10-Q 1 fsc-20130630x10q.htm 10-Q FSC- 2013.06.30-10Q
 

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 June 30, 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 121,126,462 shares of common stock outstanding as of August 6, 2013.
 

 







FIFTH STREET FINANCE CORP.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013
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)
 
June 30,
2013
 
September 30,
2012
                         ASSETS
 
 
 
Investments at fair value:

 
 
Control investments (cost June 30, 2013: $162,784; cost September 30, 2012: $58,557)
$
171,618

 
$
53,240

Affiliate investments (cost June 30, 2013: $30,564; cost September 30, 2012: $29,496)
32,350

 
31,187

Non-control/Non-affiliate investments (cost June 30, 2013: $1,582,731; cost September 30, 2012: $1,180,436)
1,598,133

 
1,203,681

Total investments at fair value (cost June 30, 2013: $1,776,079; cost September 30, 2012: $1,268,489)
1,802,101

 
1,288,108

Cash and cash equivalents
59,618

 
74,393

Interest and fees receivable
12,257

 
7,652

Due from portfolio company
3,098

 
3,292

Receivables from unsettled transactions

 
1,750

Deferred financing costs
18,994

 
13,751

Other assets
780

 
56

Total assets
$
1,896,848

 
$
1,389,002

 
 
 
 
                                 LIABILITIES AND NET ASSETS
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
1,969

 
$
978

Base management fee payable
8,164

 
6,573

Incentive fee payable
7,343

 
5,579

Due to FSC, Inc.
1,626

 
1,630

Interest payable
6,462

 
4,219

Payments received in advance from portfolio companies
16

 
40

Offering costs payable

 
162

Credit facilities payable
216,000

 
201,251

SBA debentures payable
181,750

 
150,000

Unsecured convertible notes payable
115,000

 
115,000

Unsecured notes payable
161,250

 

Total liabilities
699,580

 
485,432

Commitments and contingencies (Note 3)
 
 
 
Net assets:
 
 
 
Common stock, $0.01 par value, 250,000 and 150,000 shares authorized, at June 30, 2013 and September 30, 2012, respectively; 120,996 and 91,048 shares issued and outstanding at June 30, 2013 and September 30, 2012, respectively
1,210

 
910

Additional paid-in-capital
1,329,448

 
1,019,053

Net unrealized appreciation on investments
26,400

 
19,998

Net realized loss on investments and interest rate swap
(145,034
)
 
(128,062
)
Accumulated overdistributed net investment income
(14,756
)
 
(8,329
)
Total net assets (equivalent to $9.90 and $9.92 per common share at June 30, 2013 and September 30, 2012, respectively) (Note 12)
1,197,268

 
903,570

Total liabilities and net assets
$
1,896,848

 
$
1,389,002

 
 
 
 
See notes to Consolidated Financial Statements.


1




Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 
Three months
ended
June 30, 2013

Three months
ended
June 30, 2012

Nine months
ended
June 30, 2013

Nine months
ended
June 30, 2012
Interest income:
 
 
 
 
 
 
 
Control investments
$
1,279

 
$
2

 
$
3,037

 
$
434

Affiliate investments
741

 
835

 
2,050

 
2,229

Non-control/Non-affiliate investments
40,356

 
27,822

 
109,829

 
85,131

Interest on cash and cash equivalents
6

 
11

 
15

 
29

Total interest income
42,382

 
28,670

 
114,931

 
87,823

PIK interest income:
 
 
 
 
 
 
 
Control investments
719

 
211

 
936

 
249

Affiliate investments
316

 
158

 
1,080

 
467

Non-control/Non-affiliate investments
3,009

 
3,557

 
9,795

 
9,516

Total PIK interest income
4,044

 
3,926

 
11,811

 
10,232

Fee income:
 
 
 
 
 
 
 
Control investments
3,379

 

 
3,592

 

Affiliate investments
12

 
377

 
36

 
630

Non-control/Non-affiliate investments
7,656

 
7,954

 
32,138

 
23,744

Total fee income
11,047

 
8,331

 
35,766

 
24,374

Dividend and other income:
 
 
 
 
 
 
 
Non-control/Non-affiliate investments
577

 
81

 
2,012

 
154

Total dividend and other income
577

 
81

 
2,012

 
154

Total investment income
58,050

 
41,008

 
164,520


122,583

Expenses:
 
 
 
 
 
 
 
Base management fee
9,186

 
6,094

 
26,123

 
17,226

Incentive fee
7,343

 
5,477

 
20,983

 
16,422

Professional fees
959

 
619

 
2,931

 
2,310

Board of Directors fees
173

 
30

 
423

 
156

Interest expense
9,154

 
5,611

 
24,072

 
16,936

Administrator expense
695

 
690

 
2,294

 
2,214

General and administrative expenses
1,168

 
807

 
3,762

 
3,201

Total expenses
28,678

 
19,328

 
80,588

 
58,465

    Base management fee waived
(1,022
)
 

 
(2,321
)
 

Net expenses
27,656

 
19,328

 
78,267

 
58,465

Gain on extinguishment of unsecured convertible notes

 
230

 

 
1,571

Net investment income
30,394

 
21,910

 
86,253

 
65,689

Unrealized appreciation (depreciation) on investments:
 
 
 
 
 
 
 
Control investments
10,680

 
(2,493
)
 
14,151

 
(1,404
)
Affiliate investments
158

 
322

 
94

 
9,649

Non-control/Non-affiliate investments
2,224

 
2,350

 
(7,843
)
 
5,815

Net unrealized appreciation on investments
13,062

 
179

 
6,402


14,060

Realized gain (loss) on investments:
 
 
 
 
 
 
 
Control investments
(11,223
)
 

 
(11,223
)
 

Affiliate investments

 

 

 
(10,620
)
Non-control/Non-affiliate investments
(6,227
)
 

 
(5,748
)
 
(16,800
)
Net realized loss on investments
(17,450
)
 

 
(16,971
)

(27,420
)
Net increase in net assets resulting from operations
$
26,006

 
$
22,089

 
$
75,684

 
$
52,329

Net investment income per common share — basic
$
0.26

 
$
0.27

 
$
0.81

 
$
0.84

Earnings per common share — basic
$
0.22

 
$
0.27

 
$
0.71

 
$
0.67

Weighted average common shares outstanding — basic
118,271


82,421


106,353


78,089

Net investment income per common share — diluted
$
0.25

 
$
0.26

 
$
0.78

 
$
0.80

Earnings per common share — diluted
$
0.22

 
$
0.26

 
$
0.69

 
$
0.64

Weighted average common shares outstanding — diluted
126,061

 
90,279

 
114,143

 
86,325

See notes to Consolidated Financial Statements.

2


Fifth Street Finance Corp.
Consolidated Statements of Changes in Net Assets
(in thousands, except per share amounts)
(unaudited)
 
 
Nine months
ended
June 30, 2013
 
Nine months
ended
June 30, 2012
Operations:
 
 
 
Net investment income
$
86,253

 
$
65,689

Net unrealized appreciation on investments
6,402

 
14,060

Net realized loss on investments
(16,971
)
 
(27,420
)
Net increase in net assets resulting from operations
75,684

 
52,329

Stockholder transactions:
 
 
 
Distributions to stockholders
(92,680
)
 
(69,555
)
Net decrease in net assets from stockholder transactions
(92,680
)
 
(69,555
)
Capital share transactions:
 
 
 
Issuance of common stock, net
302,673

 
99,815

Issuance of common stock under dividend reinvestment plan
8,021

 
855

Net increase in net assets from capital share transactions
310,694

 
100,670

Total increase in net assets
293,698

 
83,444

Net assets at beginning of period
903,570

 
728,627

Net assets at end of period
$
1,197,268

 
$
812,071

Net asset value per common share
$
9.90

 
$
9.85

Common shares outstanding at end of period
120,996

 
82,462

See notes to Consolidated Financial Statements.
 

3


Fifth Street Finance Corp.
Consolidated Statements of Cash Flows
(in thousands, except per share amounts)
(unaudited)
 
 
Nine months
ended
June 30, 2013
 
Nine months
ended
June 30, 2012
Cash flows from operating activities:
 
 
 
Net increase in net assets resulting from operations
$
75,684

 
$
52,329

Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities:
 
 
 
Gain on extinguishment of convertible notes

 
(1,571
)
Net unrealized appreciation on investments
(6,402
)
 
(14,060
)
Net realized loss on investments
16,971

 
27,420

PIK interest income
(11,811
)
 
(10,232
)
Recognition of fee income
(35,766
)
 
(24,374
)
Accretion of original issue discount on investments
(448
)
 
(1,367
)
Amortization of deferred financing costs
3,896

 
3,241

Changes in operating assets and liabilities:
 
 
 
Fee income received
29,852

 
19,336

(Increase) decrease in interest and fees receivable
(3,976
)
 
385

Decrease in due from portfolio company
194

 
103

Decrease in receivables from unsettled transactions
1,750

 

(Increase) decrease in other assets
(724
)
 
151

Increase (decrease) in accounts payable, accrued expenses and other liabilities
991

 
(29
)
Increase in base management fee payable
1,591

 
384

Increase in incentive fee payable
1,764

 
480

Increase (decrease) in due to FSC, Inc.
(4
)
 
672

Increase (decrease) in interest payable
2,243

 
(704
)
Decrease in payments received in advance from portfolio companies
(24
)
 
(1
)
Purchases of investments and net revolver activity, net of syndications
(972,155
)
 
(407,854
)
Principal payments received on investments (scheduled payments)
36,593

 
32,795

Principal payments received on investments (payoffs)
368,590

 
283,966

PIK interest income received in cash
5,492

 
5,007

Proceeds from the sale of investments
54,461

 
11,549

Net cash used by operating activities
(431,238
)
 
(22,374
)
Cash flows from financing activities:
 
 
 
Distributions paid in cash
(84,658
)
 
(68,699
)
Borrowings under SBA debentures payable
31,750

 

Borrowings under credit facilities
887,548


409,297

Repayments of borrowings under credit facilities
(872,799
)

(358,780
)
Proceeds from the issuance of unsecured notes
155,824

 

Repurchases of unsecured convertible notes

 
(17,939
)
Proceeds from the issuance of common stock
303,502

 
100,700

Deferred financing costs paid
(3,713
)
 
(3,279
)
Offering costs paid
(991
)
 
(876
)
Net cash provided by financing activities
416,463

 
60,424

Net increase (decrease) in cash and cash equivalents
(14,775
)
 
38,050

Cash and cash equivalents, beginning of period
74,393

 
67,644

Cash and cash equivalents, end of period
$
59,618

 
$
105,694

Supplemental information:
 
 
 
Cash paid for interest
$
18,230

 
$
14,720

Non-cash financing activities:
 
 
 
Issuance of shares of common stock under dividend reinvestment plan
$
8,021

 
$
855

 
See notes to Consolidated Financial Statements.

4

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 2013
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
Control Investments (3)
 
 
 
 
 
 
 
 
Traffic Solutions Holdings, Inc.
 
Construction and engineering
 
 
 
 
 
 
Second Lien Term Loan, 12% cash 3% PIK due 8/10/2015
 
 
 
$14,384
 
$
14,362

 
$
14,419

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

746,114 Series A Preferred Units
 
 
 
 
 
12,390

 
15,495

746,114 Common Stock Units
 
 
 
 
 
5,316

 
11,454

 
 
 
 
 
 
32,060

 
41,368

TransTrade Operators, Inc. (14)
 
Air freight and logistics
 
 
 
 
 
 
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
 
 
 
13,556
 
13,556

 
13,507

596.67 Series A Common Units in TransTrade Holding LLC
 
 
 
 
 

 

3,033,333.33 Preferred Units in TransTrade Holding LLC
 
 
 
 
 
3,033

 
2,608

 
 
 
 
 
 
16,589

 
16,115

HFG Holdings, LLC
 
Specialized finance
 
 
 
 
 
 
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
 
 
 
92,194
 
92,194

 
92,194

860,000 Class A Units
 
 
 
 
 
21,941

 
21,941

 
 
 
 
 
 
114,135

 
114,135

Total Control Investments (14.3% of net assets)
 
 
 
 
 
$
162,784

 
$
171,618

Affiliate Investments (4)
 
 
 
 
 
 
 
 
Caregiver Services, Inc.
 
Healthcare services
 
 
 
 
 
 
1,080,399 shares of Series A Preferred Stock
 
 
 
 
 
$
1,080

 
$
3,035

 
 
 
 
 
 
1,080

 
3,035

Ambath/Rebath Holdings, Inc. (9)
 
Home improvement retail
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/30/2014
 
 
 
$4,315
 
4,308

 
4,284

First Lien Term Loan B, 12.5% cash 2.5% PIK due 12/30/2014
 
 
 
25,193
 
25,176

 
25,031

4,668,788 shares of Preferred Stock
 
 
 
 
 

 

 
 
 
 
 
 
29,484

 
29,315

Total Affiliate Investments (2.7% of net assets)
 
 
 
 
 
$
30,564

 
$
32,350

Non-Control/Non-Affiliate Investments (7)
 
 
 
 
 
 
 
 
Fitness Edge, LLC
 
Leisure Facilities
 
 
 
 
 
 
1,000 Common Units (6)
 
 
 
 
 
$
43

 
$
195

 
 
 
 
 
 
43

 
195

Capital Equipment Group, Inc. (9)
 
Industrial machinery
 
 
 
 
 
 
Second Lien Term Loan, 12% cash 2.75% PIK due 12/27/2015
 
 
 
$3,980
 
3,980

 
3,980

33,786 shares of Common Stock
 
 
 
 
 
345

 
1,078

 
 
 
 
 
 
4,325

 
5,058

Western Emulsions, Inc.
 
Construction materials
 
 
 
 
 
 
Second Lien Term Loan, 12.5% cash 2.5% PIK due 6/30/2014
 
 
 
7,154
 
7,115

 
7,281

 
 
 
 
 
 
7,115

 
7,281

Storyteller Theaters Corporation
 
Movies & entertainment
 
 
 
 
 
 
1,692 shares of Common Stock
 
 
 
 
 

 
62

20,000 shares of Preferred Stock
 
 
 
 
 
89

 
89

 
 
 
 
 
 
89

 
151

HealthDrive Corporation (9)
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan A, 10% cash due 7/17/2013
 
 
 
4,201
 
4,197

 
4,265

First Lien Term Loan B, 12% cash 1% PIK due 7/17/2013
 
 
 
10,519
 
10,519

 
10,525

First Lien Revolver, 12% cash due 7/17/2013
 
 
 
2,379
 
2,379

 
2,390

 
 
 
 
 
 
17,095

 
17,180



See notes to Consolidated Financial Statements.



5

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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

 
1,304

 
 
 
 
 
 
598

 
1,304

Riverlake Equity Partners II, LP
 
Multi-sector holdings
 
 
 
 
 
 
1.78% limited partnership interest (12)
 
 
 
 
 
362

 
373

 
 
 
 
 
 
362

 
373

Riverside Fund IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.34% limited partnership interest (6)(12)
 
 
 
 
 
731

 
676

 
 
 
 
 
 
731

 
676

Tegra Medical, LLC (9)
 
Healthcare equipment
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 12/31/2014
 
 
 
16,908
 
16,801

 
17,044

First Lien Term Loan B, 12% cash 2% PIK due 12/31/2014
 
 
 
23,633
 
23,507

 
23,691

First Lien Term Loan C, 30% PIK due 12/31/2014
 
 
 
1,383
 
1,383

 
1,364

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/31/2014
 
 
 
2,500
 
2,477

 
2,512

 
 
 
 
 
 
44,168

 
44,611

Psilos Group Partners IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
2.35% limited partnership interest (11)(12)
 
 
 
 
 

 

 
 
 
 
 
 

 

Mansell Group, Inc. (9)
 
Advertising
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2015
 
 
 
7,351
 
7,286

 
7,431

First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015
 
 
 
9,388
 
9,316

 
9,490

First Lien Revolver, LIBOR+6% (3% floor) cash due 4/30/2015 (10)
 
 
 
 
 
(15
)
 

 
 
 
 
 
 
16,587

 
16,921

Eagle Hospital Physicians, Inc. (9)(13)
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+8.75% (3% floor) cash due 8/11/2015
 
 
 
24,256
 
23,966

 
17,592

First Lien Revolver, LIBOR+5.75% (3% floor) cash due 8/11/2015
 
 
 
1,100
 
1,075

 

 
 
 
 
 
 
25,041

 
17,592

Enhanced Recovery Company, LLC
 
Diversified support services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015
 
 
 
8,633
 
8,545

 
8,649

First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015
 
 
 
11,080
 
10,986

 
11,049

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (10)
 
 
 
 
 
(34
)
 

 
 
 
 
 
 
19,497

 
19,698

Specialty Bakers LLC (13)
 
Food distributors
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015
 
 
 
3.836
 
3,701

 
3,837

First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015
 
 
 
11,000
 
10,877

 
10,991

First Lien Revolver, LIBOR+8.5% cash due 9/15/2015
 
 
 
2,750
 
2,705

 
987

 
 
 
 
 
 
17,283

 
15,815

Welocalize, Inc.
 
Internet software & services
 
 
 
 
 
 
3,393,060 Common Units in RPWL Holdings, LLC
 
 
 
 
 
3,393

 
7,892

 
 
 
 
 
 
3,393

 
7,892




See notes to Consolidated Financial Statements.














6

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
5,421

 
5,449

First Lien Term Loan B, LIBOR+10% (3% floor) 3% PIK due 12/7/2015
 
 
 
18,379
 
16,962

 
18,213

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015
 
 
 
1,482
 
1,446

 
1,468

10,371 Series A Preferred Equity units in Miche Bag Holdings, LLC
 
 
 
 
 
1,037

 
809

1,358.854 Series C Preferred Equity units in Miche Bag Holdings, LLC
 
 
 
 
 
136

 
16

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

 

 
 
 
 
 
 
26,465

 
25,955

Bunker Hill Capital II (QP), LP
 
Multi-sector holdings
 
 
 
 
 
 
0.51% limited partnership interest (12)
 
 
 
 
 
214

 
126

 
 
 
 
 
 
214

 
126

Drugtest, Inc. (9)
 
Human resources & employment services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 12/30/2015
 
 
 
39,300
 
39,179

 
39,280

First Lien Term Loan B, LIBOR+10% (1% floor) 1.5% PIK due 12/30/2015
 
 
 
15,711
 
15,628

 
15,721

First Lien Revolver, LIBOR+6% (1% floor) cash due 12/30/2015 (10)
 
 
 
 
 
(40
)
 

 
 
 
 
 
 
54,767

 
55,001

Saddleback Fence and Vinyl Products, Inc. (9)
 
Building products
 
 
 
 
 
 
First Lien Term Loan, 8% cash due 11/30/2013
 
 
 
635
 
635

 
633

First Lien Revolver, 8% cash due 11/30/2013
 
 
 
100
 
100

 
100

 
 
 
 
 
 
735

 
733

Physicians Pharmacy Alliance, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016
 
 
 
11,437
 
11,240

 
11,366

First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)
 
 
 
 
 
(23
)
 

 
 
 
 
 
 
11,217

 
11,366

Cardon Healthcare Network, LLC
 
Diversified support services
 
 
 
 
 
 
65,903 Class A Units
 
 
 
 
 
250

 
521

 
 
 
 
 
 
250

 
521

Phoenix Brands Merger Sub LLC (9)
 
Household products
 
 
 
 
 
 
Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016
 
 
 
5,642
 
5,547

 
5,555

Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
 
 
 
21,401
 
21,093

 
20,811

Senior Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016
 
 
 
3,000
 
2,913

 
2,965

 
 
 
 
 
 
29,553

 
29,331

U.S. Collections, Inc.
 
Diversified support services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.25% (1.75% floor) cash due 3/31/2016
 
 
 
9,068
 
8,982

 
9,070

 
 
 
 
 
 
8,982

 
9,070

CCCG, LLC (9)
 
Oil & gas equipment services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 7/29/2015
 
 
 
35,057
 
34,580

 
35,337

 
 
 
 
 
 
34,580

 
35,337

Maverick Healthcare Group, LLC
 
Healthcare equipment
 
 
 
 
 
 
First Lien Term Loan, LIBOR+9% (1.75% floor) cash due 12/31/2016
 
 
 
24,375
 
23,998

 
24,389

 
 
 
 
 
 
23,998

 
24,389

Refac Optical Group
 
Specialty stores
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7.5% cash due 3/23/2016
 
 
 
10,145
 
9,953

 
10,260

First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 3/23/2016
 
 
 
20,443
 
20,115

 
20,641

First Lien Revolver, LIBOR+7.5% cash due 3/23/2016 (10)
 
 
 
 
 
(80
)
 

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

 

1,000 Shares of Preferred Stock in Refac Holdings, Inc.
 
 
 
 
 
999

 
491

 
 
 
 
 
 
30,988

 
31,392


See notes to Consolidated Financial Statements.


7

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 2013
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
 
Industry
 
Principal (8)
 
Cost
 
Fair Value
GSE Environmental, Inc. (formerly Gundle/SLT Environmental, Inc.)
 
Environmental & facilities services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016
 
 
 
8,835
 
8,773

 
8,832

 
 
 
 
 
 
8,773

 
8,832

Titan Fitness, LLC
 
Leisure facilities
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+8.75% (1.25% floor) cash due 6/30/2016
 
 
 
25,091
 
24,998

 
25,003

First Lien Term Loan B, LIBOR+10.75% (1.25% floor) cash 1.5% PIK due 6/30/2016
 
 
 
17,966
 
17,889

 
18,146

First Lien Revolver, LIBOR+8.75% (1.25% floor) cash due 6/30/2016 (10)
 
 
 
 
 
(23
)
 

 
 
 
 
 
 
42,864

 
43,149

Baird Capital Partners V, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.40% limited partnership interest (12)
 
 
 
 
 
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
 
 
 
29,295
 
29,197

 
29,817

Subordinated Term Loan, 11.75% cash 2% PIK due 7/13/2017
 
 
 
11,916
 
11,856

 
11,906

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 7/13/2016
 
 
 
1,600
 
1,556

 
1,685

 
 
 
 
 
 
42,609

 
43,408

Stackpole Powertrain International ULC
 
Auto parts & equipment
 
 
 
 
 
 
1,000 Common Units (12)
 
 
 
 
 
1,000

 
3,016

 
 
 
 
 
 
1,000

 
3,016

Discovery Practice Management, Inc. (9)
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7.5% cash due 8/8/2016
 
 
 
5,959
 
5,913

 
5,964

First Lien Term Loan B, 12% cash 3% PIK due 8/8/2016
 
 
 
6,572
 
6,529

 
6,571

First Lien Revolver, LIBOR+7% cash due 8/8/2016
 
 
 
2,100
 
2,078

 
2,087

 
 
 
 
 
 
14,520

 
14,622

CTM Group, Inc.
 
Leisure products
 
 
 
 
 
 
Subordinated Term Loan A, 11% cash 2% PIK due 2/10/2017
 
 
 
10,911
 
10,834

 
10,932

Subordinated Term Loan B, 18.4% PIK due 2/10/2017
 
 
 
4,348
 
4,326

 
4,428

 
 
 
 
 
 
15,160

 
15,360

Milestone Partners IV, LP
 
Multi-sector holdings
 
 
 
 
 
 
1.36% limited partnership interest (6)(12)
 
 
 
 
 
586

 
637

 
 
 
 
 
 
586

 
637

Insight Pharmaceuticals LLC
 
Pharmaceuticals
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017
 
 
 
13,517
 
13,432

 
13,751

 
 
 
 
 
 
13,432

 
13,751

National Spine and Pain Centers, LLC
 
Healthcare services
 
 
 
 
 
 
Subordinated Term Loan, 11% cash 1.6% PIK due 9/27/2017
 
 
 
29,144
 
28,954

 
29,714

317,282.97 Class A Units
 
 
 
 
 
317

 
342

 
 
 
 
 
 
29,271

 
30,056

RCPDirect, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.91% limited partnership interest (6)(12)
 
 
 
 
 
476

 
562

 
 
 
 
 
 
476

 
562

The MedTech Group, Inc. (9)
 
Healthcare equipment
 
 
 
 
 
 
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/7/2016
 
 
 
12,529
 
12,454

 
12,547

 
 
 
 
 
 
12,454

 
12,547




See notes to Consolidated Financial Statements.


8

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
 
 
12,269
 
12,179

 
12,391

264.37 Class A Preferred Units
 
 
 
 
 
264

 
298

2,954.87 Class A Common Units
 
 
 
 
 
36

 
209

 
 
 
 
 
 
12,479

 
12,898

CPASS Acquisition Company
 
Internet software & services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+9% (1.5% floor) cash 1% PIK due 11/21/2016
 
 
 
8,151
 
8,076

 
8,226

First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (10)
 
 
 
 
 
(13
)
 

 
 
 
 
 
 
8,063

 
8,226

Genoa Healthcare Holdings, LLC
 
Pharmaceuticals
 
 
 
 
 
 
Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016
 
 
 
8,888
 
8,888

 
8,884

Subordinated Term Loan, 12% cash 2% PIK due 6/1/2017
 
 
 
12,907
 
12,818

 
13,109

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

 

500,000 Preferred units (6)
 
 
 
 
 
261

 
268

500,000 Class A Common Units
 
 
 
 
 
25

 
395

 
 
 
 
 
 
21,992

 
22,656

ACON Equity Partners III, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.31% limited partnership interest (6)(12)
 
 
 
 
 
232

 
216

 
 
 
 
 
 
232

 
216

CRGT, Inc.
 
IT consulting & other services
 
 
 
 
 
 
Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018
 
 
 
26,537
 
26,339

 
27,261

 
 
 
 
 
 
26,339

 
27,261

Riverside Fund V, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.48% limited partnership interest (12)
 
 
 
 
 
249

 
219

 
 
 
 
 
 
249

 
219

World 50, Inc.
 
Research & consulting services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017
 
 
 
10,899
 
10,794

 
10,963

First Lien Term Loan B, 12.5% cash due 3/30/2017
 
 
 
7,000
 
6,936

 
7,045

Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)
 
 
 
 
 
(46
)
 

 
 
 
 
 
 
17,684

 
18,008

Nixon, Inc.
 
Apparel, accessories & luxury goods
 
 
 
 
 
 
First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018
 
 
 
10,341
 
10,262

 
10,584

 
 
 
 
 
 
10,262

 
10,584

JTC Education, Inc. (9)
 
Education services
 
 
 
 
 
 
Subordinated Term Loan, 13% cash due 11/1/2017
 
 
 
14,500
 
14,409

 
14,498

17,391 Shares of Series A-1 Preferred Stock
 
 
 
 
 
313

 
220

17,391 Shares of Common Stock
 
 
 
 
 
187

 

 
 
 
 
 
 
14,909

 
14,718





See notes to Consolidated Financial Statements.


9

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
 
 
5,410
 
5,378

 
5,378

Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017
 
 
 
35
 
28

 
63

500 Series A Preferred Shares
 
 
 
 
 
500

 
453

50,000 Common Shares
 
 
 
 
 
1

 

 
 
 
 
 
 
5,907

 
5,894

Ansira Partners, Inc.
 
Advertising
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017
 
 
 
10,867
 
10,797

 
10,864

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

 
296

 
 
 
 
 
 
11,040

 
11,160

MX USA, Inc.
 
Healthcare services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+10.5% (1.25% floor) cash due 10/31/2017
 
 
 
27,000
 
26,842

 
27,740

 
 
 
 
 
 
26,842

 
27,740

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

 
17,167

 
 
 
 
 
 
17,000

 
17,167

I Drive Safely, LLC
 
Education services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017
 
 
 
27,000
 
26,965

 
27,549

First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)
 
 
 
 
 
(7
)
 

75,000 Class A Common Units of IDS Investments, LLC
 
 
 
 
 
750

 
697

 
 
 
 
 
 
27,708

 
28,246

Yeti Acquisition, LLC (9)
 
Leisure products
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017
 
 
 
24,590
 
24,551

 
24,871

First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017
 
 
 
12,000
 
11,984

 
12,045

First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (10)
 
 
 
 
 
(14
)
 

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

 
3,622

 
 
 
 
 
 
38,021

 
40,538

Specialized Education Services, Inc.
 
Education services
 
 
 
 
 
 
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017
 
 
 
9,084
 
9,084

 
9,105

Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018
 
 
 
17,770
 
17,770

 
18,024

 
 
 
 
 
 
26,854

 
27,129

InvestRx Corporation
 
Diversified support services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7.75% (1.25% floor) cash due 7/2/2017
 
 
 
23,830
 
23,830

 
23,823

First Lien Term Loan B, LIBOR+9.75% (1.25% floor) cash 1% PIK due 7/2/2017
 
 
 
18,371
 
18,371

 
18,749

First Lien Revolver, LIBOR+7.75% (1.25% floor) cash due 7/2/2017
 
 
 
1,300
 
1,300

 
1,301

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

 

 
 
 
 
 
 
43,501

 
43,873

PC Helps Support, LLC
 
IT consulting & other services
 
 
 
 
 
 
Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
 
 
 
18,732
 
18,732

 
18,951

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

 
733

7,500 Class A Common Stock Units of PCH Support Holdings, Inc.
 
 
 
 
 
75

 
57

 
 
 
 
 
 
19,482

 
19,741

Ikaria Acquisition, Inc.
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+6.5% (1.25% floor) cash due 9/25/2017
 
 
 
9,925
 
9,925

 
10,023

 
 
 
 
 
 
9,925

 
10,023



See notes to Consolidated Financial Statements.


10

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
 
 
13,113
 
13,113

 
13,057

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

 

 
 
 
 
 
 
13,113

 
13,057

Beecken Petty O’Keefe Fund IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.5% limited partnership interest (11)(12)
 
 
 
 
 

 

 
 
 
 
 
 

 

Deltek, Inc.
 
IT consulting & other services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019
 
 
 
25,000
 
25,000

 
25,111

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

 

 
 
 
 
 
 
25,000

 
25,111

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

 
25,187

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

 

 
 
 
 
 
 
25,000

 
25,187

Dexter Axle Company
 
Auto parts & equipment
 
 
 
 
 
 
Subordinated Term Loan, 11.25% cash 2% PIK due 11/1/2019
 
 
 
30,405
 
30,405

 
30,672

1,500 Common Shares in Dexter Axle Holding Company
 
 
 
 
 
1,500

 
1,402

 
 
 
 
 
 
31,905

 
32,074

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

 
9,969

 
 
 
 
 
 
10,000

 
9,969

SumTotal Systems LLC
 
Internet software & services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 5/16/2019
 
 
 
20,000
 
20,000

 
20,011

 
 
 
 
 
 
20,000

 
20,011

Comprehensive Pharmacy Services, LLC
 
Pharmaceuticals
 
 
 
 
 
 
Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
 
 
 
14,095
 
14,095

 
14,164

20,000 Common Shares in MCP CPS Group Holdings, Inc. (6)
 
 
 
 
 
2,000

 
2,299

 
 
 
 
 
 
16,095

 
16,463

Reliance Communications, LLC
 
Internet software & services
 
 
 
 
 
 
First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017
 
 
 
22,072
 
22,060

 
21,968

First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017
 
 
 
11,333
 
11,327

 
11,225

First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017
 
 
 
2,250
 
2,247

 
2,299

 
 
 
 
 
 
35,634

 
35,492

Garretson Firm Resolution Group, Inc.
 
Diversified support services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018
 
 
 
7,357
 
7,357

 
7,327

Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019
 
 
 
5,000
 
5,000

 
4,951

First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017
 
 
 
406
 
406

 
441

4,950,000 Preferred Units in GRG Holdings, LP
 
 
 
 
 
495

 
501

50,000 Common Units in GRG Holdings, LP
 
 
 
 
 
5

 

 
 
 
 
 
 
13,263

 
13,220



See notes to Consolidated Financial Statements.


11

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
 
 
42,868
 
42,855

 
43,217

First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017
 
 
 
20,399
 
20,393

 
20,575

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (10)
 
 
 
 
 
(2
)
 

 
 
 
 
 
 
63,246

 
63,792

Omniplex World Services Corporation
 
Security & alarm services
 
 
 
 
 
 
Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
 
 
 
12,584
 
12,584

 
12,545

500 Class A Common Units in Omniplex Holdings Corp.
 
 
 
 
 
500

 
543

 
 
 
 
 
 
13,084

 
13,088

Dominion Diagnostics, LLC
 
Healthcare services
 
 
 
 
 
 
Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
 
 
 
15,666
 
15,666

 
15,785

 
 
 
 
 
 
15,666

 
15,785

Affordable Care, Inc.
 
Healthcare services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019
 
 
 
21,500
 
21,500

 
21,713

 
 
 
 
 
 
21,500

 
21,713

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

 
6,967

 
 
 
 
 
 
7,000

 
6,967

AdVenture Interactive, Corp.
 
Advertising
 
 
 
 
 
 
First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018
 
 
 
113,288
 
113,256

 
113,290

First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)
 
 
 
 
 
(1
)
 

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

 
2,082

 
 
 
 
 
 
115,255

 
115,372

CoAdvantage Corporation
 
Human resources & employment services
 
 
 
 
 
 
Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
 
 
 
10,063
 
10,063

 
10,131

50,000 Class A Units in CIP CoAdvantage Investments LLC
 
 
 
 
 
500

 
366

 
 
 
 
 
 
10,563

 
10,497

EducationDynamics, LLC
 
Education services
 
 
 
 
 
 
Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017
 
 
 
10,895
 
10,895

 
10,861

 
 
 
 
 
 
10,895

 
10,861

Vestcom International, Inc.
 
Data processing & outsourced services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 12/26/2018
 
 
 
9,975
 
9,975

 
9,975

 
 
 
 
 
 
9,975

 
9,975

Sterling Capital Partners IV, L.P.
 
Multi-sector holdings
 
 
 
 
 
 
0.20% limited partnership interest (6)(12)
 
 
 
 
 
381

 
400

 
 
 
 
 
 
381

 
400



See notes to Consolidated Financial Statements.


12

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 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
 
 
 
9,810
 
9,810

 
9,812

 
 
 
 
 
 
9,810

 
9,812

RP Crown Parent, LLC
 
Application software
 
 
 
 
 
 
First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)
 
 
 
 
 
(658
)
 

 
 
 
 
 
 
(658
)
 

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

 
4,120

 
 
 
 
 
 
4,000

 
4,120

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

 
24,495

 
 
 
 
 
 
24,000

 
24,495

Rocket Software, Inc.
 
Internet software & services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2018
 
 
 
8,475
 
8,438

 
8,454

 
 
 
 
 
 
8,438

 
8,454

TravelClick, Inc.
 
Internet software & services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 3/26/2018
 
 
 
15,000
 
15,000

 
15,056

 
 
 
 
 
 
15,000

 
15,056

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

 
2,985

 
 
 
 
 
 
3,000

 
2,985

ISG Services, LLC
 
Diversified support services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018
 
 
 
95,000
 
94,955

 
94,892

First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018
 
 
 
4,000
 
3,995

 
4,069

 
 
 
 
 
 
98,950

 
98,961

Joerns Healthcare, LLC
 
Healthcare services
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018
 
 
 
20,000
 
20,000

 
20,019

 
 
 
 
 
 
20,000

 
20,019

Pingora MSR Opportunity Fund I, LP
 
Thrift & mortgage finance
 
 
 
 
 
 
1.90% limited partnership interest (12)
 
 
 
 
 
109

 
109

 
 
 
 
 
 
109

 
109

Chicago Growth Partners III, LP
 
Multi-sector holdings
 
 
 
 
 
 
0.50% limited partnership interest (12)
 
 
 
 
 

 

 
 
 
 
 
 

 

Credit Infonet, Inc.
 
Data processing & outsourced services
 
 
 
 
 
 
Subordinated Term Loan, 12.25% cash due 10/26/2018
 
 
 
13,250
 
13,250

 
13,250

 
 
 
 
 
 
13,250

 
13,250

Harden Healthcare, LLC
 
Healthcare services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.5% (1.25% floor) cash due 5/1/2018
 
 
 
9,000
 
9,000

 
9,000

 
 
 
 
 
 
9,000

 
9,000

H.D. Vest, Inc.
 
Specialized finance
 
 
 
 
 
 
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 6/18/2019
 
 
 
8,750
 
8,750

 
8,750

 
 
 
 
 
 
8,750

 
8,750

2Checkout.com, Inc.
 
Diversified support services
 
 
 
 
 
 
First Lien Revolver, LIBOR+5% cash due 6/26/2016
 
 
 
150
 
148

 
150

 
 
 
 
 
 
148

 
150

Meritas Schools Holdings, LLC
 
Education services
 
 
 
 
 
 
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019
 
 
 
13,000
 
13,000

 
13,000

 
 
 
 
 
 
13,000

 
13,000

Total Non-Control/Non-Affiliate Investments (133.5% of net assets)
 
 
 
 
 
$
1,582,731

 
$
1,598,133

Total Portfolio Investments (150.5% of net assets)
 
 
 
 
 
$
1,776,079

 
$
1,802,101


See notes to Consolidated Financial Statements.


13

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
June 30, 2013
(unaudited)

(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.
(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
Drugtest, Inc.
 
June 27, 2013
 
- 1.5% on Term Loan A
- 0.75% on Term Loan B
- 0.25% on Revolver
 
- 0.5% on Term Loan B
 
Per loan amendment
The MedTech Group, Inc.
 
June 12, 2013
 
- 0.50% on Term Loan
 
 
 
Per loan amendment
Discovery Practice Management, Inc.
 
April 1, 2013
 
- 1.0% on Term Loan A
- 1.0% on Revolver
 
- 1.0% on Term Loan B
 
Tier pricing per loan agreement
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 agreement
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, Inc.
 
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
Saddleback Fence & Vinyl Products, Inc.
 
December 1, 2012
 
+ 4.0% on Term Loan
+ 4.0% on Revolver
 
 
 
Per loan amendment
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
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
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 is not a qualifying asset as defined under Section 55(a) of the 1940 Act.
(13)
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)
TransTrade Operators, Inc. is the successor entity to Trans-Trade, Inc. and was formed as part of the restructuring process.

See notes to Consolidated Financial Statements.

14

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



See notes to Consolidated Financial Statements.
 

15

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

 
1394

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. (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

 




 See notes to Consolidated Financial Statements.

16

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
 
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

 

 See notes to Consolidated Financial Statements.


17

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



 See notes to Consolidated Financial Statements.


18

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






 See notes to Consolidated Financial Statements.


19

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

 




  See notes to Consolidated Financial Statements.

20

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.

















 See notes to Consolidated Financial Statements.


21

Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2012


(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
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, LLC
 
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.












 See notes to Consolidated Financial Statements.


22





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 June 30, 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
April 15, 2013

Follow-on public offering

13,500,000

10.85



146.5 million
April 26, 2013

Underwriters’ partial exercise of over-allotment option

935,253

10.85



10.1 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.
 
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.

23



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 June 30, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $133.5 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 June 30, 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 $25.6 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 June 30, 2013.
For the three and nine months ended June 30, 2013, the Company recorded interest expense of $1.9 million and $5.3 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.
  
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:

24



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 $1.80 billion and $1.29 billion at June 30, 2013 and September 30, 2012, respectively. The portfolio investments represent 150.5% and 142.6% of net assets at June 30, 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.
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. Investments for which market quotations are readily available may be valued at such market quotations. In order to validate market quotations, the Company looks at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. 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.

25



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 June 30, 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.
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.

26



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 $2.1 million that was held at Wells Fargo Bank, National Association (“Wells Fargo”) in connection with the Company’s Wells Fargo facility and $2.1 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 Statements 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 $0.8 million of offering costs charged to net assets during the nine months ended June 30, 2013.
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 year 2010. The Company did not incur a federal excise tax for calendar years 2011 and 2012 and does not expect to incur a federal excise tax for calendar year 2013. 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

27



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.    
Recent Accounting Pronouncements:
In June 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act will be automatically deemed an investment company under the new GAAP definition. As such, the Company anticipates no impact from adopting this standard on the Company’s consolidated financial results. The Company is currently assessing the additional disclosure requirements. ASU 2013-08 will be effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

Note 3. Portfolio Investments
At June 30, 2013, 150.5% of net assets or $1.80 billion was invested in 98 portfolio investments and 5.0% of net assets or $59.6 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 June 30, 2013, 78.7% 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 nine months ended June 30, 2013, the Company recorded net realized losses of $17.5 million and $17.0 million, respectively. During the three and nine months ended June 30, 2012, the Company recorded net realized losses of $0 and $27.4 million, respectively. During the three and nine months ended June 30, 2013, the Company recorded net unrealized appreciation of $13.1 million and $6.4 million, respectively. During the three and nine months ended June 30, 2012, the Company recorded net unrealized appreciation of $0.2 million and $14.1 million, respectively.
The composition of the Company’s investments as of June 30, 2013 and September 30, 2012 at cost and fair value was as follows:
 
June 30, 2013
 
September 30, 2012
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
Investments in debt securities
$
1,706,821

 
$
1,713,260

 
$
1,226,489

 
$
1,241,197

 
Investments in equity securities
69,258

 
88,841

 
42,000

 
46,911

 
Total
$
1,776,079

 
$
1,802,101

 
$
1,268,489

 
$
1,288,108

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

28


 
June 30, 2013
 
 
September 30, 2012
 
 
 
Fair Value
 
% of
Debt Portfolio
 
 
Fair Value
 
% of
 Debt Portfolio
 
 
Fixed rate debt securities
$
517,961

 
30.23
%
 
 
$
371,325

 
29.92
%
 
 
Floating rate debt securities
1,195,299

 
69.77
%
 
 
869,872

 
70.08
%
 
 
Total
$
1,713,260

 
100.00
%
 
 
$
1,241,197

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 The following table presents the financial instruments carried at fair value as of June 30, 2013, by caption on the Company’s Consolidated Statements 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)
$

 
$

 
$
1,166,199

 
$
1,166,199

 
Investments in debt securities (second lien)

 

 
252,679

 
252,679

 
Investments in debt securities (subordinated)

 

 
294,382

 
294,382

 
Investments in equity securities (preferred)

 

 
27,097

 
27,097

 
Investments in equity securities (common)

 

 
61,744

 
61,744

 
Total investments at fair value
$

 
$

 
$
1,802,101

 
$
1,802,101

 
The following table presents the financial instruments carried at fair value as of September 30, 2012, by caption on the Company’s Consolidated Statements 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

 
When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination 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 March 31, 2013 to June 30, 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 March 31, 2013
$
1,113,770

 
$
260,783

 
$
311,341

 
$
24,575

 
$
38,426

 
$
1,748,895

New investments & net revolver activity
185,864

 
22,000

 
17,250

 
3,033

 
21,998

 
250,145

Redemptions/repayments
(135,577
)
 
(30,433
)
 
(35,016
)
 
(111
)
 

 
(201,137
)
Net accrual of PIK interest income
1,630

 
169

 
969

 
382

 

 
3,150

Accretion of original issue discount
162

 
2

 

 

 

 
164

Net change in unearned income
1,494

 
212

 
341

 

 

 
2,047

Net unrealized appreciation (depreciation)
3,452

 
7,613

 
(1,669
)
 
(782
)
 
4,448

 
13,062

Unrealized adjustments due to deal exits
(4,596
)
 
(7,667
)
 
1,166

 

 
(3,128
)
 
(14,225
)
Transfer into (out of) Level 3

 

 

 

 

 

Fair value as of June 30, 2013
$
1,166,199

 
$
252,679

 
$
294,382

 
$
27,097

 
$
61,744

 
$
1,802,101

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended June 30, 2013
$
(1,144
)
 
$
(54
)
 
$
(503
)
 
$
(782
)
 
$
1,320

 
$
(1,163
)

29


The following table provides a roll-forward in the changes in fair value from March 31, 2012 to June 30, 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 March 31, 2012
 
$
736,192

 
$
122,261

 
$
171,208

 
$
7,801

 
$
18,761

 
$
1,056,223

New investments & net revolver activity
 
141,260

 
30,000

 
29,000

 
500

 
2,747

 
203,507

Redemptions/repayments
 
(47,885
)
 
(18,507
)
 

 

 

 
(66,392
)
Net accrual of PIK interest income
 
1,254

 
(1,552
)
 
1,091

 
184

 

 
977

Accretion of original issue discount
 
248

 
205

 

 

 

 
453

Net change in unearned income
 
1,587

 
44

 
(25
)
 

 

 
1,606

Net unrealized appreciation
 
(1,871
)
 
(215
)
 
2,221

 
748

 
(704
)
 
179

Unrealized adjustments due to deal exits
 
1,062

 
482

 

 

 

 
1,544

Transfer into (out of) Level 3
 

 

 

 

 

 

Fair value as of June 30, 2012
 
$
831,847

 
$
132,718

 
$
203,495

 
$
9,233

 
$
20,804

 
$
1,198,097

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2012 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended June 30, 2012
 
$
(809
)
 
$
267

 
$
2,221

 
$
748

 
$
(704
)
 
$
1,723

The following table provides a roll-forward in the changes in fair value from September 30, 2012 to June 30, 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
602,775

 
230,400

 
119,093

 
5,705

 
27,703

 
985,676

Redemptions/repayments
(332,244
)
 
(108,547
)
 
(35,016
)
 
(2,422
)
 

 
(478,229
)
Net accrual of PIK interest income
4,036

 
(970
)
 
3,542

 
(289
)
 

 
6,319

Accretion of original issue discount
437

 
11

 

 

 

 
448

Net change in unearned income
3,812

 
960

 
512

 

 

 
5,284

Net unrealized appreciation (depreciation)
(12,665
)
 
4,756

 
(361
)
 
(17
)
 
14,689

 
6,402

Unrealized adjustments due to deal exits
(2,444
)
 
(7,189
)
 
1,165

 
(120
)
 
(3,319
)
 
(11,907
)
Transfer into (out of) Level 3

 

 

 

 

 

Fair value as of June 30, 2013
$
1,166,199

 
$
252,679

 
$
294,382

 
$
27,097

 
$
61,744

 
$
1,802,101

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the nine months ended June 30, 2013
$
(15,109
)
 
$
(2,433
)
 
$
804

 
$
(137
)
 
$
11,370

 
$
(5,505
)
The following table provides a roll-forward in the changes in fair value from September 30, 2011 to June 30, 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
244,079

 
37,000

 
118,516

 
1,200

 
7,059

 
407,854

Redemptions/repayments
(289,426
)
 
(41,994
)
 

 
(713
)
 
(9
)
 
(332,142
)
Net accrual of PIK interest income
2,798

 
(904
)
 
2,814

 
517

 

 
5,225

Accretion of original issue discount
1,043

 
324

 

 

 

 
1,367

Net change in unearned income
5,012

 
1,130

 
(919
)
 

 

 
5,223

Net unrealized appreciation (depreciation)
(22
)
 
10,008

 
1,851

 
1,180

 
1,043

 
14,060

Unrealized adjustments due to deal exits
(6,729
)
 
(16,229
)
 

 
(118
)
 
(251
)
 
(23,327
)
Transfer into (out of) Level 3

 

 

 

 

 

Fair value as of June 30, 2012
$
831,847

 
$
132,718

 
$
203,495

 
$
9,233

 
$
20,804

 
$
1,198,097

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at June 30, 2012 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the nine months ended June 30, 2012
$
(6,751
)
 
$
(6,221
)
 
$
1,851

 
$
1,062

 
$
792

 
$
(9,267
)
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

30


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.
 
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 June 30, 2013:
Asset
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
Weighted
 Average
 
First lien debt
 
$
1,147,620

 
Bond yield approach
 
Capital structure premium
 
(a)
0.0
 %
-
1.0%
 
 
0.2
%
 
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(4.00
)%
-
26.3%
 
 
2.2
%
 
 
 
 
 
 
 
Size premium
 
(a)
0.5
 %
-
2.0%
 
 
1.3
%
 
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.50
)%
-
3.0%
 
 
0.5
%
 
 
 
18,579

 
Market approach
 
EBITDA multiple
 
(b)
7.7x

-
16.0x
 
 
8.2x

 
Second lien & subordinated debt
 
531,502

 
Bond yield approach
 
Capital structure premium
 
(a)
2.0
 %
-
2.0%
 
 
2.0
%
 
 
 
 
 
 
 
Tranche specific risk premium/(discount)
 
(a)
(1.00
)%
-
11.0%
 
 
3.5
%
 
 
 
 
 
 
 
Size premium
 
(a)
0.5
 %
-
2.0%
 
 
0.8
%
 
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.50
)%
-
1.7%
 
 
0.2
%
 
 
 
15,559

 
Broker quotations
 
Non-binding indicative price
 
 
99.5
 %
-
103.0%
 
 
100.6
%
 
Preferred & common equity
 
88,841

 
Market and income approach
 
Weighted average cost of capital
 
 
11.0
 %
-
29.0%
 
 
13.2
%
 
 
 
 
 
 
 
Company specific risk premium
 
(a)
1.0
 %
-
15.0%
 
 
1.5
%
 
 
 
 
 
 
 
Revenue growth rate
 
 
2.6
 %
-
81.9%
 
 
11.6
%
 
 
 
 
 
 
 
EBITDA multiple
 
(b)
3.7x

-
12.1x
 
 
5.6x

 
Total
 
$
1,802,101

 
 
 
 
 
 
 
 
 
 
 
 
 ____________________
(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

31


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)
(4.00
)%
-
25.5%
 
 
2.1
 %
 
 
 
 
 
 
 
Size premium
 
(a)
0.5
 %
-
2.0%
 
 
1.3
 %
 
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.50
)%
-
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)
0.80
 %
-
7.8%
 
 
3.1
 %
 
 
 
 
 
 
 
Size premium
 
(a)
0.5
 %
-
2.0%
 
 
0.8
 %
 
 
 
 
 
 
 
Industry premium/(discount)
 
(a)
(1.40
)%
-
1.1%
 
 
(0.1
)%
 
 
 
1,238

 
Market and income approach
 
Weighted average cost of capital
 
 
33.00
 %
-
33.0%
 
 
33.0
 %
 
 
 
 
 
 
 
Company specific risk premium
 
(a)
24.00
 %
 
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 June 30, 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
$
216,000

 
$
216,000

 
$

 
$

 
$
216,000

SBA debentures payable
181,750

 
159,143

 

 

 
$
159,143

Unsecured convertible notes payable
115,000

 
121,325

 

 

 
$
121,325

Unsecured notes payable
161,250

 
156,188

 

 
156,188

 

Total
$
674,000

 
$
652,656

 
$

 
$
156,188

 
$
496,468

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.

32


The Company uses the non-binding indicative quoted price as of the valuation date to estimate the fair value of the unsecured 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 5.875% unsecured notes due 2024 and its 6.125% unsecured notes due 2028, which trade under the symbol “FSCE” on the New York Stock Exchange and the symbol "FSCFL" on the NASDAQ Stock Exchange, respectively. 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 $147.5 million and $102.5 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of June 30, 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 in the Company’s Consolidated Statements of Assets and Liabilities.

33


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

June 30, 2013
 
September 30, 2012
Drugtest, Inc.
$
20,000


$
4,000

Deltek, Inc.
10,000



RP Crown Parent, LLC
10,000



Pingora MSR Opportunity Fund I, LP (limited partnership interest)
9,891



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

Titan Fitness, LLC
5,000


3,500

First American Payment Systems, LP
5,000



Teaching Strategies, LLC
5,000



Adventure Interactive, Corp.
5,000



Enhanced Recovery Company, LLC
4,000


4,000

World 50, Inc.
4,000


4,000

InvestRx Corporation
3,700


5,000

Phoenix Brands Merger Sub LLC
3,429


4,071

2Checkout.com, Inc.
2,850



Reliance Communications, LLC
2,750



CPASS Acquisition Company
2,500


1,000

Charter Brokerage, LLC
2,400


7,353

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



Chicago Growth Partners III, LP (limited partnership interest)
2,000



Riverside Fund V, LP (limited partnership interest)
1,751


2,000

Sterling Capital Partners IV, LP (limited partnership interest)
1,619



Miche Bag, LLC
1,518


3,500

Tegra Medical, LLC
1,500


1,500

Milestone Partners IV, LP (limited partnership interest)
1,414


1,343

BMC Acquisition, Inc.
1,215


900

Ansira Partners, Inc.
1,190


1,190

Psilos Group Partners IV, LP (limited partnership interest)
1,000


1,000

Genoa Healthcare Holdings, LLC
1,000



Discovery Practice Management, Inc.
900


2,600

Garretson Firm Resolution Group, Inc.
844



Bunker Hill Capital II (QP), LP (limited partnership interest)
786


934

ACON Equity Partners III, LP (limited partnership interest)
768


753

Riverlake Equity Partners II, LP (limited partnership interest)
638


760

HealthDrive Corporation
621


750

RCP Direct, LP (limited partnership interest)
524


615

Baird Capital Partners V, LP (limited partnership interest)
351


513

Riverside Fund IV, LP (limited partnership interest)
269


323

Welocalize, Inc.


10,000

Traffic Solutions Holdings, Inc.


5,000

Rail Acquisition Corp.


6,165

Cardon Healthcare Network, LLC


3,000

Eagle Hospital Physicians, Inc.


1,400

Specialty Bakers, LLC


750

Advanced Pain Management Holdings, Inc.


400

Saddleback Fence and Vinyl Products, Inc.


100

Total
$
147,533

 
$
102,525

 

34



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:
 
 
June 30, 2013
 
 
September 30, 2012
 
Cost:
 
 
 
 
 
 
 
 
 
First lien debt
$
1,165,141

 
65.60
%
 
 
$
888,690

 
70.06
%
 
Second lien debt
250,412

 
14.10

 
 
135,828

 
10.71

 
Subordinated debt
291,268

 
16.40

 
 
201,971

 
15.92

 
Purchased equity
60,952

 
3.43

 
 
34,516

 
2.72

 
Equity grants
4,316

 
0.24

 
 
4,724

 
0.37

 
Limited partnership interests
3,990

 
0.23

 
 
2,760

 
0.22

 
Total
$
1,776,079

 
100.00
%
 
 
$
1,268,489

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
 
 
 
First lien debt
$
1,166,199

 
64.71
%
 
 
$
902,492

 
70.06
%
 
Second lien debt
252,679

 
14.02

 
 
133,258

 
10.35

 
Subordinated debt
294,382

 
16.34

 
 
205,447

 
15.95

 
Purchased equity
79,150

 
4.39

 
 
38,600

 
3.00

 
Equity grants
5,638

 
0.31

 
 
5,551

 
0.43

 
Limited partnership interests
4,053

 
0.23

 
 
2,760

 
0.21

 
Total
$
1,802,101

 
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.
 
 
June 30, 2013
 
 
September 30, 2012
 
Cost:
 
 
 
 
 
 
 
 
 
Northeast U.S.
$
677,960

 
38.17
%
 
 
$
440,689

 
34.74
%
 
Southeast U.S.
360,366

 
20.29

 
 
230,667

 
18.18

 
Midwest U.S.
303,986

 
17.12

 
 
251,751

 
19.85

 
Southwest U.S.
262,320

 
14.77

 
 
206,522

 
16.28

 
West U.S.
170,447

 
9.60

 
 
137,860

 
10.87

 
Canada
1,000

 
0.05

 
 
1,000

 
0.08

 
Total
$
1,776,079

 
100.00
%
 
 
$
1,268,489

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
 
 
 
 
Northeast U.S.
$
686,299

 
38.08
%
 
 
$
442,111

 
34.32
%
 
Southeast U.S.
358,836

 
19.91

 
 
236,808

 
18.38

 
Midwest U.S.
306,199

 
16.99

 
 
254,509

 
19.76

 
Southwest U.S.
266,310

 
14.78

 
 
212,939

 
16.53

 
West U.S.
181,442

 
10.07

 
 
140,191

 
10.88

 
Canada
3,015

 
0.17

 
 
1,550

 
0.13

 
Total
$
1,802,101

 
100.00
%
 
 
$
1,288,108

 
100.00
%
 
 

35



The composition of the Company’s portfolio by industry at cost and fair value as of June 30, 2013 and September 30, 2012 were as follows:
 
June 30, 2013
 
 
September 30, 2012
 
Cost:
 
 
 
 
 
 
 
 
 
Healthcare services
$
228,756

 
12.88

%
 
$
168,914

 
13.32

%
Diversified support services
213,591

 
12.03

 
 
111,362

 
8.78

 
Education services
173,613

 
9.78

 
 
99,033

 
7.81

 
Advertising
155,995

 
8.78

 
 
53,665

 
4.23

 
Specialized finance
122,885

 
6.92

 
 

 

 
Internet software & services
96,871

 
5.45

 
 
73,753

 
5.81

 
Healthcare equipment
90,430

 
5.09

 
 
82,808

 
6.53

 
IT consulting & other services
80,821

 
4.55

 
 
44,979

 
3.55

 
Oil & gas equipment services
77,189

 
4.35

 
 
60,245

 
4.75

 
Human resources & employment services
65,329

 
3.68

 
 
19,441

 
1.53

 
Leisure products
53,181

 
2.99

 
 
55,534

 
4.38

 
Pharmaceuticals
51,519

 
2.90

 
 
40,309

 
3.18

 
Leisure facilities
42,907

 
2.42

 
 
29,651

 
2.34

 
Apparel, accessories & luxury goods
36,727

 
2.07

 
 
37,919

 
2.99

 
Auto parts & equipment
32,905

 
1.85

 
 
1,000

 
0.08

 
Construction & engineering
32,060

 
1.81

 
 
46,334

 
3.65

 
Specialty stores
30,988

 
1.74

 
 
33,034

 
2.60

 
Household products
29,553

 
1.66

 
 
29,738

 
2.34

 
Home improvement retail
29,484

 
1.66

 
 
28,415

 
2.24

 
Data processing & outsources services
23,225

 
1.31

 
 

 

 
Research & consulting services
17,683

 
1.00

 
 
13,885

 
1.09

 
Food distributors
17,282

 
0.97

 
 
18,115

 
1.43

 
Industrial machinery
16,804

 
0.95

 
 
21,052

 
1.66

 
Air freight & logistics
16,589

 
0.93

 
 
18,903

 
1.49

 
Security & alarm services
13,084

 
0.74

 
 

 

 
Environmental & facilities services
8,773

 
0.49

 
 
21,027

 
1.66

 
Construction materials
7,115

 
0.40

 
 
6,951

 
0.55

 
Diversified financial services
5,906

 
0.33

 
 
38,479

 
3.03

 
Multi-sector holdings
3,881

 
0.21

 
 
2,758

 
0.21

 
Building products
735

 
0.04

 
 
748

 
0.06

 
Thrift & mortgage finance
109

 
0.01

 
 

 

 
Movies & entertainment
89

 
0.01

 
 
200

 
0.02

 
Electronic equipment & instruments

 

 
 
36,163

 
2.85

 
Integrated telecommunication services

 

 
 
31,994

 
2.52

 
Restaurants

 

 
 
19,130

 
1.51

 
Distributors

 

 
 
19,115

 
1.51

 
Electronic manufacturing services

 

 
 
3,835

 
0.30

 
Total
$
1,776,079

 
100.00

%
 
$
1,268,489

 
100.00

%
 

36




June 30, 2013
 
 
September 30, 2012
 
Fair Value:
 
 
 
 
 
 
 
 
 
Healthcare services
$
226,914

 
12.59

%
 
$
174,933

 
13.58

%
Diversified support services
214,802

 
11.92

 
 
113,021

 
8.77

 
Education services
174,914

 
9.71

 
 
99,327

 
7.71

 
Advertising
156,511

 
8.68

 
 
54,125

 
4.20

 
Specialized finance
122,885

 
6.82

 
 

 

 
Internet software & services
102,098

 
5.67

 
 
79,220

 
6.15

 
Healthcare equipment
91,358

 
5.07

 
 
84,084

 
6.53

 
IT consulting & other services
82,081

 
4.55

 
 
45,746

 
3.55

 
Oil & gas equipment services
78,745

 
4.37

 
 
62,087

 
4.82

 
Human resources & employment services
65,498

 
3.63

 
 
20,196

 
1.57

 
Leisure products
55,898

 
3.10

 
 
56,477

 
4.38

 
Pharmaceuticals
52,870

 
2.93

 
 
41,000

 
3.18

 
Leisure facilities
43,343

 
2.41

 
 
30,359

 
2.36

 
Construction & engineering
41,368

 
2.30

 
 
50,003

 
3.88

 
Apparel, accessories & luxury goods
36,539

 
2.03

 
 
38,413

 
2.98

 
Auto parts & equipment
35,090

 
1.95

 
 
1,550

 
0.12

 
Specialty stores
31,392

 
1.74

 
 
34,106

 
2.65

 
Household products
29,331

 
1.63

 
 
29,880

 
2.32

 
Home improvement retail
29,315

 
1.63

 
 
28,263

 
2.19

 
Data processing & outsources services
23,225

 
1.29

 
 

 

 
Research & consulting services
18,008

 
1.00

 
 
14,189

 
1.10

 
Industrial machinery
17,956

 
1.00

 
 
21,750

 
1.69

 
Air freight & logistics
16,115

 
0.89

 
 
15,931

 
1.24

 
Food distributors
15,815

 
0.88

 
 
18,400

 
1.43

 
Security & alarm services
13,088

 
0.73

 
 

 

 
Environmental & facilities services
8,832

 
0.49

 
 
12,175

 
0.95

 
Construction materials
7,281

 
0.40

 
 
7,200

 
0.56

 
Diversified financial services
5,894

 
0.33

 
 
39,288

 
3.05

 
Multi-sector holdings
3,944

 
0.20

 
 
2,760

 
0.22

 
Building products
732

 
0.04

 
 
750

 
0.06

 
Movies & entertainment
150

 
0.01

 
 
262

 
0.02

 
Thrift & mortgage finance
109

 
0.01

 
 

 

 
Electronic equipment & instruments

 

 
 
36,265

 
2.82

 
Integrated telecommunication services

 

 
 
32,892

 
2.55

 
Distributors

 

 
 
20,153

 
1.56

 
Restaurants

 

 
 
19,468

 
1.51

 
Electronic manufacturing services

 

 
 
3,835

 
0.30

 
Total
$
1,802,101

 
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 June 30, 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 nine months ended June 30, 2013 and June 30, 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 June 30, 2013 and September 30, 2012 were $6.5 million and $11.6 million, respectively.
As of June 30, 2013, the Company had structured $5.9 million in aggregate exit fees across six 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

37



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 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.
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.

38


On April 15, 2013, the Company completed a follow-on public offering of 13,500,000 shares of its common stock at the public offering price of $10.85 per share, with 935,253 additional shares being sold as part of the underwriters' partial exercise of their over-allotment option on April 26, 2013. The net proceeds totaled $151.5 million after deducting underwriting commissions of $4.7 million and offering costs of $0.3 million.
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 nine months ended June 30, 2013 and June 30, 2012:
 
 
Three months
ended
June 30, 2013
 
Three months
ended
June 30, 2012
 
Nine months
ended
June 30, 2013
 
Nine months
ended
June 30, 2012
Earnings per common share — basic:
 
 
 
 
 
 
 
 
Net increase in net assets resulting from operations
 
$
26,006

 
$
22,089

 
$
75,684

 
$
52,329

Weighted average common shares outstanding — basic
 
118,271

 
82,421

 
106,353

 
78,089

Earnings per common share — basic
 
$
0.22

 
$
0.27

 
$
0.71

 
$
0.67

Earnings per common share — diluted:
 
 
 
 
 
 
 
 
Net increase in net assets resulting from operations, before adjustments
 
$
26,006

 
$
22,089

 
$
75,684

 
$
52,329

Adjustments for interest on convertible notes, base management fees, incentive fees and gain on extinguishment of convertible notes
 
1,365

 
1,205

 
2,714

 
3,113

Net increase in net assets resulting from operations, as adjusted
 
27,371

 
23,294

 
78,398

 
55,442

Weighted average common shares outstanding — basic
 
118,271

 
82,421

 
106,353

 
78,089

Adjustments for dilutive effect of convertible notes
 
7,790

 
7,858

 
7,790

 
8,236

Weighted average common shares outstanding — diluted
 
126,061

 
90,279

 
114,143

 
86,325

Earnings per common share — diluted
 
$
0.22

 
$
0.26

 
$
0.69

 
$
0.64


The following table reflects the distributions per share that the Board of Directors of the Company has declared and the Company paid, including shares issued under the dividend reinvestment plan (“DRIP”), on its common stock from October 1, 2011 to June 30, 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
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

 
 
10.3 million
 
127,152
 
 
 
1.3 million
May 6, 2013
 
June 14, 2013
 
June 28, 2013
 
0.0958

 
 
10.5 million
 
112,821
 
 
 
1.1 million
__________
(1) Shares were purchased on the open market and distributed.
On May 6, 2013, upon expiration of its previous stock repurchase program, the Company's Board of Directors authorized a stock repurchase program to acquire up to $50 million of its 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 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.

39


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.

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 revolving 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.
As of June 30, 2013, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on April 23, 2014 and the maturity date of the facility is April 25, 2016.
 
The Wells Fargo facility provides 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.
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, including a prepayment penalty in certain cases. 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 June 30, 2013, the Company had $60.0 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $60.0 million. The Company’s borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.982% for the nine months ended June 30, 2013. For the three and nine months ended June 30, 2013, the Company recorded interest expense of $0.8 million and $2.4 million, respectively, related to the Wells Fargo facility.
 
ING Facility
On May 27, 2010, the Company entered into a 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 allows the Company to request letters of credit from ING Capital LLC, as the issuing bank.
As of June 30, 2013, the ING facility permitted up to $445 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $600 million, and borrowings under the facility bore interest at a rate equal 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. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on November 30, 2015 and the maturity date of the facility is November 30, 2016.
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

40



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.
 
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, Inc. 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 June 30, 2013, the Company had $156.0 million of borrowings outstanding under the ING facility, which had a fair value of $156.0 million. The Company’s borrowings under the ING facility bore interest at a weighted average interest rate of 3.306% for the nine months ended June 30, 2013. For the three and nine months ended June 30, 2013, the Company recorded interest expense of $1.9 million and $5.7 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.
As of June 30, 2013, the Sumitomo facility permitted up to $200 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which the Company may make and reinvest borrowings under the facility will expire on September 16, 2014 and the maturity date of the facility is September 16, 2018, with 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.
  
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, including a prepayment penalty in certain cases. 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 June 30, 2013, the Company did not have any borrowings outstanding under the Sumitomo facility. The Company’s borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 3.510% for the nine

41



months ended June 30, 2013. For the three and nine months ended June 30, 2013, the Company recorded interest expense of $0.4 million and $1.2 million, respectively, related to the Sumitomo facility.
As of June 30, 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 nine months ended June 30, 2013 was $9.2 million and $24.1 million, respectively. Interest expense for the three and nine months ended June 30, 2012 was $5.6 million and $16.9 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.
 
Accumulated PIK interest activity for the nine months ended June 30, 2013 and June 30, 2012 was as follows:
 
Nine months
ended
June 30, 2013
 
Nine months
ended
June 30, 2012
PIK balance at beginning of period
$
18,431

 
$
22,672

Gross PIK interest accrued
12,556

 
12,306

PIK income reserves(1)
(745
)
 
(2,074
)
PIK interest received in cash
(5,492
)
 
(5,007
)
Loan exits and other PIK adjustments
(2,769
)
 

PIK balance at end of period
$
21,981

 
$
27,897

_____________ 
(1) PIK income is generally reserved for when a loan is placed on PIK non-accrual status.
As of June 30, 2013, there were no investments on which the Company had stopped accruing cash interest, PIK interest or OID income. As of June 30, 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 June 30, 2012.
The percentages of the Company’s portfolio investments at cost and fair value by accrual status as of June 30, 2013September 30, 2012 and June 30, 2012 were as follows:

June 30, 2013


September 30, 2012


June 30, 2012


Cost

% of Portfolio


Fair
 Value

% of Portfolio


Cost

% of Portfolio


Fair
 Value


% of Portfolio


Cost

% of Portfolio


Fair
 Value

% of Portfolio

Accrual
$
1,776,079


100.00
%


$
1,802,101


100.00
%


$
1,256,265


99.04
%


$
1,284,872



99.75
%


$
1,168,495


95.75
%


$
1,181,490


98.61
%

PIK non-accrual










12,224


0.96



3,236



0.25



15,637


1.28



3,454


0.29


Cash non-accrual(1)





















36,260


2.97



13,153


1.10


Total
$
1,776,079


100.00
%


$
1,802,101


100.00
%


$
1,268,489


100.00
%


$
1,288,108



100.00
%


$
1,220,392


100.00
%


$
1,198,097


100.00
%

 _____________

42


(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 June 30, 2013September 30, 2012 and June 30, 2012 was as follows:

June 30, 2013

September 30, 2012

June 30, 2012
Coll Materials Group LLC (1)


PIK non-accrual



Lighting by Gregory, LLC (1)




Cash non-accrual

Repechage Investments Limited (1)




Cash non-accrual

Rail Acquisition Corp. (1)




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 (and recapture) amounts for the three and nine months ended June 30, 2013 and June 30, 2012 were as follows:


Three months
ended
June 30, 2013


Three months
ended
June 30, 2012


Nine months
ended
June 30, 2013


Nine months
ended
June 30, 2012

Cash interest income

$
(721)

(1)

$
524



$
288



$
2,681

PIK interest income


130




1,033




745




3,078

OID income














95

Total

$
(591)



$
1,557



$
1,033



$
5,854

  _____________
(1) Represents the recapture of Eagle Hospital Physicians, Inc. cash interest income that was not accrued for the quarter ended March 31, 2013, but was subsequently collected during the quarter ended June 30, 2013.

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 nine months ended June 30, 2013.
 
 
 
Three months
ended
June 30, 2013
 
Nine months
ended
June 30, 2013
 
Net increase in net assets resulting from operations
 
$
26,006

 
$
75,684

 
Net change in unrealized appreciation
 
 
(13,062
)
 
 
(6,402
)
 
Book/tax difference due to deferred loan fees
 
 
(4,738
)
 
 
(9,560
)
 
Book/tax difference due to organizational and deferred offering costs
 
 
(22
)
 
 
(65
)
 
Book/tax difference due to interest income on certain loans
 
 
(721
)
 
 
424

 
Book/tax difference due to capital losses not recognized
 
 
17,450

 
 
16,971

 
Other book/tax differences
 
 
(577
)
 
 
(2,011
)
 
Taxable/Distributable Income (1)
 
$
24,336

 
$
75,041

 
 ______________
(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

43


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.
  

44


The Company’s Board of Directors has declared and the Company has paid the following distributions from inception to June 30, 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
 
Monthly
 
 
1/14/2013
 
 
 
4/15/2013
 
 
 
4/30/2013
 
 
 
0.0958
 
Monthly
 
 
1/14/2013
 
 
 
5/15/2013
 
 
 
5/31/2013
 
 
 
0.0958
 
Monthly
 
 
5/6/2013
 
 
 
6/14/2013
 
 
 
6/28/2013
 
 
 
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 year 2010, the Company

45


incurred a de minimis federal excise tax. The Company did not incur a federal excise tax for calendar years 2011 and 2012 and does not expect to incur a federal excise tax for calendar year 2013.

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.
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 nine months ended June 30, 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;

46


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 the transaction;
In April 2013, the Company realized a loss in the amount of $11.2 million after the senior-most creditors foreclosed on the assets of Coll Materials Group, LLC. The Company maintains a $1.0 million receivable related to a financial guarantee related to the transaction;
In April 2013, the Company received a cash payment of $14.1 million from Huddle House, 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 April 2013, the Company received a cash payment of $20.4 million from Slate Pharmaceuticals Acquisition Corp. 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 April 2013, the Company received a cash payment of $12.5 million from Securus Technologies Holdings, 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 May 2013, the Company received a cash payment of $9.6 million from ConvergeOne Holdings 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 May 2013, the Company received a cash payment of $30.9 million from CompuCom 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 May 2013, the Company received a cash payment of $31.1 million from Cardon Healthcare Network, 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;
In May 2013, the Company restructured its investment in Trans-Trade Brokers, Inc.  As part of the restructuring, the Company exchanged cash and its debt and equity securities for debt and equity securities in the restructured entity, TransTrade Operators, Inc., and recorded a realized loss in the amount of $6.1 million on this transaction;
In June 2013, the Company received a cash payment of $33.6 million from U.S. Retirement Partners, 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 June 2013, the Company received a cash payment of $14.6 million from Traffic Solutions Holdings, Inc. in full satisfaction of all obligations related to the Term Loan A and Revolver 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 nine months ended June 30, 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 nine months ended June 30, 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.;

47


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;
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;
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;
In May 2012, the Company received a cash payment of $28.9 million from JTC Education, Inc. in full satisfaction of all obligations under the first lien loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
In May 2012, the Company received a cash payment of $6.1 million from Fitness Edge, 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; and

48


In June 2012, the Company received a cash payment of $20.2 million from Caregiver Services, 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.
During the nine months ended June 30, 2013, the Company recorded net unrealized appreciation of $6.4 million. This consisted of $11.2 million of net unrealized appreciation on equity investments and $11.7 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), offset by $16.5 million of net unrealized depreciation on debt investments. During the nine months ended June 30, 2012, the Company recorded net unrealized appreciation of $14.1 million. This consisted of $1.9 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 $15.5 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.
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 and nine months ended June 30, 2013, the Investment Adviser voluntarily waived the portion of the base management fee attributable to certain new investments that closed prior to period end, which resulted in waivers of $1.0 million and $2.3 million, respectively.
For the three and nine months ended June 30, 2013, base management fees were $8.2 million and $23.8 million, respectively. For the three and nine months ended June 30, 2012, base management fees were $6.1 million and $17.2 million, respectively. At June 30, 2013, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $8.2 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

49


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. The Company does not currently accrue for capital gains incentive fees due to the accumulated realized losses in the portfolio.
For the three and nine months ended June 30, 2013, incentive fees were $7.3 million and $21.0 million, respectively. For the three and nine months ended June 30, 2012, incentive fees were $5.5 million and $16.4 million, respectively. At June 30, 2013, the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $7.3 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. 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 nine months ended June 30, 2013, the Company accrued administrative expenses of $1.2 million, including $0.5 million of general and administrative expenses, and $3.9 million, including $1.6 million of general and administrative expenses, which are due to FSC, Inc., respectively. At June 30, 2013, $1.6 million was included in Due to FSC, Inc. in the Consolidated Statement of Assets and Liabilities.

50


Note 12. Financial Highlights


 
Three months
ended
June 30, 2013
 
Three months
ended
June 30, 2012
 
Nine months
ended
June 30, 2013
 
Nine months
ended
June 30, 2012
Net asset value at beginning of period
 
$
9.90

 
$
9.87

 
$
9.92

 
$
10.07

Net investment income
 
0.26

 
0.27

 
0.81

 
0.84

Net unrealized appreciation on investments
 
0.11

 

 
0.06

 
0.18

Net realized loss on investments
 
(0.15
)
 

 
(0.16
)
 
(0.35
)
Distributions paid
 
(0.29
)
 
(0.29
)
 
(0.87
)
 
(0.89
)
Issuance of common stock
 
0.07

 

 
0.14

 

Net asset value at end of period
 
$
9.90

 
$
9.85

 
$
9.90

 
$
9.85

Per share market value at beginning of period
 
$
11.02

 
$
9.76

 
$
10.98

 
$
9.32

Per share market value at end of period
 
$
10.45

 
$
9.98

 
$
10.45

 
$
9.98

Total return(1)
 
(2.45
)%
 
5.29
%
 
3.52
%
 
17.28
%
Common shares outstanding at beginning of period
 
106,209

 
82,421

 
91,048

 
72,376

Common shares outstanding at end of period
 
120,996

 
82,462

 
120,996

 
82,462

Net assets at beginning of period
 
$
1,050,961

 
$
813,322

 
$
903,570

 
$
728,627

Net assets at end of period
 
$
1,197,268

 
$
812,071

 
$
1,197,268

 
$
812,071

Average net assets(2)
 
$
1,180,475

 
$
816,609

 
$
1,058,174

 
$
777,094

Ratio of net investment income to average net assets(3)
 
10.33
 %
 
10.76
%
 
10.90
%
 
11.26
%
Ratio of total expenses to average net assets(4)
 
9.66
 %
 
9.49
%
 
9.96
%
 
10.02
%
Ratio of portfolio turnover to average investments at fair value
 
9.57
 %
 
5.22
%
 
25.63
%
 
25.13
%
Weighted average outstanding debt(5)
 
$
621,178


$
371,346

 
$
558,850


$
409,254

Average debt per share
 
$
5.25

 
$
4.51

 
$
5.25

 
$
5.24

__________
(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)
Interim periods are annualized except for the effect of voluntary fee waivers. The ratio of total expenses to average net assets excluding voluntary fee waivers would be 9.74% and 10.18%, respectively, for the three and nine months ended June 30, 2013.
(5)
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. 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.
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

51


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 June 30, 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 nine months ended June 30, 2013, the Company recorded interest expense of $1.7 million and $5.1 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 canceled and no longer outstanding under the indenture. The Company did not repurchase Convertible Notes during the nine months ended June 30, 2013. During the nine months ended June 30, 2012, the Company repurchased $20.0 million principal of the Convertible Notes in the open market for an aggregate purchase price of $17.9 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 $1.6 million.
As of June 30, 2013, there were $115.0 million of Convertible Notes outstanding, which had a fair value of $121.3 million.

Note 14. Unsecured Notes
2024 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.
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. 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. The 2024 Notes are listed 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

52



resold by the Company. Any 2024 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2024 Notes Indenture. During the nine months ended June 30, 2013, the Company did not repurchase any of the 2024 Notes in the open market.
For the three and nine months ended June 30, 2013, the Company recorded interest expense of $1.2 million and $3.3 million, respectively, related to the 2024 Notes.
As of June 30, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.3 million.
2028 Notes
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.
The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the “2028 Notes Indenture”), between the Company and the Trustee. The 2028 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 2028 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 it 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. 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 annum. 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 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share.
The 2028 Notes Indenture contains certain covenants, including covenants requiring the Company's compliance with (regardless of whether it 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, as well as covenants requiring the Company to provide financial information to the holders of the 2028 Notes and the Trustee if it 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 2028 Notes Indenture. The Company may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 Notes repurchased by the Company may, at its option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the nine months ended June 30, 2013, the Company did not repurchase any of the 2028 Notes in the open market.
For the three and nine months ended June 30, 2013, the Company recorded interest expense of $1.3 million related to the 2028 Notes.
As of June 30, 2013, there were $86.3 million 2028 Notes outstanding, which had a fair value of $81.9 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 nine months ended June 30, 2013.



53



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 June 30, 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

54



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.
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 market quotations, asset liquidation model 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;

55


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;
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 June 30, 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
%
 
For the quarter ended June 30, 2013
76.4
%
 

As of June 30, 2013 and September 30, 2012, approximately 95.0% 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.
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 June 30, 2013, we had structured $5.9 million in aggregate exit fees across six portfolio investments upon the future exit of those investments.
Payment-in-Kind (PIK) Interest

56


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 $22.0 million  and represented 1.2% of the fair value of our portfolio of investments as of June 30, 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.

57


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:
 
June 30,
2013
 
September 30,
2012
Cost:
 
 
 
First lien debt
65.60
%
 
70.06
%
Second lien debt
14.10

 
10.71

Subordinated debt
16.40

 
15.92

Purchased equity
3.43

 
2.72

Equity grants
0.24

 
0.37

Limited partnership interests
0.23

 
0.22

Total
100.00
%
 
100.00
%
 
 
 
 
 
June 30,
2013
 
September 30,
2012
Fair value:
 
 
 
First lien debt
64.71
%
 
70.06
%
Second lien debt
14.02

 
10.35

Subordinated debt
16.34

 
15.95

Purchased equity
4.39

 
3.00

Equity grants
0.31

 
0.43

Limited partnership interests
0.23

 
0.21

Total
100.00
%
 
100.00
%
 



58


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

 
June 30,
2013
 
September 30,
2012
 
Cost:
 
 
 
 
Healthcare services
12.88

%
13.32

%
Diversified support services
12.03

 
8.78

 
Education services
9.78

 
7.81

 
Advertising
8.78

 
4.23

 
Specialized finance
6.92

 

 
Internet software & services
5.45

 
5.81

 
Healthcare equipment
5.09

 
6.53

 
IT consulting & other services
4.55

 
3.55

 
Oil & gas equipment services
4.35

 
4.75

 
Human resources & employment services
3.68

 
1.53

 
Leisure products
2.99

 
4.38

 
Pharmaceuticals
2.90

 
3.18

 
Leisure facilities
2.42

 
2.34

 
Apparel, accessories & luxury goods
2.07

 
2.99

 
Auto parts & equipment
1.85

 
0.08

 
Construction & engineering
1.81

 
3.65

 
Specialty stores
1.74

 
2.60

 
Household products
1.66

 
2.34

 
Home improvement retail
1.66

 
2.24

 
Data processing & outsources services
1.31

 

 
Research & consulting services
1.00

 
1.09

 
Food distributors
0.97

 
1.43

 
Industrial machinery
0.95

 
1.66

 
Air freight & logistics
0.93

 
1.49

 
Security & alarm services
0.74

 

 
Environmental & facilities services
0.49

 
1.66

 
Construction materials
0.40

 
0.55

 
Diversified financial services
0.33

 
3.03

 
Multi-sector holdings
0.21

 
0.21

 
Building products
0.04

 
0.06

 
Thrift & mortgage finance
0.01

 

 
Movies & entertainment
0.01

 
0.02

 
Electronic equipment & instruments

 
2.85

 
Integrated telecommunication services

 
2.52

 
Restaurants

 
1.51

 
Distributors

 
1.51

 
Electronic manufacturing services

 
0.30

 
Total
100.00

%
100.00

%
 
 
 
 
 

 
 




59


 
June 30,
2013
 
September 30,
2012
 
Fair Value:
 
 
 
 
Healthcare services
12.59

%
13.58

%
Diversified support services
11.92

 
8.77

 
Education services
9.71

 
7.71

 
Advertising
8.68

 
4.20

 
Specialized finance
6.82

 

 
Internet software & services
5.67

 
6.15

 
Healthcare equipment
5.07

 
6.53

 
IT consulting & other services
4.55

 
3.55

 
Oil & gas equipment services
4.37

 
4.82

 
Human resources & employment services
3.63

 
1.57

 
Leisure products
3.10

 
4.38

 
Pharmaceuticals
2.93

 
3.18

 
Leisure facilities
2.41

 
2.36

 
Construction & engineering
2.30

 
3.88

 
Apparel, accessories & luxury goods
2.03

 
2.98

 
Auto parts & equipment
1.95

 
0.12

 
Specialty stores
1.74

 
2.65

 
Household products
1.63

 
2.32

 
Home improvement retail
1.63

 
2.19

 
Data processing & outsources services
1.29

 

 
Research & consulting services
1.00

 
1.10

 
Industrial machinery
1.00

 
1.69

 
Air freight & logistics
0.89

 
1.24

 
Food distributors
0.88

 
1.43

 
Security & alarm services
0.73

 

 
Environmental & facilities services
0.49

 
0.95

 
Construction materials
0.40

 
0.56

 
Diversified financial services
0.33

 
3.05

 
Multi-sector holdings
0.20

 
0.22

 
Building products
0.04

 
0.06

 
Movies & entertainment
0.01

 
0.02

 
Thrift & mortgage finance
0.01

 

 
Electronic equipment & instruments

 
2.82

 
Integrated telecommunication services

 
2.55

 
Distributors

 
1.56

 
Restaurants

 
1.51

 
Electronic manufacturing services

 
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.

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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.
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 June 30, 2013 and September 30, 2012:
 
June 30, 2013
 
September 30, 2012
 
Investment Ranking
Fair Value
 
% of Portfolio
 
 
Leverage Ratio
 
Fair Value
 
 
% of Portfolio
 
 
Leverage Ratio
 
1
$
269,474

 
14.95
%
 
 
3.90
 
$
68,685

 
 
5.33
%
 
 
2.72
 
2
1,499,220

 
83.19

 
 
4.51
 
1,212,993

 
 
94.17

 
 
3.96
 
3
33,407

 
1.86

 
 
NM
(1)
3,193

 
 
0.25

 
 
NM
(1)
4

 

 
 
 

 
 

 
 
 
5

 

 
 
 
3,237

 
 
0.25

 
 
NM
(1)
Total
$
1,802,101

 
100.00
%
 
 
4.41
 
$
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 June 30, 2013, we had modified the payment terms of our investments in 15 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 June 30, 2013, there were no investments on which we had stopped accruing cash interest, PIK interest or OID income. As of June 30, 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 June 30, 2012.
The percentages of our portfolio investments at cost and fair value by accrual status for the periods ended June 30, 2013, September 30, 2012 and June 30, 2012 were as follows:

 
June 30, 2013
 
 
September 30, 2012
 
 
June 30, 2012
 

Cost
 
% of Portfolio
 
 
Fair
Value
 
% of Portfolio
 
 
Cost
 
% of Portfolio
 
 
Fair
Value
 
 
% of Portfolio
 
 
Cost
 
% of Portfolio
 
 
Fair
Value
 
% of Portfolio
 
Accrual
$
1,776,079

 
100.00
%
 
 
$
1,802,101

 
100.00
%
 
 
$
1,256,265

 
99.04
%
 
 
$
1,284,872

 
 
99.75
%
 
 
$
1,168,495

 
95.75
%
 
 
$
1,181,490

 
98.61
%
 
PIK non-accrual

 

 
 

 

 
 
12,224

 
0.96

 
 
3,236

 
 
0.25

 
 
15,637

 
1.28

 
 
3,454

 
0.29

 
Cash non-accrual(1)

 

 
 

 

 
 

 

 
 

 
 

 
 
36,260

 
2.97

 
 
13,153

 
1.10

 
Total
$
1,776,079

 
100.00
%
 
 
$
1,802,101

 
100.00
%
 
 
$
1,268,489

 
100.00
%
 
 
$
1,288,108

 
 
100.00
%
 
 
$
1,220,392

 
100.00
%
 
 
$
1,198,097

 
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 June 30, 2013September 30, 2012 and June 30, 2012 was as follows:
 
June 30, 2013
 
September 30, 2012
 
June 30, 2012
Coll Materials Group LLC (1)

 
PIK non-accrual

 

Lighting by Gregory, LLC (1)

 

 
Cash non-accrual

Repechage Investments Limited (1)

 

 
Cash non-accrual

Rail Acquisition Corp. (1)

 

 
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 June 30, 2013.

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Income non-accrual (and recapture) amounts for the three and nine months ended June 30, 2013 and June 30, 2012 were as follows:
 
 
Three months
ended
June 30, 2013
 
 
Three months
ended
June 30, 2012
 
 
Nine months
ended
June 30, 2013
 
 
Nine months
ended
June 30, 2012
 
Cash interest income
 
$
(721)

(1)
 
$
524

 
 
$
288


 
$
2,681
 
PIK interest income
 
 
130

 
 
 
1,033

 
 
 
745

 
 
 
3,078
 
OID income
 
 

 
 
 

 
 
 

 
 
 
95
 
Total
 
$
(591)

 
 
$
1,557

 
 
$
1,033

 
 
$
5,854
 
________________
(1) Represents the recapture of Eagle Hospital Physicians, Inc. cash interest income that was not accrued for the quarter ended March 31, 2013, but was subsequently collected during the quarter ended June 30, 2013.

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 the three and nine months ended June 30, 2013 and June 30, 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 June 30, 2013 and June 30, 2012 was $58.1 million and $41.0 million, respectively. For the three months ended June 30, 2013, this amount primarily consisted of $46.4 million of interest income from portfolio investments (which included $4.0 million of PIK interest) and $11.0 million of fee income. For the three months ended June 30, 2012, this amount primarily consisted of $32.6 million of interest income from portfolio investments (which included $3.9 million of PIK interest) and $8.3 million of fee income.
Total investment income for the nine months ended June 30, 2013 and June 30, 2012 was $164.5 million and $122.6 million, respectively. For the nine months ended June 30, 2013, this amount primarily consisted of $126.7 million of interest income from portfolio investments (which included $11.8 million of PIK interest) and $35.8 million of fee income. For the nine months ended June 30, 2012, this amount primarily consisted of $98.1 million of interest income from portfolio investments (which included $10.2 million of PIK interest) and $24.4 million of fee income.
The increase in our total investment income for the three and nine months ended June 30, 2013 as compared to the three and nine months ended June 30, 2012 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 16 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received and a decrease in the weighted average yield on our debt investments from 12.1% to 11.4% during the year-over-year period.
Expenses
Expenses for the three months ended June 30, 2013 and June 30, 2012 were $27.7 million and $19.3 million, respectively. Expenses increased for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 by $8.3 million. This was due primarily to increases in:
Base management fee, which was attributable to a 50.4% 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 37.8% increase in pre-incentive fee net investment income for the year-over-year period; and
Interest expense, which was attributable to a 67.3% increase in weighted average debt outstanding for the year-over-year period.

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 Expenses for the nine months ended June 30, 2013 and June 30, 2012 were $78.3 million and $58.5 million, respectively. Expenses increased for the nine months ended June 30, 2013 as compared to the nine months ended June 30, 2012 by $19.8 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 30.6% increase in pre-incentive fee net investment income for the year-over-year period; and
Interest expense, which was attributable to a 36.6% increase in weighted average debt outstanding for the year-over-year period.
Gain on Extinguishment of Convertible Notes
During the nine months ended June 30, 2013, we did not repurchase any of our unsecured convertible notes (“Convertible Notes”) in the open market. During the three and nine months ended June 30, 2012, we repurchased $9.0 million and $20.0 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 $17.9 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 for the three and nine months ended June 30, 2012 was $0.2 million and $1.6 million, respectively. 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 2024 Notes or 2028 Notes (as each is defined below) at a discount will be treated in a similar manner.
Net Investment Income
As a result of the $17.0 million increase in total investment income as compared to the $0.2 million decrease in the gain on extinguishment of debt and the $8.3 million increase in total expenses, net investment income for the three months ended June 30, 2013 reflected a $8.5 million, or 38.7%, increase compared to the three months ended June 30, 2012.
As a result of the $41.9 million increase in total investment income as compared to the $1.6 million decrease in the gain on extinguishment of debt and the $19.8 million million increase in total expenses, net investment income for the nine months ended June 30, 2013 reflected a $20.6 million, or 31.3%, increase compared to the nine months ended June 30, 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 nine months ended June 30, 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;

63


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 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;
In April 2013, we realized a loss in the amount of $11.2 million after the senior-most creditors foreclosed on the assets of Coll Materials Group, LLC. We maintain a $1.0 million receivable related to a financial guarantee related to the transaction;
In April 2013, we received a cash payment of $14.1 million from Huddle House, 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 April 2013, we received a cash payment of $20.4 million from Slate Pharmaceuticals Acquisition Corp. 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 April 2013, we received a cash payment of $12.5 million from Securus Technologies Holdings, 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 May 2013, we received a cash payment of $9.6 million from ConvergeOne Holdings 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 May 2013, we received a cash payment of $30.9 million from CompuCom 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;

64


In May 2013, we received a cash payment of $31.1 million from Cardon Healthcare Network, 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;
In May 2013, we restructured our investment in Trans-Trade Brokers, Inc.  As part of the restructuring, we exchanged cash and its debt and equity securities for debt and equity securities in the restructured entity, TransTrade Operators, Inc. and recorded a realized loss in the amount of $6.1 million on this transaction;
In June 2013, we received a cash payment of $33.6 million from U.S. Retirement Partners, 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 June 2013, we received a cash payment of $14.6 million from Traffic Solutions Holdings, Inc. in full satisfaction of all obligations related to the Term Loan A and Revolver 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 nine months ended June 30, 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 nine months ended June 30, 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 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;
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;

65


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;
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;
In May 2012, we received a cash payment of $28.9 million from JTC Education, Inc. in full satisfaction of all obligations under the first lien loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
In May 2012, we received a cash payment of $6.1 million from Fitness Edge, 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; and
In June 2012, we received a cash payment of $20.2 million from Caregiver Services, 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.
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 June 30, 2013, we recorded net unrealized appreciation of $13.1 million. This consisted of $0.5 million of net unrealized appreciation on equity investments, $13.9 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), offset by $1.4 million of net unrealized depreciation on debt investments. During the three months ended June 30, 2012, we recorded net unrealized appreciation of $0.2 million. This consisted of $0.1 million of net unrealized appreciation on debt investments and $0.1 million of net unrealized appreciation on equity investments.
During the nine months ended June 30, 2013, we recorded net unrealized appreciation of $6.4 million. This consisted of $11.2 million of net unrealized appreciation on equity investments, $11.7 million of net reclassifications to realized losses on debt and equity investments (resulting in unrealized appreciation), offset by $16.5 million of net unrealized depreciation on debt investments. During the nine months ended June 30, 2012, we recorded net unrealized appreciation of $14.1 million. This consisted of $1.9 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 $15.5 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 nine months ended June 30, 2013, we experienced a net decrease in cash and cash equivalents of $14.8 million. During that period, we used $431.2 million of cash in operating activities, primarily for the funding of $972.2 million of investments and net revolvers, partially offset by $465.1 million of principal payments, PIK payments and sale proceeds received and $86.3 million of net investment income. During the same period, cash provided by financing activities was $416.5 million, primarily consisting of $303.5 million of proceeds from issuances of our common stock, $31.8 million of net borrowings of SBA debentures, $14.7 million of net borrowings under our credit facilities and $155.8 million of proceeds from the issuance of unsecured notes, partially offset by $84.7 million of cash distributions paid, $1.0 million of offering costs paid and $3.7 million of deferred financing costs paid.
For the nine months ended June 30, 2012, we experienced a net increase in cash and cash equivalents of $38.1 million. During that period, we used $22.4 million of cash in operating activities, primarily for the funding of $407.9 million of investments and net

66


revolvers, partially offset by $333.3 million of principal payments, PIK payments and sale proceeds received and $65.7 million of net investment income. During the same period, cash provided by financing activities was $60.4 million, primarily consisting of $50.5 million of net borrowings under our credit facilities and $100.7 million of proceeds from the issuance of our common stock, partially offset by $68.7 million of cash distributions paid, $17.9 million of net repurchases of our convertible notes and $3.3 million of deferred financing costs paid.
As of June 30, 2013, we had $59.6 million in cash and cash equivalents, portfolio investments (at fair value) of $1.80 billion, $12.3 million of interest and fees receivable, $181.8 million of SBA debentures payable, $216.0 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $147.5 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 June 30, 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 the dividend 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

 
 
10.3 million
 
127,152

 
 
 
1.3 million
May 6, 2013
 
June 14, 2013
 
June 28, 2013
 
0.0958

 
 
10.5 million
 
112,821

 
 
 
1.1 million
May 6, 2013
 
July 15, 2013
 
July 31, 2013
 
0.0958

 
 
10.2 million
 
130,944

 
 
 
1.3 million
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 June 30, 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
April 2013
 
Public offering(3)
 
14,435,253
 
10.85


 
 
156.5 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

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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 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 June 30, 2013, FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $133.5 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 June 30, 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 $25.6 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 June 30, 2013.
For the three and nine months ended June 30, 2013, we recorded interest expense of $1.9 million and $5.3 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 revolving 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.
As of June 30, 2013, the Wells Fargo facility permitted up to $150 million of borrowings (subject to collateral requirements) with an accordion feature allowing for future expansion of the facility up to a total of $250 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-month) plus 2.50% per annum, with no LIBOR floor. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on April 23, 2014 and the maturity date of the facility is April 25, 2016.
 
The Wells Fargo facility provides 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.
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, including a prepayment penalty in certain cases. 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.

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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 June 30, 2013, we had $60.0 million of borrowings outstanding under the Wells Fargo facility, which had a fair value of $60.0 million. Our borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.982% for the nine months ended June 30, 2013. For the three and nine months ended June 30, 2013, we recorded interest expense of $0.8 million and $2.4 million, respectively related to the Wells Fargo facility.
ING Facility
On May 27, 2010, we entered into a 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 allows us to request letters of credit from ING Capital LLC, as the issuing bank.
As of June 30, 2013, the ING facility permitted up to $445 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $600 million, and borrowings under the facility bore interest at a rate equal 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. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on November 30, 2015 and the maturity date of the facility is November 30, 2016.
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.
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 June 30, 2013, we had $156.0 million of borrowings outstanding under the ING facility, which had a fair value of $156.0 million. Our borrowings under the ING facility bore interest at a weighted average interest rate of 3.306% for the nine months ended June 30, 2013. For the three and nine months ended June 30, 2013, we recorded interest expense of $1.9 million and $5.7 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.
As of June 30, 2013, the Sumitomo facility permitted up to $200 million of borrowings (subject to collateral requirements), and borrowings under the facility bore interest at a rate of LIBOR (1-month) plus 2.25% per annum, with no LIBOR floor. Unless extended, the period during which we may make and reinvest borrowings under the facility will expire on September 16, 2014 and the maturity date of the facility is September 16, 2018, with an option for a one-year extension.

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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, including a prepayment penalty in certain cases. 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.
 
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 June 30, 2013, we did not have any borrowings outstanding under the Sumitomo facility. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 3.510% for the nine months ended June 30, 2013. For the three and nine months ended June 30, 2013, we recorded interest expense of $0.4 million and $1.2 million, respectively, related to the Sumitomo facility.
As of June 30, 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
 
$1,051 million
 
 
Minimum shareholders’ equity (exclusive of affiliates)
 
Net assets exclusive of affiliates other than Funding shall not be less than $250 million
 
$250 million
 
$754 million
 
 
Asset coverage ratio
 
Asset coverage ratio shall not be less than 2.00:1
 
2.00:1
 
2.86:1
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
 
$1,051 million
 
 
Asset coverage ratio
 
Asset coverage ratio shall not be less than 2.10:1
 
2.10:1
 
2.86:1
 
 
Interest coverage ratio
 
Interest coverage ratio shall not be less than 2.50:1
 
2.50:1
 
3.68:1
 ___________ 
(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 March 31, 2013. 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 June 30, 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.
 
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 June 30, 2013

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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

 
 
 
 
 
 
 
 
 
 
 
LIBOR + 2.75%
 
 
6/20/2013
 
Amended credit facility
 
 
150 million
 
 

 
$
64 million
(1)
 
$
60 million

 
$
4 million
 
LIBOR (5) + 2.50%
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
 
 
445 million
 
 
0.3 million

 
 
 445 million
 
 
 
156 million

 
 
 289 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

 
 
79 million
(1)
 
 

 
 
79 million
 
LIBOR (5) + 2.25%
___________
(1)
Availability to increase upon our decision to further collateralize the facility.
(2)
LIBOR plus 3.0% 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. 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 June 30, 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

72


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 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 canceled and no longer outstanding under the Indenture. During the nine months ended June 30, 2013, we did not repurchase any of the Convertible Notes in the open market.
 
For the three and nine months ended June 30, 2013, we recorded interest expense of $1.7 million and $5.1 million, respectively, related to the Convertible Notes.
As of June 30, 2013, there were $115.0 million Convertible Notes outstanding, which had a fair value of $121.3 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. 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. The 2024 Notes are listed 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 canceled and no longer outstanding under the 2024 Notes Indenture. During the nine months ended June 30, 2013, we did not repurchase any of the 2024 Notes in the open market.
For the three and nine months ended June 30, 2013, we recorded interest expense of $1.2 million and $3.3 million, respectively, related to the 2024 Notes.
As of June 30, 2013, there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.3 million.
2028 Notes
In April and May 2013, we issued $86.3 million in aggregate principal amount of our 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.
The 2028 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the second supplemental indenture, dated April 4, 2013 (collectively, the “2028 Notes Indenture”), between us and the Trustee. The 2028 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 2028 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 2028 Notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per annum. The 2028 Notes mature on April 30, 2028

73


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 2028 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FSCFL” with a par value of $25.00 per share.
The 2028 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, as well as covenants requiring us to provide financial information to the holders of the 2028 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 2028 Notes Indenture. We may repurchase the 2028 Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any 2028 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 2028 Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the 2028 Notes Indenture. During the nine months ended June 30, 2013, we did not repurchase any of the 2028 Notes in the open market.
For the three and nine months ended June 30, 2013, we recorded interest expense of $1.3 million related to the 2028 Notes.
As of June 30, 2013, there were $86.3 million 2028 Notes outstanding, which had a fair value of $81.9 million.
Our aggregate interest expense for the three and nine months ended June 30, 2013 was $9.2 million and $24.1 million, respectively.
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 June 30, 2013, our only off-balance sheet arrangements consisted of $147.5 million of unfunded commitments, which was comprised of $124.5 million to provide debt financing to certain of our portfolio companies and $23.0 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.

74



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

June 30, 2013
 
September 30, 2012
Drugtest, Inc.
$
20,000

 
$
4,000

Deltek, Inc.
10,000

 

RP Crown Parent, LLC
10,000

 

Pingora MSR Opportunity Fund I, LP (limited partnership interest)
9,891

 

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

Titan Fitness, LLC
5,000

 
3,500

First American Payment Systems, LP
5,000

 

Teaching Strategies, LLC
5,000

 

Adventure Interactive, Corp.
5,000

 

Enhanced Recovery Company, LLC
4,000

 
4,000

World 50, Inc.
4,000

 
4,000

InvestRx Corporation
3,700

 
5,000

Phoenix Brands Merger Sub LLC
3,429

 
4,071

2Checkout.com, Inc.
2,850

 

Reliance Communications, LLC
2,750

 

CPASS Acquisition Company
2,500

 
1,000

Charter Brokerage, LLC
2,400

 
7,353

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

 

Chicago Growth Partners III, LP (limited partnership interest)
2,000

 

Riverside Fund V, LP (limited partnership interest)
1,751

 
2,000

Sterling Capital Partners IV, LP (limited partnership interest)
1,619

 

Miche Bag, LLC
1,518

 
3,500

Tegra Medical, LLC
1,500

 
1,500

Milestone Partners IV, LP (limited partnership interest)
1,414

 
1,343

BMC Acquisition, Inc.
1,215

 
900

Ansira Partners, Inc.
1,190

 
1,190

Psilos Group Partners IV, LP (limited partnership interest)
1,000

 
1,000

Genoa Healthcare Holdings, LLC
1,000

 

Discovery Practice Management, Inc.
900

 
2,600

Garretson Firm Resolution Group, Inc.
844

 

Bunker Hill Capital II (QP), LP (limited partnership interest)
786

 
934

ACON Equity Partners III, LP (limited partnership interest)
768

 
753

Riverlake Equity Partners II, LP (limited partnership interest)
638

 
760

HealthDrive Corporation
621

 
750

RCP Direct, LP (limited partnership interest)
524

 
615

Baird Capital Partners V, LP (limited partnership interest)
351

 
513

Riverside Fund IV, LP (limited partnership interest)
269

 
323

Welocalize, Inc.

 
10,000

Traffic Solutions Holdings, Inc.

 
5,000

Rail Acquisition Corp.

 
6,165

Cardon Healthcare Network, LLC

 
3,000

Eagle Hospital Physicians, Inc.

 
1,400

Specialty Bakers, LLC

 
750

Advanced Pain Management Holdings, Inc.

 
400

Saddleback Fence and Vinyl Products, Inc.

 
100

Total
$
147,533

 
$
102,525




75



Contractual Obligations
The following table reflects information pertaining to debt outstanding under the SBA debentures payable, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes, our 2024 Notes and our 2028 Notes: 
 
 
 
 
 
 
 
 
 
Debt Outstanding as of
September 30, 2012
 
Debt Outstanding as of
June 30, 2013
 
Weighted average debt
outstanding for the
nine months ended
June 30, 2013
 
Maximum debt outstanding
 for the nine months ended
June 30, 2013
SBA debentures
$
150,000

 
$
181,750

 
$
173,090

 
$
181,750

Wells Fargo facility
60,251

 
60,000

 
51,467

 
114,713

ING facility
141,000

 
156,000

 
115,513

 
185,000

Sumitomo facility

 

 
6,789

 
82,339

Convertible Notes
115,000

 
115,000

 
115,000

 
115,000

2024 Notes

 
75,000

 
70,055

 
75,000

2028 Notes

 
86,250

 
26,936

 
86,250

Total debt
$
466,251

 
$
674,000

 
$
558,850

 
$
771,750

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, our 2024 Notes and our 2028 Notes: 
 
Payments due by period as of June 30, 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
60,000

 

 
60,000

 

 

Interest due on Wells Fargo facility
4,562

 
1,617

 
2,945

 

 

ING facility
156,000

 

 

 
156,000

 

Interest due on ING facility
16,015

 
4,680

 
9,360

 
1,975

 

Sumitomo facility

 

 

 

 

Interest due on Sumitomo facility

 

 

 

 

Convertible Notes
115,000

 

 
115,000

 

 

Interest due on Convertible Notes
17,037

 
6,181

 
10,856

 

 

2024 Notes
75,000

 

 

 

 
75,000

Interest due on 2024 Notes
49,978

 
4,406

 
8,813

 
8,813

 
27,946

2028 Notes
86,250

 

 

 

 
86,250

Interest due on 2028 Notes
78,417

 
5,283

 
10,566

 
10,566

 
52,002

Total
$
895,134

 
$
28,875

 
$
231,118

 
$
190,913

 
$
444,228

 

76





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 tax rules; however, we incurred a de minimis U.S. federal excise tax for calendar year 2010. We did not incur a federal excise tax for calendar years 2011 and 2012 and do not expect to incur a federal excise tax for the calendar year 2013. We may incur a federal excise tax in future years.
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 and debt instruments. 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

77



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 nine months ended June 30, 2013, we incurred fees of $15.5 million and $44.5 million, respectively, under the investment advisory agreement. For the three and nine months ending June 30, 2013, the Investment Adviser voluntarily waived the portion of the base management fee attributable to certain new investments that closed prior to period end, which resulted in waivers of $1.0 million and $2.3 million, respectively.
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. 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 nine months ended June 30, 2013, we have incurred expenses of $1.2 million and $3.9 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 will 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 will have no legal right to the “Fifth Street” name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, its managing member.
Recent Developments
On July 17, 2013, Fifth Street Senior Floating Rate Corp. (“FSFR”) raised $100 million in an initial public offering of shares of its common stock. Our investment adviser, administrator, executive officers and certain of our directors serve in substantially similar capacities for FSFR. FSFR is a business development company that invests primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, that pay interest at rates which are determined periodically on the basis of a floating base lending rate, made to private middle market companies whose debt is rated below investment grade. FSFR's investment objective is to maximize its portfolio's total return by generating current income from its debt investments while seeking to preserve its capital. In focusing on senior loans that bear interest on the basis of a floating base lending rate, FSFR's primary investment focus differs from our more general focus on debt and equity investments in small and mid-sized companies. However, there may be overlap in terms of our targeted investments and our investment adviser has adopted an allocation policy to govern the allocation of investment opportunities between us, FSFR and other investment funds it may manage.
On August 5, 2013, our Board of Directors declared the following dividends:
$0.0958 per share, payable on September 30, 2013 to stockholders of record on September 13, 2013;
$0.0958 per share, payable on October 31, 2013 to stockholders of record on October 15, 2013; and
$0.0958 per share, payable on November 29, 2013 to stockholders of record on November 15, 2013.
On August 6, 2013, we amended the terms of the ING facility, to, among other things:
increase the size of the facility to $480 million from $445 million;
reduce the pricing by 50 basis points to LIBOR plus 2.25% per annum, with no LIBOR floor;
extend the period during which we may make and reinvest borrowings through August 6, 2017;
extend the maturity date to August 6, 2018 from November 30, 2016; and
increase the accordion feature to $800 million from $600 million, allowing for potential future expansion.
Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the Consolidated Financial Statements.
 

78


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.
As of June 30, 2013, 69.8% of our debt investment portfolio (at fair value) and 69.9% 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 June 30, 2013 and September 30, 2012 was as follows:
 
 
June 30, 2013
 
September 30, 2012
 
 
Fair Value
 
% of Floating
 Rate  Portfolio
 
Fair Value
 
% of Floating
 Rate  Portfolio
 
Under 1%
$
94,572

 
7.91
%
$
72,609

 
8.35
%
1% to under 2%
976,743

 
81.72
 
554,315

 
63.72
 
2% to under 3%
40,502

 
3.39
 
111,262

 
12.79
 
3% to under 4%
83,482

 
6.98
 
131,686

 
15.14
 
Total
$
1,195,299

 
100.00
%
$
869,872

 
100.00
%
Based on our Consolidated Statement of Assets and Liabilities as of June 30, 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)
500
 
$
43,700

 
$
(10,800
)
 
$
32,900

400
 
31,700

 
(8,600
)
 
23,100

300
 
19,800

 
(6,500
)
 
13,300

200
 
8,400

 
(4,300
)
 
4,100

100
 
600

 
(2,200
)
 
(1,600
)
__________
(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 June 30, 2013 and September 30, 2012:
 
 
June 30, 2013
 
September 30, 2012
 
Interest Bearing
 Cash and Investments
 
Borrowings
 
Interest Bearing
 Cash and Investments
 
Borrowings
Money market rate
$
59,618

 
$

 
$
74,393

 
$

Prime rate
3,783

 

 
6,832

 
60,000

LIBOR
 
 
 
 
 
 
 
1-month
30,587

 
216,000

 
32,753

 
141,251

3-month
1,165,239

 

 
822,867

 

Fixed rate
515,618

 
458,000

 
377,522

 
265,000

Total
$
1,774,845

 
$
674,000

 
$
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

79



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 June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

80



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 nine months ended June 30, 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 and in Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
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 June 30, 2013, we issued a total of 351,140 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 $3.6 million.
Item 5.    Other Information.
On August 6, 2013, we amended the terms of the ING facility, to, among other things:
increase the size of the facility to $480 million from $445 million;
reduce the pricing by 50 basis points to LIBOR plus 2.25% per annum, with no LIBOR floor;
extend the period during which we may make and reinvest borrowings through August 6, 2017;
extend the maturity date to August 6, 2018 from November 30, 2016; and
increase the accordion feature to $800 million from $600 million, allowing for potential future expansion.
The foregoing description of the amendment to the ING facility does not purport to be complete and is qualified in its entirety by reference to the full text of Amendment No. 5 to Amended and Restated Senior Secured Revolving Credit Agreement filed as Exhibit 10.2 to this Form 10-Q and incorporated by reference herein.


81



Item 6.    Exhibits.

 
 
 
Exhibit
Number
  
Description of Exhibit
 
 
10.1
  
Amendment No. 6 to the Amended and Restated Loan and Servicing Agreement among Fifth Street Finance Corp., Fifth Street Funding, LLC, Wells Fargo Securities, LLC and Wells Fargo Bank, N.A., dated as of June 20, 2013 (Incorporated by reference to Exhibit 10.1 filed with Fifth Street Finance Corp.’s Form 8-K (File No. 001-33901) filed on June 24, 2013).
 
 
10.2*
  
Amendment No. 5 to Amended and Restated Senior Secured Revolving Credit Agreement among Fifth Street Finance Corp., FSFC Holdings, Inc., Fifth Street Fund of Funds LLC, ING Capital LLC, and the lenders party thereto, dated as of August 6, 2013.
 
 
10.3*
 
Incremental Assumption Agreement among Fifth Street Finance Corp., FSFC Holdings, Inc., Fifth Street Fund of Funds LLC, ING Capital LLC and Deutsche Bank Trust Company Americas, dated as of April 15, 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


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.
Date: August 7, 2013
 
 
 
By:
/s/    Leonard M. Tannenbaum
 
 
Leonard M. Tannenbaum
 
 
Chairman and Chief Executive Officer
 
 
 
Date: August 7, 2013
By:
/s/    Alexander C. Frank
 
 
Alexander C. Frank
 
 
Chief Financial Officer


83



EXHIBIT INDEX
Exhibit
Number
  
Description of Exhibit
 
 
10.1
  
Amendment No. 6 to the Amended and Restated Loan and Servicing Agreement among Fifth Street Finance Corp., Fifth Street Funding, LLC, Wells Fargo Securities, LLC and Wells Fargo Bank, N.A., dated as of June 20, 2013 (Incorporated by reference to Exhibit 10.1 filed with Fifth Street Finance Corp.’s Form 8-K (File No. 001-33901) filed on June 24, 2013).

 
 
10.2*
  
Amendment No. 5 to Amended and Restated Senior Secured Revolving Credit Agreement among Fifth Street Finance Corp., FSFC Holdings, Inc., Fifth Street Fund of Funds LLC, ING Capital LLC, and the lenders party thereto, dated as of August 6, 2013.

 
 
 
10.3*
 
Incremental Assumption Agreement among Fifth Street Finance Corp., FSFC Holdings, Inc., Fifth Street Fund of Funds LLC, ING Capital LLC and Deutsche Bank Trust Company Americas, dated as of April 15, 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).
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Filed herewith


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