News Column

FS INVESTMENT CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts)

August 14, 2014

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and the "Company" refer to FS Investment Corporation.



Forward-Looking Statements

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



our business prospects and the prospects of the companies in which we may

invest; the impact of the investments that we expect to make; the ability of our portfolio companies to achieve their objectives; our current and expected financings and investments;



receiving and maintaining corporate credit ratings and changes in the

general interest rate environment;



the adequacy of our cash resources, financing sources and working capital;

the timing and amount of cash flows, distributions and dividends, if any,

from our portfolio companies; our contractual arrangements and relationships with third parties;



actual and potential conflicts of interest with FB Advisor, FS Investment

Advisor, LLC, FS Energy and Power Fund, FSIC II Advisor, LLC, FS

Investment Corporation II, FSIC III Advisor, LLC, FS Investment

Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities

Fund, GDFM or any of their affiliates;



the dependence of our future success on the general economy and its effect

on the industries in which we may invest; our use of financial leverage;



the ability of FB Advisor to locate suitable investments for us and to

monitor and administer our investments;



the ability of FB Advisor or its affiliates to attract and retain highly

talented professionals; our ability to maintain our qualification as a RIC and as a BDC;

the impact on our business of the Dodd-Frank Wall Street Reform and



Consumer Protection Act and the rules and regulations issued thereunder;

the effect of changes to tax legislation and our tax position; and the tax status of the enterprises in which we may invest.



In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:

changes in the economy;



risks associated with possible disruption in our operations or the economy

generally due to terrorism or natural disasters; 56



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future changes in laws or regulations and conditions in our operating

areas; and the price at which shares of our common stock may trade on the NYSE. We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.



Overview

We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007, and commenced investment operations on January 2, 2009. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. On April 16, 2014, shares of our common stock began trading on the NYSE under the ticker symbol "FSIC". This listing accomplished our goal of providing our stockholders with greatly enhanced liquidity. Our investment activities are managed by FB Advisor and supervised by our board of directors, a majority of whom are independent. Under the July 2014 investment advisory agreement, we have agreed to pay FB Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FB Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FB Advisor in identifying investment opportunities and makes investment recommendations for approval by FB Advisor according to guidelines set by FB Advisor.



Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.

Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured specifically for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not expect to make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions. Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders and collateralized loan obligations, or CLOs. 57



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In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market's apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company's financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments. We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FB Advisor and GDFM. In addition, our relationship with GSO Capital Partners LP, the parent of GDFM and one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities. Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio. Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the "over-the-counter" market for institutional loans or may issue loans to our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity or the equity-related securities in our target companies, generally in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, other debt securities and derivatives, including total return swaps and credit default swaps. The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans in which we invest may be rated by a nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than "Baa3" by Moody's Investors Service, Inc., or Moody's, or lower than "BBB-" by Standard & Poor's Ratings Services).We also invest in non-rated debt securities. 58



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Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold. Expenses Our primary operating expenses include the payment of advisory fees and other expenses under the July 2014 investment advisory agreement and the administration agreement, interest expense from financing facilities and other indebtness, and other expenses necessary for our operations. Our investment advisory fee compensates FB Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FB Advisor is responsible for compensating our investment sub-adviser. We reimburse FB Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FB Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FB Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. FB Advisor will allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics.



Expense Reimbursement

Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from proceeds of the sale of shares of our common stock or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders. 59



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Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter. Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by "other operating expenses" during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. "Other operating expenses" means our total "operating expenses" (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies. We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party. Franklin Square Holdings is controlled by our chairman and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters. As of June 30, 2014, there were no unreimbursed expense support payments subject to future reimbursement by us.



Portfolio Investment Activity for the Three and Six Months Ended June 30, 2014 and for the Year Ended December 31, 2013

During the six months ended June 30, 2014, we made investments in portfolio companies totaling $1,209,195. During the same period, we sold investments for proceeds of $673,017 and received principal repayments of $502,515. As of June 30, 2014, our investment portfolio, with a total fair value of $4,227,103, consisted of interests in 125 portfolio companies (54% in first lien senior secured loans, 18% in second lien senior secured loans, 9% in senior secured bonds, 10% in subordinated debt, 3% in collateralized securities and 60



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6% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $181.0 million. As of June 30, 2014, the investments in our portfolio were purchased at a weighted average price of 97.4% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 29.7% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 9.9% based upon the amortized cost of our investments. During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,641,733. During the same period, we sold investments for proceeds of $1,137,264 and received principal repayments of $1,373,623. As of December 31, 2013, our investment portfolio, with a total fair value of $4,137,581, consisted of interests in 165 portfolio companies (51% in first lien senior secured loans, 22% in second lien senior secured loans, 9% in senior secured bonds, 10% in subordinated debt, 4% in collateralized securities and 4% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $190.7 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 97.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 40.7% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 10.1% based upon the amortized cost of our investments. Total Portfolio Activity The following tables present certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2014: For the Three Months Ended For the Six Months Ended Net Investment Activity June 30, 2014 June 30, 2014 Purchases $ 737,704 $ 1,209,195 Sales and Redemptions (609,417 ) (1,175,532 ) Net Portfolio Activity $ 128,287 $ 33,663 For the Three Months Ended For the Six Months Ended June 30, 2014 June 30, 2014 New Investment Activity by Asset Class Purchases Percentage Purchases Percentage Senior Secured Loans-First Lien $ 529,810 72 % $ 697,850 58 % Senior Secured Loans-Second Lien 79,727 11 % 256,545 21 % Senior Secured Bonds 41,009 6 % 94,189 8 % Subordinated Debt 48,224 6 % 94,325 8 % Collateralized Securities - - - - Equity/Other 38,934 5 % 66,286 5 % Total $ 737,704 100 % $ 1,209,195 100 % 61



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The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014 (Unaudited) December 31, 2013 Amortized Percentage Amortized Percentage Cost(1) Fair Value of



Portfolio Cost(1) Fair Value of Portfolio Senior Secured Loans-First Lien $ 2,262,035$ 2,292,484

54 % $ 2,080,228$ 2,123,608 51 % Senior Secured Loans-Second Lien 761,959 780,839 18 % 875,276 897,845 22 % Senior Secured Bonds 386,165 365,379 9 % 414,297 385,548 9 % Subordinated Debt 412,526 426,787 10 % 421,964 426,728 10 % Collateralized Securities 96,641 113,245 3 % 120,206 140,508 4 % Equity/Other 209,539 248,369 6 % 142,114 163,344 4 % Total $ 4,128,865$ 4,227,103 100 % $ 4,054,085$ 4,137,581 100 %



(1) Amortized costs represent the original cost adjusted for the amortization of

premiums and/or accretion of discounts, as applicable, on investments.

The following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2014 and December 31, 2013: June 30, December 31, 2014 2013 Number of Portfolio Companies 125



165

% Variable Rate (based on fair value) 71.2 % 72.2 % % Fixed Rate (based on fair value) 22.9 % 23.5 % % Income Producing Equity or Other Investments (based 2.5 % 2.4 % on fair value) % Non-Income Producing Equity or Other Investments (based on fair value) 3.4 % 1.9 % Average Annual EBITDA of Portfolio Companies $ 181,000



$ 190,700 Weighted Average Purchase Price of Investments (as a % of par or stated value)

97.4 %



97.3 % Weighted Average Credit Rating of Investments that were Rated

B3 B3 % of Investments on Non-Accrual 0.5 % - Gross Portfolio Yield Prior to Leverage (based on amortized cost) 9.9 % 10.1 % Gross Portfolio Yield Prior to Leverage (based on amortized cost)-Excluding Non-Income Producing Assets 10.3 % 10.2 % Direct Originations



The following tables present certain selected information regarding our direct originations for the three and six months ended June 30, 2014:

For the For the Three Months Ended Six Months Ended Net Direct Originations June 30, 2014 June 30, 2014 Total Commitments (including unfunded commitments) $ 529,871 $ 898,904 Exited Investments (including partial paydowns) (114,422 ) (241,386 ) Net Direct Originations $ 415,449 $ 657,518 62



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New Direct Originations by Asset Class (including unfunded Commitment

Commitment commitments) Amount Percentage Amount



Percentage

Senior Secured Loans-First Lien $ 401,866 76 % $ 490,039 54 % Senior Secured Loans-Second Lien - - 240,332 27 % Senior Secured Bonds 27,773 5 % 43,523 5 % Subordinated Debt 65,122 12 % 72,622 8 % Collateralized Securities - - - - Equity/Other 35,110 7 % 52,388 6 % Total $ 529,871 100 % $ 898,904 100 % For the Three For the Six Months Ended Months Ended June 30, 2014 June 30, 2014 Average New Direct Origination Commitment Amount $ 44,156$ 35,956 Weighted Average Maturity for New Direct Originations 1/6/20 4/29/20 Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period 10.4 % 9.9 % Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period-Excluding Non-Income Producing Assets 11.2 % 10.5 % Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period 11.2 % 10.3 %



The following table presents certain selected information regarding our direct originations as of June 30, 2014 and December 31, 2013:

Characteristics of All Direct Originations held in Portfolio June 30, 2014

December 31, 2013 Number of Portfolio Companies 43 35 Average Annual EBITDA of Portfolio Companies $ 45,800 $ 34,900



Average Leverage Through Tranche of Portfolio Companies-Excluding Equity / Other and Collateralized Securities

4.1x 4.0x % of Investments on Non-Accrual - -



Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations

9.8 % 9.9 %



Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations-Excluding Non-Income Producing Assets

10.1 % 10.0 %



Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of June 30, 2014 and December 31, 2013:

June 30, 2014 December 31, 2013 Percentage Percentage Fair of Fair of Portfolio Composition by Strategy Value Portfolio Value Portfolio Direct Originations $ 2,788,147 66 % $ 2,096,806 51 % Opportunistic 928,235 22 % 1,155,322 28 % Broadly Syndicated/Other 510,721 12 % 885,453 21 % Total $ 4,227,103 100 % $ 4,137,581 100 % 63



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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2014 and December 31, 2013: June 30, 2014 (Unaudited) December 31, 2013 Fair Percentage of Fair Percentage of Industry Classification Value Portfolio Value Portfolio Automobiles & Components $ 19,179 0 % $ 51,551 1 % Capital Goods 896,040 21 % 858,352 21 % Commercial & Professional Services 193,624 5 % 318,196 8 % Consumer Durables & Apparel 307,110 7 % 306,917 7 % Consumer Services 626,699 15 % 436,650 11 % Diversified Financials 118,350 3 % 160,678 4 % Energy 477,054 11 % 468,036 11 % Food & Staples Retailing 23,059 1 % 29,484 1 % Food, Beverage & Tobacco - - 4,042 0 % Health Care Equipment & Services 152,517 4 % 176,010 4 % Household & Personal Products 65,000 1 % 66,300 2 % Insurance - - 17,814 0 % Materials 268,719 6 % 233,719 6 % Media 163,552 4 % 193,283 5 % Pharmaceuticals, Biotechnology & Life Sciences 43,029 1 % 57,794 1 % Real Estate 24,250 1 % - - Retailing 69,573 2 % 69,171 2 % Software & Services 365,431 9 % 366,976 9 % Technology Hardware & Equipment 143,210 3 % 134,121 3 % Telecommunication Services 191,357 4 % 178,977 4 % Transportation 75,000 2 % 9,510 0 % Utilities 4,350 0 % - - Total $ 4,227,103 100 % $ 4,137,581 100 % As of June 30, 2014, except for one equity/other investment, Fronton Investor Holdings, LLC, we were not an "affiliated person" of any of our portfolio companies, as defined in the 1940 Act. As of June 30, 2014, we did not "control" any of our portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an "affiliated person" of a portfolio company if we owned 5% or more of its voting securities. Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, we had seven such investments with aggregate unfunded commitments of $31,400. As of December 31, 2013, we had five such investments with aggregate unfunded commitments of $48,439 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $4,629. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. 64



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Portfolio Asset Quality

In addition to various risk management and monitoring tools, FB Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FB Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment Rating Summary Description 1 Investment exceeding expectations and/or capital gain expected. 2 Performing investment generally executing in accordance with the portfolio company's business plan-full return of principal and interest expected. 3 Performing investment requiring closer monitoring. 4 Underperforming investment-some loss of interest or dividend possible, but still expecting a positive return on investment. 5 Underperforming investment with expected loss of interest and some principal. The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Fair Percentage of Fair Percentage of Investment Rating Value Portfolio Value Portfolio 1 $ 402,787 9 % $ 510,687 12 % 2 3,450,489 82 % 3,244,518 79 % 3 331,225 8 % 340,238 8 % 4 15,310 0 % 40,034 1 % 5 27,292 1 % 2,104 0 % Total $ 4,227,103 100 % $ 4,137,581 100 %



The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations

Comparison of the Three Months Ended June 30, 2014 and June 30, 2013

Revenues

We generated investment income of $120,721 and $124,349 for the three months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $110,655 and $108,990 of cash income earned as well as $10,066 and $15,359 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The decrease in investment income is due primarily to the reduction on the yield in our investments attributed to a general tightening of spreads in the credit markets. 65



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Expenses

Our net expenses were $62,748 and $50,294 for the three months ended June 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FB Advisor of $19,858 and $22,615, net of waivers by FB Advisor of base management fees to which it was otherwise entitled of $2,837 and $0, for the three months ended June 30, 2014 and 2013, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $1,189 and $1,355 for the three months ended June 30, 2014 and 2013, respectively. FB Advisor is eligible to receive incentive fees based on our performance. During the three months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $15,061 and $17,167, respectively, based upon the performance of our portfolio. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $2,268 based on the performance of our portfolio, of which $929 was based on realized gains and $1,339 was based on unrealized gains. During the three months ended June 30, 2013, we reversed $5,423 of capital gains incentive fees previously accrued based on the performance of our portfolio. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See "-Critical Accounting Policies-Capital Gains Incentive Fee." We recorded interest expense of $14,129 and $11,876 for the three months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $320 and $355 for the three months ended June 30, 2014 and 2013, respectively. We incurred fees and expenses with our stock transfer agent of $546 and $900 for the three months ended June 30, 2014 and 2013, respectively. Fees for our board of directors were $264 and $223 for the three months ended June 30, 2014 and 2013, respectively. During the three months ended June 30, 2014, we incurred one-time expenses of $7,000 in connection with the listing of our shares on the NYSE, including listing advisory fees of $5,043 and other legal, printing and marketing expenses. Our other general and administrative expenses totaled $4,070 and $1,226 for the three months ended June 30, 2014 and 2013, respectively, and consisted of the following: Three Months Ended June 30, 2014 2013



Expenses associated with our independent audit and related fees

$ 181$ 187 Compensation of our chief compliance officer 24 21 Legal fees 1,074 175 Printing fees 1,591 298 Other 1,200 545 Total $ 4,070$ 1,226 During the three months ended June 30, 2014 and 2013, the ratio of our operating expenses to our average net assets was 2.50% and 1.95%, respectively. Our ratio of operating expenses to our average net assets during the three months ended June 30, 2014 and 2013 includes $14,129 and $11,876, respectively, related to interest expense, and $17,329 and $11,744, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 1.30% and 1.03% for the three months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The increase in the ratio of operating expenses to average net assets during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 can primarily be attributed to costs associated with the listing, partially offset by a reduction in management fees as a result of the waiver by FB Advisor of certain management fees to which it was otherwise entitled during the three months ended June 30, 2014, as well as a reduction in administrative services expenses and stock transfer agent fees charged to us. 66



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Net Investment Income

Our net investment income totaled $57,973 ($0.23 per share) and $74,055 ($0.29 per share) for the three months ended June 30, 2014 and 2013, respectively. The decrease in net investment income on a per share basis can be attributed to, among other things, the impact of the accrual for our capital gains incentive fees resulting from unrealized appreciation during the three months ended June 30, 2014 compared to the reversal of capital gains incentive fees resulting from significant unrealized depreciation during the three months ended June 30, 2013 as well as the one-time listing expenses incurred during the three months ended June 30, 2014. Net Realized Gains or Losses We sold investments and received principal repayments of $366,034 and $243,383, respectively, during the three months ended June 30, 2014, from which we realized a net gain of $6,716. We also realized a gain of $114 from settlements on foreign currency during the three months ended June 30, 2014. We sold investments and received principal repayments of $373,814 and $388,699, respectively, during the three months ended June 30, 2013, from which we realized a net gain of $16,447. We also realized a net loss of $39 from settlements on foreign currency during the three months ended June 30, 2013.



Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency

For the three months ended June 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $4,706 and the net change in unrealized gain (loss) on foreign currency totaled $101. For the three months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(43,498) and the net change in unrealized gain (loss) on foreign currency totaled $(26). The net change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2014 was primarily driven by unrealized appreciation in certain subordinated debt and equity/other investments. The net change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2013 was primarily driven by general widening of credit spreads in the second quarter of 2013.



Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended June 30, 2014, the net increase in net assets resulting from operations was $69,311 ($0.27 per share) compared to a net increase in net assets resulting from operations of $46,939 ($0.18 per share) during the three months ended June 30, 2013.

Comparison of the Six Months Ended June 30, 2014 and June 30, 2013

Revenues

We generated investment income of $235,517 and $234,393 for the six months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments. Such revenues represent $214,938 and $207,515 of cash income earned as well as $20,579 and $26,878 in non-cash portions relating to accretion of discount and PIK interest for the six months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to increased fee income driven by the transition to directly originated investments. The level of income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments.



Expenses

Our net expenses were $121,667 and $109,609 for the six months ended June 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FB Advisor of $42,229 and 67



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$44,821, net of waivers by FB Advisor of base management fees to which it was otherwise entitled of $2,837 and $0, for the six months ended June 30, 2014 and 2013, respectively. Our operating expenses also include administrative services expenses attributed to FB Advisor of $2,389 and $2,791 for the six months ended June 30, 2014 and 2013, respectively. FB Advisor is eligible to receive incentive fees based on performance. During the six months ended June 30, 2014, and 2013, we accrued subordinated incentive fees on income of $30,239 and $31,395, respectively, based upon the performance of our portfolio and paid to FB Advisor $29,481 and $27,621, respectively of subordinated incentive fees on income during the period. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $7,104 and $927, respectively, based on the performance of our portfolio, of which $1,140 and $122, respectively, was based on unrealized gains and $5,964 and $805, respectively, was based on realized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See "-Critical Accounting Policies-Capital Gains Incentive Fee." We recorded interest expense of $26,829 and $24,012 for the six months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities and the JPM Facility. Fees incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $652 and $720 for the six months ended June 30, 2014 and 2013, respectively. We incurred fees and expenses with our stock transfer agent of $997 and $1,790 for the six months ended June 30, 2014 and 2013, respectively. Fees for our board of directors were $529 and $448 for the six months ended June 30, 2014 and 2013, respectively. During the six months ended June 30, 2014, we incurred one-time expenses of $7,000 in connection with the listing of our shares on the NYSE, including listing advisory fees of $5,043 and other legal, printing and marketing expenses. Our other general and administrative expenses totaled $5,656 and $2,705 for the six months ended June 30, 2014 and 2013, respectively, and consisted of the following: Six Months Ended June 30, 2014 2013



Expenses associated with our independent audit and related fees $ 313$ 372 Compensation of our chief compliance officer

49 41 Legal fees 1,519 425 Printing fees 1,886 598 Other 1,889 1,269 Total $ 5,656$ 2,705 During the six months ended June 30, 2014 and 2013, the ratio of our operating expenses to our average net assets was 4.70% and 4.28%, respectively. Our ratio of operating expenses to our average net assets during the six months ended June 30, 2014 and 2013 includes $26,829 and $24,012, respectively, related to interest expense and $37,343 and $32,322, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 2.28% and 2.07% for the six months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. The increase in the ratio of operating expenses to average net assets during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 can primarily be attributed to costs associated with the listing, partially offset by a reduction in management fees as a result of the waiver by FB Advisor of certain management fees to which it was otherwise entitled during the six months ended June 30, 2014, as well as a reduction in administrative services expenses and stock transfer agent fees charged to us. 68



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Net Investment Income

Our net investment income totaled $113,850 ($0.44 per share) and $124,784 ($0.49 per share) for the six months ended June 30, 2014 and 2013, respectively. The decrease in net investment income on a per share basis can be attributed to, among other things, increases in our cost of leverage, as well as the one-time listing expenses incurred and the increase in capital gains incentive fee during the six months ended June 30, 2014.



Net Realized Gains or Losses

We sold investments and received principal repayments of $673,017 and $502,515, respectively, during the six months ended June 30, 2014, from which we realized a net gain of $20,538. We also realized a net gain of $95 from settlements on foreign currency during the six months ended June 30, 2014. We sold investments and received principal repayments of $521,758 and $784,572, respectively, during the six months ended June 30, 2013, from which we realized a net gain of $30,618. We also realized a net loss of $102 from settlements on foreign currency during the six months ended June 30, 2013.



Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency

For the six months ended June 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $14,742 and the net change in unrealized gain (loss) on foreign currency totaled $146. For the six months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(25,980), and the net change in unrealized gain (loss) on foreign currency was $95. The net change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2014 was primarily driven by unrealized appreciation in certain of our subordinated debt and equity positions. The net change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2013 was primarily driven by a general widening of credit spreads in the second quarter of 2013.



Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended June 30, 2014, the net increase in net assets resulting from operations was $149,371 ($0.58 per share) compared to a net increase in net assets resulting from operations of $129,415 ($0.52 per share) during the six months ended June 30, 2013.



Financial Condition, Liquidity and Capital Resources

As of June 30, 2014, we had $244,074 in cash, which we held in a custodial account, and $109,314 in borrowings available under our financing facilities. On July 14, 2014, we entered into the indenture, in connection with the issuance of $400,000 aggregate principal amount of our 4.000% notes due 2019. The net proceeds to us from the issuance of the notes were approximately $394,392 before expenses, after deducting the underwriting discounts and commissions of $3,600. On July 14, 2014, we used $350,000 of the net proceeds received from the issuance of the notes to repay the Arch Street credit facility in full and $44,392 of the net proceeds to repay borrowings under the Broad Street credit facility. For additional information regarding the notes, see Note 11 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q. 69



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Below is a summary of our outstanding financing facilities as of June 30, 2014: Amount Amount Facility Type of Facility Rate Outstanding Available Maturity Date Arch Street Credit Facility Revolving L + 2.05% $ 350,000 $ - August 29, 2016 Broad Street Credit Facility Revolving L + 1.50% $ 125,000 $ - December 20, 2014 ING Credit Facility Revolving L + 2.50% $ 250,886$ 49,114 April 3, 2018 JPM Facility Repurchase 3.25% $ 950,000 $ - April 15, 2017 Walnut Street Credit Facility Revolving L + 1.50% to 2.50% $



239,800 $ 60,200May 17, 2017

For additional information regarding our outstanding financing facilities as of June 30, 2014, see Note 8 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q. OnApril 16, 2014, shares of our common stock began trading on the NYSE under the ticker symbol "FSIC". This listing accomplished our goal of providing our stockholders with greatly enhanced liquidity. In connection with the listing of our shares of common stock on the NYSE, we terminated the old DRP. The final distribution reinvestment under the old DRP was made in connection with the regular monthly cash distribution paid on March 31, 2014 to our stockholders of record as of the close of business on March 28, 2014. On May 23, 2014, we adopted the new DRP, which became effective on June 2, 2014. The new DRP was first implemented in connection with the regular monthly cash distribution paid on July 2, 2014 to our stockholders of record as of the close of business on June 24, 2014. During the six months ended June 30, 2014 and 2013, we issued 3,804,344 and 5,260,004 shares of common stock pursuant to the distribution reinvestment plan in effect on the applicable date of issuance for gross proceeds of $39,040 and $53,157 at an average price per share of $10.26 and $10.11, respectively. During the period from July 1, 2014 to August 13, 2014, we issued 459,824 shares of common stock pursuant to the new DRP for gross proceeds of $4,702 at an average price per share of $10.23. For additional information regarding the terms of the new DRP, see Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.



We generate cash primarily from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments.

Prior to investing in securities of portfolio companies, we invest the net proceeds from the issuance of shares of our common stock under the new DRP and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC. On April 16, 2014, we commenced the listing tender offer to purchase for cash up to $250,000 in value of our shares of common stock from our stockholders. In accordance with the terms of the listing tender offer, we selected the lowest price, not greater than $11.00 per share or less than $10.35 per share, net to the tendering stockholder in cash, less any applicable withholding taxes and without interest, that enabled us to purchase the maximum number of shares of common stock properly tendered in the listing tender offer and not properly withdrawn having an aggregate purchase price of up to $250,000. The listing tender offer expired at 5:00 p.m., New York City time, on May 28, 2014. Based on the final count by Computershare Trust Company, N.A., the depositary and paying agent for the listing tender offer, a total of 24,075,768 shares of common stock were properly tendered and not properly withdrawn at or below the purchase price of $10.75 per share. Due to the oversubscription of the listing tender offer, on June 4, 2014, we accepted for purchase on a pro rata basis 23,255,813 shares of common stock, or approximately 96.6% of the shares tendered, at a purchase price of $10.75 per share, for an aggregate cost of approximately $250,000, excluding fees and expenses relating to the listing tender offer. The 23,255,813 shares of common stock accepted for purchase in the listing tender offer represented approximately 8.9% of our issued and outstanding shares of common stock as of June 4, 2014. 70



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Following settlement of the listing tender offer, we had approximately 239,026,360 shares of common stock outstanding. We used available cash and borrowings under the ING credit facility to fund the purchase of shares of common stock in the listing tender offer and to pay for all related fees and expenses.

Historically, we conducted quarterly tender offers pursuant to our share repurchase program to provide our stockholders with limited liquidity. In anticipation of the listing of our shares of common stock on the NYSE, our board of directors terminated our share repurchase program effective March 21, 2014.

The following table provides information concerning our repurchases pursuant to our share repurchase program during the six months ended June 30, 2014 and 2013: Percentage of Aggregate Shares Consideration Tendered Repurchase for Shares That Were



Price Per Repurchased For the Three Months Ended Repurchase Date Repurchased Repurchased Share

Shares Fiscal 2013 December 31, 2012 January 2, 2013 883,047 100 % $ 10.00 $ 8,830 March 31, 2013 April 1, 2013 1,053,119 100 % $ 10.10$ 10,637 Fiscal 2014 December 31, 2013 January 2, 2014 872,865 100 % $ 10.20 $ 8,903



RIC Status and Distributions

We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our "investment company taxable income," as defined by the Code, each year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes. Following commencement of our investment operations, we declared our first distribution on January 29, 2009. Subject to our board of directors' discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis. While we previously paid distributions on a quarterly basis, commencing in the fourth quarter of 2010, we began to pay distributions on a monthly rather than quarterly basis. We will calculate each stockholder's specific distribution amount for the period using record and declaration dates and each stockholder's distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the six months ended June 30, 2014 or 2013 represented a return of capital. 71



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We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution.

The following table reflects the cash distributions per share that we have declared and paid on our common stock during the six months ended June 30, 2014 and 2013: Distribution For the Three Months Ended Per Share Amount Fiscal 2013 March 31, 2013 $ 0.2025 $ 51,184 June 30, 2013 $ 0.2048 $ 52,111 Fiscal 2014 March 31, 2014 $ 0.2160 $ 56,237 June 30, 2014 $ 0.2228$ 56,696 On July 1, 2014, our board of directors declared a regular monthly cash distribution of $0.07425 per share. The regular monthly cash distribution was paid on August 4, 2014 to stockholders of record as of the close of business on July 25, 2014. On July 1, 2014, our board of directors also declared a special cash distribution of $0.10 per share, which will be paid on or about August 15, 2014 to stockholders of record as of the close of business on July 31, 2014. On August 5, 2014, our board of directors declared a regular monthly cash distribution of $0.07425 per share, which will be paid on or about September 3, 2014 to stockholders of record as of the close of business on August 25, 2014. As previously announced, our board of directors intends to declare another special cash distribution in the amount of $0.10 per share, that will be paid on or about November 14, 2014 to stockholders of record as of the close of business on October 31, 2014. The payment of all future distributions is subject to applicable legal restrictions and the sole discretion of our board of directors. Historically, we had an "opt in" distribution reinvestment plan for our stockholders, the old DRP, which terminated upon the listing of our shares of common stock on the NYSE. The final distribution reinvestment under the old DRP was made in connection with the regular monthly cash distribution paid on March 31, 2014 to stockholders of record as of the close of business on March 28, 2014. Under the old DRP, if we made a cash distribution, our stockholders received distributions in cash unless they specifically "opted in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. On May 23, 2014, we adopted the new DRP, which was effective June 2, 2014. The new DRP was first implemented in connection with the regular monthly cash distribution paid on July 2, 2014 to stockholders of record as of the close of business on June 24, 2014. Pursuant to the new DRP, we will reinvest all cash dividends or distributions declared by our board of directors on behalf of investors who do not elect to receive their distributions in cash. As a result, if our board of directors declares a distribution, then stockholders who have not elected to "opt out" of the new DRP will have their distributions automatically reinvested in additional shares of our common stock. With respect to each distribution pursuant to the new DRP, we reserve the right to either issue new shares of common stock or purchase shares of common stock in the open market in connection with implementation of the new DRP. Unless in our sole discretion, we otherwise direct the plan administrator, (A) if the per share market price (as defined in the new DRP) is equal to or greater than the estimated net asset value per share (rounded up to the nearest whole cent) of our common stock on the payment date for the distribution, then we will issue shares of common stock at the greater of (i) net asset value per share of common stock or (ii) 95% of the market price; or (B) if the market price is less than the net asset value per share, then, in our sole discretion, (i) shares of common stock will be purchased in open market transactions for the accounts of participants to the extent practicable, or (ii) we will issue shares of common stock at net asset value per share. Pursuant to the terms of the new DRP, the number of shares of common stock to be issued to a participant will be determined by dividing the total dollar amount of the distribution payable to a participant by the price per share at which we issue such 72



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shares; provided, however, that shares purchased in open market transactions by the plan administrator will be allocated to a participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market. If a stockholder receives distributions in the form of common stock pursuant to the new DRP, such stockholder generally will be subject to the same federal, state and local tax consequences as if it elected to receive distributions in cash. If our common stock is trading at or below net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash. If our common stock is trading above net asset value, a stockholder receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of the fair market value of our common stock. The stockholder's basis for determining gain or loss upon the sale of common stock received in a distribution will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of common stock are credited to the stockholder's account. We may fund our cash distributions to stockholders from any sources of funds available to us, including proceeds from the sale of shares of our common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 Distribution Distribution Source of Distribution Amount Percentage Amount Percentage Offering proceeds $ - - $ - - Borrowings - - - - Net investment income(1) 112,933 100 % 75,246 73 % Capital gains proceeds from the sale of assets - - 28,049 27 % Non-capital gains proceeds from the sale of assets - - - - Distributions on account of preferred and common equity - - - - Expense reimbursement from sponsor - - - - Total $ 112,933 100 % $ 103,295 100 %



(1) During the six months ended June 30, 2014 and 2013, 91.3% and 88.5%,

respectively, of our gross investment income was attributable to cash

interest earned, 6.2% and 9.8%, respectively, was attributable to non-cash

accretion of discount and 2.5% and 1.7%, respectively, was attributable to

PIK interest.

Our net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $108,549 and $124,885, respectively. As of June 30, 2014 and December 31, 2013, we had $160,965 and $137,867, respectively, of undistributed net investment income and realized gains on a tax basis. See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the six months ended June 30, 2014 and 2013. 73



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Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.



Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FB Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services. Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.



With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:

our quarterly valuation process begins with FB Advisor's management team

providing a preliminary valuation of each portfolio company or investment

to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable;



preliminary valuation conclusions are then documented and discussed with

our valuation committee; our valuation committee reviews the preliminary valuation and FB Advisor's



management team, together with our independent valuation firm, if

applicable, responds and supplements the preliminary valuation to reflect

any comments provided by the valuation committee; and



our board of directors discusses valuations and determines the fair value

of each investment in our portfolio in good faith based on various

statistical and other factors, including the input and recommendation of

FB Advisor, the valuation committee and any third-party valuation firm, if

applicable. 74



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Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of directors may use independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FB Advisor or any independent third-party valuation or pricing service that the board of directors deems to be reliable in determining fair value under the circumstances. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments. Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrower's ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments. For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used. Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items. Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with any third-party valuation firm, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at fair value. The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.



Our investments as of June 30, 2014 consisted primarily of debt securities that were acquired directly from the issuer. Thirty-two senior secured loan investments, one senior secured bond investment, seven subordinated debt investments and one collateralized security were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to

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adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment, which is traded on an active public market, was valued at its closing price on June 30, 2014. One senior secured loan investment, which was newly-issued and purchased near June 30, 2014, was valued at cost, as our board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, we valued our other investments, including two equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Twenty-seven senior secured loan investments, six subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Also, one equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013. We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.



Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts. 76



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Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized and the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.



Capital Gains Incentive Fee

Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. While none of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement or the July 2014 investment advisory agreement include or contemplate the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, commencing during the quarter ended December 31, 2010, we changed our methodology for accruing for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FB Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FB Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.



Subordinated Income Incentive Fee

Pursuant to the terms of each of the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, FB Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the 2008 investment advisory and administrative services agreement, which was calculated and payable quarterly in arrears, equaled 20.0% of our "pre-incentive fee net investment income" for the immediately preceding quarter and was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the 2008 investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor did not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeded the hurdle rate of 2.0%. Once our pre-incentive fee net investment income in any quarter exceeded the hurdle rate, FB Advisor was entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equaled 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor received 20.0% of pre-incentive fee net investment income. Under the April 2014 investment advisory agreement, the subordinated incentive fee on income was calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income was based on the value of our net assets rather than adjusted capital.



Under the July 2014 investment advisory agreement, the hurdle rate, expressed as a rate of return on the value of our net assets, was reduced from 2.0% to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a

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result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income. Under both the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the "catch-up" provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the "cumulative net increase in net assets resulting from operations" is the sum of our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate. Uncertainty in Income Taxes We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended June 30, 2014 and 2013, we did not incur any interest or penalties.



Contractual Obligations

We have entered into agreements with FB Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the July 2014 investment advisory agreement are equal to (a) an annual base management fee based on the average value of our gross assets and (b) an incentive fee based on our performance. FB Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. See "-Related Party Transactions-Compensation of the Investment Advisor" for a discussion of these agreements. For the three months ended June 30, 2014 and 2013, we incurred $19,858 and $22,615, respectively, in base management fees and $1,189 and $1,355, respectively, in administrative services expenses. For the six months ended June 30, 2014 and 2013, we incurred $42,229 and $44,821, respectively, in base management fees and $2,389 and $2,791, respectively, in administrative services expenses. In addition, FB Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $15,061 and $17,167, respectively, based upon the performance of our portfolio. During the six months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $30,239 and $31,395, respectively, based upon the performance of our portfolio. During the six months ended June 30, 2014, we paid FB Advisor $29,481 in subordinated incentive fees on 78



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income. As of June 30, 2014, a subordinated incentive fee on income of $15,061 was payable to FB Advisor. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $2,268 and during the three months ended June 30, 2013, we reversed $5,423 of capital gains incentive fees previously accrued in each case based on the performance of our portfolio. As of December 31, 2013, we had accrued capital gains incentive fees of $32,133 based on the performance of our portfolio of which $30,543 was based on unrealized gains and $1,590 was based on realized gains. We paid FB Advisor $1,590 in capital gains incentive fees during the six months ended June 30, 2014. As of June 30, 2014, we had accrued $37,647 in capital gains incentive fees, of which only $5,964 was based on realized gains and was payable to FB Advisor. A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the Arch Street credit facility, the Broad Street credit facility, the ING credit facility, the JPM Facility and the Walnut Street credit facility at June 30, 2014 is as follows: Payments Due By Period Total Less than 1 year 1-3 years 3-5 years More than 5 years Borrowings of Arch Street(1) $ 350,000 - $ 350,000 - - Borrowings of Broad Street(2) $ 125,000 $ 125,000 - - - Borrowings under ING credit facility(3) $ 250,886 - - $ 250,886 - Borrowings of Race Street(4) $ 950,000 $ 950,000 - - - Borrowings of Walnut Street(5) $ 239,800 - $ 239,800 -



(1) At June 30, 2014, no amounts remained unused under the Arch Street credit

facility. Arch Street repaid the Arch Street credit facility in full on July 14, 2014.



(2) At June 30, 2014, no amounts remained unused under the Broad Street credit

facility. All such amounts will mature, and all accrued and unpaid interest

thereunder will be due and payable, on December 20, 2014.



(3) At June 30, 2014, $49,114 remained unused under the ING credit facility. All

such amounts will mature, and all accrued and unpaid interest thereunder will

be due and payable, on April 3, 2018.



(4) At June 30, 2014, no amounts remained unused under the JPM Facility. Race

Street will, on a quarterly basis, repurchase the Class A Notes sold to JPM

under the JPM Facility and subsequently resell such Class A Notes to JPM. As

of June 30, 2014, the final repurchase transaction was scheduled to occur no

later than April 15, 2017.



(5) At June 30, 2014, $60,200 remained unused under the Walnut Street credit

facility. All such amounts will mature, and all accrued and unpaid interest

thereunder will be due and payable, on May 17, 2017.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

None. 79



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Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, FB Advisor is entitled to an annual base management fee based on the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the 2008 investment advisory and administrative services agreement on January 2, 2009, upon commencement of our investment operations. Base management fees are pain on a quarterly basis in arrears. The annual base management fees under the 2008 investment advisory and administrative services agreement and the April 2014 investment advisory agreement were equal to 2.0% of the average value of our gross assets. In anticipation of the listing of our shares of common stock on the NYSE, FB Advisor recommended that the April 2014 investment advisory agreement be further amended to (i) reduce the annualized hurdle rate used in connection with the calculation of the subordinated incentive fee on income, expressed as a rate of return on our net assets, from 8% to 7.5% and (ii) assuming the reduction to the hurdle rate was approved, reduce the base management fee from 2.0% to 1.75% of the average value of our gross assets. At a special meeting of stockholders that was adjourned on June 23, 2014 and reconvened on July 17, 2014, we received stockholder approval to amend and restate the April 2014 investment advisory agreement to reflect the amendments approved by our stockholders. On July 17, 2014, we entered into the July 2014 investment advisory agreement. Pending stockholder approval of the proposal, FB Advisor agreed, effective April 1, 2014, to waive a portion of the base management fee to which it was entitled under the April 2014 investment advisory agreement so that the fee received equaled 1.75% of the average value of our gross assets. The incentive fee consists of three parts under the 2008 investment advisory and administrative services agreement and two parts under each of the April 2014 advisory agreement and July 2014 investment advisory agreement. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of our "pre-incentive fee net investment income" for the immediately preceding quarter. Under the 2008 investment advisory and administrative services agreement the subordinated incentive fee on income was subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the 2008 investment advisory and administrative services agreement, equal to 2.0% per quarter, or an annualized hurdle rate of 8.0%. As a result, FB Advisor did not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeded the hurdle rate of 2.0%. Once our pre-incentive fee net investment income in any quarter exceeded the hurdle rate, FB Advisor was entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equaled 2.5%, or 10.0% annually, of adjusted capital. Thereafter, FB Advisor received 20.0% of our pre-incentive fee net investment income. Under the April 2014 investment advisory agreement, the subordinated incentive fee on income was calculated in the same manner, except that the hurdle rate used to compute the subordinated incentive fee on income was based on the value of our net assets rather than adjusted capital. Under the July 2014 investment advisory agreement, the hurdle rate, expressed as a rate of return on the value of our net assets, was reduced from 2.0% to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FB Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Advisor will be entitled to a "catch-up" fee equal to the amount of our pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of the value of our net assets. Thereafter, FB Advisor will be entitled to receive 20.0% of our pre-incentive fee net investment income.



Under both the April 2014 investment advisory agreement and the July 2014 investment advisory agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides that

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no incentive fee in respect of our pre-incentive fee net investment income will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and eleven preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the applicable quarterly hurdle rate, subject to the "catch-up" provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and eleven preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the eleven preceding calendar quarters. For the foregoing purpose, the "cumulative net increase in net assets resulting from operations" is the sum of our pre-incentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation for the then-current and eleven preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the July 2014 investment advisory agreement). This fee equals 20.0% of our incentive fee capital gains, which equal our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. We accrue for the capital gains incentive fee, which, if earned, is paid annually. We accrue the incentive fee based on net realized and unrealized gains; however, the fee payable to FB Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The methodology for calculating the capital gains incentive fee is identical under the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the July 2014 investment advisory agreement. The third part of the incentive fee under the 2008 investment advisory and administrative services agreement was referred to as the subordinated liquidation incentive fee, which equaled 20.0% of the net proceeds from a liquidation of our assets in excess of adjusted capital, as calculated immediately prior to liquidation. The April 2014 investment advisory agreement and the July 2014 investment advisory agreement do not include the subordinated liquidation incentive fee. Pursuant to the 2008 investment advisory and administrative services agreement, we reimbursed FB Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement was set at the lesser of (1) FB Advisor's actual costs incurred in providing such services and (2) the amount that we estimated it would be required to pay alternative service providers for comparable services in the same geographic location. FB Advisor was required to allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assessed the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of directors considered whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compared the total amount paid to FB Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. Pursuant to the administration agreement, FB Advisor provides administrative services necessary for our operation, including general ledger accounting, fund accounting, legal services, investor relations and other administrative services. There is no separate fee paid by us to FB Advisor in connection with the services provided under the administration agreement; provided, however, that we will reimburse FB Advisor no less than quarterly for all costs and expenses incurred by FB Advisor in performing its obligations and providing personnel and facilities thereunder. FB Advisor will allocate the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. 81



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The following table describes the fees and expenses accrued under the 2008 investment advisory and administrative services agreement, the April 2014 investment advisory agreement and the administration agreement during the three and six months ended June 30, 2014 and 2013:

Three Months Ended Six Months Ended June 30, June 30, Related Party Source Agreement Description 2014 2013 2014 2013 FB Advisor 2008 Investment Base Management $ 19,858$ 22,615$ 42,229$ 44,821 Advisory and Fee(1) Administrative Services Agreement and April 2014 Investment Advisory Agreement FB Advisor 2008 Investment Capital Gains $ 2,268$ (5,423 )$ 7,104$ 927 Advisory and Incentive Administrative Fee(2) Services Agreement and April 2014 Investment Advisory Agreement FB Advisor 2008 Investment Subordinated $ 15,061$ 17,167$ 30,239$ 31,395 Advisory and Incentive Administrative Fee on Services Agreement Income(3) and April 2014 Investment Advisory Agreement FB Advisor 2008 Investment Administrative $ 1,189$ 1,355$ 2,389$ 2,791 Advisory and Services Administrative Expenses(4) Services Agreement and Administration Agreement



(1) FB Advisor agreed, effective April 1, 2014, to waive a portion of the base

management fee to which it was entitled under the April 2014 investment

advisory agreement so that the fee received equaled 1.75% of the average

value of our gross assets. Amounts shown are net of waivers of $2,837 for the

three and six months ended June 30, 2014. During the six months ended

June 30, 2014 and 2013, $45,067 and $43,690, respectively, in base management

fees were paid to FB Advisor. As of June 30, 2014, $19,862 in base management

fees were payable to FB Advisor.



(2) During the six months ended June 30, 2014 and 2013, we accrued capital gains

incentive fees of $7,104 and $927, respectively, based on the performance of

our portfolio. As of June 30, 2014 and December 31, 2013, we accrued $37,647

and $32,133, respectively, in capital gains incentive fees of which $31,683

and $30,543, respectively, was based on unrealized gains and $5,964 and

$1,590, respectively, was based on realized gains. No such fees are actually

payable by us with respect to such unrealized gains unless and until those

gains are actually realized. We paid FB Advisor $1,590 in capital gains incentive fees during the six months ended June 30, 2014.



(3) During the six months ended June 30, 2014 and 2013, we paid $29,481 and

$27,621, respectively, of subordinated incentive fees on income to FB Advisor. As of June 30, 2014, a subordinated incentive fee on income of $15,061 was payable to FB Advisor.



(4) During the six months ended June 30, 2014 and 2013, $1,782 and $2,545,

respectively, of administrative services expenses related to the allocation

of costs of administrative personnel for services rendered to us by FB

Advisor and the remainder related to other reimbursable expenses. We paid

$1,856 and $2,706, respectively, in administrative services expenses to FB

Advisor during the six months ended June 30, 2014 and 2013.

See Note 4 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our related party transactions and relationships, including potential conflicts of interest, our exemptive relief order, our expense reimbursement arrangement and our trademark license agreement with Franklin Square Holdings. 82



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