OCSL 10-Q Quarterly Report March 31, 2014 | Alphaminr
Oaktree Specialty Lending Corp
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OCSL 10-Q Quarter ended March 31, 2014

Balance Sheet
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Income Statement
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10-Q 1 fsc-20140331x10q.htm 10-Q FSC- 2014.03.31-10Q

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 March 31, 2014
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, 12 th 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 139,137,757 shares of common stock outstanding as of May 7, 2014.







FIFTH STREET FINANCE CORP.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014
TABLE OF CONTENTS
Item 5.




PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements.
Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
March 31,
2014
September 30,
2013
ASSETS
Investments at fair value:
Control investments (cost March 31, 2014: $273,078; cost September 30, 2013: $207,518)
$
283,614

$
215,502

Affiliate investments (cost March 31, 2014: $38,624; cost September 30, 2013: $29,807)
41,715

31,932

Non-control/Non-affiliate investments (cost March 31, 2014: $2,347,502; cost September 30, 2013: $1,622,326)
2,358,969

1,645,612

Total investments at fair value (cost March 31, 2014: $2,659,204; cost September 30, 2013: $1,859,651)
2,684,298

1,893,046

Cash and cash equivalents
45,396

147,359

Interest and fees receivable
18,950

10,379

Due from portfolio company
6,095

1,814

Receivables from unsettled transactions
14,788

—

Deferred financing costs
22,244

19,548

Other assets
544

187

Total assets
$
2,792,315

$
2,072,333

LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable, accrued expenses and other liabilities
$
4,089

$
1,166

Base management fee payable
13,501

9,625

Incentive fee payable
8,500

7,175

Due to FSC CT, Inc.
2,008

840

Interest payable
4,907

2,939

Payables from unsettled transactions
3,937

35,716

Amounts payable to syndication partners
8,028

—

Advances received from portfolio companies
7,729

—

Credit facilities payable
576,681

188,000

SBA debentures payable
225,000

181,750

Unsecured convertible notes payable
115,000

115,000

Unsecured notes payable
409,878

161,250

Secured borrowings at fair value (proceeds of $47,750 and $0 at March 31, 2014 and September 30, 2013, respectively)
47,760

—

Total liabilities
1,427,018

703,461

Commitments and contingencies (Note 3)
Net assets:
Common stock, $0.01 par value, 250,000 shares authorized; 139,138 and 139,041 shares issued and outstanding at March 31, 2014 and September 30, 2013, respectively
1,391

1,390

Additional paid-in-capital
1,510,547

1,509,546

Net unrealized appreciation on investments and secured borrowings
25,084

33,395

Net realized loss on investments and interest rate swap
(152,925
)
(154,591
)
Accumulated overdistributed net investment income

(18,800
)
(20,868
)
Total net assets (equivalent to $9.81 and $9.85 per common share at March 31, 2014 and September 30, 2013, respectively) (Note 12)
1,365,297

1,368,872

Total liabilities and net assets
$
2,792,315

$
2,072,333

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
March 31, 2014
Three months
ended
March 31, 2013
Six months
ended
March 31, 2014

Six months
ended
March 31, 2013

Interest income:
Control investments
$
3,194

$
876

$
5,613

$
1,758

Affiliate investments
1,098

725

1,864

1,309

Non-control/Non-affiliate investments
49,699

36,019

94,995

69,473

Interest on cash and cash equivalents
3

5

6

8

Total interest income
53,994

37,625

102,478

72,548

PIK interest income:
Control investments
2,542

108

4,950

216

Affiliate investments
207

308

542

765

Non-control/Non-affiliate investments
2,721

3,631

5,592

6,786

Total PIK interest income
5,470

4,047

11,084

7,767

Fee income:
Control investments
1,967

114

2,534

213

Affiliate investments
12

12

181

24

Non-control/Non-affiliate investments
10,508

11,800

26,909

24,483

Total fee income
12,487

11,926

29,624

24,720

Dividend and other income:
Non-control/Non-affiliate investments
181

1,089

276

1,435

Total dividend and other income
181

1,089

276

1,435

Total investment income
72,132

54,687

143,462

106,470

Expenses:
Base management fee
13,735

8,891

25,794

16,937

Incentive fee
8,500

7,001

17,554

13,640

Professional fees
887

784

1,912

1,972

Board of Directors fees
141

122

296

251

Interest expense
12,833

7,761

23,046

14,917

Administrator expense
538

670

1,391

1,600

General and administrative expenses
1,499

1,455

3,252

2,594

Total expenses
38,133

26,684

73,245

51,911

Base management fee waived
(234
)
(1,300
)
(234
)
(1,300
)
Net expenses
37,899

25,384

73,011

50,611

Net investment income
34,233


29,303

70,451

55,859

Unrealized appreciation (depreciation) on investments:
Control investments
2,132

4,693

2,552

3,471

Affiliate investments
182

93

965

(63
)
Non-control/Non-affiliate investments
(4,897
)
(2,106
)
(11,818
)
(10,067
)
Net unrealized appreciation (depreciation) on investments
(2,583
)
2,680

(8,301
)
(6,659
)
Net unrealized appreciation on secured borrowings
(10
)
—

(10
)
—

Realized gain (loss) on investments:
Non-control/Non-affiliate investments
(1,540
)
(149
)
1,666

478

Net realized gain (loss) on investments
(1,540
)
(149
)
1,666

478

Net increase in net assets resulting from operations
$
30,100

$
31,834

$
63,806

$
49,678

Net investment income per common share — basic
$
0.25

$
0.28

$
0.51

$
0.56

Earnings per common share — basic
$
0.22

$
0.30

$
0.46

$
0.49

Weighted average common shares outstanding — basic
139,138


106,022

139,132

100,394


Net investment income per common share — diluted
$
0.24

$
0.27

$
0.50

$
0.54

Earnings per common share — diluted
$
0.21

$
0.29

$
0.45

$
0.48

Weighted average common shares outstanding — diluted
146,928

113,812

146,922

108,266

Distributions per common share
$
0.25

$
0.29

$
0.49

$
0.58

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)
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Operations:
Net investment income
$
70,451

$
55,859

Net unrealized depreciation on investments
(8,301
)
(6,659
)
Net unrealized appreciation on secured borrowings
(10
)
—

Net realized gains on investments
1,666

478

Net increase in net assets resulting from operations
63,806

49,678

Stockholder transactions:
Distributions to stockholders from ordinary income
(68,383
)
(58,063
)
Net decrease in net assets from stockholder transactions
(68,383
)
(58,063
)
Capital share transactions:
Issuance of common stock, net
—

151,309

Issuance of common stock under dividend reinvestment plan
6,189

4,467

Repurchases of common stock under stock repurchase program
(406
)
—

Repurchases of common stock under dividend reinvestment program
(4,781
)
—

Net increase in net assets from capital share transactions
1,002

155,776

Total increase (decrease) in net assets
(3,575
)
147,391

Net assets at beginning of period
1,368,872

903,570

Net assets at end of period
$
1,365,297

$
1,050,961

Net asset value per common share
$
9.81

$
9.90

Common shares outstanding at end of period
139,138

106,209

See notes to Consolidated Financial Statements.

3
Fifth Street Finance Corp.
Consolidated Statements of Cash Flows
(in thousands, except per share amounts)
(unaudited)



Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Cash flows from operating activities:
Net increase in net assets resulting from operations
$
63,806

$
49,678

Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities:
Net unrealized depreciation on investments
8,301

6,659

Net unrealized appreciation on secured borrowings
10

—

Net realized gains on investments
(1,666
)
(478
)
PIK interest income
(11,084
)
(7,767
)
Recognition of fee income
(29,624
)
(24,720
)
Accretion of original issue discount on investments
(388
)
(283
)
Amortization of deferred financing costs
3,441

2,623

Changes in operating assets and liabilities:
Fee income received
28,922

21,148

Increase in interest and fees receivable
(8,298
)
(2,596
)
(Increase) decrease in due from portfolio company
(4,281
)
2,437

(Increase) decrease in receivables from unsettled transactions
(14,788
)
1,750

(Increase) decrease in other assets
187

(680
)
Increase in accounts payable, accrued expenses and other liabilities
2,925

900

Increase in base management fee payable
3,876

1,018

Increase in incentive fee payable
1,325

1,422

Increase (decrease) in due to FSC CT, Inc.
1,168

(378
)
Increase (decrease) in interest payable
1,968

(1,877
)
Decrease in payables from unsettled transactions
(31,780
)
(16
)
Increase in amounts payable to syndication partners
8,028

—

Increase in advances received from portfolio companies
7,729

—

Purchases of investments and net revolver activity
(1,108,320
)
(735,531
)
Principal payments received on investments (scheduled payments)
23,992

22,328

Principal payments received on investments (payoffs)
106,710

198,463

PIK interest income received in cash
5,714

4,598

Proceeds from the sale of investments
185,916

54,461

Net cash used by operating activities
(756,211
)
(406,841
)
Cash flows from financing activities:
Distributions paid in cash
(62,194
)
(53,595
)
Borrowings under SBA debentures payable
43,250

31,750

Borrowings under credit facilities
804,338


575,548

Repayments of borrowings under credit facilities
(415,657
)

(403,251
)
Proceeds from the issuance of unsecured notes
244,403

72,465

Proceeds from the issuance of common stock
—

151,667

Proceeds from secured borrowings
47,750

—

Repurchases of common stock under stock repurchase program
(406
)
—

Repurchases of common stock under dividend reinvestment plan
(4,781
)
—

Deferred financing costs paid
(1,913
)
(3,445
)
Offering costs paid
(542
)
(522
)
Net cash provided by financing activities
654,248

370,617

Net decrease in cash and cash equivalents
(101,963
)
(36,224
)
Cash and cash equivalents, beginning of period
147,359

74,393

Cash and cash equivalents, end of period
$
45,396

$
38,169

Supplemental information:

Cash paid for interest
$
17,814

$
14,371

Non-cash financing activities:
Issuance of shares of common stock under dividend reinvestment plan
$
6,189

$
4,467

See notes to Consolidated Financial Statements.

4
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(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 12/31/2016
$
14,716

$
14,712

$
14,769

LC Facility, 8.5% cash due 12/31/2016 (10)
(1
)
—

746,114 Series A Preferred Units
13,600

16,705

746,114 Class A Common Stock Units
5,316

9,916

33,627

41,390

TransTrade Operators, Inc. (9)
Air freight and logistics
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
14,656

14,656

11,494

First Lien Revolver, 8% cash due 5/31/2016

—

—

596.67 Series A Common Units in TransTrade Holding LLC
—

—

5,200,000 Preferred Units in TransTrade Holding LLC
5,200

—

19,856

11,494

HFG Holdings, LLC
Specialized finance
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
95,028

95,028

95,127

860,000 Class A Units (12)
22,347

27,874

117,375

123,001

First Star Aviation LLC
Airlines
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
33,862

33,862

33,966

10,104,401 Common Units
10,105

13,393

43,967

47,359

First Star Speir Aviation 1 Limited
Airlines
First Lien Term Loan, 9% cash due 7/30/2018 (12)
20,600

20,600

20,600

1,087,445 Common Units (12)
1,087

1,087

21,687

21,687

First Star Bermuda Aviation Limited
Airlines
First Lien Term Loan, 9% cash 3% PIK due 8/19/2018 (12)
11,801

11,801

11,801

4,256,042 Common Units (12)
4,256

4,256

16,057

16,057

Eagle Hospital Physicians, LLC
Healthcare services
First Lien Term Loan A, 8% PIK due 8/1/2016
11,608

11,608

11,576

First Lien Term Loan B, 8.1% PIK due 8/1/2016
3,168

3,168

3,167

First Lien Revolver, 8% cash due 8/1/2016
1,633

1,633

1,633

4,100,000 Class A Common Units
4,100

6,250

20,509

22,626

Total Control Investments (20.8% of net assets)
$
273,078

$
283,614

Affiliate Investments (4)
Caregiver Services, Inc.
Healthcare services
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
$
9,053

$
9,053

$
9,020

1,080,399 shares of Series A Preferred Stock
1,080

3,578

10,133

12,598

AmBath/ReBath Holdings, Inc. (9)
Home improvement retail
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016 (14)
2,522

2,511

2,547

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
26,005

25,980

25,979

4,668,788 Shares of Preferred Stock
—

591

28,491

29,117

Total Affiliate Investments (3.1% of net assets)
$
38,624

$
41,715

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

$
211

43

211

Thermoforming Technology Group LLC (formerly Capital Equipment Group, Inc.)
Industrial machinery
2.28% membership interest
849

837

849

837

See notes to Consolidated Financial Statements.

5
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

HealthDrive Corporation (9)
Healthcare services
First Lien Term Loan A, 10% cash due 7/17/2014
$
4,227

$
4,225

$
4,150

First Lien Term Loan B, 12% cash 1% PIK due 7/17/2014
11,008

11,008

11,013

First Lien Revolver, 12% cash due 7/17/2014
2,266

2,266

2,267

17,499

17,430

Cenegenics, LLC
Healthcare services
First Lien Term Loan, 9.75% cash due 9/30/2019
32,750

32,735

32,795

414,419 Common Units (6)
598

1,252

33,333

34,047

Riverlake Equity Partners II, LP
Multi-sector holdings
1.78% limited partnership interest (12)
436

340

436

340

Riverside Fund IV, LP
Multi-sector holdings
0.34% limited partnership interest (6)(12)
678

620

678

620

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 12/31/2015 (14)
5,446

5,414

5,449

First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 12/31/2015 (14)
9,496

9,453

9,507

14,867

14,956

Enhanced Recovery Company, LLC
Diversified support services
First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
11,250

11,185

11,246

First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015 (14)
16,014

15,947

15,966

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (14)
2,500

2,476

2,500

29,608

29,712

Specialty Bakers LLC
Food distributors
First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015 (14)
2,906

2,821

2,905

First Lien Term Loan B, LIBOR+11% (2.5% floor) cash due 9/15/2015 (14)
11,000

10,916

10,998

First Lien Revolver, LIBOR+8.5% cash due 9/15/2015 (14)
4,000

3,969

4,000

17,706

17,903

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

7,438

3,393

7,438

Miche Bag, LLC (9)
Apparel, accessories & luxury goods
First Lien Term Loan B, LIBOR+10% (3% floor) cash 3% PIK due 12/7/2015 (14)
17,755

16,778

14,316

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015 (10)(14)
(25
)
—

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

—

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

—

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

—

19,389

14,316

Bunker Hill Capital II (QP), LP
Multi-sector holdings
0.51% limited partnership interest (12)
361

263

361

263

Drugtest, Inc. (9)
Human resources & employment services
First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 6/27/2018 (14)
25,487

25,372

25,652

First Lien Term Loan B, LIBOR+10% (1% floor) cash 1.5% PIK due 6/27/2018 (14)
13,327

13,261

13,301

Acquisition Line, LIBOR+5.75% cash due 6/27/2015 (14)
9,100

9,100

9,100

First Lien Revolver, LIBOR+6% (1% floor) cash due 6/27/2018 (10)(14)


(32
)
—

47,701

48,053


See notes to Consolidated Financial Statements.


6
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

Physicians Pharmacy Alliance, Inc. (9)
Healthcare services
First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016 (14)
$
11,330

$
11,168

$
11,297

11,168

11,297

Cardon Healthcare Network, LLC
Diversified support services
69,487 Class A Units
265

452

265

452

Phoenix Brands Merger Sub LLC (9)
Household products
Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (15)
5,197

5,133

5,152

Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
22,030

21,786

21,306

Senior Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016 (15)
3,000

2,938

3,000

29,857

29,458

CCCG, LLC (9)
Oil & gas equipment services
First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017 (15)
34,223

33,850

33,510

First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/31/2014 (15)
—

—

33,850

33,510

Maverick Healthcare Group, LLC
Healthcare equipment
First Lien Term Loan A, LIBOR+5.5% (1.75% floor) cash due 12/31/2016 (16)
16,894

16,208

16,924

First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 12/31/2016 (16)
38,700

38,393

38,648

CapEx Line, LIBOR+5.75% (1.75% floor) cash due 12/31/2016 (16)
1,266

1,143

1,266

55,744

56,838

Refac Optical Group
Specialty stores
First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (17)
23,017

22,857

22,838

First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 9/30/2018 (17)
33,111

32,819

32,623

First Lien Term Loan C, 12% cash due 12/31/2014
5,528

5,528

5,535

First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (17)
4,400

4,336

4,400

1,550.9435 Shares of Common Stock in Refac Holdings, Inc.
1

—

500.9435 Shares of Series A-2 Preferred Stock in Refac Holdings, Inc.
305

—

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

546

66,845

65,942

Baird Capital Partners V, LP
Multi-sector holdings
0.40% limited partnership interest (12)
649

708

649

708

Charter Brokerage, LLC
Oil & gas equipment services
Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (16)
28,153

28,087

28,162

Subordinated Term Loan, 11.75% cash 2% PIK due 10/10/2017
12,096

12,051

12,007

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (16)
533

500

533

40,638

40,702

Discovery Practice Management, Inc. (9)
Healthcare services
First Lien Term Loan, LIBOR+9.75% cash due 11/4/2018 (14)
20,308

20,230

20,251

First Lien Revolver, LIBOR+6% cash due 11/4/2018 (14)
750

732

750

Capex Line, LIBOR+7% cash due 11/4/2018 (14)
250

250

250

21,212

21,251

Milestone Partners IV, LP
Multi-sector holdings
0.85% limited partnership interest (12)
709

756

709

756

Insight Pharmaceuticals LLC
Pharmaceuticals
Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017 (15)
13,517

13,452

13,561

13,452

13,561

National Spine and Pain Centers, LLC
Healthcare services
Subordinated Term Loan, 11% cash 1.6% PIK due 9/27/2017
29,500

29,344

29,666

317,282.97 Class A Units
317

377

29,661

30,043

RCPDirect, LP
Multi-sector holdings
0.91% limited partnership interest (6)(12)
750

897

750

897

See notes to Consolidated Financial Statements.

7
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

The MedTech Group, Inc. (9)
Healthcare equipment
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/7/2016 (15)
$
12,285

$
12,228

$
12,291

12,228

12,291

Digi-Star Acquisition Holdings, Inc.
Industrial machinery
Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017
16,571

16,496

16,657

264.37 Class A Preferred Units
115

117

2,954.87 Class A Common Units (6)
36

425

16,647

17,199

CPASS Acquisition Company
Internet software & services
First Lien Term Loan, LIBOR+9% (1.5% floor) cash 1% PIK due 11/21/2016 (14)
7,800

7,734

7,847

First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (14)
750

740

750

8,474

8,597

Genoa Healthcare Holdings, LLC
Pharmaceuticals
Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016 (15)
8,550

8,550

8,572

Subordinated Term Loan, 12% cash 2% PIK due 6/1/2017
13,104

13,032

13,258

Senior Revolver, LIBOR+5.25% (1.25% floor) cash due 12/1/2016 (15)
167

167

167

500,000 Preferred Units (6)
261

289

500,000 Class A Common Units
25

804

22,035

23,090

ACON Equity Partners III, LP
Multi-sector holdings
0.13% limited partnership interest (6)(12)
518

333

518

333

CRGT, Inc.
IT consulting & other services
Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018
27,149

26,983

27,646

26,983

27,646

Riverside Fund V, LP
Multi-sector holdings
0.48% limited partnership interest (12)
418

354

418

354

World 50, Inc.
Research & consulting services
First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (18)
10,355

10,268

10,464

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

6,947

7,037

Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)(18)
(38
)
—

17,177

17,501

Nixon, Inc.
Apparel, accessories & luxury goods
First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018
8,960

8,894

8,985

8,894

8,985

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

14,425

14,506

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

403

17,391 Shares of Common Stock
187

50

14,925

14,959

BMC Acquisition, Inc.
Diversified financial services
500 Series A Preferred Shares
499

532

50,000 Common Shares
1

—

500

532

Ansira Partners, Inc. (9)
Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (15)
10,046

9,992

9,993

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)(15)
(6
)
—

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

298

10,236

10,291

Edmentum, Inc.
Education services
Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019 (15)
17,000

17,000

17,156

17,000

17,156

See notes to Consolidated Financial Statements.

8
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

I Drive Safely, LLC
Education services
First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017 (17)
$
27,000

$
26,996

$
27,479

First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)(17)
(1
)
—

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

655

27,745

28,134

Yeti Acquisition, LLC (9)
Leisure products
First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (14)
17,856

17,849

18,022

First Lien Term Loan B, LIBOR+11.25% (1.25% floor) cash 1% PIK due 6/15/2017 (14)
12,000

11,997

12,082

First Lien Revolver, LIBOR+8% (1.25% floor) cash due 6/15/2017 (14)
1,000

997

1,000

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

2,835

32,343

33,939

Specialized Education Services, Inc.
Education services
Senior Term Loan, LIBOR+7% (1.5% floor) cash due 6/28/2017 (15)
8,795

8,795

8,758

Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018
17,974

17,974

18,069

26,769

26,827

Vitalyst Holdings, Inc. (formerly known as PC Helps Support, LLC)
IT consulting & other services
Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
18,947

18,947

19,033

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

573

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

—

19,697

19,606

Olson + Co., Inc. (9)
Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (15)
13,506

13,506

13,510

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (15)
—

—

13,506

13,510

Beecken Petty O’Keefe Fund IV, L.P.
Multi-sector holdings
0.5% limited partnership interest (12)
391

370

391

370

Deltek, Inc. (9)
IT consulting & other services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019 (15)
25,000

25,000

25,463

First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017 (15)


—

—

25,000

25,463

First American Payment Systems, LP
Diversified support services
Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019 (15)
25,000

25,000

25,486

First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (15)


—

—

25,000

25,486

Dexter Axle Company
Auto parts & equipment
1,500 Common Shares in Dexter Axle Holding Company
1,500

2,281

1,500

2,281

SumTotal Systems, LLC
Internet software & services
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 5/16/2019 (15)
20,000

20,000

19,973

20,000

19,973

Comprehensive Pharmacy Services, LLC
Pharmaceuticals
Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
14,255

14,255

14,563

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

2,578

16,255

17,141

Reliance Communications, LLC
Internet software & services
First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017 (14)
21,094

21,075

21,092

First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017 (14)
11,333

11,323

11,335

First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017 (10)(14)


(4
)
—

32,394

32,427

Garretson Firm Resolution Group, Inc.
Diversified support services
First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018 (15)
7,078

7,078

7,089

Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019
5,057

5,057

5,122

First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017 (15)
606

606

606

See notes to Consolidated Financial Statements.

9
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

Garretson Firm Resolution Group, Inc. (continued)
4,950,000 Preferred Units in GRG Holdings, LP
$
495

$
288

50,000 Common Units in GRG Holdings, LP
5

—

13,241

13,105

Teaching Strategies, LLC
Education services
First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017 (18)
$
59,350

59,329

59,985

First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017 (18)
27,902

27,893

28,093

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (18)
3,000

2,997

3,000

90,219

91,078

Omniplex World Services Corporation
Security & alarm services
Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
12,704

12,704

12,732

500 Class A Common Units in Omniplex Holdings Corp.
500

553

13,204

13,285

Dominion Diagnostics, LLC
Healthcare services
Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
15,906

15,906

15,884

15,906

15,884

Affordable Care, Inc.
Healthcare services
Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019 (15)
21,500

21,500

21,822

21,500

21,822

Aderant North America, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019 (15)
7,000

7,000

7,048

7,000

7,048

AdVenture Interactive, Corp.
Advertising
First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (16)
90,989

90,945

91,341

First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)(16)
(2
)
—

2,000 Preferred Units of AVI Holdings, L.P. (6)
1,811

1,295

92,754

92,636

CoAdvantage Corporation
Human resources & employment services
Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
14,800

14,800

15,014

50,000 Class A Units in CIP CoAdvantage Investments LLC
557

603

15,357

15,617

EducationDynamics, LLC
Education services
Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017
11,400

11,400

11,396

11,400

11,396

Sterling Capital Partners IV, L.P.
Multi-sector holdings
0.20% limited partnership interest (6)(12)
602

575

602

575

Devicor Medical Products, Inc.
Healthcare equipment
First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015 (15)
9,238

9,238

9,228

9,238

9,228

RP Crown Parent, LLC
Application software
First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (10)(15)


(546
)
—

(546
)
—

Advanced Pain Management Holdings, Inc.
Healthcare services
First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018 (15)
24,000

24,000

24,392

24,000

24,392

Rocket Software, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019 (15)
10,475

10,439

10,461

10,439

10,461

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

15,000

15,070

15,000

15,070

See notes to Consolidated Financial Statements.

10
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

ISG Services, LLC
Diversified support services
First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018 (15)
$
93,831

$
93,769

$
93,623

First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018 (15)
4,000

3,993

4,000

97,762

97,623

Joerns Healthcare, LLC (9)
Healthcare services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018 (15)
20,000

20,000

19,923

20,000

19,923

Pingora MSR Opportunity Fund I, LP
Thrift & mortgage finance
1.90% limited partnership interest (12)
663

562

663

562

Chicago Growth Partners III, LP
Multi-sector holdings
0.50% limited partnership interest (11)(12)
—

—

—

—

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

13,250

13,468

13,250

13,468

H.D. Vest, Inc.
Specialized finance
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 6/18/2019 (16)
8,750

8,750

8,844

8,750

8,844

2Checkout.com, Inc.
Diversified support services
First Lien Revolver, LIBOR+5% cash due 6/26/2016 (17)
2,150

2,148

2,150

2,148

2,150

Meritas Schools Holdings, LLC
Education services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 6/25/2019 (15)
9,918

9,918

9,946

9,918

9,946

Personable Holdings, Inc.
Other diversified financial services
First Lien Term Loan, LIBOR+6% (1.25% floor) cash due 5/16/2018 (15)
10,828

10,828

10,869

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 5/16/2018 (15)
2,267

2,267

2,267

13,095

13,136

Royal Adhesives and Sealants, LLC
Specialty chemicals
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019 (15)
13,500

13,500

13,512

13,500

13,512

Bracket Holding Corp.
Healthcare services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (15)
32,000

32,000

31,019

50,000 Common Units in AB Group Holdings, LP
500

201

32,500

31,220

Salus CLO 2012-1, Ltd.
Asset management & custody banks
Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)(19)
7,500

7,500

7,500

Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)(19)
22,000

22,000

22,000

29,500

29,500

HealthEdge Software, Inc.
Application software
Second Lien Term Loan, 12% cash due 9/30/2018
17,500

17,298

17,471

482,453 Series A-3 Preferred Stock Warrants (exercise price $1.450918)
213

213

17,511

17,684

InMotion Entertainment Group, LLC
Consumer electronics
First Lien Term Loan, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
23,813

23,795

23,902

First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 10/1/2018 (14)
3,550

3,547

3,550

CapEx Line, LIBOR+7.75% (1.25% floor) cash due 10/1/2018 (14)
272

268

272

1,000,000 Class A Units in InMotion Entertainment Holdings, LLC
1,000

1,039

28,610

28,763

BMC Software Finance, Inc.
Application software
First Lien Revolver, LIBOR+4% (1% floor) cash due 9/10/2018 (20)

—

—

—

—

See notes to Consolidated Financial Statements.

11
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

CT Technologies Intermediate Holdings, Inc.
Healthcare services
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/4/2020 (15)
$
12,000

$
12,000

$
12,009

12,000

12,009

Thing5, LLC
Data processing & outsourced services
First Lien Term Loan, LIBOR+7% (1% floor) cash due 10/11/2018 (15)
45,000

44,978

45,104

First Lien Revolver, LIBOR+7% (1% floor) cash due 10/11/2018 (10)(15)
(3
)
—

2,000,000 Common Units in T5 Investment Vehicle, LLC (6)
2,000

2,229

46,975

47,333

Epic Health Services, Inc.
Healthcare services
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 10/18/2019 (15)
25,000

25,000

25,038

25,000

25,038

Kason Corporation
Industrial machinery
Subordinated Term Loan, 11.5% cash 1.75% PIK due 10/28/2019
5,645

5,645

5,646

450 Class A Preferred Units in Kason Investment, LLC
450

434

5,000 Class A Common Units in Kason Investment, LLC
50

—

6,145

6,080

First Choice ER, LLC
Healthcare services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
75,000

74,985

75,043

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 10/31/2018 (14)
7,000

6,998

7,000

First Lien Delayed Draw Term Loan, LIBOR+7.5% (1% floor) cash due 4/30/2015 (10)(14)

(33
)
—

81,950

82,043

SPC Partners V, LP
Multi-sector holdings
0.4% limited partnership interest (6)(12)
428

359

428

359

Systems Maintenance Services Holdings, Inc.
IT consulting & other services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/18/2020 (15)
24,000

24,000

24,027

24,000

24,027

Vandelay Industries Merger Sub, Inc.
Industrial machinery
Second Lien Term Loan, 10.75% cash 1% PIK due 11/12/2019
27,024

27,024

27,035

2,500,000 Class A Common Units in Vandelay Industries, LP
2,500

2,975

29,524

30,010

Vitera Healthcare Solutions, LLC
Healthcare technology
First Lien Term Loan, LIBOR+5% (1% floor) cash due 11/4/2020 (20)
4,988

4,988

4,989

Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 11/4/2021 (20)
8,000

8,000

7,999

12,988

12,988

Renaissance Learning, Inc.
Education services
Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 5/13/2021 (15)
16,000

16,000

16,053

16,000

16,053

SugarSync, Inc.
Internet software & services
First Lien Term Loan, LIBOR+10% (0.5% floor) cash due 11/18/2016 (14)
6,500

6,500

6,470

6,500

6,470

The Active Network, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021 (15)
13,600

13,600

13,631

13,600

13,631

OmniSYS Acquisition Corporation
Diversified support services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 11/21/2018 (21)
20,869

20,843

20,860

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 11/21/2018 (10)(21)

(3
)
—

100,000 Common Units in OSYS Holdings, LLC
1,000

1,015

21,840

21,875

Med-Data, Incorporated
Diversified support services
First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 11/22/2018 (17)
39,750

39,724

39,816

First Lien Revolver, LIBOR+7.25% (1% floor) cash due 11/22/2018 (10)(17)

(3
)
—

39,721

39,816


See notes to Consolidated Financial Statements


12
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)
Cost
Fair Value
All Web Leads, Inc.
Advertising
First Lien Term Loan, LIBOR+8% (1% floor) cash due 11/26/2018 (17)
$
50,433

$
50,407

$
50,430

First Lien Revolver, LIBOR+8% (1% floor) cash due 11/26/2018 (10)(17)

(3
)
—

50,404

50,430

Moelis Capital Partners Opportunity Fund I-B, LP
Multi-sector holdings
1.0% limited partnership interest (12)
300

266

300

266

Aden & Anais Merger Sub, Inc.
Apparel, accessories & luxury goods
Subordinated Term Loan, 10% cash 2% PIK due 6/23/2019
12,066

12,066

12,074

30,000 Common Units in Aden & Anais Holdings, Inc.
3,000

3,261

15,066

15,335

Lift Brands, Inc.
Leisure facilities
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/23/2019 (15)
79,500

79,447

79,513

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 12/23/2019 (15)
4,000

3,987

4,000

2,000,000 Class A Common Units in Snap Investments, LLC
2,000

2,141

85,434

85,654

Tailwind Capital Partners II, LP
Multi-sector holdings
0.3% limited partnership interest (6)(12)
378

378

378

378

Long's Drugs Incorporated
Pharmaceuticals
Subordinated Term Loan, 11% cash 1% PIK due 1/31/2020
9,470

9,470

9,470

50 Series A Preferred Shares in TWL Holdings Corp.
500

500

9,970

9,970

American Cadastre, LLC
Systems software
First Lien Revolver, LIBOR+5% (1% floor) cash due 8/14/2015 (14)
3,220

3,212

3,220

3,212

3,220

Five9, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/20/2019 (14)
20,000

19,689

19,689

474,308 Common Stock Warrants (exercise price $2.53)
321

321

20,010

20,010

Crealta Pharmaceuticals LLC
Pharmaceuticals
Second Lien Term Loan, 12.75% cash due 8/21/2020
20,000

20,000

20,000

20,000

20,000

Conviva Inc.
Application software
First Lien Term Loan, LIBOR+8.75% (1% floor) cash due 2/28/2018 (14)
5,000

4,900

4,900

417,851 Series D Preferred Stock Warrants (exercise price $1.1966)
105

105

5,005

5,005

OnCourse Learning Corporation
Education services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
65,000

64,923

65,000

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 2/28/2019 (14)
250

244

250

200,000 Class A Units in CIP OCL Investments, LLC
2,000

2,000

67,167

67,250

ShareThis, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+10.5% (1% floor) cash due 3/5/2018 (14)
15,000

14,640

14,640

345,452 Series C Preferred Stock Warrants (exercise price $3.0395)
367

367

15,007

15,007

Aegis Toxicology Sciences Corporation
Healthcare services
Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/24/2021 (15)
18,000

18,000

18,000

18,000

18,000

Aptean, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/24/2021 (15)
3,000

3,000

3,000

3,000

3,000

See notes to Consolidated Financial Statements.

13
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)
Cost
Fair Value
Desert NDT, LLC
Oil & gas equipment services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/26/2019 (16)
$
133,000

$
132,959

$
133,000

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 3/26/2019 (10)(16)

(5
)
—

132,954

133,000

Integrated Petroleum Technologies, Inc.
Oil & gas equipment services
First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 3/31/2019 (15)
33,103

33,063

33,103

First Lien Revolver, LIBOR+7.5% (1% floor) cash due 3/31/2019 (15)
720

713

720

33,776

33,823

Total Military Management, Inc.
Air freight and logistics
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (16)
13,429

13,429

13,429

Delayed Draw Term Loan, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (16)

—

—

First Lien Revolver, LIBOR+5.75% (1.25% floor) cash due 3/31/2019 (16)

—

—

13,429

13,429

Flexera Software LLC
Internet software & services
Second Lien Term Loan, LIBOR+7% (1% floor) cash due 4/2/2021 (15)
3,900

3,900

3,900

3,900

3,900

Total Non-Control/Non-Affiliate Investments (172.8% of net assets)
$
2,347,502

$
2,358,969

Total Portfolio Investments (196.6% of net assets)
$
2,659,204

$
2,684,298

See notes to Consolidated Financial Statements.












14
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(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
Joerns Healthcare, LLC
February 12, 2014
+ 0.5% on Term Loan
Per loan amendment
Olson + Co., Inc.
December 13, 2013
+ 0.25% on Term Loan & Revolver
Per loan amendment
Phoenix Brands Merger Sub LLC
November 21, 2013
+ 2.75% on Senior Term Loan, Revolver and Subordinated Term Loan
Per loan agreement
TransTrade Operators, Inc.
October 1, 2013
- 11.0% on Term Loan
+ 11.0% on Term Loan
Per loan amendment
HealthDrive Corporation
October 1, 2013
- 4.0% on Term Loan A
- 6.0% on Term Loan B
+ 6.0% on Term Loan A
+ 7.0% on Term Loan B
Per loan amendment
Miche Bag, LLC
July 26, 2013
- 3.0% on Term Loan B
- 1.0% on Term Loan B
Per loan amendment
Ansira Partners, Inc.
June 30, 2013
- 0.5% on Term Loan & Revolver
Tier pricing per loan agreement
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
Physicians Pharmacy Alliance, Inc.
April 1, 2013
+ 3.0% on Term Loan & Revolver
+ 1.0% on Term Loan
Per loan agreement
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
Deltek, Inc.
February 1, 2013
- 1.0% on Revolver
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
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
(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, in whole or in part.
(13)
The sale of a portion of this loan does not qualify for sale accounting under ASC Topic 860 - Transfers and Servicing , and therefore, the entire debt investment remains in the Schedule of Investments. (See Note 15 in the accompanying notes to the Consolidated Financial Statements.)
(14)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 90-day LIBOR.

15
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
March 31, 2014
(unaudited)

(15)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day, 60-day, 90-day or 180-day LIBOR, at the borrower's option.
(16)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day, 60-day or 90-day LIBOR, at the borrower's option.
(17)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day LIBOR.
(18)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day or 60-day LIBOR, at the borrower's option.
(19)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 180-day LIBOR.
(20)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day, 90-day or 180-day LIBOR, at the borrower's option.
(21)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day or 90-day LIBOR, at the borrower's option.
See notes to Consolidated Financial Statements.

16
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


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 12/31/2016
$
14,494

$
14,480

$
14,499

LC Facility, 8.5% cash due 12/31/2016 (10)
(5
)
—

746,114 Series A Preferred Units
12,786

15,891

746,114 Class A Common Stock Units
5,316

10,529

32,577

40,919

TransTrade Operators, Inc.
Air freight and logistics
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
13,660

13,660

13,524

596.67 Series A Common Units in TransTrade Holding LLC
—

—

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

539

16,693

14,063

HFG Holdings, LLC
Specialized finance
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
93,135

93,135

93,297

860,000 Class A Units (12)
22,347

22,346

115,482

115,643

First Star Aviation LLC
Airlines
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
19,211

19,211

19,211

5,264,207 Common Units
5,264

5,264

24,475

24,475

Eagle Hospital Physicians, LLC (13)
Healthcare services
First Lien Term Loan A, 8% PIK due 8/1/2016
11,150

11,150

11,149

First Lien Term Loan B, 8.1% PIK due 8/1/2016
3,041

3,041

3,050

First Lien Revolver, 8% cash due 8/1/2016
—

—

4,100,000 Class A Common Units
4,100

6,203

18,291

20,402

Total Control Investments (15.7% of net assets)
$
207,518

$
215,502

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

$
3,256

1,080

3,256

AmBath/ReBath Holdings, Inc. (9)
Home improvement retail
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016 (15)
$
3,223

3,219

3,272

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
25,515

25,508

25,317

4,668,788 Shares of Preferred Stock
—

87

28,727

28,676

Total Affiliate Investments (2.3% of net assets)
$
29,807

$
31,932

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

$
190

43

190

Capital Equipment Group, Inc. (9)
Industrial machinery
Second Lien Term Loan, 12% cash 2.75% PIK due 12/27/2015
$
4,007

4,007

4,003

33,786 shares of Common Stock
345

1,206

4,352

5,209

Western Emulsions, Inc.
Construction materials
Second Lien Term Loan, 12.5% cash 2.5% PIK due 6/30/2014
7,200

7,170

7,297

7,170

7,297

HealthDrive Corporation (9)
Healthcare services
First Lien Term Loan A, 10% cash due 7/17/2014
4,151

4,148

4,213

First Lien Term Loan B, 12% cash 1% PIK due 7/17/2014
10,573

10,573

10,497

First Lien Revolver, 12% cash due 7/17/2014
2,266

2,266

2,266

16,987

16,976


See notes to Consolidated Financial Statements.

17
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

Cenegenics, LLC
Healthcare services
First Lien Term Loan, 9.75% cash due 9/30/2019
$
33,500

$
33,468

$
33,527

414,419 Common Units (6)
598

1,317

34,066

34,844

Riverlake Equity Partners II, LP
Multi-sector holdings
1.78% limited partnership interest (6)(12)
362

325

362

325

Riverside Fund IV, LP
Multi-sector holdings
0.34% limited partnership interest (6)(12)
713

658

713

658

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 (15)
6,551

6,498

6,616

First Lien Term Loan B, LIBOR+9% (3% floor) cash 1.5% PIK due 4/30/2015 (15)
9,424

9,362

9,510

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

(13
)
—

15,847

16,126

Enhanced Recovery Company, LLC
Diversified support services
First Lien Term Loan A, LIBOR+7% (2% floor) cash due 8/13/2015 (15)
11,500

11,398

11,522

First Lien Term Loan B, LIBOR+10% (2% floor) cash 1% PIK due 8/13/2015 (15)
16,013

15,913

15,999

First Lien Revolver, LIBOR+7% (2% floor) cash due 8/13/2015 (15)
500

463

500

27,774

28,021

Specialty Bakers LLC
Food distributors
First Lien Term Loan A, LIBOR+8.5% cash due 9/15/2015 (15)
3,720

3,596

3,721

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

10,882

11,011

First Lien Revolver, LIBOR+8.5% cash due 9/15/2015 (15)
4,000

3,957

4,000

18,435

18,732

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

7,695

3,393

7,695

Miche Bag, LLC (9)
Apparel, accessories & luxury goods
First Lien Term Loan B, LIBOR+10% (3% floor) 3% PIK due 12/7/2015 (15)
17,576

16,307

17,514

First Lien Revolver, LIBOR+7% (3% floor) cash due 12/7/2015 (10)(15)
(33
)
—

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

419

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

—

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

—

18,910

17,933




See notes to Consolidated Financial Statements.














18
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

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

$
121

214

121

Drugtest, Inc. (9)
Human resources & employment services
First Lien Term Loan A, LIBOR+7.5% (0.75% floor) cash due 6/27/2018 (15)
$
38,809

38,702

38,864

First Lien Term Loan B, LIBOR+10% (1% floor) 1.5% PIK due 6/27/2018 (15)
15,752

15,682

15,899

First Lien Revolver, LIBOR+6% (1% floor) cash due 6/27/2018 (10)(15)
(34
)
—

54,350

54,763

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

635

635

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

100

100

735

735

Physicians Pharmacy Alliance, Inc. (9)
Healthcare services
First Lien Term Loan, LIBOR+9% cash 1.5% PIK due 1/4/2016 (15)
11,435

11,266

11,399

First Lien Revolver, LIBOR+6% cash due 1/4/2016 (10)(15)
(20
)
—

11,246

11,399

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

523

250

523

Phoenix Brands Merger Sub LLC (9)
Household products
Senior Term Loan, LIBOR+5% (1.5% floor) cash due 1/31/2016 (16)
5,518

5,432

5,423

Subordinated Term Loan, 10% cash 3.875% PIK due 2/1/2017
21,610

21,323

20,842

Senior Revolver, LIBOR+5% (1.5% floor) cash due 1/31/2016 (16)
3,000

2,922

3,000

29,677

29,265

CCCG, LLC (9)
Oil & gas equipment services
First Lien Term Loan, LIBOR+8% (1.75% floor) cash 1% PIK due 12/29/2017 (16)
35,148

34,717

34,988

First Lien Revolver, LIBOR+5.5% (1.75% floor) cash due 12/31/2014 (16)
—

—

34,717

34,988

Maverick Healthcare Group, LLC
Healthcare equipment
First Lien Term Loan A, LIBOR+9% (1.75% floor) cash due 12/31/2016 (17)
9,950

9,950

9,956

First Lien Term Loan B, LIBOR+9% (1.75% floor) cash due 12/31/2016 (17)
38,900

38,546

38,838

48,496

48,794

Refac Optical Group (14)
Specialty stores
First Lien Term Loan A, LIBOR+7.5% cash due 9/30/2018 (18)
24,674

24,510

24,923

First Lien Term Loan B, LIBOR+8.5% cash 1.75% PIK due 9/30/2018 (18)
32,932

32,639

33,205

First Lien Term Loan C, 12% cash due 12/31/2014
10,000

10,000

10,013

First Lien Revolver, LIBOR+7.5% cash due 9/30/2018 (10)(18)
(69
)
—

1,550.9435 Shares of Common Stock in Refac Holdings, Inc.
1

—

500.9435 Shares of Series A-2 Preferred Stock in Refac Holdings, Inc.
305

—

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

884

68,385

69,025

GSE Environmental, Inc. (9)
Environmental & facilities services
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/27/2016 (16)
8,812

8,755

8,113

8,755

8,113

Baird Capital Partners V, LP
Multi-sector holdings
0.40% limited partnership interest (12)
649

728

649

728


See notes to Consolidated Financial Statements.


19
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

Charter Brokerage, LLC
Oil & gas equipment services
Senior Term Loan, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (17)
$
28,914

$
28,828

$
29,462

Subordinated Term Loan, 11.75% cash 2% PIK due 10/10/2017
11,976

11,921

12,004

Senior Revolver, LIBOR+6.5% (1.5% floor) cash due 10/10/2016 (10)(17)
(40
)
—

40,709

41,466

Stackpole Powertrain International Holding, L.P.
Auto parts & equipment
1,000 Common Units (12)
1,000

3,200

1,000

3,200

Discovery Practice Management, Inc. (9)
Healthcare services
First Lien Term Loan A, LIBOR+7.5% cash due 8/8/2016 (15)
5,756

5,706

5,761

First Lien Term Loan B, 12% cash 3% PIK due 8/8/2016 (15)
6,606

6,559

6,608

First Lien Revolver, LIBOR+7% cash due 8/8/2016 (15)
3,000

2,977

3,000

15,242

15,369

CTM Group, Inc.
Leisure products
Subordinated Term Loan A, 11% cash 2% PIK due 2/10/2017
10,966

10,896

11,024

Subordinated Term Loan B, 18.4% PIK due 2/10/2017
4,553

4,532

4,559

15,428

15,583

Milestone Partners IV, LP
Multi-sector holdings
0.86% limited partnership interest (6)(12)
586

638

586

638

Insight Pharmaceuticals LLC
Pharmaceuticals
Second Lien Term Loan, LIBOR+11.75% (1.5% floor) cash due 8/25/2017 (16)
13,517

13,439

13,607

13,439

13,607

National Spine and Pain Centers, LLC
Healthcare services
Subordinated Term Loan, 11% cash 1.6% PIK due 9/27/2017
29,263

29,084

29,535

317,282.97 Class A Units
317

404

29,401

29,939

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

569

476

569

The MedTech Group, Inc. (9)
Healthcare equipment
Senior Term Loan, LIBOR+5.5% (1.25% floor) cash due 9/7/2016 (16)
12,448

12,379

12,454

12,379

12,454

Digi-Star Acquisition Holdings, Inc.
Industrial machinery
Subordinated Term Loan, 12% cash 1.5% PIK due 11/18/2017
12,316

12,231

12,439

264.37 Class A Preferred Units
264

304

2,954.87 Class A Common Units
36

246

12,531

12,989

CPASS Acquisition Company
Internet software & services
First Lien Term Loan, LIBOR+9% (1.5% floor) cash 1% PIK due 11/21/2016 (15)
8,069

8,005

8,166

First Lien Revolver, LIBOR+9% (1.5% floor) cash due 11/21/2016 (10)(15)
(12
)
—

7,993

8,166

Genoa Healthcare Holdings, LLC
Pharmaceuticals
Senior Term Loan, LIBOR+5.25% (1.25% floor) cash due 12/1/2016 (16)
8,775

8,775

8,797

Subordinated Term Loan, 12% cash 2% PIK due 6/1/2017
12,973

12,890

13,206

Senior Revolver, LIBOR+5.25% (1.25% floor) cash due 12/1/2016 (16)
—

—

500,000 Preferred units (6)
261

275

500,000 Class A Common Units
25

466

21,951

22,744




See notes to Consolidated Financial Statements.


20
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

ACON Equity Partners III, LP
Multi-sector holdings
0.15% limited partnership interest (6)(12)
$
329

$
361

329

361

CRGT, Inc.
IT consulting & other services
Subordinated Term Loan, 12.5% cash 3% PIK due 3/9/2018
$
26,741

26,553

27,445

26,553

27,445

Riverside Fund V, LP
Multi-sector holdings
0.48% limited partnership interest (12)
288

239

288

239

World 50, Inc.
Research & consulting services
First Lien Term Loan A, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (19)
10,718

10,622

10,834

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

6,941

7,078

Senior Revolver, LIBOR+6.25% (1.5% floor) cash due 3/30/2017 (10)(19)
(42
)
—

17,521

17,912

Nixon, Inc.
Apparel, accessories & luxury goods
First Lien Term Loan, 8.75% cash 2.75% PIK due 4/16/2018
9,551

9,476

9,791

9,476

9,791

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

14,415

14,503

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

174

17,391 Shares of Common Stock
187

—

14,915

14,677

BMC Acquisition, Inc.
Diversified financial services
Senior Term Loan, LIBOR+5.5% (1% floor) cash due 5/1/2017 (16)
5,315

5,285

5,311

Senior Revolver, LIBOR+5% (1% floor) cash due 5/1/2017 (10)(16)
(7
)
—

500 Series A Preferred Shares
500

534

50,000 Common Shares
1

—

5,779

5,845

Ansira Partners, Inc. (9)
Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (16)
10,593

10,529

10,580

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 5/4/2017 (10)(16)
(6
)
—

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

334

10,773

10,914

Edmentum, Inc.
Education services
Second Lien Term Loan, LIBOR+9.75% (1.5% floor) cash due 5/17/2019 (16)
17,000

17,000

17,288

17,000

17,288









See notes to Consolidated Financial Statements.


21
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

I Drive Safely, LLC
Education services
First Lien Term Loan, LIBOR+8.5% (1.5% floor) cash due 5/25/2017 (18)
$
27,000

$
26,975

$
27,521

First Lien Revolver, LIBOR+6.5% (1.5% floor) cash due 5/25/2017 (10)(18)
(5
)
—

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

755

27,720

28,276

Yeti Acquisition, LLC (9)
Leisure products
First Lien Term Loan A, LIBOR+8% (1.25% floor) cash due 6/15/2017 (15)
18,345

18,317

18,523

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

11,988

12,089

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

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

3,755

31,795

34,367

Specialized Education Services, Inc.
Education services
Senior Term Loan, LIBOR+5.5% (1.5% floor) cash due 6/28/2017 (16)
8,988

8,988

9,056

Subordinated Term Loan, 11% cash 1.5% PIK due 6/28/2018
17,839

17,839

18,200

26,827

27,256

PC Helps Support, LLC
IT consulting & other services
Subordinated Term Loan, 12% cash 1.5% PIK due 9/5/2018
18,804

18,804

18,989

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

674

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

—

19,554

19,663

Olson + Co., Inc.
Advertising
First Lien Term Loan, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (16)
12,853

12,853

12,853

First Lien Revolver, LIBOR+5.5% (1.5% floor) cash due 9/30/2017 (16)
—

—

12,853

12,853

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

—

—

—

Deltek, Inc. (9)
IT consulting & other services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 10/10/2019 (16)
25,000

25,000

25,415

First Lien Revolver, LIBOR+4.75% (1.25% floor) cash due 10/10/2017 (16)
1,333

1,333

1,333

26,333

26,748

First American Payment Systems, LP
Diversified support services
Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 4/12/2019 (16)
25,000

25,000

25,130

First Lien Revolver, LIBOR+4.5% (1.25% floor) cash due 10/12/2017 (16)
—

—

25,000

25,130

Dexter Axle Company
Auto parts & equipment
Subordinated Term Loan, 11.25% cash 2% PIK due 11/1/2019
30,561

30,561

31,009

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

1,795

32,061

32,804

IG Investments Holdings, LLC
IT consulting & other services
Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 10/31/2020 (16)
10,000

10,000

10,059

10,000

10,059



See notes to Consolidated Financial Statements.


22
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

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

$
20,000

$
20,015

20,000

20,015

Comprehensive Pharmacy Services, LLC
Pharmaceuticals
Subordinated Term Loan, 11.25% cash 1.5% PIK due 11/30/2019
14,148

14,148

14,401

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

2,036

16,148

16,437

Reliance Communications, LLC
Internet software & services
First Lien Term Loan A, LIBOR+7% (1% floor) cash due 12/18/2017 (15)
21,774

21,769

21,898

First Lien Term Loan B, LIBOR+11.5% (1% floor) cash due 12/18/2017 (15)
11,333

11,331

11,398

First Lien Revolver, LIBOR+7% (1% floor) cash due 12/18/2017 (15)
2,250

2,249

2,250

35,349

35,546

Garretson Firm Resolution Group, Inc.
Diversified support services
First Lien Term Loan, LIBOR+5% (1.25% floor) cash due 12/20/2018 (16)
7,264

7,264

7,283

Subordinated Term Loan, 11% cash 1.5% PIK due 6/20/2019
5,019

5,019

5,025

First Lien Revolver, LIBOR+5% (1.25% floor) cash due 12/20/2017 (16)
1,250

1,250

1,250

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

489

50,000 Common Units in GRG Holdings, LP
5

—

14,033

14,047

Teaching Strategies, LLC
Education services
First Lien Term Loan A, LIBOR+6% (1.25% floor) cash due 12/21/2017 (19)
36,662

36,656

37,173

First Lien Term Loan B, LIBOR+8.35% (1.25% floor) cash 3.15% PIK due 12/21/2017 (19)
19,605

19,603

19,888

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 12/21/2017 (10)(19)
(1
)
—

56,258

57,061

Omniplex World Services Corporation
Security & alarm services
Subordinated Term Loan, 12.25% cash 1.25% PIK due 12/21/2018
12,624

12,624

12,627

500 Class A Common Units in Omniplex Holdings Corp.
500

477

13,124

13,104

Dominion Diagnostics, LLC
Healthcare services
Subordinated Term Loan, 11% cash 2% PIK due 12/21/2018
15,746

15,746

16,016

15,746

16,016

Affordable Care, Inc.
Healthcare services
Second Lien Term Loan, LIBOR+9.25% (1.25% floor) cash due 12/26/2019 (16)
21,500

21,500

21,957

21,500

21,957

Aderant North America, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/20/2019 (16)
7,000

7,000

7,067

7,000

7,067

AdVenture Interactive, Corp.
Advertising
First Lien Term Loan, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (17)
112,575

112,555

112,760

First Lien Revolver, LIBOR+6.75% (1.25% floor) cash due 3/22/2018 (10)(17)
(1
)
—

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

2,123

114,554

114,883



See notes to Consolidated Financial Statements.


23
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013



Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)

Cost

Fair Value

CoAdvantage Corporation
Human resources & employment services
Subordinated Term Loan, 11.5% cash 1.25% PIK due 12/31/2018
$
10,094

$
10,094

$
10,229

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

400

10,594

10,629

EducationDynamics, LLC
Education services
Subordinated Term Loan, 12% cash 6% PIK due 1/16/2017
11,062

11,062

10,961

11,062

10,961

Vestcom International, Inc.
Data processing & outsourced services
First Lien Term Loan, LIBOR+5.75% (1.25% floor) cash due 12/26/2018 (16)
9,950

9,950

10,010

9,950

10,010

Sterling Capital Partners IV, L.P.
Multi-sector holdings
0.20% limited partnership interest (6)(12)
472

517

472

517

Devicor Medical Products, Inc.
Healthcare equipment
First Lien Term Loan, LIBOR+5% (2% floor) cash due 7/8/2015 (16)
9,619

9,619

9,618

9,619

9,618

RP Crown Parent, LLC
Application software
First Lien Revolver, LIBOR+5.5% (1.25% floor) cash due 12/21/2017 (16)
1,000

379

1,000

379

1,000

SESAC Holdco II LLC
Diversified support services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 6/28/2019 (16)
4,000

4,000

4,097

4,000

4,097

Advanced Pain Management Holdings, Inc.
Healthcare services
First Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 2/26/2018 (16)
24,000

24,000

24,454

24,000

24,454

Rocket Software, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.75% (1.5% floor) cash due 2/8/2019 (16)
10,475

10,435

10,482

10,435

10,482

TravelClick, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 3/26/2018 (16)
15,000

15,000

15,106

15,000

15,106

ISG Services, LLC
Diversified support services
First Lien Term Loan, LIBOR+8% (1% floor) cash due 3/28/2018 (16)
95,000

94,972

95,111

First Lien Revolver, LIBOR+8% (1% floor) cash due 3/28/2018 (16)
4,000

3,997

4,000

98,969

99,111

Joerns Healthcare, LLC
Healthcare services
Second Lien Term Loan, LIBOR+8.75% (1.25% floor) cash due 9/28/2018 (16)
20,000

20,000

19,965

20,000

19,965

Pingora MSR Opportunity Fund I, LP
Thrift & mortgage finance
1.90% limited partnership interest (12)
208

139

208

139

Chicago Growth Partners III, LP
Multi-sector holdings
0.50% limited partnership interest (11)(12)
—

—

—

—

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

13,250

13,285

13,250

13,285

See notes to Consolidated Financial Statements.

24
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


Portfolio Company/Type of Investment (1)(2)(5)
Industry
Principal (8)
Cost
Fair Value
Harden Healthcare, LLC
Healthcare services
First Lien Term Loan, LIBOR+5.5% (1.25% floor) cash due 5/1/2018 (16)
$
8,888

$
8,888

$
8,929

8,888

8,929

H.D. Vest, Inc.
Specialized finance
Second Lien Term Loan, LIBOR+8% (1.25% floor) cash due 6/18/2019 (17)
8,750

8,750

8,757

8,750

8,757

2Checkout.com, Inc.
Diversified support services
First Lien Revolver, LIBOR+5% cash due 6/26/2016 (18)
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 (16)
12,968

12,968

12,973

12,968

12,973

Personable Holdings, Inc.
Other diversified financial services
First Lien Term Loan, LIBOR+6% (1.25% floor) cash due 5/16/2018 (16)
11,109

11,109

11,109

First Lien Revolver, LIBOR+6% (1.25% floor) cash due 5/16/2018 (16)
—

—

11,109

11,109

Ikaria Acquisition, Inc.
Healthcare services
First Lien Term Loan B, LIBOR+6% (1.25% floor) cash due 7/3/2018 (16)
9,875

9,875

9,875

Second Lien Term Loan, LIBOR+9.75% (1.25% floor) cash due 7/3/2019 (16)
8,000

8,000

8,000

17,875

17,875

Blue Coat Systems, Inc.
Internet software & services
Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 6/28/2020 (16)
10,000

10,000

10,000

10,000

10,000

Royal Adhesives and Sealants, LLC
Specialty chemicals
Second Lien Term Loan, LIBOR+8.5% (1.25% floor) cash due 1/31/2019 (16)
20,000

20,000

20,000

20,000

20,000

Bracket Holding Corp.
Healthcare services
Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 2/15/2020 (16)
32,000

32,000

32,000

50,000 Common Units in AB Group Holdings, LP
500

500

32,500

32,500

Digital Insight Corporation
Other diversified financial services
First Lien Term Loan, LIBOR+4.25% (1.25% floor) cash due 8/1/2019 (16)
5,000

5,000

5,000

Second Lien Term Loan, LIBOR+8.25% (1.25% floor) cash due 8/1/2020 (16)
20,000

20,000

20,000

25,000

25,000

Salus CLO 2012-1, Ltd.
Asset management & custody banks
Class F Deferrable Notes - A, LIBOR+11.5% cash due 3/5/2021 (12)(20)
7,500

7,500

7,500

Class F Deferrable Notes - B, LIBOR+10.85% cash due 3/5/2021 (12)(20)
22,000

22,000

22,000

29,500

29,500

HealthEdge Software, Inc.
Application software
Second Lien Term Loan, 12% cash due 9/30/2018
12,500

12,500

12,500

12,500

12,500

Total Non-Control/Non-Affiliate Investments (120.2% of net assets)
$
1,622,326

$
1,645,612

Total Portfolio Investments (138.3% of net assets)
$
1,859,651

$
1,893,046


See notes to Consolidated Financial Statements.

25
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


(1)
All debt investments are income producing unless otherwise noted. Equity is non-income producing unless otherwise noted.
(2)
See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
(3)
Control Investments are defined by the 1940 Act as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(4)
Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.
(5)
Equity ownership may be held in shares or units of companies related to the portfolio companies.
(6)
Income producing through payment of dividends or distributions.
(7)
Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
(8)
Principal includes accumulated PIK interest and is net of repayments.
(9) Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:
Portfolio Company
Effective date
Cash interest
PIK interest
Reason
Phoenix Brands Merger Sub LLC
July 31, 2013
+ 2.25% on Senior Term Loan
+ 2.25% on Revolver
+ 0.75% on Subordinated Term
Loan
Per loan agreement
GSE Environmental, Inc.
July 30, 2013
+ 2.0% on Term Loan
Per loan amendment
Miche Bag, LLC
July 26, 2013
- 3.0% on Term Loan B
- 1.0% on Term Loan B
Per loan amendment
Ansira Partners, Inc.
June 30, 2013
- 0.5% on Term Loan & Revolver
Tier pricing per loan agreement
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
Physicians Pharmacy Alliance, Inc.
April 1, 2013
+ 3.0% on Term Loan & Revolver
+ 1.0% on Term Loan
Per loan agreement
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
Deltek, Inc.
February 1, 2013
- 1.0% on Revolver
Per loan amendment
HealthDrive Corporation
January 1, 2013
+ 2.0% on Term Loan A
+ 1.0% on Term Loan B
Per loan amendment
JTC Education, Inc.
January 1, 2013
+ 0.25% on Term Loan
Per loan amendment
Mansell Group, Inc.
January 1, 2013
+ 2.0% on Term Loan A,
Term Loan B & Revolver
Per loan agreement
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
(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, in whole or in part.
(13)
Eagle Hospital Physicians, LLC, is the successor entity to Eagle Hospital Physicians, Inc. and was formed as part of the restructuring process.
(14)
Prior to fiscal year end, the Company closed on a $33.4 million incremental investment in Refac Optical Group that had not yet settled as of September 30, 2013. As such, this amount was recorded in "Payables from unsettled transactions" in the Statement of Assets and Liabilities.
(15)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 90-day LIBOR.

26
Fifth Street Finance Corp.
Consolidated Schedule of Investments
(dollar amounts in thousands)
September 30, 2013


(16)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day, 60-day, 90-day or 180-day LIBOR, at the borrower's option.
(17)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day, 60-day or 90-day LIBOR, at the borrower's option.
(18)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day LIBOR.
(19)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day or 60-day LIBOR, at the borrower's option.
(20)
The principal balance outstanding for this debt investment, in whole or in part, is indexed to180-day LIBOR.
See notes to Consolidated Financial Statements.

27
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”). The Company is managed by the Investment Adviser. Prior to January 2, 2008, references to the Company are to the Partnership.
The Company also has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for income tax purposes, which hold certain portfolio investments of the Company. The subsidiaries are consolidated with the Company for accounting purposes, and the portfolio investments held by the subsidiaries are included in the Company’s Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
On November 28, 2011, the Company transferred the listing of its common stock from the New York Stock Exchange to the NASDAQ Global Select Market, where it continues to trade under the symbol “FSC.” The following table reflects common stock offerings that occurred from inception through March 31, 2014 :
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

10.5

58.0 million
January 27, 2010
Follow-on public offering
7,000,000

11.2

78.4 million
February 25, 2010
Underwriters’ partial exercise of over-allotment option
300,500

11.2

3.4 million
June 21, 2010
Follow-on public offering (including underwriters’ exercise of over-allotment option)
9,200,000

11.5

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
September 26, 2013
Follow-on public offering (including underwriters’ partial exercise of over-allotment option)
17,643,000

10.31

181.9 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

28


prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital. As of March 31, 2014 , FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $ 133.3 million . These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:
Rate Fix Date
Debenture
Amount
Fixed
Interest
Rate
SBA
Annual
Charge
September 2010
$
73,000

3.215
%
0.285
%
March 2011
65,300

4.084

0.285

September 2011
11,700

2.877

0.285

As of March 31, 2014 , FSMP V had $37.5 million in regulatory capital and $ 75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $62.8 million . These debentures bear interest at a weighted average interest rate of 2.835% (excluding the SBA annual charge), as follows:
Rate Fix Date
Debenture
Amount
Fixed
Interest
Rate
SBA
Annual Charge
March 2013
$
31,750

2.351
%
0.804
%
March 2014
43,250

3.191

0.804

As a result, the $225.0 million of SBA-guaranteed debentures held by the Company’s SBIC subsidiaries carry a weighted average interest rate of 3.323% as of March 31, 2014 .
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $ 2.0 million and $ 4.0 million , respectively, related to the SBA-guaranteed debentures of both SBIC 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:
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 pursuant to the requirements for reporting on Form 10-Q 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.

29
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and conditions. The most significant estimates inherent in the preparation of the Company’s Consolidated Financial Statements are the valuation of investments and revenue recognition.
The Consolidated Financial Statements include portfolio investments at fair value of $2.68 billion and $1.89 billion at March 31, 2014 and September 30, 2013 , respectively. The portfolio investments represent 196.6% and 138.3% of net assets at March 31, 2014 and September 30, 2013 , 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 and liabilities 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. In certain instances, the Company may use alternative methodologies, including an asset liquidation, expected recovery model or other alternative approaches.

30
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.
Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Company analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization), cash flows, net income or revenues. The Company generally requires portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year. The Company determines the fair value of its limited partnership interests based on the most recently available net asset value of the partnership.
Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.
The Company’s Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the Company’s investments:
•
The quarterly valuation process begins with each portfolio company or investment being initially valued by the Company’s finance department;
• Preliminary valuations are then reviewed and discussed with principals of the Investment Adviser;
•
Separately, independent valuation firms are engaged by the Board of Directors to prepare preliminary valuations on a selected basis and submit the reports to the Company;
•
The finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
•
The finance department prepares a valuation report for the Audit Committee of the Board of Directors;
•
The Audit Committee of the Board of Directors is apprised of the preliminary valuations of the independent valuation firms;
•
The Audit Committee of the Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser, and the finance department responds and supplements the preliminary valuations to reflect any comments provided by the Audit Committee;
•
The Audit Committee of the Board of Directors makes a recommendation to the Board of Directors regarding the fair value of the investments in the Company’s portfolio; and
•
The Board of Directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith.
The fair value of each of the Company’s investments at March 31, 2014 and September 30, 2013 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. In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by the Company's Board of Directors in determining the fair value of such investment.
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

31
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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.
For the Company's secured borrowings, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer in the partial loan sales is recorded within interest expense in the Consolidated Statements of Operations.
Distributions of earnings from portfolio companies are recorded as dividend income when the distribution is received.
The Company has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.
Fee income consists of the monthly servicing fees, advisory fees, structuring fees and prepayment fees that the Company receives in connection with its debt investments. These fees are recognized as earned.
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 $2.2 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 Sumitomo Mitsui Banking Corporation verifies the Company’s compliance per the terms of the credit agreement with the Company. Additionally, the Company has $5.8 million that was held at Wells Fargo Bank, National Association ("Wells Fargo") which represents collateral for standby letters of credit issued to portfolio companies under the Wells Fargo facility (as defined in Note 6 — Lines of Credit) which was terminated on February 21, 2014.
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. Upon early termination of a credit facility, the remaining balance of unamortized fees related to such facility is accelerated into interest expense.

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 no offering costs charged to capital during the six months ended March 31, 2014 .

32
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 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 2010, 2011 or 2012. 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.
Secured Borrowings:
The Company follows the guidance in ASC 860 Transfers and Servicing when accounting for loan participations and other partial loan sales. Such guidance provides accounting and reporting standards for transfers and servicing of financial assets and requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 15 for additional information.
Fair Value Option:
The Company adopted ASC 825-10-25-1 Financial Instruments – Fair Value Option as of February 19, 2014, and elected the fair value option for its secured borrowings which have a cost basis of $47.8 million in the aggregate. The Company believes that by electing the fair value option for these financial instruments, it provides consistent measurement of the assets and liabilities which relate to the partial loan sales mentioned above.
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

33
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 March 31, 2014 , 196.6% of net assets or $2.68 billion was invested in 124 portfolio investments and 3.3% of net assets or $45.4 million was invested in cash and cash equivalents. In comparison, at September 30, 2013 , 138.3% of net assets or $ 1.89 billion was invested in 99 portfolio investments and 10.8% of net assets or $147.4 million was invested in cash and cash equivalents. As of March 31, 2014 , 83.2% of the Company’s portfolio at fair value consisted of senior secured debt investments that were secured by 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, limited liability company interests or warrants. These equity instruments generally do not produce a current return but are held for potential investment appreciation and capital gain.
During the three and six months ended March 31, 2014 , the Company recorded net realized gains (losses) of $(1.5) million and $1.7 million , respectively. During the three and six months ended March 31, 2013 , the Company recorded net realized gains (losses) of $(0.1) million and $0.5 million , respectively. During the three and six months ended March 31, 2014 , the Company recorded net unrealized depreciation of $2.6 million and $8.3 million , respectively. During the three and six months ended March 31, 2013 , the Company recorded net unrealized appreciation (depreciation) of $2.7 million and $(6.7) million , respectively.
The composition of the Company’s investments as of March 31, 2014 and September 30, 2013 at cost and fair value was as follows:
March 31, 2014
September 30, 2013
Cost
Fair Value
Cost
Fair Value
Investments in debt securities
$
2,547,864

$
2,551,371

$
1,779,201

$
1,793,463

Investments in equity securities
111,340

132,927

80,450

99,583

Total
$
2,659,204

$
2,684,298

$
1,859,651

$
1,893,046

The composition of the Company’s debt investments as of March 31, 2014 and September 30, 2013 at fixed rates and floating rates was as follows:
March 31, 2014
September 30, 2013
Fair Value
% of
Debt Portfolio
Fair Value
% of
Debt Portfolio
Fixed rate debt securities
$
662,936

25.98
%
$
584,876

32.61
%
Floating rate debt securities
1,888,435

74.02

1,208,587

67.39

Total
$
2,551,371

100.00
%
$
1,793,463

100.00
%
The following table presents the financial instruments carried at fair value as of March 31, 2014 , 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 (senior secured)
$
—

$
—

$
2,234,355

$
2,234,355

Investments in debt securities (subordinated)
—

—

287,516

287,516

Investments in debt securities (collateralized loan obligation, or CLO)
—

—

29,500

29,500

Investments in equity securities (preferred)
—

—

25,852

25,852

Investments in equity securities (common and other)
—

—

107,075

107,075

Total investments at fair value
$
—

$
—

$
2,684,298

$
2,684,298

Secured borrowings relating to senior secured debt investments
—

—

$
47,760

$
47,760

Total liabilities at fair value
$
—

$
—

$
47,760

$
47,760

The following table presents the financial instruments carried at fair value as of September 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:

34
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Level 1
Level 2
Level 3
Total
Investments in debt securities (senior secured)
$
—

$
—

$
1,467,665

$
1,467,665

Investments in debt securities (subordinated)
—

—

296,298

296,298

Investments in debt securities (CLO)
—

—

29,500

29,500

Investments in equity securities (preferred)
—

—

25,648

25,648

Investments in equity securities (common and other)
—

—

73,935

73,935

Total investments at fair value
$
—

$
—

$
1,893,046

$
1,893,046

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 December 31, 2013 to March 31, 2014 , for all investments and secured borrowings for which the Company determines fair value using unobservable (Level 3) factors:
Investments
Liabilities
Senior Secured Debt
Subordinated
Debt
CLO Debt
Preferred
Equity
Common
and Other
Equity
Total
Secured Borrowings
Fair value as of December 31, 2013
$
1,928,209

$
304,033

$
29,500

$
25,952

$
89,018

$
2,376,712

$
—

New investments & net revolver activity
432,258

14,091

—

1,585

10,269

458,203

—

Proceeds from secured borrowings
—

—

—

—

—

—

47,750

Redemptions/repayments
(121,777
)
(30,000
)
—

(189
)
—

(151,966
)
—

Net accrual of PIK interest income
2,939

635

—

407

—

3,981

—

Accretion of original issue discount
223

—

—

—

—

223

—

Net change in unearned income
208

65

—

—

—

273

—

Net unrealized appreciation (depreciation) on investments
(7,160
)
(1,308
)
—

(1,903
)
7,788

(2,583
)
—

Net unrealized appreciation on secured borrowings
—

—

—

—

—

—

10

Unrealized adjustments due to deal exits
(545
)
—

—

—

—

(545
)
—

Transfer into (out of) Level 3
—

—

—

—

—

—

Fair value as of March 31, 2014
$
2,234,355

$
287,516

$
29,500

$
25,852

$
107,075

$
2,684,298

$
47,760

Net unrealized appreciation/depreciation relating to Level 3 assets and liabilities still held at March 31, 2014 and reported within net unrealized appreciation/depreciation in the Consolidated Statement of Operations for the three months ended March 31, 2014
$
(7,705
)
$
(1,308
)
$
—

$
(1,903
)
$
7,788

$
(3,128
)
$
10

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

Senior Secured Debt
Subordinated
Debt
CLO Debt
Preferred
Equity
Common and Other
Equity
Total
Fair value as of December 31, 2012
$
1,224,432

$
298,563

$
—

$
25,912

$
31,541

$
1,580,448

New investments & net revolver activity
323,477

10,600

—

2,000

647

336,724

Redemptions/repayments
(171,601
)
—

—

(2,310
)
—

(173,911
)
Net accrual of PIK interest income
(832
)
1,462

—

(871
)
—

(241
)
Accretion of original issue discount
151

—

—

—

—

151

Net change in unearned income
1,516

86

—

—

—

1,602

Net unrealized appreciation (depreciation)
(4,344
)
630

—

(36
)
6,430

2,680

Unrealized adjustments due to deal exits
1,754

—

—

(120
)
(192
)
1,442

Transfer into (out of) Level 3
—

—

—

—

—

—

Fair value as of March 31, 2013
$
1,374,553

$
311,341

$
—

$
24,575

$
38,426

$
1,748,895

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended March 31, 2013
$
(2,590
)
$
630

$
—

$
(156
)
$
6,238

$
4,122


35
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The following table provides a roll-forward in the changes in fair value from September 30, 2013 to March 31, 2014 , for all investments and secured borrowings for which the Company determines fair value using unobservable (Level 3) factors:
Investments
Liabilities
Senior Secured Debt
Subordinated
Debt
CLO Debt
Preferred
Equity
Common and Other
Equity
Total
Secured Borrowings
Fair value as of September 30, 2013
$
1,467,665

$
296,298

$
29,500

$
25,648

$
73,935

$
1,893,046

$
—

New investments & net revolver activity
1,041,596

35,837

—

3,117

27,794

1,108,344

—

Proceeds from secured borrowings
—

—

—

—

—

—

47,750

Redemptions/repayments
(270,320
)
(43,757
)
—

(339
)
(2,695
)
(317,111
)
—

Net accrual of PIK interest income
4,413

143

—

814

—

5,370

—

Accretion of original issue discount
388

—

—

—

—

388

—

Net change in unearned income
209

221

—

—

—

430

—

Net unrealized appreciation (depreciation) on investments
(9,372
)
(1,382
)
—

(3,388
)
5,841

(8,301
)
—

Net unrealized appreciation on secured borrowings
—

—

—

—

—

10

Unrealized adjustments due to deal exits
(224
)
156

—

—

2,200

2,132

—

Transfer into (out of) Level 3
—

—

—

—

—

—

Fair value as of March 31, 2014
$
2,234,355

$
287,516

$
29,500

$
25,852

$
107,075

$
2,684,298

$
47,760

Net unrealized appreciation/depreciation relating to Level 3 assets and liabilities still held at March 31, 2014 and reported within net unrealized appreciation/depreciation in the Consolidated Statement of Operations for the six months ended March 31, 2014
$
(9,596
)
$
(1,226
)
$
—

$
(3,388
)
$
8,041

$
(6,169
)
$
10

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

Senior Secured Debt
Subordinated
Debt
Preferred
Equity
Common and Other
Equity
Total
Fair value as of September 30, 2012
$
1,035,750

$
205,447

$
24,240

$
22,671

$
1,288,108

New investments & net revolver activity
625,312

101,843

2,670

5,706

735,531

Redemptions/repayments
(274,781
)
—

(2,310
)
—

(277,091
)
Net accrual of PIK interest income
1,268

2,572

(671
)
—

3,169

Accretion of original issue discount
283

—

—

—

283

Net change in unearned income
3,064

171

—

—

3,235

Net unrealized appreciation (depreciation)
(18,973
)
1,308

765

10,241

(6,659
)
Unrealized adjustments due to deal exits
2,630

—

(119
)
(192
)
2,319

Transfer into (out of) Level 3
—

—

—

—

—

Fair value as of March 31, 2013
$
1,374,553

$
311,341

$
24,575

$
38,426

$
1,748,895

Net unrealized appreciation (depreciation) relating to Level 3 assets still held at March 31, 2013 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the six months ended March 31, 2013
$
(16,384
)
$
1,308

$
646

$
10,049

$
(4,381
)
The Company generally utilizes a bond yield model to estimate the fair value of its debt investments when there is not a readily available market value (Level 3) which model is based on the present value of expected cash flows from the debt investments. The significant observable inputs into the model are market interest rates for debt with similar characteristics, which are adjusted for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position. These factors are incorporated into the calculation of the capital structure premium, tranche specific risk premium/(discount), size premium and industry premium/(discount), which are significant unobservable inputs into the model.

36
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Significant Unobservable Inputs for Level 3 Investments
The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments and secured borrowings, which are carried at fair value as of March 31, 2014 :
Asset
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average (c)
Senior secured debt
$
2,220,039

Bond yield approach
Capital structure premium
(a)
0.0%
-
2.0%
0.6%
Tranche specific risk premium/(discount)
(a)
(4.0)%
-
14.0%
1.9%
Size premium
(a)
0.5%
-
2.0%
1.1%
Industry premium/(discount)
(a)
(1.1)%
-
2.3%
0.2%
14,316

Market and income approach
Weighted average cost of capital
25.0%
-
25.0%
25.0%
Company specific risk premium
(a)
10.0%
-
10.0%
10.0%
Revenue growth rate
(10.0)%
-
(10.0)%
(10.0)%
Subordinated debt
287,516

Bond yield approach
Capital structure premium
(a)
2.0%
-
2.0%
2.0%
Tranche specific risk premium
(a)
1.0%
-
11.0%
4.7%
Size premium
(a)
0.5%
-
2.0%
1.2%
Industry premium/(discount)
(a)
(1.1)%
-
1.1%
0.1%
CLO debt
29,500

Bond yield approach
Credit spread
11.3%
-
11.8%
11.6%
Discount rate
13.5%
-
14.0%
13.7%
Preferred, common and other equity
132,927

Market and income approach
Weighted average cost of capital
13.0%
-
30.0%
18.7%
Company specific risk premium
(a)
1.0%
-
15.0%
3.4%
Revenue growth rate
0.0%
-
42.3%
11.0%
EBITDA multiple
(b)
2.6x
-
14.5x
10.0x
Revenue multiple
(b)
4.1x
-
5.3x
4.7x
Book value multiple
(b)
0.9x
-
1.1x
1.0x
Total
$
2,684,298

Liability
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average (c)
Secured borrowings
$
47,760

Bond yield approach
Capital structure premium
(a)
0.0%
-
1.0%
0.7%
Tranche specific risk premium/(discount)
(a)
(3.6)%
-
(3.0)%
(3.4)%
Size premium
(a)
0.5%
-
2.0%
0.9%
Industry premium/(discount)
(a)
(0.2)%
-
1.0%
0.7%
Total
$
47,760


(a)
Used when market participant would take into account this premium or discount when pricing the investment or secured borrowing.
(b)
Used when market participant would use such multiples when pricing the investment.
(c)
Weighted averages are calculated based on fair value of investments or secured borrowings.

37
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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, 2013 :
Asset
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average (d)
Senior secured debt
$
1,467,665

Bond yield approach
Capital structure premium
(a)
0.0%
-
2.0%
0.5%
Tranche specific risk premium/(discount)
(a)
(4.0)%
-
13.0%
2.0%
Size premium
(a)
0.5%
-
2.0%
1.1%
Industry premium/(discount)
(a)
(1.1)%
-
3.3%
0.3%
Subordinated debt
296,298

Bond yield approach
Capital structure premium
(a)
2.0%
-
2.0%
2.0%
Tranche specific risk premium
(a)
1.0%
-
11.0%
4.7%
Size premium
(a)
0.5%
-
2.0%
1.1%
Industry premium/(discount)
(a)
(1.0)%
-
1.4%
0.0%
CLO debt
29,500

(c)
Recent market transaction
Market yield
11.4%
11.4%
11.4%
Preferred, common and other equity
99,583

Market and income approach
Weighted average cost of capital
11.0%
-
31.0%
17.4%
Company specific risk premium
(a)
1.0%
-
15.0%
2.4%
Revenue growth rate
0.6%
-
81.9%
8.4%
EBITDA multiple
(b)
5.4x
-
15.3x
7.4x
Revenue multiple
(b)
4.1x
5.3x
4.7x
Book value multiple
(b)
0.9x
1.1x
1.0x
Total
$
1,893,046

(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.
(c)
The Company's $29.5 million CLO debt investment in Salus CLO 2012-1, Ltd. was valued at its acquisition price as it closed near fiscal year end.
(d)
Weighted averages are calculated based on fair value of investments.
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 valuation multiples in isolation may result in a significantly higher or lower fair value measurement, respectively.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of March 31, 2014 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
$
576,681

$
576,681

$
—

$
—

$
576,681

SBA debentures payable
225,000

196,137

—

—

196,137

Unsecured convertible notes payable
115,000

122,619

—

—

122,619

Unsecured notes payable
409,878

412,603

—

156,603

256,000

Total
$
1,326,559

$
1,308,040

$
—

$
156,603

$
1,151,437


38
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 September 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
$
188,000

$
188,000

$
—

$
—

$
188,000

SBA debentures payable
181,750

156,073

—

—

156,073

Unsecured convertible notes payable
115,000

122,331

—

—

122,331

Unsecured notes payable
161,250

151,008

—

151,008

—

Total
$
646,000

$
617,412

$
—

$
151,008

$
466,404

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 values of its SBA debentures payable, which are included in Level 3 of the hierarchy. Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flows streams for the debentures. The Company reviews various sources of data involving investments with similar characteristics and assesses the information in the valuation process.
The Company uses the non-binding indicative quoted price as of the valuation date to estimate the fair value of its unsecured notes payable and its 4.875% unsecured notes due 2019, 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 $221.4 million and $149.5 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of March 31, 2014 and September 30, 2013 , 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 Company's Consolidated Statement of Assets and Liabilities and are not reflected in the Company’s Consolidated Statements of Assets and Liabilities.

39
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


A summary of the composition of the unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of March 31, 2014 and September 30, 2013 is shown in the table below:
March 31, 2014
September 30, 2013
Lift Brands Holdings, Inc.
$
16,000

$
—

BMC Software Finance, Inc.
15,000

—

Desert NDT, LLC
15,000

—

Drugtest, Inc.
10,900

20,000

RP Crown Parent, LLC
10,000

9,000

P2 Upstream Acquisition Co.
10,000

—

Deltek, Inc.
9,880

8,667

Pingora MSR Opportunity Fund I, LP (limited partnership interest)
9,337

9,792

InMotion Entertainment Group, LLC
8,273

—

Yeti Acquisition, LLC
6,500

7,500

ISG Services, LLC
6,000

6,000

Thing5, LLC
6,000

—

Med-Data, Incorporated
6,000

—

I Drive Safely, LLC
5,000

5,000

Adventure Interactive, Corp.
5,000

5,000

First American Payment Systems, LP
5,000

5,000

Reliance Communications, LLC
5,000

2,750

All Web Leads, Inc.
5,000

—

OnCourse Learning Corporation
4,750

—

Integrated Petroleum Technologies, Inc.
4,678

—

Discovery Practice Management, Inc.
4,589

1,000

World 50, Inc.
4,000

4,000

Refac Optical Group
3,600

8,000

Charter Brokerage, LLC
3,467

4,000

Phoenix Brands Merger Sub LLC
3,429

3,429

American Cadastre, LLC
2,780

—

OmniSYS Acquisition Corporation
2,500

—

First Choice ER, LLC (1)
2,157

—

Teaching Strategies, LLC
2,000

5,000

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

2,000

CPASS Acquisition Company
1,750

2,500

Moelis Capital Partners Opportunity Fund I-B, LP (limited partnership interest)
1,700

—

Olson + Co., Inc.
1,673

2,105

Tailwind Capital Partners II, LP (limited partnership interest)
1,622

—

Beecken Petty O'Keefe Fund IV, LP (limited partnership interest)
1,609

2,000

Riverside Fund V, LP (limited partnership interest)
1,582

1,712

SPC Partners V, LP (limited partnership interest)
1,572

—

CCCG, LLC
1,520

1,520

Enhanced Recovery Company, LLC
1,500

3,500

Sterling Capital Partners IV, LP (limited partnership interest)
1,398

1,528

Milestone Partners IV, LP (limited partnership interest)
1,291

1,414

Ansira Partners, Inc.
1,190

1,190

Personable Holdings, Inc.
1,142

3,409

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

1,000

Total Military Management, Inc.
857

—

2Checkout, Inc.
850

2,850

Genoa Healthcare Holdings, LLC
833

1,000

HealthDrive Corporation
734

734

Garretson Firm Resolution Group, Inc.
644

—

Bunker Hill Capital II (QP), LP (limited partnership interest)
639

786

Riverlake Equity Partners II, LP (limited partnership interest)
564

638

ACON Equity Partners III, LP (limited partnership interest)
482

671

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

351


40
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Riverside Fund IV, LP (limited partnership interest)
322

287

TransTrade Operators, Inc.
255

—

RCP Direct, LP (limited partnership interest)
250

524

Eagle Hospital Physicians, Inc.
233

1,867

HealthEdge Software, Inc.
—

5,000

Mansell Group, Inc.
—

2,000

Physicians Pharmacy Alliance, Inc.
—

2,000

Miche Bag, LLC
—

1,500

BMC Acquisition, Inc.
—

1,250

Total
$
221,403

$
149,474

________________
(1) In addition to its revolving commitment, the Company has extended a $175.0 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of March 31, 2014, the total amount available to the borrower under this delayed draw facility was $16.1 million, and the facility was undrawn as of this date.

Portfolio Composition
Summaries of the composition of the Company’s investment portfolio at cost and fair value as a percentage of total investments are shown in the following tables:
March 31, 2014
September 30, 2013
Cost:
Senior secured debt
$
2,232,773

83.97
%
$
1,456,710

78.33
%
Subordinated debt
285,591

10.74

292,991

15.76

CLO debt
29,500

1.11

29,500

1.59

Purchased equity
98,831

3.72

71,835

3.86

Equity grants
5,229

0.20

4,316

0.23

Limited partnership interests
7,280

0.26

4,299

0.23

Total
$
2,659,204

100.00
%
$
1,859,651

100.00
%
Fair Value:
Senior secured debt
$
2,234,355

83.24
%
$
1,467,665

77.53
%
Subordinated debt
287,516

10.71

296,298

15.65

CLO debt
29,500

1.10

29,500

1.56

Purchased equity
119,507

4.45

89,688

4.74

Equity grants
6,640

0.25

5,599

0.30

Limited partnership interests
6,780

0.25

4,296

0.22

Total
$
2,684,298

100.00
%
$
1,893,046

100.00
%
The Company primarily invests in portfolio companies located in North America. 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. The following tables show the portfolio composition by geographic region at cost and fair value as a percentage of total investments:

41
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


March 31, 2014
September 30, 2013
Cost:
Northeast U.S.
$
839,389

31.57
%
$
744,582

40.04
%
Southwest U.S.
582,647

21.91

279,369

15.02

Midwest U.S.
487,325

18.33

314,653

16.92

Southeast U.S.
404,948

15.23

277,342

14.91

West U.S.
307,151

11.55

242,705

13.05

International
37,744

1.41

1,000

0.06

Total
$
2,659,204

100.00
%
$
1,859,651

100.00
%
Fair Value:
Northeast U.S.
$
852,004

31.74
%
$
753,263

39.79
%
Southwest U.S.
578,651

21.56

280,247

14.80

Midwest U.S.
489,891

18.25

317,958

16.80

Southeast U.S.
414,024

15.42

285,648

15.09

West U.S.
311,984

11.62

252,730

13.35

International
37,744

1.41

3,200

0.17

Total
$
2,684,298

100.00
%
$
1,893,046

100.00
%

42
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)



The composition of the Company’s portfolio by industry at cost and fair value as of March 31, 2014 and September 30, 2013 were as follows:
March 31, 2014
September 30, 2013
Cost:
Healthcare services
$
394,373

14.83

%
$
266,823

14.35

%
Education services
281,144

10.57

166,750

8.97

Oil & gas equipment services
241,219

9.07

75,426

4.06

Diversified support services
229,584

8.63

170,174

9.15

Advertising
181,768

6.84

154,026

8.28

Internet software & services
158,718

5.97

109,170

5.87

Specialized finance
126,125

4.74

124,232

6.68

IT consulting & other services
95,680

3.60

82,440

4.43

Leisure facilities
85,476

3.21

43

—

Pharmaceuticals
81,712

3.07

51,538

2.77

Airlines
81,711

3.07

24,475

1.32

Healthcare equipment
77,210

2.90

70,494

3.79

Specialty stores
66,845

2.51

68,386

3.68

Human resources & employment services
63,058

2.37

64,944

3.49

Data processing & outsourced services
60,225

2.26

23,200

1.25

Industrial machinery
53,165

2.00

16,883

0.91

Apparel, accessories & luxury goods
43,348

1.63

28,385

1.53

Construction and engineering
33,626

1.26

32,577

1.75

Air freight and logistics
33,284

1.25

16,693

0.90

Leisure products
32,343

1.22

47,222

2.54

Household products
29,857

1.12

29,677

1.60

Asset management & custody banks
29,500

1.11

29,500

1.59

Consumer electronics
28,610

1.08

—

—

Home improvement retail
28,491

1.07

28,726

1.54

Application software
21,969

0.83

12,879

0.69

Food distributors
17,706

0.67

18,435

0.99

Research & consulting services
17,177

0.65

17,521

0.94

Other diversified financial services
13,595

0.51

41,888

2.25

Specialty chemicals
13,500

0.51

20,000

1.08

Security & alarm services
13,204

0.50

13,124

0.71

Healthcare technology
12,988

0.49

—

—

Multi-sector holdings
6,618

0.26

4,091

0.20

Systems software
3,212

0.12

—

—

Auto parts & equipment
1,500

0.06

33,061

1.78

Thrift & mortgage finance
663

0.02

208

0.01

Environmental & facilities services
—

—

8,755

0.47

Construction materials
—

—

7,170

0.39

Building products
—

—

735

0.04

Total
$
2,659,204

100.00

%
$
1,859,651

100.00

%

43
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)



March 31, 2014
September 30, 2013
Fair Value:
Healthcare services
$
399,624

14.89

%
$
273,880

14.47

%
Education services
282,798

10.54

168,492

8.90

Oil & gas equipment services
241,034

8.98

76,454

4.04

Diversified support services
230,220

8.58

171,078

9.04

Advertising
181,822

6.77

154,777

8.18

Internet software & services
163,034

6.07

114,077

6.03

Specialized finance
131,845

4.91

124,400

6.57

IT consulting & other services
96,742

3.60

83,916

4.43

Leisure facilities
85,865

3.20

190

0.01

Airlines
85,103

3.17

24,475

1.29

Pharmaceuticals
83,762

3.12

52,787

2.79

Healthcare equipment
78,357

2.92

70,866

3.74

Specialty stores
65,942

2.46

69,024

3.65

Human resources & employment services
63,670

2.37

65,391

3.45

Data processing & outsourced services
60,802

2.27

23,295

1.23

Industrial machinery
54,126

2.02

18,197

0.96

Construction and engineering
41,390

1.54

40,919

2.16

Apparel, accessories & luxury goods
38,636

1.44

27,724

1.46

Leisure products
33,939

1.26

49,952

2.64

Asset management & custody banks
29,500

1.10

29,500

1.56

Household products
29,458

1.10

29,264

1.55

Home improvement retail
29,117

1.08

28,677

1.51

Consumer electronics
28,764

1.07

—

—

Air freight and logistics
24,922

0.93

14,063

0.74

Application software
22,688

0.85

13,500

0.71

Food distributors
17,903

0.67

18,732

0.99

Research & consulting services
17,501

0.65

17,912

0.95

Other diversified financial services
13,668

0.51

41,954

2.22

Specialty chemicals
13,512

0.50

20,000

1.06

Security & alarm services
13,284

0.49

13,104

0.69

Healthcare technology
12,989

0.48

—

—

Multi-sector holdings
6,218

0.24

4,158

0.21

Systems software
3,220

0.12

—

—

Auto parts & equipment
2,281

0.08

36,004

1.90

Thrift & mortgage finance
562

0.02

139

0.01

Environmental & facilities services
—

—

8,113

0.43

Construction materials
—

—

7,297

0.39

Building products
—

—

735

0.04

Total
$
2,684,298

100.00

%
$
1,893,046

100.00

%
The Company’s investments are generally in small and mid-sized companies in a variety of industries. At March 31, 2014 and September 30, 2013 , the Company had no single investment that represented greater than 10% of the total investment portfolio at fair value. Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given year can be highly concentrated among several investments. For the three and six months ended March 31, 2014 and March 31, 2013 , 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 including servicing, advisory, structuring and prepayments fees, which are classified as fee income and recognized as they are earned. The ending unearned fee income balances as of March 31, 2014 and September 30, 2013 were $4.5 million and $5.0 million, respectively.

44
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


As of March 31, 2014 , the Company had structured $4.5 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 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 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 March 19, 2013, the Company amended its Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 shares to 250,000,000 shares.
The following table sets forth the computation of basic and diluted earnings per share, pursuant to ASC 260-10 Earnings per Share , for the three and six months ended March 31, 2014 and March 31, 2013 :
Three months
ended
March 31, 2014
Three months
ended
March 31, 2013
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Earnings per common share — basic:
Net increase in net assets resulting from operations
$
30,100

$
31,834

$
63,806

$
49,678

Weighted average common shares outstanding — basic
139,138

106,022

139,132

100,394

Earnings per common share — basic
$
0.22

$
0.30

$
0.46

$
0.49

Earnings per common share — diluted:
Net increase in net assets resulting from operations, before adjustments
$
30,100

$
31,834

$
63,806

$
49,678

Adjustments for interest on convertible notes, base management fees and incentive fees
1,364

1,366

2,727

2,714

Net increase in net assets resulting from operations, as adjusted
31,464

33,200

66,533

52,392

Weighted average common shares outstanding — basic
139,138

106,022

139,132

100,394

Adjustments for dilutive effect of convertible notes
7,790

7,790

7,790

7,872

Weighted average common shares outstanding — diluted
146,928

113,812

146,922

108,266

Earnings per common share — diluted
$
0.21

$
0.29

$
0.45

$
0.48

The following table reflects the distributions per share that the Company has paid, including shares issued under the dividend reinvestment plan (“DRIP”), on its common stock from October 1, 2012 to March 31, 2014 :

45
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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

10.3 million
136,052

1.3 million
August 5, 2013
September 13, 2013
September 30, 2013
0.0958

10.3 million
135,027

1.3 million
August 5, 2013
October 15, 2013
October 31, 2013
0.0958

11.9 million
142,320

1.4 million
August 5, 2013
November 15, 2013
November 29, 2013
0.0958

12.0 million
145,063

(1)
1.4 million
November 21, 2013
December 13, 2013
December 30, 2013
0.05

6.3 million
69,291

(1)
0.6 million
November 21, 2013
January 15, 2014
January 31, 2014
0.0833

10.5 million
114,033

(1)
1.1 million
November 21, 2013
February 14, 2014
February 28, 2014
0.0833

10.5 million
110,486

(1)
1.1 million
November 21, 2013
March 14, 2014
March 31, 2014
0.0833

11.0 million
64,748

(1)
0.6 million
__________
(1) Shares were purchased on the open market and distributed.
On November 21, 2013, the Company's Board of Directors terminated the Company's previous $50 million stock repurchase program and approved a new $100 million stock repurchase program. Any stock repurchases under this program would be made through the open market at times and in such amounts as the Company's management would deem appropriate, provided they are below the most recently published net asset value per share. Unless extended by the Company's Board of Directors, the stock repurchase program will expire on November 21, 2014 and may be limited or terminated at any time without prior notice.
In December 2013, the Company repurchased 45,104 shares at the weighted average price of $8.978 per share, resulting in $0.4 million of cash paid during the six months ended March 31, 2014 .

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.
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. The maturity date of the Wells Fargo facility was April 25, 2016.
The Wells Fargo facility provided for the issuance from time to time of letters of credit for the benefit of the Company's portfolio companies. The letters of credit were 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 had sold to Funding certain loan assets it had originated or acquired, 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 had no other operations.

46
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


The Wells Agreement and related agreements that governed 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 included 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 have accelerated repayment under the facility.
The Wells Fargo facility was secured by all of the assets of Funding, and all of the Company’s equity interest in Funding. The Company used the Wells Fargo facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the facility was subject to the satisfaction of certain conditions. The Company’s borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.686% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , the Company recorded interest expense of $1.0 million and $1.8 million , respectively, related to the Wells Fargo facility.
Effective February 21, 2014, the Company and Funding terminated the Wells Fargo facility. In connection therewith, the Amended and Restated Loan and Servicing Agreement and other related documents governing the Wells Fargo facility were also terminated. As such, the Company has no borrowing capacity under the Wells Fargo facility as of March 31, 2014. Upon termination of the Wells Fargo facility, the Company accelerated the $0.7 million remaining unamortized fee balance into interest expense.
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 March 31, 2014 , the ING facility permitted up to $650 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 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 2.25% 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 August 6, 2017 and the maturity date of the facility is August 6, 2018.
The ING facility is secured by substantially all of the Company’s assets, as well as the assets of the Company’s wholly-owned subsidiary, FSFC Holdings, Inc. ("Holdings"), and its indirect wholly-owned subsidiary, Fifth Street Fund of Funds LLC ("Fund of Funds"), subject to certain exclusions for, among other things, equity interests in the Company’s SBIC subsidiaries, and equity interests in Funding and Funding II (which is defined and discussed below) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., ING Capital LLC, as collateral agent, and the Company. Fifth Street Fund of Funds LLC and FSFC Holdings, Inc. were formed to hold certain of the Company’s portfolio companies for tax purposes and have no other operations. None of the Company’s SBIC subsidiaries, Funding or Funding II is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that the Company may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.
Pursuant to the ING Security Agreement, Holdings and Fund of Funds guaranteed the obligations under the ING Security Agreement, including the Company’s obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, the Company pledged its entire equity interest in Holdings and Holdings pledged its entire equity interest in Fund of Funds to the collateral agent pursuant to the terms of the ING Security Agreement.
The ING Credit Agreement and related agreements governing the ING facility required Holdings, Fund of Funds and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of the Company’s businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by the Company to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the ING facility.

47
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the ING facility at any particular time or at all.
As of March 31, 2014 , the Company had $515.3 million of borrowings outstanding under the ING facility, which had a fair value of $515.3 million . The Company’s borrowings under the ING facility bore interest at a weighted average interest rate of 2.691% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , the Company recorded interest expense of $3.6 million and $6.4 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 March 31, 2014 , the Sumitomo facility permitted up to $125 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, 2016 and the maturity date of the facility is September 16, 2020, 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 March 31, 2014 , the Company had $61.4 million of borrowings outstanding under the Sumitomo facility, which had a fair value of $61.4 million . The Company’s borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.514% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , the Company recorded interest expense of $0.6 million and $1.1 million , respectively, related to the Sumitomo facility.
As of March 31, 2014 , 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 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.
Total interest expense for the three and six months ended March 31, 2014 was $12.8 million and $ 23.0 million , respectively. Total interest expense for the three and six months ended March 31, 2013 was $7.8 million and $ 14.9 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.

48
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 six months ended March 31, 2014 and March 31, 2013 was as follows:
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
PIK balance at beginning of period
$
23,934

$
18,431

Gross PIK interest accrued
11,084

8,382

PIK income reserves(1)
—

(615
)
PIK interest received in cash
(5,714
)
(4,598
)
Loan exits and other PIK adjustments
(421
)
(1,207
)
PIK balance at end of period
$
28,883

$
20,393

_____________
(1) PIK income is generally reserved for when a loan is placed on PIK non-accrual status.
As of March 31, 2014 and September 30, 2013 , there were no investments on which the Company had stopped accruing cash and/or PIK interest and OID income. As of March 31, 2013 , the Company had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013.
The percentages of the Company’s debt investments at cost and fair value by accrual status as of March 31, 2014 , September 30, 2013 and March 31, 2013 were as follows:

March 31, 2014


September 30, 2013


March 31, 2013


Cost

% of Debt Portfolio


Fair
Value

% of Debt Portfolio


Cost

% of Debt Portfolio


Fair
Value


% of Debt Portfolio


Cost

% of Debt Portfolio


Fair
Value

% of Debt Portfolio

Accrual
$
2,547,864


100.00
%


$
2,551,371


100.00
%


$
1,779,201


100.00
%


$
1,793,463



100.00
%


$
1,645,425


97.43
%


$
1,666,161


98.83
%

PIK non-accrual
—


—



—


—



—


—



—



—



6,203


0.37



—


—


Cash non-accrual (1)
—


—



—


—



—


—



—



—



37,224


2.20



19,733


1.17


Total
$
2,547,864


100.00
%


$
2,551,371


100.00
%


$
1,779,201


100.00
%


$
1,793,463



100.00
%


$
1,688,852


100.00
%


$
1,685,894


100.00
%

_____________
(1) Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.
The non-accrual status of the Company’s portfolio investments as of March 31, 2014 , September 30, 2013 and March 31, 2013 was as follows:

March 31, 2014

September 30, 2013

March 31, 2013
Coll Materials Group LLC (1)
—


—


Cash non-accrual
Eagle Hospital Physicians, Inc.
—

—

Cash non-accrual
Trans-Trade, Inc. - Term Loan B (1)
—


—


PIK non-accrual
_____________
(1) The Company did not hold this investment at March 31, 2014 or September 30, 2013. See Note 9 for a discussion of the Company’s recent realization events.

49
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Income non-accrual amounts for the three and six months ended March 31, 2014 and March 31, 2013 were as follows:


Three months
ended
March 31, 2014

Three months
ended
March 31, 2013
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Cash interest income

$
—


$
1,008

$
—

$
1,008

PIK interest income


—



191

—

615

OID income


—



—

—

—

Total

$
—


$
1,199

$
—

$
1,623


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, 2013, the Company has net loss carryforwards of $107.4 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 $95.6 million will not expire. During the year ended September 30, 2013, the Company realized capital losses from the sale of investments after October 31, 2012 and prior to year end (“post-October capital losses”) of $21.3 million, which for tax purposes are treated as arising on the first day of the following year.
Listed below is a reconciliation of “net increase in net assets resulting from operations” to taxable income for the three and six months ended March 31, 2014 .
Three months
ended
March 31, 2014
Six months
ended
March 31, 2014
Net increase in net assets resulting from operations
$
30,100

$
63,806

Net unrealized depreciation on investments and secured borrowings
2,593

8,311

Book/tax difference due to deferred loan fees
(2,166
)
(3,447
)
Book/tax difference due to organizational and deferred offering costs
(22
)
(44
)
Book/tax difference due to capital losses not recognized
1,540

(1,666
)
Other book/tax differences
(181
)
(276
)
Taxable/Distributable Income (1)
$
31,864

$
66,684

______________
(1) The Company’s taxable income for 2014 is an estimate and will not be finally determined until the Company files its tax return for the fiscal year ended September 30, 2014. Therefore, the final taxable income may be different than the estimate.
The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. The Company has recorded a deferred tax asset for the difference in the book and tax basis of certain equity investments and tax net operating losses held by its taxable subsidiaries of $1.4 million. However, this amount has been fully offset by a valuation allowance of $1.4 million, since it is more likely than not that these deferred tax assets will not be realized.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted, which changed various technical rules governing the tax treatment of RICs. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company is permitted to carry forward any net capital losses, if any, incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment net loss carryforwards may be more likely to expire unused.
Distributions to stockholders are recorded on the record date. The Company is required to distribute annually to its stockholders at least 90% of its net taxable income and net realized short-term capital gains in excess of net realized long-term

50
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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.
For income tax purposes, the Company estimates that its distributions for the calendar year 2014 will be composed primarily of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar year 2014.
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. 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 six months ended March 31, 2014 , the Company recorded investment realization events, including the following:
•
In October and December 2013, the Company received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of its equity investment. A realized gain of $2.2 million was recorded on this transaction;
•
In October 2013, the Company received a payment of $8.9 million from Harden Healthcare, 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 the transaction;
•
In October 2013, the Company received a payment of $4.0 million from Capital Equipment Group, 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 the transaction. The Company also received an additional $0.9 million in connection with the sale of its common equity investment, realizing a gain of $0.6 million;
•
In November 2013, the Company received a payment of $10.0 million from IG Investments Holdings, 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 the transaction;
•
In November 2013, the Company received a payment of $15.7 million from CTM Group, 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 the transaction;
•
In December 2013, the Company received a payment of $0.4 million in connection with the exit of its debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;
•
In December 2013, the Company received a payment of $7.2 million from Western Emulsions, 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 the transaction;
•
In January 2014, the Company received a payment of $5.1 million from BMC Acquisition, 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 the transaction;

51
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


•
In February 2014, the Company received a payment of $17.8 million from Ikaria 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 the transaction;
•
In February 2014, the Company received a payment of $30.8 million from Dexter Axle Company 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 March 2014, the Company received a payment of $9.9 million from Vestcom International, 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 the transaction; and
•
During the six months ended March 31, 2014 , the Company received payments of $231.3 million in connection with syndications of debt investments to other investors and sales of debt investments in the open market and recorded a net realized loss of $1.0 million.
During the six months ended March 31, 2013 , the Company recorded investment realization events, including the following:
•
In October 2012, the Company received a 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 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 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 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 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 or $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;

52
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


•
In March 2013, the Company received a cash payment of $15.0 million from AdVenture Interactive Corp. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In March 2013, the Company received a cash payment of $19.5 million from idX Corporation in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and
•
During the six months ended March 31, 2013 , the Company received payments of $54.0 million in connection with partial sales of debt investments in the open market and recorded a net realized gain of $0.5 million.
During the six months ended March 31, 2014 , the Company recorded net unrealized depreciation of $8.3 million . This consisted of $10.4 million of net unrealized depreciation on debt investments and $2.6 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $4.7 million of net unrealized appreciation on equity investments. During the six months ended March 31, 2013 , the Company recorded net unrealized depreciation of $6.7 million. This consisted of $15.1 million of net unrealized depreciation on debt investments and $2.3 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $10.7 million of net unrealized appreciation on equity 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 months ended March 31, 2014 , the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to assets funded with proceeds from secured borrowings, which resulted in a waiver of $0.2 million. For the three months ended March 31, 2013 , the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to certain new investments that closed prior to quarter end, which resulted in a waiver of $1.3 million.
For the three and six months ended March 31, 2014 , base management fees were $13.5 million and $25.6 million, respectively. For the three and six months ended March 31, 2013 , base management fees were $7.6 million and $15.6 million, respectively. At March 31, 2014 , the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $13.5 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, 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

53
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


(8% annualized), subject to a “catch-up” provision measured as of the end of each fiscal quarter. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of its gross assets used to calculate the 2% base management fee. The operation of the incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income for each quarter is as follows:
•
No incentive fee is payable to the Investment Adviser in any fiscal quarter in which the Company’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2% (the “preferred return” or “hurdle”);
•
100% of the Company's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the “catch-up.” The “catch-up” provision is intended to provide the Investment Adviser with an incentive fee of 20% on all of the Company's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company's Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and
•
20% of the amount of the Company's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved (20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Investment Adviser).
The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date) and equals 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
GAAP requires the Company to accrue for the theoretical capital gains incentive fee that would be payable after giving effect to the net realized and unrealized capital appreciation. It should be noted that a fee so calculated and accrued would not necessarily be payable under the investment advisory agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts ultimately paid under the investment advisory agreement will be consistent with the formula reflected in the investment advisory agreement. The Company does not currently accrue for capital gains incentive fees due to the accumulated realized losses in the portfolio.
For the three and six months ended March 31, 2014 , incentive fees were $8.5 million and $17.6 million , respectively. For the three and six months ended March 31, 2013 , incentive fees were $7.0 million and $13.6 million, respectively. At March 31, 2014 , the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $8.5 million reflecting the unpaid portion of the incentive fee payable to the Investment Adviser.
Advances received from portfolio companies
For the purpose of efficient cash management, the Company has received advances from First Star Aviation, LLC, First Star Speir Aviation I Limited and First Star Bermuda Aviation Limited (collectively, "First Star") in the aggregate amount of $7.7 million.  The advances will be used from time to time to fund operating and financing activities of First Star, including the payment of interest and management fees to the Company and operating expenses.
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
On January 1, 2014, the Company entered into an administration agreement with a new administrator, FSC CT, Inc., under substantially similar terms as its prior administration agreement with FSC, Inc. Under the administration agreement with FSC CT, Inc., administrative services are provided to the Company, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, FSC CT, 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 CT, Inc. assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the

54
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 provides reimbursement for the allocable portion of overhead and other expenses incurred in connection with payments of 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 CT, Inc. FSC CT, Inc. may also provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.
For the three and six months ended March 31, 2014 , the Company accrued administrative expenses of $1.5 million, including $1.0 million of general and administrative expenses and $3.2 million, including $1.8 million of general and administrative expenses, respectively. At March 31, 2014 , $2.0 million was included in Due to FSC CT, Inc. in the Consolidated Statement of Assets and Liabilities.

55
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Note 12. Financial Highlights


Three months
ended
March 31, 2014
Three months
ended
March 31, 2013
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Net asset value at beginning of period
$
9.85

$
9.88

$
9.85

$
9.92

Net investment income
0.25

0.28

0.51

0.56

Net unrealized appreciation (depreciation) on investments and secured borrowings
(0.03
)
0.02

(0.07
)
(0.07
)
Net realized gains (losses) on investments
(0.01
)
—

0.01

—

Distributions of ordinary income
(0.25
)
(0.29
)
(0.49
)
(0.58
)
Issuance of common stock
—

0.01

—

0.07

Net asset value at end of period
$
9.81

$
9.90

$
9.81

$
9.90

Per share market value at beginning of period
$
9.25

$
10.42

$
10.29

$
10.98

Per share market value at end of period
$
9.46

$
11.02

$
9.46

$
11.02

Total return (1)
4.96
%
8.73
%
(3.25
)%
6.13
%
Common shares outstanding at beginning of period
139,138

105,943

139,041

91,048

Common shares outstanding at end of period
139,138

106,209

139,138

106,209

Net assets at beginning of period
$
1,369,968

$
1,046,879

$
1,368,872

$
903,570

Net assets at end of period
$
1,365,297

$
1,050,961

$
1,365,297

$
1,050,961

Average net assets (2)
$
1,373,093

$
1,053,209

$
1,373,063

$
997,023

Ratio of net investment income to average net assets(3)
10.11
%
11.28
%
10.29
%
11.24
%
Ratio of total expenses to average net assets (excluding base management fee waiver) (3)
11.26
%
10.28
%
10.70
%
10.44
%
Base management fee waiver effect (3)
(0.07
)%
(0.51
)%
(0.04
)%
(0.26
)%
Ratio of net expenses to average net assets (3)
11.19
%
9.77
%
10.66
%
10.18
%
Ratio of portfolio turnover to average investments at fair value
2.91
%
9.93
%
5.44
%
14.89
%
Weighted average outstanding debt (4)
$
1,124,598


$
572,641

$
975,373

$
527,686

Average debt per share
$
8.08

$
5.40

$
7.01

$
5.26

__________
(1)
Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's dividend reinvestment plan. Total return is not annualized during interim periods.
(2)
Calculated based upon the weighted average net assets for the period.
(3)
Interim periods are annualized.
(4)
Calculated based upon the weighted average of loans payable for the period.

Note 13. Convertible Notes
On April 12, 2011, the Company issued $152 million unsecured convertible notes, including $2 million issued to Leonard M. Tannenbaum, the Company’s Chief Executive Officer. The Convertible Notes were issued pursuant to an Indenture, dated April 12, 2011 (the “Indenture”), between the Company and the Trustee.
The Convertible Notes mature on April 1, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Notes bear interest at a rate of 5.375% per annum payable semiannually in arrears on April 1 and October 1 of each year. 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,

56
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


holders may convert their Convertible Notes at any time. Upon conversion, the Company will deliver shares of its common stock. The conversion rate was initially, and currently is, 67.7415 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $14.76 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments, including for any cash dividends or distributions paid on shares of the Company’s common stock in excess of a monthly dividend of $0.1066 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. Based on the current conversion rate, the maximum number of shares of common stock that would be issued upon conversion of the $115 million convertible debt outstanding at March 31, 2014 is 7,790,273. If the Company delivers shares of common stock upon a conversion at the time that net asset value per share exceeds the conversion price in effect at such time, the Company’s stockholders may incur dilution. In addition, the Company’s stockholders will experience dilution in their ownership percentage of common stock upon the issuance of common stock in connection with the conversion of the Company’s convertible notes and any dividends paid on common stock will also be paid on shares issued in connection with such conversion after such issuance. The shares of common stock issued upon a conversion are not subject to registration rights.
The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.
The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Notes, and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture.
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $ 1.7 million and $ 3.4 million , respectively, related to the Convertible Notes.
The Company may repurchase the Convertible Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Convertible Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Convertible Notes surrendered for cancellation will be promptly canceled and no longer outstanding under the indenture. The Company did not repurchase Convertible Notes during the six months ended March 31, 2014 or March 31, 2013 .
As of March 31, 2014 , there were $115.0 million of Convertible Notes outstanding, which had a fair value of $122.6 million .

Note 14. Unsecured Notes
2019 Notes
On February 26, 2014, the Company issued $250.0 million in aggregate principal amount of its 4.875% unsecured notes due 2019 (the “2019 Notes”) for net proceeds of $244.6 million after deducting original issue discount of $1.4 million, underwriting commissions and discounts of $3.7 million and offering costs of $0.3 million.
The 2019 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated February 26, 2014 (collectively, the “2019 Notes Indenture”), between the Company and the Trustee. The 2019 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2019 Notes. The 2019 Notes will rank equally in right of payment with all of the Company’s existing and future liabilities that are not so subordinated. The 2019 Notes will effectively rank junior to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness. The 2019 Notes will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities.
Interest on the 2019 Notes is paid semi-annually on March 1 and September 1, at a rate of 4.875% per annum. The 2019 Notes mature on March 1, 2019 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity.
The 2019 Notes Indenture contains certain covenants, including covenants requiring the Company’s compliance with (regardless of whether the Company is subject to) 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 2019 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the

57
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 2019 Notes Indenture. The Company may repurchase the 2019 Notes in accordance with the 1940 Act and the rules promulgated thereunder. In addition, holders of the 2019 Notes can require the Company to repurchase the 2019 Notes at 100% of their principal amount upon the occurrence of a certain change of control events as described in the 2019 Notes Indenture. The 2019 Notes are issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the six months ended March 31, 2014 , the Company did not repurchase any of the 2019 Notes in the open market.
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $ 1.2 million related to the 2019 Notes.
As of March 31, 2014 , there were $250.0 million of 2019 Notes outstanding, which had a fair value of $256.0 million.
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 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 six months ended March 31, 2014 , the Company did not repurchase any of the 2024 Notes in the open market.
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $ 1.2 million and $ 2.3 million , respectively, related to the 2024 Notes.
As of March 31, 2014 , there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.0 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

58
FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts, percentages and as otherwise indicated)


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 six months ended March 31, 2014 , the Company did not repurchase any of the 2028 Notes in the open market.
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $1.3 million and $ 2.7 million , respectively, related to the 2028 Notes.
As of March 31, 2014 , there were $86.3 million of 2028 Notes outstanding, which had a fair value of $82.6 million .
Note 15. Secured Borrowings
The Company follows the guidance in ASC 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
As of March 31, 2014, secured borrowings at fair value totaled $47.8 million and the fair value of the investments that are associated with these secured borrowings was $136.4 million. These secured borrowings were the result of the Company’s completion of partial loan sales of two senior secured debt investments totaling $47.8 million during the three months ended March 31, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the six months ended March 31, 2014, there were no repayments on secured borrowings.
As of March 31, 2014 , there were $47.8 million of secured borrowings outstanding, which had a fair value of $47.8 million.
For the three and six months ended March 31, 2014 , the Company recorded interest expense of $0.2 million related its secured borrowings.

Note 16. Subsequent Events
The Company’s management evaluated subsequent events through the date of issuance of the Consolidated Financial Statements. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the Consolidated Financial Statements as of and for the six months ended March 31, 2014 .


59


Schedule 12-14
Fifth Street Finance Corp.
Schedule of Investments in and Advances to Affiliates
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
Six months ended March 31, 2014

Portfolio Company/Type of Investment(1)
Amount of
Interest,
Fees or
Dividends
Credited in
Income(2)
Fair Value
at October 1,
2013
Gross
Additions(3)
Gross
Reductions(4)
Fair Value
at March 31, 2014
Control Investments
Traffic Solutions Holdings, Inc.
Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
$
1,355

$
14,499

$
508

$
(238
)
$
14,769

LC Facility, 8.5% cash due 12/31/2016
129

—

4

(4
)
—

746,114 Series A Preferred Units
813

15,891

814

—

16,705

746,114 Common Stock Units
—

10,529

60

(673
)
9,916

TransTrade Operators, Inc.
First Lien Term Loan, 11% cash 3% PIK due 5/31/2016
1,018

13,524

1,020

(3,050
)
11,494

First Lien Revolver, 8% cash due 5/31/2016
5

—

—

—

—

596.67 Series A Common Units in TransTrade Holding LLC
—

—

—

—

—

5,200,000 Preferred Units in TransTrade Holding LLC
—

539

2,167

(2,706
)
—

HFG Holdings, LLC
First Lien Term Loan, 6% cash 4% PIK due 6/10/2019
4,857

93,297

2,018

(188
)
95,127

860,000 Class A Units
—

22,346

5,528

—

27,874

First Star Aviation, LLC
First Lien Term Loan, 9% cash 3% PIK due 1/9/2018
2,294

19,211

15,697

(942
)
33,966

10,104,401 Common Units
—

5,264

8,129

—

13,393

First Star Speir Aviation 1 Limited
First Lien Term Loan, 9% cash due 7/30/2018
977

—

21,180

(580
)
20,600

1,087,445 Common Units
—

—

1,087

—

1,087

First Star Bermuda Aviation Limited
First Lien Term Loan, 9% cash 3% PIK due 8/19/2018
1,018

—

12,699

(898
)
11,801

4,256,042 Common Units
—

—

4,256

—

4,256

Eagle Hospital Physicians, LLC
First Lien Term Loan A, 8% PIK due 8/1/2016
459

11,149

461

(34
)
11,576

First Lien Term Loan B, 8.1% PIK due 8/1/2016
127

3,050

127

(10
)
3,167

First Lien Revolver, 8% cash due 8/1/2016
45

—

1,637

(4
)
1,633

4,100,000 Class A Common Units
—

6,203

87

(40
)
6,250

Total Control Investments
$
13,097

$
215,502

$
77,479

$
(9,367
)
$
283,614

Affiliate Investments
Caregiver Services, Inc.
Second Lien Term Loan, 10% cash 2% PIK due 6/30/2019
473

—

9,217

(197
)
9,020

1,080,399 shares of Series A Preferred Stock
—

3,256

323

—

3,579

AmBath/ReBath Holdings, Inc.
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016
144

3,272

28

(754
)
2,546

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
1,970

25,317

695

(33
)
25,979

4,668,788 shares of Preferred Stock
—

87

504

—

591

Total Affiliate Investments
$
2,587

$
31,932

$
10,767

$
(984
)
$
41,715

Total Control & Affiliate Investments
$
15,684

$
247,434

$
88,246

$
(10,351
)
$
325,329


60


This schedule should be read in connection with the Company’s Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
(1)
The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.
(2)
Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.
(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on Investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category.
(4)
Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.

61


Schedule 12-14
Fifth Street Finance Corp.
Schedule of Investments in and Advances to Affiliates
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
Six months ended March 31, 2013
Portfolio Company/Type of Investment(1)
Amount of
Interest,
Fees or
Dividends
Credited in
Income(2)
Fair Value
at October 1,
2012
Gross
Additions(3)
Gross
Reductions(4)
Fair Value
at March 31, 2013
Control Investments
Coll Materials Group LLC
Second Lien Term Loan A, 12% cash due 11/1/2014
$
—

$
1,238

$
—

$
(1,238
)
$
—

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

1,999

—

(999
)
1,000

50% interest in CD Holdco, LLC
—

—

—

—

—

Traffic Solutions Holdings, Inc.
First Lien Term Loan A, LIBOR+8.5% (1.25% floor) cash due 8/10/2015
897

15,023

235

(612
)
14,646

Second Lien Term Loan, 12% cash 3% PIK due 12/31/2016
1,098

14,068

285

(7
)
14,346

First Lien Revolver, LIBOR+8.5% (1.25% floor) cash due 8/10/2015
23

—

23

(23
)
—

LC Facility, 8.5% cash due 12/31/2016
169

—

4

(4
)
—

746,114 Series A Preferred Units
—

14,377

736

—

15,113

746,114 Common Stock Units
—

6,535

4,874

—

11,409

Total Control Investments
$
2,187

$
53,240

$
6,157

$
(2,883
)
$
56,514

Affiliate Investments
Caregiver Services, Inc.
1,080,399 shares of Series A Preferred Stock
—

2,924

129

—

3,053

AmBath/ReBath Holdings, Inc.
First Lien Term Loan A, LIBOR+7% (3% floor) cash due 4/30/2016
225

4,268

48

(63
)
4,253

First Lien Term Loan B, 12.5% cash 2.5% PIK due 4/30/2016
1,873

23,995

825

(262
)
24,558

4,668,788 shares of Preferred Stock
—

—

—

—

—

Total Affiliate Investments
$
2,098

$
31,187

$
1,002

$
(325
)
$
31,864

Total Control & Affiliate Investments
$
4,285

$
84,427

$
7,159

$
(3,208
)
$
88,378


62


This schedule should be read in connection with the Company’s Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
(1)
The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.
(2)
Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Non-Control/Non-Affiliate categories, respectively.
(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on Investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category.
(4)
Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category.


63


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”, “seek,” “plan,” “should,” “estimate” 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, 2013 and elsewhere in this quarterly report on Form 10-Q for the quarter ended March 31, 2014 . 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.”
Market Conditions
The global economy has experienced economic uncertainty in recent years. Economic uncertainty impacts our business in many ways, including changing spreads, structures and purchase multiples as well as the overall supply of investment capital. See "Risk Factors — Risks Relating to Economic Conditions" in our annual report on Form 10-K for the year ended September 30, 2013.

64


Despite the economic uncertainty, we believe 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, expected recovery model or other alternative approaches.
Under the bond yield approach, we use bond yield models to determine the present value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.
Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flows, net income or revenues. We generally require portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business.
Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:
•
The quarterly valuation process begins with each portfolio company or investment being initially valued by our finance department;
•
Preliminary valuations are then reviewed and discussed with principals of the investment adviser;
•
Separately, independent valuation firms are engaged by our Board of Directors to prepare preliminary valuations on a selected basis and submit the reports to us;
•
Our finance department compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
•
Our finance department prepares a valuation report for the Audit Committee of our Board of Directors;
•
The Audit Committee of our Board of Directors is apprised of the preliminary valuations of the independent valuation firms;

65

•
The Audit Committee of our Board of Directors reviews the preliminary valuations with the portfolio managers of the investment adviser, 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 March 31, 2014 , and September 30, 2013 , 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. In certain cases, an independent valuation firm may perform a portfolio company valuation which is reviewed and, where appropriate, relied upon by our Board of Directors in determining the fair value of such investment.
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, 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
%
For the quarter ended September 30, 2013
86.5
%
For the quarter ended December 31, 2013
78.9
%
For the quarter ended March 31, 2014
80.7
%

As of March 31, 2014 and September 30, 2013 , approximately 96.1% and 91.3%, 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 including servicing, advisory, structuring and prepayment fees, which 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 March 31, 2014 , we had structured $4.5 million in aggregate exit fees across six portfolio investments upon the future exit of those investments.
Payment-in-Kind (PIK) Interest
Our loans typically contain contractual PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest

66

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, 2013 . 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 $28.9 million and represented 1.1% of the fair value of our portfolio of investments as of March 31, 2014 and $23.9 million or 1.3% as of September 30, 2013 . The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.

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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 senior secured and subordinated loans which we believe will provide superior risk-adjusted returns while maintaining adequate credit protection. The mix may change over time based on market conditions and management’s view of where the best risk adjusted returns are available.
A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:
March 31,
2014
September 30,
2013
Cost:
Senior secured debt
83.97
%
78.33
%
Subordinated debt
10.74

15.76

Collateralized loan obligation ("CLO") debt
1.11

1.59

Purchased equity
3.72

3.86

Equity grants
0.20

0.23

Limited partnership interests
0.26

0.23

Total
100.00
%
100.00
%
Fair Value:
Senior secured debt
83.24
%
77.53
%
Subordinated debt
10.71

15.65

CLO debt
1.10

1.56

Purchased equity
4.45

4.74

Equity grants
0.25

0.30

Limited partnership interests
0.25

0.22

Total
100.00
%
100.00
%



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

March 31,
2014
September 30,
2013
Cost:
Healthcare services
14.83

%
14.35

%
Education services
10.57

8.97

Oil & gas equipment services
9.07

4.06

Diversified support services
8.63

9.15

Advertising
6.84

8.28

Internet software & services
5.97

5.87

Specialized finance
4.74

6.68

IT consulting & other services
3.60

4.43

Leisure facilities
3.21

0.00

Pharmaceuticals
3.07

2.77

Airlines
3.07

1.32

Healthcare equipment
2.90

3.79

Specialty stores
2.51

3.68

Human resources & employment services
2.37

3.49

Data processing & outsourced services
2.26

1.25

Industrial machinery
2.00

0.91

Apparel, accessories & luxury goods
1.63

1.53

Construction and engineering
1.26

1.75

Air freight and logistics
1.25

0.90

Leisure products
1.22

2.54

Household products
1.12

1.60

Asset management & custody banks
1.11

1.59

Consumer electronics
1.08

0.00

Home improvement retail
1.07

1.54

Application software
0.83

0.69

Food distributors
0.67

0.99

Research & consulting services
0.65

0.94

Other diversified financial services
0.51

2.25

Specialty chemicals
0.51

1.08

Security & alarm services
0.50

0.71

Healthcare technology
0.49

—

Multi-sector holdings
0.26

0.20

Systems software
0.12

—

Auto parts & equipment
0.06

1.78

Thrift & mortgage finance
0.02

0.01

Environmental & facilities services
—

0.47

Construction materials
—

0.39

Building products
—

0.04

Total
100.00

%
100.00

%





69

March 31,
2014
September 30,
2013
Fair Value:
Healthcare services
14.89

%
14.47

%
Education services
10.54

8.90

Oil & gas equipment services
8.98

4.04

Diversified support services
8.58

9.04

Advertising
6.77

8.18

Internet software & services
6.07

6.03

Specialized finance
4.91

6.57

IT consulting & other services
3.60

4.43

Leisure facilities
3.20

0.01

Airlines
3.17

1.29

Pharmaceuticals
3.12

2.79

Healthcare equipment
2.92

3.74

Specialty stores
2.46

3.65

Human resources & employment services
2.37

3.45

Data processing & outsourced services
2.27

1.23

Industrial machinery
2.02

0.96

Construction and engineering
1.54

2.16

Apparel, accessories & luxury goods
1.44

1.46

Leisure products
1.26

2.64

Asset management & custody banks
1.10

1.56

Household products
1.10

1.55

Home improvement retail
1.08

1.51

Consumer electronics
1.07

—

Air freight and logistics
0.93

0.74

Application software
0.85

0.71

Food distributors
0.67

0.99

Research & consulting services
0.65

0.95

Other diversified financial services
0.51

2.22

Specialty chemicals
0.50

1.06

Security & alarm services
0.49

0.69

Healthcare technology
0.48

—

Multi-sector holdings
0.24

0.21

Systems software
0.12

—

Auto parts & equipment
0.08

1.90

Thrift & mortgage finance
0.02

0.01

Environmental & facilities services
—

0.43

Construction materials
—

0.39

Building products
—

0.04

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 4. 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 capital gains are expected.
•
Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
•
Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants

70

and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
•
Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.
The following table shows the distribution of our investments on the 1 to 4 investment ranking scale at fair value as of March 31, 2014 and September 30, 2013 :
March 31, 2014
September 30, 2013
Investment Ranking
Fair Value
% of Portfolio
Leverage Ratio
Fair Value
% of Portfolio
Leverage Ratio
1
$
112,521

4.20
%
2.67
$
122,769

6.49
%
2.67
2
2,557,461

95.27

4.79
1,770,277

93.51

4.70
3
14,316

0.53

NM
(1)
—

—

—
4
—

—

—
—

—

—
Total
$
2,684,298

100.00
%
4.69
$
1,893,046

100.00
%
4.57
_______________
(1) Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.
We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of March 31, 2014 , we had modified the payment terms of our investments in 17 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.
Loans and Debt Securities on Non-Accrual Status
As of March 31, 2014 and September 30, 2013 , there were no investments on which we had stopped accruing cash and/or PIK interest and OID income. As of March 31, 2013 , we had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013.
The percentages of our debt investments at cost and fair value by accrual status for the periods ended March 31, 2014 , September 30, 2013 and March 31, 2013 were as follows:
March 31, 2014
September 30, 2013
March 31, 2013

Cost
% of Debt Portfolio
Fair
Value
% of Debt Portfolio
Cost
% of Debt Portfolio
Fair
Value
% of Debt Portfolio
Cost
% of Debt Portfolio
Fair
Value
% of Debt Portfolio
Accrual
$
2,547,864

100.00
%
$
2,551,371

100.00
%
$
1,779,201

100.00
%
$
1,793,463

100.00
%
$
1,645,425

97.43
%
$
1,666,161

98.83
%
PIK non-accrual
—

—

—

—

—

—

—

—

6,203

0.37

—

—

Cash non-accrual (1)
—

—

—

—

—

—

—

—

37,224

2.20

19,733

1.17

Total
$
2,547,864

100.00
%
$
2,551,371

100.00
%
$
1,779,201

100.00
%
$
1,793,463

100.00
%
$
1,688,852

100.00
%
$
1,685,894

100.00
%
________________
(1)
Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.
The non-accrual status of our portfolio investments as of March 31, 2014 , September 30, 2013 and March 31, 2013 was as follows:
March 31, 2014
September 30, 2013
March 31, 2013
Coll Materials Group LLC (1)
—

—

Cash non-accrual
Eagle Hospital Physicians, Inc.
—

—

Cash non-accrual
Trans-Trade, Inc. - Term Loan B (1)
—

—

PIK non-accrual
________________
(1)
We did not hold this investment at March 31, 2014 or September 30, 2013 . See “— Discussion and Analysis of Results and Operations — Comparison of the three and six months ended March 31, 2014 and March 31, 2013 — Realized Gain (Loss) on Investments” for a discussion of our recent realization events.
Income non-accrual amounts for the three and six months ended March 31, 2014 and March 31, 2013 were as follows:

71


Three months
ended
March 31, 2014
Three months
ended
March 31, 2013
Six months
ended
March 31, 2014
Six months
ended
March 31, 2013
Cash interest income
$
—

$
1,008

$
—

$
1,008

PIK interest income
—

191

—

615

OID income
—

—

—

—

Total
$
—

$
1,199

$
—

$
1,623


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 six months ended March 31, 2014 and March 31, 2013
Total Investment Income
Total investment income includes interest income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, administrative fees, unused fees, amendment fees, advisory fees, structuring fees, exit fees, prepayment fees and waiver fees. Other investment income consists primarily of dividend income received from certain of our equity investments.
Total investment income for the three months ended March 31, 2014 and March 31, 2013 was $72.1 million and $54.7 million , respectively. For the three months ended March 31, 2014 , this amount primarily consisted of $59.5 million of interest income from portfolio investments (which included $5.5 million of PIK interest) and $12.5 million of fee income. For the three months ended March 31, 2013 , this amount primarily consisted of $41.7 million of interest income from portfolio investments (which included $4.0 million of PIK interest) and $11.9 million of fee income.
Total investment income for the six months ended March 31, 2014 and March 31, 2013 was $143.5 million and $106.5 million, respectively. For the six months ended March 31, 2014 , this amount primarily consisted of $113.6 million of interest income from portfolio investments (which included $11.1 million of PIK interest) and $29.6 million of fee income. For the six months ended March 31, 2013 , this amount primarily consisted of $80.3 million of interest income from portfolio investments (which included $7.8 million of PIK interest) and $24.7 million of fee income.
The increase in our total investment income for the three and six months ended March 31, 2014 as compared to the three and six months ended March 31, 2013 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 22 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received on our debt investments and a decrease in the weighted average yield of our debt investments from 11.4% to 10.8% during the year-over-year period.
Expenses
Expenses for the three months ended March 31, 2014 and March 31, 2013 were $37.9 million and $25.4 million, respectively. Expenses increased for the three months ended March 31, 2014 , as compared to the three months ended March 31, 2013 by $12.5 million. This was due primarily to increases in:
•
Base management fee, which was attributable to a 53.5% 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 17.7% increase in pre-incentive fee net investment income for the year-over-year period; and
•
Interest expense, which was attributable to a 96.4% increase in the weighted average debt outstanding for the year-over-year period.
Expenses for the six months ended March 31, 2014 and March 31, 2013 were $73.0 million and $50.6 million, respectively. Expenses increased for the six months ended March 31, 2014 as compared to the six months ended March 31, 2013 by $22.4 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;

72

•
Incentive fee, which was attributable to a 26.6% increase in pre-incentive fee net investment income for the year-over-year period; and
•
Interest expense, which was attributable to a 84.9% increase in the weighted average debt outstanding for the year-over-year period.
Gain on Extinguishment of Convertible Notes
During the six months ended March 31, 2014 and March 31, 2013 , we did not repurchase any of our unsecured convertible notes (“Convertible Notes”) in the open market. In previous periods, we recognized a gain on repurchasing Convertible Notes at a discount. 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 2019 Notes, 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 $17.4 million increase in total investment income and the $12.5 million increase in total expenses, net investment income for the three months ended March 31, 2014 reflected a $4.9 million , or 16.8% , increase compared to the three months ended March 31, 2013 .
As a result of the $37.0 million increase in total investment income and the $22.4 million increase in total expenses, net investment income for the six months ended March 31, 2014 reflected a $14.6 million, or 26.1%, increase compared to the six months ended March 31, 2013.
Realized Gain (Loss) on Investments
Realized gain (loss) is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
During the six months ended March 31, 2014 , we recorded investment realization events, including the following:
•
In October and December 2013, we received payments of $3.2 million from Stackpole Powertrain International Holding, L.P. related to the sale of our equity investment. A realized gain of $2.2 million was recorded on this transaction;
•
In October 2013, we received a payment of $8.9 million from Harden Healthcare, 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 the transaction;
•
In October 2013, we received a payment of $4.0 million from Capital Equipment Group, 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 the transaction. We also received an additional $0.9 million in connection with the sale of our common equity investment, realizing a gain of $0.6 million;
•
In November 2013, we received a payment of $10.0 million from IG Investments Holdings, 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 the transaction;
•
In November 2013, we received a payment of $15.7 million from CTM Group, 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 the transaction;
•
In December 2013, we received a payment of $0.4 million in connection with the exit of our debt investment in Saddleback Fence and Vinyl Products, Inc. A realized loss of $0.3 million was recorded on this transaction;
•
In December 2013, we received a payment of $7.2 million from Western Emulsions, 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 the transaction;

73

•
In January 2014, we received a payment of $5.1 million from BMC Acquisition, 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 the transaction;
•
In February 2014, we received a payment of $17.8 million from Ikaria 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 the transaction;
•
In February 2014, we received a payment of $30.8 million from Dexter Axle Company 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 March 2014, we received a payment of $9.9 million from Vestcom International, 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 the transaction; and
•
During the six months ended March 31, 2014 , we received payments of $231.3 million in connection with syndications of debt investments to other investors and sales of debt investments in the open market and recorded a net realized loss of $1.0 million.
During the six months ended March 31, 2013 , we recorded investment realization events, including the following:
•
In October 2012, we received a 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 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 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 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, we received a 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. 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 or $0.1 million;
•
In January 2013, we received a cash payment of $44.6 million from Welocalize, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In February 2013, we received a cash payment of $14.6 million from Edmentum, Inc. in full satisfaction of all obligations under the first lien loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;
•
In February 2013, we received a cash payment of $7.1 million from Advanced Pain Management Holdings, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In March 2013, we received a cash payment of $10.0 million from eResearch Technology, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction;

74

•
In March 2013, we received a cash payment of $15.0 million from AdVenture Interactive Corp. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
•
In March 2013, we received a cash payment of $19.5 million from idX Corporation in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on this transaction; and
•
During the six months ended March 31, 2013 , we received 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.
Net Unrealized Appreciation (Depreciation) on Investments
Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
During the three months ended March 31, 2014 , we recorded net unrealized depreciation of $2.6 million. This consisted of $8.6 million of net unrealized depreciation on debt investments, offset by $5.9 million of net unrealized appreciation on equity investments and $0.1 million of net reclassifications to realized losses (resulting in unrealized appreciation). During the three months ended March 31, 2013 , we recorded net unrealized appreciation of $2.7 million. This consisted of $6.1 million of net unrealized appreciation on equity investments, offset by $1.4 million of net reclassifications to realized gains on debt and equity investments (resulting in unrealized depreciation) and $2.0 million of net unrealized depreciation on debt investments.
During the six months ended March 31, 2014 , we recorded net unrealized depreciation of $8.3 million . This consisted of $10.4 million of net unrealized depreciation on debt investments and $2.6 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $4.7 million of net unrealized appreciation on equity investments. During the six months ended March 31, 2013 , we recorded net unrealized depreciation of $6.7 million. This consisted of $15.1 million of net unrealized depreciation on debt investments and $2.3 million of net reclassifications to realized gains (resulting in unrealized depreciation), offset by $10.7 million of net unrealized appreciation on equity investments.
Financial Condition, Liquidity and Capital Resources
Cash Flows
We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt and funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate.
For the six months ended March 31, 2014 , we experienced a net decrease in cash and cash equivalents of $102.0 million . During that period, we used $756.2 million of cash in operating activities, primarily for the funding of $1.1 billion of investments and net revolvers, partially offset by $322.3 million of principal payments, PIK payments and sale proceeds received and $70.5 million of net investment income. During the same period, cash provided by financing activities was $654.2 million , primarily consisting of $244.4 million of proceeds from the issuance of our 4.875% unsecured notes due 2019 (the “2019 Notes”), $43.3 million of net borrowings of SBA debentures, $47.8 million of proceeds from secured borrowings and $388.7 million of net borrowings under our credit facilities, partially offset by $62.2 million of cash distributions paid and $4.8 million of repurchases of common stock under our dividend reinvestment program.
For the six months ended March 31, 2013, we experienced a net decrease in cash and cash equivalents of $36.2 million. During that period, we used $406.8 million of cash in operating activities, primarily for the funding of $735.5 million of investments and net revolvers, partially offset by $280.0 million of principal payments, PIK payments and sale proceeds received and $55.9 million of net investment income. During the same period, cash provided by financing activities was $370.6 million, primarily consisting of $151.7 million of proceeds from issuances of our common stock, $31.8 million of net borrowings of SBA debentures, $172.3 million of net borrowings under our credit facilities and $75.0 million of proceeds from the issuance of the 5.875% unsecured notes due 2024 (the “2024 Notes”), partially offset by $53.6 million of cash distributions paid, $0.5 million of offering costs paid and $3.4 million of deferred financing costs paid.
As of March 31, 2014 , we had $45.4 million in cash and cash equivalents, portfolio investments (at fair value) of $2.68 billion , $19.0 million of interest and fees receivable, $225.0 million of SBA debentures payable, $576.7 million of borrowings outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $409.9 million of unsecured notes payable, $47.8 million of secured borrowings and unfunded commitments of $221.4 million .
As of September 30, 2013 , we had $147.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.89 billion , $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188.0 million of borrowings

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outstanding under our credit facilities, $115.0 million of Convertible Notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million .
Other Sources of Liquidity
We intend to continue to generate cash primarily from cash flows from operations, including interest earned, future borrowings (including secured borrowings relating to senior secured debt investments) 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. We maintain a universal shelf registration statement that allows for the public offering and sale of our common stock, debt securities and warrants to purchase such securities. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. In the future, we may also securitize a portion of our investments in first and second lien senior loans or unsecured debt or other assets. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. We may also from time to time enter into joint ventures with other investors to invest in similar securities.
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 senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.
In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Internal Revenue Code. See “Regulated Investment Company Status and Dividends” below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
As a business development company, under the 1940 Act, we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). This requirement limits the amount that we may borrow. As of March 31, 2014 , 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, 2012
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, 2012:
Date Declared
Record Date
Payment Date
Amount
per Share
Cash
Distribution
DRIP Shares
Issued
DRIP Shares
Value
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

10.3 million
136,052

1.3 million
August 5, 2013
September 13, 2013
September 30, 2013
0.0958

10.3 million
135,027

1.3 million
August 5, 2013
October 15, 2013
October 31, 2013
0.0958

11.9 million
142,320

1.4 million
August 5, 2013
November 15, 2013
November 29, 2013
0.0958

12.0 million
145,063

(1)
1.4 million
November 21, 2013
December 13, 2013
December 30, 2013
0.05

6.3 million
69,291

(1)
0.6 million
November 21, 2013
January 15, 2014
January 31, 2014
0.0833

10.5 million
114,033

(1)
1.1 million
November 21, 2013
February 14, 2014
February 28, 2014
0.0833

10.5 million
110,486

(1)
1.1 million
November 21, 2013
March 14, 2014
March 31, 2014
0.0833

11.0 million
64,748

(1)
0.6 million
November 21, 2013
April 15, 2014
April 30, 2014
0.0833

10.5 million
120,604

(1)
1.1 million
November 21, 2013
May 15, 2014
May 30, 2014
0.0833

February 6, 2014
June 16, 2014
June 30, 2014
0.0833

February 6, 2014
July 15, 2014
July 31, 2014
0.0833

February 6, 2014
August 15, 2014
August 29, 2014
0.0833

___________
(1) Shares were purchased on the open market and distributed.
The following table reflects share transactions that occurred from October 1, 2012 through March 31, 2014 :
Date
Transaction
Shares
Public Offering Price
Gross Proceeds
December 7, 2012
Public offering (1)
14,725,000
$
10.68

$157.3 million
April 2013
Public offering (1)
14,435,253
10.85

156.5 million
September 26, 2013
Public offering (1)
17,643,000
10.31

181.9 million
____________
(1) Includes the underwriters' partial exercise of their over-allotment option
Borrowings
SBIC Subsidiaries
Through wholly-owned subsidiaries, we sought and obtained two licenses from the SBA to operate SBIC subsidiaries. Specifically, on February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P. (“FSMP IV”), received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. On May 15, 2012, our wholly-owned subsidiary, Fifth Street Mezzanine Partners V, L.P. (“FSMP V”), received a license, effective May 10, 2012, from the SBA to operate as an SBIC. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
SBA regulations currently limit the amount that an SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million when they have at least $112.5 million in regulatory capital. As of March 31, 2014 , FSMP IV had $75 million in regulatory capital and $150 million in SBA-guaranteed debentures outstanding, which had a fair value of $133.3 million . These debentures bear interest at a weighted average interest rate of 3.567% (excluding the SBA annual charge), as follows:

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Rate Fix Date
Debenture
Amount
Fixed
Interest
Rate
SBA
Annual
Charge
September 2010
$
73,000

3.215
%
0.285
%
March 2011
65,300

4.084

0.285

September 2011
11,700

2.877

0.285

As of March 31, 2014 , FSMP V had $37.5 million in regulatory capital and $ 75.0 million in SBA-guaranteed debentures outstanding, which had a fair value of $62.8 million . These debentures bear interest at a weighted average interest rate of 2.835% (excluding the SBA annual charge), as follows:
Rate Fix Date
Debenture
Amount
Fixed
Interest
Rate
SBA
Annual Charge
March 2013
$
31,750

2.351
%
0.804
%
March 2014
43,250

3.191

0.804

As a result, the $225.0 million of SBA-guaranteed debentures held by our SBIC subsidiaries carry a weighted average interest rate of 3.323% as of March 31, 2014 .
For the three and six months ended March 31, 2014 , we recorded interest expense of $ 2.0 million and $ 4.0 million , respectively, related to the SBA-guaranteed debentures of both SBIC 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.
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. The maturity date of the Wells Fargo facility was April 25, 2016.
The Wells Fargo facility provided for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit were 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 included 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 have accelerated repayment under the facility.
The Wells Fargo facility was secured by all of the assets of Funding, and all of our equity interest in Funding. We used the Wells Fargo facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the

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facility was subject to the satisfaction of certain conditions. Our borrowings under the Wells Fargo facility bore interest at a weighted average interest rate of 2.686% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , we recorded interest expense of $1.0 million and $1.8 million, respectively related to the Wells Fargo facility.
Effective February 21, 2014, we, together with Funding, terminated the Wells Fargo facility. In connection therewith, the Amended and Restated Loan and Servicing Agreement and other related documents governing the Wells Fargo facility were also terminated. As such, we have no borrowing capacity under the Wells Fargo facility as of March 31, 2014. Upon termination of the Wells Fargo facility, we accelerated the $0.7 million remaining unamortized fee balance into interest expense.
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 March 31, 2014 , the ING facility permitted up to $650 million of borrowings with an accordion feature allowing for future expansion of the facility up to a total of $800 million, and borrowings under the facility bore interest at a rate equal to LIBOR (1-, 2-, 3- or 6-month, at our option) plus 2.25% 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 August 6, 2017 and the maturity date of the facility is August 6, 2018.
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 March 31, 2014 , we had $515.3 million of borrowings outstanding under the ING facility, which had a fair value of $515.3 million . Our borrowings under the ING facility bore interest at a weighted average interest rate of 2.691% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , we recorded interest expense of $3.6 million and $6.4 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.
As of March 31, 2014 , the Sumitomo facility permitted up to $125 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, 2016, and the maturity date of the facility is September 16, 2020, 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 will 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 March 31, 2014 , we had $61.4 million of borrowings outstanding under the Sumitomo facility. Our borrowings under the Sumitomo facility bore interest at a weighted average interest rate of 2.514% for the six months ended March 31, 2014 . For the three and six months ended March 31, 2014 , we recorded interest expense of $0.6 million and $1.1 million , respectively, related to the Sumitomo facility.
As of March 31, 2014 , 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 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)
ING facility
Minimum shareholders’ equity
Net assets shall not be less than the greater of (a) 40% of total assets; and (b) $825 million plus 50% of the aggregate net proceeds of all sales of equity interests after August 6, 2013
$913 million
$1,370 million
Asset coverage ratio
Asset coverage ratio shall not be less than 2.10:1
2.10:1
2.63:1
Interest coverage ratio
Interest coverage ratio shall not be less than 2.50:1
2.50:1
5.22:1
___________
(1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Form 10-Q for the quarter ended December 31, 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 March 31, 2014.
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, 2013 .
The following table reflects material credit facility and SBA debenture transactions that have occurred since October 1, 2009. Amounts available and drawn are as of March 31, 2014 .

80

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

—

—

LIBOR (3) + 2.50%
2/21/2014
Terminated credit facility
—

—

—

—

—

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%
2/29/2012
Amended credit facility
230 million

1.5 million

LIBOR + 3.00%/3.25%
11/30/2012
Amended credit facility
385 million

2.2 million

LIBOR + 2.75%
1/7/2013
Expanded credit facility
445 million

0.3 million

LIBOR + 2.75%
8/6/2013
Amended credit facility
480 million

1.8 million

LIBOR + 2.25%
10/22/2013
Expanded credit facility
605 million

0.7 million

LIBOR + 2.25%
1/30/2014
Expanded credit facility
650 million

0.1 million

650 million

515 million

135 million

LIBOR (4) + 2.25%
SBA
2/16/2010
Received capital commitment
75 million

0.8 million

9/21/2010
Received capital commitment
150 million

0.8 million

7/23/2012
Received capital commitment
225 million

0.8 million

225 million

225 million

—

3.323% (2)
Sumitomo facility
9/16/2011
Entered into credit facility
200 million

2.5 million

LIBOR + 2.25%
10/30/2013
Reduced credit facility
125 million

—

73 million

(1)
61 million

12 million

LIBOR (3) + 2.25%
_______________
(1)
Availability to increase upon our decision to further collateralize the facility
(2)
Weighted average interest rate of locked debentures (excludes the SBA annual charge)
(3)
1-month
(4)
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 March 31, 2014 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

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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 six months ended March 31, 2014 or March 31, 2013, we did not repurchase any of the Convertible Notes in the open market.
For the three and six months ended March 31, 2014 , we recorded interest expense of $1.7 million and $3.4 million, respectively, related to the Convertible Notes.
As of March 31, 2014 , there were $115.0 million Convertible Notes outstanding, which had a fair value of $122.6 million .
2019 Notes
On February 26, 2014, we issued $250.0 million in aggregate principal amount of our 4.875% unsecured notes due 2019 (the “2019 Notes”) for net proceeds of $244.6 million after deducting original issue discount of $1.4 million, underwriting commissions and discounts of $3.7 million and offering costs of $0.3 million.
The 2019 Notes were issued pursuant to an indenture, dated April 30, 2012, as supplemented by the first supplemental indenture, dated February 26, 2014 (collectively, the “2019 Notes Indenture”), between us and the Trustee. The 2019 Notes are our general unsecured obligations that rank senior in right of payment to all of our existing and future indebtedness that is expressly subordinated in right of payment to the 2019 Notes. The 2019 Notes will rank equally in right of payment with all of our existing and future liabilities that are not so subordinated. The 2019 Notes will effectively rank junior to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness. The 2019 Notes will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.
Interest on the 2019 Notes is paid semi-annually on March 1 and September 1, at a rate of 4.875% per annum. The 2019 Notes mature on March 1, 2019 and may be redeemed in whole or in part at any time or from time to time at our option prior to maturity.
The 2019 Notes Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) 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 2019 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 2019 Notes Indenture. We may repurchase the 2019 Notes in accordance with the 1940 Act and the rules promulgated thereunder. In addition, holders of the 2019 Notes can require us to repurchase the 2019 Notes at 100% of their principal amount upon the occurrence of a certain change of control events as described in the 2019 Notes Indenture. The 2019 Notes are issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. During the six months ended March 31, 2014 , we did not repurchase any of the 2019 Notes in the open market.
For the three and six months ended March 31, 2014 , we recorded interest expense of $ 1.2 million related to the 2019 Notes.
As of March 31, 2014 , there were $250.0 million of 2019 Notes outstanding, which had a fair value of $256.0 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.

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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 six months ended March 31, 2014 and March 31, 2013 , we did not repurchase any of the 2024 Notes in the open market.
For the three and six months ended March 31, 2014 , we recorded interest expense of $1.2 million and $2.3 million, respectively, related to the 2024 Notes.
As of March 31, 2014 , there were $75.0 million 2024 Notes outstanding, which had a fair value of $74.0 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 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 six months ended March 31, 2014 , we did not repurchase any of the 2028 Notes in the open market.
For the three and six months ended March 31, 2014 , we recorded interest expense of $1.3 million and $ 2.7 million , respectively, related to the 2028 Notes.
As of March 31, 2014 , there were $86.3 million of 2028 Notes outstanding, which had a fair value of $82.6 million .
Secured Borrowings
We follow the guidance in ASC 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on our Consolidated Statement of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
As of March 31, 2014, secured borrowings at fair value totaled $47.8 million and the fair value of the loans that are associated with these secured borrowings was $136.4 million. These secured borrowings were the result of the completion of partial loan sales of two senior secured debt investments totaling $47.8 million during the three months ended March 31, 2014 that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and these partial loan sales were treated as secured borrowings. During the six months ended March 31, 2014, there were no repayments on secured borrowings.
As of March 31, 2014 , there were $47.8 million of secured borrowings outstanding, which had a fair value of $47.8 million.

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For the three and six months ended March 31, 2014 , we recorded interest expense of $0.2 million related to the secured borrowings.
Total interest expense for the three and six months ended March 31, 2014 was $12.8 million and $ 23.0 million , respectively. Total interest expense for the three and six months ended March 31, 2013 was $7.8 million and $ 14.9 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 March 31, 2014 , our only off-balance sheet arrangements consisted of $221.4 million of unfunded commitments, which was comprised of $195.7 million to provide debt financing to certain of our portfolio companies and $25.7 million related to unfunded limited partnership interests. As of September 30, 2013 , our only off-balance sheet arrangements consisted of $149.5 million , which was comprised of $126.8 million to provide debt financing to certain of our portfolio companies and $22.7 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 our Consolidated Statement of Assets and Liabilities and are not reflected on our Consolidated Statement of Assets and Liabilities.

84


A summary of the composition of unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of March 31, 2014 and September 30, 2013 is shown in the table below:
March 31, 2014
September 30, 2013
Lift Brands Holdings, Inc.
$
16,000

$
—

BMC Software Finance, Inc.
15,000

—

Desert NDT, LLC
15,000

—

Drugtest, Inc.
10,900

20,000

RP Crown Parent, LLC
10,000

9,000

P2 Upstream Acquisition Co.
10,000

—

Deltek, Inc.
9,880

8,667

Pingora MSR Opportunity Fund I, LP (limited partnership interest)
9,337

9,792

InMotion Entertainment Group, LLC
8,273

—

Yeti Acquisition, LLC
6,500

7,500

ISG Services, LLC
6,000

6,000

Thing5, LLC
6,000

—

Med-Data, Incorporated
6,000

—

I Drive Safely, LLC
5,000

5,000

Adventure Interactive, Corp.
5,000

5,000

First American Payment Systems, LP
5,000

5,000

Reliance Communications, LLC
5,000

2,750

All Web Leads, Inc.
5,000

—

OnCourse Learning Corporation
4,750

—

Integrated Petroleum Technologies, Inc.
4,678

—

Discovery Practice Management, Inc.
4,589

1,000

World 50, Inc.
4,000

4,000

Refac Optical Group
3,600

8,000

Charter Brokerage, LLC
3,467

4,000

Phoenix Brands Merger Sub LLC
3,429

3,429

American Cadastre, LLC
2,780

—

OmniSYS Acquisition Corporation
2,500

—

First Choice ER, LLC (1)
2,157

—

Teaching Strategies, LLC
2,000

5,000

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

2,000

CPASS Acquisition Company
1,750

2,500

Moelis Capital Partners Opportunity Fund I-B, LP (limited partnership interest)
1,700

—

Olson + Co., Inc.
1,673

2,105

Tailwind Capital Partners II, LP (limited partnership interest)
1,622

—

Beecken Petty O'Keefe Fund IV, LP (limited partnership interest)
1,609

2,000

Riverside Fund V, LP (limited partnership interest)
1,582

1,712

SPC Partners V, LP (limited partnership interest)
1,572

—

CCCG, LLC
1,520

1,520

Enhanced Recovery Company, LLC
1,500

3,500

Sterling Capital Partners IV, LP (limited partnership interest)
1,398

1,528

Milestone Partners IV, LP (limited partnership interest)
1,291

1,414

Ansira Partners, Inc.
1,190

1,190

Personable Holdings, Inc.
1,142

3,409

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

1,000

Total Military Management, Inc.
857

—

2Checkout, Inc.
850

2,850

Genoa Healthcare Holdings, LLC
833

1,000

HealthDrive Corporation
734

734

Garretson Firm Resolution Group, Inc.
644

—

Bunker Hill Capital II (QP), LP (limited partnership interest)
639

786

Riverlake Equity Partners II, LP (limited partnership interest)
564

638

ACON Equity Partners III, LP (limited partnership interest)
482

671

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

351

Riverside Fund IV, LP (limited partnership interest)
322

287

TransTrade Operators, Inc.
255

—


85


RCP Direct, LP (limited partnership interest)
250

524

Eagle Hospital Physicians, Inc.
233

1,867

HealthEdge Software, Inc.
—

5,000

Mansell Group, Inc.
—

2,000

Physicians Pharmacy Alliance, Inc.
—

2,000

Miche Bag, LLC
—

1,500

BMC Acquisition, Inc.
—

1,250

Total
$
221,403

$
149,474

________________
(1) In addition to its revolving commitment, we have extended a $175.0 million delayed draw term loan facility to First Choice ER, LLC. Specific amounts are made available to the borrower as certain financial requirements are satisfied. As of March 31, 2014, the total amount available to the borrower under this delayed draw facility was $16.1 million, and the facility was undrawn as of this date.


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Contractual Obligations
The following table reflects information pertaining to our debt outstanding under the SBA debentures payable, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes, our 2024 Notes, 2028 Notes, our 2019 Notes and secured borrowings:
Debt Outstanding as of
September 30, 2013
Debt Outstanding as of
March 31, 2014
Weighted average debt outstanding for the six months ended
March 31, 2014
Maximum debt outstanding
for the six months ended
March 31, 2014
SBA debentures payable
$
181,750

$
225,000

$
203,391

$
225,000

Wells Fargo facility
20,000

—

35,363

55,072

ING facility
168,000

515,250

343,926

515,250

Sumitomo facility
—

61,431

63,421

83,500

Convertible Notes
115,000

115,000

115,000

115,000

2024 Notes
75,000

75,000

75,000

75,000

2028 Notes
86,250

86,250

86,250

86,250

2019 Notes
—

250,000

45,330

250,000

Secured borrowings
—

47,750

7,692

47,750

Total debt
$
646,000

$
1,375,681

$
975,373

$
1,385,877

The following table reflects our contractual obligations arising from the SBA debentures payable, the Wells Fargo facility, the ING facility, the Sumitomo facility, our Convertible Notes, our 2024 Notes, our 2028 Notes, our 2019 Notes and secured borrowings:
Payments due by period as of March 31, 2014
Total
< 1 year
1-3 years
3-5 years
> 5 years
SBA debentures payable
$
225,000

$
—

$
—

$
—

$
225,000

Interest due on SBA debentures
68,788

8,744

17,749

17,725

24,570

ING facility
515,250

—

—

515,250

—

Interest due on ING facility
54,607

12,559

25,118

16,930

—

Sumitomo facility
61,431

—

—

61,431

—

Interest due on Sumitomo facility
6,598

1,477

2,955

2,166

—

Convertible Notes
115,000

—

115,000

—

—

Interest due on Convertible Notes
12,396

6,181

6,215

—

—

Secured Borrowings
47,750

—

—

47,750

—

Interest due on secured borrowings
9,504

2,300

4,600

2,604

—

2024 Notes
75,000

—

—

—

75,000

Interest due on 2024 Notes
46,670

4,406

8,813

8,813

24,638

2028 Notes
86,250

—

—

—

86,250

Interest due on 2028 Notes
74,451

5,283

10,566

10,566

48,036

2019 Notes
250,000

—

—

250,000

—

Interest due on 2019 Notes
59,970

12,188

24,375

23,407

—

Total
$
1,708,665

$
53,138

$
215,391

$
956,642

$
483,494


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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 2013). 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

88


preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our “Incentive Fee Capital Gains,” which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three and six months ended March 31, 2014 , we incurred fees of $22.0 million and $43.1 million, respectively, under the investment advisory agreement. For the three months ended March 31, 2014 , the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to assets funded with proceeds from secured borrowings, which resulted in a waiver of $0.2 million. For the three months ended March 31, 2013 , the Investment Adviser voluntarily agreed to waive the portion of the base management fee attributable to certain new investments that closed prior to quarter end, which resulted in a waiver of $1.3 million.
Pursuant to the administration agreement entered into as of January 1, 2014 with FSC CT, Inc., which is controlled by Mr. Tannenbaum, FSC CT, Inc. we are furnished 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 CT, 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 reimburse our allocable portion of overhead and other expenses incurred in performing the 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. The administration agreement with FSC, CT, Inc. has terms substantially similar to the terms of our prior administration agreement with FSC, Inc. During the three and six months ended March 31, 2014 , we have incurred expenses of $1.5 million and $3.2 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 May 2, 2014, one new lender joined the ING facility and one existing lender increased its commitment, increasing our borrowing capacity to $670 million from $650 million.
On May 2, 2014, we and Trinity Universal Insurance Company ("Trinity"), a subsidiary of Kemper Corporation, entered into a limited liability company agreement to co-manage Senior Loan Fund JV I, LLC ("SLF JV I"). We and Trinity have committed to provide $100 million of subordinated notes and equity to the joint venture, with us providing $87.5 million and Trinity providing $12.5 million. In addition, SLF JV I intends to seek up to $200 million in third party financing. SLF JV I is expected to invest in middle market and other corporate debt securities.

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act (See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation”). Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.
As of March 31, 2014 , 74.0% of our debt investment portfolio (at cost and fair value) bore interest at floating rates. The composition of our floating rate debt investments by cash interest rate floor (excluding PIK) as of March 31, 2014 and September 30, 2013 was as follows:
March 31, 2014
September 30, 2013
Fair Value
% of Floating
Rate  Portfolio
Fair Value
% of Floating
Rate  Portfolio
Under 1%
$
137,435

7.28
%
$
115,659

9.57
%
1% to under 2%
1,669,244

88.39

1,007,366

83.35

2% to under 3%
49,938

2.64

48,649

4.03

3% and over
31,818

1.69

36,913

3.05

Total
$
1,888,435

100.00
%
$
1,208,587

100.00
%
Based on our Consolidated Statement of Assets and Liabilities as of March 31, 2014 , 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
$
73,800

$
(31,000
)
$
42,800

400
54,900

(24,700
)
30,200

300
36,000

(18,500
)
17,500

200
17,300

(12,200
)
5,100

100
1,700

(6,000
)
(4,300
)
__________
(1)
A decline in interest rates would not have a material impact on our Consolidated Financial Statements.
We regularly measure exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows a comparison of the interest rate base for our interest-bearing cash and outstanding investments, at principal, and our outstanding borrowings as of March 31, 2014 and September 30, 2013 :
March 31, 2014
September 30, 2013
Interest Bearing
Cash and Investments
Borrowings
Interest Bearing
Cash and Investments
Borrowings
Money market rate
$
45,396

$
—

$
147,359

$
—

Prime rate
18,185

—

2,886

—

LIBOR
1-month
62,677

576,681

57,604

188,000

3-month
1,809,906

47,750

1,143,068

—

Fixed rate
664,817

749,878

582,340

458,000

Total
$
2,600,981

$
1,374,309

$
1,933,257

$
646,000

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

90


the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in timely identifying, recording, processing, summarizing, and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Currently, we are party to pending litigation but there are no material claims against us.
I tem 1A. Risk Factors.
There have been no material changes during the three months ended March 31, 2014 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2013 .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 5. Other Information.
On May 2, 2014, we entered into incremental assumption agreements to increase the size of our syndicated revolving credit facility with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent (the "ING facility"), by $20 million. The size of the ING facility is now $670 million, with an accordion feature allowing for potential future expansion up to $800 million, and the facility includes 16 lenders. The final maturity of the facility remains August 6, 2018.

Item 6. Exhibits.

Exhibit
Number
Description of Exhibit
10.1
Senior Loan Fund JV I, LLC Limited Liability Company Agreement dated May 2, 2014, by and between Fifth Street Finance Corp. and Trinity Universal Insurance Company (incorporated by reference to Exhibit 10.1 filed with Fifth Street Finance Corp.'s Form 8-K (File No. 001-33901) filed on May 7, 2014).
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
_______________
*Filed herewith



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIFTH STREET FINANCE CORP.
Date: May 7, 2014
By:
/s/    Leonard M. Tannenbaum
Leonard M. Tannenbaum
Chairman and Chief Executive Officer
Date: May 7, 2014
By:
/s/    Alexander C. Frank
Alexander C. Frank
Chief Financial Officer


93


EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
10.1
Senior Loan Fund JV I, LLC Limited Liability Company Agreement dated May 2, 2014, by and between Fifth Street Finance Corp. and Trinity Universal Insurance Company (incorporated by reference to Exhibit 10.1 filed with Fifth Street Finance Corp.'s Form 8-K (File No. 001-33901) filed on May 7, 2014).
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
______________
*Filed herewith


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