0001193125-13-207629.txt : 20130508 0001193125-13-207629.hdr.sgml : 20130508 20130508163533 ACCESSION NUMBER: 0001193125-13-207629 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20130331 FILED AS OF DATE: 20130508 DATE AS OF CHANGE: 20130508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Fifth Street Finance Corp CENTRAL INDEX KEY: 0001414932 IRS NUMBER: 261219283 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00755 FILM NUMBER: 13825022 BUSINESS ADDRESS: STREET 1: 10 BANK STREET STREET 2: SUITE 1210 CITY: WHITE PLAINS STATE: NY ZIP: 10601 BUSINESS PHONE: (914) 286-6800 MAIL ADDRESS: STREET 1: 10 BANK STREET STREET 2: SUITE 1210 CITY: WHITE PLAINS STATE: NY ZIP: 10601 10-Q 1 d527293d10q.htm 10-Q 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 March 31, 2013

OR

 

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

COMMISSION FILE NUMBER: 1-33901

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

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 120,755,545 shares of common stock outstanding as of May 7, 2013.

 

 

 


Table of Contents

FIFTH STREET FINANCE CORP.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

 

   PART I — FINANCIAL INFORMATION   
Item 1.    Consolidated Financial Statements (unaudited, except as noted below):   
  

Consolidated Statements of Assets and Liabilities as of March 31, 2013 and September 30, 2012

     1   
  

Consolidated Statements of Operations for the three and six months ended March 31, 2013 and March 31, 2012

     2   
  

Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2013 and March 31, 2012

     3   
  

Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and March 31, 2012

     4   
  

Consolidated Schedule of Investments as of March 31, 2013

     5   
  

Consolidated Schedule of Investments as of September 30, 2012 (audited)

     15   
  

Notes to Consolidated Financial Statements

     23   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      54   
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      80   


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 amounts)

(unaudited)

 

     March 31,
2013
    September 30,
2012
 
ASSETS   

Investments at fair value:

    

Control investments (cost March 31, 2013: $58,360; cost September 30, 2012: $58,557)

   $ 56,514      $ 53,240   

Affiliate investments (cost March 31, 2013: $30,236; cost September 30, 2012: $29,496)

     31,864        31,187   

Non-control/Non-affiliate investments (cost March 31, 2013: $1,647,340; cost September 30, 2012: $1,180,436)

     1,660,517        1,203,681   
  

 

 

   

 

 

 

Total investments at fair value (cost March 31, 2013: $1,735,936; cost September 30, 2012: $1,268,489)

     1,748,895        1,288,108   

Cash and cash equivalents

     38,169        74,393   

Interest and fees receivable

     10,584        7,652   

Due from portfolio company

     855        3,292   

Receivables from unsettled transactions

            1,750   

Deferred financing costs

     17,108        13,751   

Other assets

     736        56   
  

 

 

   

 

 

 

Total assets

   $ 1,816,347      $ 1,389,002   
  

 

 

   

 

 

 
                                             LIABILITIES AND NET ASSETS     

Liabilities:

    

Accounts payable, accrued expenses and other liabilities

   $ 1,878      $ 978   

Base management fee payable

     7,591        6,573   

Incentive fee payable

     7,001        5,579   

Due to FSC, Inc.

     1,252        1,630   

Interest payable

     2,342        4,219   

Payments received in advance from portfolio companies

     24        40   

Offering costs payable

            162   

Credit facilities payable

     373,548        201,251   

SBA debentures payable

     181,750        150,000   

Unsecured convertible notes payable

     115,000        115,000   

Unsecured notes payable

     75,000          
  

 

 

   

 

 

 

Total liabilities

     765,386        485,432   

Net assets:

    

Common stock, $0.01 par value, 250,000 and 150,000 shares authorized at March 31, 2013 and September 30, 2012, respectively; 106,209 and 91,048 shares issued and outstanding at March 31, 2013 and September 30, 2012, respectively

     1,062        910   

Additional paid-in-capital

     1,174,678        1,019,053   

Net unrealized appreciation on investments

     13,337        19,998   

Net realized loss on investments and interest rate swap

     (127,584     (128,062

Accumulated overdistributed net investment income

     (10,532     (8,329
  

 

 

   

 

 

 

Total net assets (equivalent to $9.90 and $9.92 per common share at March 31, 2013 and September 30, 2012, respectively) (Note 12)

     1,050,961        903,570   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,816,347      $ 1,389,002   
  

 

 

   

 

 

 

See notes to Consolidated Financial Statements.

 

1


Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

     Three months
ended

March  31,
2013
    Three months
ended
March 31,
2012
    Six months
ended
March 31,
2013
    Six months
ended
March 31,
2012
 

Interest income:

        

Control investments

   $ 876      $ 211      $ 1,758      $ 432   

Affiliate investments

     725        690        1,309        1,394   

Non-control/Non-affiliate investments

     36,019        28,183        69,473        57,309   

Interest on cash and cash equivalents

     5        14        8        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     37,625        29,098        72,548        59,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

PIK interest income:

        

Control investments

     108               216        38   

Affiliate investments

     308        155        765        310   

Non-control/Non-affiliate investments

     3,631        2,737        6,786        5,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     4,047        2,892        7,767        6,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee income:

        

Control investments

     114               213          

Affiliate investments

     12        146        24        254   

Non-control/Non-affiliate investments

     11,800        9,905        24,483        15,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     11,926        10,051        24,720        16,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend and other income:

        

Non-control/Non-affiliate investments

     1,089        39        1,435        72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other income

     1,089        39        1,435        72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     54,687        42,080        106,470        81,576   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Base management fee

     8,891        5,391        16,937        11,132   

Incentive fee

     7,001        5,698        13,640        10,945   

Professional fees

     784        600        1,972        1,691   

Board of Directors fees

     122        70        251        126   

Interest expense

     7,761        5,602        14,917        11,326   

Administrator expense

     670        708        1,600        1,524   

General and administrative expenses

     1,455        1,256        2,594        2,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     26,684        19,325        51,911        39,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee waived

     (1,300            (1,300       
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     25,384        19,325        50,611        39,138   

Gain on extinguishment of unsecured convertible notes

            36               1,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     29,303        22,791        55,859        43,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized appreciation (depreciation) on investments:

        

Control investments

     4,693        (25     3,471        1,089   

Affiliate investments

     93        10,610        (63     9,327   

Non-control/Non-affiliate investments

     (2,106     (2,538 )     (10,067     3,465   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on investments

     2,680        8,047        (6,659     13,881   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized gain (loss) on investments:

        

Control investments

                            

Affiliate investments

            (10,693 )            (10,620 )

Non-control/Non-affiliate investments

     (149     (89     478        (16,800
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) on investments

     (149     (10,782 )     478        (27,420 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 31,834      $ 20,056      $ 49,678      $ 30,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share — basic

   $ 0.28      $ 0.29      $ 0.56      $ 0.58   

Earnings per common share — basic

   $ 0.30      $ 0.25      $ 0.49      $ 0.40   

Weighted average common shares outstanding — basic

     106,022        79,534        100,394        75,935   

Net investment income per common share — diluted

   $ 0.27      $ 0.28      $ 0.54      $ 0.54   

Earnings per common share — diluted

   $ 0.29      $ 0.24      $ 0.48      $ 0.38   

Weighted average common shares outstanding — diluted

     113,812        87,943        108,266        84,084   

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 amounts)

(unaudited)

 

     Six months
ended
March 31,
2013
    Six months
ended
March 31,
2012
 

Operations:

    

Net investment income

   $ 55,859      $ 43,779   

Net unrealized appreciation (depreciation) on investments

     (6,659     13,881   

Net realized gain (loss) on investments

     478        (27,420
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     49,678        30,240   
  

 

 

   

 

 

 

Stockholder transactions:

    

Distributions to stockholders

     (58,063     (45,867 )
  

 

 

   

 

 

 

Net decrease in net assets from stockholder transactions

     (58,063     (45,867 )
  

 

 

   

 

 

 

Capital share transactions:

    

Issuance of common stock, net

     151,309        99,876   

Issuance of common stock under dividend reinvestment plan

     4,467        446   
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     155,776        100,322   
  

 

 

   

 

 

 

Total increase in net assets

     147,391        84,695   
  

 

 

   

 

 

 

Net assets at beginning of period

     903,570        728,627   
  

 

 

   

 

 

 

Net assets at end of period

   $ 1,050,961      $ 813,322   
  

 

 

   

 

 

 

Net asset value per common share

   $ 9.90      $ 9.87   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     106,209        82,421   

See notes to Consolidated Financial Statements.

 

3


Table of Contents

Fifth Street Finance Corp.

Consolidated Statements of Cash Flows

(in thousands, except per share amounts)

(unaudited)

 

     Six months
ended
March 31,
2013
    Six months
ended
March 31,
2012
 

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 49,678      $ 30,240   

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

    

Gain on extinguishment of convertible notes

            (1,341

Net unrealized (appreciation) depreciation on investments

     6,659        (13,881

Net realized (gain) loss on investments

     (478     27,420   

PIK interest income

     (7,767 )     (6,307

Recognition of fee income

     (24,720     (16,044

Accretion of original issue discount on investments

     (283 )     (914

Amortization of deferred financing costs

     2,623        2,051   

Changes in operating assets and liabilities:

    

Fee income received

     21,148        12,578   

Increase in interest and fees receivable

     (2,596     (225

(Increase) decrease in due from portfolio company

     2,437        (105

Decrease in receivables from unsettled transactions

     1,750          

(Increase) decrease in other assets

     (680 )     26   

Increase in accounts payable, accrued expenses and other liabilities

     900        483   

Increase (decrease) in base management fee payable

     1,018        (319

Increase in incentive fee payable

     1,422        700   

Decrease in due to FSC, Inc.

     (378 )     (63

Decrease in interest payable

     (1,877 )     (360

Decrease in payments received in advance from portfolio companies

     (16 )     (8

Purchases of investments and net revolver activity, net of syndications

     (735,531 )     (204,346

Principal payments received on investments (scheduled payments)

     22,328        23,309   

Principal payments received on investments (payoffs)

     198,463        228,604   

PIK interest income received in cash

     4,598        1,798   

Proceeds from the sale of investments

     54,461        11,549   
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     (406,841 )     94,845   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Distributions paid in cash

     (53,595 )     (45,421

Borrowings under SBA debentures payable

     31,750          

Borrowings under credit facilities

     575,548        223,500   

Repayments of borrowings under credit facilities

     (403,251 )     (314,024

Proceeds from the issuance of unsecured notes

     72,465          

Repurchases of unsecured convertible notes

            (9,378

Proceeds from the issuance of common stock

     151,667        100,700   

Deferred financing costs paid

     (3,445 )     (1,973

Offering costs paid

     (522 )     (715
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     370,617        (47,311
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (36,224     47,534   

Cash and cash equivalents, beginning of period

     74,393        67,644   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 38,169      $ 115,178   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 14,371      $ 9,840   

Non-cash financing activities:

    

Issuance of shares of common stock under dividend reinvestment plan

   $ 4,467      $ 446   

 

4


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Control Investments (3)

          

Coll Materials Group LLC (9)(12)

   Environmental & facilities services        

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

      $ 7,658       $ 7,096      $   

Second Lien Term Loan B, 14% PIK due 11/1/2014

        2,113         2,000        1,000   

50% Membership interest in CD Holdco, LLC

           3,128          
        

 

 

   

 

 

 
           12,224        1,000   
        

 

 

   

 

 

 

Traffic Solutions Holdings, Inc. (formerly Statewide Holdings, Inc.)

   Construction and Engineering        

First Lien Term Loan A, LIBOR+8.5% (1.25% floor) cash due 8/10/2015

        14,557         14,550        14,646   

First Lien Term Loan B, 12% cash 3% PIK due 8/10/2015

        14,275         14,268        14,346   

First Lien Revolver, LIBOR+8.5% (1.25% floor) cash due 8/10/2015 (10)

           (3       

LC Facility, 8.5% cash due 8/10/2015 (10)

           (3       

746,114 Series A Preferred Units

           12,008        15,113   

746,114 Common Stock Units

           5,316        11,409   
        

 

 

   

 

 

 
           46,136        55,514   
        

 

 

   

 

 

 

Total Control Investments (5.4% of net assets)

         $ 58,360      $ 56,514   
        

 

 

   

 

 

 

Affiliate Investments (4)

          

Caregiver Services, Inc.

   Healthcare services        

1,080,399 shares of Series A Preferred Stock

         $ 1,080      $ 3,053   
        

 

 

   

 

 

 
           1,080        3,053   
        

 

 

   

 

 

 

Ambath/Rebath Holdings, Inc. (9)

   Home improvement retail        

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

      $ 4,315         4,304        4,253   

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

        24,877         24,852        24,558   

4,668,788 shares of Preferred Stock

                    
        

 

 

   

 

 

 
           29,156        28,811   
        

 

 

   

 

 

 

Total Affiliate Investments (3.0% of net assets)

         $ 30,236      $ 31,864   
        

 

 

   

 

 

 

Non-Control/Non-Affiliate Investments (7)

          

Fitness Edge, LLC

   Leisure Facilities        

1,000 Common Units

         $ 43      $ 210   
        

 

 

   

 

 

 
           43        210   
        

 

 

   

 

 

 

Capital Equipment Group, Inc. (9)

   Industrial machinery        

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

      $ 3,965         3,952        3,972   

33,786 shares of Common Stock

           345        861   
        

 

 

   

 

 

 
           4,297        4,833   
        

 

 

   

 

 

 

Western Emulsions, Inc.

   Construction materials        

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

        7,109         7,060        7,243   
        

 

 

   

 

 

 
           7,060        7,243   
        

 

 

   

 

 

 

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

        4,201         4,170        4,283   

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

        10,466         10,456        10,488   

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

        2,500         2,499        2,514   
        

 

 

   

 

 

 
           17,125        17,285   
        

 

 

   

 

 

 

 

5


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Cenegenics, LLC

   Healthcare services        

414,419 Common Units (6)

           598        1,335   
        

 

 

   

 

 

 
           598        1,335   
        

 

 

   

 

 

 

Trans-Trade Brokers, Inc. (9)

   Air freight & logistics        

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

        13,464         13,351        13,463   

First Lien Term Loan B, 12% cash due 9/10/2014 (13)

        6,482         6,203          
        

 

 

   

 

 

 
           19,554        13,463   
        

 

 

   

 

 

 

Riverlake Equity Partners II, LP

   Multi-sector holdings        

1.78% limited partnership interest (14)

           362        337   
        

 

 

   

 

 

 
           362        337   
        

 

 

   

 

 

 

Riverside Fund IV, LP

   Multi-sector holdings        

0.34% limited partnership interest (6)(14)

           731        679   
        

 

 

   

 

 

 
           731        679   
        

 

 

   

 

 

 

Tegra Medical, LLC (9)

   Healthcare equipment        

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

        17,545         17,417        17,619   

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

        23,485         23,336        23,426   

First Lien Term Loan C, 30% PIK due 12/31/2014

        1,286         1,286        1,260   

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

        2,500         2,473        2,500   
        

 

 

   

 

 

 
           44,512        44,805   
        

 

 

   

 

 

 

Psilos Group Partners IV, LP

   Multi-sector holdings        

2.35% limited partnership interest (11)(14)

                    
        

 

 

   

 

 

 
                    
        

 

 

   

 

 

 

Mansell Group, Inc. (9)

   Advertising        

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

        8,362         8,283        8,549   

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

        9,353         9,271        9,582   

First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (10)

           (17       
        

 

 

   

 

 

 
           17,537        18,131   
        

 

 

   

 

 

 

Eagle Hospital Physicians, Inc. (9)(12)(15)

   Healthcare services        

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

        24,256         23,929        18,733   

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

        1,100         1,071          
        

 

 

   

 

 

 
           25,000        18,733   
        

 

 

   

 

 

 

Enhanced Recovery Company, LLC

   Diversified support services        

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

        9,408         9,295        9,418   

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

        11,080         10,969        11,001   

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (10)

           (40       
        

 

 

   

 

 

 
           20,224        20,419   
        

 

 

   

 

 

 

Specialty Bakers LLC (15)

   Food distributors        

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

        3,836         3,680        3,836   

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

        11,000         10,860        11,000   

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

        2,750         2,699        69   
        

 

 

   

 

 

 
           17,239        14,905   
        

 

 

   

 

 

 

Welocalize, Inc.

   Internet software & services        

3,393,060 Common Units in RPWL Holdings, LLC

           3,393        7,457   
        

 

 

   

 

 

 
           3,393        7,457   
        

 

 

   

 

 

 

 

6


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Miche Bag, LLC

   Apparel, accessories &
luxury goods
       

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

        5,466         5,393        5,463   

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

        18,240         16,677        17,700   

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

        1,482         1,442        1,480   

10,371 Series A Preferred Equity units in Miche Bag Holdings, LLC

           1,037        1,442   

1,358.854 Series C Preferred Equity units in Miche Bag Holdings, LLC

           136        29   

19,417 Series A Common Equity units in Miche Bag Holdings, LLC

                    

146,289 Series D Common Equity units in Miche Bag Holdings, LLC

           1,463          
        

 

 

   

 

 

 
           26,148        26,114   
        

 

 

   

 

 

 

Bunker Hill Capital II (QP), LP

   Multi-sector holdings        

0.51% limited partnership interest (14)

           94        4   
        

 

 

   

 

 

 
           94        4   
        

 

 

   

 

 

 

Drugtest, Inc.

   Human resources &
employment services
       

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

        10,493         10,351        10,607   

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

        8,589         8,493        8,675   

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

        4,500         4,453        4,541   
        

 

 

   

 

 

 
           23,297        23,823   
        

 

 

   

 

 

 

Saddleback Fence and Vinyl Products, Inc. (9)

   Building products        

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

        635         635        636   

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

        100         100        101   
        

 

 

   

 

 

 
           735        737   
        

 

 

   

 

 

 

Physicians Pharmacy Alliance, Inc. (9)

   Healthcare services        

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

        11,415         11,190        11,401   

First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)

           (27       
        

 

 

   

 

 

 
           11,163        11,401   
        

 

 

   

 

 

 

Cardon Healthcare Network, LLC (9)

   Diversified support
services
       

First Lien Term Loan A, LIBOR+10% (1.75% floor) cash due 1/24/2017

        10,058         9,906        10,156   

First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 1/24/2017

        21,014         20,833        21,222   

First Lien Revolver, LIBOR+6.5% (1.75% floor) cash due 1/24/2017 (10)

           (35       

65,903 Class A Units

           250        508   
        

 

 

   

 

 

 
           30,954        31,886   
        

 

 

   

 

 

 

U.S. Retirement Partners, Inc.

   Diversified financial
services
       

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

        33,563         33,217        33,847   
        

 

 

   

 

 

 
           33,217        33,847   
        

 

 

   

 

 

 

Phoenix Brands Merger Sub LLC (9)

   Household products        

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

        6,161         6,054        6,108   

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

        21,197         20,866        20,851   

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

        2,357         2,262        2,365   
        

 

 

   

 

 

 
           29,182        29,324   
        

 

 

   

 

 

 

U.S. Collections, Inc.

   Diversified support
services
       

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

        9,387         9,293        9,368   
        

 

 

   

 

 

 
           9,293        9,368   
        

 

 

   

 

 

 

CCCG, LLC (9)

   Oil & gas equipment
services
       

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

        34,881         34,348        35,174   
        

 

 

   

 

 

 
           34,348        35,174   
        

 

 

   

 

 

 

Maverick Healthcare Group, LLC

   Healthcare equipment        

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

        24,438         24,039        24,444   
        

 

 

   

 

 

 
           24,039        24,444   
        

 

 

   

 

 

 

Refac Optical Group

   Specialty stores        

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

        11,948         11,726        12,004   

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

        20,402         20,042        20,453   

First Lien Revolver, LIBOR+7.5% cash due 3/23/2016 (10)

           (90       

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

           1          

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

           999        309   
        

 

 

   

 

 

 
           32,678        32,766   
        

 

 

   

 

 

 

 

7


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Securus Technologies, Inc. (9)

   Integrated telecommunication

services

       

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

        12,500         12,306        12,735   
        

 

 

   

 

 

 
           12,306        12,735   
        

 

 

   

 

 

 

Gundle/SLT Environmental, Inc.

   Environmental & facilities
services
       

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

        8,857         8,790        8,916   
        

 

 

   

 

 

 
           8,790        8,916   
        

 

 

   

 

 

 

Titan Fitness, LLC

   Leisure facilities        

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

        28,696         28,593        28,692   

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

        17,898         17,815        17,935   

First Lien Revolver, LIBOR+8.75% (1.25% floor) cash due 6/30/2016 (10)

           (25       
        

 

 

   

 

 

 
           46,383        46,627   
        

 

 

   

 

 

 

Baird Capital Partners V, LP

   Multi-sector holdings        

0.40% limited partnership interest (14)

           649        733   
        

 

 

   

 

 

 
           649        733   
        

 

 

   

 

 

 

Charter Brokerage, LLC

   Oil & gas equipment services        

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

        30,225         30,117        30,810   

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

        11,857         11,792        11,850   

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 7/13/2016 (10)

           (48 )       
        

 

 

   

 

 

 
           41,861        42,660   
        

 

 

   

 

 

 

Stackpole Powertrain International ULC

   Auto parts & equipment        

1,000 Common Units (14)

           1,000        2,687   
        

 

 

   

 

 

 
           1,000        2,687   
        

 

 

   

 

 

 

Discovery Practice Management, Inc.

   Healthcare services        

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

        6,112         6,059        6,177   

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

        6,539         6,490        6,596   

First Lien Revolver, LIBOR+7% cash due 8/8/2016

        850         825        894   
        

 

 

   

 

 

 
           13,374        13,667   
        

 

 

   

 

 

 

CTM Group, Inc.

   Leisure products        

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

        10,856         10,774        10,908   

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

        4,163         4,139        4,289   
        

 

 

   

 

 

 
           14,913        15,197   
        

 

 

   

 

 

 

Milestone Partners IV, LP

   Multi-sector holdings        

1.36% limited partnership interest (14)

           895        1,021   
        

 

 

   

 

 

 
           895        1,021   
        

 

 

   

 

 

 

Insight Pharmaceuticals LLC

   Pharmaceuticals        

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

        13,517         13,426        13,703   
        

 

 

   

 

 

 
           13,426        13,703   
        

 

 

   

 

 

 

National Spine and Pain Centers, LLC

   Healthcare services        

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

        29,026         28,825        29,535   

300,700.98 Class A Units

           301        316   
        

 

 

   

 

 

 
           29,126        29,851   
        

 

 

   

 

 

 

RCPDirect, LP

   Multi-sector holdings        

0.91% limited partnership interest (6)(14)

           461        523   
        

 

 

   

 

 

 
           461        523   
        

 

 

   

 

 

 

The MedTech Group, Inc.

   Healthcare equipment        

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

        12,610         12,530        12,620   
        

 

 

   

 

 

 
           12,530        12,620   
        

 

 

   

 

 

 

 

8


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Digi-Star Acquisition Holdings, Inc.

   Industrial
machinery
       

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

        12,223         12,127        12,349   

264.37 Class A Preferred Units

           264        292   

2,954.87 Class A Common Units

           36        145   
        

 

 

   

 

 

 
           12,427        12,786   
        

 

 

   

 

 

 

CPASS Acquisition Company

   Internet
software &
services
       

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

        4,724         4,638        4,780   

First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (10)

           (14       
        

 

 

   

 

 

 
           4,624        4,780   
        

 

 

   

 

 

 

Genoa Healthcare Holdings, LLC

   Pharmaceuticals        

Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016

        9,000         9,000        9,025   

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

        12,842         12,747        13,094   

Senior Revolver, LIBOR+5.25% (1.25% floor) cash due 12/1/2016

                    

500,000 Preferred units (6)

           261        261   

500,000 Class A Common Units

           25        421   
        

 

 

   

 

 

 
           22,033        22,801   
        

 

 

   

 

 

 

Slate Pharmaceuticals Acquisition Corp.

   Healthcare
services
       

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

        20,385         20,230        21,005   
        

 

 

   

 

 

 
           20,230        21,005   
        

 

 

   

 

 

 

ACON Equity Partners III, LP

   Multi-
sector holdings
       

0.31% limited partnership interest (6)(14)

           222        208   
        

 

 

   

 

 

 
           222        208   
        

 

 

   

 

 

 

CRGT, Inc.

   IT consulting &
other services
       

Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018

        26,337         26,128        27,064   
        

 

 

   

 

 

 
           26,128        27,064   
        

 

 

   

 

 

 

Riverside Fund V, LP

   Multi-sector
holdings
       

0.48% limited partnership interest (14)

           147        147   
        

 

 

   

 

 

 
           147        147   
        

 

 

   

 

 

 

World 50, Inc.

   Research &
consulting
services
       

First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017

        11,080         10,965        11,174   

First Lien Term Loan B, 12.5% cash due 3/30/2017

        7,000         6,930        7,063   

First Lien Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)

           (50       
        

 

 

   

 

 

 
           17,845        18,237   
        

 

 

   

 

 

 

Huddle House, Inc.

   Restaurants        

Subordinated Term Loan, 11% cash 1.6% PIK due 3/30/2018

        14,077         13,964        14,355   
        

 

 

   

 

 

 
           13,964        14,355   
        

 

 

   

 

 

 

Nixon, Inc.

   Apparel,
accessories &
luxury goods
       

First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018

        10,270         10,187        10,490   
        

 

 

   

 

 

 
           10,187        10,490   
        

 

 

   

 

 

 

JTC Education, Inc. (9)

   Education
services
       

Subordinated Term Loan, 13% cash due 11/1/2017

        14,500         14,404        14,621   

17,391 Shares of Series A-1 Preferred Stock

           313        195   

17,391 Shares of Common Stock

           187          
        

 

 

   

 

 

 
           14,904        14,816   
        

 

 

   

 

 

 

 

9


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

BMC Acquisition, Inc.

   Diversified financial services        

Senior Term Loan, LIBOR+5.5% (1% floor) cash due 5/1/2017

        5,555         5,520        5,534   

Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017

        115         107        146   

500 Series A Preferred Shares

           500        450   

50,000 Common Shares

           1          
        

 

 

   

 

 

 
           6,128        6,130   
        

 

 

   

 

 

 

Ansira Partners, Inc.

   Advertising        

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017

        11,730         11,655        11,730   

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)

           (7       

250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC

           250        277   
        

 

 

   

 

 

 
           11,898        12,007   
        

 

 

   

 

 

 

MX USA, Inc.

   Healthcare services        

Second Lien Term Loan, LIBOR+10.5% (1.25% floor) cash due 10/31/2017

        27,000         26,833        27,620   
        

 

 

   

 

 

 
           26,833        27,620   
        

 

 

   

 

 

 

Edmentum, Inc. (formerly PLATO, Inc.)

   Education services        

Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019

        17,000         17,000        17,232   
        

 

 

   

 

 

 
                 17,000     17,232  
        

 

 

   

 

 

 

I Drive Safely, LLC

   Education services        

First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017

        27,000         26,996        27,683   

First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)

           (1 )       

75,000 Class A Common Units of IDS Investments, LLC

           750        689   
        

 

 

   

 

 

 
           27,745        28,372   
        

 

 

   

 

 

 

ConvergeOne Holdings Corp.

   Integrated telecommunication

services

       

First Lien Term Loan, LIBOR+7% (1.5% floor) cash due 6/8/2017

        9,625         9,625        9,718   
        

 

 

   

 

 

 
           9,625        9,718   
        

 

 

   

 

 

 

Yeti Acquisition, LLC (9)

   Leisure products        

First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017

        26,950         26,943        27,566   

First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017

        12,000         11,997        12,185   

First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)

           (3       

1,500 Common Stock Units of Yeti Holdings, Inc.

           1,500        3,219   
        

 

 

   

 

 

 
           40,437        42,970   
        

 

 

   

 

 

 

Specialized Education Services, Inc.

   Education services        

Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017

        9,180         9,180        9,227   

Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018

        17,703         17,703        18,021   
        

 

 

   

 

 

 
           26,883        27,248   
        

 

 

   

 

 

 

InvestRx Corporation

   Diversified support services        

First Lien Term Loan A, LIBOR+7.75% (1.25% floor) cash due 7/2/2017

        24,155         24,149        24,157   

First Lien Term Loan B, LIBOR+9.75% (1.25% floor) cash 1% PIK due 7/2/2017

        18,371         18,366        18,271   

First Lien Delayed Draw Term Loan, LIBOR+8.25% (1.25% floor) cash due 7/2/2014

                    

First Lien Revolver, LIBOR+7.75% (1.25% floor) cash due 7/2/2017

        600         599        788   
        

 

 

   

 

 

 
           43,114        43,216   
        

 

 

   

 

 

 

PC Helps Support, LLC

   IT consulting & other

services

       

Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018

        18,661         18,661        18,944   

675 Series A Preferred Units of PCH Support Holdings, Inc.

           675        714   

7,500 Class A Common Stock Units of PCH Support Holdings, Inc.

           75        109   
        

 

 

   

 

 

 
           19,411        19,767   
        

 

 

   

 

 

 

Ikaria Acquisition, Inc.

   Healthcare services        

First Lien Term Loan, LIBOR+6.5% (1.25% floor) cash due 9/25/2017

        9,950         9,950        10,045   
        

 

 

   

 

 

 
           9,950        10,045   
        

 

 

   

 

 

 

 

10


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost      Fair Value  

Olson + Co., Inc.

   Advertising         

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017

        13,374         13,374         13,374   

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017

                     
        

 

 

    

 

 

 
           13,374         13,374   
        

 

 

    

 

 

 

Beecken Petty O’Keefe Fund IV, L.P.

   Multi-sector
holdings
        

0.5% limited partnership interest (11)(14)

                     
        

 

 

    

 

 

 
                     
        

 

 

    

 

 

 

CompuCom Systems, Inc.

   IT consulting &
other services
        

Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 10/4/2019

        30,850         30,850         31,144   
        

 

 

    

 

 

 
           30,850         31,144   
        

 

 

    

 

 

 

Deltek, Inc.

   IT consulting &
other services
        

Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019

        20,000         20,000         20,037   

First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017

                     
        

 

 

    

 

 

 
           20,000         20,037   
        

 

 

    

 

 

 

First American Payment Systems, LP

   Diversified
support services
        

Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019

        25,000         25,000         25,281   

First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017

                     
        

 

 

    

 

 

 
           25,000         25,281   
        

 

 

    

 

 

 

Dexter Axle Company

   Auto parts &
equipment
        

Subordinated Term Loan, 11.25% cash 2% PIK due 11/1/2019

        30,252         30,252         30,298   

1,500 Common Shares in Dexter Axle Holding Company

           1,500         1,403   
        

 

 

    

 

 

 
           31,752         31,701   
        

 

 

    

 

 

 

IG Investments Holdings, LLC

   IT consulting &
other services
        

Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 10/31/2020

        10,000         10,000         10,010   
        

 

 

    

 

 

 
           10,000         10,010   
        

 

 

    

 

 

 

SumTotal Systems LLC

   Internet
software &
services
        

Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 5/16/2019

        15,000         15,000         15,013   
        

 

 

    

 

 

 
           15,000         15,013   
        

 

 

    

 

 

 

Comprehensive Pharmacy Services, LLC

   Pharmaceuticals         

Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019

        10,050         10,050         10,142   

20,000 Common Shares in MCP CPS Group Holdings, Inc.

           2,000         2,216   
        

 

 

    

 

 

 
           12,050         12,358   
        

 

 

    

 

 

 

Reliance Communications, LLC

   Internet
software &
services
        

First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017

        22,369         22,350         22,391   

First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017

        11,333         11,324         11,344   

First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017

        1,250         1,246         1,348   
        

 

 

    

 

 

 
           34,920         35,083   
        

 

 

    

 

 

 

Garretson Firm Resolution Group, Inc.

   Diversified
support services
        

First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018

        7,450         7,450         7,446   

Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019

        5,000         5,000         4,997   

First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017

        219         219         251   

4,950,000 Preferred Units in GRG Holdings, LP

           495         475   

50,000 Common Units in GRG Holdings, LP

           5           
        

 

 

    

 

 

 
           13,169         13,169   
        

 

 

    

 

 

 

 

11


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Teaching Strategies, LLC

   Education services        

First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017

        31,025         31,004        31,297   

First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017

        14,601         14,592        14,614   

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (10)

           (3       
        

 

 

   

 

 

 
           45,593        45,911   
        

 

 

   

 

 

 

Omniplex World Services Corporation

   Security & alarm services        

Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018

        12,544         12,544        12,543   

500 Class A Common Units in Omniplex Holdings Corp.

           500        438   
        

 

 

   

 

 

 
           13,044        12,981   
        

 

 

   

 

 

 

Dominion Diagnostics, LLC

   Healthcare services        

Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018

        15,587         15,587        15,608   
        

 

 

   

 

 

 
           15,587        15,608   
        

 

 

   

 

 

 

Affordable Care, Inc.

   Healthcare services        

Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019

        21,500         21,500        21,556   
        

 

 

   

 

 

 
           21,500        21,556   
        

 

 

   

 

 

 

Aderant North America, Inc.

   Internet software &
services
       

Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019

        7,000         7,000        7,013   
        

 

 

   

 

 

 
           7,000        7,013   
        

 

 

   

 

 

 

AdVenture Interactive, Corp.

   Advertising        

First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018

        114,000         113,956        114,000   

First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)

           (2       

2,000 Preferred Units of AVI Holdings, L.P. (6)

           2,000        2,041   
        

 

 

   

 

 

 
           115,954        116,041   
        

 

 

   

 

 

 

CoAdvantage Corporation

   Human resources &
employment services
       

Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018

        10,031         10,031        10,135   

50,000 Class A Units in CIP CoAdvantage Investments LLC

           500        624   
        

 

 

   

 

 

 
           10,531        10,759   
        

 

 

   

 

 

 

EducationDynamics, LLC

   Education services        

Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017

        10,733         10,733        10,733   
        

 

 

   

 

 

 
           10,733        10,733   
        

 

 

   

 

 

 

Vestcom International, Inc.

   Data processing &
outsourced services
       

First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 12/26/2018

        10,000         10,000        10,000   
        

 

 

   

 

 

 
           10,000        10,000   
        

 

 

   

 

 

 

Sterling Capital Partners IV, L.P.

   Multi-sector holdings        

0.20% limited partnership interest (6)(14)

           389        389   
        

 

 

   

 

 

 
           389        389   
        

 

 

   

 

 

 

 

12


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

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

  

Industry

   Principal (8)      Cost      Fair Value  

Devicor Medical Products, Inc.

   Healthcare equipment         

First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015

        10,000         10,000         10,000   
        

 

 

    

 

 

 
           10,000         10,000   
        

 

 

    

 

 

 

RP Crown Parent, LLC

   Application software         

First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017

        1,000         305         1,000   
        

 

 

    

 

 

 
           305         1,000   
        

 

 

    

 

 

 

SESAC Holdco II LLC

   Diversified support
services
        

Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/28/2019

        4,000         4,000         4,000   
        

 

 

    

 

 

 
           4,000         4,000   
        

 

 

    

 

 

 

Advanced Pain Management Holdings, Inc.

   Healthcare services         

First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018

        24,000         24,000         24,192   
        

 

 

    

 

 

 
           24,000         24,192   
        

 

 

    

 

 

 

Rocket Software, Inc.

   Internet software &
services
        

Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2018

        5,225         5,186         5,225   
        

 

 

    

 

 

 
           5,186         5,225   
        

 

 

    

 

 

 

TravelClick, Inc.

   Internet software &
services
        

Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 3/26/2018

        15,000         15,000         15,000   
        

 

 

    

 

 

 
           15,000         15,000   
        

 

 

    

 

 

 

American Renal Holdings, Inc.

   Healthcare services         

Second Lien Term Loan, LIBOR+7.25% (1.25% floor) cash due 2/27/2018

        3,000         3,000         3,000   
        

 

 

    

 

 

 
           3,000         3,000   
        

 

 

    

 

 

 

ISG Services, LLC

   Diversified support
services
        

First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018

        95,000         94,938         95,000   

First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018

        4,000         3,993         4,000   
        

 

 

    

 

 

 
           98,931         99,000   
        

 

 

    

 

 

 

Joerns Healthcare, LLC

   Healthcare services         

Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018

        20,000         20,000         20,000   
        

 

 

    

 

 

 
           20,000         20,000   
        

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (157.9% of net assets)

         $ 1,647,340       $ 1,660,517   
        

 

 

    

 

 

 
        

 

 

    

 

 

 

Total Portfolio Investments (166.3% of net assets)

         $ 1,735,936       $ 1,748,895   
        

 

 

    

 

 

 

 

 

(1) All 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.

 

13


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

March 31, 2013

(unaudited)

 

(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 tier pricing arrangements or 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

Phoenix Brands Merger Sub LLC

   March 1, 2013   

+ 0.25% on Senior Term Loan

+ 0.25% on Revolver

+ 0.75% on Subordinated Term Loan

      Tier pricing per loan amendment

HealthDrive Corporation

   January 1, 2013    + 2.0% on Term Loan A    + 1.0% on Term Loan B    Per loan amendment

JTC Education, Inc.

   January 1, 2013    + 0.25% on Term Loan       Per loan amendment

Mansell Group, LLC

   January 1, 2013    + 2.0% on Term Loan A, Term Loan B & Revolver       Per loan agreement

Physicians Pharmacy Alliance, Inc.

   January 1, 2013   

+ 1.0% on Term Loan

+ 3.0% on Revolver

   + 1.0% on Term Loan    Per loan amendment

Coll Materials Group LLC

   January 1, 2013       – 3.0% on Term Loan B    Per loan amendment

Saddleback Fence & Vinyl Products, Inc.

   December 1, 2012   

+ 4.0% on Term Loan

+ 4.0% on Revolver

      Per loan amendment

Trans-Trade, Inc.

   December 1, 2012    – 12.0% on Term Loan B    + 12.0% on Term Loan B    Per agreement

Capital Equipment Group, Inc.

   November 30, 2012       – 1.25% on Term Loan    Per loan amendment

CCCG, LLC

   November 15, 2012    + 0.5% on Term Loan    + 1.0% on Term Loan    Per loan amendment

Yeti Acquisition, LLC

   October 1, 2012    – 1.0% on Term Loan A, Term Loan B & Revolver       Tier pricing per loan agreement

Securus Technologies Holdings, Inc.

   June 6, 2012    + 0.75% on Term Loan       Per loan amendment

Ambath/Rebath Holdings, Inc.

   April 1, 2012   

– 2.0% on Term Loan A

– 4.5% on Term Loan B

  

+ 2.0% on Term Loan A

+ 4.5% on Term Loan B

   Per loan amendment

Cardon Healthcare Network, LLC

   April 1, 2012   

– 2.25% on Term Loan A

– 1.25% on Term Loan B

      Tier pricing per loan agreement

Tegra Medical, LLC

   January 1, 2012       + 0.5% on Term Loan B    Per loan amendment

Eagle Hospital Physicians, Inc.

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

 

(10) Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.

 

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

 

(12) Investment was on cash non-accrual status as of March 31, 2013.

 

(13) Investment was on PIK non-accrual status as of March 31, 2013.

 

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

 

(15) The loan agreements for the Eagle Hospital Physicians, Inc. and Specialty Bakers LLC credit facilities state that the revolvers are structurally junior to the term loans in the respective capital structures. Thus, the unrealized appreciation (depreciation) on the loan tranches of these facilities has been allocated accordingly.

 

14


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Control Investments (3)

          

Coll Materials Group LLC (9)(12)

   Environmental & facilities services        

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

      $ 7,372       $ 7,096      $ 1,238   

Second Lien Term Loan B, 14% PIK due 11/1/2014

        2,040         2,000        1,999   

50% Membership interest in CD Holdco, LLC

           3,127          
        

 

 

   

 

 

 
           12,223        3,237   
        

 

 

   

 

 

 

Statewide Holdings, Inc. (formerly Traffic Control and Safety Corp.)

   Construction and Engineering        

First Lien Term Loan A, LIBOR+8.5% (1.25% floor) cash due 8/10/2015

        15,000         14,981        15,023   

First Lien Term Loan B, 12% cash 3% PIK due 8/10/2015

        14,059         14,042        14,068   

First Lien Revolver, LIBOR+8.5% (1.25% floor) cash due 8/10/2015 (10)

           (6       

LC Facility, 8.5% cash due 8/10/2015 (10)

           (6       

746,114 Series A Preferred Units

           12,007        14,377   

746,114 Common Stock Units

           5,316        6,535   
        

 

 

   

 

 

 
           46,334        50,003   
        

 

 

   

 

 

 

Total Control Investments (5.9% of net assets)

         $ 58,557      $ 53,240   
        

 

 

   

 

 

 

Affiliate Investments (4)

          

Caregiver Services, Inc.

   Healthcare services        

1,080,399 shares of Series A Preferred Stock

         $ 1,080      $ 2,924   
        

 

 

   

 

 

 
           1,080        2,924   
        

 

 

   

 

 

 

Ambath/Rebath Holdings, Inc. (9)

   Home improvement retail        

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

      $ 4,293         4,290        4,268   

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

        24,134         24,126        23,995   

4,668,788 shares of Preferred Stock

                    
        

 

 

   

 

 

 
           28,416        28,263   
        

 

 

   

 

 

 

Total Affiliate Investments (3.5% of net assets)

         $ 29,496      $ 31,187   
        

 

 

   

 

 

 

Non-Control/Non-Affiliate Investments (7)

          

TBA Global, LLC

   Advertising        

53,994 Senior Preferred Shares

         $ 216      $   

191,977 Shares A Shares

           192          
        

 

 

   

 

 

 
           408          
        

 

 

   

 

 

 

Fitness Edge, LLC

   Leisure Facilities        

1,000 Common Units (6)

           43        200   
        

 

 

   

 

 

 
           43        200   
        

 

 

   

 

 

 

Capital Equipment Group, Inc. (9)

   Industrial machinery        

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

      $ 10,489         10,430        10,577   

33,786 shares of Common Stock

           345        568   
        

 

 

   

 

 

 
           10,775        11,145   
        

 

 

   

 

 

 

Rail Acquisition Corp.

   Electronic manufacturing services        

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

        3,835         3,835        3,835   
        

 

 

   

 

 

 
           3,835        3,835   
        

 

 

   

 

 

 

Western Emulsions, Inc.

   Construction materials        

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

        7,020         6,951        7,200   
        

 

 

   

 

 

 
           6,951        7,200   
        

 

 

   

 

 

 

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

        4,601         4,511        4,697   

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

        10,387         10,357        10,473   

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

        1,250         1,247        1,268   
        

 

 

   

 

 

 
           16,115        16,438   
        

 

 

   

 

 

 

idX Corporation

   Distributors        

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

        19,283         19,115        20,153   
        

 

 

   

 

 

 
           19,115        20,153   
        

 

 

   

 

 

 

 

15


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Cenegenics, LLC

   Healthcare services        

414,419 Common Units (6)

           598        1,394   
        

 

 

   

 

 

 
           598        1,394   
        

 

 

   

 

 

 

Trans-Trade Brokers, Inc.

   Air freight & logistics        

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

        12,845         12,700        12,738   

First Lien Term Loan B, 12% cash due 9/10/2014

        6,226         6,203        3,193   
        

 

 

   

 

 

 
           18,903        15,931   
        

 

 

   

 

 

 

Riverlake Equity Partners II, LP

   Multi-sector holdings        

1.78% limited partnership interest (13)

           240        240   
        

 

 

   

 

 

 
           240        240   
        

 

 

   

 

 

 

Riverside Fund IV, LP

   Multi-sector holdings        

0.34% limited partnership interest (6)(13)

           677        677   
        

 

 

   

 

 

 
           677        677   
        

 

 

   

 

 

 

Tegra Medical, LLC (9)

   Healthcare equipment        

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

        19,581         19,402        19,604   

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

        23,190         22,997        23,052   

First Lien Term Loan C, 30% PIK due 12/31/2014

        1,111         1,111        1,083   

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

        2,500         2,465        2,483   
        

 

 

   

 

 

 
           45,975        46,222   
        

 

 

   

 

 

 

Psilos Group Partners IV, LP

   Multi-sector holdings        

2.35% limited partnership interest (11)(13)

                    
        

 

 

   

 

 

 
                    
        

 

 

   

 

 

 

Mansell Group, Inc.

   Advertising        

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

        9,467         9,362        9,659   

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

        9,282         9,181        9,464   

First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (10)

           (21       
        

 

 

   

 

 

 
           18,522        19,123   
        

 

 

   

 

 

 

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         21,774        21,809   

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

        8,231         8,231        8,281   

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

        3,500         3,487        3,504   

2,000 Series D Preferred Units

           2,671        2,671   
        

 

 

   

 

 

 
           36,163        36,265   
        

 

 

   

 

 

 

Eagle Hospital Physicians, Inc. (9)(14)

   Healthcare services        

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

        24,256         23,890        24,184   

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

        1,100         1,068        1,060   
        

 

 

   

 

 

 
           24,958        25,244   
        

 

 

   

 

 

 

Enhanced Recovery Company, LLC

   Diversified support services        

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

        10,764         10,597        10,804   

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

        11,080         10,935        11,098   

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (10)

           (53       
        

 

 

   

 

 

 
           21,479        21,902   
        

 

 

   

 

 

 

Specialty Bakers LLC (14)

   Food distributors        

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

        4,301         4,103        4,277   

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

        11,000         10,826        10,888   

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

        3,250         3,187        3,236   
        

 

 

   

 

 

 
           18,116        18,401   
        

 

 

   

 

 

 

Welocalize, Inc.

   Internet software & services        

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

        20,553         20,297        21,037   

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

        24,048         23,755        24,669   

First Lien Revolver, LIBOR+7% (2% floor) cash due 11/19/2015 (10)

           (155       

3,393,060 Common Units in RPWL Holdings, LLC

           3,393        6,278   
        

 

 

   

 

 

 
           47,290        51,984   
        

 

 

   

 

 

 

 

16


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Miche Bag, LLC

   Apparel, accessories & luxury goods        

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

        8,008         7,854        8,039   

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

        17,964         16,108        17,818   

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

        1,500         1,420        1,513   

10,371 Preferred Equity units in Miche Holdings, LLC

           1,037        878   

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

           1,463          
        

 

 

   

 

 

 
           27,882        28,248   
        

 

 

   

 

 

 

Bunker Hill Capital II (QP), LP

   Multi-sector holdings        

0.51% limited partnership interest(13)

           66        66   
        

 

 

   

 

 

 
           66        66   
        

 

 

   

 

 

 

Advanced Pain Management Holdings, Inc.

   Healthcare services        

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

        7,271         7,177        7,402   

First Lien Revolver, LIBOR+5% (1.75% floor) cash due 12/22/2015 (10)

           (4       
        

 

 

   

 

 

 
           7,173        7,402   
        

 

 

   

 

 

 

Drugtest, Inc. (formerly DISA, Inc.)

   Human resources & employment services        

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

        11,215         11,066        11,445   

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

        8,524         8,424        8,751   

First Lien Revolver, LIBOR+6% (1% floor) cash due 12/30/2015 (10)

           (49       
        

 

 

   

 

 

 
           19,441        20,196   
        

 

 

   

 

 

 

Saddleback Fence and Vinyl Products, Inc. (9)

   Building products        

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

        648         648        648   

First Lien Revolver, 8% cash due 11/30/2012

        100         100        102   
        

 

 

   

 

 

 
           748        750   
        

 

 

   

 

 

 

Physicians Pharmacy Alliance, Inc.

   Healthcare services        

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

        13,653         13,419        13,654   

First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)

           (28       
        

 

 

   

 

 

 
           13,391        13,654   
        

 

 

   

 

 

 

Cardon Healthcare Network, LLC (9)

   Diversified support services        

First Lien Term Loan A, LIBOR+10% (1.75% floor) cash due 1/24/2017

        10,395         10,239        10,601   

First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 1/24/2017

        21,719         21,521        22,016   

First Lien Revolver, LIBOR+6.5% (1.75% floor) cash due 1/24/2017 (10)

           (37       

65,903 Class A Units (6)

           250        456   
        

 

 

   

 

 

 
           31,973        33,073   
        

 

 

   

 

 

 

U.S. Retirement Partners, Inc.

          

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

  

Diversified financial

services

     32,350         31,991        32,767   
        

 

 

   

 

 

 
           31,991        32,767   
        

 

 

   

 

 

 

Phoenix Brands Merger Sub LLC (9)

   Household products        

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

        6,804         6,671        6,803   

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

        21,194         20,821        20,630   

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

        2,357         2,245        2,447   
        

 

 

   

 

 

 
           29,737        29,880   
        

 

 

   

 

 

 

U.S. Collections, Inc.

  

Diversified support

services

       

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

        9,885         9,772        9,871   
        

 

 

   

 

 

 
           9,772        9,871   
        

 

 

   

 

 

 

CCCG, LLC (9)

   Oil & gas equipment services        

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

        34,748         34,111        35,280   
        

 

 

   

 

 

 
           34,111        35,280   
        

 

 

   

 

 

 

Maverick Healthcare Group, LLC

   Healthcare equipment        

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

        24,563         24,121        24,859   
        

 

 

   

 

 

 
           24,121        24,859   
        

 

 

   

 

 

 

 

17


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

Refac Optical Group

   Specialty stores        

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

        12,431         12,191        12,530   

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

        20,322         19,939        20,565   

First Lien Revolver, LIBOR+7.5% cash due 3/23/2016 (10)

           (96       

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

           1          

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

           999        1,011   
        

 

 

   

 

 

 
           33,034        34,106   
        

 

 

   

 

 

 

Securus Technologies, Inc. (9)

  

Integrated

telecommunication

services

       

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

        22,500         22,119        22,952   
        

 

 

   

 

 

 
           22,119        22,952   
        

 

 

   

 

 

 

Gundle/SLT Environmental, Inc.

  

Environmental &

facilities services

       

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

        8,880         8,803        8,939   
        

 

 

   

 

 

 
           8,803        8,939   
        

 

 

   

 

 

 

Titan Fitness, LLC

   Leisure facilities        

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

        14,906         14,779        14,969   

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

        11,722         11,626        11,919   

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

        3,254         3,232        3,271   

First Lien Revolver, LIBOR+8.75% (1.25% floor) cash due 6/30/2016 (10)

           (29       
        

 

 

   

 

 

 
           29,608        30,159   
        

 

 

   

 

 

 

Baird Capital Partners V, LP

   Multi-sector holdings        

0.40% limited partnership interest (13)

           487        487   
        

 

 

   

 

 

 
           487        487   
        

 

 

   

 

 

 

Charter Brokerage, LLC (9)

  

Oil & gas equipment

services

       

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

        16,150         16,019        16,408   

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

        10,246         10,171        10,399   

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 7/13/2016 (10)

           (55       
        

 

 

   

 

 

 
           26,135        26,807   
        

 

 

   

 

 

 

Stackpole Powertrain International ULC

  

Auto parts &

equipment

       

1,000 Common Units (13)

           1,000        1,550   
        

 

 

   

 

 

 
           1,000        1,550   
        

 

 

   

 

 

 

Discovery Practice Management, Inc.

   Healthcare services        

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

        6,417         6,350        6,451   

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

        6,441         6,380        6,602   

First Lien Revolver, LIBOR+7% cash due 8/8/2016

        400         370        452   
        

 

 

   

 

 

 
           13,100        13,505   
        

 

 

   

 

 

 

CTM Group, Inc.

   Leisure products        

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

        10,746         10,654        10,750   

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

        3,807         3,780        3,916   
        

 

 

   

 

 

 
           14,434        14,666   
        

 

 

   

 

 

 

Bojangles

   Restaurants        

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

        5,385         5,291        5,386   
        

 

 

   

 

 

 
           5,291        5,386   
        

 

 

   

 

 

 

Milestone Partners IV, LP

   Multi-sector holdings        

1.36% limited partnership interest (13)

           657        657   
        

 

 

   

 

 

 
           657        657   
        

 

 

   

 

 

 

Insight Pharmaceuticals LLC

   Pharmaceuticals        

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

        9,900         9,839        9,901   

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

        17,500         17,363        17,502   
        

 

 

   

 

 

 
           27,202        27,403   
        

 

 

   

 

 

 

National Spine and Pain Centers, LLC

   Healthcare services        

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

        27,049         26,824        27,407   

300,700.98 Class A Units (6)

           301        247   
        

 

 

   

 

 

 
           27,125        27,654   
        

 

 

   

 

 

 

 

18


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

RCPDirect, LP

   Multi-sector holdings        

0.91% limited partnership interest (6)(13)

           385        385   
        

 

 

   

 

 

 
           385        385   
        

 

 

   

 

 

 

The MedTech Group, Inc.

   Healthcare equipment        

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

        12,805         12,713        13,003   
        

 

 

   

 

 

 
           12,713        13,003   
        

 

 

   

 

 

 

Digi-Star Acquisition Holdings, Inc.

   Industrial machinery        

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

        10,133         10,027        10,290   

225 Class A Preferred Units

           225        241   

2,500 Class A Common Units

           25        74   
        

 

 

   

 

 

 
           10,277        10,605   
        

 

 

   

 

 

 

CPASS Acquisition Company

  

Internet software &

services

       

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

        4,856         4,772        4,969   

First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (10)

           (16       
        

 

 

   

 

 

 
           4,756        4,969   
        

 

 

   

 

 

 

Genoa Healthcare Holdings, LLC

   Pharmaceuticals        

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

        12,712         12,606        12,926   

500,000 Preferred units

           475        516   

500,000 Class A Common Units

           25        155   
        

 

 

   

 

 

 
           13,106        13,597   
        

 

 

   

 

 

 

SolutionSet, Inc. (9)

   Advertising        

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

        8,522         8,441        8,561   
        

 

 

   

 

 

 
           8,441        8,561   
        

 

 

   

 

 

 

Slate Pharmaceuticals Acquisition Corp.

   Healthcare services        

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

        20,231         20,059        20,882   
        

 

 

   

 

 

 
           20,059        20,882   
        

 

 

   

 

 

 

ACON Equity Partners III, LP

   Multi-sector holdings        

0.31% limited partnership interest (13)

           247        247   
        

 

 

   

 

 

 
           247        247   
        

 

 

   

 

 

 

Blue Coat Systems, Inc.

  

Internet software &

services

       

First Lien Term Loan, LIBOR+6% (1.5% floor) cash due 2/15/2018

        14,906         14,770        15,060   

Second Lien Term Loan, LIBOR+10% (1.5% floor) cash due 8/15/2018

        7,000         6,937        7,208   
        

 

 

   

 

 

 
           21,707        22,268   
        

 

 

   

 

 

 

CRGT, Inc.

  

IT consulting & other

services

       

Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018

        25,939         25,709        26,476   
        

 

 

   

 

 

 
           25,709        26,476   
        

 

 

   

 

 

 

Riverside Fund V, LP

   Multi-sector holdings        

0.48% limited partnership interest (11)(13)

                    
        

 

 

   

 

 

 
                    
        

 

 

   

 

 

 

World 50, Inc.

  

Research & consulting

services

       

First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017

        8,638         8,514        8,667   

First Lien Term Loan B, 12.5% cash due 3/30/2017

        5,500         5,425        5,522   

First Lien Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)

           (54       
        

 

 

   

 

 

 
           13,885        14,189   
        

 

 

   

 

 

 

Huddle House, Inc.

   Restaurants        

Subordinated Term Loan, 11% cash 1.6% PIK due 3/30/2018

        13,964         13,839        14,082   
        

 

 

   

 

 

 
           13,839        14,082   
        

 

 

   

 

 

 

Nixon, Inc.

  

Apparel, accessories

& luxury goods

       

First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018

        10,128         10,036        10,164   
        

 

 

   

 

 

 
           10,036        10,164   
        

 

 

   

 

 

 

 

19


Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost     Fair Value  

JTC Education, Inc.

   Education services        

Subordinated Term Loan, 13% cash due 11/1/2017

        11,500         11,394        11,573   

17,391 Shares of Series A-1 Preferred Stock

           313        290   

17,391 Shares of Common Stock

           187          
        

 

 

   

 

 

 
           11,894        11,863   
        

 

 

   

 

 

 

BMC Acquisition, Inc.

   Diversified financial services        

Senior Term Loan, LIBOR+5.5% (1% floor) cash due 5/1/2017

        5,685         5,646        5,668   

Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017

        350         341        396   

500 Series A Preferred Shares

           499        456   

50,000 Common Shares

           1          
        

 

 

   

 

 

 
           6,487        6,520   
        

 

 

   

 

 

 

Ansira Partners, Inc.

   Advertising        

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017

        12,243         12,158        12,320   

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)

           (8       

250 Preferred Units & 250 Class A Common Units of Ansira Holdings, LLC

           250        227   
        

 

 

   

 

 

 
           12,400        12,547   
        

 

 

   

 

 

 

MX USA, Inc.

   Healthcare services        

Second Lien Term Loan, LIBOR+10.5% (1.25% floor) cash due 10/31/2017

        22,000         21,815        22,336   
        

 

 

   

 

 

 
           21,815        22,336   
        

 

 

   

 

 

 

PLATO, Inc.

   Education services        

First Lien Term Loan, LIBOR+6% (1.5% floor) cash due 5/17/2018

        14,812         14,812        14,804   

Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019

        17,000         17,000        17,093   
        

 

 

   

 

 

 
           31,812        31,897   
        

 

 

   

 

 

 

I Drive Safely, LLC

   Education services        

First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017

        27,000         27,007        27,352   

First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017

           1          

75,000 Class A Common Units of IDS Investments, LLC

           750        591   
        

 

 

   

 

 

 
           27,758        27,943   
        

 

 

   

 

 

 

ConvergeOne Holdings Corp.

  

Integrated telecommunication

services

       

First Lien Term Loan, LIBOR+7% (1.5% floor) cash due 6/8/2017

        9,875         9,875        9,940   
        

 

 

   

 

 

 
           9,875        9,940   
        

 

 

   

 

 

 

Yeti Acquisition, LLC

   Leisure products        

First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017

        27,650         27,622        28,036   

First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017

        12,000         11,988        12,275   

First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)

           (10       

1,500 Common Stock Units of Yeti Holdings, Inc.

           1,500        1,500   
        

 

 

   

 

 

 
           41,100        41,811   
        

 

 

   

 

 

 

Specialized Education Services, Inc.

   Education services        

Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017

        10,000         10,000        10,026   

Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018

        17,569         17,569        17,597   
        

 

 

   

 

 

 
           27,569        27,623   
        

 

 

   

 

 

 

InvestRx Corporation

   Diversified support services        

First Lien Term Loan A, LIBOR+7.75% (1.25% floor) cash due 7/2/2017

        24,805         24,786        24,805   

First Lien Term Loan B, LIBOR+9.75% (1.25% floor) cash 1% PIK due 7/2/2017

        18,370         18,356        18,370   

First Lien Delayed Draw Term Loan, LIBOR+8.25% (1.25% floor) cash due 7/2/2014

                    

First Lien Revolver, LIBOR+7.75% (1.25% floor) cash due 7/2/2017 (10)

           (5       
        

 

 

   

 

 

 
           43,137        43,175   
        

 

 

   

 

 

 

eResearch Technology, Inc.

   Healthcare services        

First Lien Term Loan, LIBOR+6.5% (1.5% floor) cash due 5/2/2018

        13,500         13,500        13,500   
        

 

 

   

 

 

 
           13,500        13,500   
        

 

 

   

 

 

 

Connolly, LLC

   Diversified support services        

Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 7/15/2019

        5,000         5,000        5,000   
        

 

 

   

 

 

 
           5,000        5,000   
        

 

 

   

 

 

 

 

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Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

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

  

Industry

   Principal (8)      Cost      Fair Value  

PC Helps Support, LLC

   IT consulting & other services         

Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018

        18,520         18,520         18,520   

675 Series A Preferred Units of PCH Support Holdings, Inc.

           675         675   

7,500 Class A Common Stock Units of PCH Support Holdings, Inc.

           75         75   
        

 

 

    

 

 

 
           19,270         19,270   
        

 

 

    

 

 

 

Ikaria Acquisition, Inc.

   Healthcare services         

First Lien Term Loan, LIBOR+6.5% (1.25% floor) cash due 9/25/2017

        10,000         10,000         10,000   
        

 

 

    

 

 

 
           10,000         10,000   
        

 

 

    

 

 

 

Olson + Co., Inc.

   Advertising         

First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017

        13,895         13,895         13,895   

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017

                     
        

 

 

    

 

 

 
           13,895         13,895   
        

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (133.2% of net assets)

         $ 1,180,436       $ 1,203,681   
        

 

 

    

 

 

 

Total Portfolio Investments (142.6% of net assets)

         $ 1,268,489       $ 1,288,108   
        

 

 

    

 

 

 

 

(1) All 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 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 tier pricing arrangements or 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:

 

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Table of Contents

Fifth Street Finance Corp.

Consolidated Schedule of Investments

(dollar amounts in thousands)

September 30, 2012

 

Portfolio Company

  

Effective date

  

Cash interest

  

PIK interest

  

Reason

SolutionSet, Inc.

   September 13, 2012    – 0.5% on Term Loan       Tier pricing per loan agreement

Securus Technologies Holdings, Inc.

   June 6, 2012    + 0.75% on Term Loan       Per loan amendment

Charter Brokerage, LLC

   May 9, 2012    – 0.5% on Senior Term Loan & Revolver       Tier pricing per loan agreement

Coll Materials Group LLC

   July 1, 2012    – 12.0% on Term Loan A    + 15.0% on Term Loan A    Per loan amendment

HealthDrive Corporation

   April 1, 2012    + 2.0% on Term Loan A       Tier pricing per loan agreement

Ambath/Rebath Holdings, Inc.

   April 1, 2012   

– 2.0% on Term Loan A

– 4.5% on Term Loan B

   + 2.0% on Term Loan A + 4.5% on Term Loan B    Per loan amendment

Cardon Healthcare Network, LLC

   April 1, 2012   

– 2.25% on Term Loan A

– 1.25% on Term Loan B

      Tier pricing per loan agreement

Tegra Medical, LLC

   January 1, 2012       + 0.5% on Term Loan B    Per loan amendment

NDSSI Holdings, Inc.

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

Phoenix Brands Merger Sub LLC

   December 22, 2011   

+ 0.75% on Subordinated Term Loan

+ 0.5% on Senior Term Loan & Revolver

      Per loan amendment

CCCG, LLC

   November 15, 2011    + 0.5% on Term Loan       Per loan amendment

Saddleback Fence and Vinyl Products, Inc.

   October 31, 2011    + 4.0% on Revolver       Per loan amendment

Eagle Hospital Physicians, Inc.

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

Capital Equipment Group, Inc.

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

 

(10) Investment has undrawn commitments and a negative cost basis as a result of unamortized fees. Unamortized fees are classified as unearned income which reduces cost basis.

 

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

 

(12) Investment was on PIK non-accrual status as of September 30, 2012.

 

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

 

(14) The loan agreements for the Eagle Hospital Physicians, Inc. and Specialty Bakers LLC credit facilities state that the revolvers are structurally junior to the term loans in the respective capital structures. Thus, the unrealized appreciation (depreciation) on the loan tranches of these facilities has been allocated accordingly.

 

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Table of Contents

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.

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 occurred from inception through March 31, 2013:

 

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’ partial 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’ partial exercise of over-allotment option)      5,558,469         11.72        65.1 million   

January 26, 2012

   Follow-on public offering      10,000,000         10.07        100.7 million   

September 14, 2012

   Follow-on public offering (including underwriters’ partial exercise of over-allotment option)      8,451,486         10.79        91.2 million   

December 7, 2012

   Follow-on public offering      14,000,000         10.68        149.5 million   

December 14, 2012

   Underwriters’ partial exercise of over-allotment option      725,000         10.68        7.7 million   

 

(1) Average offering price.

On February 3, 2010, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (“FSMP IV”), 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. On May 15, 2012, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. (“FSMP V”), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designed 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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The SBIC licenses allow the Company’s SBIC subsidiaries 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 10-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 when they have at least $112.5 million in regulatory capital. As of March 31, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $132.6 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   

As of March 31, 2013, FSMP V had $37.5 million in regulatory capital and $31.8 million in SBA-guaranteed debentures outstanding, which had a fair value of $25.5 million. In March 2013, the SBA fixed the interest rate on such SBIC subsidiary’s $31.8 million of drawn leverage at an interest rate of 2.351% (excluding the SBA annual charge of 0.804%). As a result, the $181.8 million of SBA-guaranteed debentures held by the Company’s SBIC subsidiaries carry a weighted average interest rate of 3.355% as of March 31, 2013.

For the three and six months ended March 31, 2013, the Company recorded interest expense of $1.7 million and $3.4 million, respectively, related to the SBA-guaranteed debentures of both subsidiaries.

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 subsidiaries may also be limited in their ability to make distributions to the Company if they do not have sufficient capital, in accordance with SBA regulations.

The Company’s SBIC subsidiaries are 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 subsidiaries will receive SBA-guaranteed debenture funding and is further dependent upon the SBIC subsidiaries continuing to be in compliance with SBA regulations and policies.

The SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders in the event the Company liquidates the SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiaries 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 subsidiaries 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 $225 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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Table of Contents

Although the Company expects to fund the growth of its investment portfolio through the net proceeds from recent and future equity offerings, the Company’s dividend reinvestment plan, and issuances of debt 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 $1.75 billion and $1.29 billion at March 31, 2013 and September 30, 2012, respectively. The portfolio investments represent 166.4% and 142.6% of net assets at March 31, 2013 and September 30, 2012, 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 (“FASB”) 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.

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.

 

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Table of Contents

Under ASC 820, the Company performs detailed valuations of its debt and equity investments on an individual basis, using bond yield, market and income approaches as appropriate. In general, the Company utilizes the bond yield method in determining the fair value of its debt 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 or income 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 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.

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 or revenues. 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. The Company determines the fair value of its limited partnership interests based on the most recently available net asset value of the partnership.

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.

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;

 

   

Separately, independent valuation firms are engaged by the Board of Directors to 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 Audit Committee of the Board of Directors;

 

   

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

 

   

The Audit 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 Audit Committee;

 

   

The Audit 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 each of the Company’s investments at March 31, 2013 and September 30, 2012 was determined by the Board of Directors. The Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. 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 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.

A portion of the Company’s portfolio is valued by independent third parties on a quarterly basis, with a substantial portion being valued over the course of each fiscal year.

 

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Table of Contents

Investment Income:

Interest income, adjusted for accretion of original issue discount or “OID,” 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, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan.

Distributions of earnings from portfolio companies are recorded as dividend income when the distribution is received.

The Company has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.

Fee income consists of the monthly servicing fees, advisory fees, structuring fees and prepayment fees that the Company receives in connection with its debt investments and the accreted portion of the debt origination fees. The Company capitalizes upfront debt origination fees, if any, received in connection with investments. The unearned fee income from such fees is accreted into fee income, based on the straight line method or effective interest method as applicable, over the life of the investment.

The Company has also structured exit fees across certain of its portfolio investments to be received upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt security. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.

Gain on Extinguishment of Convertible Notes:

The Company may repurchase its convertible notes (“Convertible Notes”) in accordance with the 1940 Act and the rules promulgated thereunder and may surrender these Convertible Notes to Deutsche Bank Trust Company Americas (the “Trustee”), as trustee, for cancellation. If the repurchase occurs at a purchase price below par value, a gain on the extinguishment of these Convertible Notes is recorded. The amount of the gain recorded is the difference between the reacquisition price and the net carrying amount of the Convertible Notes, net of the proportionate amount of unamortized debt issuance costs.

Cash and Cash Equivalents:

Cash and cash equivalents consist of demand deposits and highly liquid investments with maturities of three months or less, when acquired. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation insured limit. Included in cash and cash equivalents is $3.0 million that was held at Wells Fargo Bank, National Association (“Wells Fargo”) in connection with the Company’s Wells Fargo facility (as defined in Note 6 – Lines of Credit) and $2.4 million that was held at U.S. Bank, National Association in connection with the Company’s Sumitomo facility (as defined in Note 6 – Lines of Credit). The Company is restricted in terms of access to this cash until such time as the Company submits its required monthly reporting schedules and Wells Fargo and Sumitomo Mitsui Banking Corporation verify the Company’s compliance per the terms of their respective credit agreements with the Company.

Deferred Financing Costs:

Deferred financing costs consist of fees and expenses paid in connection with the closing or amending of credit facilities and debt offerings, and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the terms of the respective credit facilities and debt securities. This amortization expense is included in interest expense in the Company’s Consolidated Statement of Operations.

Offering Costs:

Offering costs consist of fees and expenses incurred in connection with the public offer and sale of the Company’s common stock, including legal, accounting and printing fees. There were $0.4 million of offering costs charged to net assets during the six months ended March 31, 2013.

 

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Income Taxes:

As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company intends to distribute between 90% and 100% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a 4% federal excise tax based on distribution requirements of its taxable income on a calendar year basis. The Company anticipates timely distribution of its taxable income within the tax rules; however, the Company incurred a de minimis federal excise tax for calendar years 2008, 2009 and 2010. The Company did not incur a federal excise tax for calendar year 2011 and does not expect to incur a federal excise tax for calendar year 2012. The Company may incur a federal excise tax in future years.

        The purpose of the Company’s taxable subsidiaries is to permit the Company to hold equity investments in portfolio companies which are “pass through” entities for federal tax purposes in order to comply with the “source income” requirements contained in the RIC tax requirements. The taxable subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense as a result of their ownership of certain portfolio investments. This income tax expense, if any, would be reflected in the Company’s Consolidated Statements of Operations. The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences.

ASC 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the Company’s Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Company’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2009, 2010 or 2011. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.

 

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Note 3. Portfolio Investments

At March 31, 2013, 166.4% of net assets or $1.75 billion was invested in 97 portfolio investments and 3.6% of net assets or $38.2 million was invested in cash and cash equivalents. In comparison, at September 30, 2012, 142.6% of net assets or $1.29 billion was invested in 78 portfolio investments and 8.2% of net assets or $74.4 million was invested in cash and cash equivalents. As of March 31, 2013, 78.6% of the Company’s portfolio at fair value consisted of debt investments that were secured by first or second priority liens on the assets of the portfolio companies. Moreover, the Company held equity investments in certain of its portfolio companies consisting of common stock, preferred stock, limited partnership interests or limited liability company interests. These equity instruments generally do not produce a current return but are held for potential investment appreciation and capital gain.

During the three and six months ended March 31, 2013, the Company recorded net realized gains (losses) of ($0.1 million) and $0.5 million, respectively. During the three and six months ended March 31, 2012, the Company recorded net realized losses of $10.8 million and $27.4 million, respectively. During the three and six months ended March 31, 2013, the Company recorded net unrealized appreciation (depreciation) of $2.7 million and ($6.7 million), respectively. During the three and six months ended March 31, 2012, the Company recorded net unrealized appreciation of $8.0 million and $13.9 million, respectively.

The composition of the Company’s investments as of March 31, 2013 and September 30, 2012 at cost and fair value was as follows:

 

     March 31, 2013      September 30, 2012  
     Cost      Fair Value      Cost      Fair Value  

Investments in debt securities

   $ 1,688,852       $ 1,685,894       $ 1,226,489       $ 1,241,197   

Investments in equity securities

     47,084         63,001         42,000         46,911   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,735,936       $ 1,748,895       $ 1,268,489       $ 1,288,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

The composition of the Company’s debt investments as of March 31, 2013 and September 30, 2012 at fixed rates and floating rates was as follows:

 

     March 31, 2013     September 30, 2012  
     Fair Value      % of
Debt  Portfolio
    Fair Value      % of
Debt Portfolio
 

Fixed rate debt securities

   $ 442,780         26.26   $ 371,325         29.92

Floating rate debt securities

     1,243,114         73.74        869,872         70.08   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,685,894         100.00   $ 1,241,197         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the financial instruments carried at fair value as of March 31, 2013, by caption on the Company’s Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820.

 

     Level 1      Level 2      Level 3      Total  

Investments in debt securities (first lien)

   $       $       $ 1,113,770       $ 1,113,770   

Investments in debt securities (second lien)

                     260,783         260,783   

Investments in debt securities (subordinated)

                     311,341         311,341   

Investments in equity securities (preferred)

                     24,575         24,575   

Investments in equity securities (common)

                     38,426         38,426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments at fair value

   $       $       $ 1,748,895       $ 1,748,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the financial instruments carried at fair value as of September 30, 2012, by caption on the Company’s Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820.

 

     Level 1      Level 2      Level 3      Total  

Investments in debt securities (first lien)

   $       $       $ 902,492       $ 902,492   

Investments in debt securities (second lien)

                     133,258         133,258   

Investments in debt securities (subordinated)

                     205,447         205,447   

Investments in equity securities (preferred)

                     24,240         24,240   

Investments in equity securities (common)

                     22,671         22,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments at fair value

   $       $       $ 1,288,108       $ 1,288,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Any determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the fact that the unobservable factors are the most significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated by external sources). Accordingly, the appreciation (depreciation) in the tables below includes changes in fair value due in part to observable factors that are part of the valuation methodology.

The following table provides a roll-forward in the changes in fair value from December 31, 2012 to March 31, 2013, for all investments for which the Company determines fair value using unobservable (Level 3) factors:

 

     First Lien
Debt
    Second
Lien Debt
    Subordinated
Debt
     Preferred
Equity
    Common
Equity
    Total  

Fair value as of December 31, 2012

   $ 979,514      $ 244,918      $ 298,563       $ 25,912      $ 31,541      $ 1,580,448   

New investments & net revolver activity

     276,291        47,186        10,600         2,000        647        336,724   

Redemptions/repayments

     (141,244     (30,357             (2,310            (173,911

Net accrual of PIK interest income

     491        (1,323     1,462         (871            (241

Accretion of original issue discount

     150        1                              151   

Net change in unearned income

     1,111        405        86                       1,602   

Net unrealized appreciation (depreciation)

     (4,090 )     (254     630         (36     6,430        2,680   

Unrealized adjustments due to deal exits

     1,547        207                (120     (192     1,442   

Transfer into (out of) Level 3

                                           
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2013

   $ 1,113,770      $ 260,783      $ 311,341       $ 24,575      $ 38,426      $ 1,748,895   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended March 31, 2013

   $ (2,584   $ (47   $ 630       $ (156   $ 6,238      $ 4,081   

The following table provides a roll-forward in the changes in fair value from December 31, 2011 to March 31, 2012 for all investments for which the Company determines fair value using unobservable (Level 3) factors.

 

     First Lien
Debt
    Second
Lien Debt
    Subordinated
Debt
    Preferred
Equity
    Common
Equity
    Total  

Fair value as of December 31, 2011

   $ 834,405      $ 139,624      $ 123,696      $ 7,429      $ 14,744      $ 1,119,898   

New investments & net revolver activity

     62,064        7,000        47,016               3,747        119,827   

Redemptions/repayments

     (162,030 )     (25,745                          (187,775 )

Net accrual of PIK interest income

     850        347        857        172               2,226   

Accretion of original issue discount

     248        60                             308   

Net change in unearned income

     2,323        378        (397                   2,304   

Net unrealized appreciation

     6,917        243        36        331        520        8,047   

Unrealized adjustments due to deal exits

     (8,585     354               (131     (250     (8,612

Transfer into (out of) Level 3

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2012

   $ 736,192      $ 122,261      $ 171,208      $ 7,801      $ 18,761      $ 1,056,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31, 2012 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended March 31, 2012

   $ (1,668   $ 597      $ 36      $ 200      $ 270      $ (565 )

 

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The following table provides a roll-forward in the changes in fair value from September 30, 2012 to March 31, 2013, for all investments for which the Company determines fair value using unobservable (Level 3) factors:

 

     First Lien
Debt
    Second
Lien Debt
    Subordinated
Debt
     Preferred
Equity
    Common
Equity
    Total  

Fair value as of September 30, 2012

   $ 902,492      $ 133,258      $ 205,447       $ 24,240      $ 22,671      $ 1,288,108   

New investments & net revolver activity

     416,911        208,401        101,843         2,670        5,706        735,531   

Redemptions/repayments

     (196,666 )     (78,115 )             (2,310            (277,091

Net accrual of PIK interest income

     2,407        (1,139     2,572         (671            3,169   

Accretion of original issue discount

     274        9                              283   

Net change in unearned income

     2,316        748        171                       3,235   

Net unrealized appreciation (depreciation)

     (16,116 )     (2,857 )     1,308         765        10,241        (6,659

Unrealized adjustments due to deal exits

     2,152        478                (119     (192     2,319   

Transfer into (out of) Level 3

                                           
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2013

   $ 1,113,770      $ 260,783      $ 311,341       $ 24,575      $ 38,426      $ 1,748,895   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31,2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the six months ended March 31, 2013

   $ (14,005   $ (2,379 )   $ 1,308       $ 646      $ 10,049      $ (4,381

The following table provides a roll-forward in the changes in fair value from September 30, 2011 to March 31, 2012, for all investments for which the Company determines fair value using unobservable (Level 3) factors:

 

     First Lien
Debt
    Second
Lien Debt
    Subordinated
Debt
    Preferred
Equity
    Common
Equity
    Total  

Fair value as of September 30, 2011

   $ 875,092      $ 143,383      $ 81,233      $ 7,167      $ 12,962      $ 1,119,837   

New investments & net revolver activity

     102,817        7,000        89,516        700        4,313        204,346   

Redemptions/repayments

     (241,538 )     (23,751 )            (713     (9 )     (266,011 )

Net accrual of PIK interest income

     1,545        908        1,723        333               4,509   

Accretion of original issue discount

     794        120                             914   

Net change in unearned income

     3,424        1,088        (894                   3,618   

Net unrealized appreciation (depreciation)

     1,850        10,223        (370     432        1,746        13,881   

Unrealized adjustments due to deal exits

     (7,792     (16,710            (118     (251     (24,871

Transfer into (out of) Level 3

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2012

   $ 736,192      $ 122,261      $ 171,208      $ 7,801      $ 18,761      $ 1,056,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31, 2012 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the six months ended March 31, 2012

   $ (5,942 )   $ (6,487 )   $ (370   $ 314      $ 1,495      $ (10,990 )

The Company generally utilizes a bond yield model to estimate the fair value of its debt investments when there is not a readily available market value (Level 3) which model is based on the present value of expected cash flows from the debt investments. The significant observable inputs into the model are market interest rates for debt with similar characteristics, which are adjusted for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. These factors are incorporated into the calculation of the capital structure premium, tranche specific risk premium, size premium and industry premium, which are significant unobservable inputs into the model.

 

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Table of Contents

Significant Unobservable Inputs for Level 3 Investments

The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of March 31, 2013:

 

Asset

  Fair Value    

Valuation Technique

 

Unobservable Input

  Range     Weighted
Average
 

First lien debt

  $ 1,080,132      Bond yield approach   Capital structure premium     (a     0.0%         -        1.0     0.3
      Tranche specific risk premium/(discount)     (a     (4.0%)         -        26.3     2.5
      Size premium     (a     0.5%         -        2.0     1.3
      Industry premium/(discount)     (a     (1.3%)         -        4.0     0.2
    18,733      Market approach   EBITDA multiple     (b     3.7x         -        3.7x        3.7x   
    14,905      Expected recovery approach   Recovery rate       40.0%         -        100.0 %     70.0 %

Second lien & subordinated debt

    571,124      Bond yield approach   Capital structure premium     (a     2.0%         -        2.0     2.0
      Tranche specific risk premium/(discount)     (a     (0.8%)         -        9.0     3.2
      Size premium     (a     0.5%         -        2.0     0.7
      Industry premium/(discount)     (a     (1.3%)         -        1.2     0.1 %
    1,000      Expected recovery approach   Recovery rate       100.0         -        100.0 %     100.0 %

Preferred & common equity

    63,001      Market and income approach   Weighted average cost of capital       14.0%         -        29.0     16.8
      Company specific risk premium     (a     1.0%         -        15.0     2.2
      Revenue growth rate       1.4%         -        23.2     8.0
      EBITDA multiple     (b     3.9x         -        11.3x        6.2x   
 

 

 

                

Total

  $ 1,748,895                
 

 

 

                

 

(a) Used when market participant would take into account this premium or discount when pricing the investment

 

(b) Used when market participant would use such multiples when pricing the investment

 

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Table of Contents

The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of September 30, 2012:

 

Asset

  Fair Value      Valuation Technique    Unobservable Input   Range     Weighted
Average
 

First lien debt

  $ 895,464       Bond yield approach    Capital structure premium     (a )      0.0%         -         1.0     0.3
        Tranche specific risk

premium/(discount)

    (a )      (4.0%)         -         25.5     2.1
        Size premium     (a )      0.5%         -         2.0     1.3
        Industry premium/
(discount)
    (a )      (1.5%)         -         4.7     0.1
    7,028       Market approach    EBITDA multiple     (b )      6.2x         -         6.2x        6.2x   

Second lien & subordinated debt

    337,467       Bond yield approach    Capital structure premium     (a )      2.0%         -         2.0     2.0
        Tranche specific risk
premium
    (a )      0.8%         -         7.8     3.1
        Size premium     (a )      0.5%         -         2.0     0.8
        Industry premium/
(discount)
    (a )      (1.4%)         -         1.1     (0.1 %) 
    1,238       Market and income
approach
   Weighted average cost of
capital
      33.0%         -         33.0     33.0
        Company specific risk
premium
    (a )      24.0%         -         24.0     24.0
        Revenue growth rate       15.5%         -         15.5     15.5

Preferred & common equity

    46,911       Market and income
approach
   Weighted average cost of
capital
      13.0%         -         33.0     19.1
        Company specific risk
premium
    (a )      1.0%         -         24.0     4.0
        Revenue growth rate       1.9%         -         44.5     11.0
        EBITDA multiple     (b )      4.8x         -         9.7x        7.5x   
 

 

 

              

 

 

      

Total

  $ 1,288,108                     
 

 

 

                   

 

(a) Used when market participant would take into account this premium or discount when pricing the investment.

 

(b) Used when market participant would use such multiples when pricing the investment.

Under the bond yield approach, the significant unobservable inputs used in the fair value measurement of the Company’s investments in debt securities are capital structure premium, tranche specific risk premium/(discount), size premium and industry premium/(discount). Significant increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement, respectively.

Under the market and income approaches, the significant unobservable inputs used in the fair value measurement of the Company’s investments in debt or equity securities are the weighted average cost of capital, company specific risk premium, revenue growth rate and EBITDA multiple. Significant increases or decreases in a portfolio company’s weighted average cost of capital or company specific risk premium in isolation may result in a significantly lower or higher fair value measurement, respectively. Significant increases or decreases in the revenue growth rate or EBITDA multiple in isolation may result in a significantly higher or lower fair value measurement, respectively.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of March 31, 2013 and the level of each financial liability within the fair value hierarchy:

 

     Carrying
Value
     Fair Value      Level 1      Level 2      Level 3  

Credit facilities payable

   $ 373,548       $ 373,548       $       $       $ 373,548   

SBA debentures payable

     181,750         158,098                         158,098   

Convertible notes payable

     115,000         120,750                         120,750   

Unsecured notes payable

     75,000         74,910                 74,910           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 745,298       $ 727,306       $       $ 74,910       $ 652,396   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The carrying values of credit facilities payable approximates their fair values and are included in Level 3 of the hierarchy.

The Company utilizes the bond yield approach to estimate the fair value of its SBA debentures payable, which are included in Level 3 of the hierarchy. Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flows streams for the debentures. The Company reviews various sources of data involving investments with similar characteristics and assesses the information in the valuation process.

The Company uses the most recently available market transactions to estimate the fair value of the convertible notes payable, which are included in Level 3 of the hierarchy.

The Company uses the unadjusted quoted price as of the valuation date to calculate the fair value of its unsecured notes which trade under the symbol “FSCE” on the New York Stock Exchange. As such, these securities are included in Level 2 of the hierarchy.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements consisted of $125.9 million and $102.5 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of March 31, 2013 and September 30, 2012, respectively. Such commitments are subject to the portfolio companies’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Statement of Assets and Liabilities and are not reflected on the Company’s Consolidated Statements of Assets and Liabilities.

 

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A summary of the composition of the unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of March 31, 2013 and September 30, 2012 is shown in the table below:

 

     March 31, 2013      September 30, 2012  

Deltek, Inc.

   $ 10,000       $   

RP Crown Parent, LLC

     9,000           

Yeti Acquisition, LLC

     7,500         7,500   

ISG Services, LLC

     6,000           

Refac Optical Group

     5,500         5,500   

I Drive Safely, LLC

     5,000         5,000   

Traffic Solutions Holdings, Inc.

     5,000         5,000   

Titan Fitness, LLC

     5,000         3,500   

First American Payment Systems, LP

     5,000           

Teaching Strategies, LLC

     5,000           

AdVenture Interactive, Corp.

     5,000           

InvestRx Corporation

     4,400         5,000   

Phoenix Brands Merger Sub LLC

     4,071         4,071   

Charter Brokerage, LLC

     4,000         7,353   

Enhanced Recovery Company, LLC

     4,000         4,000   

World 50, Inc.

     4,000         4,000   

Reliance Communications, LLC

     3,750           

Cardon Healthcare Network, LLC

     3,000         3,000   

Drugtest, Inc.

     2,500         4,000   

Discovery Practice Management, Inc.

     2,150         2,600   

Olson + Co., Inc.

     2,105         2,105   

Mansell Group, Inc.

     2,000         2,000   

Physicians Pharmacy Alliance, Inc.

     2,000         2,000   

Beecken Petty O’Keefe Fund IV, LP (limited partnership interest)

     2,000           

Riverside Fund V, LP (limited partnership interest)

     1,853         2,000   

Sterling Capital Partners IV, LP (limited partnership interest)

     1,611           

Miche Bag, LLC

     1,518         3,500   

Tegra Medical, LLC

     1,500         1,500   

Ansira Partners, Inc.

     1,190         1,190   

BMC Acquisition, Inc.

     1,135         900   

Milestone Partners IV, LP (limited partnership interest)

     1,105         1,343   

Garretson Firm Resolution Group, Inc.

     1,031           

Psilos Group Partners IV, LP (limited partnership interest)

     1,000         1,000   

CPASS Acquisition Company

     1,000         1,000   

Genoa Healthcare Holdings, LLC

     1,000           

Bunker Hill Capital II (QP), LP (limited partnership interest)

     906         934   

ACON Equity Partners III, LP (limited partnership interest)

     778         753   

Riverlake Equity Partners II, LP (limited partnership interest)

     638         760   

RCP Direct, LP (limited partnership interest)

     539         615   

HealthDrive Corporation

     500         750   

Baird Capital Partners V, LP (limited partnership interest)

     351         513   

Riverside Fund IV, LP (limited partnership interest)

     269         323   

Welocalize, Inc.

             10,000   

Rail Acquisition Corp.

             6,165   

Eagle Hospital Physicians, Inc.

             1,400   

Specialty Bakers, LLC

             750   

Advanced Pain Management Holdings, Inc.

             400   

Saddleback Fence and Vinyl Products, Inc.

             100   
  

 

 

    

 

 

 

Total

   $ 125,900       $ 102,525   
  

 

 

    

 

 

 

 

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Table of Contents

Portfolio Composition

Summaries of the composition of the Company’s investment portfolio at cost and fair value as a percentage of total investments are shown in the following tables:

 

     March 31, 2013     September 30, 2012  

Cost:

          

First lien debt

   $ 1,116,083         64.29   $ 888,690         70.06

Second lien debt

     266,210         15.34        135,828         10.71   

Subordinated debt

     306,559         17.66        201,971         15.92   

Purchased equity

     38,817         2.24        34,516         2.72   

Equity grants

     4,316         0.25        4,724         0.37   

Limited partnership interests

     3,951         0.22        2,760         0.22   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,735,936         100.00   $ 1,268,489         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair Value:

          

First lien debt

   $ 1,113,770         63.68   $ 902,492         70.06

Second lien debt

     260,783         14.91        133,258         10.35   

Subordinated debt

     311,341         17.80        205,447         15.95   

Purchased equity

     52,685         3.01        38,600         3.00   

Equity grants

     6,276         0.36        5,551         0.43   

Limited partnership interests

     4,040         0.24        2,760         0.21   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,748,895         100.00   $ 1,288,108         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company invests in portfolio companies located in North America. The following tables show the portfolio composition by geographic region at cost and fair value as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

 

     March 31, 2013     September 30, 2012  

Cost:

          

Northeast U.S.

   $ 573,063         33.01   $ 440,689         34.74

Southeast U.S.

     386,098         22.24        230,667         18.18   

Midwest U.S.

     301,415         17.36        251,751         19.85   

Southwest U.S.

     292,120         16.83        206,522         16.28   

West U.S.

     182,240         10.50        137,860         10.87   

Canada

     1,000         0.06        1,000         0.08   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,735,936         100.00   $ 1,268,489         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair Value:

          

Northeast U.S.

   $ 580,628         33.20   $ 442,111         34.32

Southeast U.S.

     386,968         22.13        236,808         18.38   

Southwest U.S.

     292,282         16.71        254,509         19.76   

Midwest U.S.

     291,883         16.69        212,939         16.53   

West U.S.

     194,447         11.12        140,191         10.88   

Canada

     2,687         0.15        1,550         0.13   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,748,895         100.00   $ 1,288,108         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The composition of the Company’s portfolio by industry at cost and fair value as of March 31, 2013 and September 30, 2012 was as follows:

 

     March 31, 2013     September 30, 2012  

Cost:

          

Diversified support services

   $ 244,683         14.10   $ 111,362         8.78

Healthcare services

     238,567         13.74        168,914         13.32   

Advertising

     158,763         9.15        53,665         4.23   

Education services

     142,859         8.23        99,033         7.81   

IT consulting & other services

     106,389         6.13        44,979         3.55   

Healthcare equipment

     91,080         5.25        82,808         6.53   

Internet software & services

     85,122         4.90        73,753         5.81   

Oil & gas equipment services

     76,209         4.39        60,245         4.75   

Leisure products

     55,351         3.19        55,534         4.38   

Pharmaceuticals

     47,509         2.74        40,309         3.18   

Leisure facilities

     46,426         2.67        29,651         2.34   

Construction and engineering

     46,137         2.66        46,334         3.65   

Diversified financial services

     39,345         2.27        38,479         3.03   

Apparel, accessories & luxury goods

     36,334         2.09        37,919         2.99   

Human resources & employment services

     33,828         1.95        19,441         1.53   

Auto parts & equipment

     32,752         1.89        1,000         0.08   

Specialty stores

     32,678         1.88        33,034         2.60   

Household products

     29,182         1.68        29,738         2.34   

Home improvement retail

     29,156         1.68        28,415         2.24   

Integrated telecommunication services

     21,931         1.26        31,994         2.52   

Environmental & facilities services

     21,014         1.21        21,026         1.66   

Air freight and logistics

     19,555         1.13        18,903         1.49   

Research & consulting services

     17,845         1.03        13,885         1.09   

Food distributors

     17,239         0.99        18,115         1.43   

Industrial machinery

     16,724         0.96        21,052         1.66   

Restaurants

     13,964         0.80        19,130         1.51   

Security & alarm services

     13,044         0.75                  

Data processing & outsourced services

     10,000         0.58                  

Construction materials

     7,060         0.41        6,951         0.55   

Multi-sector holdings

     3,950         0.22        2,759         0.21   

Building products

     735         0.04        748         0.06   

Application software

     305         0.02                  

Movies & entertainment

     200         0.01        200         0.02   

Electronic manufacturing services

                    36,163         2.85   

Distributors

                    19,115         1.51   

Electronic manufacturing services

                    3,835         0.30   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,735,936         100.00   $ 1,268,489         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     March 31, 2013     September 30, 2012  

Fair Value:

          

Diversified support services

   $ 246,341         14.09   $ 113,021         8.77

Healthcare services

     238,351         13.63        174,933         13.58   

Advertising

     159,553         9.12        54,125         4.20   

Education services

     144,314         8.25        99,327         7.71   

IT consulting & other services

     108,022         6.18        45,746         3.55   

Healthcare equipment

     91,869         5.25        84,084         6.53   

Internet software & services

     89,570         5.12        79,220         6.15   

Oil & gas equipment services

     77,834         4.45        62,087         4.82   

Leisure products

     58,167         3.33        56,477         4.38   

Construction and engineering

     55,514         3.17        50,003         3.88   

Pharmaceuticals

     48,863         2.79        41,000         3.18   

Leisure facilities

     46,837         2.68        30,359         2.36   

Diversified financial services

     39,976         2.29        39,288         3.05   

Apparel, accessories & luxury goods

     36,604         2.09        38,413         2.98   

Human resources & employment services

     34,581         1.98        20,196         1.57   

Auto parts & equipment

     34,388         1.97        1,550         0.12   

Specialty stores

     32,767         1.87        34,106         2.65   

Household products

     29,325         1.68        29,880         2.32   

Home improvement retail

     28,811         1.65        28,263         2.19   

Integrated telecommunication services

     22,452         1.28        32,892         2.55   

Research & consulting services

     18,237         1.04        14,189         1.10   

Industrial machinery

     17,618         1.01        21,750         1.69   

Food distributors

     14,905         0.85        18,400         1.43   

Restaurants

     14,355         0.82        19,468         1.51   

Air freight and logistics

     13,463         0.77        15,931         1.24   

Security & alarm services

     12,981         0.74                  

Data processing & outsourced services

     10,000         0.57                  

Environmental & facilities services

     9,916         0.57        12,175         0.95   

Construction materials

     7,243         0.41        7,200         0.56   

Multi-sector holdings

     4,040         0.24        2,760         0.22   

Application software

     1,000         0.06                  

Building products

     736         0.04        750         0.06   

Movies & entertainment

     262         0.01        262         0.02   

Electronic equipment & instruments

                    36,265         2.82   

Distributors

                    20,153         1.56   

Electronic manufacturing services

                    3,835         0.30   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,748,895         100.00   $ 1,288,108         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s investments are generally in small and mid-sized companies in a variety of industries. At March 31, 2013 and September 30, 2012, the Company had no single investment that represented greater than 10% of the total investment portfolio at fair value. Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given year can be highly concentrated among several investments. For the three and six months ended March 31, 2013 and March 31, 2012, no individual investment produced income that exceeded 10% of investment income.

 

Note 4. Fee Income

The Company receives a variety of fees in the ordinary course of business. Certain fees, such as origination fees, are capitalized and amortized in accordance with ASC 310-20 Nonrefundable Fees and Other Costs. In accordance with ASC 310-20, the net unearned fee income balance is netted against the cost of the respective investments. Other fees, such as servicing, advisory, structuring and prepayments fees, are classified as fee income and recognized as they are earned. The ending unearned fee income balances as of March 31, 2013 and September 30, 2012 were $8.3 million and $11.6 million, respectively.

 

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Table of Contents

As of March 31, 2013, the Company had structured $6.4 million in aggregate exit fees across seven portfolio investments upon the future exit of those investments. Exit fees are fees which are payable upon the exit of a debt investment. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan.

 

Note 5. Share Data

Effective January 2, 2008, the Partnership merged with and into the Company. At the time of the merger, all outstanding partnership interests in the Partnership were exchanged for 12,480,972 shares of common stock of the Company. An additional 26 fractional shares were payable to the stockholders in cash.

On June 17, 2008, the Company completed an initial public offering of 10,000,000 shares of its common stock at the public offering price of $14.12 per share. The net proceeds totaled $129.5 million after deducting underwriting commissions of $9.9 million and offering costs of $1.8 million.

On July 21, 2009, the Company completed a follow-on public offering of 9,487,500 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the public offering price of $9.25 per share. The net proceeds totaled $82.7 million after deducting underwriting commissions of $4.4 million and offering costs of $0.7 million.

On September 25, 2009, the Company completed a follow-on public offering of 5,520,000 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the public offering price of $10.50 per share. The net proceeds totaled $54.9 million after deducting underwriting commissions of $2.8 million and offering costs of $0.3 million.

On January 27, 2010, the Company completed a follow-on public offering of 7,000,000 shares of its common stock at the public offering price of $11.20 per share, with 300,500 additional shares being sold as part of the underwriters’ partial exercise of their over-allotment option on February 25, 2010. The net proceeds totaled $77.5 million after deducting underwriting commissions of $3.7 million and offering costs of $0.5 million.

On April 20, 2010, at the Company’s 2010 Annual Meeting, the Company’s stockholders approved, among other things, amendments to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 49,800,000 shares to 150,000,000 shares and to remove the Company’s authority to issue shares of Series A Preferred Stock.

On June 21, 2010, the Company completed a follow-on public offering of 9,200,000 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the public offering price of $11.50 per share. The net proceeds totaled $100.5 million after deducting underwriting commissions of $4.8 million and offering costs of $0.5 million.

On December 7, 2010, the Company entered into an at-the-market equity offering sales agreement relating to shares of its common stock. Throughout the month of December 2010, the Company sold 429,110 shares of its common stock at an average public offering price of $11.87 per share. The net proceeds totaled $5.0 million after deducting fees and commissions of $0.1 million. The Company terminated the at-the-market equity offering sales agreement effective January 20, 2011 and did not sell any shares of the Company’s common stock pursuant thereto subsequent to December 31, 2010.

On February 4, 2011, the Company completed a follow-on public offering of 11,500,000 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the public offering price of $12.65 per share. The net proceeds totaled $138.6 million after deducting underwriting commissions of $6.5 million and offering costs of $0.3 million.

On June 24, 2011, the Company completed a follow-on public offering of 5,558,469 shares of its common stock, which included the underwriters’ partial exercise of their over-allotment option, at the public offering price of $11.72 per share. The net proceeds totaled $62.7 million after deducting underwriting commissions of $2.3 million and offering costs of $0.2 million.

On January 26, 2012, the Company completed a follow-on public offering of 10,000,000 shares of its common stock at the public offering price of $10.07 per share. The net proceeds totaled $99.9 million after deducting offering costs of $0.8 million.

 

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Table of Contents

On September 14, 2012, the Company completed a follow-on public offering of 8,451,486 shares of its common stock, which included the underwriters’ partial exercise of their over-allotment option, at the public offering price of $10.79 per share. The net proceeds totaled $87.5 million after deducting underwriting commissions of $3.2 million and offering costs of $0.5 million.

On December 7, 2012, the Company completed a follow-on public offering of 14,000,000 shares of its common stock at the public offering price of $10.68 per share, with 725,000 additional shares being sold as part of the underwriters’ partial exercise of their over-allotment option on December 14, 2012. The net proceeds totaled $151.4 million after deducting underwriting commissions of $5.6 million and offering costs of $0.3 million.

On March 19, 2013, the Company amended its Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares.

The following table sets forth the computation of basic and diluted earnings per share, pursuant to ASC 260-10 Earnings per Share, for the three and six months ended March 31, 2013 and March 31, 2012:

 

     Three months
ended
March 31,
2013
     Three months
ended
March 31,
2012
     Six months
ended
March 31,
2013
     Six months
ended
March 31,
2012
 

Earnings per common share — basic:

           

Net increase in net assets resulting from operations

   $ 31,834       $ 20,056       $ 49,678       $ 30,240   

Weighted average common shares outstanding — basic

     106,022         79,534         100,394         75,935   

Earnings per common share — basic

   $ 0.30       $ 0.25       $ 0.49       $ 0.40   

Earnings per common share — diluted:

           

Net increase in net assets resulting from operations, before adjustments

   $ 31,834       $ 20,056       $ 49,678       $ 30,240   

Adjustments for interest on convertible notes, base management fees, incentive fees and gain on extinguishment of convertible notes

     1,366         1,450         2,714         1,908   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations, as adjusted

     33,200       $ 21,506         52,392       $ 32,148   

Weighted average common shares outstanding — basic

     106,022         79,534         100,394         75,935   

Adjustments for dilutive effect of convertible notes

     7,790         8,409         7,872         8,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding — diluted

     113,812         87,943         108,266         84,084   

Earnings per common share — diluted

   $ 0.29       $ 0.24       $ 0.48       $ 0.38   

The following table reflects the distributions per share that the Board of Directors of the Company declared and the Company paid, including shares issued under the dividend reinvestment plan (“DRIP”), on its common stock from October 1, 2011 to March 31, 2013:

 

Date Declared

   Record
Date
     Payment
Date
     Amount
per Share
     Cash
Distribution
     DRIP Shares
Issued
    DRIP Shares
Value
 

November 10, 2011

     January 13, 2012         January 31, 2012       $ 0.0958       $ 6.6 million         29,902 (1)   $ 0.3 million   

November 10, 2011

     February 15, 2012         February 29, 2012         0.0958         7.4 million         45,071        0.4 million   

November 10, 2011

     March 15, 2012         March 30, 2012         0.0958         7.5 million         41,807 (1)     0.4 million   

February 7, 2012

     April 13, 2012         April 30, 2012         0.0958         7.4 million         48,328 (1)     0.5 million   

February 7, 2012

     May 15, 2012         May 31, 2012         0.0958         7.4 million         47,877 (1)     0.5 million   

February 7, 2012

     June 15, 2012         June 29, 2012         0.0958         7.5 million         41,499        0.4 million   

May 7, 2012

     July 13, 2012         July 31, 2012         0.0958         7.4 million         49,217        0.5 million   

 

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Table of Contents

Date Declared

   Record
Date
     Payment
Date
     Amount
per Share
     Cash
Distribution
     DRIP Shares
Issued
     DRIP Shares
Value
 

May 7, 2012

     August 15, 2012         August 31, 2012         0.0958         7.5 million         41,359         0.4 million   

May 7, 2012

     September 14, 2012         September 28, 2012         0.0958         8.3 million         43,952         0.5 million   

August 6, 2012

     October 15, 2012         October 31, 2012         0.0958         8.2 million         51,754         0.5 million   

August 6, 2012

     November 15, 2012         November 30, 2012         0.0958         8.2 million         53,335         0.5 million   

August 6, 2012

     December 14, 2012         December 28, 2012         0.0958         9.5 million         64,680         0.6 million   

August 6, 2012

     January 15, 2013         January 31, 2013         0.0958         9.5 million         61,782         0.6 million   

August 6, 2012

     February 15, 2013         February 28, 2013         0.0958         9.1 million         103,356         1.0 million   

January 14, 2013

     March 15, 2013         March 29, 2013         0.0958         9.1 million         100,802         1.1 million   

 

(1) Shares were purchased on the open market and distributed.

In October 2010, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $20 million of the Company’s outstanding common stock. Stock repurchases under this program were to be made through the open market at times and in such amounts as the Company’s management deemed appropriate. The stock repurchase program expired December 31, 2011, with the Company not repurchasing any shares of its common stock pursuant to this repurchase program.

In May 2012, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $30 million of the Company’s outstanding common stock. Stock repurchases under this program would be made through the open market at times and in such amounts as the Company’s management deems appropriate, provided they are below the most recently published net asset value per share. Unless extended by the Company’s Board of Directors, the stock repurchase program will expire on May 7, 2013 and may be limited or terminated at any time without prior notice. As of March 31, 2013, the Company had not repurchased any shares of its common stock pursuant to this repurchase program.

 

Note 6. Lines of Credit

Wells Fargo Facility

On November 16, 2009, Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding”), and the Company entered into a Loan and Servicing Agreement (“Wells Agreement”), with respect to a three-year credit facility (as subsequently amended, the “Wells Fargo facility”) with Wells Fargo, as successor to Wachovia Bank, National Association, Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time, in the amount of $50 million, with an accordion feature which allowed for potential future expansion of the facility up to $100 million. The facility bore interest at LIBOR plus 4.0% per annum and had a maturity date of November 16, 2012.

On May 26, 2010, the Company amended the Wells Fargo facility to expand the borrowing capacity under that facility. Pursuant to the amendment, the Company received an additional $50 million commitment, thereby increasing the size of the facility from $50 million to $100 million, with an accordion feature which allowed for potential future expansion of that facility from a total of $100 million up to a total of $150 million. In addition, the interest rate of the Wells Fargo facility was reduced from LIBOR plus 4.0% per annum to LIBOR plus 3.5% per annum, with no LIBOR floor, and the maturity date of the facility was extended from November 16, 2012 to May 26, 2013.

On November 5, 2010, the Company amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of the Company’s portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million. On February 28, 2011, the Company amended the Wells Fargo facility to, among other things, (i) reduce the interest rate to LIBOR plus 3.0% per annum, with no LIBOR floor, (ii) extend the period during which the Company may make new borrowings under the facility to February 25, 2013 and (iii) extend the maturity date of the facility to February 25, 2014.

On November 30, 2011, the Company amended the Wells Fargo facility to, among other things, reduce the interest rate to LIBOR (1-month) plus 2.75% per annum, with no LIBOR floor.

 

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On April 23, 2012, the Company amended the Wells Fargo facility to, among other things, expand the borrowing capacity under the facility. Pursuant to the amendment, the Company received an additional $50 million commitment, thereby increasing the size of the facility to $150 million, with an accordion feature which allows for future expansion of the facility up to a total of $250 million. In addition, the period during which the Company may make and reinvest borrowings under the facility was extended to April 23, 2014 and the maturity date of the facility was extended to April 25, 2016.

In connection with the Wells Fargo facility, the Company concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which the Company has sold and will continue to sell to Funding certain loan assets it has originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which the Company pledged all of its equity interests in Funding as security for the payment of Funding’s obligations under the Wells Agreement and other documents entered into in connection with the Wells Fargo facility. Funding was formed for the sole purpose of entering into the Wells Fargo facility and has no other operations.

The Wells Agreement and related agreements governing the Wells Fargo facility required both Funding and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of their businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or the Company to materially perform under the Wells Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the Wells Fargo facility.

The Wells Fargo facility is secured by all of the assets of Funding, and all of the Company’s equity interest in Funding. The Company uses the Wells Fargo facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. The Company cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of March 31, 2013, the Company had $106.2 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $106.2 million. The Company’s borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 3.005% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, the Company recorded interest expense of $0.7 million and $1.6 million, respectively, related to the Wells Fargo facility.

ING Facility

On May 27, 2010, the Company entered into a three-year secured syndicated revolving credit facility (as subsequently amended, the “ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility initially allowed for the Company to borrow money at a rate of either (i) LIBOR plus 3.5% per annum or (ii) 2.5% per annum plus an alternate base rate based on the greatest of the Prime Rate, Federal Funds Rate plus 0.5% per annum or LIBOR plus 1% per annum, and had a maturity date of May 27, 2013. The ING facility also allows the Company to request letters of credit from ING Capital LLC, as the issuing bank. The initial commitment under the ING facility was $90 million, and the ING facility included an accordion feature that allowed for potential future expansion of the facility up to a total of $150 million.

The ING facility is secured by substantially all of the Company’s assets, as well as the assets of the Company’s wholly-owned subsidiary, FSFC Holdings, Inc. (“Holdings”), and its indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC (“Fund of Funds”), subject to certain exclusions for, among other things, equity interests in the Company’s SBIC subsidiaries, and equity interests in Funding and Funding II (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and the Company. Fifth Street Fund of Funds LLC and FSFC Holdings, Inc. were formed to hold certain of the Company’s portfolio companies for tax purposes and have no other operations. None of the Company’s SBIC subsidiaries, Funding or Funding II is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that the Company may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

 

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On February 22, 2011, the Company amended the ING facility to, among other things, expand the borrowing capacity to $215 million. In addition, the ING facility’s accordion feature was increased to allow for potential future expansion up to a total of $300 million and the maturity date was extended to February 22, 2014. On July 8, 2011, the Company amended the ING facility to, among other things, expand the borrowing capacity to $230 million and increase the accordion feature to allow for potential future expansion up to a total of $350 million. In addition, the ING facility’s interest rate was reduced to LIBOR plus 3.0% per annum, with no LIBOR floor, when the facility is drawn more than 35%. Otherwise, the interest rate was LIBOR plus 3.25% per annum, with no LIBOR floor. On February 29, 2012, the Company amended the ING facility to, among other things, (i) extend the period during which the Company may make and repay borrowings under the ING facility to February 27, 2015, (ii) extend the maturity date to February 29, 2016, and (iii) increase the accordion feature to allow for potential future expansion up to a total of $450 million.

On November 30, 2012, the Company amended the ING facility to, among other things, (i) increase the borrowing capacity of the facility to $380 million, (ii) add five new banks to the syndicate group, (iii) increase the accordion feature of the facility to $600 million, (iv) reduce the interest rate to LIBOR (1-, 2-, 3- or 6-month, at the Company’s option) plus 2.75% per annum, with no LIBOR floor, assuming the Company maintains its current credit rating, (v) extend the period during which the Company may make and repay borrowings to November 30, 2015, and (vi) extend the maturity date to November 30, 2016. During December 2012 and January 2013, additional lenders were added to the ING facility and the borrowing capacity increased to $425 million as of March 31, 2013. With the addition of the new lenders, the ING facility syndicate group now includes 12 lenders.

Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including the Company’s obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, the Company pledged its entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.

The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of the Company’s businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by the Company to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the ING facility.

Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the ING facility at any particular time or at all.

As of March 31, 2013, the Company had $185.0 million of borrowings outstanding under the ING facility, which had a fair value of $185.0 million. The Company’s borrowings under the ING facility bore interest at a weighted average interest rate of 3.357% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, the Company recorded interest expense of $2.0 million and $3.7 million, respectively, related to the ING facility.

Sumitomo Facility

On September 16, 2011, Fifth Street Funding II, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding II”), entered into a Loan and Servicing Agreement (“Sumitomo Agreement”) with respect to a seven-year credit facility (“Sumitomo facility”) with Sumitomo Mitsui Banking Corporation (“SMBC”), an affiliate of Sumitomo Mitsui Financial Group, Inc., as administrative agent, and each of the lenders from time to time party thereto, in the amount of $200 million. The Sumitomo facility bears interest at a rate of LIBOR (1-month) plus 2.25% per annum with no LIBOR floor, permits the Company to make new borrowings until September 16, 2014, matures on September 16, 2018 and includes an option for a one-year extension.

In connection with the Sumitomo facility, the Company concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which it has sold and will continue to sell to Funding II certain loan assets the Company has originated or acquired, or will originate or acquire.

 

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The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of its businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding II, and the failure by Funding II or the Company to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.

The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. There is no assurance that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of March 31, 2013, the Company had $82.3 million of borrowings outstanding under the Sumitomo facility, which had a fair value of $82.3 million. The Company’s borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 4.164% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, the Company recorded interest expense of $0.4 million and $0.8 million, respectively, related to the Sumitomo facility.

As of March 31, 2013, except for assets that were funded through the Company’s SBIC subsidiaries, substantially all of the Company’s assets were pledged as collateral under the Wells Fargo facility, the ING facility or the Sumitomo facility. With respect to the assets funded through the Company’s SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over the Company’s stockholders.

Interest expense for the three and six months ended March 31, 2013 was $7.8 million and $14.9 million, respectively. Interest expense for the three and six months ended March 31, 2012 was $5.6 million and $11.3 million, respectively.

 

Note 7. Interest and Dividend Income

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. In accordance with the Company’s policy, accrued interest is evaluated periodically for collectability. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.

The Company holds debt in its portfolio that contains PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company generally ceases accruing PIK interest if there is insufficient value to support the accrual or if the Company does not expect the portfolio company to be able to pay all principal and interest due. The Company’s decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; the Company’s assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by the Company in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, the Company determines whether to cease accruing PIK interest on a loan or debt security. The Company’s determination to cease accruing PIK interest on a loan or debt security is generally made well before the Company’s full write-down of such loan or debt security.

 

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Accumulated PIK interest activity for the six months ended March 31, 2013 and March 31, 2012 was as follows:

 

     Six months ended
March  31,
2013
    Six months ended
March  31,
2012
 

PIK balance at beginning of period

   $ 18,431      $ 22,672   

Gross PIK interest accrued

     8,382        8,351   

PIK income reserves(1)

     (615     (2,044

PIK interest received in cash

     (4,598     (1,798

Loan exits and other PIK adjustments

     (1,207       
  

 

 

   

 

 

 

PIK balance at end of period

   $ 20,393      $ 27,181   
  

 

 

   

 

 

 

 

(1) PIK income is generally reserved for when a loan is placed on PIK non-accrual status.

As of March 31, 2013, the Company had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013. As of March 31, 2012, the Company had stopped accruing cash and/or PIK interest and OID on four investments, including three that had not paid all of their scheduled cash interest payments for the period ended March 31, 2012.

The percentages of the Company’s portfolio investments at cost and fair value by accrual status as of March 31, 2013, September 30, 2012 and March 31, 2012 were as follows:

 

    March 31, 2013     September 30, 2012     March 31, 2012  
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
 

Accrual

  $ 1,692,509        97.50   $ 1,729,162        98.87   $ 1,256,265        99.04   $ 1,284,872        99.75   $ 1,027,219        95.23   $ 1,038,705        98.34

PIK non-accrual

    6,203        0.36                      12,224        0.96        3,236        0.25        15,637        1.45        3,082        0.29   

Cash non-accrual(1)

    37,224        2.14        19,733        1.13                                    35,841        3.32        14,436        1.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,735,936        100.00   $ 1,748,895        100.00   $ 1,268,489        100.00   $ 1,288,108        100.00   $ 1,078,697        100.00   $ 1,056,223        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

The non-accrual status of the Company’s portfolio investments as of March 31, 2013, September 30, 2012 and March 31, 2013 was as follows:

 

     March 31, 2013      September 30, 2012      March 31, 2012  

Coll Materials Group LLC

     Cash non-accrual         PIK non-accrual           

Eagle Hospital Physicians, Inc.

     Cash non-accrual                   

Lighting by Gregory, LLC(1)

                     Cash non-accrual   

Repechage Investments Limited(1)

                     Cash non-accrual   

Rail Acquisition Corp.(1)

                     PIK non-accrual   

Trans-Trade, Inc. – Term Loan B

     PIK non-accrual                   

Traffic Control & Safety Corp. – Second Lien and Subordinated Debt(1)

                     Cash non-accrual   

 

(1) The Company no longer holds this investment.

Income non-accrual amounts for the three and six months ended March 31, 2013 and March 31, 2012 were as follows:

 

     Three months
ended
March  31, 2013
     Three months
ended
March  31, 2012
     Six months
ended
March  31, 2013
     Six months
ended
March  31, 2012
 

Cash interest income

   $ 1,008       $ 967       $ 1,008       $ 2,157   

PIK interest income

     191         1,217         615         2,044   

OID income

             6                 96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,199       $ 2,190       $ 1,623       $ 4,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8. Taxable/Distributable Income and Dividend Distributions

Taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in taxable income until they are realized; (2) origination and exit fees received in connection with investments in portfolio companies; (3) organizational and deferred offering costs; (4) recognition of interest income on certain loans; and (5) income or loss recognition on exited investments.

At September 30, 2012, the Company has net capital loss carryforwards of $41.8 million to offset net capital gains, to the extent provided by federal tax law. Of the capital loss carryforwards, $1.5 million will expire on September 30, 2017, $10.3 million will expire on September 30, 2019, and $30.0 million will not expire. During the year ended September 30, 2012, the Company realized capital losses from the sale of investments after October 31, 2011 and prior to calendar year end (“post-October capital losses”) of $65.8 million, which for tax purposes are treated as arising on the first day of the following year.

Listed below is a reconciliation of “net increase in net assets resulting from operations” to taxable income for the three and six months ended March 31, 2013.

 

     Three months
ended
March  31, 2013
    Six months
ended
March  31, 2013
 

Net increase in net assets resulting from operations

   $ 31,834      $ 49,678   

Net change in unrealized (appreciation) depreciation

     (2,680     6,659   

Book/tax difference due to deferred loan fees

     (2,551     (4,821

Book/tax difference due to organizational and deferred offering costs

     (22 )     (44 )

Book/tax difference due to interest income on certain loans

     721        1,145   

Book/tax difference due to capital losses not recognized

     149        (478

Other book-tax differences

     (1,089     (1,435
  

 

 

   

 

 

 

Taxable/Distributable Income(1)

   $ 26,362      $ 50,704   
  

 

 

   

 

 

 

 

(1) The Company’s taxable income for 2013 is an estimate and will not be finally determined until the Company files its tax return for the fiscal year ended September 30, 2013. Therefore, the final taxable income may be different than the estimate.

The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. The Company has recorded a deferred tax asset for the difference in the book and tax basis of certain equity investments and tax net operating losses held by its taxable subsidiaries of $1.4 million. However, this amount has been fully offset by a valuation allowance of $1.4 million, since it is more likely than not that these deferred tax assets will not be realized.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted, which changed various technical rules governing the tax treatment of RICs. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company is permitted to carry forward any net capital losses, if any, incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment net loss carryforwards may be more likely to expire unused.

Distributions to stockholders are recorded on the record date. The Company is required to distribute annually to its stockholders at least 90% of its net taxable income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors and is based on management’s estimate of the Company’s annual taxable income. The Company maintains an “opt out” dividend reinvestment plan for its stockholders.

 

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The Company’s Board of Directors has declared and the Company has paid the following distributions from inception to March 31, 2013:

 

Distribution Type

   Date Declared      Record Date      Payment Date      Amount Per Share  

Quarterly

     5/1/2008         5/19/2008         6/3/2008       $ 0.30   

Quarterly

     8/6/2008         9/10/2008         9/26/2008         0.31   

Quarterly

     12/9/2008         12/19/2008         12/29/2008         0.32   

Quarterly

     12/9/2008         12/30/2008         1/29/2009         0.33   

Special

     12/18/2008         12/30/2008         1/29/2009         0.05   

Quarterly

     4/14/2009         5/26/2009         6/25/2009         0.25   

Quarterly

     8/3/2009         9/8/2009         9/25/2009         0.25   

Quarterly

     11/12/2009         12/10/2009         12/29/2009         0.27   

Quarterly

     1/12/2010         3/3/2010         3/30/2010         0.30   

Quarterly

     5/3/2010         5/20/2010         6/30/2010         0.32   

Quarterly

     8/2/2010         9/1/2010         9/29/2010         0.10   

Monthly

     8/2/2010         10/6/2010         10/27/2010         0.10   

Monthly

     8/2/2010         11/3/2010         11/24/2010         0.11   

Monthly

     8/2/2010         12/1/2010         12/29/2010         0.11   

Monthly

     11/30/2010         1/4/2011         1/31/2011         0.1066   

Monthly

     11/30/2010         2/1/2011         2/28/2011         0.1066   

Monthly

     11/30/2010         3/1/2011         3/31/2011         0.1066   

Monthly

     1/30/2011         4/1/2011         4/29/2011         0.1066   

Monthly

     1/30/2011         5/2/2011         5/31/2011         0.1066   

Monthly

     1/30/2011         6/1/2011         6/30/2011         0.1066   

Monthly

     5/2/2011         7/1/2011         7/29/2011         0.1066   

Monthly

     5/2/2011         8/1/2011         8/31/2011         0.1066   

Monthly

     5/2/2011         9/1/2011         9/30/2011         0.1066   

Monthly

     8/1/2011         10/14/2011         10/31/2011         0.1066   

Monthly

     8/1/2011         11/15/2011         11/30/2011         0.1066   

Monthly

     8/1/2011         12/13/2011         12/23/2011         0.1066   

Monthly

     11/10/2011         1/13/2012         1/31/2012         0.0958   

Monthly

     11/10/2011         2/15/2012         2/29/2012         0.0958   

Monthly

     11/10/2011         3/15/2012         3/30/2012         0.0958   

Monthly

     2/7/2012         4/13/2012         4/30/2012         0.0958   

Monthly

     2/7/2012         5/15/2012         5/31/2012         0.0958   

Monthly

     2/7/2012         6/15/2012         6/29/2012         0.0958   

Monthly

     5/7/2012         7/13/2012         7/31/2012         0.0958   

Monthly

     5/7/2012         8/15/2012         8/31/2012         0.0958   

Monthly

     5/7/2012         9/14/2012         9/28/2012         0.0958   

Monthly

     8/6/2012         10/15/2012         10/31/2012         0.0958   

Monthly

     8/6/2012         11/15/2012         11/30/2012         0.0958   

Monthly

     8/6/2012         12/14/2012         12/28/2012         0.0958   

Monthly

     8/6/2012         1/15/2013         1/31/2013         0.0958   

Monthly

     8/6/2012         2/15/2013         2/28/2013         0.0958   

Monthly

     1/14/2013         3/15/2013         3/29/2013         0.0958   

For income tax purposes, the Company estimates that its distributions for the calendar year 2013 will be composed primarily of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar year 2013.

As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis. Because the Company did not satisfy these distribution requirements for calendar years 2009 and 2010, the Company incurred a de minimis federal excise tax for those calendar years. The Company did not incur a federal excise tax for calendar year 2011 and does not expect to incur a federal excise tax for calendar year 2012.

 

Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments

Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with the Company’s determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.

 

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Net unrealized appreciation or depreciation reflects the net change in the valuation of the portfolio pursuant to the Company’s valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation.

During the six months ended March 31, 2013, the Company recorded investment realization events, including the following:

 

   

In October 2012, the Company received a cash payment of $4.2 million from Rail Acquisition Corp. in full satisfaction of all obligations related to the revolving loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, the Company received a cash payment of $5.4 million from Bojangles in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, the Company received a cash payment of $21.9 million from Blue Coat Systems, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, the Company received a cash payment of $9.9 million from Insight Pharmaceuticals LLC in full satisfaction of all obligations related to the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In November 2012, the Company received a cash payment of $8.5 million from SolutionSet, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In January 2013, the Company received a cash payment of $30.2 million from NDSSI Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction. The Company also received an additional $3.0 million in connection with the sale of its preferred equity investment (including accumulated PIK of $0.9 million), realizing a gain of $0.1 million;

 

   

In January 2013, the Company received a cash payment of $44.6 million from Welocalize, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2013, the Company received a cash payment of $14.6 million from Edmentum, Inc. in full satisfaction of all obligations under the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2013, the Company received a cash payment of $7.1 million from Advanced Pain Management Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, the Company received a cash payment of $10.0 million from eResearch Technology, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, the Company received a cash payment of $15.0 million from AdVenture Interactive, Corp. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, the Company received a cash payment of $19.5 million from idX Corporation in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and

 

   

During the six months ended March 31, 2013, the Company received cash payments of $54.0 million in connection with partial sales of debt investments in the open market and recorded a net realized gain of $0.5 million.

During the six months ended March 31, 2012, the Company recorded investment realization events, including the following:

 

   

In November 2011, the Company recorded a realized loss in the amount of $18.1 million as a result of a Delaware bankruptcy court judge ruling which confirmed a Chapter 11 plan of reorganization that provided no recovery on the Company’s investment in Premier Trailer Leasing, Inc.;

 

   

In November 2011, the Company received a cash payment of $20.2 million from IZI Medical Products, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and the Company received an additional $1.3 million proceeds from its equity investment, realizing a gain of $0.8 million;

 

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In December 2011, the Company received a cash payment of $23.0 million from ADAPCO, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, the Company received a cash payment of $2.0 million from Best Vinyl Fence & Deck, LLC in full satisfaction of all obligations related to the Term Loan A under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, the Company received a cash payment of $9.2 million from Actient Pharmaceuticals LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, the Company sold $4.0 million of its $10.0 million debt investment in Bojangles and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, the Company sold $2.0 million of its $11.5 million debt investment in US Collections, Inc. and no realized gain or loss was recorded on this transaction;

 

   

In January 2012, the Company received a cash payment of $18.5 million from IOS Acquisitions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2012, the Company received a cash payment of $2.1 million from O’Currance, Inc. The debt investment was exited below par and the Company recorded a realized loss in the amount of $10.7 million on this transaction;

 

   

In February 2012, the Company received a cash payment of $25.0 million from Ernest Health, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, the Company received a cash payment of $47.7 million from CRGT, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, the Company received a cash payment of $24.5 million from Epic Acquisition, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, the Company received a cash payment of $48.8 million from Dominion Diagnostics, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and

 

   

In March 2012, the Company received a cash payment of $5.0 million from Genoa Healthcare Holdings, LLC in full satisfaction of all obligations under the senior loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction.

        During the six months ended March 31, 2013, the Company recorded net unrealized depreciation of $6.7 million. This consisted of $15.1 million of net unrealized depreciation on debt investments and $2.3 million of net reclassifications to realized gains on debt and equity investments (resulting in unrealized depreciation), offset by $10.7 million of net unrealized appreciation on equity investments. During the six months ended March 31, 2012, the Company recorded net unrealized appreciation of $13.9 million. This consisted of $1.8 million of net unrealized appreciation on equity investments and $27.7 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), offset by $15.6 million of net unrealized depreciation on debt investments.

 

Note 10. Concentration of Credit Risks

The Company places its cash in financial institutions and at times such balances may be in excess of the FDIC insured limit. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions and monitoring their financial stability.

 

Note 11. Related Party Transactions

The Company has entered into an investment advisory agreement with the Investment Adviser. Under the investment advisory agreement, the Company pays the Investment Adviser a fee for its services consisting of two components — a base management fee and an incentive fee.

 

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Base management Fee

The base management fee is calculated at an annual rate of 2% of the Company’s gross assets, which includes any borrowings for investment purposes but excludes any cash and cash equivalents held at the end of each quarter. The base management fee is payable quarterly in arrears and the fee for any partial month or quarter is appropriately prorated.

For the three months ended March 31, 2013, the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to certain new investments that closed prior to quarter end, which resulted in a waiver of $1.3 million.

For the three and six months ended March 31, 2013, base management fees were $7.6 million and $15.6 million, respectively. For the three and six months ended March 31, 2012, base management fees were $5.4 million and $11.1 million, respectively. At March 31, 2013, the Company had a liability on its Consolidated Statement of Assets and Liabilities in the amount of $7.6 million reflecting the unpaid portion of the base management fee payable to the Investment Adviser.

Incentive Fee

The incentive fee portion of the investment advisory agreement has two parts. The first part is calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net Investment Income” for the immediately preceding fiscal quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the Company’s administration agreement with FSC, Inc., and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding fiscal quarter, will be compared to a “hurdle rate” of 2% per quarter (8% annualized), subject to a “catch-up” provision measured as of the end of each fiscal quarter. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of its gross assets used to calculate the 2% base management fee. The operation of the incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income for each quarter is as follows:

 

   

No incentive fee is payable to the Investment Adviser in any fiscal quarter in which the Company’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2% (the “preferred return” or “hurdle”);

 

   

100% of the Company’s Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the “catch-up.” The “catch-up” provision is intended to provide the Investment Adviser with an incentive fee of 20% on all of the Company’s Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company’s Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and

 

   

20% of the amount of the Company’s Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved (20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Investment Adviser).

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date) and equals 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

GAAP requires the Company to accrue for the theoretical capital gains incentive fee that would be payable after giving effect to the net realized and unrealized capital appreciation. It should be noted that a fee so calculated and accrued would not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts ultimately paid under the investment advisory agreement will be consistent with the formula reflected in the investment advisory agreement.

 

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The Company does not currently accrue for capital gains incentive fees due to the accumulated realized losses in the portfolio.

For the three and six months ended March 31, 2013, incentive fees were $7.0 million and $13.6 million, respectively. For the three and six months ended March 31, 2012, incentive fees were $5.7 million and $10.9 million, respectively. At March 31, 2013, the Company had a liability on its Consolidated Statement of Assets and Liabilities in the amount of $7.0 million reflecting the unpaid portion of the incentive fee payable to the Investment Adviser.

Indemnification

The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, the Company’s Investment Adviser and its officers, managers, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Investment Adviser’s services under the investment advisory agreement or otherwise as the Company’s Investment Adviser.

Administration Agreement

The Company has also entered into an administration agreement with FSC, Inc. under which FSC, Inc. provides administrative services for the Company, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, FSC, Inc. also performs or oversees the performance of the Company’s required administrative services, which includes being responsible for the financial records which the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, FSC, Inc. assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company reimburses FSC, Inc. the allocable portion of overhead and other expenses incurred by FSC, Inc. in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost with no profit to, or markup by, FSC, Inc.

As of March 31, 2013, FSC, Inc. had voluntarily determined to forgo receiving reimbursement for the services performed for the Company by its chief compliance officer. However, although FSC, Inc. relinquished its right to receive such reimbursement, it is under no obligation to do so and may cease to do so at any time in the future. FSC, Inc. may also provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

For the three and six months ended March 31, 2013, the Company accrued administrative expenses of $1.1 million, including $0.4 million of general and administrative expenses and $2.7 million, including $1.1 million of general and administrative expenses, which are due to FSC, Inc., respectively. At March 31, 2013, $1.2 million was included in Due to FSC, Inc. in the Consolidated Statement of Assets and Liabilities.

 

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Note 12. Financial Highlights

 

     Three months
ended
March 31,
2013
    Three months
ended
March 31,
2012
    Six months
ended
March 31,
2013
    Six months
ended
March 31,
2012
 

Net asset value at beginning of period

   $ 9.88      $ 9.89      $ 9.92      $ 10.07   

Net investment income

     0.28        0.29        0.56        0.58   

Net unrealized appreciation (depreciation) on investments

     0.02        0.10        (0.07     0.18   

Net realized loss on investments

            (0.14            (0.36

Distributions paid

     (0.29     (0.29     (0.58 )     (0.61

Issuance of common stock

     0.01        0.02        0.07        0.01   

Net asset value at end of period

   $ 9.90      $ 9.87      $ 9.90      $ 9.87   

Per share market value at beginning of period

   $ 10.42      $ 9.57      $ 10.98      $ 9.32   

Per share market value at end of period

   $ 11.02      $ 9.76      $ 11.02      $ 9.76   

Total return(1)

     8.73     5.01     6.13     11.39

Common shares outstanding at beginning of period

     105,943        72,376        91,048        72,376   

Common shares outstanding at end of period

     106,209        82,421        106,209        82,421   

Net assets at beginning of period

   $ 1,046,879      $ 715,665      $ 903,570      $ 728,627   

Net assets at end of period

   $ 1,050,961      $ 813,322      $ 1,050,961      $ 813,322   

Average net assets(2)

   $ 1,053,209      $ 789,909      $ 997,023      $ 757,445   

Ratio of net investment income to average net assets(3)

     11.28     11.57     11.24     11.53

Ratio of total expenses to average net assets(3)

     9.77     9.81     10.18     10.31

Ratio of portfolio turnover to average investments at fair value

     9.93     15.82     14.89 %     21.36

Weighted average outstanding debt(4)

   $ 572,641      $ 417,952      $ 527,686      $ 428,104   

Average debt per share

   $ 5.40      $ 5.26      $ 5.26      $ 5.64   

 

(1) Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company’s dividend reinvestment plan. Total return is not annualized during interim periods.

 

(2) Calculated based upon the weighted average net assets for the period.

 

(3) Interim periods are annualized.

 

(4) Calculated based upon the weighted average of loans payable for the period.

 

Note 13. Convertible Notes

On April 12, 2011, the Company issued $152 million unsecured convertible notes, including $2 million issued to Leonard M. Tannenbaum, the Company’s Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the “Indenture”), between the Company and the Trustee.

The Convertible Notes mature on April 1, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011. The Convertible Notes are the Company’s unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles.

 

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Prior to the close of business on the business day immediately preceding January 1, 2016, holders may convert their Convertible Notes only under certain circumstances set forth in the Indenture, such as during specified periods when the Company’s shares of common stock trade at more than 110% of the then applicable conversion price or the Convertible Notes trade at less than 98% of their conversion value. On or after January 1, 2016 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. Upon conversion, the Company will deliver shares of its common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of the Company’s common stock in excess of a monthly dividend of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115 million convertible debt outstanding at March 31, 2013 is 7,790,273. If the Company delivers shares of common stock upon a conversion at the time that net asset value per share exceeds the conversion price in effect at such time, the Company’s stockholders may incur dilution. In addition, the Company’s stockholders will experience dilution in their ownership percentage of common stock upon the issuance of common stock in connection with the conversion of the Company’s convertible notes and any dividends paid on common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.

The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Notes, and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture.

For the three and six months ended March 31, 2013, the Company recorded interest expense of $1.7 million and $3.4 million, respectively, related to the Convertible Notes.

The Company may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Convertible Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the indenture. The Company did not repurchase Convertible Notes during the six months ended March 31, 2013. During the six months ended March 31, 2012, the Company repurchased $11.0 million principal of the Convertible Notes in the open market for an aggregate purchase price of $9.4 million and surrendered them to the Trustee for cancellation. The Company recorded a gain on the extinguishment of these Convertible Notes in the amount of the difference between the reacquisition price and the net carrying amount, net of the proportionate amount of unamortized debt issuance costs. The net gain recorded was $1.3 million.

As of March 31, 2013, there were $115.0 million of Convertible Notes outstanding, which had a fair value of $120.8 million.

 

Note 14. Unsecured Notes

On October 18, 2012, the Company issued $75.0 million in aggregate principal amount of its 5.875% unsecured notes due 2024 (the “2024 Notes”) for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.

The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the “2024 Notes Indenture”), between the Company and the Trustee. The 2024 Notes are the Company’s unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles.

 

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Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum, beginning January 30, 2013. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 30, 2017. On November 1, 2012, the Company listed the 2024 Notes on the New York Stock Exchange under the trading symbol “FSCE” with a par value of $25.00 per share.

The 2024 Notes Indenture contains certain covenants, including covenants requiring the Company’s compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the 2024 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. The Company may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2024 Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the 2024 Notes Indenture. During the six months ended March 31, 2013, the Company did not repurchase any of the 2024 Notes in the open market.

For the three and six months ended March 31, 2013, the Company recorded interest expense of $1.2 million and $2.1 million, respectively, related to the 2024 Notes.

As of March 31, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.9 million.

 

Note 15. Subsequent Events

The Company’s management evaluated subsequent events through the date of issuance of the Consolidated Financial Statements. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the Consolidated Financial Statements as of and for the six months ended March 31, 2013, except as discussed below:

In April and May 2013, the Company issued $86.3 million in aggregate principal amount of its 6.125% unsecured notes due 2028 (the “2028 Notes”) for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option. Interest on the 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per year, beginning April 30, 2013. The 2028 Notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after April 30, 2018. The Company has listed the 2028 Notes on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share.

In April 2013, the Company completed a follow-on public offering of 14,435,253 shares of its common stock, which included the underwriters’ partial exercise of their over-allotment option, at the public offering price of $10.85. The net proceeds totaled $151.5 million after deducting underwriting commissions of $4.7 million and offering costs of $0.3 million.

 

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

The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.

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

 

   

our future operating results and dividend projections;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of the investments that we expect to make;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital; and

 

   

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

In addition, words such as “anticipate,” “believe,” “expect,” “project” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2012 and elsewhere in this quarterly report on Form 10-Q for the quarter ended March 31, 2013. Other factors that could cause actual results to differ materially include:

 

   

changes in the economy and the financial markets;

 

   

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

 

   

future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies, SBICs or RICs; and

 

   

other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Except as otherwise specified, references to the “Company,” “we,” “us,” and “our” refer to Fifth Street Finance Corp.

All amounts are in thousands, except share and per share amounts, percentages and as otherwise indicated.

Overview

We are a specialty finance company that lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity investments.

We were formed as a Delaware limited partnership (Fifth Street Mezzanine Partners III, L.P.) on February 15, 2007. Effective as of January 2, 2008, Fifth Street Mezzanine Partners III, L.P. merged with and into Fifth Street Finance Corp. At the time of the merger, all outstanding partnership interests in Fifth Street Mezzanine Partners III, L.P. were exchanged for 12,480,972 shares of common stock in Fifth Street Finance Corp.

On June 17, 2008, we completed an initial public offering of 10,000,000 shares of our common stock at the offering price of $14.12 per share. Our stock was listed on the New York Stock Exchange until November 28, 2011 when we transferred the listing to the NASDAQ Global Select Market, where it continues to trade under the symbol “FSC.”

Current Market Conditions

Since mid-2007, the global financial markets have experienced stress, volatility, illiquidity and disruption. This turmoil appears to have peaked in the fall of 2008, resulting in several major financial institutions becoming insolvent, being acquired, or receiving government assistance. While the turmoil in the financial markets appears to have abated somewhat, the global economy continues to experience economic uncertainty. Economic uncertainty impacts our business in many ways, including changing spreads, structures and purchase multiples as well as the overall supply of investment capital.

Despite the economic uncertainty, our deal pipeline remains robust, with high quality transactions backed by private equity sponsors in small to mid-sized companies. As always, we remain cautious in selecting new investment opportunities, and will only deploy capital in deals which we believe are consistent with our disciplined philosophy of pursuing superior risk-adjusted returns.

 

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We expect to grow the investment portfolio by strategically investing in small and mid-sized companies when and where appropriate, as evidenced by our recent investment activities. Although we believe that we currently have sufficient capital available to fund investments, a prolonged period of market disruptions may cause us to reduce the volume of loans we originate and/or fund, which could have an adverse effect on our business, financial condition and results of operations. In this regard, because our common stock has at times traded at a price below our then current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.

Critical Accounting Policies

Basis of Presentation

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions affecting amounts reported in the Consolidated Financial Statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Investment Valuation

We are required to report our investments that are not publicly traded or for which current market values are not readily available at fair value. The fair value is deemed to be the price 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.

In accordance with authoritative accounting guidance, we perform detailed valuations of our debt and equity investments on an individual basis, using bond yield, market and income approaches as appropriate. In general, we utilize a bond yield method for the majority of our investments, as long as it is appropriate. If, in our judgment, the bond yield approach is not appropriate, we may use the market approach, income approach, or, in certain cases, an alternative methodology potentially including an asset liquidation or expected recovery model.

Under the bond yield approach, we use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.

Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. 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 we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze 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 or revenues. We generally require 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, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business.

Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:

 

   

The quarterly valuation process begins with each portfolio company or investment being initially valued by our finance department;

 

   

Preliminary valuations are then reviewed and discussed with principals of the investment adviser;

 

   

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

 

   

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

 

   

Our finance department prepares a valuation report for the Audit Committee of our Board of Directors;

 

   

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

 

   

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

 

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The Audit Committee of our Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in our portfolio; and

 

   

Our Board of Directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith.

The fair value of all of our investments at March 31, 2013, and September 30, 2012, was determined by our Board of Directors. Our Board of Directors has authorized the engagement of independent valuation firms to provide us with valuation assistance. We will continue to engage independent valuation firms to provide us with assistance regarding our determination of the fair value of selected portfolio securities each quarter; however, our Board of Directors is ultimately and solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.

We intend to have a portion of the portfolio valued by an independent third party on a quarterly basis, with a substantial portion being valued over the course of each fiscal year. The percentages of our portfolio, at fair value, valued by independent valuation firms each period during the current and two preceding fiscal years were as follows:

 

For the quarter ended September 30, 2010

     61.8

For the quarter ended December 31, 2010

     73.9

For the quarter ended March 31, 2011

     82.0

For the quarter ended June 30, 2011

     82.9

For the quarter ended September 30, 2011

     91.2

For the quarter ended December 31, 2011

     89.1

For the quarter ended March 31, 2012

     87.3

For the quarter ended June 30, 2012

     84.3

For the quarter ended September 30, 2012

     79.6

For the quarter ended December 31, 2012

     79.5

For the quarter ended March 31, 2013

     73.8

As of March 31, 2013 and September 30, 2012, approximately 96.2% and 92.7%, respectively, of our total assets represented investments in portfolio companies valued at fair value.

Revenue Recognition

Interest and Dividend Income

Interest income, adjusted for accretion of original issue discount, or OID, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.

Fee Income

We receive a variety of fees in the ordinary course of business. Certain fees, such as loan origination fees, if any, are capitalized and amortized in accordance with ASC 310-20 Nonrefundable Fees and Other Costs. In accordance with ASC 310-20, the net unearned fee income balance is netted against the cost and fair value of the respective investments. Other fees, such as servicing, advisory, structuring and prepayment fees are classified as fee income and recognized as they are earned.

 

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We have also structured exit fees across certain of our portfolio investments to be received upon the future exit of those investments. Exit fees are payable upon the exit of a debt security. These fees are to be paid to us upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. The receipt of such fees is contingent upon the occurrence of one of the events listed above for each of the investments. A percentage of these fees is included in net investment income over the life of the loan. As of March 31, 2013, we had structured $6.4 million in aggregate exit fees across seven portfolio investments upon the future exit of those investments.

Payment-in-Kind (PIK) Interest

Our loans typically contain contractual PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; our assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by us in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we determine whether to cease accruing PIK interest on a loan or debt security. Our determination to cease accruing PIK interest on a loan or debt security is generally made well before our full write-down of such loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest.

For a discussion of risks we are subject to as a result of our use of PIK interest in connection with our investments, see “Risk Factors — Risks Relating to Our Business and Structure — We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income,” “— We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive” and “— Our incentive fee may induce our investment adviser to make speculative investments” in our annual report on Form 10-K for the year ended September 30, 2012. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost basis of these investments in our consolidated financial statements and, as a result, increases the cost basis of these investments for purposes of computing the capital gains incentive fee payable by us to our investment adviser.

To maintain our status as a RIC, PIK income must be paid out to our stockholders in the form of dividends even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $20.4 million and represented 1.2% of the fair value of our portfolio of investments as of March 31, 2013 and $18.4 million or 1.4% as of September 30, 2012. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.

Portfolio Composition

Our investments principally consist of loans, purchased equity investments and equity grants in privately-held companies. Our loans are typically secured by a first, second or subordinated lien on the assets of the portfolio company and generally have terms of up to six years (but an expected average life of between three and four years). We are currently focusing our origination efforts on a prudent mix of first lien, second lien and subordinated loans which we believe will provide superior risk-adjusted returns while maintaining adequate credit protection. The mix may change over time based on market conditions and management’s view of where the best risk adjusted returns are available.

A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:

 

     March 31,
2013
    September 30,
2012
 

Cost:

    

First lien debt

     64.29     70.06

Second lien debt

     15.34        10.71   

Subordinated debt

     17.66        15.92   

Purchased equity

     2.24        2.72   

Equity grants

     0.25        0.37   

Limited partnership interests

     0.22        0.22   
  

 

 

   

 

 

 

Total

     100.00     100.00
  

 

 

   

 

 

 

 

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     March 31,
2013
    September 30,
2012
 

Fair value:

    

First lien debt

     63.68     70.06

Second lien debt

     14.91        10.35   

Subordinated debt

     17.80        15.95   

Purchased equity

     3.01        3.00   

Equity grants

     0.36        0.43   

Limited partnership interests

     0.24        0.21   
  

 

 

   

 

 

 

Total

     100.00     100.00
  

 

 

   

 

 

 

The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:

 

     March 31,
2013
    September 30,
2012
 

Cost:

    

Diversified support services

     14.10     8.78

Healthcare services

     13.74        13.32   

Advertising

     9.15        4.23   

Education services

     8.23        7.81   

IT consulting & other services

     6.13        3.55   

Healthcare equipment

     5.25        6.53   

Internet software & services

     4.90        5.81   

Oil & gas equipment services

     4.39        4.75   

Leisure products

     3.19        4.38   

Pharmaceuticals

     2.74        3.18   

Leisure facilities

     2.67        2.34   

Construction and engineering

     2.66        3.65   

Diversified financial services

     2.27        3.03   

Apparel, accessories & luxury goods

     2.09        2.99   

Human resources & employment services

     1.95        1.53   

Auto parts & equipment

     1.89        0.08   

Specialty stores

     1.88        2.60   

Household products

     1.68        2.34   

Home improvement retail

     1.68        2.24   

Integrated telecommunication services

     1.26        2.52   

Environmental & facilities services

     1.21        1.66   

Air freight & logistics

     1.13        1.49   

Research & consulting services

     1.03        1.09   

Food distributors

     0.99        1.43   

Industrial machinery

     0.96        1.66   

Restaurants

     0.80        1.51   

Security & alarm services

     0.75        0.00   

Data processing & outsourced services

     0.58        0.00   

Construction materials

     0.41        0.55   

Multi-sector holdings

     0.22        0.21   

Building products

     0.04        0.06   

Application software

     0.02        0.00   

Movies & entertainment

     0.01        0.02   

Electronic manufacturing services

     0.00        2.85   

Distributors

     0.00        1.51   

Electronic manufacturing services

     0.00        0.30   
  

 

 

   

 

 

 

Total

     100.00     100.00
  

 

 

   

 

 

 

 

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     March 31,
2013
    September 30,
2012
 

Fair Value:

    

Diversified support services

     14.09     8.77

Healthcare services

     13.63        13.58   

Advertising

     9.12        4.20   

Education services

     8.25        7.71   

IT consulting & other services

     6.18        3.55   

Healthcare equipment

     5.25        6.53   

Internet software & services

     5.12        6.15   

Oil & gas equipment services

     4.45        4.82   

Leisure products

     3.33        4.38   

Construction and engineering

     3.17        3.88   

Pharmaceuticals

     2.79        3.18   

Leisure facilities

     2.68        2.36   

Diversified financial services

     2.29        3.05   

Apparel, accessories & luxury goods

     2.09        2.98   

Human resources & employment services

     1.98        1.57   

Auto parts & equipment

     1.97        0.12   

Specialty stores

     1.87        2.65   

Household products

     1.68        2.32   

Home improvement retail

     1.65        2.19   

Integrated telecommunication services

     1.28        2.55   

Research & consulting services

     1.04        1.10   

Industrial machinery

     1.01        1.69   

Food distributors

     0.85        1.43   

Restaurants

     0.82        1.51   

Air freight and logistics

     0.77        1.24   

Security & alarm services

     0.74        0.00   

Data processing & outsourced services

     0.57        0.00   

Environmental & facilities services

     0.57        0.95   

Construction materials

     0.41        0.56   

Multi-sector holdings

     0.24        0.22   

Application software

     0.06        0.00   

Building products

     0.04        0.06   

Movies & entertainment

     0.01        0.02   

Electronic equipment & instruments

     0.00        2.82   

Distributors

     0.00        1.56   

Electronic manufacturing services

     0.00        0.30   
  

 

 

   

 

 

 

Total

     100.00     100.00
  

 

 

   

 

 

 

Portfolio Asset Quality

We employ a ranking system to assess and monitor the credit risk of our investment portfolio. We rank all investments on a scale from 1 to 5. The system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loan, and other factors considered relevant to making a credit judgment. We have determined that there should be an individual ranking assigned to each tranche of securities in the same portfolio company where appropriate. This may arise when the perceived risk of loss on the investment varies significantly between tranches due to their respective seniority in the capital structure.

 

   

Investment Ranking 1 is used for investments that are performing above expectations and/or a capital gain is expected.

 

   

Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risks at the time of the original investment. All new investments are initially ranked 2.

 

   

Investment Ranking 3 is used for investments that are performing below our expectations and that require closer monitoring, but where we expect no loss of investment return (interest and/or dividends) or principal. Companies with a ranking of 3 may be out of compliance with financial covenants.

 

   

Investment Ranking 4 is used for investments that are performing below our expectations and whose risks have increased materially since the original investment. We expect some loss of investment return, but no loss of principal.

 

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Investment Ranking 5 is used for investments that are performing substantially below our expectations and whose risks have increased substantially since the original investment. Investments with a ranking of 5 are those for which some loss of principal is expected.

The following table shows the distribution of our investments on the 1 to 5 investment ranking scale at fair value as of March 31, 2013 and September 30, 2012:

 

Investment Ranking

   March 31, 2013     September 30, 2012  
   Fair Value      % of Portfolio     Leverage Ratio     Fair Value      % of Portfolio     Leverage Ratio  

1

   $ 225,180         12.88     2.77      $ 68,685         5.33     2.72   

2

     1,489,077         85.14        4.22        1,212,993         94.17        3.96   

3

     14,905         0.85        NM (1)      3,193         0.25        NM (1) 

4

     18,733         1.07        NM (1)                       

5

     1,000         0.06        NM (1)      3,237         0.25        NM (1) 
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,748,895         100.00     4.10      $ 1,288,108         100.00     3.89   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Due to operating performance this ratio is not measurable.

We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of March 31, 2013, we had modified the payment terms of our investments in 16 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.

Loans and Debt Securities on Non-Accrual Status

As of March 31, 2013, we had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013. As of March 31, 2012, we had stopped accruing cash and/or PIK interest and OID on four investments, including three that had not paid all of their scheduled cash interest payments for the period ended March 31, 2012.

The percentages of our portfolio investments at cost and fair value by accrual status for the periods ended March 31, 2013, September 30, 2012 and March 31, 2012 were as follows:

 

    March 31, 2013     September 30, 2012     March 31, 2012  
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
    Cost     % of
Portfolio
    Fair
Value
    % of
Portfolio
 

Accrual

  $ 1,692,509        97.50   $ 1,729,162        98.87   $ 1,256,265        99.04   $ 1,284,872        99.75   $ 1,027,219        95.23   $ 1,038,705        98.34

PIK non-accrual

    6,203        0.36                      12,224        0.96        3,236        0.25        15,637        1.45        3,082        0.29   

Cash non-accrual(1)

    37,224        2.14        19,733        1.13                                    35,841        3.32        14,436        1.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,735,936        100.00   $ 1,748,895        100.00   $ 1,268,489        100.00   $ 1,288,108        100.00   $ 1,078,697        100.00   $ 1,056,223        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.

The non-accrual status of our portfolio investments as of March 31, 2013, September 30, 2012 and March 31, 2012 was as follows:

 

     March 31, 2013      September 30, 2012      March 31, 2012  

Coll Materials Group LLC

     Cash non-accrual         PIK non-accrual           

Eagle Hospital Physicians, Inc.

     Cash non-accrual                   

Lighting by Gregory, LLC(1)

                     Cash non-accrual   

Repechage Investments Limited(1)

                     Cash non-accrual   

Rail Acquisition Corp.(1)

                     PIK non-accrual   

Trans-Trade, Inc. – Term Loan B

     PIK non-accrual                   

Traffic Control & Safety Corp. – Second Lien and Subordinated Debt(1)

                     Cash non-accrual   

 

(1) We no longer hold this investment as of March 31, 2013.

 

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Income non-accrual amounts for the three and six months ended March 31, 2013 and March 31, 2012 were as follows:

 

     Three months ended
March 31, 2013
     Three months ended
March 31, 2012
     Six months ended
March 31, 2013
     Six months ended
March 31, 2012
 

Cash interest income

   $ 1,008       $ 967       $ 1,008       $ 2,157   

PIK interest income

     191         1,217         615         2,044   

OID income

             6                 96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,199       $ 2,190       $ 1,623       $ 4,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Discussion and Analysis of Results and Operations

Results of Operations

The principal measure of our financial performance is the net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfolio.

Comparison of three and six months ended March 31, 2013 and March 31, 2012

Total Investment Income

Total investment income includes interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, servicing fees, unused fees, amendment fees, advisory fees, structuring fees, exit fees, prepayment fees and waiver fees. Other investment income consists primarily of dividend income received from certain of our equity investments.

Total investment income for the three months ended March 31, 2013 and March 31, 2012 was $54.7 million and $42.1 million, respectively. For the three months ended March 31, 2013, this amount primarily consisted of $41.7 million of interest income from portfolio investments (which included $4.0 million of PIK interest) and $11.9 million of fee income. For the three months ended March 31, 2012, this amount primarily consisted of $32.0 million of interest income from portfolio investments (which included $2.9 million of PIK interest) and $10.1 million of fee income.

Total investment income for the six months ended March 31, 2013 and March 31, 2012 was $106.5 million and $81.6 million, respectively. For the six months ended March 31, 2013, this amount primarily consisted of $80.3 million of interest income from portfolio investments (which included $7.8 million of PIK interest) and $24.7 million of fee income. For the six months ended March 31, 2012, this amount primarily consisted of $65.5 million of interest income from portfolio investments (which included $6.3 million of PIK interest) and $16.0 million of fee income.

The increase in our total investment income for the three and six months ended March 31, 2013 as compared to the three and six months ended March 31, 2012 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 25 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received on our debt investments and a decrease in the weighted average yield on our debt investments from 12.4% to 11.4% during the year-over-year period.

Expenses

Expenses for the three months ended March 31, 2013 and March 31, 2012 were $25.4 million and $19.3 million, respectively. Expenses increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 by $6.1 million. This was due primarily to increases in:

 

   

Base management fee, which was attributable to a 65.6% increase in the fair value of the investment portfolio due to an increase in net investment fundings in the year-over-year period;

 

   

Incentive fee, which was attributable to a 27.4% increase in pre-incentive fee net investment income for the year-over-year period; and

 

   

Interest expense, which was attributable to a 37.0% increase in weighted average debt outstanding for the year-over-year period.

 

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Expenses for the six months ended March 31, 2013 and March 31, 2012 were $50.6 million and $39.1 million, respectively. Expenses increased for the six months ended March 31, 2013 as compared to the six months ended March 31, 2012 by $11.5 million. This was due primarily to increases in:

 

   

Base management fee, which was attributable to the increase in the fair value of the investment portfolio discussed above;

 

   

Incentive fee, which was attributable to a 27.0% increase in pre-incentive fee net investment income for the year-over-year period; and

 

   

Interest expense, which was attributable to a 23.3% increase in weighted average debt outstanding for the year-over-year period.

Gain on Extinguishment of Convertible Notes

During the six months ended March 31, 2013, we did not repurchase any of our unsecured convertible notes (“Convertible Notes”) in the open market. During the three and six months ended March 31, 2012, we repurchased $0.5 million and $11.0 million, respectively, in principal amounts of our Convertible Notes in the open market and surrendered them to the trustee for cancellation. The aggregate purchase price of these Convertible Notes was $9.4 million because they were trading at a discount due to what we believe were volatile market conditions. As such, we recorded a gain in the amount of the difference between the reacquisition price and the net carrying amount of these Convertible Notes, net of the proportionate amount of unamortized debt issuance costs. The net gain on extinguishment of debt we recorded for the six months ended March 31, 2012 was $1.3 million. Because this net gain was included in the amount that must be distributed to our stockholders in order for us to maintain our RIC status and is classified as a component of net investment income in our Consolidated Statements of Operations, such net gain was included in “Pre-Incentive Fee Net Investment Income” for purposes of the payment of the income incentive fee to the investment adviser under our investment advisory agreement. Paying an incentive fee on this type of net gain is permissible under our investment advisory agreement, but because such a fee was not specifically detailed in the investment advisory agreement, we obtained the approval of our Board of Directors to pay such fees. This type of net gain, and corresponding income incentive fee, may occur again in the future. Any repurchase of our Notes (as defined below) at a discount will be treated in a similar manner.

Net Investment Income

As a result of the $12.6 million increase in total investment income as compared to the $6.1 million increase in total expenses, net investment income for the three months ended March 31, 2013 reflected a $6.5 million, or 28.6%, increase compared to the three months ended March 31, 2012.

As a result of the $24.9 million increase in total investment income as compared to the $1.3 million decrease in the gain on extinguishment of debt and the $11.5 million increase in total expenses, net investment income for the six months ended March 31, 2013 reflected a $12.1 million, or 27.6%, increase compared to the six months ended March 31, 2012.

Realized Gain (Loss) on Investments

Realized gain (loss) is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.

During the six months ended March 31, 2013, we recorded investment realization events, including the following:

 

   

In October 2012, we received a cash payment of $4.2 million from Rail Acquisition Corp. in full satisfaction of all obligations related to the revolving loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, we received a cash payment of $5.4 million from Bojangles in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, we received a cash payment of $21.9 million from Blue Coat Systems, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In October 2012, we received a cash payment of $9.9 million from Insight Pharmaceuticals LLC in full satisfaction of all obligations related to the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

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In November 2012, we received a cash payment of $8.5 million from SolutionSet, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In January 2013, we received a cash payment of 30.2 million from NDSSI Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction. We also received an additional $3.0 million in connection with the sale of its preferred equity investment (including accumulated PIK of $0.9 million), realizing a gain of $0.1 million;

 

   

In January 2013, we received a cash payment of $44.6 million from Welocalize, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2013, we received a cash payment of $14.6 million from Edmentum, Inc. in full satisfaction of all obligations under the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2013, we received a cash payment of $7.1 million from Advanced Pain Management Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, we received a cash payment of $10.0 million from eResearch Technology, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, we received a cash payment of $15.0 million from AdVenture Interactive, Corp. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In March 2013, we received a cash payment of $19.5 million from idX Corporation in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and

 

   

During the six months ended March 31, 2013, we received cash payments of $54.0 million in connection with partial sales of debt investments in the open market and recorded a net realized gain of $0.5 million.

During the six months ended March 31, 2012, we recorded investment realization events, including the following:

 

   

In November 2011, we recorded a realized loss in the amount of $18.1 million as a result of a Delaware bankruptcy court judge ruling which confirmed a Chapter 11 plan of reorganization that provided no recovery on our investment in Premier Trailer Leasing, Inc.;

 

   

In November 2011, we received a cash payment of $20.2 million from IZI Medical Products, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and we received an additional $1.3 million proceeds from our equity investment, realizing a gain of $0.8 million;

 

   

In December 2011, we received a cash payment of $23.0 million from ADAPCO, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, we received a cash payment of $2.0 million from Best Vinyl Fence & Deck, LLC in full satisfaction of all obligations related to the Term Loan A under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, we received a cash payment of $9.2 million from Actient Pharmaceuticals LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, we sold $4.0 million of our $10.0 million debt investment in Bojangles and no realized gain or loss was recorded on this transaction;

 

   

In December 2011, we sold $2.0 million of our $11.5 million debt investment in US Collections, Inc. and no realized gain or loss was recorded on this transaction;

 

   

In January 2012, we received a cash payment of $18.5 million from IOS Acquisitions, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (including associated fees) and no realized gain or loss was recorded on this transaction;

 

   

In February 2012, we received a cash payment of $2.1 million from O’Currance, Inc. The debt investment was exited below par and the Company recorded a realized loss in the amount of $10.7 million on this transaction;

 

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In February 2012, we received a cash payment of $25.0 million from Ernest Health, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (including associated fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, we received a cash payment of $47.7 million from CRGT, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (including associated fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, we received a cash payment of $24.5 million from Epic Acquisition, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (including associated fees) and no realized gain or loss was recorded on this transaction;

 

   

In March 2012, we received a cash payment of $48.8 million from Dominion Diagnostics, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (including associated fees) and no realized gain or loss was recorded on this transaction; and

 

   

In March 2012, we received a cash payment of $5.0 million from Genoa Healthcare Holdings, LLC in full satisfaction of all obligations under the senior loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction.

Net Unrealized Appreciation (Depreciation) on Investments

Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the three months ended March 31, 2013, we recorded net unrealized appreciation of $2.7 million. This consisted of $6.1 million of net unrealized appreciation on equity investments, offset by $1.4 million of net reclassifications to realized gains on debt and equity investments (resulting in unrealized depreciation) and $2.0 million of net unrealized depreciation on debt investments. During the three months ended March 31, 2012, we recorded net unrealized appreciation of $8.0 million. This consisted of $10.6 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), and $0.4 million of net unrealized appreciation on equity investments, offset by $3.0 million of net unrealized depreciation on debt investments.

During the six months ended March 31, 2013, we recorded net unrealized depreciation of $6.7 million. This consisted of $15.1 million of net unrealized depreciation on debt investments and $2.3 million of net reclassifications to realized gains on debt and equity investments (resulting in unrealized depreciation), offset by $10.7 million of net unrealized appreciation on equity investments. During the six months ended March 31, 2012, we recorded net unrealized appreciation of $13.9 million. This consisted of $1.8 million of net unrealized appreciation on equity investments and $27.7 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), offset by $15.6 million of net unrealized depreciation on debt investments.

Financial Condition, Liquidity and Capital Resources

Cash Flows

We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt and funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate.

For the six months ended March 31, 2013, we experienced a net decrease in cash and cash equivalents of $36.2 million. During that period, we used $406.8 million of cash in operating activities, primarily for the funding of $735.5 million of investments and net revolvers, partially offset by $280.0 million of principal payments, PIK payments and sale proceeds received and $55.9 million of net investment income. During the same period, cash provided by financing activities was $370.6 million, primarily consisting of $151.7 million of proceeds from issuances of our common stock, $31.8 million of net borrowings of SBA debentures, $172.3 million of net borrowings under our credit facilities and $75.0 million of proceeds from the issuance of the 5.875% unsecured notes due 2024 (the “2024 Notes”), partially offset by $53.6 million of cash distributions paid, $0.5 million of offering costs paid and $3.4 million of deferred financing costs paid.

 

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For the six months ended March 31, 2012, we experienced a net increase in cash and cash equivalents of $47.5 million. During that period, we had $94.8 million of cash provided by operating activities, primarily from $265.3 million of principal payments, PIK payments and sale proceeds received and $43.8 million of net investment income, offset by the funding of $204.3 million of investments and net revolvers. During the same period cash used by financing activities was $47.3 million, primarily consisting of $90.5 million of net repayments under our credit facilities, $45.4 million of cash dividends distributions paid, $9.4 million of net repurchases of our convertible notes and $2.0 million of deferred financing costs paid, partially offset by $100.7 million of proceeds from the issuance of our common stock.

As of March 31, 2013, we had $38.2 million in cash and cash equivalents, portfolio investments (at fair value) of $1.75 billion, $10.6 million of interest and fees receivable, $181.8 million of SBA debentures payable, $373.5 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $75.0 million of 2024 Notes payable and unfunded commitments of $125.9 million.

As of September 30, 2012, we had $74.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.29 billion, $7.7 million of interest and fees receivable, $150.0 million of SBA debentures payable, $201.3 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable and unfunded commitments of $102.5 million.

Other Sources of Liquidity

We intend to continue to generate cash primarily from cash flows from operations, including interest earned, future borrowings and future offerings of securities. Our primary use of funds is investments in our targeted asset classes and cash distributions to holders of our common stock.

Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan, and issuances of debt securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.

In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Internal Revenue Code. See “Regulated Investment Company Status and Dividends” below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

As a business development company, under the 1940 Act, we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). This requirement limits the amount that we may borrow. As of March 31, 2013, we were in compliance with this requirement. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.

 

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Significant Capital Transactions That Have Occurred Since October 1, 2011

The following table reflects distributions per share that our Board of Directors has declared, including shares issued under our DRIP, on our common stock since October 1, 2011:

 

Date Declared

  

Record

Date

    

Payment Date

     Amount per
Share
     Cash
Distribution
     DRIP Shares
Issued
    DRIP Shares
Value
 

November 10, 2011

     January 13, 2012         January 31, 2012       $ 0.0958       $ 6.6 million         29,902 (1)   $ 0.3 million   

November 10, 2011

     February 15, 2012         February 29, 2012         0.0958         7.4 million         45,071        0.4 million   

November 10, 2011

     March 15, 2012         March 30, 2012         0.0958         7.5 million         41,807 (1)     0.4 million   

February 7, 2012

     April 13, 2012         April 30, 2012         0.0958         7.4 million         48,328 (1)     0.5 million   

February 7, 2012

     May 15, 2012         May 31, 2012         0.0958         7.4 million         47,877 (1)     0.5 million   

February 7, 2012

     June 15, 2012         June 29, 2012         0.0958         7.5 million         41,499        0.4 million   

May 7, 2012

     July 13, 2012         July 31, 2012         0.0958         7.4 million         49,217        0.5 million   

May 7, 2012

     August 15, 2012         August 31, 2012         0.0958         7.5 million         41,359        0.4 million   

May 7, 2012

     September 14, 2012         September 28, 2012         0.0958         8.3 million         43,952        0.5 million   

August 6, 2012

     October 15, 2012         October 31, 2012         0.0958         8.2 million         51,754        0.5 million   

August 6, 2012

     November 15, 2012         November 30, 2012         0.0958         8.2 million         53,335        0.5 million   

August 6, 2012

     December 14, 2012         December 28, 2012         0.0958         9.5 million         64,680        0.6 million   

August 6, 2012

     January 15, 2013         January 31, 2013         0.0958         9.5 million         61,782        0.6 million   

August 6, 2012

     February 15, 2013         February 28, 2013         0.0958         9.1 million         103,356        1.0 million   

January 14, 2013

     March 15, 2013         March 29, 2013         0.0958         9.1 million         100,802        1.1 million   

January 14, 2013

     April 15, 2013         April 30, 2013         0.0958         10.3 million         111,167        1.2 million   

January 14, 2013

     May 15, 2013         May 31, 2013         0.0958           

May 6, 2013

     June 14, 2013         June 28, 2013         0.0958           

May 6, 2013

     July 15, 2013         July 31, 2013         0.0958           

May 6, 2013

     August 15, 2013         August 30, 2013         0.0958           

 

(1) Shares were purchased on the open market and distributed.

The following table reflects share transactions that occurred from October 1, 2010 through March 31, 2013:

 

Date

  

Transaction

  Shares      Public Offering Price     Gross Proceeds  

December 2010

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

February 4, 2011

   Public offering(2)     11,500,000         12.65        145.5 million   

June 24, 2011

   Public offering(3)     5,558,469         11.72        65.1 million   

January 26, 2012

   Public offering     10,000,000         10.07        100.7 million   

September 14, 2012

   Public offering(3)     8,451,486         10.79        91.2 million   

December 2012

   Public offering(3)     14,725,000         10.68        157.3 million   

 

(1) Average offering price
(2) Includes the underwriters’ full exercise of their over-allotment option
(3) Includes the underwriters’ partial exercise of their over-allotment option

Borrowings

SBIC Subsidiaries

Through wholly-owned subsidiaries, we sought and obtained two licenses from the SBA to operate SBIC subsidiaries. Specifically, on February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (“FSMP IV”), received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, our wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. (“FSMP V”), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. 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.

The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other 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.

 

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SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $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 when they have at least $112.5 million in regulatory capital. As of March 31, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $132.6 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

As of March 31, 2013, FSMP V had $37.5 million in regulatory capital and $31.8 million in SBA-guaranteed debentures outstanding, which had a fair value of $25.5 million. In March 2013, the SBA fixed the interest rate on the SBIC subsidiary’s $31.8 million of drawn leverage at an interest rate of 2.351% (excluding the SBA annual charge of 0.804%). As a result, the $181.8 million of SBA-guaranteed debentures held by our SBIC subsidiaries carry a weighted average interest rate of 3.355% as of March 31, 2013.

For the three and six months ended March 31, 2013, we recorded interest expense of $1.7 million and $3.4 million, respectively, related to the SBA-guaranteed debentures of both subsidiaries.

We have received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $225 million more than we would otherwise be able to absent the receipt of this exemptive relief.

Wells Fargo Facility

On November 16, 2009, we and Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote special purpose subsidiary (“Funding”), entered into a Loan and Servicing Agreement (“Wells Agreement”) with respect to a three-year credit facility (as subsequently amended, the “Wells Fargo facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), as successor to Wachovia Bank, National Association (“Wachovia”), Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time, in the amount of $50 million, with an accordion feature which allowed for potential future expansion of the facility up to $100 million. The facility bore interest at LIBOR plus 4.0% per annum and had a maturity date of November 16, 2012.

On May 26, 2010, we amended the Wells Fargo facility to expand the borrowing capacity under that facility. Pursuant to the amendment, we received an additional $50 million commitment, thereby increasing the size of the facility from $50 million to $100 million, with an accordion feature that allows for potential future expansion of that facility from a total of $100 million up to a total of $150 million. In addition, the interest rate of the Wells Fargo facility was reduced from LIBOR plus 4.0% per annum to LIBOR plus 3.5% per annum, with no LIBOR floor, and the maturity date of the facility was extended from November 16, 2012 to May 26, 2013.

On November 5, 2010, we amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million. On February 28, 2011, we amended the Wells Fargo facility to, among other things, (i) reduce the interest rate to LIBOR plus 3.0% per annum, with no LIBOR floor, (ii) extend the period during which we may make new borrowings under the facility to February 25, 2013, and (iii) extend the maturity date of the facility to February 25, 2014.

On November 30, 2011, we amended the Wells Fargo facility to, among other things, reduce the interest rate to LIBOR (1-month) plus 2.75% per annum, with no LIBOR floor.

On April 23, 2012, we amended the Wells Fargo facility to, among other things, expand the borrowing capacity under the facility. Pursuant to the amendment, we received an additional $50 million commitment, thereby increasing the size of the facility to $150 million, with an accordion feature which allows for future expansion of the facility up to a total of $250 million. In addition, the period during which we may make and reinvest borrowings under the facility was extended to April 23, 2014 and the maturity date of the facility was extended to April 25, 2016.

 

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In connection with the Wells Fargo facility, we concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which we have sold and will continue to sell to Funding certain loan assets we have originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which we pledged all of our equity interests in Funding as security for the payment of Funding’s obligations under the Wells Agreement and other documents entered into in connection with the Wells Fargo facility. Funding was formed for the sole purpose of entering into the Wells Fargo facility and has no other operations.

The Wells Agreement and related agreements governing the Wells Fargo facility required both Funding and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or us to materially perform under the Wells Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

The Wells Fargo facility is secured by all of the assets of Funding, and all of our equity interest in Funding. We use the Wells Fargo facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of March 31, 2013, we had $106.2 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $106.2 million. Our borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 3.005% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, we recorded interest expense of $0.7 million and $1.6 million, respectively related to the Wells Fargo facility.

ING Facility

On May 27, 2010, we entered into a three-year secured syndicated revolving credit facility (as subsequently amended, the “ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility initially allowed for us to borrow money at a rate of either (i) LIBOR plus 3.5% per annum or (ii) 2.5% per annum plus an alternate base rate based on the greatest of the Prime Rate, Federal Funds Rate plus 0.5% per annum or LIBOR plus 1% per annum, and had a maturity date of May 27, 2013. The ING facility also allows us to request letters of credit from ING Capital LLC, as the issuing bank. The initial commitment under the ING facility was $90 million, and the ING facility included an accordion feature that allowed for potential future expansion of the facility up to a total of $150 million.

The ING facility is secured by substantially all of our assets, as well as the assets of our wholly-owned subsidiary, FSFC Holdings, Inc. (“Holdings”), and our indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC (“Fund of Funds”), subject to certain exclusions for, among other things, equity interests in any of our SBIC subsidiaries and equity interests in Funding and Fifth Street Funding II, LLC (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and us. None of our SBIC subsidiaries, Funding or Fifth Street Funding II, LLC is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that we may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

On February 22, 2011, we amended the ING facility to, among other things, expand the borrowing capacity to $215 million. In addition, the ING facility’s accordion feature was increased to allow for potential future expansion up to a total of $300 million and the maturity date was extended to February 22, 2014. On July 8, 2011, we amended the ING facility to, among other things, expand the borrowing capacity to $230 million and increase the accordion feature to allow for potential future expansion up to a total of $350 million. In addition, the ING facility’s interest rate was reduced to LIBOR plus 3.0% per annum, with no LIBOR floor, when the facility is drawn more than 35%. Otherwise, the interest rate was LIBOR plus 3.25% per annum, with no LIBOR floor. On February 29, 2012, we amended the ING facility to, among other things, (i) extend the period during which we may make and repay borrowings under the ING facility to February 27, 2015, (ii) extend the maturity date to February 29, 2016, and (iii) increase the accordion feature to allow for potential future expansion up to a total of $450 million.

 

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On November 30, 2012, we amended our existing $230 million ING facility to, among other things: (i) increase the borrowing capacity of the facility to $380 million, (ii) add five new banks to the syndicate group, (iii) increase the accordion feature of the facility to $600 million, (iv) reduce the interest rate to LIBOR (1-, 2-, 3- or 6-month, at our option) plus 2.75% per annum, with no LIBOR floor, assuming we maintain our current credit rating, (v) extend the period during which we may make and repay borrowings to November 30, 2015, and (vi) extend the maturity date to November 30, 2016. During December 2012 and January 2013, additional lenders were added to the ING facility and the borrowing capacity increased to $425 million as of March 31, 2013. With the addition of the new lenders, the ING facility syndicate group now includes 12 lenders.

Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including our obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, we pledged our entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.

The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by us to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. We cannot be assured that we will be able to borrow funds under the ING facility at any particular time or at all. As of March 31, 2013, we had $185.0 million of borrowings outstanding under the ING facility, which had a fair value of $185.0 million. Our borrowings under the ING facility bore interest at a weighted average interest rate of 3.357% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, we recorded interest expense of $2.0 million and $3.7 million, respectively, related to the ING facility.

Sumitomo Facility

On September 16, 2011, Fifth Street Funding II, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding II”), entered into a Loan and Servicing Agreement (“Sumitomo Agreement”) with respect to a seven-year credit facility (“Sumitomo facility”) with Sumitomo Mitsui Banking Corporation (“SMBC”), an affiliate of Sumitomo Mitsui Financial Group, Inc., as administrative agent, and each of the lenders from time to time party thereto, in the amount of $200 million. The Sumitomo facility bears interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor, permits us to make new borrowings until September 16, 2014, matures on September 16, 2018 and includes an option for a one-year extension.

In connection with the Sumitomo facility, we concurrently entered into a Purchase and Sale Agreement with Funding II, pursuant to which we have sold and will continue to sell to Funding II certain loan assets we have originated or acquired, or will originate or acquire.

The Sumitomo Agreement and related agreements governing the Sumitomo facility required both Funding II and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Sumitomo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding II, and the failure by Funding II or us to materially perform under the Sumitomo Agreement and related agreements governing the Sumitomo facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. Funding II was formed for the sole purpose of entering into the Sumitomo facility and has no other operations.

 

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The Sumitomo facility is secured by all of the assets of Funding II. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding II will be able to borrow funds under the Sumitomo facility at any particular time or at all. As of March 31, 2013, we had $82.3 million of borrowings outstanding under the Sumitomo facility, which had a fair value of $82.3 million. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 4.164% for the six months ended March 31, 2013. For the three and six months ended March 31, 2013, we recorded interest expense of $0.4 million and $0.8 million, respectively, related to the Sumitomo facility.

As of March 31, 2013, except for assets that were funded through our SBIC subsidiaries, substantially all of our assets were pledged as collateral under the Wells Fargo facility, ING facility or the Sumitomo facility. With respect to the assets funded through our SBIC subsidiaries, the SBA, as a creditor, will have a superior claim to the SBIC subsidiaries’ assets over our stockholders.

The following table describes significant financial covenants with which we must comply under the Wells Fargo facility and ING facility on a quarterly basis. The Sumitomo facility does not require us to comply with significant financial covenants.

 

Facility

  

Financial Covenant

  

Description

  

Target Value

  

Reported Value (1)

Wells Fargo facility

   Minimum shareholders’ equity (inclusive of affiliates)    Net assets shall not be less than $510 million plus 50% of the aggregate net proceeds of all sales of equity interests after February 25, 2011    $712 million    $1,047 million
   Minimum shareholders’ equity (exclusive of affiliates)    Net assets exclusive of affiliates other than Funding shall not be less than $250 million    $250 million    $795 million
   Asset coverage ratio    Asset coverage ratio shall not be less than 2.00:1    2.00:1    3.57:1

ING facility

   Minimum shareholders’ equity    Net assets shall not be less than the greater of (a) 40% of total assets; and (b) $675 million plus 50% of the aggregate net proceeds of all sales of equity interests after November 30, 2012    $751 million    $1,047 million
   Asset coverage ratio    Asset coverage ratio shall not be less than 2.10:1    2.10:1    3.57:1
   Interest coverage ratio    Interest coverage ratio shall not be less than 2.50:1    2.50:1    5.25:1

 

(1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Form 10-Q for the quarter ended December 31, 2012. We were also in compliance with all financial covenants under these credit facilities based on the financial information contained in this Form 10-Q for the quarter ended March 31, 2013.

We and our SBIC subsidiaries are also subject to certain regulatory requirements relating to our borrowings. For a discussion of such requirements, see “Item 1. Business — Regulation — Business Development Company Regulations” and “— Small Business Investment Company Regulations” in our Annual Report on Form 10-K for the year ended September 30, 2012.

 

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The following table reflects material credit facility and SBA debenture transactions that have occurred since October 1, 2010. Amounts available and drawn are as of March 31, 2013.

 

Facility

   Date     

Transaction

   Total
Facility
Amount
     Upfront
Fee Paid
     Total  Facility
Availability
    Amount
Drawn
     Remaining
Availability
    

Interest Rate

Wells Fargo facility

     11/16/2009       Entered into credit facility    $ 50 million       $ 0.8 million               LIBOR + 4.00%
     5/26/2010       Expanded credit facility      100 million         0.9 million               LIBOR + 3.50%
     2/28/2011       Amended credit facility      100 million         0.4 million               LIBOR + 3.00%
     11/30/2011       Amended credit facility      100 million                       LIBOR + 2.75%
     4/23/2012       Amended credit facility      150 million         1.2 million       $ 109 million (1)    $ 106 million       $ 3 million       LIBOR(5) + 2.75%

ING facility

     5/27/2010       Entered into credit facility      90 million         0.8 million               LIBOR + 3.50%
     2/22/2011       Expanded credit facility      215 million         1.6 million               LIBOR + 3.50%
     7/8/2011       Expanded credit facility      230 million         0.4 million               LIBOR + 3.00%/3.25%(2)
     2/29/2012       Amended credit facility      230 million         1.5 million               LIBOR + 3.00%/3.25%(2)
     11/30/2012       Amended credit facility      385 million         2.2 million               LIBOR + 2.75%(3)
     1/7/2013       Expanded credit facility      425million         0.3 million         425 million        185 million         240 million       LIBOR(6) + 2.75%(3)

SBA

     2/16/2010       Received capital commitment      75 million         2.6 million              
     9/21/2010       Received capital commitment      150 million         2.6 million              
     7/23/2012       Received capital commitment      225 million         1.5 million         225 million        182 million         43 million       3.355%(4)

Sumitomo facility

     9/16/2011       Entered into credit facility      200 million         2.5 million         82 million (1)      82 million               LIBOR(5) + 2.25%

 

(1) Availability may be increased upon our decision to further collateralize the facility.
(2) LIBOR plus 3.00% when the facility is drawn more than 35%. Otherwise, LIBOR plus 3.25%.
(3) Assuming we maintain our current credit rating.
(4) Weighted average interest rate of 3.355% (excludes the SBA annual charge).
(5) 1-month.
(6) 1-, 2-, 3- or 6-month, at our option.

Convertible Notes

On April 12, 2011, we issued $152 million unsecured convertible notes (“Convertible Notes”), including $2 million issued to Leonard M. Tannenbaum, our Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the “Indenture”), between us and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”).

The Convertible Notes mature on April 1, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011. The Convertible Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles.

Prior to the close of business on the business day immediately preceding January 1, 2016, holders may convert their Convertible Notes only under certain circumstances set forth in the Indenture, such as during specified periods when our shares of common stock trade at more than 110% of the then applicable conversion price or the Convertible Notes trade at less than 98% of their conversion value. On or after January 1, 2016 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Convertible Notes at any time. Upon conversion, we will deliver shares of our common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of our common stock in excess of a monthly dividend of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115.0 million Convertible Notes outstanding at March 31, 2013 is 7,790,273. If we deliver shares of common stock upon a conversion at the time our net asset value per share exceeds the conversion price in effect at such time, our stockholders may incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of our common stock upon our issuance of common stock in connection with the conversion of our Convertible Notes and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.

We may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect to us, holders of the Convertible Notes may require us to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

 

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The Indenture contains certain covenants, including covenants requiring us to provide financial information to the holders of the Convertible Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. We may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Convertible Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. During the six months ended March 31, 2013, we did not repurchase any of the Convertible Notes in the open market.

For the three and six months ended March 31, 2013, we recorded interest expense of $1.7 million and $3.4 million, respectively, related to the Convertible Notes.

As of March 31, 2013, there were $115.0 million of Convertible Notes outstanding, which had a fair value of $120.8 million.

2024 Notes

On October 18, 2012, we issued $75.0 million in aggregate principal amount of our 5.875% 2024 Notes for net proceeds of $72.5 million after deducting underwriting commissions of $2.2 million and offering costs of $0.3 million.

The 2024 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated October 18, 2012 (collectively, the “2024 Notes Indenture”), between us and the Trustee. The 2024 Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the 2024 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 5.875% per annum, beginning January 30, 2013. The 2024 Notes mature on October 30, 2024 and may be redeemed in whole or in part at any time or from time to time at our option on or after October 30, 2017. On November 1, 2012, we listed the 2024 Notes on the New York Stock Exchange under the trading symbol “FSCE” with a par value of $25.00 per share.

The 2024 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act and with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 2024 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2024 Notes Indenture. We may repurchase the 2024 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2024 Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any 2024 Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the 2024 Notes Indenture. During the six months ended March 31, 2013, we did not repurchase any of the 2024 Notes in the open market.

For the three and six months ended March 31, 2013, we recorded interest expense of $1.2 million and $2.1 million, respectively, related to the 2024 Notes.

As of March 31, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.9 million.

Our aggregate interest expense for the three and six months ended March 31, 2013 was $7.8 million and $14.9 million, respectively.

 

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Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of March 31, 2013, our only off-balance sheet arrangements consisted of $125.9 million of unfunded commitments, which was comprised of $114.9 million to provide debt financing to certain of our portfolio companies and $11.0 million related to unfunded limited partnership interests. As of September 30, 2012, our only off-balance sheet arrangements consisted of $102.5 million, which was comprised of $94.3 million to provide debt financing to certain of our portfolio companies and $8.2 million related to unfunded limited partnership interests. Such commitments are subject to our portfolio companies’ satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Statement of Assets and Liabilities and are not reflected on our Consolidated Statement of Assets and Liabilities.

A summary of the composition of unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of March 31, 2013 and September 30, 2012 is shown in the table below:

 

     March 31, 2013      September 30, 2012  

Deltek, Inc.

   $ 10,000       $   

RP Crown Parent, LLC

     9,000           

Yeti Acquisition, LLC

     7,500         7,500   

ISG Services, LLC

     6,000           

Refac Optical Group

     5,500         5,500   

I Drive Safely, LLC

     5,000         5,000   

Traffic Solutions Holdings, Inc.

     5,000         5,000   

Titan Fitness, LLC

     5,000         3,500   

First American Payment Systems, LP

     5,000           

Teaching Strategies, LLC

     5,000           

AdVenture Interactive, Corp.

     5,000           

InvestRx Corporation

     4,400         5,000   

Phoenix Brands Merger Sub LLC

     4,071         4,071   

Charter Brokerage, LLC

     4,000         7,353   

Enhanced Recovery Company, LLC

     4,000         4,000   

World 50, Inc

     4,000         4,000   

Reliance Communications, LLC

     3,750           

Cardon Healthcare Network, LLC

     3,000         3,000   

Drugtest, Inc.

     2,500         4,000   

Discovery Practice Management, Inc.

     2,150         2,600   

Olson + Co., Inc.

     2,105         2,105   

Mansell Group, Inc.

     2,000         2,000   

Physicians Pharmacy Alliance, Inc.

     2,000         2,000   

Beecken Petty O’Keefe Fund IV, LP (limited partnership interest)

     2,000           

Riverside Fund V, LP (limited partnership interest)

     1,853         2,000   

Sterling Capital Partners IV, LP (limited partnership interest)

     1,611           

Miche Bag, LLC

     1,518         3,500   

Tegra Medical, LLC

     1,500         1,500   

Ansira Partners, Inc.

     1,190         1,190   

BMC Acquisition, Inc.

     1,135         900   

Milestone Partners IV, LP (limited partnership interest)

     1,105         1,343   

Garretson Firm Resolution Group, Inc.

     1,031           

Psilos Group Partners IV, LP (limited partnership interest)

     1,000         1,000   

CPASS Acquisition Company

     1,000         1,000   

Genoa Healthcare Holdings, LLC

     1,000           

Bunker Hill Capital II (QP), LP (limited partnership interest)

     906         934   

ACON Equity Partners III, LP (limited partnership interest)

     778         753   

Riverlake Equity Partners II, LP (limited partnership interest)

     638         760   

RCP Direct, LP (limited partnership interest)

     539         615   

HealthDrive Corporation

     500         750   

Baird Capital Partners V, LP (limited partnership interest)

     351         513   

Riverside Fund IV, LP (limited partnership interest)

     269         323   

Welocalize, Inc.

             10,000   

Rail Acquisition Corp.

             6,165   

Eagle Hospital Physicians, Inc.

             1,400   

Specialty Bakers, LLC

             750   

Advanced Pain Management

             400   

Saddleback Fence and Vinyl Products, Inc.

             100   
  

 

 

    

 

 

 

Total

   $ 125,900       $ 102,525   
  

 

 

    

 

 

 

 

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Contractual Obligations

The following table reflects information pertaining to debt outstanding under the SBA debentures, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes and our 2024 Notes:

 

      Debt Outstanding
as of  September 30,
2012
     Debt Outstanding
as of  March 31,
2013
     Weighted average  debt
outstanding for the
six months ended
March 31, 2013
     Maximum  debt
outstanding
for the six
months ended
March 31,
2013
 

SBA debentures

   $ 150,000       $ 181,750       $ 168,760       $ 181,750   

Wells Fargo facility

     60,251         106,209         53,904       $ 114,713   

ING facility

     141,000         185,000         117,088       $ 185,000   

Sumitomo facility

             82,339         5,352       $ 82,339   

Convertible Notes

     115,000         115,000         115,000       $ 115,000   

2024 Notes

             75,000         67,582       $ 75,000   
  

 

 

    

 

 

    

 

 

    

Total debt

   $ 466,251       $ 745,298       $ 527,686       $ 753,802   
  

 

 

    

 

 

    

 

 

    

The following table reflects our contractual obligations arising from the SBA debentures, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes and our 2024 Notes:

 

     Payments due by period as of March 31, 2013  
     Total      < 1 year      1-3 years      3-5 years      > 5 years  

SBA debentures

   $ 181,750       $       $       $       $ 181,750   

Interest due on SBA debentures

     55,125         6,708         13,578         13,559         21,280   

Wells Fargo facility

     106,209                         106,209           

Interest due on Wells Fargo facility

     9,635         3,137         6,274         224           

ING facility

     185,000                         185,000           

Interest due on ING facility

     20,375         5,550         11,100         3,725           

Sumitomo facility

     82,339                                 82,339   

Interest due on Sumitomo facility

     10,988         2,010         4,021         4,021         936   

Convertible Notes

     115,000                         115,000           

Interest due on Convertible Notes

     18,578         6,181         12,363         34           

2024 Notes

     75,000                                 75,000   

Interest due on 2024 Notes

     51,076         4,406         8,813         8,813         29,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 911,075       $ 27,992       $ 56,149       $ 436,585       $ 390,349   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Regulated Investment Company Status and Dividends

We elected, effective as of January 2, 2008, to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis (e.g., calendar year 2012). We anticipate timely distribution of our taxable income in accordance with the tax rules; however, we incurred a de minimis U.S. federal excise tax for calendar years 2009 and 2010. We did not incur a federal excise tax for calendar year 2011 and do not expect to incur a federal excise tax for the calendar year 2012. We may incur a federal excise tax in future years.

 

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We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, we are partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. Also, the covenants under the Wells Fargo facility and Sumitomo facility could, under certain circumstances, restrict Funding and Funding II from making distributions to us and, as a result, hinder our ability to satisfy the distribution requirement. Similarly, the covenants contained in the ING facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in our credit facilities. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder electing to receive cash receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.

Related Party Transactions

We have entered into an investment advisory agreement with Fifth Street Management LLC, our investment adviser. Fifth Street Management LLC is controlled by Leonard M. Tannenbaum, its managing member and the chairman of our Board of Directors and our chief executive officer. Pursuant to the investment advisory agreement, fees payable to our investment adviser equal to (a) a base management fee of 2.0% of the value of our gross assets, which includes any borrowings for investment purposes and excludes cash and cash equivalents, and (b) an incentive fee based on our performance. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “Pre-Incentive Fee Net Investment Income” for the immediately preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our “Incentive Fee Capital Gains,” which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three and six months ended March 31, 2013, we incurred fees of $14.6 million and $29.3 million, respectively, under the investment advisory agreement. For the three months ending March 31, 2013, the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to certain new investments that closed prior to quarter end, which resulted in a waiver of $1.3 million.

 

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Pursuant to the administration agreement with FSC, Inc., which is controlled by Mr. Tannenbaum, FSC, Inc. will furnish us with the facilities and administrative services necessary to conduct our day-to-day operations, including equipment, clerical, bookkeeping and recordkeeping services at such facilities. In addition, FSC, Inc. will assist us in connection with the determination and publishing of our net asset value, the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders. We will pay FSC, Inc. our allocable portion of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including a portion of the rent and the compensation of our chief financial officer and chief compliance officer and their respective staffs. As of March 31, 2013, FSC, Inc. had voluntarily determined to forgo receiving reimbursement for the services performed for us by our chief compliance officer. Although FSC, Inc. relinquished its right to receive such reimbursement, it is under no obligation to do so and may cease to do so at any time in the future. The administration agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three and six months ended March 31, 2013, we have incurred expenses of $1.1 million and $2.7 million, respectively, under the administration agreement.

We have also entered into a license agreement with Fifth Street Capital LLC pursuant to which Fifth Street Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Fifth Street.” Under this agreement, we have a right to use the “Fifth Street” name for so long as Fifth Street Management LLC or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Fifth Street” name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, its managing member.

Recent Developments

In April and May 2013, we issued $86.3 million in aggregate principal amount of our 6.125% unsecured notes due 2028 for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option. Interest on these notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per year, beginning April 30, 2013. The notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2018. The notes are listed on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share. The notes were assigned an investment grade (BBB-) counterparty credit rating from Fitch Ratings and Standard & Poor’s.

In April 2013, we completed a follow-on public offering of 14,435,253 shares of our common stock, which included the underwriters’ partial exercise of their over-allotment option, at the public offering price of $10.85. The net proceeds totaled $151.5 million after deducting underwriting commissions of $4.7 million and offering costs of $0.3 million.

In April 2013, the existing lender group increased its commitment to the ING facility and our borrowing capacity increased to $445 million.

On May 6, 2013, our Board of Directors declared the following dividends:

 

   

$0.0958 per share, payable on June 28, 2013 to stockholders of record on June 14, 2013;

 

   

$0.0958 per share, payable on July 31, 2013 to stockholders of record on July 15, 2013; and

 

   

$0.0958 per share, payable on August 30, 2013 to stockholders of record on August 15, 2013.

On May 6, 2013, upon expiration of our existing stock repurchase program, our Board of Directors authorized a stock repurchase program to acquire up to $50 million of our outstanding common stock. Stock repurchases under this program would be made through the open market at times and in such amounts as our management deems appropriate, provided they are below the most recently published net asset value per share. Unless extended by our Board of Directors, the stock repurchase program will expire on May 7, 2014 and may be limited or terminated at any time without prior notice.

On May 6, 2013, our Board of Directors appointed David H. Harrison as Chief Compliance Officer. Bernard D. Berman, who previously served as Chief Compliance Officer, remains our President and Secretary.

On May 7, 2013, we entered into a definitive agreement to acquire Healthcare Finance Group, LLC (“HFG”) as a portfolio company. HFG is a specialty lender providing asset-based lending and term loan products to the healthcare industry. To effect the acquisition, we anticipate investing approximately $110 million and intend to finance the purchase with available liquidity, including operating cash and borrowings under our existing credit facilities. Customary closing conditions, including the expiration of the applicable waiting period under the Hart Scott Rodino Act, apply to the acquisition.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act (See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation”). Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.

 

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As of March 31, 2013, 73.7% of our debt investment portfolio (at fair value) and 73.3% of our debt investment portfolio (at cost) bore interest at floating rates. The composition of our floating rate debt investments by cash interest rate floor (excluding PIK) as of March 31, 2013 and September 30, 2012 was as follows:

 

     March 31, 2013     September 30, 2012  
     Fair Value      % of Floating
Rate  Portfolio
    Fair Value      % of Floating
Rate  Portfolio
 

Under 1%

   $ 65,441         5.26   $ 72,609         8.35

1% to under 2%

     1,016,529         81.77        554,315         63.72   

2% to under 3%

     75,266         6.05        111,262         12.79   

3% to under 4%

     85,878         6.92        131,686         15.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,243,114         100.00   $ 869,872         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Based on our Consolidated Statement of Assets and Liabilities as of March 31, 2013, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure.

 

Basis point increase(1)

   Interest
income
     Interest
expense
    Net  increase
(decrease)
 

100

   $ 600       $ (3,700   $ (3,100

200

     8,400         (7,500     900   

300

     20,100         (11,200     8,900   

400

     32,300         (14,900     17,400   

500

     44,600         (18,700     25,900   

 

(1) A decline in interest rates would not have a material impact on our Consolidated Financial Statements.

We regularly measure exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows a comparison of the interest rate base for our interest-bearing cash and outstanding investments, at principal, and our outstanding borrowings as of March 31, 2013 and September 30, 2012:

 

     March 31, 2013      September 30, 2012  
     Interest Bearing
Cash and
Investments
     Borrowings      Interest Bearing
Cash and
Investments
     Outstanding
Borrowings
 

Money market rate

   $ 38,169       $       $ 74,393       $   

Prime rate

     3,148         87,339         6,832         60,000   

LIBOR

           

1-month

     32,350         286,209         32,753         141,251   

3-month

     1,210,453                 822,867           

Fixed rate

     454,450         371,750         377,522         265,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,738,570       $ 745,298       $ 1,314,367       $ 466,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 4. Controls and Procedures

All controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in timely identifying, recording, processing, summarizing, and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Currently, we are party to pending litigation but there are no material claims against us.

 

Item 1A. Risk Factors.

Except as set forth below, there have been no material changes during the six months ended March 31, 2013 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2012.

Risks Relating to Our Business and Structure

Pending legislation may allow us to incur additional leverage.

As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). We have agreed in a covenant in the indenture governing the Notes not to violate this section of the 1940 Act, whether or not we continue to be subject to such provision, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Recent legislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to 150%. In addition, recent legislation introduced in the U.S. Senate would modify SBA regulations in a manner that may permit us to incur additional SBA leverage. As a result, we may be able to incur additional indebtedness in the future.

 

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

While we did not engage in any sales of unregistered securities during the three months ended March 31, 2013, we issued a total of 265,940 shares of common stock under our dividend reinvestment plan (“DRIP”). This issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value of the shares of our common stock issued under our DRIP was approximately $2.7 million.

 

Item 6. Exhibits.

 

Exhibit

Number

  

Description of Exhibit

  3.6    Certificate of Amendment to Fifth Street Finance Corp.’s Restated Certificate of Incorporation (Incorporated by reference to Exhibit(a)(5) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).
  3.7    Second Amended and Restated Bylaws of Fifth Street Finance Corp. (Incorporated by reference to Exhibit 3.1 filed with Fifth Street Finance Corp.’s Form 8-K (File No. 001-33901) filed on April 19, 2013).
  4.7    Form of Second Supplemental Indenture relating to the 6.125% Unsecured Notes due 2028, between the Registrant and Deutsche Bank Trust Company Americas, as trustee (Incorporated by reference to Exhibit(d)(7) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).
  4.8    Form of 6.125% Unsecured Notes due 2028 (Incorporated by reference to Exhibit(d)(8) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).
31.1*    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2*    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1*    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2*    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        FIFTH STREET FINANCE CORP.
    By:   /s/    Leonard M. Tannenbaum
      Leonard M. Tannenbaum
      Chairman and Chief Executive Officer
Date: May 8, 2013     By:   /s/    Alexander C. Frank
      Alexander C. Frank
      Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description of Exhibit

  3.6    Certificate of Amendment to Fifth Street Finance Corp.’s Restated Certificate of Incorporation (Incorporated by reference to Exhibit (a)(5) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).
  3.7    Second Amended and Restated Bylaws of Fifth Street Finance Corp. (Incorporated by reference to Exhibit 3.1 filed with Fifth Street Finance Corp.’s Form 8-K (File No. 001-33901) filed on April 19, 2013).
  4.7   

Form of Second Supplemental Indenture relating to the 6.125% Unsecured Notes due 2028, between the Registrant and Deutsche Bank Trust Company Americas, as trustee (Incorporated by reference to Exhibit (d)(7) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).

  4.8    Form of 6.125% Unsecured Notes due 2028 (Incorporated by reference to Exhibit (d)(8) filed with Fifth Street Finance Corp.’s Registration Statement on Form N-2 (File No. 333-180267) filed on April 2, 2013).
31.1*    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2*    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1*    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2*    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

* Filed herewith.

 

82

EX-31.1 2 d527293dex311.htm EX-31.1 EX-31.1

Exhibit 31.1

I, Leonard M. Tannenbaum, Chief Executive Officer of Fifth Street Finance Corp., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2013 of Fifth Street Finance Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 8th day of May, 2013.

 

By:   /s/    Leonard M. Tannenbaum
 

Leonard M. Tannenbaum

Chief Executive Officer

EX-31.2 3 d527293dex312.htm EX-31.2 EX-31.2

Exhibit 31.2

I, Alexander C. Frank, Chief Financial Officer of Fifth Street Finance Corp., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2013 of Fifth Street Finance Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated this 8th day of May, 2013.

 

By:  

/s/    Alexander C. Frank

 

Alexander C. Frank

Chief Financial Officer

EX-32.1 4 d527293dex321.htm EX-32.1 EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (the “Report”) of Fifth Street Finance Corp . (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Leonard M. Tannenbaum, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/    Leonard M. Tannenbaum

Name:    Leonard M. Tannenbaum

Date: May 8, 2013

EX-32.2 5 d527293dex322.htm EX-32.2 EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (the “Report”) of Fifth Street Finance Corp . (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Alexander C. Frank, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/    Alexander C. Frank

Name:    Alexander C. Frank

Date: May 8, 2013