10-Q 1 d291232d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended December 31, 2011

OR

 

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

For the transition period from:                     to                     

Commission File Number: 01-33901

Fifth Street Finance Corp.

(Exact name of registrant as specified in its charter)

 

Delaware   26-1219283
(State or jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
10 Bank Street, 12th Floor,
White Plains, NY
  10606
(Address of principal executive office)   (Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

(914) 286-6800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Name of Each Exchange
on Which Registered

Common Stock, par value $0.01 per share   The NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

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 periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ        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 such 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  þ   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
    (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    YES  ¨        NO  þ

The registrant had 82,375,832 shares of common stock outstanding as of February 8, 2012.

 

 

 


Table of Contents

FIFTH STREET FINANCE CORP.

FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

  
Item 1.  

Consolidated Financial Statements (unaudited):

  
 

Consolidated Statements of Assets and Liabilities as of December 31, 2011 and September 30, 2011

     1   
 

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

     2   
 

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

     3   
 

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

     4   
 

Consolidated Schedule of Investments as of December 31, 2011

     5   
 

Consolidated Schedule of Investments as of September 30, 2011

     13   
 

Notes to Consolidated Financial Statements

     21   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     78   
Item 4.  

Controls and Procedures

     79   
 

PART II — OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     80   
Item 1A.  

Risk Factors

     80   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     80   
Item 6.  

Exhibits

     80   

Signatures

     81   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

Fifth Street Finance Corp.

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

(unaudited)

 

     December 31,
2011
    September 30,
2011
 
ASSETS   

Investments at Fair Value:

    

Control investments (cost December 31, 2011: $13,831; cost September 30, 2011: $13,726)

   $ 15,723      $ 14,500   

Affiliate investments (cost December 31, 2011: $34,042; cost September 30, 2011: $34,182)

     24,473        25,897   

Non-control/Non-affiliate investments (cost December 31, 2011: $1,102,546; cost September 30, 2011: $1,108,174)

     1,079,702        1,079,440   
  

 

 

   

 

 

 

Total Investments at Fair Value (cost December 31, 2011: $1,150,419; cost September 30, 2011: $1,156,082)

     1,119,898        1,119,837   

Cash and cash equivalents

     70,336        67,644   

Interest and fees receivable

     6,889        6,752   

Due from portfolio company

     1,281        552   

Receivables from unsettled transactions

     6,000          

Deferred financing costs

     13,636        14,668   

Collateral posted to bank and other assets

     432        264   
  

 

 

   

 

 

 

Total Assets

   $ 1,218,472      $ 1,209,717   
  

 

 

   

 

 

 
LIABILITIES AND NET ASSETS   

Liabilities:

    

Accounts payable, accrued expenses and other liabilities

   $ 1,617      $ 1,175   

Base management fee payable

     5,741        5,710   

Incentive fee payable

     5,247        4,997   

Due to FSC, Inc.

     1,761        1,480   

Interest payable

     4,270        4,669   

Payments received in advance from portfolio companies

     402        35   

Credit facilities payable

     209,269        178,024   

SBA debentures payable

     150,000        150,000   

Convertible senior notes payable

     124,500        135,000   
  

 

 

   

 

 

 

Total Liabilities:

     502,807        481,090   
  

 

 

   

 

 

 

Net Assets:

    

Common stock, $0.01 par value, 150,000 shares authorized, 72,376 shares issued and outstanding at December 31, 2011 and September 30, 2011

     724        724   

Additional paid-in-capital

     829,620        829,620   

Net unrealized depreciation on investments and interest rate swap

     (30,143     (35,976

Net realized loss on investments and interest rate swap

     (80,122     (63,485

Accumulated overdistributed net investment income

     (4,414     (2,256
  

 

 

   

 

 

 

Total Net Assets (equivalent to $9.89 and $10.07 per common share at December 31, 2011 and September 30, 2011) (Note 12)

     715,665        728,627   
  

 

 

   

 

 

 

Total Liabilities and Net Assets

   $ 1,218,472      $ 1,209,717   
  

 

 

   

 

 

 

 

See notes to Consolidated Financial Statements.

 

1


Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

     Three months
ended
December 31,
2011
    Three months
ended
December 31,
2010
 

Interest income:

    

Control investments

   $ 221      $ 1   

Affiliate investments

     704        1,163   

Non-control/Non-affiliate investments

     29,126        16,489   

Interest on cash and cash equivalents

     4        9   
  

 

 

   

 

 

 

Total interest income

     30,055        17,662   
  

 

 

   

 

 

 

PIK interest income:

    

Control investments

     38        33   

Affiliate investments

     155        282   

Non-control/Non-affiliate investments

     3,222        2,829   
  

 

 

   

 

 

 

Total PIK interest income

     3,415        3,144   
  

 

 

   

 

 

 

Fee income:

    

Control investments

            126   

Affiliate investments

     108        134   

Non-control/Non-affiliate investments

     5,885        4,267   
  

 

 

   

 

 

 

Total fee income

     5,993        4,527   
  

 

 

   

 

 

 

Dividend and other income:

    

Non-control/Non-affiliate investments

     34        2   
  

 

 

   

 

 

 

Total dividend and other income

     34        2   
  

 

 

   

 

 

 

Total investment income

     39,497        25,335   
  

 

 

   

 

 

 

Expenses:

    

Base management fee

     5,741        3,779   

Incentive fee

     5,247        3,514   

Professional fees

     1,091        690   

Board of Directors fees

     56        50   

Interest expense

     5,724        1,939   

Administrator expense

     816        354   

General and administrative expenses

     1,138        953   
  

 

 

   

 

 

 

Total expenses

     19,813        11,279   
  

 

 

   

 

 

 

Gain on extinguishment of convertible senior notes

     1,305          
  

 

 

   

 

 

 

Net investment income

     20,989        14,056   
  

 

 

   

 

 

 

Unrealized appreciation on interest rate swap

            736   

Unrealized appreciation (depreciation) on investments:

    

Control investments

     1,114        8,071   

Affiliate investments

     (1,283     (1,580

Non-control/Non-affiliate investments

     6,002        9,615   
  

 

 

   

 

 

 

Net unrealized appreciation on investments

     5,833        16,106   
  

 

 

   

 

 

 

Realized gain (loss) on investments:

    

Control investments

            (7,765

Affiliate investments

     76          

Non-control/Non-affiliate investments

     (16,714     (5,685
  

 

 

   

 

 

 

Net realized loss on investments

     (16,638     (13,450
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 10,184      $ 17,448   
  

 

 

   

 

 

 

Net investment income per common share — basic

   $ 0.29      $ 0.26   

Earnings per common share — basic

   $ 0.14      $ 0.32   

Weighted average common shares outstanding — basic

     72,376        54,641   

Net investment income per common share — diluted

   $ 0.27      $ 0.26   

Earnings per common share — diluted

   $ 0.13      $ 0.32   

Weighted average common shares outstanding — diluted

     80,913        54,641   

 

See notes to Consolidated Financial Statements.

 

2


Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Changes in Net Assets

(in thousands, except per share data)

(unaudited)

 

     Three months ended
December 31,
2011
    Three months ended
December 31,
2010
 

Operations:

    

Net investment income

   $ 20,989      $ 14,056   

Net unrealized appreciation on investments and interest rate swap

     5,833        16,842   

Net realized loss on investments

     (16,638     (13,450
  

 

 

   

 

 

 

Net increase in net assets from operations

     10,184        17,448   

Stockholder transactions:

    

Distributions to stockholders

     (23,146     (17,464
  

 

 

   

 

 

 

Net decrease in net assets from stockholder transactions

     (23,146     (17,464

Capital share transactions:

    

Issuance of common stock, net

            4,814   

Issuance of common stock under dividend reinvestment plan

            950   
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

            5,764   
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     (12,962     5,748   
  

 

 

   

 

 

 

Net assets at beginning of period

     728,627        569,172   
  

 

 

   

 

 

 

Net assets at end of period

   $ 715,665      $ 574,920   
  

 

 

   

 

 

 

Net asset value per common share

   $ 9.89      $ 10.44   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     72,376        55,059   

See notes to Consolidated Financial Statements.

 

3


Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Three months
ended
December 31,
2011
    Three months
ended
December 31,
2010
 

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 10,184      $ 17,448   

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

    

Gain on extinguishment of convertible senior notes

     (1,305       

Net unrealized appreciation on investments and interest rate swap

     (5,833     (16,842

Net realized losses on investments and interest rate swap

     16,638        13,450   

PIK interest income

     (3,415     (3,144

Recognition of fee income

     (5,993     (4,527

Accretion of original issue discount on investments

     (606     (389

Amortization of deferred financing costs

     979        409   

Change in operating assets and liabilities:

    

Fee income received

     4,962        8,006   

Increase in interest and fees receivable

     (419     (850

Increase in due from portfolio company

     (728     (49 )

Increase in receivables from unsettled transactions

     (6,000       

Decrease in collateral posted to bank and other assets

     126        438   

Increase in accounts payable, accrued expenses and other liabilities

     443        122   

Increase in base management fee payable

     30        903   

Increase in incentive fee payable

     250        655   

Increase in due to FSC, Inc.

     281        179   

Increase (decrease) in interest payable

     (399     865   

Increase (decrease) in payments received in advance from portfolio companies

     367        (185

Purchases of investments and net revolver activity, net of syndications

     (84,519     (234,708 )

Principal payments received on investments (scheduled payments)

     12,721        4,015   

Principal payments received on investments (payoffs)

     53,499        49,721   

PIK interest income received in cash

     1,131        5,109   

Proceeds from the sale of investments

     11,636          
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     4,030        (159,374
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Dividends paid in cash

     (23,146     (16,515

Borrowings under SBA debentures payable

            50,300   

Borrowings under credit facilities

     151,500        126,000   

Repayments of borrowings under credit facilities

     (120,255     (37,000

Repurchases of convertible senior notes

     (8,926       

Proceeds from the issuance of common stock

            4,993   

Deferred financing costs paid

     (215     (1,970

Offering costs paid

     (296     (178
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (1,338     125,630   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,692        (33,744

Cash and cash equivalents, beginning of period

     67,644        76,765   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 70,336      $ 43,021   
  

 

 

   

 

 

 

Supplemental Information:

    

Cash paid for interest

   $ 5,143      $ 665   

Non-cash financing activities:

    

Issuance of shares of common stock under dividend reinvestment plan

   $      $ 950   

 

See notes to Consolidated Financial Statements.

 

4


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost      Fair Value  

Control Investments (3)

           

Lighting By Gregory, LLC (9)(13)(14)

   Housewares & specialties         

First Lien Term Loan A, 9.75% PIK due 2/28/2013

      $ 4,475       $ 3,996       $ 2,078   

First Lien Bridge Loan, 8% PIK due 3/31/2012

        113         113           

97.38% membership interest

           1,210           
        

 

 

    

 

 

 
           5,319         2,078   

Coll Materials Group LLC(17)

   Environmental & facilities services         

Second Lien Term Loan, 12% cash due 11/1/2014

        6,885         6,885         6,892   

50% Membership interest in CD Holdco, LLC

           1,627         6,753   
        

 

 

    

 

 

 
           8,512         13,645   
        

 

 

    

 

 

 

Total Control Investments (2.2% of net assets)

         $ 13,831       $ 15,723   
        

 

 

    

 

 

 

Affiliate Investments (4)

           

O’Currance, Inc. (13)(14)

   Data Processing & Outsourced Services         

First Lien Term Loan A, 12.875% cash 4% PIK due 3/21/2012

        11,531       $ 11,254       $ 1,960   

First Lien Term Loan B, 12.875% cash 4% PIK due 3/21/2012

        1,176         1,140         200   

1.75% Preferred Membership interest in O’Currance Holding Co., LLC

           130           

3.3% Membership Interest in O’Currance Holding Co., LLC

           251           
        

 

 

    

 

 

 
           12,775         2,160   

Caregiver Services, Inc.

   Healthcare services         

Second Lien Term Loan A, LIBOR+6.85% (5.15% floor) cash due 2/25/2013

        5,355         5,203         5,485   

Second Lien Term Loan B, 12.5% cash 4% PIK due 2/25/2013

        15,282         14,983         15,228   

1,080,399 shares of Series A Preferred Stock

           1,081         1,600   
        

 

 

    

 

 

 
           21,267         22,313   
        

 

 

    

 

 

 

Total Affiliate Investments (3.4% of net assets)

         $ 34,042       $ 24,473   
        

 

 

    

 

 

 

Non-Control/Non-Affiliate Investments (7)

           

Repechage Investments Limited(13)(14)

   Restaurants         

First Lien Term Loan, 12.75% cash 2.75% PIK due 10/16/2011(16)

        3,583         3,412         1,932   

7,500 shares of Series A Preferred Stock of Elephant & Castle, Inc.

           750           
        

 

 

    

 

 

 
           4,162         1,932   

Traffic Control & Safety Corporation (9)

   Construction and Engineering         

Senior Term Loan A, LIBOR+9.0% cash due 06/29/2012

        5,000         4,913         5,026   

Senior Revolver, LIBOR+9% cash due 6/29/2012

        12,486         12,332         12,555   

Second Lien Term Loan, 12% cash 3% PIK due 5/28/2015

        21,008         20,829         10,917   

Subordinated Loan, 15% PIK due 5/28/2015

        5,531         5,531           

24,750 shares of Series B Preferred Stock

           248           

43,494 shares of Series D Preferred Stock

           435           

25,000 shares of Common Stock

           3           
        

 

 

    

 

 

 
           44,291         28,498   

TBA Global, LLC

   Advertising         

53,994 Senior Preferred Shares

           216         388   

191,977 Shares A Shares

           192         61   
        

 

 

    

 

 

 
           408         449   

Fitness Edge, LLC

   Leisure facilities         

First Lien Term Loan A, LIBOR+5.25% (4.75% floor), cash due 7/31/2012

        563         562         569   

First Lien Term Loan B, 12% cash 2.5% PIK due 7/31/2012

        5,813         5,795         5,905   

1,000 Common Units

           43         198   
        

 

 

    

 

 

 
           6,400         6,672   

 

5


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Capital Equipment Group, Inc. (9)

          

Second Lien Term Loan, 12% cash 2.75% PIK due 7/10/2013

   Industrial machinery      10,331         10,192        10,365   

33,463 shares of Common Stock

           345        668   
        

 

 

   

 

 

 
           10,537        11,033   

Rail Acquisition Corp. (14)

   Electronic manufacturing services        

First Lien Term Loan, 8% cash 4% PIK due 9/1/2013

        18,986         15,637        4,007   

First Lien Revolver, 7.85% cash due 9/1/2013

        4,691         4,691        4,691   
        

 

 

   

 

 

 
           20,328        8,698   

Western Emulsions, Inc.

   Construction materials        

Second Lien Term Loan, 12.5% cash 2.5% PIK due 6/30/2014

        6,888         6,789        7,013   
        

 

 

   

 

 

 
           6,789        7,013   

Storyteller Theaters Corporation

   Movies & entertainment        

1,692 shares of Common Stock

                  62   

20,000 shares of Preferred Stock

           200        200   
        

 

 

   

 

 

 
           200        262   

HealthDrive Corporation (9)

   Healthcare services        

First Lien Term Loan A, 10% cash due 7/17/2013

        6,163         5,980        6,126   

First Lien Term Loan B, 12% cash 1% PIK due 7/17/2013

        10,309         10,249        10,329   

First Lien Revolver, 12% cash due 7/17/2013 (11)

           (6       
        

 

 

   

 

 

 
           16,223        16,455   

idX Corporation

   Distributors        

Second Lien Term Loan, 12.5% cash 2% PIK due 7/1/2014

        18,992         18,752        19,218   
        

 

 

   

 

 

 
           18,752        19,218   

Cenegenics, LLC

   Healthcare services        

414,419 Common Units

           598        1,270   
        

 

 

   

 

 

 
           598        1,270   

Trans-Trade, Inc.

   Air freight & logistics        

First Lien Term Loan A, 13% cash 2.5% PIK due 12/31/2012

        12,602         12,394        11,914   

First Lien Term Loan B, 12% cash due 12/31/2012

        5,800         5,706        4,715   
        

 

 

   

 

 

 
           18,100        16,629   

Riverlake Equity Partners II, LP

   Multi-sector holdings        

1.89% limited partnership interest (15)

           240        240   
        

 

 

   

 

 

 
           240        240   

Riverside Fund IV, LP

   Multi-sector holdings        

0.33% limited partnership interest (6)(15)

           483        483   
        

 

 

   

 

 

 
           483        483   

Ambath/Rebath Holdings, Inc.

   Home improvement retail        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/30/2014

        3,250         3,250        3,068   

First Lien Term Loan B, 12.5% cash 2.5% PIK due 12/30/2014

        23,146         23,146        20,504   

First Lien Term Revolver, LIBOR+6.5% (3% floor) cash due 12/30/2014 (10)

        1,500         1,500        1,336   
        

 

 

   

 

 

 
           27,896        24,908   

JTC Education, Inc.

   Education services        

First Lien Term Loan, LIBOR+9.5% (3% floor) cash due 12/31/2014

        29,769         29,153        29,753   

First Lien Revolver, LIBOR+9.5% (3.25% floor) cash due 12/31/2014

        2,225         1,943        2,323   

17,391 Shares of Series A-1 Preferred Stock

           313        313   

17,391 Shares of Common Stock

           187        119   
        

 

 

   

 

 

 
           31,596        32,508   

 

6


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Tegra Medical, LLC (9)

   Healthcare equipment        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2014

        21,490         21,228        21,441   

First Lien Term Loan B, 12% cash 2% PIK due 12/31/2014

        22,753         22,494        22,784   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/31/2014

        2,500         2,453        2,474   
        

 

 

   

 

 

 
           46,175        46,699   

Psilos Group Partners IV, LP

   Multi-sector holdings        

2.52% limited partnership interest (12)(15)

                    
        

 

 

   

 

 

 
                    

Mansell Group, Inc.

   Advertising        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2015

        10,399         10,250        10,475   

First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015

        9,177         9,046        9,212   

First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (11)

           (27 )       
        

 

 

   

 

 

 
           19,269        19,687   

NDSSI Holdings, LLC (9)

   Electronic equipment & instruments        

First Lien Term Loan A, LIBOR+9.75% (3% floor) cash 1% PIK due 12/31/2012

        21,864         21,524        21,469   

First Lien Term Loan B, LIBOR+9.75% (3% floor) cash 3.75% PIK due 12/31/2012

        8,000         8,000        7,815   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/31/2012

        3,500         3,448        3,462   

2,000 Series D Preferred Units

           2,208        2,207   
        

 

 

   

 

 

 
           35,180        34,953   

Eagle Hospital Physicians, Inc. (9)

   Healthcare services        

First Lien Term Loan, LIBOR+8.75% (3% floor) cash due 8/11/2015

        25,039         24,584        24,916   

First Lien Revolver, LIBOR+5.75% (3% floor) cash due 8/11/2015 (11)

           (39 )       
        

 

 

   

 

 

 
           24,545        24,916   

Enhanced Recovery Company, LLC

   Diversified support services        

First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015

        13,380         13,160        13,392   

First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015

        11,071         10,899        11,033   

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (11)

           (62 )       
        

 

 

   

 

 

 
           23,997        24,425   

Epic Acquisition, Inc.

   Healthcare services        

First Lien Term Loan A, LIBOR+8.5% (3% floor) cash due 8/13/2015

        7,844         7,723        7,862   

First Lien Term Loan B, 12.25% cash 3% PIK due 8/13/2015

        17,247         16,987        17,280   

First Lien Revolver, LIBOR+6.5% (3% floor) cash due 8/13/2015(11)

           (46 )       
        

 

 

   

 

 

 
           24,664        25,142   

Specialty Bakers LLC

   Food distributors        

First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015

        7,988         7,829        7,999   

First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015

        11,000         10,787        10,968   

First Lien Revolver, LIBOR+8.5% cash due 9/15/2015 (11)

           (78 )       
        

 

 

   

 

 

 
           18,538        18,967   

CRGT, Inc.

   IT consulting & other services        

First Lien Term Loan A, LIBOR+7.5% cash due 10/1/2015

        26,825         26,447        26,540   

First Lien Term Loan B, 12.5% cash 10/1/2015

        22,000         21,670        21,800   

First Lien Revolver, LIBOR+7.5% cash due 10/1/2015(11)

           (188 )       
        

 

 

   

 

 

 
           47,929        48,340   

 

7


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Welocalize, Inc.

   Internet software & services        

First Lien Term Loan A, LIBOR+8% (2% floor) cash due 11/19/2015

        15,785         15,533        15,467   

First Lien Term Loan B, LIBOR+9% (2% floor) cash 1.25% PIK due 11/19/2015

        21,299         20,977        21,051   

First Lien Revolver, LIBOR+7% (2% floor) cash due 11/19/2015

        5,250         5,158        5,169   

2,086,163 Common Units in RPWL Holdings, LLC

           2,086        1,781   
        

 

 

   

 

 

 
           43,754        43,468   

Miche Bag, LLC

   Apparel, accessories & luxury goods        

First Lien Term Loan A, LIBOR+9% (3% floor) cash due 12/7/2013

        12,417         12,117        12,521   

First Lien Term Loan B, LIBOR+10% (3% floor) cash 3% PIK due 12/7/2015

        17,559         15,264        17,358   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015(11)

           (99 )       

10,371 Preferred Equity units in Miche Holdings, LLC(6)

           1,037        1,169   

146,289 Series D Common Equity units in Miche Holdings, LLC(6)

           1,463        1,382   
        

 

 

   

 

 

 
           29,782        32,430   

Bunker Hill Capital II (QP), LP

   Multi-sector holdings        

0.50% limited partnership interest(15)

           54        54   
        

 

 

   

 

 

 
           54        54   

Dominion Diagnostics, LLC(9)

   Healthcare services        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/17/2015

        29,150         28,661        29,043   

First Lien Term Loan B, LIBOR+10.5% (2.5% floor) cash 1% PIK due 12/17/2015

        20,008         19,695        19,694   

First Lien Revolver, LIBOR+6.5% (2.5% floor) cash due 12/17/2015(11)

           (78 )       
        

 

 

   

 

 

 
           48,278        48,737   

Advanced Pain Management

   Healthcare services        

First Lien Term Loan, LIBOR+5% (1.75% floor) cash due 12/22/2015

        7,688         7,572        7,600   

First Lien Revolver, LIBOR+5% (1.75% floor) cash due 12/22/2015(11)

                (5  
        

 

 

   

 

 

 
           7,567        7,600   

DISA, Inc.

   Human resources & employment services        

First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 12/30/2015

        12,190         12,009        12,242   

First Lien Term Loan B, LIBOR+10% (1% floor) cash 1.5% PIK due 12/30/2015

        8,427         8,310        8,629   

First Lien Revolver, LIBOR+6% (1% floor) cash due 12/30/2015 (11)

           (57 )       
        

 

 

   

 

 

 
           20,262        20,871   

Saddleback Fence and Vinyl Products, Inc.

   Building products        

First Lien Term Loan, 8% cash due 11/30/2013

        648         648        648   

First Lien Revolver, 8% cash due 11/30/2013

                    
        

 

 

   

 

 

 
           648        648   

Best Vinyl Fence & Deck, LLC

   Building products        

First Lien Term Loan B, 8% PIK due 6/30/2012

        4,106         4,106        1,885   
        

 

 

   

 

 

 
           4,106        1,885   

Physicians Pharmacy Alliance, Inc.

   Healthcare services        

First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016

        16,618         16,343        16,374   

First Lien Revolver, LIBOR+6% cash due 1/4/2016(11)

           (32 )       
        

 

 

   

 

 

 
           16,311        16,374   

Cardon Healthcare Network, LLC

   Diversified support services        

First Lien Term Loan, LIBOR+10% (1.75% floor) cash due 1/6/2016(9)

        10,800         10,624        10,829   

First Lien Revolver, LIBOR+6.5% (1.75% floor) cash due 1/6/2016(11)

           (32 )       
        

 

 

   

 

 

 
           10,592        10,829   

 

8


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

U.S. Retirement Partners, Inc.

   Diversified financial services        

First Lien Term Loan, LIBOR+9.5% (2% floor) cash due 1/6/2016

        25,350         24,904        24,875   
        

 

 

   

 

 

 
           24,904        24,875   

IOS Acquisitions, Inc.

   Oil & gas equipment & services        

First Lien Term Loan A, LIBOR+8% (2% floor) cash due 1/14/2016

        8,235         8,131        8,235   

First Lien Term Loan B, LIBOR+10% (2% floor) cash 2% PIK due 1/14/2016

        10,672         10,538        10,602   

First Lien Revolver, LIBOR+8% (2% floor) cash due 1/14/2016

        1,000         968        1,025   
        

 

 

   

 

 

 
           19,637        19,862   

Phoenix Brands Merger Sub LLC(9)

   Household products        

Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016

        7,768         7,596        7,440   

Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017

        20,590         20,152        19,689   

First Lien Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016

        3,000         2,863        2,916   
        

 

 

   

 

 

 
           30,611        30,045   

U.S. Collections, Inc.

   Diversified support services        

First Lien Term Loan, LIBOR+5.25% (1.75% floor) cash due 3/31/2016

        8,708         8,523        8,634   
        

 

 

   

 

 

 
           8,523        8,634   

CCCG, LLC(9)

   Oil & gas equipment & services        

First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 7/29/2015

        34,739         33,945        34,384   
        

 

 

   

 

 

 
           33,945        34,384   

Maverick Healthcare Group, LLC

   Healthcare equipment        

First Lien Term Loan, LIBOR+9% (1.75% floor) cash due 12/31/2016

        24,750         24,248        23,904   
        

 

 

   

 

 

 
           24,248        23,904   

Refac Optical Group

   Specialty stores        

First Lien Term Loan A, LIBOR+7.5% cash due 3/23/2016

        14,075         13,784        14,135   

First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 3/23/2016

        20,202         19,770        20,309   

First Lien Revolver, LIBOR+7.5% cash due 3/23/2016(11)

           (111 )       

1,000 Shares of Common Stock in Refac Holdings, Inc.

           1          

1,000 Shares of Preferred Stock in Refac Holdings, Inc.

           999        851   
        

 

 

   

 

 

 
           34,443        35,295   

Pacific Architects & Engineers, Inc.

  

Diversified support

services

       

First Lien Term Loan A, LIBOR+5% (1.5% floor) cash due 4/4/2017

        3,994         3,933        3,992   

First Lien Term Loan B, LIBOR+6% (1.5% floor) cash due 4/4/2017

        4,700         4,632        4,711   
        

 

 

   

 

 

 
           8,565        8,703   

Ernest Health, Inc.

   Healthcare services        

Second Lien Term Loan, LIBOR+8.5% (1.75% floor) cash due 5/13/2017

        25,000         24,675        25,029   
        

 

 

   

 

 

 
           24,675        25,029   

Securus Technologies, Inc.

   Integrated telecommunication services        

Second Lien Term Loan, LIBOR+8.25% (1.75% floor) cash due 5/31/2018

        22,500         22,069        22,220   
        

 

 

   

 

 

 
           22,069        22,220   

Gundle/SLT Environmental, Inc.

  

Environmental

& facilities services

       

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016

        7,960         7,869        8,015   
        

 

 

   

 

 

 
           7,869        8,015   

 

9


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Titan Fitness, LLC

   Leisure facilities        

First Lien Term Loan A, LIBOR+8.75 (1.25% floor) cash due 6/30/2016

        16,625         16,455        16,340   

First Lien Term Loan B, LIBOR+10.75% (1.25% floor) cash 1.5% PIK due 6/30/2016

        11,589         11,473        11,630   

First Lien Term Loan C, 18% PIK due 6/30/2016

        2,846         2,820        2,787   

First Lien Revolver, LIBOR+8.75% (1.25% floor) cash due 6/30/2016(11)

           (35  
        

 

 

   

 

 

 
           30,713        30,757   

Baird Capital Partners V, LP

   Multi-sector holdings        

0.4% limited partnership interest(15)

           386        386   
        

 

 

   

 

 

 
           386        386   

Charter Brokerage, LLC

   Oil & gas equipment services        

Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 7/13/2016

        17,174         17,015        16,949   

Mezzanine Term Loan, 11.75% cash 2% PIK due 7/13/2017

        10,093         10,004        10,095   

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 7/13/2016

        1,765         1,699        1,886   
        

 

 

   

 

 

 
           28,718        28,930   

Stackpole Powertrain International ULC(15)

   Auto parts & equipment        

Subordinated Term Loan, 12% cash 2% PIK due 8/1/2018

        18,151         17,982        18,046   

1,000 Common Units

           1,000        735   
        

 

 

   

 

 

 
           18,982        18,781   

Discovery Practice Management, Inc.

   Healthcare services        

Senior Term Loan A, LIBOR+7.5% cash due 8/8/2016

        6,875         6,797        6,823   

Senior Term Loan B, 12% cash 3% PIK due 8/8/2016

        6,296         6,227        6,369   

Senior Revolver, LIBOR+7% cash due 8/8/2016(11)

           (34       
        

 

 

   

 

 

 
           12,990        13,192   

CTM Group, Inc.

   Leisure products        

Mezzanine Term Loan A, 11% cash 2% PIK due 2/10/2017

        10,584         10,476        10,514   

Mezzanine Term Loan B, 18.4% PIK due 2/10/2017

        3,326         3,295        3,444   
        

 

 

   

 

 

 
           13,771        13,958   

Bojangles

   Restaurants        

First Lien Term Loan, LIBOR+6.5% (1.5% floor) cash due 8/17/2017

        5,789         5,600        5,693   
        

 

 

   

 

 

 
           5,600        5,693   

Milestone Partners IV, LP

   Multi-sector holdings        

3.07% limited partnership interest(12)(15)

                    
        

 

 

   

 

 

 
                    

Insight Pharmaceuticals, LLC

   Pharmaceuticals        

First Lien Term Loan, LIBOR+6% (1.5% floor) cash due 8/25/2016

        9,975         9,904        10,165   

Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017

        17,500         17,339        17,258   
        

 

 

   

 

 

 
           27,243        27,423   

National Spine and Pain Centers, LLC

   Healthcare services        

Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2017

        19,081         18,902        19,205   

250,000 Class A Units

           250        241   
        

 

 

   

 

 

 
           19,152        19,446   

RCPDirect, LP.

   Multi-Sector Holdings        

0.91% limited partnership interest(15)

           260        260   
        

 

 

   

 

 

 
           260        260   

 

10


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

The MedTech Group, Inc.

   Healthcare equipment        

Senior Term Loan, LIBOR + 5.5% (1.5% floor) cash due 9/7/2016

        13,000         12,890        13,000   
        

 

 

   

 

 

 
           12,890        13,000   

Digi-Star Acquisition Holdings, Inc.

   Industrial Machinery        

Mezzanine Term Loan, 12% cash 1.5% PIK due 11/18/2017

        10,018         9,896        10,018   

225 Class A Preferred Units—Purchased

           225        225   

2,500 Class A Common Units—Purchased

           25        25   
        

 

 

   

 

 

 
           10,146        10,268   

CPASS Acquisition Company

   Internet software and services        

Senior Term Loan, LIBOR + 9% (1.5% floor) cash 1% PIK due 11/21/2016

        5,005         4,887        5,006   

Senior Revolver, LIBOR + 9% (1.5% floor) cash due 11/21/2016(11)

           (19       
        

 

 

   

 

 

 
           4,868        5,006   

Genoa Healthcare Holdings, LLC

   Pharmaceuticals        

Senior Term Loan, LIBOR+5.75% (1.5% floor) cash due 12/1/2016

        5,000         4,946        5,000   

Mezzanine Term Loan, 12% cash 2% PIK due 6/1/2017

        12,521        12,398        12,521   

Senior Revolver, LIBOR+5.75% (1.5% floor) cash due 12/1/2016

        1,158         1,136        1,158   

500,000 Preferred units—Purchased

           475        475   

500,000 Class A Common Units

           25        25   
        

 

 

   

 

 

 
           18,980        19,179   

SolutionSet, Inc.

   Advertising        

Senior Term Loan, LIBOR +6% (1% floor) cash due 12/21/2016

        10,000         9,901        10,000   
        

 

 

   

 

 

 
           9,901        10,000   

Slate Pharmaceuticals Acquisition Corp.

   Healthcare services        

Subordinated Term Loan, 12% cash 1.5% PIK due 12/29/2017

        20,001         19,803        20,164   
        

 

 

   

 

 

 
           19,803        20,164   
        

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (150.9% of net assets)

         $ 1,102,546      $ 1,079,702   
        

 

 

   

 

 

 

Total Portfolio Investments

         $ 1,150,419      $ 1,119,898   
        

 

 

   

 

 

 

 

(1) Debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.

 

(2) See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.

 

(3) Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.

 

(4) Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.

 

(5) Equity ownership may be held in shares or units of companies related to the portfolio companies.

 

(6) Income producing through payment of dividends or distributions.

 

(7) Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.

 

(8) Principal includes accumulated PIK interest and is net of repayments.

 

11


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

December 31, 2011

(dollar amounts in thousands)

(unaudited)

 

(9) Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:

 

Portfolio Company

 

Effective date

 

Cash interest

 

PIK interest

 

Reason

NDSSI Holdings, Inc.

  December 31, 2011   +0.5% on Term Loan   – 1.0% on Term Loan A   Per loan amendment

Tegra Medical, LLC

  December 30, 2011     +0.5% on Term Loan B   Per loan amendment

Phoenix Brands Merger Sub LLC

  December 22, 2011   +0.75% on Senior Term Loan, Subordinated Term Loan & Revolver     Per loan amendment

CCCG, LLC

  November 15, 2011   +0.5% on Term Loan     Per waiver agreement

Eagle Hospital Physicians, Inc.

  July 1, 2011   – 0.25% on Term Loan & Revolver     Per loan amendment

Dominion Diagnostics, LLC

  April 1, 2011   – 0.5% on Term Loan A   – 1.0% on Term Loan B   Tier pricing per credit agreement

Lighting By Gregory, LLC

  March 11, 2011   – 2.0% on Bridge Loan     Per loan amendment

Capital Equipment Group, Inc.

  July 1, 2010   – 2.0% on Term Loan   – 0.75% on Term Loan   Per waiver agreement

Traffic Control & Safety Corporation.

  June 1, 2010   – 4.0% on Second Lien Term Loan   + 1.0% on Second Lien Term Loan   Per restructuring agreement

HealthDrive Corporation

  April 30, 2009   + 2.0% on Term Loan     Per waiver agreement

 

(10) Revolving credit line has been suspended and is deemed unlikely to be renewed in the future.

 

(11) Amounts represent unearned income related to undrawn commitments.

 

(12) Represents an unfunded commitment to fund limited partnership interest.

 

(13) Investment was on cash non-accrual status as of December 31, 2011.

 

(14) Investment was on PIK non-accrual status as of December 31, 2011.

 

(15) Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act.

 

(16) Repechage Investments Limited Term Loan is under negotiation and, as such, the maturity date of the loan has been temporarily suspended.

 

(17) In November 2011, Nicos Polymers & Grinding, Inc. was merged into Coll Materials Group, LLC. As a result of this transaction, the Company’s 50% membership interest in CD Holdco, LLC now represents a 23.25% membership interest in Coll Materials Group, LLC and the first lien revolver and term loan were consolidated into a $6.9 million second lien term loan with a scheduled maturity of three years that bears monthly cash interest at a rate of 12.0% per annum.

 

12


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost      Fair Value  

Control Investments(3)

           

Lighting By Gregory, LLC(9)(13)(14)

   Housewares & Specialties         

First Lien Term Loan A, 9.75% PIK due 2/28/2013

      $ 4,366       $ 3,996       $ 2,526   

First Lien Bridge Loan, 8% PIK due 3/31/2012

        112         113           

97.38% membership interest

           1,210           
        

 

 

    

 

 

 
           5,319         2,526   

Nicos Polymers & Grinding, Inc.  

   Environmental & facilities services         

First Lien Term Loan, 8% cash due 12/4/2017

        5,347         5,280         5,189   

First Lien Revolver, 8% cash due 12/4/2017

        1,500         1,500         1,551   

50% Membership interest in CD Holdco, LLC

           1,627         5,234   
        

 

 

    

 

 

 
           8,407         11,974   
        

 

 

    

 

 

 

Total Control Investments (2.0% of net assets)

         $ 13,726       $ 14,500   
        

 

 

    

 

 

 

Affiliate Investments(4)

           

O’Currance, Inc.(13)(14)

   Data Processing & Outsourced Services         

First Lien Term Loan A, 12.875% cash 4% PIK due 3/21/2012

      $ 11,414       $ 11,254       $ 3,173   

First Lien Term Loan B, 12.875% cash 4% PIK 3/21/2012

        1,164         1,140         324   

1.75% Preferred Membership interest in O’Currance Holding Co., LLC

           130           

3.3% Membership Interest in O’Currance Holding Co., LLC

           250           
        

 

 

    

 

 

 
           12,774         3,497   

Caregiver Services, Inc.

   Healthcare services         

Second Lien Term Loan A, LIBOR+6.85% (5.15% floor) cash due 2/25/2013

        5,712         5,527         5,843   

Second Lien Term Loan B, 12.5% cash 4% PIK due 2/25/2013

        15,161         14,801         15,067   

1,080,399 shares of Series A Preferred Stock

           1,080         1,490   
        

 

 

    

 

 

 
           21,408         22,400   
        

 

 

    

 

 

 

Total Affiliate Investments (3.6% of net assets)

         $ 34,182       $ 25,897   
        

 

 

    

 

 

 

Non-Control/Non-Affiliate Investments(7)

           

Repechage Investments Limited(13)(14)

   Restaurants         

First Lien Term Loan, 12.75% cash 2.75% PIK due 10/16/2011

      $ 3,558       $ 3,412       $ 1,829   

7,500 shares of Series A Preferred Stock of Elephant & Castle, Inc.

           750           
        

 

 

    

 

 

 
           4,162         1,829   

Traffic Control & Safety Corporation(9)

   Construction and Engineering         

Senior Term Loan, LIBOR+9% cash due 6/29/2012

        5,000         4,870         4,957   

Senior Revolver, LIBOR+9% cash due 6/29/2012

        11,986         11,754         11,966   

Second Lien Term Loan, 12% cash 3% PIK due 5/28/2015

        20,795         20,602         17,545   

Subordinated Loan, 15% PIK due 5/28/2015

        5,325         5,325         1,346   

24,750 shares of Series B Preferred Stock

           247           

43,494 shares of Series D Preferred Stock

           435           

25,000 shares of Common Stock

           3           
        

 

 

    

 

 

 
           43,236         35,814   

TBA Global, LLC

   Advertising         

53,994 Senior Preferred Shares

           216         388   

191,977 Shares A Shares

           192         74   
        

 

 

    

 

 

 
           408         462   

Fitness Edge, LLC

   Leisure Facilities         

First Lien Term Loan A, LIBOR+5.25% (4.75% floor) cash due 7/31/2012

        750         749         757   

First Lien Term Loan B, 12.5% cash 2.5% PIK due 7/31/2012

        5,776         5,750         5,814   

1,000 Common Units(6)

           43         181   
        

 

 

    

 

 

 
           6,542         6,752   

 

13


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Boot Barn

   Apparel, accessories & luxury goods and footwear        

255.78 shares of Series A&B Preferred Stock

           247        71   

1,354 shares of Common Stock

           9        9   
        

 

 

   

 

 

 
           256        80   

Premier Trailer Leasing, Inc.(9)(13)(14)

   Trucking        

Second Lien Term Loan, 13.25% cash 3.25% PIK due 10/23/2012

        19,070         17,064          

285 shares of Common Stock

           1          
        

 

 

   

 

 

 
           17,065          

Capital Equipment Group, Inc.(9)

   Industrial machinery        

Second Lien Term Loan, 12% cash 2.75% PIK due 7/10/2013

        10,278         10,112        10,226   

33,463 shares of Common Stock

           345        634   
        

 

 

   

 

 

 
           10,457        10,860   

Rail Acquisition Corp.  

   Electronic manufacturing services        

First Lien Term Loan, 8% cash 4% PIK due 9/1/2013

        18,415         15,636        4,106   

First Lien Revolver, 7.85% cash due 9/1/2013

        4,554         4,554        4,554   
        

 

 

   

 

 

 
           20,190        8,660   

Western Emulsions, Inc.

   Construction materials        

Second Lien Term Loan, 12.5% cash 2.5% PIK due 6/30/2014

        6,844         6,736        6,840   
        

 

 

   

 

 

 
           6,736        6,840   

Storyteller Theaters Corporation

   Movies & entertainment        

1,692 shares of Common Stock

                  62   

20,000 shares of Preferred Stock

           200        200   
        

 

 

   

 

 

 
           200        262   

HealthDrive Corporation

   Healthcare services        

First Lien Term Loan A, 10% cash due 7/17/2013

        6,263         6,049        6,352   

First Lien Term Loan B, 12% cash 1% PIK due 7/17/2013

        10,282         10,212        10,217   

First Lien Revolver, 12% cash due 7/17/2013(11)

           (7 )       
        

 

 

   

 

 

 
           16,254        16,569   

idX Corporation

   Distributors        

Second Lien Term Loan, 12.5% cash 2% PIK due 7/1/2014

        18,895         18,631        18,938   
        

 

 

   

 

 

 
           18,631        18,938   

Cenegenics, LLC

   Healthcare services        

414,419 Common Units(6)

           598        1,060   
        

 

 

   

 

 

 
           598        1,060   

IZI Medical Products, Inc.  

   Healthcare technology        

First Lien Term Loan A, 12% cash due 3/31/2014

        3,236         3,215        3,244   

First Lien Term Loan B, 13% cash 3% PIK due 3/31/2014

        17,258         16,861        17,061   

First Lien Revolver, 10% cash due 3/31/2014(11)

           (25 )       

453,755 Preferred units of IZI Holdings, LLC

           454        642   
        

 

 

   

 

 

 
           20,505        20,947   

Trans-Trade, Inc.

   Air freight & logistics        

First Lien Term Loan, 13% cash 2.5% PIK due 9/10/2014

        12,523         12,287        11,763   

First Lien Revolver, 12% cash due 9/10/2014

        5,800         5,697        5,479   
        

 

 

   

 

 

 
           17,984        17,242   

Riverlake Equity Partners II, LP

   Multi-sector holdings        

1.89% limited partnership interest(16)

           122        122   
        

 

 

   

 

 

 
           122        122   

Riverside Fund IV, LP

   Multi-sector holdings        

0.33% limited partnership interest(16)

           445        445   
        

 

 

   

 

 

 
           445        445   

 

14


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

ADAPCO, Inc.  

   Fertilizers & agricultural chemicals        

First Lien Term Loan A, 10% cash due 12/17/2014

        8,000         7,871        8,010   

First Lien Term Loan B, 12% cash 2% PIK due 12/17/2014

        15,521         15,306        15,371   

First Lien Term Revolver, 10% cash due 12/17/2014

        5,750         5,623        5,809   
        

 

 

   

 

 

 
           28,800        29,190   

Ambath/Rebath Holdings, Inc.  

   Home improvement retail        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/30/2014

        3,500         3,500        3,497   

First Lien Term Loan B, 12.5% cash 2.5% PIK due 12/30/2014

        22,999         22,999        22,600   

First Lien Term Revolver, LIBOR+6.5% (3% floor) cash due 12/30/2014(10)

        1,500         1,500        1,479   
        

 

 

   

 

 

 
           27,999        27,576   

JTC Education, Inc.  

   Education services        

First Lien Term Loan, LIBOR+9.5% (3% floor) cash due 12/31/2014

        30,134         29,467        29,780   

First Lien Revolver, LIBOR+9.5% (3.25% floor) cash due 12/31/2014(11)

           (305 )       

17,391 Shares of Series A-1 Preferred Stock

           313        313   

17,391 Shares of Common Stock

           187        83   
        

 

 

   

 

 

 
           29,662        30,176   

Tegra Medical, LLC

   Healthcare equipment        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2014

        22,540         22,244        22,744   

First Lien Term Loan B, 12% cash 2% PIK due 12/31/2014

        22,551         22,270        22,226   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/31/2014

        2,500         2,449        2,501   
        

 

 

   

 

 

 
           46,963        47,471   

Psilos Group Partners IV, LP

   Multi-sector holdings        

2.52% limited partnership interest(12)(16)

                    
        

 

 

   

 

 

 
                    

Mansell Group, Inc.  

   Advertising        

First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2015

        10,675         10,512        10,654   

First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015

        9,142         9,001        9,067   

First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015(11)

           (29 )       
        

 

 

   

 

 

 
           19,484        19,721   

NDSSI Holdings, LLC

   Electronic equipment & instruments        

First Lien Term Loan, LIBOR+9.75% (3% floor) cash 1% PIK due 12/31/2012

        29,788         29,370        29,278   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/31/2012

        3,500         3,435        3,538   

2,000 Series D Preferred Units

           2,047        2,047   
        

 

 

   

 

 

 
           34,852        34,863   

Eagle Hospital Physicians, Inc.(9)

   Healthcare services        

First Lien Term Loan, LIBOR+8.75% (3% floor) cash due 8/11/2015

        25,400         24,907        25,246   

First Lien Revolver, LIBOR+5.75% (3% floor) cash due 8/11/2015(11)

           (42 )       
        

 

 

   

 

 

 
           24,865        25,246   

Enhanced Recovery Company, LLC

   Diversified support services        

First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015

        13,961         13,713        13,945   

First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015

        11,070         10,882        11,015   

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015(11)

           (69 )       
        

 

 

   

 

 

 
           24,526        24,960   

Epic Acquisition, Inc.  

   Healthcare services        

First Lien Term Loan A, LIBOR+8% (3% floor) cash due 8/13/2015

        8,329         8,189        8,343   

First Lien Term Loan B, 12.25% cash 3% PIK due 8/13/2015

        17,246         16,962        17,281   

First Lien Revolver, LIBOR+6.5% (3% floor) cash due 8/13/2015(11)

           (50 )       
        

 

 

   

 

 

 
           25,101        25,624   

 

15


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Specialty Bakers LLC

   Food distributors        

First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015

        8,325         8,148        8,220   

First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015

        11,000         10,770        10,756   

First Lien Revolver, LIBOR+8.5% cash due 9/15/2015

        2,000         1,916        2,029   
        

 

 

   

 

 

 
           20,834        21,005   

CRGT, Inc.  

   IT consulting & other services        

First Lien Term Loan A, LIBOR+7.5% cash due 10/1/2015

        27,913         27,495        27,659   

First Lien Term Loan B, 12.5% cash 10/1/2015

        22,000         21,648        21,869   

First Lien Revolver, LIBOR+7.5% cash due 10/1/2015(11)

           (200 )       
        

 

 

   

 

 

 
           48,943        49,528   

Welocalize, Inc.  

   Internet software & services        

First Lien Term Loan A, LIBOR+8% (2% floor) cash due 11/19/2015

        15,990         15,720        15,668   

First Lien Term Loan B, LIBOR+9% (2% floor) cash 1.25% PIK due 11/19/2015

        21,231         20,888        20,983   

First Lien Revolver, LIBOR+7% (2% floor) cash due 11/19/2015

        5,250         5,152        5,162   

2,086,163 Common Units in RPWL Holdings, LLC

           2,086        1,973   
        

 

 

   

 

 

 
           43,846        43,786   

Miche Bag, LLC

   Apparel, accessories & luxury goods        

First Lien Term Loan A, LIBOR+9% (3% floor) cash due 12/7/2013

        13,708         13,353        13,735   

First Lien Term Loan B, LIBOR+10% (3% floor) cash 3% PIK due 12/7/2015

        17,425         14,983        17,115   

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015(11)

           (105 )       

10,371 Preferred Equity units in Miche Holdings, LLC(6)

           1,037        1,169   

146,289 Series D Common Equity units in Miche Holdings, LLC(6)

           1,463        1,496   
        

 

 

   

 

 

 
           30,731        33,515   

Bunker Hill Capital II (QP), LP

   Multi-sector holdings        

0.50% limited partnership interest(16)

           40        40   
        

 

 

   

 

 

 
           40        40   

Dominion Diagnostics, LLC(9)

   Healthcare services        

First Lien Term Loan A, LIBOR+7% (2.5% floor) cash due 12/17/2015

        29,550         29,030        29,442   

First Lien Term Loan B, LIBOR+10.5% (2.5% floor) cash 1% PIK due 12/17/2015

        20,008         19,675        19,546   

First Lien Revolver, LIBOR+6.5% (2.5% floor) cash due 12/17/2015(11)

           (83 )       
        

 

 

   

 

 

 
           48,622        48,988   

Advanced Pain Management

   Healthcare services        

First Lien Term Loan, LIBOR+5% (1.75% floor) cash due 12/22/2015

        8,046         7,923        8,007   

First Lien Revolver, LIBOR+5% (1.75% floor) cash due 12/22/2015

        133         129        135   
        

 

 

   

 

 

 
           8,052        8,142   

DISA, Inc.  

   Human resources & employment services        

First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 12/30/2015

        12,460         12,256        12,542   

First Lien Term Loan B, LIBOR+10% (1% floor) cash 1.5% PIK due 12/30/2015

        8,395         8,264        8,410   

First Lien Revolver, LIBOR+6% (1% floor) cash due 12/30/2015(11)

           (63 )       
        

 

 

   

 

 

 
           20,457        20,952   

Saddleback Fence and Vinyl Products, Inc.  

   Building products        

First Lien Term Loan, 8% cash due 11/30/2013

        773         773        773   

First Lien Revolver, 8% cash due 11/30/2013

                    
        

 

 

   

 

 

 
           773        773   

 

16


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Best Vinyl Fence & Deck, LLC

   Building products        

First Lien Term Loan A, 8% cash due 11/30/2013

        2,061         1,947        2,061   

First Lien Term Loan B, 8% PIK due 7/31/2011(15)

        3,969         3,969        2,000   

First Lien Revolver, 8% cash due 11/30/2013

                    
        

 

 

   

 

 

 
           5,916        4,061   

Physicians Pharmacy Alliance, Inc.  

   Healthcare services        

First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016

        16,766         16,461        16,702   

First Lien Revolver, LIBOR+6% cash due 1/4/2016(11)

           (35 )       
        

 

 

   

 

 

 
           16,426        16,702   

Cardon Healthcare Network, LLC

   Diversified support services        

First Lien Term Loan, LIBOR+10% (1.75% floor) cash due 1/6/2016(9)

        11,250         11,051        11,210   

First Lien Revolver, LIBOR+6.5% (1.75% floor) cash due 1/6/2016(11)

           (35 )       
        

 

 

   

 

 

 
           11,016        11,210   

U.S. Retirement Partners, Inc.  

   Diversified financial services        

First Lien Term Loan, LIBOR+9.5% (2% floor) cash due 1/6/2016

        13,600         13,311        13,329   
        

 

 

   

 

 

 
           13,311        13,329   

IOS Acquisitions, Inc.  

   Oil & gas equipment & services        

First Lien Term Loan A, LIBOR+8% (2% floor) cash due 1/14/2016

        8,700         8,576        8,656   

First Lien Term Loan B, LIBOR+10% (2% floor) cash 2% PIK due 1/14/2016

        10,618         10,466        10,480   

First Lien Revolver, LIBOR+8% (2% floor) cash due 1/14/2016

        750         714        777   
        

 

 

   

 

 

 
           19,756        19,913   

Actient Pharmaceuticals, LLC

   Healthcare services        

First Lien Term Loan, LIBOR+6.25% (2% floor) cash due 7/29/2015

        9,180         9,018        9,169   
        

 

 

   

 

 

 
           9,018        9,169   

Phoenix Brands Merger Sub LLC

   Household products        

Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016

        8,036         7,875        7,674   

Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017

        20,390         20,035        19,071   

First Lien Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016

        3,429         3,303        3,198   
        

 

 

   

 

 

 
           31,213        29,943   

U.S. Collections, Inc.  

   Diversified support services        

First Lien Term Loan, LIBOR+5.25% (1.75% floor) cash due 3/31/2016

        10,847         10,649        10,828   
        

 

 

   

 

 

 
           10,649        10,828   

CCCG, LLC

   Oil & gas equipment & services        

First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 7/29/2015

        34,738         34,115        34,152   
        

 

 

   

 

 

 
           34,115        34,152   

Maverick Healthcare Group, LLC

   Healthcare equipment        

First Lien Term Loan, LIBOR+9% (1.75% floor) cash due 12/31/2016

        24,813         24,292        24,440   
        

 

 

   

 

 

 
           24,292        24,440   

Refac Optical Group

  

Specialty

stores

       

First Lien Term Loan A, LIBOR+7.5% cash due 3/23/2016

        14,220         13,920        14,273   

First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 3/23/2016

        20,162         19,731        20,078   

First Lien Revolver, LIBOR+7.5% cash due 3/23/2016(11)

           (113 )       

1,000 Shares of Common Stock in Refac Holdings, Inc.

           1          

1,000 Shares of Preferred Stock in Refac Holdings, Inc.

           999        847   
        

 

 

   

 

 

 
           34,538        35,198   

 

17


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost     Fair Value  

Pacific Architects & Engineers, Inc.  

  

Diversified support

services

       

First Lien Term Loan A, LIBOR+5% (1.5% floor) cash due 4/4/2017

        4,416         4,352        4,332   

First Lien Term Loan B, LIBOR+6% (1.5% floor) cash due 4/4/2017

        5,000         4,929        4,903   
        

 

 

   

 

 

 
           9,281        9,235   

Ernest Health, Inc.  

   Healthcare services        

Second Lien Term Loan, LIBOR+8.5% (1.75% floor) cash due 5/13/2017

        25,000         24,656        25,049   
        

 

 

   

 

 

 
           24,656        25,049   

Securus Technologies, Inc.  

   Integrated telecommunication services        

Second Lien Term Loan, LIBOR+8.25% (1.75% floor) cash due 5/31/2018

        26,500         25,995        26,374   
        

 

 

   

 

 

 
           25,995        26,374   

Gundle/SLT Environmental, Inc.  

  

Environmental

& facilities services

       

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016

        7,980         7,904        7,977   
        

 

 

   

 

 

 
           7,904        7,977   

Titan Fitness, LLC

  

Leisure

facilities

       

First Lien Term Loan A, LIBOR+8.75 (1.25% floor) cash due 6/30/2016

        17,063         16,878        16,938   

First Lien Term Loan B, LIBOR+10.75% (1.25% floor) cash 1.5% PIK due 6/30/2016

        11,545         11,422        11,343   

First Lien Term Loan C, 18% PIK due 6/30/2016

        2,721         2,693        2,593   

First Lien Revolver, LIBOR+8.75% (1.25% floor) cash due 6/30/2016

        543         506        821   
        

 

 

   

 

 

 
           31,499        31,695   

Baird Capital Partners V, LP

   Multi-sector holdings        

0.4% limited partnership interest(16)

           299        299   
        

 

 

   

 

 

 
           299        299   

Charter Brokerage, LLC

   Oil & gas equipment services        

Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 7/13/2016

        17,411         17,242        17,411   

Mezzanine Term Loan, 11.75% cash 2% PIK due 7/13/2017

        10,043         9,948        10,043   

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 7/13/2016

        1,176         1,107        1,177   
        

 

 

   

 

 

 
           28,297        28,631   

Stackpole Powertrain International ULC(16)

   Auto parts & equipment        

Subordinated Term Loan, 12% cash 2% PIK due 8/1/2018

        18,059         17,883        18,059   

1,000 Common Units

           1,000        1,000   
        

 

 

   

 

 

 
           18,883        19,059   

Discovery Practice Management, Inc.  

   Healthcare services        

Senior Term Loan A, LIBOR+7.5% cash due 8/8/2016

        7,027         6,942        7,027   

Senior Term Loan B, 12% cash 3% PIK due 8/8/2016

        6,248         6,174        6,248   

Senior Revolver, LIBOR+7% cash due 8/8/2016(11)

           (37 )       
        

 

 

   

 

 

 
           13,079        13,275   

CTM Group, Inc.  

   Leisure products        

Mezzanine Term Loan A, 11% cash 2% PIK due 2/10/2017

        10,530         10,417        10,530   

Mezzanine Term Loan B, 18.4% PIK due 2/10/2017

        3,181         3,147        3,181   
        

 

 

   

 

 

 
           13,564        13,711   

Bojangles

   Restaurants        

First Lien Term Loan, LIBOR+6.5% (1.5% floor) cash due 8/17/2017

        10,000         9,803        10,000   
        

 

 

   

 

 

 
           9,803        10,000   

Milestone Partners IV, LP

   Multi-sector holdings        

3.07% limited partnership interest(12)(16)

                    
        

 

 

   

 

 

 
                    

 

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Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

Portfolio Company/Type of Investment(1)(2)(5)

  

Industry

   Principal(8)      Cost      Fair Value  

Insight Pharmaceuticals, LLC

   Pharmaceuticals         

First Lien Term Loan, LIBOR+6% (1.5% floor) cash due 8/25/2016

        10,000         9,926         10,000   

Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017

        17,500         17,331         17,500   
        

 

 

    

 

 

 
           27,257         27,500   

National Spine and Pain Centers, LLC

   Healthcare services         

Mezzanine Term Loan, 11% cash 1.6% PIK due 9/27/2017

        19,002         18,816         19,002   

250,000 Class A Units

           250         250   
        

 

 

    

 

 

 
           19,066         19,252   
        

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (148.1% of net assets)

         $ 1,108,174       $ 1,079,440   
        

 

 

    

 

 

 

Total Portfolio Investments

         $ 1,156,082       $ 1,119,837   
        

 

 

    

 

 

 

 

(1) Debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.

 

(2) See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.

 

(3) Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.

 

(4) Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.

 

(5) Equity ownership may be held in shares or units of companies related to the portfolio companies.

 

(6) Income producing through payment of dividends or distributions.

 

(7) Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.

 

(8) Principal includes accumulated PIK interest and is net of repayments.

 

(9) Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:

 

Portfolio Company

 

Effective date

 

Cash interest

 

PIK interest

 

Reason

Cardon Healthcare Network, LLC

  July 1, 2011   – 2.5% on Term Loan     Tier pricing per credit agreement

Eagle Hospital Physicians, Inc.

  July 1, 2011   – 0.25% on Term Loan & Revolver     Per loan agreement

Dominion Diagnostics, LLC

  April 1, 2011   – 0.5% on Term Loan A   – 1.0% on Term Loan B   Tier pricing per credit agreement

Lighting by Gregory, LLC

  March 11, 2011   – 2.0% on Bridge Loan     Per loan amendment

Capital Equipment Group, Inc.

  July 1, 2010   – 2.0% on Term Loan   – 0.75% on Term Loan   Per waiver agreement

Traffic Control & Safety Corporation

  June 1, 2010   – 4.0% on Second Lien Term Loan   + 1.0% on Second Lien Term Loan   Per restructuring agreement

Premier Trailer Leasing, Inc.

  August 4, 2009   + 4.0% on Term Loan     Default interest per credit agreement

 

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Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2011

 

(10) Revolving credit line had been suspended and was deemed unlikely to be renewed in the future.

 

(11) Amounts represent unearned income related to undrawn commitments.

 

(12) Represents an unfunded commitment to fund limited partnership interest.

 

(13) Investment was on cash non-accrual status as of September 30, 2011.

 

(14) Investment was on PIK non-accrual status as of September 30, 2011.

 

(15) Best Vinyl Fence & Deck, LLC Term Loan B was under negotiation and, as such, the maturity date of the loan had been temporarily suspended.

 

(16) Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act.

 

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FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

 

Note 1. Organization

Fifth Street Mezzanine Partners III, L.P. (the “Partnership”), a Delaware limited partnership, was organized on February 15, 2007 to primarily invest in debt securities of small and middle market companies. FSMPIII GP, LLC was the Partnership’s general partner (the “General Partner”). The Partnership’s investments were managed by Fifth Street Management LLC (the “Investment Adviser”). The General Partner and Investment Adviser were under common ownership.

Effective January 2, 2008, the Partnership merged with and into Fifth Street Finance Corp. (the “Company”), an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 (the “1940 Act”). Fifth Street Finance Corp. is managed by the Investment Adviser. Prior to January 2, 2008, references to the Company are to the Partnership. Since January 2, 2008, references to the “Company”, “FSC”, “we” or “our” are to Fifth Street Finance Corp., unless the context otherwise requires.

The Company also has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for income tax purposes, which hold certain portfolio investments of the Company. The subsidiaries are consolidated with the Company for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Company’s Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.

On November 28, 2011, the Company transferred the listing of its common stock from the New York Stock Exchange to the NASDAQ Global Select Market, where it continues to trade under the symbol “FSC.” The following table reflects common stock offerings that have occurred from inception through December 31, 2011:

 

Date

 

Transaction

  Shares     Offering price     Gross proceeds  

June 17, 2008

  Initial public offering     10,000,000      $ 14.12      $ 141.2 million   

July 21, 2009

  Follow-on public offering (including underwriters’ exercise of over-allotment option)     9,487,500      $ 9.25      $ 87.8 million   

September 25, 2009

  Follow-on public offering (including underwriters’ exercise of over-allotment option)     5,520,000      $ 10.50      $ 58.0 million   

January 27, 2010

  Follow-on public offering     7,000,000      $ 11.20      $ 78.4 million   

February 25, 2010

  Underwriters’ exercise of over-allotment option     300,500      $ 11.20      $ 3.4 million   

June 21, 2010

  Follow-on public offering (including underwriters’ exercise of over-allotment option)     9,200,000      $ 11.50      $ 105.8 million   

December 2010

  At-the-Market offering     429,110      $ 11.87 (1)    $ 5.1 million   

February 4, 2011

  Follow-on public offering (including underwriters’ exercise of over-allotment option)     11,500,000      $ 12.65      $ 145.5 million   

June 24, 2011

  Follow-on public offering (including underwriters’ exercise of over-allotment option)     5,558,469      $ 11.72      $ 65.1 million   

 

(1) Average offering price

On February 3, 2010, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P., received a license, effective February 1, 2010, from the United States Small Business Administration, or SBA, to operate as a small business investment company, or SBIC, under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.

 

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Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

 

The SBIC license allows the Company’s SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million in SBA-guaranteed debentures when they have at least $112.5 million in combined regulatory capital. As of December 31, 2011, the Company’s SBIC subsidiary had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $113.4 million. These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:

 

Rate Fix Date

   Debenture
Amount
     Fixed
Interest
Rate
    SBA
Annual
Charge
 

September 2010

   $ 73,000         3.215 %     0.285 %

March 2011

     65,300         4.084 %     0.285 %

September 2011

     11,700         2.877 %     0.285 %

The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, the Company’s SBIC subsidiary may also be limited in its ability to make distributions to the Company if it does not have sufficient capital, in accordance with SBA regulations.

The Company’s SBIC subsidiary is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that the SBIC subsidiary will receive SBA-guaranteed debenture funding and is dependent upon the SBIC subsidiary continuing to be in compliance with SBA regulations and policies.

The SBA, as a creditor, will have a superior claim to the SBIC subsidiary’s assets over the Company’s stockholders in the event the Company liquidates the SBIC subsidiary or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiary upon an event of default.

The Company has received exemptive relief from the Securities and Exchange Commission (“SEC”) to permit it to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the definition of senior securities in the Company’s 200% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200% asset coverage test by permitting it to borrow up to $150 million more than it would otherwise be able to under the 1940 Act absent the receipt of this exemptive relief.

 

Note 2. Significant Accounting Policies

Basis of Presentation and Liquidity:

The Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair presentation of the Consolidated Financial Statements have been made. The financial results of the Company’s portfolio investments are not consolidated in the Company’s Consolidated Financial Statements.

 

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FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

 

Although the Company expects to fund the growth of its investment portfolio through the net proceeds from the recent and future equity offerings, the Company’s dividend reinvestment plan, and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, the Company cannot assure that its plans to raise capital will be successful. In addition, the Company intends to distribute to its stockholders between 90% and 100% of its taxable income each year in order to satisfy the requirements applicable to Regulated Investment Companies (“RICs”) under Subchapter M of the Internal Revenue Code (“Code”). Consequently, the Company may not have the funds or the ability to fund new investments, to make additional investments in its portfolio companies, to fund its unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of its portfolio investments may make it difficult for the Company to sell these investments when desired and, if the Company is required to sell these investments, it may realize significantly less than their recorded value.

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and conditions. The most significant estimates inherent in the preparation of the Company’s Consolidated Financial Statements are the valuation of investments and revenue recognition.

The Consolidated Financial Statements include portfolio investments at fair value of $1.1 billion and $1.1 billion at December 31, 2011 and September 30, 2011, respectively. The portfolio investments represent 156.5% and 153.7% of net assets at December 31, 2011 and September 30, 2011, respectively, and their fair values have been determined by the Company’s Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation; “Affiliate Investments” are defined as investments in companies in which the Company owns between 5% and 25% of the voting securities; and “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.

Fair Value Measurements:

The Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures (“ASC 820”) defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

 

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Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

 

Assets recorded at fair value in the Company’s Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

   

Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

   

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

 

   

Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Under ASC 820, the Company performs detailed valuations of its debt and equity investments on an individual basis, using market, income and bond yield approaches as appropriate. In general, the Company utilizes the bond yield method in determining the fair value of its investments, as long as it is appropriate. If, in the Company’s judgment, the bond yield approach is not appropriate, it may use the market approach in determining the fair value of the Company’s investment in the portfolio company. If there is deterioration in the credit quality of the portfolio company or an investment is in workout status, the Company may use alternative methodologies, including an asset liquidation or expected recovery model.

Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Company analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization), cash flows, net income, revenues, or in limited cases, book value. The Company generally requires portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

The Company’s Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the Company’s investments:

 

   

The quarterly valuation process begins with each portfolio company or investment being initially valued by the Company’s finance department;

 

   

Preliminary valuations are then reviewed and discussed with principals of the Investment Adviser;

 

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Table of Contents

FIFTH STREET FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

 

   

Separately, independent valuation firms engaged by the Board of Directors prepare preliminary valuations on a selected basis and submit the reports to the Company;

 

   

The finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;

 

   

The finance department prepares a valuation report for the Valuation Committee of the Board of Directors;

 

   

The Valuation Committee of the Board of Directors is apprised of the preliminary valuations of the independent valuation firms;

 

   

The Valuation Committee of the Board of Directors reviews the preliminary valuations, and the finance department responds and supplements the preliminary valuations to reflect any comments provided by the Valuation Committee;

 

   

The Valuation Committee of the Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in the Company’s portfolio; and

 

   

The Board of Directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith.

The fair value of all of the Company’s investments at December 31, 2011 and September 30, 2011 was determined by the Board of Directors. The Board of Directors is solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and a consistently applied valuation process.

The Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. Upon completion of their processes each quarter, the independent valuation firms provide the Company with written reports regarding the preliminary valuations of selected portfolio securities as of the close of such quarter. The Company will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of selected portfolio securities each quarter; however, the Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. The Company intends to have a portion of the portfolio valued by an independent third party on a quarterly basis, with a substantial portion being valued on an annual basis.

Investment Income:

Interest income, adjusted for amortization of premium and accretion of original issue discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. In connection with its investment, the Company sometimes receives nominal cost equity that is valued as part of the negotiation process with the particular portfolio company. When the Company receives nominal cost equity, the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the loan is ac