Equipment & Services

 

L+925

  1.3%    12/26/19      40,000         39,471        40,000   

Alliance Laundry Systems LLC

  

(e)

  

Capital Goods

 

L+825

  1.3%    12/10/19      2,012         1,994        2,034   

American Energy—Utica, LLC

  

(f)

  

Energy

 

L+950

  1.5%    9/30/18      75,000         75,000        75,000   

American Racing and Entertainment, LLC

  

(g)

  

Consumer Services

 

12.0%

     7/1/18      16,800         16,281        16,968   

Attachmate Corp.

  

(e)(f)

  

Software & Services

 

L+950

  1.5%    11/22/18      28,218         27,466        27,913   

Audio Visual Services Group, Inc.

  

(d)(f)(g)

  

Technology Hardware & Equipment

 

L+950

  1.3%    5/9/18      52,885         51,931        52,884   

BJ’s Wholesale Club, Inc.

  

(e)(f)

  

Food & Staples Retailing

 

L+850

  1.3%    3/26/20      8,298         8,223        8,492   

Blackboard Inc.

  

(f)(g)

  

Software & Services

 

L+1000

  1.5%    4/4/19      22,000         20,262        22,660   

Brand Energy & Infrastructure Services, Inc.

  

(e)(g)

  

Energy

 

L+975

  1.3%    10/23/19      36,000         34,613        36,930   

Brasa (Holdings) Inc.

  

(f)

  

Consumer Services

 

L+950

  1.5%    1/20/20      11,180         10,799        11,348   

Brock Holdings III, Inc.

  

(e)(g)

  

Energy

 

L+825

  1.8%    3/16/18      7,756         7,673        7,882   

Camp International Holding Co.

  

(d)

  

Capital Goods

 

L+875

  1.3%    11/29/19      6,207         6,099        6,351   

CHG Buyer Corp.

  

(d)

  

Health Care Equipment & Services

 

L+775

  1.3%    11/19/20      5,787         5,680        5,917   

Consolidated Precision Products Corp.

  

(d)(e)(h)

  

Capital Goods

 

L+925

  1.3%    6/28/20      15,000         14,857        15,516   

Crossmark Holdings, Inc.

  

(e)

  

Commercial & Professional Services

 

L+750

  1.3%    12/21/20      7,778         7,705        7,778   

DEI Sales, Inc.

  

(f)(g)

  

Commercial & Professional Services

 

L+900

  1.5%    1/15/18      57,500         56,820        57,716   

Eastman Kodak Co.

  

(f)(j)

  

Consumer Durables & Apparel

 

L+950

  1.3%    7/31/20      50,000         48,761        50,719   

EZE Software Group LLC

  

(e)

  

Software & Services

 

L+750

  1.3%    2/22/21      2,381         2,359        2,420   

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

 

Footnotes

 

Industry

  Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Fram Group Holdings Inc.

 

(e)

 

Automobiles & Components

  L+900   1.5%   1/29/18   $ 2,000      $ 1,993      $ 1,943   

ILC Industries, LLC

 

(f)(g)

 

Capital Goods

  L+1000   1.5%   6/14/19     27,976        27,057        26,297   

Keystone Automotive Operations, Inc.

 

(f)

 

Automobiles & Components

  L+950   1.3%   8/15/20     44,500        43,623        44,278   

Kronos Inc.

 

(e)(f)

 

Software & Services

  L+850   1.3%   4/30/20     21,769        21,570        22,599   

LM U.S. Member LLC

 

(g)

 

Transportation

  L+825   1.3%   10/19/20     9,375        9,245        9,516   

OSP Group, Inc.

 

(d)(f)(g)(h)

 

Consumer Durables & Apparel

  L+900   1.3%   7/31/20     105,000        105,000        106,575   

Paw Luxco II Sarl

 

(j)

 

Consumer Durables & Apparel

  EURIBOR+950     1/29/19   20,000        24,107        24,293   

Pelican Products, Inc.

 

(d)

 

Capital Goods

  L+1000   1.5%   6/14/19   $ 6,667        6,551        6,700   

Pregis Corp.

 

(f)(g)

 

Capital Goods

  L+1000   1.5%   3/23/18     50,000        49,244        50,000   

Quikrete Holdings, Inc.

 

(f)(i)

 

Capital Goods

  L+600   1.0%   3/26/21     3,922        3,882        4,002   

Ranpak Corp.

 

(g)

 

Commercial & Professional Services

  L+725   1.3%   4/8/20     11,324        11,215        11,607   

Sensus USA Inc.

 

(d)(e)

 

Capital Goods

  L+725   1.3%   5/9/18     8,571        8,577        8,427   

SESAC Holdings Inc.

 

(f)

 

Media

  L+875   1.3%   7/12/19     3,000        2,959        3,075   

Smart & Final Inc.

 

(g)

 

Food & Staples Retailing

  L+925   1.3%   11/16/20     4,595        4,466        4,679   

Stadium Management Corp.

 

(f)

 

Consumer Services

  L+950   1.3%   12/7/18     23,529        23,146        23,618   

TravelCLICK, Inc.

 

(f)(g)

 

Consumer Services

  L+850   1.3%   3/26/18     34,925        34,606        35,798   

TriZetto Group, Inc.

 

(g)

 

Software & Services

  L+725   1.3%   3/28/19     8,372        8,261        7,263   

Vertafore, Inc.

 

(e)

 

Software & Services

  L+825   1.5%   10/27/17     14,750        14,709        15,054   

Wall Street Systems Holdings, Inc.

 

(d)

 

Software & Services

  L+800   1.3%   10/25/20     7,000        6,874        7,059   

WildHorse Resources, LLC

   

Energy

  L+625   1.3%   12/13/18     15,407        15,112        15,214   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                895,270        914,603   
             

 

 

   

 

 

 

Senior Secured Bonds—14.6%

               

Advanced Lighting Technologies, Inc.

 

(f)(g)

 

Materials

  10.5%     6/1/19     78,500        76,850        64,763   

Allen Systems Group, Inc.

 

(f)(g)

 

Software & Services

  10.5%     11/15/16     38,448        29,934        23,357   

Aspect Software, Inc.

 

(e)

 

Software & Services

  10.6%     5/15/17     4,000        4,000        4,000   

Avaya Inc.

 

(e)(f)(g)

 

Technology Hardware & Equipment

  7.0%     4/1/19     23,500        21,955        22,031   

Avaya Inc.

 

(e)

 

Technology Hardware & Equipment

  9.0%     4/1/19     5,000        5,000        4,850   

Caesars Entertainment Resort Properties, LLC

 

(e)(f)(i)(j)

 

Consumer Services

  11.0%     10/1/21     35,000        35,000        35,000   

Chassix, Inc.

 

(e)

 

Automobiles & Components

  9.3%     8/1/18     5,000        5,070        5,313   

Chester Downs & Marina, LLC

 

(e)

 

Consumer Services

  9.3%     2/1/20     3,750        3,781        3,761   

Clear Channel Communications, Inc.

 

(d)(e)

 

Media

  9.0%     12/15/19     2,073        1,843        2,049   

Edgen Murray Corp.

 

(e)(j)

 

Capital Goods

  8.8%     11/1/20     1,400        1,391        1,428   

Energy Future Intermediate Holding Co. LLC

 

(f)

 

Utilities

  11.8%     3/1/22     14,250        14,657        16,102   

 

See notes to unaudited consolidated financial statements.

 

9


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

 

Footnotes

 

Industry

  Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

FairPoint Communications, Inc.

 

(e)(f)

 

Telecommunication Services

  8.8%     8/15/19   $ 22,750      $ 22,750      $ 23,033   

Global A&T Electronics Ltd.

 

(e)(j)

 

Technology Hardware & Equipment

  10.0%     2/1/19     9,000        9,000        7,772   

HOA Restaurant Group, LLC

 

(f)

 

Consumer Services

  11.3%     4/1/17     14,100        14,116        14,370   

JW Aluminum Co.

 

(f)

 

Materials

  11.5%     11/15/17     20,000        19,676        20,125   

KeHE Distributors, LLC

 

(e)

 

Food, Beverage & Tobacco

  7.6%     8/15/21     6,200        6,200        6,355   

Kinetic Concepts, Inc.

 

(f)

 

Health Care Equipment & Services

  10.5%     11/1/18     11,660        11,129        12,954   

Logan’s Roadhouse Inc.

 

(e)

 

Consumer Services

  10.8%     10/15/17     3,994        3,775        3,696   

Neff Rental LLC

 

(f)

 

Capital Goods

  9.6%     5/15/16     7,352        7,619        7,848   

Ryerson Inc.

 

(e)

 

Capital Goods

  9.0%     10/15/17     3,100        3,100        3,223   

Sorenson Communication, Inc.

 

(g)

 

Telecommunication Services

  10.5%     2/1/15     39,000        35,366        28,280   

Speedy Cash Intermediate Holdings Corp.

 

(e)(f)

 

Diversified Financials

  10.8%     5/15/18     19,000        19,310        19,924   

Tervita Corp.

 

(e)(j)

 

Commercial & Professional Services

  8.0%     11/15/18     3,250        3,250        3,274   

Texas Competitive Electric Holdings Co. LLC

 

(f)

 

Utilities

  11.5%     10/1/20     10,000        9,921        6,969   

Titlemax, Inc.

 

(d)(e)

 

Diversified Financials

  8.5%     9/5/18     15,000        15,000        15,713   

Travelport LLC

 

(g)

 

Consumer Services

  4.0%, 4.4% PIK     12/1/16     23,552        19,433        23,743   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                399,126        379,933   
             

 

 

   

 

 

 

Subordinated Debt—18.5%

               

Alta Mesa Holdings, L.P.

 

(e)

 

Energy

  9.6%     10/15/18     16,700        16,573        17,744   

Asurion, LLC

 

(f)

 

Insurance

  L+950   1.5%   8/16/19     15,000        14,618        15,713   

Aurora Diagnostics, LLC

 

(f)(g)

 

Pharmaceuticals, Biotechnology & Life Sciences

  10.8%     1/15/18     18,065        18,108        11,381   

BMC Software Finance, Inc.

 

(e)

 

Software & Services

  8.1%     7/15/21     6,500        6,500        6,784   

Comstock Resources, Inc.

 

(e)(f)(j)

 

Energy

  9.5%     6/15/20     21,000        20,121        22,926   

CrownRock, L.P.

 

(e)(f)

 

Energy

  7.1%     4/15/21     25,000        25,000        24,847   

Cumulus Media Inc.

 

(f)(j)

 

Media

  7.8%     5/1/19     5,000        4,502        5,200   

Entercom Radio, LLC

 

(e)(j)

 

Media

  10.5%     12/1/19     13,500        13,369        15,323   

Flanders Corp.

 

(f)(g)

 

Capital Goods

  10.0%, 3.8% PIK     5/14/18     15,832        15,667        16,248   

Harland Clarke Holdings Corp.

 

(g)

 

Commercial & Professional Services

  9.5%     5/15/15     2,193        2,039        2,197   

Hub International Ltd.

 

(e)(i)

 

Insurance

  7.9%     10/1/21     2,250        2,250        2,256   

Ipreo Holdings LLC

 

(f)

 

Software & Services

  11.8%     8/15/18     10,000        9,964        10,550   

Kinetic Concepts, Inc.

 

(e)(f)(g)

 

Health Care Equipment & Services

  12.5%     11/1/19     24,700        23,559        25,935   

KODA Distribution Group, Inc.

 

(f)

 

Materials

  11.3%     9/30/19     32,500        31,850        31,850   

MModal Inc.

 

(e)(g)

 

Health Care Equipment & Services

  10.8%     8/15/20     2,418        2,373        1,934   

Monitronics International, Inc.

 

(e)(j)

 

Consumer Services

  9.1%     4/1/20     2,250        2,250        2,357   

 

See notes to unaudited consolidated financial statements.

 

10


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

 

Footnotes

 

Industry

  Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Mood Media Corp.

  (e)(f)(g)(i)(j)   Media   9.3%     10/15/20   $ 25,400      $ 25,293      $ 21,717   

QR Energy, L.P.

  (e)(j)   Energy   9.3%     8/1/20     3,250        3,209        3,327   

Resolute Energy Corp.

  (e)(j)   Energy   8.5%     5/1/20     8,500        8,594        8,764   

RKI Exploration & Production, LLC

  (e)   Energy   8.5%     8/1/21     10,900        10,900        11,012   

Samson Investment Co.

  (e)(f)   Energy   9.8%     2/15/20     19,420        19,614        20,701   

SandRidge Energy, Inc.

  (e)(j)   Energy   8.1%     10/15/22     7,000        7,000        7,132   

Sequel Industrial Products Holdings, LLC

  (g)   Energy   12.0%, 2.5% PIK     5/10/18     15,792        15,539        16,108   

Sidewinder Drilling Inc.

  (f)(g)   Capital Goods   9.8%     11/15/19     8,000        8,000        7,811   

Symmetry Medical Inc.

  (g)(j)   Health Care Equipment & Services   12.0%, 2.0% PIK     12/29/17     33,675        32,903        35,191   

ThermaSys Corp.

  (f)(g)   Capital Goods   9.0%, 1.8% PIK     5/3/20     130,373        130,373        129,721   

VPG Group Holdings LLC

  (f)   Materials   11.0%, 2.0% PIK     7/15/19     5,000        5,000        5,000   
             

 

 

   

 

 

 

Total Subordinated Debt

                475,168        479,729   
             

 

 

   

 

 

 

Collateralized Securities—4.7%

               

ACASC 2013-2A B

  (g)   Diversified Financials   12.6%     10/15/23     30,500        30,475        30,500   

Apidos CDO IV Class E

  (g)(j)   Diversified Financials   L+360     10/27/18     2,000        1,276        1,870   

Ares 2007 CLO 11A Class E

  (g)(j)   Diversified Financials   L+600     10/11/21     4,775        3,296        4,725   

Ares 2007 CLO 12X Class E

  (g)(j)   Diversified Financials   L+575     11/25/20     2,252        1,851        2,246   

Carlyle Azure CLO Class Income

  (j)   Diversified Financials   19.3%     5/27/20     28,000        11,646        14,818   

Dryden CDO 23A Class Subord.

  (j)   Diversified Financials   21.4%     7/17/23     10,000        6,403        7,651   

Lightpoint CLO 2006 V Class D

  (g)(j)   Diversified Financials   L+365     8/5/19     6,500        3,683        6,002   

Rampart CLO 2007 1A Class Subord.

  (j)   Diversified Financials   31.9%     10/25/21     10,000        4,159        7,693   

Stone Tower CLO VI Class Subord.

  (g)(j)   Diversified Financials   33.7%     4/17/21     5,000        3,184        5,278   

Wind River CLO Ltd. 2012-1A Class Subord. B

  (j)   Diversified Financials   11.0%     1/15/24     42,504        39,883        41,434   
             

 

 

   

 

 

 

Total Collateralized Securities

                105,856        122,217   
             

 

 

   

 

 

 
                        Number of
Shares
    Amortized
Cost
    Fair
Value(c)
 

Equity/Other—6.0%(k)

               

American Energy Ohio Holdings, LLC, Common Equity

  (l)(m)   Energy           5,070,590        5,071        5,071   

Aquilex Corp., Common Equity, Class A Shares

  (f)   Energy           15,128        1,087        2,702   

Aquilex Corp., Common Equity, Class B Shares

  (f)(g)   Energy           32,637        2,346        5,829   

Burleigh Point, Ltd., Warrants

  (j)(l)   Retailing           17,256,081        1,898        3,279   

Eastman Kodak Co., Common Equity

  (f)(j)(l)   Consumer Durables & Apparel           61,859        1,202        1,546   

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  

Footnotes

  

Industry

                  Number of
Shares
     Amortized
Cost
     Fair
Value(c)
 

ERC Ireland Holdings Ltd., Common Equity

   (j)(l)    Telecommunication Services               21,099       $ —         $ —     

ERC Ireland Holdings Ltd., Warrants

   (j)(l)    Telecommunication Services               4,943         —           —     

Flanders Corp., Common Equity

   (g)(l)    Capital Goods               5,000,000         5,000         9,500   

Florida Gaming Centers, Inc., Warrants

   (g)(l)    Consumer Services               71         —           3,071   

Florida Gaming Corp., Warrants

   (g)(l)    Consumer Services               226,635         —           —     

HBC Solutions, Inc., Common Equity, Class A Units

   (l)    Media               26,984         3,051         3,206   

Ipreo Holdings LLC, Common Equity

   (g)(l)    Software & Services               1,000,000         1,000         1,950   

JW Aluminum Co., Common Equity

   (g)(l)    Materials               37,500         3,225         —     

Leading Edge Aviation Services, Inc., Common Equity

   (g)(l)    Capital Goods               4,181         418         388   

Leading Edge Aviation Services, Inc., Preferred Equity

   (g)(l)    Capital Goods               1,177         1,177         1,177   

Micronics, Inc., Common Equity

   (l)    Capital Goods               50,000         500         470   

Micronics, Inc., Preferred Equity

   (l)    Capital Goods               50         500         500   

Milagro Holdings, LLC, Common Equity

   (g)(l)    Energy               12,057         50         —     

Milagro Holdings, LLC, Preferred Equity

   (l)    Energy               283,947         11,180         3,155   

Plains Offshore Operations Inc., Preferred Equity

   (f)(g)    Energy               50,000         54,495         61,505   

Plains Offshore Operations Inc., Warrants

   (f)(g)(l)    Energy               1,013,444         1,722         2,939   

Safariland, LLC, Common Equity

   (g)(l)    Capital Goods               25,000         2,500         4,665   

Safariland, LLC, Preferred Equity

   (g)    Capital Goods               1,021         20,547         20,327   

Safariland, LLC, Warrants

   (g)(l)    Capital Goods               2,263         473         846   

Sequel Industrial Products Holdings, LLC, Common Equity

   (g)(l)    Energy               3,330,600         3,400         6,661   

Sequel Industrial Products Holdings, LLC, Preferred Equity

   (g)(l)    Energy               8,000,000         8,965         8,976   

Sequel Industrial Products Holdings, LLC, Warrants

   (g)(l)    Energy               20,681         13         41   

ThermaSys Corp., Common Equity

   (g)(l)    Capital Goods               51,813         1           

ThermaSys Corp., Preferred Equity

   (g)    Capital Goods               51,813         5,181         3,808   

VPG Group Holdings LLC, Class A-2 Units

   (g)(l)    Materials               2,500,000         3,638         3,638   
                    

 

 

    

 

 

 

Total Equity/Other

                       138,640         155,250   
                    

 

 

    

 

 

 

TOTAL INVESTMENTS—161.7%

                     $ 4,132,160         4,200,801   
                    

 

 

    

LIABILITIES IN EXCESS OF OTHER ASSETS—(61.7%)

                          (1,603,111
                       

 

 

 

NET ASSETS—100%

                        $ 2,597,690   
                       

 

 

 

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2013

(in thousands, except share amounts)

 

 

 

 

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

 

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

 

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

 

(d) Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).

 

(e) Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(f) Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(g) Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

 

(h) Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8).

 

(i) Position or portion thereof unsettled as of September 30, 2013.

 

(j) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of September 30, 2013, 81.3% of the Company’s total assets represented qualifying assets.

 

(k) Listed investments may be treated as debt for GAAP or tax purposes.

 

(l) Security is non-income producing.

 

(m) Security held within IC American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Senior Secured Loans—First Lien—77.5%

               

A.P. Plasman Inc.

  (f)(h)(j)   Capital Goods   L+850   1.5%   12/29/16   $ 53,350      $ 52,456      $ 54,150   

AccentCare, Inc.

  (d)   Health Care Equipment & Services   L+500   1.5%   12/22/16     2,017        1,828        1,573   

Advantage Sales & Marketing Inc.

  (d)   Commercial & Professional Services   L+375   1.5%   12/18/17     4,550        4,544        4,592   

Airvana Network Solutions Inc.

  (f)   Telecommunication Services   L+800   2.0%   3/25/15     3,685        3,677        3,702   

AlixPartners, LLP

  (d)(f)   Diversified Financials   L+525   1.3%   6/28/19     9,950        9,878        10,092   

Alkermes, Inc.

  (d)(j)   Pharmaceuticals, Biotechnology & Life Sciences   L+350   1.0%   9/18/19     4,200        4,159        4,247   

Allied Security Holdings, LLC

  (d)   Commercial & Professional Services   L+400   1.3%   2/3/17     3,851        3,833        3,880   

Altegrity, Inc.

  (d)(e)   Commercial & Professional Services   L+600   1.8%   2/20/15     5,121        5,115        5,125   

Amaya Holdings Corp.

  (d)(h)   Consumer Services   L+775   1.3%   11/5/15     25,000        24,642        25,000   

American & Efird Global, LLC

  (f)(h)   Consumer Durables & Apparel   L+900   1.5%   12/21/16     43,400        42,486        44,051   

American Racing and Entertainment, LLC Term Loan A

  (f)   Consumer Services   L+700     6/30/14     14,500        14,500        14,500   

American Racing and Entertainment, LLC Term Loan B

  (f)   Consumer Services   9.0%     6/30/14     7,750        7,750        7,789   

American Racing and Entertainment, LLC Term Loan C

  (f)   Consumer Services   9.0%     6/30/14     750        750        754   

Applied Systems, Inc.

  (d)   Software & Services   L+400   1.5%   12/8/16     3,506        3,490        3,536   

Ardent Medical Services, Inc.

  (d)(e)   Health Care Equipment & Services   L+500   1.5%   9/15/15     13,248        13,164        13,314   

Ardent Medical Services, Inc.

  (d)(e)(i)   Health Care Equipment & Services   L+525   1.5%   5/23/18     8,488        8,403        8,589   

Aspect Software, Inc.

  (d)   Software & Services   L+525   1.8%   5/7/16     6,765        6,581        6,824   

Attachmate Corp.

  (d)(e)   Software & Services   L+575   1.5%   11/22/17     11,421        11,213        11,547   

Avaya Inc.

  (d)   Technology Hardware & Equipment   L+275     10/24/14     1,973        1,944        1,939   

Avaya Inc.

  (d)(e)   Technology Hardware & Equipment   L+450     10/26/17     9,012        8,208        7,976   

AZ Chem U.S. Inc.

  (h)(i)   Materials   L+575   1.5%   12/22/17     4,545        4,451        4,611   

Barbri, Inc.

  (d)   Consumer Services   L+450   1.5%   6/16/17     3,227        3,219        3,233   

Barrington Broadcasting Group LLC

  (f)   Media   L+600   1.5%   6/14/17     2,889        2,816        2,917   

BBB Industries, LLC

  (f)   Automobiles & Components   L+450   2.0%   6/27/14     8,025        7,993        7,945   

BJ’s Wholesale Club, Inc.

  (d)(e)   Food & Staples Retailing   L+450   1.3%   9/26/19     14,000        13,864        14,204   

Blackboard Inc.

  (d)(f)(h)   Software & Services   L+600   1.5%   10/4/18     18,307        17,142        18,536   

Boomerang Tube, LLC

  (d)(h)   Energy   L+950   1.5%   10/11/17     24,688        23,971        24,379   

Brasa (Holdings) Inc.

  (d)   Consumer Services   L+625   1.3%   7/19/19     5,819        5,749        5,877   

Bushnell Inc.

  (d)   Consumer Durables & Apparel   L+425   1.5%   8/24/15     7,581        7,342        7,584   

Caesars Entertainment Operating Co.

  (d)(e)(f)(j)   Consumer Services   L+425     1/26/18     19,166        16,718        16,624   

Cannery Casino Resorts, LLC

  (d)   Consumer Services   L+475   1.3%   10/2/18     3,990        3,951        4,008   

Capital Vision Services, LLC

  (f)(h)   Health Care Equipment & Services   Prime+625   1.3%   12/3/17     17,196        17,196        17,196   

Capital Vision Services, LLC

    Health Care Equipment & Services   L+100     12/3/17     2,804        2,804        2,804   

CCM Merger, Inc.

  (d)   Consumer Services   L+475   1.3%   3/1/17     4,746        4,694        4,766   

Cengage Learning Acquisitions, Inc.

  (d)(i)   Consumer Durables & Apparel   L+225     7/3/14     3,117        2,618        2,471   

 

See notes to unaudited consolidated financial statements.

 

14


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Chrysler Group LLC

  (d)(e)(f)(h)   Automobiles & Components   L+475   1.3%   5/24/17   $ 22,444      $ 21,726      $ 22,952   

Citgo Petroleum Corp.

  (e)(j)   Energy   L+600   2.0%   6/24/15     3,036        3,066        3,062   

Citgo Petroleum Corp.

  (e)(f)(j)   Energy   L+700   2.0%   6/23/17     7,661        7,643        7,779   

Clear Channel Communications, Inc.

  (d)(e)(f)(i)   Media   L+365     1/29/16     27,557        22,354        22,842   

Collective Brands, Inc.

  (f)   Consumer Durables & Apparel   L+600   1.3%   10/9/19     10,820        10,662        10,968   

CompuCom Systems, Inc.

  (d)   Software & Services   L+525   1.3%   10/4/18     3,448        3,415        3,472   

The Container Store, Inc.

  (d)(e)   Consumer Durables & Apparel   L+500   1.3%   4/5/19     13,065        13,001        13,187   

Corel Corp.

  (d)(j)   Software & Services   L+700     5/2/14     9,400        9,352        9,447   

Corner Investment PropCo, LLC

  (d)(f)(j)   Consumer Services   L+975   1.3%   11/1/19     24,000        23,532        23,730   

Crestwood Holdings LLC

  (f)   Energy   L+825   1.5%   3/26/18     16,689        16,603        17,050   

DAE Aviation Holdings, Inc.

  (h)   Capital Goods   L+500   1.3%   10/29/18     6,825        6,690        6,927   

DAE Aviation Holdings, Inc.

  (h)   Capital Goods   L+500   1.3%   11/2/18     3,094        3,033        3,140   

Del Monte Foods Co.

  (d)   Food, Beverage & Tobacco   L+300   1.5%   3/8/18     2,876        2,832        2,886   

Drumm Investors LLC

  (d)(f)   Health Care Equipment & Services   L+375   1.3%   5/4/18     8,542        8,021        8,037   

Dynegy Inc.

  (f)   Energy   L+775   1.5%   8/5/16     6,096        6,225        6,393   

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+750   1.0%   7/19/13     7,232        7,181        7,252   

Education Management LLC

  (f)(j)   Consumer Services   L+400     6/1/16     3,978        3,233        3,257   

Education Management LLC

  (e)(j)   Consumer Services   L+700   1.3%   3/29/18     15,870        15,796        13,271   

Electrical Components International, Inc.

  (f)   Capital Goods   L+525   1.5%   2/4/16     235        218        236   

Electrical Components International, Inc.

  (g)   Capital Goods   L+525   1.5%   2/4/17     3,573        3,295        3,582   

EquiPower Resources Holdings, LLC

  (d)   Utilities   L+425   1.3%   12/21/18     4,975        4,996        5,054   

ERC Ireland Holdings Ltd.

  (i)(j)   Telecommunication Services   EURIBOR+300, 1.0% PIK     9/30/17   11,173        10,733        11,896   

Fairway Group Acquisition Co.

  (d)(f)(h)   Food & Staples Retailing   L+675   1.5%   8/17/18   $ 25,325        25,037        25,578   

Flanders Corp.

  (f)(h)   Capital Goods   L+950   1.5%   5/16/18     38,993        38,104        39,188   

Fleetgistics Holdings, Inc.

  (f)   Transportation   L+588   2.0%   3/23/15     2,026        2,011        1,783   

Flexera Software, Inc.

  (d)   Software & Services   L+625   1.3%   9/29/17     2,925        2,923        2,948   

Florida Gaming Centers, Inc.

  (f)   Consumer Services   15.8%     4/25/16     12,517        12,343        12,455   

Fram Group Holdings Inc.

  (d)   Automobiles & Components   L+500   1.5%   7/29/17     1,990        1,952        1,992   

FREIF North American Power I LLC

  (d)   Energy   L+450   1.5%   3/29/19     3,073        3,080        3,111   

FREIF North American Power I LLC

  (d)   Energy   L+450   1.5%   3/29/19     880        882        891   

Generac Power Systems, Inc.

  (d)(j)   Capital Goods   L+500   1.3%   5/30/18     3,563        3,630        3,653   

Generic Drug Holdings, Inc.

  (d)   Retailing   L+475   1.3%   9/28/19     2,728        2,701        2,753   

Genesys Telecom Holdings, U.S., Inc.

  (d)   Telecommunication Services   L+525   1.5%   1/31/19     1,711        1,724        1,730   

Gymboree Corp.

  (d)   Consumer Durables & Apparel   L+350   1.5%   2/23/18     3,702        3,477        3,420   

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate   Floor     Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Halifax Media Holdings LLC

  (f)(h)   Media   L+1050     0.8%      6/30/16   $ 16,068      $ 15,748      $ 15,907   

Hamilton Lane Advisors, LLC

  (d)   Diversified Financials   L+500     1.5%      2/23/18     2,730        2,717        2,750   

Harbor Freight Tools USA, Inc.

  (d)   Consumer Durables & Apparel   L+425     1.3%      11/14/17     4,365        4,364        4,424   

HarbourVest Partners L.P.

  (d)   Diversified Financials   L+375     1.0%      11/21/17     5,752        5,724        5,781   

Harland Clarke Holdings Corp.

  (f)   Commercial & Professional Services   L+250     6/30/14     6,334        5,741        6,135   

Hawaiian Telcom Communications, Inc.

  (d)(f)(h)   Telecommunication Services   L+575     1.3%      2/28/17     16,979        16,864        17,335   

Hupah Finance Inc.

  (d)(e)   Capital Goods   L+500     1.3%      1/21/19     11,333        11,275        11,475   

Hyland Software, Inc.

  (d)   Software & Services   L+425     1.3%      10/25/19     4,918        4,918        4,939   

IASIS Healthcare LLC

  (d)   Health Care Equipment & Services   L+375     1.3%      5/3/18     1,453        1,427        1,459   

Ikaria Acquisition Inc.

  (d)   Pharmaceuticals, Biotechnology & Life Sciences   L+650     1.3%      9/18/17     3,967        3,948        3,992   

ILC Industries, LLC

  (d)(h)   Capital Goods   L+600     1.5%      7/11/18     10,131        9,941        10,038   

Immucor, Inc.

  (d)   Health Care Equipment & Services   L+450     1.3%      8/17/18     3,873        3,882        3,929   

INC Research, LLC

  (d)(f)   Health Care Equipment & Services   L+575     1.3%      7/12/18     16,788        16,522        16,913   

INEOS Finance Plc

  (d)(e)(f)(j)   Materials   L+525     1.3%      5/4/18     18,914        18,713        19,145   

Infogroup Inc.

  (d)   Software & Services   L+425     1.5%      5/25/18     3,338        2,940        3,004   

Insight Equity A.P. X, L.P.

  (f)(g)(h)   Household & Personal Products   L+850     1.0%      10/26/18     65,000        63,736        65,000   

Intelsat Jackson Holdings SA

  (d)(j)   Telecommunication Services   L+325     1.3%      4/2/18     2,963        2,962        2,993   

Intralinks, Inc.

  (f)(j)   Software & Services   L+425     1.5%      6/15/14     1,033        938        1,034   

inVentiv Health, Inc.

  (d)   Health Care Equipment & Services   L+500     1.5%      8/4/16     1,066        997        1,040   

inVentiv Health, Inc.

  (e)   Health Care Equipment & Services   L+525     1.5%      5/15/18     2,725        2,704        2,671   

Ipreo Holdings LLC

  (d)(f)   Software & Services   L+525     1.3%      8/7/17     8,968        8,861        9,024   

Jason Inc. (TLA)

  (g)   Capital Goods   L+625     2.0%      9/21/14     2,403        2,395        2,399   

Jason Inc. (TLB)

  (g)   Capital Goods   L+625     2.0%      9/21/14     971        968        973   

JHCI Acquisition, Inc.

  (d)   Transportation   L+250     6/19/14     2,304        2,192        2,070   

KIK Custom Products Inc.

  (e)(j)   Household & Personal Products   L+225     6/2/14     10,274        9,693        9,657   

Kronos Inc.

  (d)   Commercial & Professional Services   L+425     1.3%      10/25/19     4,500        4,478        4,560   

La Paloma Generating Co., LLC

  (e)(f)   Energy   L+550     1.5%      8/25/17     8,697        8,445        8,686   

Lantiq Deutschland GmbH

  (f)(j)   Software & Services   L+900     2.0%      11/16/15     12,105        11,241        11,076   

Leading Edge Aviation Services, Inc.

  (d)(g)(h)   Capital Goods   L+850     1.5%      4/5/18     36,301        35,651        35,212   

Maritime Telecommunications Network, Inc.

  (f)   Telecommunication Services   L+600     1.5%      3/3/16     5,169        5,117        5,159   

MMM Holdings, Inc.

    Health Care Equipment & Services   L+825     1.5%      12/12/17     13,509        13,240        13,527   

Mood Media Corp.

  (d)(j)   Media   L+550     1.5%      5/7/18     3,045        3,016        3,054   

MSO of Puerto Rico, Inc.

    Health Care Equipment & Services   L+825     1.5%      12/12/17     9,825        9,629        9,838   

National Mentor Holdings, Inc.

  (d)   Health Care Equipment & Services   L+525     1.3%      2/9/17     7,980        7,980        7,985   

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate   Floor     Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

National Vision, Inc.

  (d)   Health Care Equipment & Services   L+575     1.3%      8/2/18   $ 4,764      $ 4,774      $ 4,835   

Natural Products Group, LLC

  (g)   Household & Personal Products   Prime+600     4.0%      3/5/15     1,325        1,266        1,272   

Navistar, Inc.

  (d)(f)(h)(j)   Capital Goods   L+550     1.5%      8/17/17     20,944        20,891        21,082   

NCI Building Systems, Inc.

  (d)(e)(g)(h)(j)   Capital Goods   L+675     1.3%      5/2/18     31,573        30,815        31,635   

NCO Group, Inc.

  (e)(h)   Software & Services   L+675     1.3%      4/3/18     19,807        19,448        19,900   

Nexeo Solutions, LLC

    Capital Goods   L+350     1.5%      9/7/17     3,990        3,912        3,926   

NSH Merger Sub, Inc.

  (d)(f)   Health Care Equipment & Services   L+650     1.8%      2/2/17     19,042        18,869        18,613   

Nuveen Investments, Inc.

  (d)   Diversified Financials   L+550     5/13/17     9,000        9,004        9,055   

NXP BV

  (d)(j)   Semiconductors & Semiconductor Equipment   L+425     1.3%      3/3/17     2,351        2,375        2,402   

On Assignment, Inc.

  (d)(j)   Commercial & Professional Services   L+375     1.3%      5/15/19     2,992        2,976        3,033   

Onex Carestream Finance L.P.

  (d)(j)   Health Care Equipment & Services   L+350     1.5%      2/25/17     1,419        1,383        1,416   

Orbitz Worldwide, Inc.

  (d)(j)   Retailing   L+300     7/25/14     4,216        4,058        4,056   

Ozburn-Hessey Holding Co., LLC

  (d)(f)   Transportation   L+625     2.0%      4/8/16     5,650        5,446        5,650   

Panda Sherman Power, LLC

  (d)   Energy   L+750     1.5%      9/14/18     9,273        9,192        9,435   

Panda Temple Power, LLC (TLA)

  (f)   Energy   L+700     1.5%      7/17/18     3,000        3,000        3,045   

Party City Holdings Inc.

  (d)(e)(f)   Retailing   L+450     1.3%      7/26/19     16,593        16,513        16,809   

Patheon Inc.

  (d)(i)(j)   Pharmaceuticals, Biotechnology & Life Sciences   L+600     1.3%      12/6/18     10,259        9,951        10,259   

Pelican Products, Inc.

  (d)   Capital Goods   L+550     1.5%      7/11/18     2,972        2,944        2,954   

Peninsula Gaming LLC

  (f)(j)   Consumer Services   L+450     1.3%      8/3/17     4,605        4,562        4,671   

Pharmaceutical Product Development, Inc.

  (d)   Health Care Equipment & Services   L+500     1.3%      12/5/18     8,967        8,890        9,126   

Pharmaceutical Research Associates, Inc.

  (d)(i)   Health Care Equipment & Services   L+525     1.3%      11/27/18     5,833        5,775        5,841   

PL Propylene LLC

  (d)(j)   Materials   L+575     1.3%      3/23/17     6,833        6,714        6,944   

Presidio, Inc.

  (d)(f)(g)(h)   Software & Services   L+450     1.3%      3/31/17     15,302        15,231        15,455   

Princeton Review, Inc.

  (g)   Consumer Services   L+550     1.5%      12/7/14     1,113        1,022        990   

Property Data (U.S.) I, Inc.

  (f)   Software & Services   L+550     1.5%      1/4/17     4,295        4,251        4,303   

Protection One, Inc.

  (d)   Consumer Services   L+450     1.3%      3/21/19     2,544        2,551        2,580   

PRV Aerospace, LLC

  (d)   Capital Goods   L+525     1.3%      5/9/18     4,976        4,965        4,989   

RBS Holding Co. LLC

  (d)   Commercial & Professional Services   Prime+600     3/23/17     9,825        6,065        3,635   

RBS Worldpay, Inc.

  (d)   Software & Services   L+400     1.3%      11/30/17     1,522        1,524        1,534   

Remy International, Inc.

  (d)(j)   Automobiles & Components   L+450     1.8%      12/16/16     1,923        1,861        1,940   

Reynolds Group Holdings, Inc.

  (d)(j)   Consumer Durables & Apparel   L+375     1.0%      9/28/18     4,293        4,293        4,349   

Rocket Software, Inc.

  (d)   Software & Services   L+450     1.3%      2/8/18     6,630        6,636        6,673   

Roundy’s Supermarkets, Inc.

  (d)(j)   Food & Staples Retailing   L+450     1.3%      2/13/19     2,776        2,648        2,619   

Sabre Inc.

  (d)   Consumer Services   L+575     12/29/17     1,487        1,471        1,500   

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

Sabre Inc.

  (e)   Consumer Services   L+600   1.3%   12/29/17   $ 4,978      $ 4,931      $ 5,052   

Safariland, LLC

  (d)(f)(h)   Capital Goods   L+925   1.5%   7/27/18     45,243        44,392        46,601   

Sagittarius Restaurants LLC

  (d)(f)   Consumer Services   L+550   2.0%   5/18/15     6,530        6,497        6,505   

Shell Topco L.P.

  (d)(h)   Energy   L+750   1.5%   9/28/18     33,000        32,524        33,000   

Sheridan Production Co., LLC

  (e)   Energy   L+375   1.3%   9/14/19     5,224        5,173        5,279   

Shield Finance Co. Sarl

  (f)(j)   Software & Services   L+525   1.3%   5/10/19     10,974        10,822        11,002   

Sirius Computer Solutions, Inc.

  (d)(i)   Software & Services   L+575   1.3%   11/30/18     9,808        9,710        9,900   

Sitel, LLC

  (e)   Telecommunication Services   L+675     1/30/17     5,966        5,743        5,951   

Six3 Systems, Inc.

  (d)   Software & Services   L+575   1.3%   10/4/19     4,674        4,629        4,674   

Smarte Carte, Inc.

  (d)(f)(h)   Commercial & Professional Services   L+650   1.3%   11/30/17     61,000        60,288        61,000   

Smile Brands Group Inc.

  (d)(e)   Health Care Equipment & Services   L+525   1.8%   12/21/17     13,717        13,308        12,962   

Sophia, L.P.

  (d)(e)(f)   Software & Services   L+500   1.3%   7/19/18     13,966        13,880        14,165   

Sorenson Communication, Inc.

  (d)(e)(f)(h)   Telecommunication Services   L+400   2.0%   8/16/13     50,402        49,586        49,609   

Spansion LLC

  (e)(j)   Semiconductors & Semiconductor Equipment   L+350   1.3%   2/9/15     6,369        6,285        6,418   

Sports Authority, Inc.

  (d)(e)(f)   Consumer Durables & Apparel   L+600   1.5%   11/16/17     22,418        22,234        22,615   

Sprouts Farmers Markets Holdings, LLC

    Food & Staples Retailing   L+475     4/18/16     5,250        5,250        5,001   

Sprouts Farmers Markets Holdings, LLC

  (d)   Food & Staples Retailing   L+475   1.3%   4/18/18     4,803        4,746        4,861   

SRA International, Inc.

  (d)(e)(f)   Software & Services   L+525   1.3%   7/20/18     21,624        20,910        20,489   

Star West Generation LLC

  (d)   Energy   L+450   1.5%   5/17/18     5,923        5,860        5,949   

Surgery Center Holdings, Inc.

  (d)(f)(h)   Health Care Equipment & Services   L+500   1.5%   2/6/17     14,693        14,473        14,620   

Swiss Watch International, Inc.

  (d)(f)(h)   Consumer Durables & Apparel   L+725   1.3%   11/8/18     50,000        49,022        50,000   

Technicolor SA

  (j)   Media   EURIBOR+500   2.0%   5/26/16   2,345        2,770        3,080   

Technicolor SA

  (j)   Media   EURIBOR+600   2.0%   5/26/17   6,279        7,402        8,249   

Technicolor SA

  (g)(j)   Media   L+500   2.0%   5/26/16   $ 1,659        1,507        1,651   

Technicolor SA

  (g)(j)   Media   L+600   2.0%   5/26/17     4,376        3,967        4,357   

Texas Competitive Electric Holdings Co. LLC

  (d)(e)(f)(g)(i)   Utilities   L+350     10/10/14     76,891        56,163        58,221   

Texas Competitive Electric Holdings Co. LLC

  (g)   Utilities   L+450     10/10/17     38,867        26,875        25,992   

TI Group Automotive Systems, LLC

  (d)(e)(j)   Capital Goods   L+550   1.3%   3/14/18     8,956        8,709        9,045   

Titlemax, Inc.

  (f)(h)   Diversified Financials   L+850   1.5%   6/15/15     25,000        24,790        25,500   

Total Safety U.S., Inc.

  (d)(f)   Energy   L+625   1.3%   10/31/17     9,900        9,667        10,032   

Totes Isotoner Corp.

  (d)   Consumer Durables & Apparel   L+575   1.5%   7/7/17     6,928        6,830        6,945   

Toys “R” Us-Delaware, Inc.

  (d)(e)   Consumer Durables & Apparel   L+450   1.5%   9/1/16     3,842        3,843        3,729   

TravelCLICK, Inc.

  (d)   Consumer Services   L+500   1.5%   3/16/16     7,836        7,746        7,836   

Travelport LLC

  (e)(f)(g)   Consumer Services   L+475     8/21/15     15,682        14,327        15,143   

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

U.S. Security Associates Holdings, Inc.

  (d)   Commercial & Professional Services   L+475   1.3%   7/28/17   $ 3,959      $ 3,958      $ 3,985   

Unifrax I LLC

  (e)(f)   Capital Goods   L+500   1.5%   11/28/18     13,958        13,707        14,145   

United Surgical Partners International Inc.

  (d)   Health Care Equipment & Services   L+475   1.3%   4/3/19     4,374        4,372        4,418   

Univar Inc.

  (e)   Materials   L+350   1.5%   6/30/17     6,509        6,509        6,500   

Univision Communications Inc.

  (e)(f)   Media   L+425     3/31/17     9,593        8,591        9,454   

Virtual Radiologic Corp.

  (g)   Health Care Equipment & Services   Prime+450     12/22/16     3,528        3,468        3,105   

Vision Solutions, Inc.

  (d)   Software & Services   L+450   1.5%   7/22/16     6,800        6,753        6,787   

VPG Group Holdings LLC

  (f)(h)   Materials   L+900   1.0%   10/4/16     55,055        54,173        55,056   

Wall Street Systems Holdings, Inc.

  (d)   Software & Services   L+450   1.3%   10/24/19     5,000        4,926        5,013   

WASH Multifamily Laundry Systems, LLC

  (g)   Commercial & Professional Services   Prime+375     8/28/14     3,830        3,803        3,825   

West Corp.

  (d)   Software & Services   L+450   1.3%   6/29/18     7,297        7,245        7,422   

Wide OpenWest Finance, LLC

  (d)   Media   L+500   1.3%   7/17/18     6,219        6,211        6,299   

Willbros United States Holdings, Inc.

  (h)(j)   Energy   L+750   2.0%   6/30/14     6,705        6,635        6,721   

WireCo WorldGroup Inc.

  (d)   Capital Goods   L+475   1.3%   2/15/17     3,558        3,554        3,638   

Woodstream Corp.

  (f)   Household & Personal Products   L+350     8/31/14     705        665        673   

Woodstream Corp.

  (g)   Household & Personal Products   Prime+375     8/31/14     1,530        1,508        1,522   
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                1,929,800        1,959,963   

Unfunded Loan Commitments

                (14,804     (14,804
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                1,914,996        1,945,159   
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—30.4%

               

Advance Pierre Foods, Inc.

  (e)(f)(g)   Food & Staples Retailing   L+825   1.3%   10/10/17     25,556        25,133        26,075   

Advantage Sales & Marketing Inc.

  (e)(f)   Commercial & Professional Services   L+775   1.5%   6/18/18     20,314        20,363        20,466   

Affordable Care, Inc.

  (d)(e)(f)(g)(h)   Health Care Equipment & Services   Prime+825     12/26/19     40,000        39,401        39,400   

AlixPartners, LLP

  (e)   Diversified Financials   L+925   1.5%   12/27/19     15,000        14,570        15,197   

Alliance Laundry Systems LLC

  (d)(e)   Capital Goods   L+825   1.3%   12/10/19     4,919        4,870        4,987   

American Racing and Entertainment, LLC

  (g)   Consumer Services   12.0%     7/2/18     16,800        16,227        16,632   

AssuraMed Holding, Inc.

  (f)   Health Care Equipment & Services   L+800   1.3%   4/24/20     10,000        9,803        10,137   

Asurion, LLC

  (d)(e)   Insurance   L+750   1.5%   5/24/19     12,229        12,179        12,623   

Attachmate Corp.

  (e)(f)   Software & Services   L+950   1.5%   11/22/18     29,000        28,145        28,608   

Audio Visual Services Group, Inc.

  (d)(f)(g)   Technology Hardware & Equipment   L+900   1.3%   4/30/19     52,885        51,845        52,224   

BJ’s Wholesale Club, Inc.

  (e)(f)   Food & Staples Retailing   L+850   1.3%   3/26/20     8,298        8,217        8,547   

Blackboard Inc.

  (f)(g)   Software & Services   L+1000   1.5%   4/4/19     22,000        20,107        21,197   

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

BNY ConvergEx Group, LLC

  (g)   Software & Services   L+700   1.8%   12/18/17   $ 9,000      $ 9,021      $ 8,533   

Brasa (Holdings) Inc.

  (f)   Consumer Services   L+950   1.5%   1/20/20     17,391        16,731        17,652   

Brock Holdings III, Inc.

  (e)   Energy   L+825   1.8%   3/16/18     7,756        7,660        7,815   

Camp International Holding Co.

  (d)   Capital Goods   L+875   1.3%   11/29/19     6,207        6,090        6,340   

Cannery Casino Resorts, LLC

  (g)   Consumer Services   L+875   1.3%   10/2/19     12,000        11,767        11,470   

CHG Buyer Corp.

  (d)   Health Care Equipment & Services   L+775   1.3%   11/20/20     5,787        5,673        5,827   

DEI Sales, Inc.

  (f)(g)   Commercial & Professional Services   L+850   1.5%   1/15/18     57,500        56,734        57,500   

EquiPower Resources Holdings, LLC

  (d)   Utilities   L+850   1.5%   6/21/19     7,000        6,868        7,204   

FR Brand Acquisition Corp.

  (e)(g)(i)   Energy   L+975   1.3%   10/23/19     36,000        34,475        35,580   

Fram Group Holdings Inc.

  (e)   Automobiles & Components   L+900   1.5%   1/29/18     7,000        6,972        6,650   

Hubbard Radio, LLC

  (f)   Telecommunication Services   L+725   1.5%   4/30/18     1,429        1,417        1,457   

ILC Industries, LLC

  (f)(g)   Capital Goods   L+1000   1.5%   6/14/19     37,000        35,681        36,630   

JHCI Acquisition, Inc.

  (g)   Transportation   L+550     12/19/14     11,250        10,549        10,144   

Kronos Inc.

  (d)(e)(f)   Software & Services   L+850   1.3%   4/30/20     30,769        30,466        30,846   

LM U.S. Member LLC

    Transportation   L+825   1.3%   10/15/20     9,375        9,236        9,457   

Multi Packaging Solutions, Inc.

  (f)   Commercial & Professional Services   L+900   1.3%   5/4/19     23,250        22,903        22,785   

NES Rentals Holdings, Inc.

  (g)   Capital Goods   L+1150   1.8%   10/14/14     8,500        8,461        8,500   

Paw Luxco II Sarl

  (j)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   20,000        23,768        23,190   

Pelican Products, Inc.

  (d)   Capital Goods   L+1000   1.5%   6/14/19   $ 6,667        6,541        6,633   

Pharmaceutical Research Associates, Inc.

  (f)   Health Care Equipment & Services   L+925   1.3%   11/27/19     25,000        24,751        25,266   

Pregis Corp.

  (f)(g)   Capital Goods   L+1000   1.5%   3/23/18     45,000        44,211        44,550   

Samson Investment Co.

  (d)   Energy   L+475   1.3%   9/25/18     5,515        5,475        5,581   

Sedgwick CMS Holdings Inc.

    Commercial & Professional Services   L+750   1.5%   5/30/17     500        500        508   

Sensus U.S.A. Inc.

  (d)(e)   Capital Goods   L+725   1.3%   5/9/18     8,571        8,577        8,614   

Sheridan Holdings, Inc.

  (f)   Health Care Equipment & Services   L+775   1.3%   7/1/19     2,727        2,702        2,769   

Smart & Final Inc.

  (g)   Food & Staples Retailing   L+925   1.3%   11/16/20     6,400        6,209        6,464   

Southern Pacific Resource Corp.

  (e)(f)(j)   Energy   Prime+750     1/7/16     13,693        13,571        13,878   

SRAM, LLC

  (d)   Consumer Durables & Apparel   L+700   1.5%   12/7/18     5,000        4,960        5,088   

Stadium Management Corp.

  (f)   Consumer Services   L+950   1.3%   12/7/18     23,529        23,095        23,647   

TriZetto Group, Inc.

    Software & Services   L+725   1.3%   3/27/19     8,372        8,250        8,337   

Venoco, Inc.

  (d)(g)   Energy   L+700   1.5%   6/30/17     7,857        7,705        8,024   

Vertafore, Inc.

  (e)   Software & Services   L+825   1.5%   10/27/17     14,750        14,703        14,833   

Wall Street Systems Holdings, Inc.

  (d)   Software & Services   L+800   1.3%   4/24/20     7,000        6,862        7,018   

Web.com Group, Inc.

  (d)(f)(j)   Software & Services   L+950   1.5%   10/26/18     4,187        4,098        4,323   

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

WP CPP Holdings, LLC

  (d)(e)(h)(i)   Capital Goods   L+925   1.3%   6/28/20   $ 15,000      $ 14,850      $ 15,150   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                752,392        764,356   
             

 

 

   

 

 

 

Senior Secured Bonds—18.6%

               

Advanced Lighting Technologies, Inc.

  (f)(g)   Materials   10.5%     6/1/19     78,500        76,710        78,010   

Allen Systems Group, Inc.

  (f)   Software & Services   10.5%     11/15/16     15,323        14,205        11,186   

Aspect Software, Inc.

  (e)   Software & Services   10.6%     5/15/17     4,000        4,000        3,631   

Avaya Inc.

  (e)(f)(g)   Technology Hardware & Equipment   7.0%     4/1/19     23,500        21,792        22,002   

Avaya Inc.

  (e)   Technology Hardware & Equipment   9.0%     4/1/19     5,000        5,000        5,075   

Cenveo Corp.

  (e)(f)   Commercial & Professional Services   8.9%     2/1/18     23,788        21,717        22,711   

Chester Downs & Marina, LLC

  (e)   Consumer Services   9.3%     2/1/20     3,750        3,784        3,700   

Clear Channel Communications, Inc.

  (d)(e)(f)(i)   Media   9.0%     12/15/19     8,254        7,498        7,606   

Eastman Kodak Co.

  (f)(l)   Consumer Durables & Apparel   10.6%     3/15/19     14,500        12,136        11,932   

Eastman Kodak Co.

  (l)   Consumer Durables & Apparel   9.8%     3/1/18     18,992        13,990        15,599   

Edgen Murray Corp.

  (e)(j)   Capital Goods   8.8%     11/1/20     1,400        1,390        1,414   

Energy Future Intermediate Holding Co. LLC

  (f)   Utilities   11.8%     3/1/22     14,250        14,689        15,924   

Energy Future Intermediate Holding Co. LLC

  (g)   Utilities   6.9%     8/15/17     1,100        1,100        1,173   

First Data Corp.

  (g)   Software & Services   6.8%     11/1/20     2,000        1,985        2,037   

HOA Restaurant Group, LLC

  (f)   Consumer Services   11.3%     4/1/17     14,100        14,121        12,985   

INEOS Finance Plc

  (e)(j)   Materials   7.5%     5/1/20     850        850        890   

INEOS Finance Plc

  (e)(j)   Materials   8.4%     2/15/19     3,000        3,000        3,238   

JW Aluminum Co.

  (f)   Materials   11.5%     11/15/17     20,000        19,633        19,400   

Kinetic Concepts, Inc.

  (e)(f)   Health Care Equipment & Services   10.5%     11/1/18     18,660        18,093        19,640   

Neff Rental LLC

    Capital Goods   9.6%     5/15/16     1,352        1,363        1,402   

NES Rentals Holdings, Inc.

  (f)(g)   Capital Goods   12.3%     4/15/15     38,375        38,683        39,573   

Paetec Holdings Corp.

  (e)(j)   Telecommunication Services   8.9%     6/30/17     4,680        4,767        5,031   

Palace Entertainment Holdings, LLC

  (e)   Consumer Services   8.9%     4/15/17     2,400        2,400        2,541   

PH Holding LLC

  (f)   Consumer Durables & Apparel   9.8%     12/31/17     10,000        9,810        10,100   

Reynolds Group Holdings, Inc.

  (e)(j)   Consumer Durables & Apparel   5.8%     10/15/20     6,750        6,750        6,986   

Reynolds Group Holdings, Inc.

  (e)(j)   Consumer Durables & Apparel   7.1%     4/15/19     3,000        3,121        3,253   

Ryerson Inc.

  (e)   Capital Goods   9.0%     10/15/17     3,100        3,100        3,149   

Sorenson Communication, Inc.

  (g)   Telecommunication Services   10.5%     2/1/15     39,000        33,702        32,525   

Speedy Cash Intermediate Holdings Corp.

  (f)   Diversified Financials   10.8%     5/15/18     16,000        16,164        17,104   

Symbion, Inc.

  (e)(f)   Health Care Equipment & Services   8.0%     6/15/16     12,460        12,327        12,881   

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

Technicolor SA

  (g)(j)   Media   9.4%     4/23/16   $ 2,241      $ 2,078      $ 2,314   

Technicolor SA

  (g)(j)   Media   9.4%     5/26/17     13,495        12,478        13,934   

Texas Competitive Electric Holdings Co. LLC

  (f)   Utilities   11.5%     10/1/20     10,000        9,916        7,909   

Titlemax, Inc.

  (f)   Diversified Financials   13.3%     7/15/15     14,500        15,073        16,149   

Tops Markets LLC

  (e)   Food & Staples Retailing   8.9%     12/15/17     2,750        2,750        2,851   

Travelport LLC

  (g)   Consumer Services   L+600 PIK     12/1/16     22,933        18,111        18,404   

Univision Communications Inc.

  (f)   Media   6.9%     5/15/19     6,800        6,754        7,128   

Viasystems Group Inc.

  (e)(j)   Technology Hardware & Equipment   7.9%     5/1/19     5,000        5,000        4,912   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                460,040        466,299   
             

 

 

   

 

 

 

Subordinated Debt—20.4%

               

Advantage Sales & Marketing Inc.

  (g)   Commercial & Professional Services   13.0%     12/23/18     10,000        9,818        9,850   

Alta Mesa Holdings, L.P.

  (e)   Energy   9.6%     10/15/18     16,700        16,557        17,264   

Asurion, LLC

  (f)   Insurance   L+950   1.5%   8/16/19     15,000        14,586        16,000   

Aurora Diagnostics, LLC

  (f)   Pharmaceuticals, Biotechnology & Life Sciences   10.8%     1/15/18     20,065        20,120        18,761   

Aurora USA Oil & Gas, Inc.

  (j)   Energy   9.9%     2/15/17     3,000        3,041        3,236   

BakerCorp. International Inc.

  (f)   Commercial & Professional Services   8.3%     6/1/19     5,000        5,000        5,069   

Bresnan Broadband Holdings LLC

  (e)(j)   Telecommunication Services   8.0%     12/15/18     5,000        5,000        5,419   

Calumet Lubricants Co., L.P.

  (f)(j)   Energy   9.4%     5/1/19     5,800        5,800        6,330   

Calumet Lubricants Co., L.P.

  (f)(j)   Energy   9.6%     8/1/20     1,500        1,475        1,646   

Cincinnati Bell Inc.

  (e)(j)   Telecommunication Services   8.4%     10/15/20     8,895        8,750        9,651   

Comstock Resources, Inc.

  (e)(f)(j)   Energy   9.5%     6/15/20     21,000        20,061        22,301   

Cumulus Media Inc.

  (f)(j)   Media   7.8%     5/1/19     5,000        4,453        4,895   

Del Monte Foods Co.

  (e)   Food, Beverage & Tobacco   7.6%     2/15/19     3,500        3,498        3,654   

Entercom Radio, LLC

  (e)(j)   Media   10.5%     12/1/19     13,500        13,360        14,873   

EPL Oil & Gas, Inc.

  (e)(j)   Energy   8.3%     2/15/18     3,200        3,169        3,300   

First Data Corp.

  (g)   Software & Services   12.6%     1/15/21     5,000        5,309        5,284   

Flanders Corp.

  (g)   Capital Goods   10.0%, 3.8% PIK     5/14/18     8,153        7,969        8,194   

Gymboree Corp.

  (g)   Consumer Durables & Apparel   9.1%     12/1/18     7,000        6,418        6,306   

Harland Clarke Holdings Corp.

  (g)   Commercial & Professional Services   9.5%     5/15/15     2,689        2,432        2,473   

Infiltrator Systems, Inc.

    Capital Goods   12%, 2.0% PIK     3/11/18     63,558        62,508        65,942   

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate   Floor   Maturity   Principal
Amount(b)
    Amortized
Cost
    Fair
Value(c)
 

Ipreo Holdings LLC

  (f)   Software & Services   11.8%     8/15/18   $ 10,000      $ 9,960      $ 10,600   

J.Crew Group, Inc.

    Consumer Durables & Apparel   8.1%     3/1/19     1,200        1,200        1,273   

JBS U.S.A. LLC

  (e)(j)   Food, Beverage & Tobacco   8.3%     2/1/20     3,000        2,960        3,173   

Kinetic Concepts, Inc.

  (e)(f)(g)   Health Care Equipment & Services   12.5%     11/1/19     26,700        25,405        25,565   

Lin Television Corp.

  (e)(j)   Media   6.4%     1/15/21     750        750        787   

Lone Pine Resources Canada Ltd.

  (g)(j)   Energy   10.4%     2/15/17     5,000        4,938        4,676   

MModal Inc.

  (e)(g)   Health Care Equipment & Services   10.8%     8/15/20     2,418        2,370        2,249   

Monitronics International, Inc.

  (e)(j)   Consumer Services   9.1%     4/1/20     2,250        2,250        2,331   

Mood Media Corp.

  (e)(f)(j)   Media   9.3%     10/15/20     24,250        24,277        25,252   

The Pantry, Inc.

  (g)(j)   Food & Staples Retailing   8.4%     8/1/20     5,500        5,500        5,789   

Petco Holdings, Inc.

  (e)   Retailing   8.5%     10/15/17     1,000        995        1,034   

Pharmaceutical Product Development, Inc.

  (g)   Health Care Equipment & Services   9.5%     12/1/19     2,900        2,900        3,302   

QR Energy, L.P.

  (e)(j)   Energy   9.3%     8/1/20     3,250        3,206        3,441   

Quicksilver Resources Inc.

  (e)(j)   Energy   7.1%     4/1/16     1,000        891        802   

Resolute Energy Corp.

  (e)(j)   Energy   8.5%     5/1/20     10,500        10,629        10,671   

Samson Investment Co.

  (e)(f)   Energy   9.8%     2/15/20     19,420        19,630        20,585   

SandRidge Energy, Inc.

  (e)(j)   Energy   8.1%     10/15/22     7,500        7,500        8,234   

Sequel Industrial Products Holdings, LLC

  (g)   Energy   12.0%, 2.5% PIK     5/10/18     15,500        15,214        15,655   

Sidewinder Drilling Inc.

  (f)(g)   Capital Goods   9.8%     11/15/19     8,000        8,000        8,030   

Symmetry Medical Inc.

  (g)(j)   Health Care Equipment & Services   12.0%, 2.0% PIK     12/29/17     33,170        32,305        34,413   

ThermaSys Corp.

    Capital Goods   10.0%, 2.5% PIK     12/31/16     86,210        84,674        86,210   

Univar Inc.

  (f)   Materials   12.0%     6/30/18     3,000        2,953        3,045   

Viking Cruises, Ltd.

  (e)(j)   Consumer Services   8.5%     10/15/22     4,075        4,075        4,406   
             

 

 

   

 

 

 

Total Subordinated Debt

                491,906        511,971   
             

 

 

   

 

 

 

Collateralized Securities—4.7%

               

Apidos CDO IV Class E

  (g)(j)   Diversified Financials   L+360     10/27/18     2,000        1,214        1,660   

Ares 2007 CLO 11A Class E

  (g)(j)   Diversified Financials   L+600     10/11/21     4,775        3,221        4,320   

Ares 2007 CLO 12X Class E

  (g)(j)   Diversified Financials   L+575     11/25/20     2,252        1,820        2,128   

Carlyle Azure CLO Class Income

  (j)   Diversified Financials   23.3%     5/27/20     28,000        13,099        18,141   

Dryden CDO 23A Class E

  (j)   Diversified Financials   L+700     7/20/23     4,500        3,634        3,984   

Dryden CDO 23A Class Subord.

  (j)   Diversified Financials   15.2%     7/17/23     10,000        7,650        8,710   

Galaxy VII CLO Class Subord.

  (j)   Diversified Financials   28.9%     10/13/18     2,000        886        1,422   

Lightpoint CLO 2006 V Class D

  (g)(j)   Diversified Financials   L+365     8/5/19     6,500        3,490        5,168   

 

See notes to unaudited consolidated financial statements.

 

23


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes   Industry   Rate  

Floor

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

Mountain View CLO II Class Pref.

  (j)   Diversified Financials   34.5%     1/12/21   $ 9,225      $ 4,658      $ 8,819   

Octagon CLO 2006 10A Class Income

  (j)   Diversified Financials   54.0%     10/18/20     4,375        2,346        4,472   

Rampart CLO 2007 1A Class Subord.

  (j)   Diversified Financials   55.8%     10/25/21     10,000        5,290        11,973   

Stone Tower CLO VI Class Subord.

  (g)(j)   Diversified Financials   48.9%     4/17/21     5,000        3,067        6,226   

Wind River CLO Ltd. 2012 1A Class Sub B

  (j)   Diversified Financials   16.8%     1/15/24     42,504        41,036        41,971   
             

 

 

   

 

 

 

Total Collateralized Securities

                91,411        118,994   
             

 

 

   

 

 

 
                        Number
of Shares
    Amortized
Cost
    Fair
Value(c)
 

Equity/Other—5.1%(k)

               

Aquilex Corp., Common Equity, Class A Shares

  (f)(l)   Energy           15,128        2,266        5,977   

Aquilex Corp., Common Equity, Class B Shares

  (f)(g)(l)   Energy           32,637        4,889        12,895   

ERC Ireland Holdings Ltd., Common Equity

  (i)(j)(l)   Telecommunication Services           13,510        —          —     

ERC Ireland Holdings Ltd., Warrants

  (i)(j)(l)   Telecommunication Services           2,617        —          —     

Flanders Corp., Common Equity

  (g)(l)   Capital Goods           5,000,000        5,000        6,500   

Florida Gaming Centers, Inc., Warrants

  (g)(l)   Consumer Services           71        —          99   

Florida Gaming Corp., Warrants

  (g)(l)   Consumer Services           226,635        —          —     

Ipreo Holdings LLC, Common Equity

  (g)(l)   Software & Services           1,000,000        1,000        1,350   

JW Aluminum Co., Common Equity

  (g)(l)   Materials           37,500        3,225        —     

Leading Edge Aviation Services, Inc., Common Equity

  (g)(l)   Capital Goods           2,623        262        —     

Leading Edge Aviation Services, Inc., Preferred Equity

  (g)(l)   Capital Goods           738        738        608   

Micronics, Inc., Common Equity

  (g)(l)   Energy           12,057        50        —     

Micronics, Inc., Preferred Equity

  (l)   Energy           283,947        11,181        6,673   

Plains Offshore Operations Inc., Preferred Equity

  (f)(g)   Energy           523,068        51,941        55,924   

Plains Offshore Operations Inc., Warrants

  (f)(g)(l)   Energy           1,013,444        1,722        2,432   

Safariland, LLC, Common Equity

  (g)(l)   Capital Goods           25,000        2,500        3,738   

Safariland, LLC, Preferred Equity

  (g)   Capital Goods           1,095        10,031        10,572   

Safariland, LLC, Warrants

  (g)(l)   Capital Goods           2,263        246        338   

Sequel Industrial Products Holdings, LLC, Common Equity

  (g)(l)   Energy           3,330,600        3,400        4,330   

Sequel Industrial Products Holdings, LLC, Preferred Equity

  (g)(l)   Energy           87,607        8,354        8,366   

Sequel Industrial Products Holdings, LLC, Warrants

  (g)(l)   Energy           20,681        12        16   

 

See notes to unaudited consolidated financial statements.

 

24


Table of Contents

FS Investment Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

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

ThermaSys Corp., Common Equity

  (g)(l)   Capital Goods           51,813      $ 1      $ 694   

ThermaSys Corp., Preferred Equity

  (g)(l)   Capital Goods           51,813        5,181        5,181   

VPG Group Holdings LLC, Class A-2 Units

  (g)(l)   Materials           2,500,000        2,500        2,250   
             

 

 

   

 

 

 

Total Equity/Other

                114,499        127,943   
             

 

 

   

 

 

 

TOTAL INVESTMENTS—156.7%

              $ 3,825,244        3,934,722   
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(56.7%)

                  (1,422,984
               

 

 

 

NET ASSETS—100.0%

                $ 2,511,738   
               

 

 

 

 

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

 

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

 

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

 

(d) Security or portion thereof held within Arch Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).

 

(e) Security or portion thereof held within Broad Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(f) Security or portion thereof held within Locust Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Race Street Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(g) Security or portion thereof held within Race Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

 

(h) Security or portion thereof held within Walnut Street Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8).

 

(i) Position or portion thereof unsettled as of December 31, 2012.

 

(j) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of December 31, 2012, 83.4% of the Company’s total assets represented qualifying assets.

 

(k) Listed investments may be treated as debt for GAAP or tax purposes.

 

(l) Security is non-income producing.

 

See notes to unaudited consolidated financial statements.

 

25


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

 

Note 1. Principal Business and Organization

FS Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced operations on January 2, 2009. The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of September 30, 2013, the Company had five wholly-owned financing subsidiaries, Broad Street Funding LLC, or Broad Street, Arch Street Funding LLC, or Arch Street, Locust Street Funding LLC, or Locust Street, Race Street Funding LLC, or Race Street, and Walnut Street Funding LLC, or Walnut Street, and a sixth wholly-owned subsidiary, IC American Energy Investments, Inc., through which it holds an equity interest in American Energy Ohio Holdings, LLC, a non-controlled and non-affiliated portfolio company. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of September 30, 2013. All significant intercompany transactions have been eliminated in consolidation.

The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or directly from its target companies as primary market investments.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2012 included in the Company’s annual report on Form 10-K. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The December 31, 2012 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the year ended December 31, 2012. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.

Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.

 

26


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

Capital Gains Incentive Fee: The Company has entered into an investment advisory and administrative services agreement with FB Income Advisor, LLC, or FB Advisor, dated as of February 12, 2008, which was amended on August 5, 2008, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, the Company changed its methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 2.0%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.

In connection with the Company’s 2013 annual meeting of stockholders, the Company received stockholder approval to amend the investment advisory and administrative services agreement effective upon the listing of the Company’s common stock on a national securities exchange. Upon such event, if any, the hurdle rate used to compute the subordinated incentive fee on income will be based on the net asset value of the Company’s assets rather than adjusted capital. In addition to the amendments approved by stockholders, the subordinated incentive fee on income will become subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 2. Summary of Significant Accounting Policies (continued)

 

quarters. In other words, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.

Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three and nine months ended September 30, 2012 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and nine months ended September 30, 2013. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30,  
     2013     2012  
     Shares     Amount     Shares     Amount  

Gross Proceeds from Offering(1)

     —        $ —          83,239,728      $ 886,432   

Reinvestment of Distributions

     7,984,869        80,950        7,479,245        72,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Proceeds

     7,984,869        80,950        90,718,973        958,849   

Commissions and Dealer Manager Fees

     —          —          —          (83,084
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Proceeds to Company

     7,984,869        80,950        90,718,973        875,765   

Share Repurchase Program

     (2,685,390     (27,109     (1,207,919     (11,670
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Proceeds from Share Transactions

     5,299,479      $ 53,841        89,511,054      $ 864,095   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Following the closing of its continuous public offering in May 2012, the Company has continued to issue shares only pursuant to its distribution reinvestment plan.

Public Offering of Shares

In May 2012, the Company closed its continuous public offering of shares of common stock to new investors. The Company sold 247,454,171 shares (as adjusted for stock distributions) of common stock for gross proceeds of $2,605,158 in its continuous public offering. Following the closing of its continuous public offering, the Company has continued to issue shares pursuant to its distribution reinvestment plan. As of October 29, 2013, the Company had sold a total of 263,357,017 shares (as adjusted for stock distributions) of common stock and

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 3. Share Transactions (continued)

 

raised total gross proceeds of $2,763,697, including approximately $1,000 contributed by the principals of the Company’s investment adviser in February 2008.

During the nine months ended September 30, 2013 and 2012, the Company sold 7,984,869 and 90,718,973 shares for gross proceeds of $80,950 and $958,849 at an average price per share of $10.14 and $10.57, respectively. The gross proceeds received during the nine months ended September 30, 2012 include reinvested stockholder distributions of $72,417, for which the Company issued 7,479,245 shares of common stock. During the period from October 1, 2013 to October 29, 2013, the Company issued 914,401 shares of common stock for gross proceeds of $9,327 at a price per share of $10.20 pursuant to its distribution reinvestment plan.

The proceeds from the issuance of common stock as presented on the Company’s unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $0 and $83,084 for the nine months ended September 30, 2013 and 2012, respectively.

Share Repurchase Program

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

 

   

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

 

   

the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);

 

   

the Company’s investment plans and working capital requirements;

 

   

the relative economies of scale with respect to the Company’s size;

 

   

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

 

   

the condition of the securities markets.

The Company intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above.

Under the share repurchase program, the Company intends to offer to repurchase shares of common stock on each date of repurchase at a price equal to the price at which shares of common stock are issued pursuant to the Company’s distribution reinvestment plan on the distribution date coinciding with the applicable share

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 3. Share Transactions (continued)

 

repurchase date. The repurchase price is determined by the Company’s board of directors or a committee thereof, in its sole discretion, and will be (i) not less than the net asset value per share of the Company’s common stock (as determined in good faith by the Company’s board of directors or a committee thereof) immediately prior to the repurchase date and (ii) not more than 2.5% greater than the net asset value per share as of such date.

The Company’s board of directors may amend, suspend or terminate the share repurchase program at any time, upon 30 days’ notice. The first such tender offer commenced in March 2010, and the repurchase occurred in connection with the Company’s April 1, 2010 semi-monthly closing.

The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program during the nine months ended September 30, 2013 and 2012:

 

For the Three Months Ended

   Repurchase Date    Shares
Repurchased
     Percentage
of
Shares
Tendered
That Were
Repurchased
    Repurchase
Price Per
Share
     Aggregate
Consideration
for
Repurchased
Shares
 

Fiscal 2012

        

December 31, 2011

   January 3, 2012      385,526         100   $ 9.585       $ 3,695   

March 31, 2012

   April 2, 2012      411,815         100   $ 9.675       $ 3,984   

June 30, 2012

   July 2, 2012      410,578         100   $ 9.720       $ 3,991   

Fiscal 2013

             

December 31, 2012

   January 2, 2013      883,047         100   $ 10.000       $ 8,830   

March 31, 2013

   April 1, 2013      1,053,119         100   $ 10.100       $ 10,637   

June 30, 2013

   July 1, 2013      749,224         100   $ 10.200       $ 7,642   

On October 1, 2013, the Company repurchased 656,541 shares (representing 100% of shares of common stock tendered for repurchase) at $10.20 per share for aggregate consideration totaling $6,697.

Note 4. Related Party Transactions

Compensation of the Dealer Manager and Investment Adviser

Pursuant to the investment advisory and administrative services agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company’s gross assets and an incentive fee based on the Company’s performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon commencement of the Company’s operations. Management fees are paid on a quarterly basis in arrears.

The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 2.0%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate,

 

30


Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 4. Related Party Transactions (continued)

 

FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.5%, or 10.0% annually, of adjusted capital. This “catch-up” feature allows FB Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.

In connection with the Company’s 2013 annual meeting of stockholders, the Company received stockholder approval to amend the investment advisory and administrative services agreement effective upon the listing of the Company’s common stock on a national securities exchange. Upon such event, if any, the hurdle rate used to compute the subordinated incentive fee on income will be based on the net asset value of the Company’s assets rather than adjusted capital. In addition to the amendments approved by stockholders, the subordinated incentive fee on income will become subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. In other words, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which the Company’s pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, 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 Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized.

The third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, equals 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation. The investment advisory and administrative services agreement will be amended effective upon the listing of the Company’s common stock on a national securities exchange, if any, to eliminate the subordinated liquidation incentive fee.

The Company reimburses FB Advisor for expenses necessary to perform services related to the Company’s administration and operations. The amount of this reimbursement is set at the lesser of (1) FB Advisor’s actual

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 4. Related Party Transactions (continued)

 

costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to FB Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company’s sponsor and an affiliate of FB Advisor, has funded certain of the Company’s offering costs and organization costs. Under the terms of the investment advisory and administrative services agreement, when the Company’s registration statement was declared effective by the SEC and the Company was successful in raising gross proceeds in excess of $2,500, or the minimum offering requirement, from persons who were not affiliated with the Company or FB Advisor, FB Advisor became entitled to receive 1.5% of gross proceeds raised in the Company’s continuous public offering until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On January 2, 2009, the Company satisfied the minimum offering requirement. The Company did not pay any reimbursements under this arrangement during the nine months ended September 30, 2013 or 2012.

The dealer manager for the Company’s continuous public offering was FS2 Capital Partners, LLC, or FS2, which is one of the Company’s affiliates. Under the dealer manager agreement among the Company, FB Advisor and FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in the Company’s continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.

The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and nine months ended September 30, 2013 and 2012:

 

            Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 

Related Party

 

Source Agreement

 

Description

      2013             2012             2013             2012      

FB Advisor

  Investment Advisory and Administrative Services Agreement   Base Management
Fee
(1)
  $ 22,720      $ 19,021      $ 67,541      $ 46,570   

FB Advisor

  Investment Advisory and Administrative Services Agreement   Capital Gains Incentive Fee(2)   $ (1,548   $ 17,421      $ (621   $ 33,920   

FB Advisor

  Investment Advisory and Administrative Services Agreement   Subordinated Incentive Fee on Income(3)   $ 16,555      $ —        $ 47,950      $ —     

FB Advisor

  Investment Advisory and Administrative Services Agreement   Administrative Services Expenses(4)   $ 1,243      $ 1,782      $ 4,034      $ 4,116   

FS2

  Dealer Manager Agreement   Dealer Manager Fee(5)   $ —        $ —        $ —        $ 15,842   

 

(1) During the nine months ended September 30, 2013 and 2012, $66,240 and $37,028, respectively, in base management fees were paid to FB Advisor.

 

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 4. Related Party Transactions (continued)

 

(2) During the nine months ended September 30, 2013, the Company reversed $621 of capital gains incentive fees previously accrued based on the performance of its portfolio. As of September 30, 2013, the Company had accrued capital gains incentive fees of $27,339 based on the performance of its portfolio, of which $26,605 was based on unrealized gains and $734 was based on realized gains. During the nine months ended September 30, 2012, the Company accrued capital gains incentive fees of $33,920 based on the performance of its portfolio, of which $27,421 was based on unrealized gains and $6,499 was based on realized gains. No such fees are actually payable by the Company with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, the Company had accrued capital gains incentive fees of $39,751 based on the performance of its portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. The Company paid FB Advisor $11,791 in capital gains incentive fees during the nine months ended September 30, 2013.

 

(3) During the nine months ended September 30, 2013, $44,788 of subordinated incentive fees on income were paid to FB Advisor. As of September 30, 2013, a subordinated incentive fee on income of $16,555 was payable to FB Advisor.

 

(4) During the nine months ended September 30, 2013 and 2012, $3,520 and $3,789, respectively, of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FB Advisor and the remainder related to other reimbursable expenses. The Company paid $3,620 and $2,661, respectively, in administrative services expenses to FB Advisor during the nine months ended September 30, 2013 and 2012.

 

(5)

Represents aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker- dealers.

Potential Conflicts of Interest

FB Advisor’s senior management team is comprised of the same personnel as the senior management teams of FS Investment Advisor, LLC and FSIC II Advisor, LLC, the investment advisers to Franklin Square Holdings’ other affiliated BDCs, FS Energy and Power Fund and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services to each of the Company, FS Energy and Power Fund and FS Investment Corporation II. While none of FB Advisor, FS Investment Advisor, LLC or FSIC II Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Energy and Power Fund and FS Investment Corporation II, respectively, any, or all, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FB Advisor or its management team.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FB Advisor, including FS Investment Corporation II and FS Energy and Power Fund and any future BDCs that are advised by FB Advisor or its affiliated investment advisers. Because the Company did not seek exemptive relief to engage in co-investment transactions with GSO / Blackstone Debt Funds Management LLC, or GDFM and its affiliates, the Company will be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Company’s net investment income and net capital gains were equal to or greater than the cumulative distributions paid to its stockholders in each quarter.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 4. Related Party Transactions (continued)

 

This arrangement was designed to ensure that no portion of the Company’s distributions would represent a return of capital for its stockholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Company’s expenses.

Pursuant to an expense support and conditional reimbursement agreement, dated as of March 13, 2012, and amended as of May 16, 2013, or, as amended, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company’s distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company’s distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.

Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Company’s cumulative distributions paid to its stockholders in each quarter, less the sum of the Company’s net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.

Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company’s net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense reimbursement payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company’s average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company’s average net assets attributable to its shares of common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 4. Related Party Transactions (continued)

 

the expense support payment to which such reimbursement relates. “Other operating expenses” means the Company’s total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Company’s conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

Franklin Square Holdings is controlled by the Company’s chairman and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Company’s expenses in future quarters. During the nine months ended September 30, 2013 and 2012, no such reimbursements were required from Franklin Square Holdings.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common stock during the nine months ended September 30, 2013 and 2012:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2012

     

March 31, 2012

   $ 0.2016       $ 37,014   

June 30, 2012

   $ 0.2020       $ 47,305   

September 30, 2012

   $ 0.2525       $ 62,758   

Fiscal 2013

     

March 31, 2013

   $ 0.2025       $ 51,184   

June 30, 2013

   $ 0.2048       $ 52,111   

September 30, 2013

   $ 0.2093       $ 53,626   

On October 16, 2013, the Company’s board of directors declared a regular monthly cash distribution of $0.06975 per share, which was paid on October 31, 2013 to stockholders of record on October 30, 2013. Also on October 16, 2013, the Company’s board of directors increased the amount of the regular monthly cash distribution payable to stockholders of record from $0.06975 per share to $0.0720 per share in order to increase its annual distribution rate from 7.75% to 8.00% (based on the Company’s last public offering price of $10.80 per share), commencing with the regular monthly cash distribution which will be paid on November 29, 2013 to stockholders of record on November 28, 2013. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 5. Distributions (continued)

 

“opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

The Company may fund its cash distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the distributions the Company makes will represent a return of capital for tax purposes. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions (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 the Company’s stockholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.

The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common stock during the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30,  
     2013     2012  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     124,747         79     128,781         88

Capital gains proceeds from the sale of assets

     32,174         21     18,296         12

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 156,921         100   $ 147,077         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the nine months ended September 30, 2013 and 2012, 89% and 92%, respectively, of the Company’s gross investment income was attributable to cash interest earned and 11% and 8%, respectively, was attributable to non-cash accretion of discount and paid-in-kind, or PIK, interest.

The Company’s net investment income on a tax basis for the nine months ended September 30, 2013 and 2012 was $191,169 and $129,901, respectively. As of September 30, 2013 and December 31, 2012, the Company had $124,162 and $57,740, respectively, of undistributed net investment income on a tax basis. The Company’s undistributed net investment income on a tax basis as of December 31, 2012 has been adjusted following the filing of the Company’s 2012 tax return in September 2013. The adjustment was primarily due to tax-basis income received by the Company during the year ended December 31, 2012 exceeding GAAP-basis income with respect to collateralized securities and interests in partnerships held in its investment portfolio during such period. The tax notices for such

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 5. Distributions (continued)

 

collateralized securities and interests in partnerships were received by the Company subsequent to the filing of the Company’s annual report on Form 10-K for the year ended December 31, 2012.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is due to the tax-basis amortization of organization costs incurred prior to the commencement of the Company’s operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company and, with respect to the nine months ended September 30, 2012, the inclusion of a portion of the periodic net settlement payments due on the Company’s total return swap in tax-basis net investment income and the accretion of discount on the total return swap.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended
September 30,
 
         2013             2012      

GAAP-basis net investment income

   $ 192,556      $ 86,171   

Tax-basis amortization of organization costs

     (32     (32

Reversal of incentive fee accrual on unrealized gains

     (1,355     27,421   

Periodic payments due on total return swap

     —          15,563   

Accretion of discount on total return swap

     —          778   
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 191,169      $ 129,901   
  

 

 

   

 

 

 

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

The following table reflects the stock distributions per share that the Company declared on its common stock through September 30, 2013:

 

Date Declared

   Record Date    Distribution 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   

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 5. Distributions (continued)

 

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

The stock distributions increased the number of shares outstanding, thereby reducing the Company’s net asset value per share. However, because the stock distributions were issued to all stockholders as of the applicable record date in proportion to their holdings as of such date, the reduction in net asset value per share as a result of the stock distributions was offset exactly by the increase in the number of shares owned by each investor. As overall value to an investor was not reduced as a result of the special stock distributions, the Company’s board of directors determined that these issuances would not be dilutive to stockholders as of the applicable record date. As the stock distributions did not change any stockholder’s proportionate interest in the Company, they did not represent taxable distributions.

As of September 30, 2013 and December 31, 2012, the components of accumulated earnings on a tax basis were as follows:

 

     September 30,  2013
(Unaudited)
    December 31,
2012
 
      

Distributable ordinary income

   $ 124,162      $ 57,740   

Undistributed GAAP realized gains on collateralized securities

     5,014        —     

Incentive fee accrual on unrealized gains

     (26,605     (27,960

Unamortized organization costs

     (440     (472

Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(1)

     43,640        84,352   
  

 

 

   

 

 

 
   $ 145,771      $ 113,660   
  

 

 

   

 

 

 

 

(1) As of September 30, 2013 and December 31, 2012, the gross unrealized appreciation on the Company’s investments and gain on foreign currency was $107,393 and $114,920, respectively. As of September 30, 2013 and December 31, 2012, the gross unrealized depreciation on the Company’s investments and loss on foreign currency was $63,753 and $30,568, respectively.

The aggregate cost of the Company’s investments for federal income tax purposes totaled $4,157,161 and $3,850,245 as of September 30, 2013 and December 31, 2012, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $43,640 and $84,352 as of September 30, 2013 and December 31, 2012, respectively.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2013 and December 31, 2012:

 

    September 30, 2013
(Unaudited)
    December 31, 2012  
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 2,118,100      $ 2,149,069        51   $ 1,914,996      $ 1,945,159        50

Senior Secured Loans—Second Lien

    895,270        914,603        22     752,392        764,356        19

Senior Secured Bonds

    399,126        379,933        9     460,040        466,299        12

Subordinated Debt

    475,168        479,729        11     491,906        511,971        13

Collateralized Securities

    105,856        122,217        3     91,411        118,994        3

Equity/Other

    138,640        155,250        4     114,499        127,943        3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 4,132,160      $ 4,200,801        100   $ 3,825,244      $ 3,934,722        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The Company does not “control” and is not an “affiliate” of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if it owned 5% or more of its voting securities.

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2013, the Company had seven such investments with aggregate unfunded commitments of $72,743 and one equity investment with an unfunded commitment of $4,629. As of December 31, 2012, the Company had three such investments with aggregate unfunded commitments of $14,804. The Company maintains sufficient cash on hand to fund such unfunded commitments should the need arise.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 6. Investment Portfolio (continued)

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013
(Unaudited)
    December 31, 2012  

Industry Classification

   Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
 

Automobiles & Components

   $ 53,447         1   $ 41,479         1

Capital Goods

     830,975         20     675,187         17

Commercial & Professional Services

     317,640         8     271,978         7

Consumer Durables & Apparel

     317,884         8     264,722         7

Consumer Services

     304,100         7     293,408         7

Diversified Financials

     157,854         4     220,622         6

Energy

     492,161         12     430,444         11

Food & Staples Retailing

     40,065         1     96,739         2

Food, Beverage & Tobacco

     10,362         0     9,713         0

Health Care Equipment & Services

     226,352         5     362,456         9

Household & Personal Products

     66,300         2     78,124         2

Insurance

     17,969         0     28,623         1

Materials

     211,295         5     199,089         5

Media

     222,163         5     154,599         4

Pharmaceuticals, Biotechnology & Life Sciences

     54,752         1     37,259         1

Retailing

     182,002         4     24,652         1

Semiconductors & Semiconductor Equipment

     —                  8,820         0

Software & Services

     370,010         9     339,641         9

Technology Hardware & Equipment

     132,489         3     94,128         2

Telecommunication Services

     158,740         4     152,458         4

Transportation

     11,170         0     29,104         1

Utilities

     23,071         1     121,477         3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,200,801         100   $ 3,934,722         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of September 30, 2013 and December 31, 2012, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   September 30, 2013
(Unaudited)
     December 31, 2012  

Level 1—Price quotations in active markets

   $ 1,546       $ —     

Level 2—Significant other observable inputs

     —           —     

Level 3—Significant unobservable inputs

     4,199,255         3,934,722   
  

 

 

    

 

 

 
   $ 4,200,801       $ 3,934,722   
  

 

 

    

 

 

 

The Company’s investments as of September 30, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Twenty-eight senior secured loan investments and six subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Two senior secured loan investments, one senior secured bond investment, one subordinated debt investment and one equity investment, all of which were newly-issued and purchased near September 30, 2013, were valued at cost, as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Also, one equity investment which is traded on an active public market was valued at its closing price as of September 30, 2013.

The Company’s investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Twenty-one senior secured loan investments, one senior secured bond investment and seven subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Company’s equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan investment, which was newly-issued and purchased near December 31, 2012, was valued at cost, as the Company’s board of directors determined that the cost of such investment was the best indication of its fair value.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which the Company purchases and sells its investments. The Company’s valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

The following is a reconciliation for the nine months ended September 30, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Nine Months Ended September 30, 2013  
    Senior Secured
Loans -  First
Lien
    Senior Secured
Loans - Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/Other     Total  

Fair value at beginning of period

  $ 1,945,159      $ 764,356      $ 466,299      $ 511,971      $ 118,994      $ 127,943      $ 3,934,722   

Accretion of discount (amortization of premium)

    21,997        3,733        4,128        4,373        407        38        34,676   

Net realized gain (loss)

    4,389        1,579        20,080        5,485        5,687        —          37,220   

Net change in unrealized appreciation (depreciation)

    806        7,369        (25,452     (15,504     (11,222     2,822        (41,181

Purchases

    1,366,182        352,967        159,158        268,915        30,620        25,516        2,203,358   

Paid-in-kind interest

    449        —          619        3,262        —          1,107        5,437   

Sales and redemptions

    (1,189,913     (215,401     (244,899     (298,773     (22,269     (3,722     (1,974,977

Net transfers in or out of Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,149,069      $ 914,603      $ 379,933      $ 479,729      $ 122,217      $ 153,704      $ 4,199,255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 25,453      $ 11,193      $ (16,034   $ (8,236   $ (4,050   $ 3,980      $ 12,306   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

    For the Nine Months Ended September 30, 2012  
    Senior Secured
Loans -  First
Lien
    Senior Secured
Loans - Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/Other     Total  

Fair value at beginning of period

  $ 1,023,183      $ 388,508      $ 115,360      $ 233,877      $ 68,366      $ 15,064      $ 1,844,358   

Accretion of discount (amortization of premium)

    7,025        3,163        1,078        791        586        31        12,674   

Net realized gain (loss)

    9,954        2,061        2,700        (2,532     433        2,237        14,853   

Net change in unrealized appreciation (depreciation)

    42,797        16,347        4,856        21,009        27,318        13,768        126,095   

Purchases

    1,446,766        384,307        354,938        523,360        11,671        116,302        2,837,344   

Paid-in-kind interest

    —          197        —          1,953        —          282        2,432   

Sales and redemptions

    (401,612     (223,250     (81,981     (194,015     (10,641     (25,639     (937,138

Net transfers in or out of Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
             

Fair value at end of period

  $ 2,128,113      $ 571,333      $ 396,951      $ 584,443      $ 97,733      $ 122,045      $ 3,900,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 49,060      $ 15,269      $ 4,056      $ 16,531      $ 27,535      $ 13,418      $ 125,869   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an independent valuation firm as of September 30, 2013 and December 31, 2012 were as follows:

 

Type of Investment

  Fair Value at
September  30, 2013(1)
(Unaudited)
   

Valuation

Technique(2)

 

Unobservable

Input

  Range  

Weighted

Average

Senior Secured Loans—First Lien

  $ 1,292,422      Market Comparables   Market Yield (%)   5.0% - 16.0%   9.0%

Senior Secured Loans—Second Lien

    124,684      Market Comparables   Market Yield (%)   10.0% - 11.8%   11.0%

Subordinated Debt

    212,818      Market Comparables   Market Yield (%)   9.0% - 14.3%   11.3%

Equity/Other

    148,633      Market Comparables   Market Yield (%)   13.8% - 15.8%   15.1%
      EBITDA Multiples (x)   5.0x - 13.3x   7.2x
      Production Multiples (Mmb/d)   $37,500.0 - $42,500.0   $40,000.0
      Proved Reserves Multiples (Mmboe)   $8.0 - $9.0   $8.5
      PV-10 Multiples (x)   0.6x - 0.7x   0.6x
    Discounted Cash Flow   Discount Rate (%)   17.3% - 17.3%   17.3%
    Option Valuation Model   Volatility (%)   52.5% - 61.5%   52.9%

 

(1) Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Two senior secured loan investments ($95,000), one senior secured bond investment ($35,000), one subordinated debt investment ($31,850) and one equity investment ($5,071), all of which were newly-issued and purchased near September 30, 2013, were valued at cost, as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. As of September 30, 2013, $68,933 of the senior secured loans-first lien investments valued by the independent valuation firm consisted of unfunded loan commitments.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 7. Fair Value of Financial Instruments (continued)

 

(2) For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

Type of Investment

  Fair Value at
December  31,
2012(1)
   

Valuation

Technique(2)

 

Unobservable

Input

   Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 605,163      Market Comparables   Market Yield (%)    6.8% - 17.3%   9.7%

Senior Secured Loans—Second Lien

    118,682      Market Comparables   Market Yield (%)    10.3% - 12.8%   11.2%

Senior Secured Bonds

    10,100      Market Comparables   Market Yield (%)    9.3% - 9.8%   9.5%

Subordinated Debt

    224,059      Market Comparables   Market Yield (%)    9.3% - 14.5%   12.9%

Equity/Other

    127,943      Market Comparables   Market Yield (%)    15.3% - 15.8%   15.5%
      EBITDA Multiples (x)    3.3x - 12.5x   6.9x
      Production Multiples (Mmb/d)    $57,500.0 - $62,500.0   $60,000.0
      Proved Reserves Multiples (Mmboe)    $12.5 - $13.5   $13.0
      PV-10 Multiples (x)    0.8x - 0.9x   0.9x
      Revenue Multiples    1.6x - 1.6x   1.6x
    Discounted Cash Flow   Discount Rate (%)    17.3% - 17.3%   17.3%
    Option Valuation Model   Volatility (%)    44.0% - 59.7%   44.0%

 

(1) Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. One senior secured loan investment ($39,400), which was newly-issued and purchased near December 31, 2012, was valued at cost, as the Company’s board of directors determined that the cost of such investment was the best indication of its fair value. As of December 31, 2012, $14,804 of the senior secured loans-first lien investments consisted of unfunded loan commitments.

 

(2) For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements

The following table presents summary information with respect to the Company’s outstanding financing arrangements as of September 30, 2013. For additional information regarding these financing facilities, please see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2012 and the additional disclosure set forth in this Note 8.

 

Facility

 

Type of Facility

 

Rate

  Amount
Outstanding
    Amount
Available
    Maturity Date

Arch Street Credit Facility

  Revolving   L + 1.75%   $ 497,682      $ 52,318      August 29, 2015

Broad Street Credit Facility

  Revolving   L + 1.50%   $ 240,000      $ —        December 22, 2013

JPM Facility

  Repurchase   3.25%   $ 906,083      $ 43,917      April 15, 2017

Walnut Street Credit Facility

  Revolving   L + 1.50% to 2.75%   $ 248,739      $ 1,261      May 17, 2017

Arch Street Credit Facility

On August 29, 2012, Arch Street, the Company’s wholly-owned, special-purpose financing subsidiary, terminated its total return swap financing arrangement, or TRS, with Citibank, N.A., or Citibank, and entered into a revolving credit facility, or the Arch Street credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Arch Street credit facility provides for borrowings in an aggregate principal amount up to $550,000 on a committed basis. The Company may contribute cash or debt securities to Arch Street from time to time, subject to certain restrictions set forth in the Arch Street credit facility, and will retain a residual interest in any assets contributed through its ownership of Arch Street or will receive fair market value for any debt securities sold to Arch Street. Arch Street may purchase additional debt securities from various sources. Arch Street’s obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of Arch Street, including its portfolio of debt securities. The obligations of Arch Street under the facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of the Company’s investment in Arch Street.

Borrowings under the Arch Street credit facility accrue interest at a rate equal to the three-month London Interbank Offered Rate, or LIBOR, plus 1.75% per annum during the first two years of the facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of Arch Street’s portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Arch Street’s portfolio. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee to the extent the aggregate principal amount available under the Arch Street credit facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2015.

As of September 30, 2013 and December 31, 2012, $497,682 was outstanding under the Arch Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $4,446 in connection with obtaining the Arch Street credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2013, $2,832 of such deferred financing costs had yet to be amortized to interest expense.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements (continued)

 

The effective interest rate on the borrowings under the Arch Street credit facility was 2.03% per annum as of September 30, 2013. Interest is payable quarterly in arrears and commenced August 29, 2012. The Company recorded interest expense of $2,989 and $1,057 for the three months ended September 30, 2013 and 2012, respectively, of which $373 and $130, respectively, related to the amortization of deferred financing costs $66 and $0, respectively, related to commitment fees on the unused portion of the facility. The Company recorded interest expense of $9,049 and $1,057 for the nine months ended September 30, 2013 and 2012, respectively, of which $1,107 and $130, respectively, related to the amortization of deferred financing costs and $198 and $0, respectively, related to commitment fees on the unused portion of the facility. The Company paid $9,487 and $0 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the Arch Street credit facility for the nine months ended September 30, 2013 was $497,682 with a weighted average interest rate (including the effect of non-usage fees) of 2.10%. The average borrowings under the Arch Street credit facility for the period August 29, 2012 to September 30, 2012, was $447,682 with a weighted average interest rate (including the effect of non-usage fees) of 2.33%.

Broad Street Credit Facility

On January 28, 2011, Broad Street, the Company’s wholly-owned, special-purpose financing subsidiary, Deutsche Bank AG, New York Branch, or Deutsche Bank, and the other lenders party thereto entered into an amended and restated multi-lender, syndicated revolving credit facility, or the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street entered into an amendment to the Broad Street credit facility which extended the maturity date of the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR + 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. The Broad Street credit facility provides for borrowings of up to $240,000 at a rate of LIBOR plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.

Under the Broad Street credit facility, the Company transfers debt securities to Broad Street from time to time as a contribution to capital and retains a residual interest in the contributed debt securities through its ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to the Company and its exposure under the facility is limited to the value of its investment in Broad Street.

As of September 30, 2013 and December 31, 2012, $240,000 was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $2,566 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2013, all of the deferred financing costs have been amortized to interest expense.

The effective interest rate under the Broad Street credit facility was 1.76% per annum as of September 30, 2013. Interest is paid quarterly in arrears and commenced August 20, 2010. The Company recorded interest expense of $1,078 and $2,115 for the three months ended September 30, 2013 and 2012, respectively, of which

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements (continued)

 

$0 and $272, respectively, related to the amortization of deferred financing costs. The Company recorded interest expense of $3,445 and $6,545 for the nine months ended September 30, 2013 and 2012, respectively, of which $225 and $703, respectively, related to the amortization of deferred financing costs and $0 and $18, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $3,246 and $6,104 in interest expense for the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the credit facility for the nine months ended September 30, 2013 and 2012 were $240,000 and $364,833, respectively, with a weighted average interest rate of 1.77% and 2.15%, respectively.

JPM Financing

On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Locust Street and Race Street, the Company entered into an amendment, or the April 2013 amendment, to its conventional debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which was originally entered into on July 21, 2011. The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $700,000 to $950,000; and (ii) extended the final repurchase date under the financing arrangement from October 15, 2016 to April 15, 2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Locust Street when the financing arrangement is fully-ramped is approximately $1,791,500. The assets held by Locust Street secure the obligations of Locust Street under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture, dated as of September 26, 2012 and as supplemented by Supplemental Indenture No. 1, dated April 23, 2013, with Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1,140,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.

Race Street, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, and subsequently amended as of October 24, 2013, or, collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1,140,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility is $950,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements (continued)

 

principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Race Street when the financing arrangement is fully-ramped is $720,000. The assets held by Race Street secure the obligations of Race Street under the JPM Facility.

As of September 30, 2013 and December 31, 2012, Class A Notes in the aggregate principal amount of $1,087,300 and $812,000, respectively, had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $906,083 and $676,667, respectively. The carrying amount outstanding under the JPM Facility approximates its fair value. The Company funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2013 and December 31, 2012, Race Street’s liability under the JPM Facility was $906,083 and $676,667, respectively, plus $5,930 and $4,298, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on the Company’s financial statements.

As of September 30, 2013 and December 31, 2012, the fair value of assets held by Locust Street was $1,693,241 and $1,307,933, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of September 30, 2013 and December 31, 2012, the fair value of assets held by Race Street was $808,230 and $598,528, respectively.

The Company incurred costs of $425 in connection with obtaining the JPM Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM Facility. As of September 30, 2013, $200 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility was 3.25% as of September 30, 2013. The Company recorded interest expense of $6,983 and $3,795 for the three months ended September 30, 2013 and 2012, respectively, of which $27 and $27, respectively, related to the amortization of deferred financing costs. The Company recorded interest expense of $18,696 and $9,802 for the nine months ended September 30, 2013 and 2012, respectively, of which $79 and $80, respectively, related to the amortization of deferred financing costs. The Company paid $16,985 and $7,789 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the JPM Facility for the nine months ended September 30, 2013 and 2012 were $755,374 and $341,114, respectively, with a weighted average interest rate of 3.25% and 3.74%, respectively.

Walnut Street Credit Facility

On May 17, 2012, Walnut Street, the Company’s wholly-owned, special-purpose financing subsidiary, Wells Fargo Securities, LLC, and Wells Fargo Bank, National Association, or collectively with Wells Fargo Securities, LLC, Wells Fargo, entered into a revolving credit facility, or the Walnut Street credit facility. Wells Fargo Securities, LLC serves as the administrative agent and Wells Fargo Bank, National Association is the sole lender, collateral agent, account bank and collateral custodian under the facility. The Walnut Street credit facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

 

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Table of Contents

FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements (continued)

 

Under the Walnut Street credit facility, the Company contributes cash or debt securities to Walnut Street from time to time and retains a residual interest in any assets contributed through its ownership of Walnut Street or receives fair market value for any debt securities sold to Walnut Street. The obligations of Walnut Street under the Walnut Street credit facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of the Company’s investment in Walnut Street.

Pricing under the Walnut Street credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible debt securities owned by Walnut Street, plus a spread ranging between 1.50% and 2.75% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee to the extent the aggregate principal amount available under the Walnut Street credit facility is not borrowed. Any amounts borrowed under the Walnut Street credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.

As of September 30, 2013 and December 31, 2012, $248,739 and $235,364, respectively, was outstanding under the Walnut Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $3,761 in connection with obtaining the Walnut Street credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2013, $2,725 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the Walnut Street credit facility was 2.87% per annum as of September 30, 2013. Interest is payable quarterly in arrears and commenced October 15, 2012. The Company recorded interest expense of $2,048 and $777 for the three months ended September 30, 2013 and 2012, respectively, of which $190 and $191, respectively, related to the amortization of deferred financing costs and $2 and $72, respectively, related to commitment fees on the unused portion of the credit facility. The Company recorded interest expense of $5,920 and $867 for the nine months ended September 30, 2013 and 2012, respectively, of which $567 and $279, respectively, related to the amortization of deferred financing costs and $20 and $72, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $5,111 and $0 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the Walnut Street credit facility for the nine months ended September 30, 2013 and 2012 were $244,741 and $73,210, respectively, with a weighted average interest rate (including the effect of non-usage fees) of 2.89% and 3.05%, respectively.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 9. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2013 and the year ended December 31, 2012:

 

     Nine Months Ended
September 30, 2013
(Unaudited)
    Year Ended
December 31, 2012
 

Per Share Data:

    

Net asset value, beginning of period

   $ 9.97      $ 9.35   

Results of operations(1)

    

Net investment income (loss)

     0.76        0.59   

Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency

     (0.01     0.86   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.75        1.45   
  

 

 

   

 

 

 

Stockholder distributions(2)

    

Distributions from net investment income

     (0.49     (0.63

Distributions from net realized gain on investments

     (0.13     (0.23
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.62     (0.86
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(3)

     —          0.04   

Repurchases of common stock(4)

     —          —     

Offering costs(1)

     —          (0.01
  

 

 

   

 

 

 

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

     —          0.03   
  

 

 

   

 

 

 

Net asset value, end of period

   $ 10.10      $ 9.97   
  

 

 

   

 

 

 

Shares outstanding, end of period

     257,190,300        251,890,821   
  

 

 

   

 

 

 

Total return(5)

     7.52     15.83
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 2,597,690      $ 2,511,738   
  

 

 

   

 

 

 

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

     7.50     6.07

Ratio of operating expenses to average net assets(6)

     6.43     7.67

Portfolio turnover(7)

     48.48     65.70

 

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

 

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

 

(3) The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous public offering and pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share.

 

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FS Investment Corporation

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 9. Financial Highlights (continued)

 

(4) The per share impact of the Company’s repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the applicable period.

 

(5) The total return for the nine months ended September 30, 2013 was calculated by taking the net asset value per share as of September 30, 2013, adding the cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2012. The 2012 total return was calculated by taking the net asset value per share as of December 31, 2012, 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, 2011. The total return does not consider the effect of the sales load from the sale of the Company’s common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Company’s future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its 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. The total return as calculated above represents the total return on the Company’s investment portfolio during such period and is calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders.

 

(6) Weighted average net assets during the period are used for this calculation. Ratios are not annualized. The following is a schedule of supplemental ratios for the nine months ended September 30, 2013 and the year ended December 31, 2012:

 

     Nine Months Ended
September 30, 2013
(Unaudited)
    Year Ended
December 31,
2012
 

Ratio of accrued capital gains incentive fees to average net assets

     (0.02 )%      1.80

Ratio of subordinated income incentive fees to average net assets

     1.87     0.61

Ratio of interest expense to average net assets

     1.45     1.37

 

(7) Portfolio turnover is not annualized.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts)

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us,” “our” and the “Company” refer to FS Investment Corporation.

Forward-Looking Statements

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

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of the investments that we expect to make;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our current and expected financings and investments;

 

   

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

 

   

the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

 

   

our contractual arrangements and relationships with third parties;

 

   

actual and potential conflicts of interest with FB Advisor, FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS Investment Corporation II, GDFM or any of their affiliates;

 

   

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

 

   

our use of financial leverage;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the tax status of the enterprises in which we invest.

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

 

   

changes in the economy;

 

   

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

 

   

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

 

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We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. 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. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007, and commenced operations on January 2, 2009 upon raising gross proceeds in excess of $2,500 from the sale of shares of our common stock in our continuous public offering to persons who were not affiliated with us or FB Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. In May 2012, we closed our continuous public offering of shares of common stock to new investors.

Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under our investment advisory and administrative services agreement, we have agreed to pay FB Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following six investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.

Originated/Proprietary Transactions: We intend to leverage our relationship with GDFM and their global sourcing and origination platform to identify proprietary investment opportunities. We define proprietary investments as any investment originated or structured specifically for us or made by us that was not generally available to the broader market. Proprietary investments may include both debt and equity components, although we do not expect to make equity investments independent of having an existing credit relationship. We believe proprietary transactions may offer attractive investment opportunities as they typically offer higher returns than broadly syndicated transactions.

Anchor Orders: In addition to proprietary transactions, we will invest in certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the average syndicate participant. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FB Advisor and GDFM. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment.

Event Driven: We intend to take advantage of dislocations that arise in the markets due to an impending event and where the market’s apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company’s financial position. Compared to other investment strategies, event driven investing depends

 

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more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.

Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment.

Collateralized Securities: Collateralized loan obligations, or CLOs, are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities. Our relationship with GSO Capital Partners LP, one of the largest CLO managers in the world, allows us to invest in these securities with confidence and to capitalize on opportunities in the secondary CLO market.

Broadly Syndicated/Other: Although our primary focus is to invest in proprietary transactions, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our proprietary investments and provide a complement to our more illiquid proprietary strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.

Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. 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, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities.

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

Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain on investments, net realized gain on total return swap, net unrealized appreciation and depreciation on investments, net unrealized appreciation and depreciation on total return swap and net unrealized gain and loss on foreign currency. Net investment income is the difference

 

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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 amortized cost. Net realized gain on total return swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation and depreciation on total return swap is the net change in the fair value of the TRS. Net unrealized gain and loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. In future quarters, we do not expect our revenues to include net realized gain on total return swap or net unrealized appreciation and depreciation on total return swap as a result of the termination of the TRS on August 29, 2012. We may, however, elect to utilize a total return swap in the future.

We principally generate revenues in the form of interest income on the debt investments we hold. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fees compensate 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 reimburse FB Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FB Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records which we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FB Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See “—Related Party Transactions” for additional information regarding the reimbursements payable to FB Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2012.

In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FB Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.

Expense Reimbursement

Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to ensure that, for tax purposes, our net investment income and net capital gains were equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement was designed to ensure that no portion of our distributions would represent a return of capital for our stockholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of our expenses.

 

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Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.

Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.

Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense reimbursement payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. “Other operating expenses” means our total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

 

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Franklin Square Holdings is controlled by our chairman and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters. As of September 30, 2013, there were no unreimbursed expense support payments subject to future reimbursement by us.

Portfolio Investment Activity for the Three and Nine Months Ended September 30, 2013 and for the Year Ended December 31, 2012

The following table presents certain selected information regarding our portfolio investment activity for the three and nine months ended September 30, 2013.

 

Total Portfolio Activity              
    Three Months Ended     Nine Months Ended  

Net Investment Activity

  September 30, 2013    

September 30, 2013

 

Purchases

  $ 875,476      $ 2,204,560   

Sales and Redemptions

    (668,647     (1,974,977
 

 

 

   

 

 

 

Net Portfolio Activity

  $ 206,829      $ 229,583   
 

 

 

   

 

 

 
    For the Three Months Ended
September 30, 2013
    For the Nine Months Ended
September 30, 2013
 

New Investment Activity by Asset Class

  Purchases     Percentage     Purchases     Percentage  

Senior Secured Loans—First Lien

  $ 483,807        55   $ 1,366,182        62

Senior Secured Loans—Second Lien

    203,295        23     352,967        16

Senior Secured Bonds

    77,201        9     159,158        7

Subordinated Debt

    59,982        7     268,915        12

Collateralized Securities

    30,620        4     30,620        2

Equity/Other

    20,571        2     26,718        1
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 875,476        100   $ 2,204,560        100
 

 

 

   

 

 

   

 

 

   

 

 

 
    September 30, 2013  

Total Portfolio Characteristics

  Fair Value     Percentage of
Portfolio
 

Senior Secured Loans—First Lien

  $ 2,149,069        51

Senior Secured Loans—Second Lien

    914,603        22

Senior Secured Bonds

    379,933        9

Subordinated Debt

    479,729        11

Collateralized Securities

    122,217        3

Equity/Other

    155,250        4
 

 

 

   

 

 

 

Total

  $ 4,200,801        100
 

 

 

   

 

 

 

Number of Portfolio Companies

  182

% Variable Rate (based on fair value)

  70.0%

% Fixed Rate (based on fair value)

  26.3%

% Income Producing Preferred Equity (based on fair value)

  2.2%

% Non-Income Producing Equity or Other Investments (based on fair value)

  1.5%

Average Annual EBITDA of Portfolio Companies

  $252,900

Weighted Average Credit Rating of Investments that were Rated

  B3

% of Investments on Non-Accrual

  —  

Gross Portfolio Yield Prior to Leverage (based on amortized cost)

  10.4%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets

  10.6%

 

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New Proprietary Activity              
    Three Months Ended
September 30, 2013
       

Total Commitments (including Unfunded Commitments)

  $ 614,862     

Exited Investments (including partial paydowns)

    (97,561  
 

 

 

   

Net Proprietary Activity

  $ 517,301     
 

 

 

   
    For the Three Months Ended
September 30, 2013
 

New Proprietary Commitments by Asset Class

  Commitment
Amount
            Percentage          

Senior Secured Loans—First Lien

  $ 412,189        67

Senior Secured Loans—Second Lien

    142,000        23

Senior Secured Bonds

    —          —     

Subordinated Debt

    37,500        6

Collateralized Securities

    —          —     

Equity/Other

    23,173        4
 

 

 

   

 

 

 

Total

  $ 614,862        100
 

 

 

   

 

 

 

Average New Proprietary Commitment Amount

    $55,897   

Weighted Average Maturity for Newly Funded Proprietary Commitments

    7/31/18   

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Newly Funded Investments during Period

    11.7%   

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Investments Exited during Period

    11.0%   

Total Proprietary Portfolio Characteristics

     

Number of Funded Proprietary Portfolio Companies

    36   

% of Funded Proprietary Investments on Non-Accrual

    —     

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary Investments

    10.5%   

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary Investments—Excluding Non-Income Producing Assets

    10.7%   

During the nine months ended September 30, 2013, we made investments in portfolio companies totaling $2,204,560. During the same period, we sold investments for proceeds of $900,636 and received principal repayments of $1,074,341. As of September 30, 2013, our investment portfolio, with a total fair value of $4,200,801, consisted of interests in 182 portfolio companies (51% in first lien senior secured loans, 22% in second lien senior secured loans, 9% in senior secured bonds, 11% in subordinated debt, 3% in collateralized securities and 4% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $252.9 million. As of September 30, 2013, the investments in our portfolio were purchased at a weighted average price of 97.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 43.8% of our portfolio based on the fair value of our investments) was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.4% based upon the amortized cost of our investments.

During the year ended December 31, 2012, we made investments in portfolio companies totaling $3,863,334. During the same period, we sold investments for proceeds of $926,136 and received principal repayments of $1,045,311. As of December 31, 2012, our investment portfolio, with a total fair value of $3,934,722, consisted of interests in 263 portfolio companies (50% in first lien senior secured loans, 19% in second lien senior secured loans, 12% in senior secured bonds, 13% in subordinated debt, 3% in collateralized

 

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securities and 3% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $302.0 million. As of December 31, 2012, the investments in our portfolio were purchased at a weighted average price of 95.4% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 59.4% of our portfolio based on the fair value of our investments) was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 10.4% based upon the amortized cost of our investments.

The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2013 and December 31, 2012:

 

    September 30, 2013
(Unaudited)
    December 31, 2012  
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 2,118,100      $ 2,149,069        51   $ 1,914,996      $ 1,945,159        50

Senior Secured Loans—Second Lien

    895,270        914,603        22     752,392        764,356        19

Senior Secured Bonds

    399,126        379,933        9     460,040        466,299        12

Subordinated Debt

    475,168        479,729        11     491,906        511,971        13

Collateralized Securities

    105,856        122,217        3     91,411        118,994        3

Equity/Other

    138,640        155,250        4     114,499        127,943        3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 4,132,160      $ 4,200,801        100   $ 3,825,244      $ 3,934,722        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2013, we had seven such investments with aggregate unfunded commitments of $72,743 and one equity investment with an unfunded commitment of $4,629. As of December 31, 2012, we had three such investments with aggregate unfunded commitments of $14,804. We maintain sufficient cash on hand to fund such unfunded commitments should the need arise.

 

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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, 2013 and December 31, 2012:

 

     September 30, 2013
(Unaudited)
    December 31, 2012  

Industry Classification

   Fair
Value
     Percentage  of
Portfolio
    Fair
Value
     Percentage  of
Portfolio
 

Automobiles & Components

   $ 53,447         1   $ 41,479         1

Capital Goods

     830,975         20     675,187         17

Commercial & Professional Services

     317,640         8     271,978         7

Consumer Durables & Apparel

     317,884         8     264,722         7

Consumer Services

     304,100         7     293,408         7

Diversified Financials

     157,854         4     220,622         6

Energy

     492,161         12     430,444         11

Food & Staples Retailing

     40,065         1     96,739         2

Food, Beverage & Tobacco

     10,362         0     9,713         0

Health Care Equipment & Services

     226,352         5     362,456         9

Household & Personal Products

     66,300         2     78,124         2

Insurance

     17,969         0     28,623         1

Materials

     211,295         5     199,089         5

Media

     222,163         5     154,599         4

Pharmaceuticals, Biotechnology & Life Sciences

     54,752         1     37,259         1

Retailing

     182,002         4     24,652         1

Semiconductors & Semiconductor Equipment

     —                  8,820         0

Software & Services

     370,010         9     339,641         9

Technology Hardware & Equipment

     132,489         3     94,128         2

Telecommunication Services

     158,740         4     152,458         4

Transportation

     11,170         0     29,104         1

Utilities

     23,071         1     121,477         3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,200,801         100   $ 3,934,722         100
  

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2013 and December 31, 2012, approximately 77% and 58%, respectively, of our portfolio based on fair value constituted non-broadly syndicated investments. We define non-broadly syndicated investments as any investment that is considered proprietary, an anchor order, an opportunistic or event driven investment, or a collateralized security. The table below enumerates the percentage, by fair value, of the types of investments in our portfolio as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013     December 31, 2012  

Deal Composition

   Fair Value      Percentage  of
Portfolio
    Fair Value      Percentage  of
Portfolio
 

Originated/Proprietary

   $ 2,163,752         52   $ 1,063,807         27

Anchor Order

     648,011         15     421,936         11

Event Driven

     43,505         1     167,819         4

Opportunistic

     270,789         6     491,593         13

Collateralized Securities

     122,217         3     118,994         3

Broadly Syndicated/Other

     952,527         23     1,670,573         42
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,200,801         100   $ 3,934,722         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Portfolio Asset Quality

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

 

Investment
Rating
  

Summary Description

1    Investment exceeding expectations and/or capital gain expected.
2    Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3    Performing investment requiring closer monitoring.
4    Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
5    Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013     December 31, 2012  

Investment Rating

   Fair Value      Percentage  of
Portfolio
    Fair Value      Percentage  of
Portfolio
 

1

   $ 300,405         7   $ 183,638         5

2

     3,551,113         85     3,424,857         87

3

     300,802         7     174,228         4

4

     45,326         1     148,364         4

5

     3,155         0     3,635         0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,200,801         100   $ 3,934,722         100
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Results of Operations

Comparison of the Three Months Ended September 30, 2013 and September 30, 2012

Revenues

We generated investment income of $123,307 and $84,015 for the three months ended September 30, 2013 and 2012, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $110,072 and $76,794 of cash income earned as well as $13,235 and $7,221 in non-cash portions relating to accretion of discount and PIK interest for the three months ended September 30, 2013 and 2012, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year and the transition of the portfolio to higher yielding non-broadly syndicated assets. The level of income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments.

 

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Expenses

Our total operating expenses were $55,535 and $49,259 for the three months ended September 30, 2013 and 2012, respectively. Our operating expenses include base management fees attributed to FB Advisor of $22,720 and $19,021 for the three months ended September 30, 2013 and 2012, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $1,243 and $1,782 for the three months ended September 30, 2013 and 2012, respectively.

FB Advisor is eligible to receive incentive fees based on performance. As of June 30, 2013, $17,167 in subordinated income incentive fees were payable by us to FB Advisor, all of which we paid to FB Advisor during the three months ended September 30, 2013. During the three months ended September 30, 2013, we accrued additional subordinated income incentive fees of $16,555 based upon the performance of our portfolio. We did not accrue any subordinated income incentive fees during the three months ended September 30, 2012. During the three months ended September 30, 2013, we reversed $1,548 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the three months ended September 30, 2012, we accrued capital gains incentive fees of $17,421 based on the performance of our portfolio.

We recorded interest expense of $13,098 and $7,744 for the three months ended September 30, 2013 and 2012, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $343 and $280 for the three months ended September 30, 2013 and 2012, respectively. We incurred fees and expenses with our stock transfer agent of $610 and $910 for the three months ended September 30, 2013 and 2012, respectively. Fees for our board of directors were $241 and $212 for the three months ended September 30, 2013 and 2012, respectively.

Our other general and administrative expenses totaled $2,273 and $1,889 for the three months ended September 30, 2013 and 2012, respectively, and consisted of the following:

 

     Three Months  Ended
September 30,
 
     2013      2012  

Expenses associated with our independent audit and related fees

   $ 151       $ 167   

Compensation of our chief compliance officer

     21         21   

Legal fees

     251         465   

Printing fees

     601         178   

Other

     1,249         1,058   
  

 

 

    

 

 

 

Total

   $ 2,273       $ 1,889   
  

 

 

    

 

 

 

During the three months ended September 30, 2013 and 2012, the ratio of our operating expenses to our average net assets was 2.15% and 2.04%, respectively. Our ratio of operating expenses to our average net assets during the three months ended September 30, 2013 and 2012 includes $13,098 and $7,744, respectively, related to interest expense and $15,007 and $17,421, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 1.06% and 1.00% for the three months ended September 30, 2013 and 2012, respectively. Incentive fees and interest expense, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The higher ratio of operating expenses to average net assets during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 can primarily be attributed to higher management fees as a percentage of average net assets as a result of the termination of the TRS and the replacement of such financing arrangement with a revolving credit facility.

 

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Net Investment Income

Our net investment income totaled $67,772 ($0.26 per share) and $34,756 ($0.14 per share) for the three months ended September 30, 2013 and 2012, respectively. The increase in net investment income on a per share basis can be attributed to, among other things, our ability to efficiently deploy capital following the closing of our public offering and the transition of our portfolio to higher yielding non-broadly syndicated assets.

Net Realized Gains or Losses

We sold investments and received principal repayments of $378,878 and $289,769, respectively, during the three months ended September 30, 2013, from which we realized a net gain of $6,602. We also realized a net gain of $70 from settlements on foreign currency during the three months ended September 30, 2013. We sold investments and received principal repayments of $178,042 and $232,008, respectively, during the three months ended September 30, 2012, from which we realized a net gain of $10,259. We also earned $9,729 from periodic net settlement payments on our TRS and realized a net gain of $521 from settlements on foreign currency during the three months ended September 30, 2012.

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

For the three months ended September 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(14,857) and the net change in unrealized gain (loss) on foreign currency totaled $30. For the three months ended September 30, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $69,216, the net change in unrealized appreciation (depreciation) on our TRS was $(2,453) and the net change in unrealized gain (loss) on foreign currency totaled $(261). The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2013 was primarily driven by mark-to-market declines in the value of certain of our senior secured bond positions. The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2012 was primarily a result of a general strengthening in the credit markets during the quarter.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended September 30, 2013, the net increase in net assets resulting from operations was $59,617 ($0.23 per share) compared to a net increase in net assets resulting from operations of $121,767 ($0.49 per share) during the three months ended September 30, 2012.

Comparison of the Nine Months Ended September 30, 2013 and September 30, 2012

Revenues

We generated investment income of $357,700 and $197,604 for the nine months ended September 30, 2013 and 2012, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $317,587 and $182,498 of cash income earned as well as $40,113 and $15,106 in non-cash portions relating to accretion of discount and PIK interest for the nine months ended September 30, 2013 and 2012, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year and the transition of the portfolio to higher yielding non-broadly syndicated assets. The level of income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments.

 

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Expenses

Our total operating expenses were $165,144 and $111,433 for the nine months ended September 30, 2013 and 2012, respectively. Our operating expenses include base management fees attributed to FB Advisor of $67,541 and $46,570 for the nine months ended September 30, 2013 and 2012, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $4,034 and $4,116 for the nine months ended September 30, 2013 and 2012, respectively.

FB Advisor is eligible to receive incentive fees based on performance. During the nine months ended September 30, 2013, we accrued subordinated income incentive fees of $47,950 based upon the performance of our portfolio and paid to FB Advisor $44,788 of subordinated income incentive fees during the period. We did not accrue any subordinated income incentive fees during the nine months ended September 30, 2012. During the nine months ended September 30, 2013, we reversed $621 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the nine months ended September 30, 2012, we accrued capital gains incentive fees of $33,920 based on the performance of our portfolio, of which $27,421 was based on unrealized gains and $6,499 was based on realized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

We recorded interest expense of $37,110 and $18,271 for the nine months ended September 30, 2013 and 2012, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $1,063 and $1,126 for the nine months ended September 30, 2013 and 2012, respectively. We incurred fees and expenses with our stock transfer agent of $2,400 and $2,731 for the nine months ended September 30, 2013 and 2012, respectively. Fees for our board of directors were $689 and $633 for the nine months ended September 30, 2013 and 2012, respectively.

Our other general and administrative expenses totaled $4,978 and $4,066 for the nine months ended September 30, 2013 and 2012, respectively, and consisted of the following:

 

     Nine Months  Ended
September 30,
 
     2013      2012  

Expenses associated with our independent audit and related fees

   $ 523       $ 503   

Compensation of our chief compliance officer

     62         74   

Legal fees

     676         825   

Printing fees

     1,199         530   

Other

     2,518         2,134   
  

 

 

    

 

 

 

Total

   $ 4,978       $ 4,066   
  

 

 

    

 

 

 

During the nine months ended September 30, 2013 and 2012, the ratio of our operating expenses to our average net assets was 6.43% and 5.27%, respectively. Our ratio of operating expenses to our average net assets during the nine months ended September 30, 2013 and 2012 includes $37,110 and $18,271, respectively, related to interest expense and $47,329 and $33,920, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 3.13% and 2.81% for the nine months ended September 30, 2013 and 2012, respectively. Incentive fees and interest expense, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The higher ratio of operating expenses to average net assets during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 can primarily be attributed to higher management fees as a percentage of average net assets as a result of the termination of the TRS and the replacement of such financing arrangement with a revolving credit facility.

 

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Net Investment Income

Our net investment income totaled $192,556 ($0.76 per share) and $86,171 ($0.39 per share) for the nine months ended September 30, 2013 and 2012, respectively. The increase in net investment income on a per share basis can be attributed to, among other things, our ability to efficiently deploy capital following the closing of our public offering and the transition of our portfolio to higher yielding non-broadly syndicated assets.

Net Realized Gains or Losses

We sold investments and received principal repayments of $900,636 and $1,074,341, respectively, during the nine months ended September 30, 2013, from which we realized a net gain of $37,220. We also realized a net loss of $32 from settlements on foreign currency during the nine months ended September 30, 2013. We sold investments and received principal repayments of $435,998 and $501,140, respectively, during the nine months ended September 30, 2012, from which we realized a net gain of $14,853. We also earned $19,596 from periodic net settlement payments on our TRS and realized a net gain of $534 from settlements on foreign currency during the nine months ended September 30, 2012.

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

For the nine months ended September 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(40,837) and the net change in unrealized gain (loss) on foreign currency totaled $125. For the nine months ended September 30, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $126,095, the net change in unrealized appreciation (depreciation) on our TRS was $1,996 and the net change in unrealized gain (loss) on foreign currency was $0. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2013 was primarily driven by a general widening of credit spreads during the second quarter of 2013 and mark-to-market declines in the value of certain of our senior secured bond positions during the three months ended September 30, 2013. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2012 was primarily driven by a general strengthening of the credit markets during 2012.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the nine months ended September 30, 2013, the net increase in net assets resulting from operations was $189,032 ($0.75 per share) compared to a net increase in net assets resulting from operations of $249,245 ($1.13 per share) during the nine months ended September 30, 2012.

Financial Condition, Liquidity and Capital Resources

Overview

As of September 30, 2013, we had $290,439 in cash, which we held in a custodial account, and $97,496 in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of September 30, 2013:

 

Facility

  Type of Facility  

Rate

  Amount
Outstanding
    Amount
Available
    Maturity Date

Arch Street Credit Facility

  Revolving   L + 1.75%   $ 497,682      $ 52,318      August 29, 2015

Broad Street Credit Facility

  Revolving   L + 1.50%   $ 240,000      $ —        December 22, 2013

JPM Facility

  Repurchase   3.25%   $ 906,083      $ 43,917      April 15, 2017

Walnut Street Credit Facility

  Revolving   L + 1.50% to 2.75%   $ 248,739      $ 1,261      May 17, 2017

During the nine months ended September 30, 2013, we issued 7,984,869 shares of our common stock for gross proceeds of $80,950 at an average price per share of $10.14 pursuant to our distribution reinvestment plan.

 

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During the nine months ended September 30, 2012, we sold 90,718,973 shares of our common stock for gross proceeds of $958,849 at an average price per share of $10.57. The gross proceeds received during the nine months ended September 30, 2012 include reinvested stockholder distributions of $72,417, for which we issued 7,479,245 shares of common stock. During the nine months ended September 30, 2012, we also incurred offering costs of $3,234 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $83,084 for the nine months ended September 30, 2012. These sales commissions and fees include $15,842 retained by the dealer manager, FS2, which is one of our affiliates.

As of October 29, 2013, we have sold 263,357,017 shares (as adjusted for stock distributions) of our common stock for gross proceeds of $2,763,697, including approximately $1,000 contributed by the principals of FB Advisors in February 2008.

We generate cash primarily from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. In May 2012, we closed our continuous public offering of shares of our common stock and, following the closing, sell shares only pursuant to our distribution reinvestment plan.

Prior to investing in securities of portfolio companies, we invest the net proceeds from the sale of shares of our common stock under our distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The following table provides information concerning our repurchases pursuant to our share repurchase program during the nine months ended September 30, 2013 and 2012:

 

For the Three Months Ended

   Repurchase Date    Shares
Repurchased
     Percentage
of
Shares
Tendered
That Were
Repurchased
    Repurchase
Price Per
Share
     Aggregate
Consideration
for
Repurchased
Shares
 

Fiscal 2012

        

December 31, 2011

   January 3, 2012      385,526         100   $ 9.585       $ 3,695   

March 31, 2012

   April 2, 2012      411,815         100   $ 9.675       $ 3,984   

June 30, 2012

   July 2, 2012      410,578         100   $ 9.720       $ 3,991   

Fiscal 2013

             

December 31, 2012

   January 2, 2013      883,047         100   $ 10.000       $ 8,830   

March 31, 2013

   April 1, 2013      1,053,119         100   $ 10.100       $ 10,637   

June 30, 2013

   July 1, 2013      749,224         100   $ 10.200       $ 7,642   

On October 1, 2013, we repurchased 656,541 shares (representing 100% of shares of common stock tendered for repurchase) at $10.20 per share for aggregate consideration totaling $6,697.

Arch Street Credit Facility

On August 29, 2012, Arch Street terminated its TRS with Citibank and entered into the Arch Street credit facility with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Arch Street credit facility provides for borrowings in an aggregate principal amount up to $550,000 on a committed basis. We may contribute cash or debt securities to Arch Street from time to time,

 

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subject to certain restrictions set forth in the Arch Street credit facility, and will retain a residual interest in any assets contributed through our ownership of Arch Street or will receive fair market value for any debt securities sold to Arch Street. Arch Street may purchase additional debt securities from various sources. Arch Street’s obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of Arch Street, including its portfolio of debt securities. The obligations of Arch Street under the facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Arch Street.

Borrowings under the Arch Street credit facility accrue interest at a rate equal to three-month LIBOR plus 1.75% per annum during the first two years of the facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of Arch Street’s portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Arch Street’s portfolio. Beginning November 27, 2012, Arch Street became required to pay a non-usage fee to the extent the aggregate principal amount available under the Arch Street credit facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2015.

As of September 30, 2013 and December 31, 2012, $497,682 was outstanding under the Arch Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $4,446 in connection with obtaining the Arch Street credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of September 30, 2013, $2,832 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the Arch Street credit facility was 2.03% per annum as of September 30, 2013. Interest is payable quarterly in arrears and commenced August 29, 2012. We recorded interest expense of $2,989 and $1,057, for the three months ended September 30, 2013 and 2012, respectively, of which $373 and $130, respectively, related to the amortization of deferred financing costs and $66 and $0, respectively, related to commitment fees on the unused portion of the facility. We recorded interest expense of $9,049 and $1,057 for the nine months ended September 30, 2013 and 2012, respectively, of which $1,107 and $130, respectively, related to the amortization of deferred financing costs and $198 and $0, respectively, related to commitment fees on the unused portion of the facility. We paid $9,487 and $0 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the Arch Street credit facility for the nine months ended September 30, 2013 was $497,682 with a weighted average interest rate (including the effect of non-usage fees) of 2.10% . The average borrowings under the Arch Street credit facility for the period August 29, 2012 to September 30, 2012 was $447,682, with a weighted average interest rate (including the effect of non-usage fees) of 2.33%.

Broad Street Credit Facility

On January 28, 2011, Broad Street, Deutsche Bank and the other lenders party thereto entered into the Broad Street credit facility, which amended and restated the revolving credit facility that Broad Street originally entered into with Deutsche Bank on March 10, 2010 and the amendments thereto. On March 23, 2012, Broad Street entered into an amendment to the Broad Street credit facility which extended the maturity date of the facility to March 23, 2013, increased the aggregate amount which could be borrowed under the facility to $380,000 and reduced the interest rate for all borrowings under the facility to a rate of LIBOR + 1.50% per annum. On December 13, 2012, Broad Street repaid $140,000 of borrowings under the facility, thereby reducing the amount which could be borrowed under the facility to $240,000. On March 22, 2013, Broad Street and Deutsche Bank entered into an amendment to the facility to extend the maturity date of the facility to December 22, 2013. The Broad Street credit facility provides for borrowings of up to $240,000 at a rate of LIBOR plus 1.50% per annum. Deutsche Bank is a lender and serves as administrative agent under the facility.

 

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Under the Broad Street credit facility, we transfer debt securities to Broad Street from time to time as a contribution to capital and retain a residual interest in the contributed debt securities through our ownership of Broad Street. The obligations of Broad Street under the facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Broad Street.

As of September 30, 2013 and December 31, 2012, $240,000 was outstanding under the Broad Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $2,566 in connection with obtaining and amending the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of September 30, 2013, all of such deferred financing costs have been amortized to interest expense.

The effective interest rate under the Broad Street credit facility was 1.76% per annum as of September 30, 2013. Interest is paid quarterly in arrears and commenced August 20, 2010. We recorded interest expense of $1,078 and $2,115 for the three months ended September 30, 2013 and 2012, respectively, of which $0 and $272, respectively, related to the amortization of deferred financing costs. We recorded interest expense of $3,445 and $6,545 for the nine months ended September 30, 2013 and 2012, respectively, of which $225 and $703, respectively, related to the amortization of deferred financing costs and $0 and $18, respectively, related to commitment fees on the unused portion of the credit facility. We paid $3,246 and $6,104 in interest expense for the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the credit facility for the nine months ended September 30, 2013 and 2012 were $240,000 and $364,833, respectively, with a weighted average interest rate of 1.77% and 2.15%, respectively.

JPM Financing

On April 23, 2013, through our two wholly-owned, special purpose financing subsidiaries, Locust Street and Race Street, we entered into the April 2013 amendment to our conventional debt financing arrangement with JPM, which was originally entered into on July 21, 2011. The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $700,000 to $950,000; and (ii) extended the final repurchase date under the financing arrangement from October 15, 2016 to April 15, 2017. We elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Locust Street when the financing arrangement is fully-ramped is approximately $1,791,500. The assets held by Locust Street secure the obligations of Locust Street under the Class A Notes to be issued from time to time by Locust Street to Race Street pursuant to the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Locust Street from time to time is $1,140,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of April 15, 2024. Race Street will purchase the Class A Notes to be issued by Locust Street from time to time at a purchase price equal to their par value.

Race Street, in turn, has entered into the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Race Street for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility is $1,140,000. Accordingly, the maximum amount payable at any time to Race Street under the JPM Facility is $950,000. Under the JPM Facility, Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than April 15, 2017. The repurchase price paid by Race Street to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing April 15, 2015, Race Street is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other

 

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reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.

Pursuant to the financing arrangement, the aggregate market value of assets expected to be held by Race Street when the financing arrangement is fully-ramped is $720,000. The assets held by Race Street secure the obligations of Race Street under the JPM Facility.

As of September 30, 2013 and December 31, 2012, Class A Notes in the aggregate principal amount of $1,087,300 and $812,000, respectively, had been purchased by Race Street from Locust Street and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $906,083 and $676,667, respectively. The carrying amount outstanding under the JPM Facility approximates its fair value. We funded each purchase of Class A Notes by Race Street through a capital contribution to Race Street. As of September 30, 2013 and December 31, 2012, Race Street’s liability under the JPM Facility was $906,083 and $676,667, respectively, plus $5,930 and $4,298, respectively, of accrued interest expense. The Class A Notes issued by Locust Street and purchased by Race Street eliminate in consolidation on our financial statements.

As of September 30, 2013 and December 31, 2012, the fair value of assets held by Locust Street was $1,693,241 and $1,307,933, respectively, which included assets purchased by Locust Street with proceeds from the issuance of Class A Notes. As of September 30, 2013 and December 31, 2012, the fair value of assets held by Race Street was $808,230 and $598,528, respectively.

We had incurred costs of $425 in connection with obtaining the JPM Facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the JPM Facility. As of September 30, 2013, $200 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the JPM Facility was 3.25% as of September 30, 2013. We recorded interest expense of $6,983 and $3,795 for the three months ended September 30, 2013 and 2012, respectively, of which $27 and $27, respectively, related to the amortization of deferred financing costs. We recorded interest expense of $18,696 and $9,802 for the nine months ended September 30, 2013 and 2012, respectively, of which $79 and $80, respectively, related to the amortization of deferred financing costs. We paid $16,985 and $7,789 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the JPM Facility for the nine months ended September 30, 2013 and 2012 were $755,374 and $341,114, respectively, with a weighted average interest rate of 3.25% and 3.74%, respectively.

Walnut Street Credit Facility

On May 17, 2012, Walnut Street and Wells Fargo entered into the Walnut Street credit facility. Wells Fargo Securities, LLC serves as the administrative agent and Wells Fargo Bank, National Association is the sole lender, collateral agent, account bank and collateral custodian under the facility. The Walnut Street credit facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

Under the Walnut Street credit facility, we contribute cash or debt securities to Walnut Street from time to time and retain a residual interest in any assets contributed through our ownership of Walnut Street or receive fair market value for any debt securities sold to Walnut Street. The obligations of Walnut Street under the Walnut Street credit facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Walnut Street.

Pricing under the Walnut Street credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible debt securities owned by Walnut Street, plus a spread ranging between 1.50% and 2.75% per annum, depending on the composition of the portfolio of debt securities for the relevant period. Beginning on September 17, 2012, Walnut Street became subject to a non-usage fee to

 

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the extent the aggregate principal amount available under the Walnut Street credit facility is not borrowed. Any amounts borrowed under the Walnut Street credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.

As of September 30, 2013 and December 31, 2012, $248,739 and $235,364, respectively, was outstanding under the Walnut Street credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. We incurred costs of $3,761 in connection with obtaining the Walnut Street credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the facility. As of September 30, 2013, $2,725 of such deferred financing costs had yet to be amortized to interest expense.

The effective interest rate on the borrowings under the Walnut Street credit facility was 2.87% per annum as of September 30, 2013. Interest is payable quarterly in arrears and commenced October 15, 2012. We recorded interest expense of $2,048 and $777 for the three months ended September 30, 2013 and 2012, respectively, of which $190 and $191, respectively, related to the amortization of deferred financing costs and $2 and $72, respectively, related to commitment fees on the unused portion of the credit facility. We recorded interest expense of $5,920 and $867 for the nine months ended September 30, 2013 and 2012, respectively, of which $567 and $279, respectively, related to the amortization of deferred financing costs and $20 and $72, respectively, related to commitment fees on the unused portion of the credit facility. We paid $5,111 and $0 in interest expense during the nine months ended September 30, 2013 and 2012, respectively. The average borrowings under the Walnut Street credit facility for the nine months ended September 30, 2013 and 2012 were $244,741 and $73,210, respectively, with a weighted average interest rate (including the effect of non-usage fees) of 2.89% and 3.05%, respectively.

RIC Status and Distributions

We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our “investment company taxable income,” as defined by the Code, each year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and 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 on which we paid no federal income taxes.

Following commencement of our operations, we declared our first distribution on January 29, 2009. Subject to our board of directors’ discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. While we historically paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, we began to pay distributions on a monthly rather than quarterly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. 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. A return of capital generally is a return of an investor’s investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the nine months ended September 30, 2013 or 2012 represented a return of capital for tax purposes.

 

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We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless stockholders elect to receive their cash 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.

The following table reflects the cash distributions per share that we have declared and paid on our common stock during the nine months ended September 30, 2013 and 2012:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2012

     

March 31, 2012

   $ 0.2016       $ 37,014   

June 30, 2012

   $ 0.2020       $ 47,305   

September 30, 2012

   $ 0.2525       $ 62,758   

Fiscal 2013

     

March 31, 2013

   $ 0.2025       $ 51,184   

June 30, 2013

   $ 0.2048       $ 52,111   

September 30, 2013

   $ 0.2093       $ 53,626   

On October 16, 2013, our board of directors declared a regular monthly cash distribution of $0.06975 per share, which was paid on October 31, 2013 to stockholders of record on October 30, 2013. Also, on October 16, 2013, our board of directors increased the amount of the regular monthly cash distribution payable to stockholders of record from $0.06975 per share to $0.0720 per share in order to increase our annual distribution rate from 7.75% to 8.00% (based on our last public offering price of $10.80 per share), commencing with the regular monthly cash distribution, which will be paid on November 29, 2013 to stockholders of record on November 28, 2013. 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 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, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.

The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30,  
     2013     2012  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     124,747         79     128,781         88

Capital gains proceeds from the sale of assets

     32,174         21     18,296         12

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 156,921         100   $ 147,077         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the nine months ended September 30, 2013 and 2012, 89% and 92%, respectively, of our gross investment income was attributable to cash interest earned and 11% and 8%, respectively, was attributable to non-cash accretion of discount and PIK interest.

 

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Our net investment income on a tax basis for the nine months ended September 30, 2013 and 2012 was $191,169 and $129,901, respectively. As of September 30, 2013 and December 31, 2012, we had $124,162 and $57,740, respectively, of undistributed net investment income on a tax basis. Our undistributed net investment income on a tax basis as of December 31, 2012 has been adjusted following the filing of our 2012 tax return in September 2013. The adjustment was primarily due to tax-basis income received by us during the year ended December 31, 2012 exceeding GAAP-basis income with respect to collateralized securities and interests in partnerships held in our investment portfolio during such period. The tax notices for such collateralized securities and interests in partnerships were received by us subsequent to the filing of our annual report on Form 10-K for the year ended December 31, 2012.

See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including information regarding stock distributions declared on our common stock and a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the nine months ended September 30, 2013 and 2012.

Critical Accounting Policies

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

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

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

 

   

our quarterly valuation process begins with FB Advisor’s management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from our sub-adviser or an independent valuation firm, if applicable;

 

   

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

 

   

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

 

   

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

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

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

For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

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

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

When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, our board of directors allocates the cost basis in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at fair value.

 

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The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Our investments as of September 30, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Twenty-eight senior secured loan investments and six subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Two senior secured loan investments, one senior secured bond investment, one subordinated debt investment and one equity investment, all of which were newly-issued and purchased near September 30, 2013, were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Also, one equity investment which is traded on an active public market was valued at its closing price as of September 30, 2013.

Our investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Twenty-one senior secured loan investments, one senior secured bond investment and seven subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan investment, which was newly-issued and purchased near December 31, 2012, was valued at cost, as our board of directors determined that the cost of such investment was the best indication of its fair value.

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

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to

 

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collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as fee income. Upfront structuring fees are recorded as income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

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

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

Capital Gains Incentive Fee

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

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, we changed our methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 2.0%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor will receive 20.0% of pre-incentive fee net investment income.

In connection with our 2013 annual meeting of stockholders, we received stockholder approval to amend the investment advisory and administrative services agreement effective upon the listing of our common stock on a

 

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national securities exchange. Upon such event, if any, the hurdle rate used to compute the subordinated incentive fee on income will be based on the net asset value of our assets rather than adjusted capital. In addition to the amendments approved by stockholders, the subordinated incentive fee on income will become subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. In other words, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate and there will be no delay of payment if prior quarters are below the quarterly hurdle rate.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the nine months ended September 30, 2013 and 2012, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FB Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FB Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. For the three months ended September 30, 2013 and 2012, we incurred $22,720 and $19,021, respectively, in base management fees and $1,243 and $1,782, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the nine months ended September 30, 2013 and 2012, we incurred $67,541 and $46,570, respectively, in base management fees and $4,034 and $4,116, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FB Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three months ended September 30, 2013, we accrued a subordinated incentive fee on income of $16,555 based upon the performance of our portfolio. During the nine months ended September 30, 2013, we accrued a subordinated incentive fee on income of $47,950 based upon the performance of our portfolio. During the nine months ended September 30, 2013, we paid FB Advisor $44,788 in subordinated incentive fees on income. As of September 30, 2013, a subordinated incentive fee on income of $16,555 was payable to FB Advisor. During the three months ended September 30, 2013, we reversed $1,548 of capital gains incentive fees previously accrued, and during the three months ended September 30, 2012, we accrued capital gains incentive fees of $17,421, in each case based on the performance of our portfolio. During the nine months ended September 30, 2013, we reversed $621 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the nine months ended September 30, 2012, we accrued capital gains incentive fees of $33,920 based on

 

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the performance of its portfolio, of which $27,421 was based on unrealized gains and $6,499 was based on realized gains. As of December 31, 2012, we had accrued capital gains incentive fees of $39,751 based on the performance of our portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. We paid FB Advisor $11,791 in capital gains incentive fees during the nine months ended September 30, 2013. As of September 30, 2013, we had accrued $27,339 in capital gains incentive fees, of which only $734 was based on realized gains and was payable to FB Advisor.

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the Arch Street credit facility, the Broad Street credit facility, the JPM Facility and the Walnut Street credit facility at September 30, 2013 is as follows:

 

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

Borrowings of Arch Street(1)

   $ 497,682         —         $ 497,682         —           —     

Borrowings of Broad Street(2)

   $ 240,000       $ 240,000         —           —           —     

Borrowings of Race Street(3)

   $ 906,083       $ 906,083         —           —           —     

Borrowings of Walnut Street(4)

   $ 248,739         —           —         $ 248,739         —     

 

(1) At September 30, 2013, $52,318 remained unused under the Arch Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 29, 2015.

 

(2) At September 30, 2013, no amounts remained unused under the Broad Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on December 22, 2013.

 

(3) At September 30, 2013, $43,917 remained unused under the JPM Facility. Race Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. As of September 30, 2013, the final repurchase transaction was scheduled to occur no later than April 15, 2017.

 

(4) At September 30, 2013, $1,261 remained unused under the Walnut Street credit facility. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 17, 2017.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

None.

Related Party Transactions

Compensation of the Dealer Manager and Investment Adviser

Pursuant to the investment advisory and administrative services agreement, FB Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on January 2, 2009, upon commencement of our operations. Management fees are paid on a quarterly basis in arrears.

The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on

 

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adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue the incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, equals 20.0% of the net proceeds in excess of adjusted capital from our liquidation, as calculated immediately prior to liquidation. See Note 4 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a discussion of certain amendments to the investment advisory and administrative services agreement which will become effective upon the listing of our common stock on a national exchange, if any.

We reimburse FB Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FB Advisor’s actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor is required to allocate the cost of such services to us based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to FB Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

Franklin Square Holdings has funded certain of our offering costs and organization costs. Under the terms of the investment advisory and administrative services agreement, when our registration statement was declared effective by the SEC and we were successful in satisfying the minimum offering requirement, FB Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FB Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On January 2, 2009, the Company satisfied the minimum offering requirement. We did not pay any reimbursements under this arrangement during the nine months ended September 30, 2013 or 2012.

The dealer manager for our continuous public offering was FS2, which is one of our affiliates. Under our dealer manager agreement with FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.

 

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The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and nine months ended September 30, 2013 and 2012:

 

            Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Related Party

 

Source Agreement

  Description       2013             2012             2013             2012      

FB Advisor

  Investment Advisory and Administrative Services Agreement   Base Management
Fee
(1)
  $ 22,720      $ 19,021      $ 67,541      $ 46,570   

FB Advisor

  Investment Advisory and Administrative Services Agreement   Capital Gains  Incentive
Fee
(2)
  $ (1,548   $ 17,421      $ (621   $ 33,920   

FB Advisor

  Investment Advisory and Administrative Services Agreement   Subordinated Incentive
Fee on Income
(3)
  $ 16,555      $ —        $ 47,950      $ —     

FB Advisor

  Investment Advisory and Administrative Services Agreement   Administrative
Services Expenses
(4)
  $ 1,243      $ 1,782      $ 4,034      $ 4,116   

FS2

  Dealer Manager Agreement   Dealer Manager Fee(5)   $ —        $ —        $ —        $ 15,842   

 

(1) During the nine months ended September 30, 2013 and 2012, $66,240 and $37,028, respectively, in base management fees were paid to FB Advisor.

 

(2) During the nine months ended September 30, 2013, we reversed $621 of capital gains incentive fees previously accrued based on performance of our portfolio. As of September 30, 2013, we had accrued capital gains incentive fees of $27,339 based on the performance of our portfolio, of which $26,605 was based on unrealized gains and $734 was based on realized gains. During the nine months ended September 30, 2012, we accrued capital gains incentive fees of $33,920 based on the performance of our portfolio, of which $27,421 was based on unrealized gains and $6,499 was based on realized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, we had accrued capital gains incentive fees of $39,751 based on the performance of our portfolio, of which $27,960 was based on unrealized gains and $11,791 was based on realized gains. We paid FB Advisor $11,791 in capital gains incentive fees during the nine months ended September 30, 2013.

 

(3) During the nine months ended September 30, 2013, we paid $44,788 of subordinated incentive fees on income to FB Advisor. As of September 30, 2013, a subordinated incentive fee on income of $16,555 was payable to FB Advisor.

 

(4) During the nine months ended September 30, 2013 and 2012, $3,520 and $3,789, respectively, of the administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FB Advisor and the remainder related to other reimbursable expenses. We paid $3,620 and $2,661, respectively, in administrative services expenses to FB Advisor during the nine months ended September 30, 2013 and 2012.

 

(5)

Represents aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker dealers.

Potential Conflicts of Interest

FB Advisor’s senior management team is comprised of the same personnel as the senior management teams of FS Investment Advisor, LLC and FSIC II Advisor, LLC, the investment advisers to Franklin Square Holdings’ other affiliated BDCs, FS Energy and Power Fund and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services to us and each of FS Energy and Power Fund and FS Investment Corporation II. While none of FB Advisor, FS Investment Advisor, LLC or FSIC II Advisor, LLC is currently making private corporate debt investments for clients other than us, FS Energy and Power Fund and FS Investment Corporation II, respectively, any, or all, may do so in the future. In the event that FB Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FB Advisor or its management team.

 

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Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FB Advisor, including FS Investment Corporation II and FS Energy and Power Fund and any future BDCs that are advised by FB Advisor or its affiliated investment advisers. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Beginning on February 26, 2009, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to ensure that, for tax purposes, our net investment income and net capital gains were equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement was designed to ensure that no portion of our distributions would represent a return of capital for our stockholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of our expenses.

Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from our offering proceeds or borrowings. See “—Overview—Expense Reimbursement” for a detailed description of the expense reimbursement agreement.

During the nine months ended September 30, 2013 and 2012, no such reimbursements were required from Franklin Square Holdings.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of September 30, 2013, 70.0% of our portfolio investments (based on fair value) paid variable interest rates, 26.3% paid fixed interest rates, 2.2% were income producing preferred equity investments, and the remainder (1.5%) consisted of non-income producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed our incentive fee hurdle rate, as described in the investment advisory and administrative services agreement we have entered into with FB Advisor, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FB Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the Arch Street credit facility, the Broad Street credit facility and the Walnut Street credit facility, Arch Street, Broad Street and Walnut Street, respectively, borrow at a floating rate based on LIBOR. Under the terms of the JPM Facility, Race Street pays interest to JPM at a fixed rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

 

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The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of September 30, 2013 (dollar amounts are presented in thousands):

 

LIBOR Basis Point Change

   Increase
(Decrease)
in Interest
Income(1)
    Increase
(Decrease)
in Interest
Expense
    Increase
(Decrease)  in
Net Interest
Income
    Percentage
Change in  Net
Interest Income
 

Down 25 basis points

   $ (847   $ (2,088   $ 1,241        0.3%   

Current LIBOR

     —          —          —          —     

Up 100 basis points

     3,873        8,354        (4,481     (1.2)%   

Up 300 basis points

     56,330        25,061        31,269        8.2%   

Up 500 basis points

     110,822        41,769        69,053        18.0%   

 

(1) Assumes no defaults or prepayments by portfolio companies over the next twelve months.

We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the nine months ended September 30, 2013 and 2012, we did not engage in interest rate hedging activities.

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

 

Item 4. Controls and Procedures.

As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.

 

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2012.

 

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

The table below provides information concerning our repurchases of shares of our common stock during the quarter ended September 30, 2013 pursuant to our share repurchase program.

 

Period

   Total Number of
Shares  Purchased
     Average
Price Paid
per Share
     Total Number of
Shares  Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
 

July 1 to July 31, 2013

     749,224       $ 10.20         749,224         (1)   

August 1 to August 31, 2013

     —           —           —             

September 1 to September 30, 2013

     —           —           —             
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     749,224       $ 10.20         749,224         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) A description of the maximum number of shares that may be purchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.

See Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more detailed discussion of the terms of our share repurchase program.

 

Item 3. Defaults upon Senior Securities.

Not applicable.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

Not applicable.

 

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Item 6. Exhibits.

 

  3.1    Articles of Amendment and Restatement of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 31, 2009.)
  3.2    Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (b)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
  4.1    Amended and Restated Distribution Reinvestment Plan, effective as of October 31, 2012. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 12, 2012.)
10.1    Investment Advisory and Administrative Services Agreement, dated as of February 12, 2008, by and between the Company and FB Income Advisor, LLC. (Incorporated by reference to Exhibit (g) filed with the Company’s registration statement on Form N-2 (File No. 333-149374) filed on February 25, 2008.)
10.2    First Amendment to the Investment Advisory and Administrative Services Agreement, dated as of August 5, 2008, by and between the Company and FB Income Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
10.3    Investment Sub-advisory Agreement, dated as of April 13, 2008, by and between FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on June 19, 2008.)
10.4    Form of Dealer Manager Agreement by and between the Company and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
10.5    Form of Amendment to Form of Dealer Manager Agreement by and between the Company and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784) filed on October 20, 2011.)
10.6    Form of Selected Dealer Agreement (Included as Appendix A to the Form of Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
10.7    Form of Amendment to Form of Selected Dealer Agreement. (Incorporated by reference to Exhibit A of Exhibit (h)(2) filed with Pre-Effective Amendment No. 2 to the Company’s registration statement on Form N-2 (File No. 333-174784) filed on October 20, 2011.)
10.8    Custodian Agreement, dated as of November 14, 2011, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.9 filed with the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 filed on November 14, 2011.)
10.9    Form of Escrow Agreement by and between the Company and UMB Bank, N.A. (Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-149374) filed on September 17, 2008.)
10.10    Amended and Restated Credit Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 1, 2011.)

 

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10.11    Fourth Amendment to Credit Agreement, dated as of March 23, 2012, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 27, 2012.)
10.12    Fifth Amendment to Credit Agreement, dated as of March 22, 2013, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 28, 2013.)
10.13    Asset Contribution Agreement, dated as of March 10, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 16, 2010.)
10.14    First Amendment to Asset Contribution Agreement, dated as of June 17, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 19, 2010.)
10.15    Investment Management Agreement, dated as of March 10, 2010, by and between the Company and Broad Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 16, 2010.)
10.16    Amended and Restated Security Agreement, dated as of January 28, 2011, by and between Broad Street Funding LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 1, 2011.)
10.17    ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of March 18, 2011, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 24, 2011.)
10.18    Amended and Restated Confirmation Letter Agreement, dated as of June 9, 2011, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 13, 2011.)
10.19    Amended and Restated Confirmation Letter Agreement, dated as of February 16, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.20    Amended and Restated Confirmation Letter Agreement, dated as of June 12, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 15, 2012.)
10.21    Termination Acknowledgement (TRS), dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.22    Investment Management Agreement, dated as of March 18, 2011, by and between the Company and Arch Street Funding LLC. (Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 24, 2011.)
10.23    Amended and Restated Investment Management Agreement, dated as of August 29, 2012, by and between the Company and Arch Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.24    Asset Transfer Agreement, dated as of July 21, 2011, by and between the Company and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)

 

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10.25    Amendment No. 1 to Asset Transfer Agreement, dated as of February 15, 2012, by and between the Company and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.26    Amended and Restated Asset Transfer Agreement, dated as of September 26, 2012, by and between the Company and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.27    Loan Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.28    Account Control Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.29    Security Agreement, dated as of August 29, 2012, by and between Arch Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.30    Agreement and Plan of Merger, dated as of August 29, 2012, by and among Arch Street Funding LLC, Benjamin Loan Funding LLC, Benjamin 2 Loan Funding LLC, Citibank, N.A. and Citibank Financial Products Inc. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 31, 2012.)
10.31    Indenture, dated as of July 21, 2011, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.32    Supplemental Indenture No. 1, dated as of February 15, 2012, by and between Locust Street Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.33    Amended and Restated Indenture, dated as of September 26, 2012, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.34    Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Locust Street Funding LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.35    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2021. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.36    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.37    Locust Street Funding LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.38    TBMA/ISMA 2000 Global Master Repurchase Agreement by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Confirmation thereto, each dated as of July 21, 2011. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.39    TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of September 26, 2012. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)

 

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10.40    TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.41    Amended and Restated Confirmation, dated as of February 15, 2012, by and between Race Street Funding LLC and JPMorgan Chase Bank, N.A., London Branch. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 21, 2012.)
10.42    Revolving Credit Agreement, dated as of July 21, 2011, by and between the Company and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.43    Amendment to Credit Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.44    Asset Transfer Amendment, dated as of September 26, 2012, by and between the Company and Race Street Funding LLC. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.45    Amendment Agreement, dated as of October 24, 2013, by and between JPMorgan Chase Bank, N.A., London Branch and Race Street Funding LLC. (Incorporated by references to Exhibit 10.1 to the Company’s Current Report in Form 8-K filed on October 28, 2013.)
10.46    Collateral Management Agreement, dated as of July 21, 2011, by and between the Company and Locust Street Funding LLC. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.47    Amended and Restated Collateral Management Agreement, dated as of September 26, 2012, by and between Locust Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.48    Collateral Administration Agreement, dated as of July 21, 2011, by and among Locust Street Funding LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on July 27, 2011.)
10.49    Amended and Restated Collateral Administration Agreement, dated as of September 26, 2012, by and among Locust Street Funding LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.50    Collateral Management Agreement, dated as of September 26, 2012, by and between Race Street Funding LLC and the Company. (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)
10.51    Loan and Servicing Agreement, dated as of May 17, 2012, by and among Walnut Street Funding LLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association, and the other lender parties thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.52    Purchase and Sale Agreement, dated as of May 17, 2012, by and between the Company and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
10.53    Collateral Management Agreement, dated as of May 17, 2012, by and between the Company and Walnut Street Funding LLC. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)

 

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10.54    Securities Account Control Agreement, dated as of May 17, 2012, by and between Walnut Street Funding LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 18, 2012.)
31.1*    Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1*    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 14, 2013.

 

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

Michael C. Forman

Chief Executive Officer

(Principal Executive Officer)

By:   /s/    William Goebel
   

William Goebel

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael C. Forman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FS Investment Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2013

 

/s/ MICHAEL C. FORMAN

Michael C. Forman

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, William Goebel certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FS Investment Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2013

 

/s/ WILLIAM GOEBEL

William Goebel

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION of CEO and CFO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of FS Investment Corporation (the “Company”) for the three months ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), Michael C. Forman, as Chief Executive Officer of the Company, and William Goebel, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

   

the Form 10-Q of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

   

the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: November 14, 2013
/s/ MICHAEL C. FORMAN

Michael C. Forman

Chief Executive Officer

 

/s/ WILLIAM GOEBEL

William Goebel

Chief Financial Officer