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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:                      to                     
Commission File Number: 01-33901
Fifth Street Finance Corp.
(Exact name of registrant as specified in its charter)
     
Delaware   26-1219283
     
(State or jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
10 Bank Street, 12th Floor
White Plains, NY
  10606
     
(Address of principal executive office)   (Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(914) 286-6800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
     
Title of Each Class   Name of Each Exchange
on Which Registered
     
Common Stock, par value $0.01 per share   New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES o NO þ
The registrant had 55,059,057 shares of common stock outstanding as of January 28, 2011.
 
 

 


 

FIFTH STREET FINANCE CORP.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2010
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 EX-10.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(unaudited)
                 
    December 31, 2010   September 30, 2010
Assets
               
 
               
Investments at fair value:
               
Control investments (cost 12/31/10: $9,681,508; cost 9/30/10: $12,195,029)
  $ 9,088,988     $ 3,700,000  
Affiliate investments (cost 12/31/10: $50,136,804; cost 9/30/10: $50,133,521)
    45,645,034       47,222,059  
Non-control/Non-affiliate investments (cost 12/31/10: $695,146,171; cost 9/30/10: $530,168,045)
    687,661,313       512,899,257  
Total investments at fair value (cost 12/31/10: $754,964,483; cost 9/30/10: $592,496,595)
    742,395,335       563,821,316  
 
               
Cash and cash equivalents
    43,020,557       76,765,254  
Interest and fees receivable
    4,663,901       3,813,757  
Due from portfolio company
    151,962       103,426  
Deferred financing costs
    7,026,645       5,465,964  
Collateral posted to bank and other assets
    1,517,868       1,956,013  
 
               
Total Assets
  $ 798,776,268     $ 651,925,730  
 
               
Liabilities and Net Assets
               
 
               
Liabilities:
               
Accounts payable, accrued expenses and other liabilities
  $ 708,382     $ 1,322,282  
Base management fee payable
    3,778,779       2,875,802  
Incentive fee payable
    3,513,901       2,859,139  
Due to FSC, Inc.
    1,261,541       1,083,038  
Interest payable
    1,147,642       282,640  
Payments received in advance from portfolio companies
    1,146,210       1,330,724  
Loans payable
    89,000,000        
SBA debentures payable
    123,300,000       73,000,000  
Total Liabilities
    223,856,455       82,753,625  
 
               
Net Assets:
               
Common stock, $0.01 par value, 150,000,000 shares authorized, 55,059,057 and 54,550,290 shares issued and outstanding at December 31, 2010 and September 30, 2010
    550,591       545,503  
Additional paid-in-capital
    625,519,180       619,759,984  
Net unrealized depreciation on investments and interest rate swap
    (12,606,190 )     (29,448,713 )
Net realized loss on investments
    (46,541,180 )     (33,090,961 )
Accumulated undistributed net investment income
    7,997,412       11,406,292  
Total Net Assets (equivalent to $10.44 and $10.43 per common share at December 31, 2010 and September 30, 2010) (Note 12)
    574,919,813       569,172,105  
 
               
Total Liabilities and Net Assets
  $ 798,776,268     $ 651,925,730  
See notes to Consolidated Financial Statements.

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Table of Contents

Fifth Street Finance Corp.
Consolidated Statements of Operations
(unaudited)
                 
    Three months   Three months
    ended December 31,   ended December 31,
    2010   2009
Interest income:
               
Control investments
  $ 969     $ 224,746  
Affiliate investments
    1,162,516       2,259,501  
Non-control/Non-affiliate investments
    16,489,184       7,673,326  
Interest on cash and cash equivalents
    9,136       195,662  
Total interest income
    17,661,805       10,353,235  
 
               
PIK interest income:
               
Control investments
    33,333        
Affiliate investments
    281,800       331,616  
Non-control/Non-affiliate investments
    2,828,555       1,630,158  
Total PIK interest income
    3,143,688       1,961,774  
 
               
Fee income:
               
Control investments
    126,486        
Affiliate investments
    133,554       253,777  
Non-control/Non-affiliate investments
    4,267,216       661,364  
Total fee income
    4,527,256       915,141  
 
               
Dividend and other income:
               
Control investments
           
Affiliate investments
           
Non-control/Non-affiliate investments
    2,434       11,333  
Total dividend and other income
    2,434       11,333  
 
               
Total Investment Income
    25,335,183       13,241,483  
 
               
Expenses:
               
Base management fee
    3,778,779       2,267,003  
Incentive fee
    3,513,901       2,087,264  
Professional fees
    690,489       301,605  
Board of Directors fees
    49,500       38,000  
Interest expense
    1,938,710       91,179  
Administrator expense
    354,169       251,818  
General and administrative expenses
    954,033       582,623  
Total expenses
    11,279,581       5,619,492  
Base management fee waived
          (727,067 )
Net expenses
    11,279,581       4,892,425  
 
               
Net Investment Income
    14,055,602       8,349,058  
Unrealized appreciation on interest rate swap
    736,390        
 
               
Unrealized appreciation (depreciation) on investments:
               
Control investments
    8,070,596       1,993,222  
Affiliate investments
    (1,580,308 )     399,934  
Non-control/Non-affiliate investments
    9,615,845       (1,393,862 )
Net unrealized appreciation on investments
    16,106,133       999,294  
 
               
Realized gain (loss) on investments:
               
Control investments
    (7,765,119 )      
Affiliate investments
           
Non-control/Non-affiliate investments
    (5,685,100 )     106,000  
Net realized gain (loss) on investments
    (13,450,219 )     106,000  
 
               
Net increase in net assets resulting from operations
  $ 17,447,906     $ 9,454,352  
 
               
Net investment income per common share — basic and diluted
  $ 0.26     $ 0.22  
Earnings per common share — basic and diluted
  $ 0.32     $ 0.25  
Weighted average common shares— basic and diluted
    54,641,164       37,880,435  
See notes to Consolidated Financial Statements.

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Fifth Street Finance Corp.
Consolidated Statements of Changes in Net Assets
(unaudited)
                 
    Three months ended   Three months ended
    December 31, 2010   December 31, 2009
Operations:
               
Net investment income
  $ 14,055,602     $ 8,349,058  
Net unrealized appreciation on investments and interest rate swap
    16,842,523       999,294  
Net realized gain (loss) on investments
    (13,450,219 )     106,000  
 
               
Net increase in net assets from operations
    17,447,906       9,454,352  
 
               
Stockholder transactions:
               
Distributions to stockholders from net investment income
    (17,464,482 )     (10,227,326 )
 
               
Net decrease in net assets from stockholder transactions
    (17,464,482 )     (10,227,326 )
 
               
Capital share transactions:
               
Issuance of common stock, net
    4,814,310       (12,138 )
Issuance of common stock under dividend reinvestment plan
    949,974       486,392  
 
               
Net increase in net assets from capital share transactions
    5,764,284       474,254  
Total increase (decrease) in net assets
    5,747,708       (298,720 )
Net assets at beginning of period
    569,172,105       410,556,071  
Net assets at end of period
  $ 574,919,813     $ 410,257,351  
 
               
Net asset value per common share
  $ 10.44     $ 10.82  
 
               
Common shares outstanding at end of period
    55,059,057       37,923,407  
See notes to Consolidated Financial Statements.

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Table of Contents

Fifth Street Finance Corp.
Consolidated Statements of Cash Flows
(unaudited)
                 
    Three months ended   Three months ended
    December 31, 2010   December 31, 2009
Cash flows from operating activities:
               
Net increase in net assets resulting from operations
  $ 17,447,906     $ 9,454,352  
Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities:
               
Net unrealized appreciation on investments and interest rate swap
    (16,842,523 )     (999,294 )
Net realized (gains) losses on investments
    13,450,219       (106,000 )
PIK interest income
    (3,143,688 )     (1,961,774 )
Recognition of fee income
    (4,527,256 )     (915,141 )
Accretion of original issue discount on investments
    (388,637 )     (220,943 )
Amortization of deferred financing costs
    409,095        
Change in operating assets and liabilities:
               
PIK interest income received in cash
    5,109,022       525,194  
Fee income received
    8,005,581       4,834,926  
Increase in interest and fees receivable
    (850,144 )     (575,625 )
Increase in due from portfolio company
    (48,536 )     (27,269 )
(Increase) decrease in collateral posted to bank and other assets
    438,145       (984,419 )
Increase (decrease) in accounts payable, accrued expenses and other liabilities
    122,488       (448,360 )
Increase (decrease) in base management fee payable
    902,977       (12,224 )
Increase in incentive fee payable
    654,762       143,001  
Increase in due to FSC, Inc.
    178,503       24,115  
Increase in interest payable
    865,002       49,513  
Increase (decrease) in payments received in advance from portfolio companies
    (184,514 )     58,640  
Purchase of investments
    (238,577,119 )     (144,203,972 )
Proceeds from the sale of investments
          106,000  
Principal payments received on investments (scheduled repayments and revolver paydowns)
    7,883,358       1,973,601  
Principal payments received on investments (payoffs)
    49,720,635       3,885,000  
Net cash used by operating activities
    (159,374,724 )     (129,400,679 )
Cash flows from financing activities:
               
Dividends paid in cash
    (16,514,508 )     (9,740,934 )
Borrowings under SBA debentures payable
    50,300,000        
Borrowings under credit facilities
    126,000,000       38,000,000  
Repayments of borrowings under credit facilities
    (37,000,000 )      
Deferred financing costs paid
    (1,969,775 )      
Proceeds from the issuance of common stock
    4,992,802        
Offering costs paid
    (178,492 )     (281,358 )
Net cash provided by financing activities
    125,630,027       27,977,708  
Net decrease in cash and cash equivalents
    (33,744,697 )     (101,422,971 )
Cash and cash equivalents, beginning of period
    76,765,254       113,205,287  
Cash and cash equivalents, end of period
  $ 43,020,557     $ 11,782,316  
 
               
Supplemental Information:
               
Cash paid for interest
  $ 664,613     $  
Non-cash financing activities:
               
Issuance of shares of common stock under dividend reinvestment plan
  $ 949,974     $ 486,392  
See notes to Consolidated Financial Statements.

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
December 31, 2010
(unaudited)
                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
Control Investments (3)
                               
Lighting By Gregory, LLC (13)(14)
  Housewares & Specialties                        
 
                               
First Lien Term Loan A, 9.75% due 2/28/2013
          $ 4,055,655     $ 3,996,187     $ 4,055,655  
First Lien Bridge Loan, 8% due 10/15/2010
            155,404       150,000        
97.38% membership interest
                    410,000        
                     
 
                               
 
                    4,556,187       4,055,655  
 
                               
Nicos Polymers & Grinding Inc. (15)
  Environmental & facilities services                        
First Lien Term Loan, 8% due 12/4/2017
            5,033,333       4,957,235       5,033,333  
First Lien Revolver, 8% due 12/4/2017
                         
50% Membership Interest in CD Holdco, LLC
                    168,086        
                     
 
                               
 
                    5,125,321       5,033,333  
                     
 
                               
Total Control Investments
                  $ 9,681,508     $ 9,088,988  
                     
 
                               
Affiliate Investments (4)
                               
O’Currance, Inc.
  Data Processing & Outsourced Services                        
 
                               
First Lien Term Loan A, 16.875% due 3/21/2012
            11,073,880     $ 10,997,715     $ 10,879,458  
First Lien Term Loan B, 16.875%, due 3/21/2012
            1,872,993       1,851,757       1,913,528  
1.75% Preferred Membership interest in O’Currance Holding Co., LLC
                    130,413       3,587  
3.3% Membership Interest in O’Currance Holding Co., LLC
                    250,000        
                     
 
                               
 
                    13,229,885       12,796,573  
 
                               
MK Network, LLC (13)(14)
  Education services                        
First Lien Term Loan A, 13.5% due 6/1/2012
            9,789,304       9,539,188       6,928,697  
First Lien Term Loan B, 17.5% due 6/1/2012
            4,950,941       4,748,004       3,448,666  
First Lien Revolver, Prime + 1.5% (10% floor), due 6/1/2010 (10)
                         
11,030 Membership Units (6)
                    771,575        
                     
 
                               
 
                    15,058,767       10,377,363  
 
                               
Caregiver Services, Inc.
  Healthcare services                        
Second Lien Term Loan A, LIBOR+6.85% (12% floor) due 2/25/2013
            6,783,839       6,492,617       6,768,521  
Second Lien Term Loan B, 16.5% due 2/25/2013
            14,808,616       14,275,137       14,353,376  
1,080,399 shares of Series A Preferred Stock
                    1,080,398       1,349,201  
                     
 
                               
 
                    21,848,152       22,471,098  
                     
 
                               
Total Affiliate Investments
                  $ 50,136,804     $ 45,645,034  
                     
 
                               
Non-Control/Non-Affiliate Investments (7)
                               
 
                               
CPAC, Inc.
  Household Products                        
 
                               
Subordinated Term Loan, 12.5% due 6/1/2012
            1,098,928     $ 1,098,928     $ 1,098,928  
                     
 
                               
 
                    1,098,928       1,098,928  
 
                               

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Table of Contents

                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
Repechage Investments Limited
  Restaurants                        
First Lien Term Loan, 15.5% due 10/16/2011
            3,584,394       3,388,830       3,417,458  
7,500 shares of Series A Preferred Stock of Elephant & Castle, Inc.
                    750,000       438,902  
                     
 
                               
 
                    4,138,830       3,856,360  
 
                               
Traffic Control & Safety Corporation
  Construction and Engineering                        
Senior Term Loan A, 7.741% due 6/29/2012
            2,361,779       2,243,690       2,243,690  
Senior Term Loan B, 5.29% due 6/29/2012
            2,846,473       2,704,149       2,704,149  
Senior Term Loan C, 5.29% due 6/29/2012
            4,027,956       3,826,558       3,826,558  
Senior Revolver, 5.29% due 6/29/2012
            5,250,000       4,987,501       4,987,501  
Second Lien Term Loan, 15% due 5/28/2015 (9)
            20,174,355       19,942,451       19,742,401  
Subordinated Loan, 15% due 5/28/2015
            4,755,534       4,755,534       4,221,399  
24,750 shares of Series B Preferred Stock
                    247,500        
43,494 shares of Series D Preferred Stock (6)
                    434,937        
25,000 shares of Common Stock
                    2,500        
                     
 
                               
 
                    39,144,820       37,725,698  
 
                               
TBA Global, LLC
  Advertising                        
53,994 Senior Preferred Shares
                    215,975       215,975  
191,977 Shares A Shares
                    191,977       179,240  
                     
 
                               
 
                    407,952       395,215  
 
                               
Fitness Edge, LLC
  Leisure facilities                        
First Lien Term Loan A, LIBOR+5.25% (10% floor), due 8/8/2012
            1,125,000       1,121,180       1,125,818  
First Lien Term Loan B, 15% due 8/8/2012
            5,667,603       5,619,154       5,726,159  
1,000 Common Units (6)
                    42,908       121,545  
                     
 
                               
 
                    6,783,242       6,973,522  
 
                               
Filet of Chicken (9)
  Food Distributors                        
Second Lien Term Loan, 14.5% due 7/31/2012
            9,327,820       9,108,209       9,023,399  
                     
 
                               
 
                    9,108,209       9,023,399  
 
                               
Boot Barn (9)
  Apparel, accessories & luxury goods                        
247.06 shares of Series A Preferred Stock
                    247,060       71,394  
1,308 shares of Common Stock
                    131        
                     
 
                               
 
                    247,191       71,394  
 
                               
Premier Trailer Leasing, Inc. (9)(13)(14)
  Trucking                        
Second Lien Term Loan, 16.5% due 10/23/2012
            18,606,639       17,063,645       4,597,412  
285 shares of Common Stock
                    1,140        
                     
 
                               
 
                    17,064,785       4,597,412  
 
                               
Pacific Press Technologies, Inc. (9)
                               
Second Lien Term Loan, 14.75% due 1/10/2013
  Industrial machinery     10,123,432       9,877,279       9,917,997  
33,463 shares of Common Stock
                    344,513       739,542  
                     
 
                               
 
                    10,221,792       10,657,539  
 
                               
Rail Acquisition Corp. (9)
  Electronic manufacturing services                        
 
                               
First Lien Term Loan, 17% due 9/1/2013
            16,821,351       14,042,454       11,680,404  
First Lien Revolver, 7.85% due 9/1/2013
            4,959,135       4,959,135       4,959,135  
                     
 
                               
 
                    19,001,589       16,639,539  

8


Table of Contents

                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
Western Emulsions, Inc. (9)
  Construction materials                        
Second Lien Term Loan, 15% due 6/30/2014
            6,615,232       6,477,386       6,477,386  
                     
 
                               
 
                    6,477,386       6,477,386  
 
                               
Storyteller Theaters Corporation
  Movies & entertainment                        
1,692 shares of Common Stock
                    169       61,613  
20,000 shares of Preferred Stock
                    200,000       200,000  
                     
 
                               
 
                    200,169       261,613  
 
                               
HealthDrive Corporation (9)
  Healthcare services                        
First Lien Term Loan A, 10% due 7/17/2013
            6,562,970       6,255,358       6,485,832  
First Lien Term Loan B, 13% due 7/17/2013
            10,204,760       10,104,760       10,082,408  
First Lien Revolver, 12% due 7/17/2013
            500,000       490,000       546,086  
                     
 
                               
 
                    16,850,118       17,114,326  
 
                               
idX Corporation
  Distributors                        
Second Lien Term Loan, 14.5% due 7/1/2014
            13,658,366       13,436,082       13,415,216  
                     
 
                               
 
                    13,436,082       13,415,216  
 
                               
Cenegenics, LLC
  Healthcare services                        
First Lien Term Loan, 17% due 10/27/2014
            20,051,045       19,186,297       19,569,475  
414,419 Common Units (6)
                    598,382       1,319,149  
                     
 
                               
 
                    19,784,679       20,888,624  
 
                               
IZI Medical Products, Inc.
  Healthcare technology                        
First Lien Term Loan A, 12% due 3/31/2014
            4,249,775       4,196,179       4,232,773  
First Lien Term Loan B, 16% due 3/31/2014
            17,259,468       16,743,527       17,113,683  
First Lien Revolver, 10% due 3/31/2014 (11)
                  (32,500 )      
453,755 Preferred units of IZI Holdings, LLC (6)
                    453,755       647,069  
                     
 
                               
 
                    21,360,961       21,993,525  
Trans-Trade, Inc.
  Air freight & logistics                        
First Lien Term Loan, 15.5% due 9/10/2014
            16,006,996       15,710,301       15,878,390  
First Lien Revolver, 12% due 9/10/2014
            2,000,000       1,890,667       1,956,755  
                     
 
                               
 
                    17,600,968       17,835,145  
 
                               
Riverlake Equity Partners II, LP
  Multi-sector holdings                        
1.89% limited partnership interest
                    122,105       122,105  
                     
 
                               
 
                    122,105       122,105  
 
                               
Riverside Fund IV, LP
  Multi-sector holdings                        
0.25% limited partnership interest
                    321,417       321,417  
                     
 
                               
 
                    321,417       321,417  
 
                               
ADAPCO, Inc.
  Fertilizers & agricultural chemicals                        
First Lien Term Loan A, 10% due 12/17/2014
            8,500,000       8,311,428       8,365,910  
First Lien Term Loan B, 14% due 12/17/2014
            14,298,448       13,985,575       14,002,842  
First Lien Term Revolver, 10% due 12/17/2014
            4,250,000       4,026,520       4,170,584  
                     
 
                               
 
                    26,323,523       26,539,336  
 
                               
Ambath/Rebath Holdings, Inc.
  Home improvement retail                        
First Lien Term Loan A, LIBOR+7% (10% floor) due 12/30/2014
            9,250,000       9,048,648       8,951,281  
First Lien Term Loan B, 15% due 12/30/2014
            22,567,297       22,101,997       21,922,954  
First Lien Term Revolver, LIBOR+6.5% (9.5% floor) due 12/30/2014
            1,500,000       1,436,550       1,444,374  
                     
 
                               
 
                    32,587,195       32,318,609  
 
                               

9


Table of Contents

                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
JTC Education, Inc.
  Education services                        
First Lien Term Loan, LIBOR+9.5% (12.5% floor) due 12/31/2014
            30,859,375       30,093,388       30,457,010  
First Lien Revolver, LIBOR+9.5% (12.5% floor) due 12/31/2014 (11)
                  (377,222 )      
                     
 
                               
 
                    29,716,166       30,457,010  
 
                               
Tegra Medical, LLC
  Healthcare equipment                        
First Lien Term Loan A, LIBOR+7% (10% floor) due 12/31/2014
            25,480,000       25,075,398       25,525,452  
First Lien Term Loan B, 14% due 12/31/2014
            22,212,109       21,864,318       22,164,301  
First Lien Revolver, LIBOR+7% (10% floor) due 12/31/2014 (11)
                  (62,667 )      
                     
 
                               
 
                    46,877,049       47,689,753  
 
                               
Flatout, Inc.
  Food retail                        
First Lien Term Loan A, 10% due 12/31/2014
            7,050,000       6,888,024       6,927,166  
First Lien Term Loan B, 15% due 12/31/2014
            12,863,830       12,560,321       12,686,564  
First Lien Revolver, 10% due 12/31/2014 (11)
                  (35,847 )      
                     
 
                               
 
                    19,412,498       19,613,730  
 
                               
Psilos Group Partners IV, LP
  Multi-sector holdings                        
2.52% limited partnership interest (12)
                           
                     
 
                               
Mansell Group, Inc.
  Advertising                        
First Lien Term Loan A, LIBOR+7% (10% floor) due 4/30/2015
            9,937,500       9,755,254       9,753,678  
First Lien Term Loan B, LIBOR+9% (12% floor) due 4/30/2015
            8,046,018       7,898,194       7,995,656  
First Lien Revolver, LIBOR+6% (9% floor) due 4/30/2015 (11)
                  (34,667 )      
                     
 
                               
 
                    17,618,781       17,749,334  
 
                               
NDSSI Holdings, Inc.
  Electronic equipment & instruments                        
First Lien Term Loan, LIBOR+9.75% (12.75% floor) due 4/30/2015
            30,132,293       29,603,069       29,284,795  
First Lien Revolver, LIBOR+7% (10% floor) due 4/30/2015
            3,500,000       3,415,385       3,397,632  
                     
 
                               
 
                    33,018,454       32,682,427  
 
                               
Eagle Hospital Physicians, Inc.
  Healthcare services                        
First Lien Term Loan, LIBOR+8.75% (11.75% floor) due 8/11/2015
            8,000,000       7,801,966       7,808,773  
First Lien Revolver, LIBOR+5.75% (8.75% floor) due 8/11/2015
                  (60,076 )      
                     
 
                               
 
                    7,741,890       7,803,773  
 
                               
Enhanced Recovery Company, LLC
  Diversified support services                        
First Lien Term Loan A, LIBOR+7% (9% floor) due 8/13/2015
            15,250,000       14,950,346       14,892,359  
First Lien Term Loan B, LIBOR+10% (13% floor) due 8/13/2015
            11,043,150       10,827,388       10,928,166  
First Lien Revolver, LIBOR+7% (9% floor) due 8/13/2015
                  (78,459 )      
                     
 
                               
 
                    25,699,275       25,820,525  
 
                               
Epic Acquisition, Inc.
  Healthcare services                        
First Lien Term Loan A, LIBOR+8% (11% floor) due 8/13/2015
            9,685,000       9,459,263       9,423,141  
First Lien Term Loan B, 15.25% due 8/13/2015
            17,031,895       16,624,539       16,680,678  
First Lien Revolver, LIBOR+6.5% (9.5% floor) due 8/13/2015
            800,000       728,544       779,105  
                     
 
                               
 
                    26,812,346       26,882,924  
 
                               
Specialty Bakers LLC
  Food distributors                        
First Lien Term Loan A, LIBOR+8.5% due 9/15/2015
            9,000,000       8,769,920       8,799,561  
First Lien Term Loan B, LIBOR+11% (13.5% floor) due 9/15/2015
            11,000,000       10,723,533       10,706,353  
First Lien Revolver, LIBOR+8.5% due 9/15/2015
                  (100,533 )      
                     
 
                               
 
                    19,392,920       19,505,914  

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Table of Contents

                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
CRGT, Inc.
  IT consulting & other services                        
First Lien Term Loan A, LIBOR+7.5% due 10/1/2015
            29,000,000       28,460,094       29,000,000  
First Lien Term Loan B, 12.5% due 10/1/2015
            22,000,000       21,582,000       22,000,000  
First Lien Revolver, LIBOR+7.5% due 10/1/2015
                  (237,500 )      
                     
 
                               
 
                    49,804,594       51,000,000  
 
                               
Welocalize, Inc.
  Internet software & services                        
First Lien Term Loan A, LIBOR+8% (10% floor) due 11/19/2015
            16,400,000       16,079,508       16,400,000  
First Lien Term Loan, LIBOR+9% (12.25% floor) due 11/19/2015
            21,030,634       20,624,634       21,030,634  
First Lien Revolver, LIBOR+7% (9% floor) due 11/19/2015
            1,250,000       1,134,000       1,250,000  
2,086,163 Common Units in RPWL Holdings, LLC
                    2,086,163       2,086,163  
                     
 
                               
 
                    39,924,305       40,766,797  
 
                               
Miche Bag, LLC
  Apparel, accessories & luxury goods                        
First Lien Term Loan B, LIBOR+9% (12% floor) due 12/7/2013
            15,500,000       15,118,187       15,500,000  
First Lien Term Loan, LIBOR+10% (16% floor) due 12/7/2015
            17,034,000       14,152,177       14,534,000  
First Lien Revolver, LIBOR+7% (10% floor) due 12/7/2015
                  (124,555 )      
10,371 Preferred Equity units in Miche Holdings, LLC
                    1,037,112       1,037,112  
146,289 Series D Common Equity units in Miche Holdings, LLC
                    1,462,888       1,462,888  
                     
 
                               
 
                    31,645,809       32,534,000  
 
                               
Bunker Hill Capital II (QP), L.P.
  Multi-sector holdings                        
0.50% limited partnership interest (12)
                           
                     
 
                               
 
                           
                     
 
                               
Dominion Diagnostics, LLC
  Healthcare services                        
First Lien Term Loan A, LIBOR+7% (9% floor) due 12/17/2015
            30,750,000       30,140,651       30,750,000  
First Lien Term Loan, LIBOR+9% (12.5% floor) due 12/17/2015
            20,008,333       19,615,000       20,008,333  
First Lien Revolver, LIBOR+6.5% (9% floor) due 12/17/2015
                  (98,083 )      
                     
 
                               
 
                    49,657,568       50,758,333  
 
                               
Advanced Pain Management
  Healthcare services                        
First Lien Term Loan, LIBOR+5% (6.75% floor) due 12/22/2015
            8,200,000       8,056,673       8,200,000  
First Lien Revolver, LIBOR+5% (6.75% floor) due 12/22/2015
                  (5,900 )    
                     
 
                               
 
                    8,050,773       8,200,000  
 
                               
DISA, Inc.
  Human resources & employment services                        
First Lien Term Loan A, LIBOR+7.5% (8.25% floor) due 12/30/2015
            13,000,000       12,727,732       13,000,000  
First Lien Term Loan B, LIBOR+11.5% (12.5% floor) due 12/30/2015
            8,300,346       8,128,965       8,300,346  
First Lien Revolver, LIBOR+6% (7% floor) due 12/30/2015
                  (82,593 )      
                     
 
                               
 
                    20,774,104       21,300,346  
 
                               
Saddleback Fence and Vinyl Products, Inc. (9) (16)
  Building products                        
First Lien Term Loan, 8% due 11/30/2013
            757,516       757,516       757,516  
First Lien Revolver, 8% due 11/30/2011
                         
                     
 
                               
 
                    757,516       757,516  

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Table of Contents

                                 
Portfolio Company/Type of Investment (1)(2)(5)   Industry   Principal (8)   Cost   Fair Value
 
 
                               
Best Vinyl Fence & Deck, LLC (9) (16)
  Building Products                        
First Lien Term Loan A, 8% due 11/30/2013
            2,020,043       1,916,192       2,020,043  
First Lien Term Loan B, 8% due 5/31/2011
            3,787,580       3,787,580       3,787,580  
First Lien Revolver, 8% due 11/30/2011
                         
25,641 Shares of Series A Preferred Stock in Vanguard Vinyl, Inc.
                    253,846        
25,641 Shares of Common Stock in Vanguard Vinyl, Inc.
                    2,564        
                     
 
                               
 
                    5,960,182       5,807,623  
 
                               
Total Non-Control/Non-Affiliate Investments
                  $ 695,146,171     $ 687,661,313  
                     
 
                               
Total Portfolio Investments
                  $ 754,964,483     $ 742,395,335  
                     
 
(1)   All debt investments are income producing unless otherwise noted in (13) or (14). Equity is non-income producing unless otherwise noted.
 
(2)   See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
 
(3)   Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
 
(4)   Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.
 
(5)   Equity ownership may be held in shares or units of companies related to the portfolio companies.
 
(6)   Income producing through payment of dividends or distributions.
 
(7)   Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
 
(8)   Principal includes accumulated PIK interest and is net of repayments.
 
(9)   Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:

12


Table of Contents

                 
Portfolio Company   Effective date   Cash interest   PIK interest   Reason
Traffic Control & Safety Corp.
  May 28, 2010   - 4.0% on Term Loan   + 1.0% on Term Loan   Per restructuring agreement
Filet of Chicken
  October 1, 2010   + 1.0% on Term Loan   + 1.0% on Term Loan   Tier pricing per waiver agreement
Premier Trailer Leasing, Inc.
  August 4, 2009   + 4.0% on Term Loan       Default interest per credit agreement
HealthDrive Corporation
  April 30, 2009   + 2.0% on Term Loan A       Per waiver agreement
 
(10)   Revolving credit line has been suspended and is deemed unlikely to be renewed in the future.
 
(11)   Amounts represent unearned income related to undrawn commitments.
 
(12)   Represents an unfunded commitment to fund a limited partnership interest.
 
(13)   Investment was on cash non-accrual status as of December 31, 2010.
 
(14)   Investment was on PIK non-accrual status as of December 31, 2010.
 
(15)   On October 13, 2010, Nicos Polymers & Grinding, Inc., an existing portfolio company, filed for Chapter 11 bankruptcy as part of a restructuring of that investment. On December 2, 2010, the Company and the major shareholder of Nicos Polymers & Grinding, Inc. closed on a restructuring agreement via an out of court foreclosure process, resulting in a restructured facility and these terms.
 
(16)   On November 4, 2010, the Company held a foreclosure auction of the assets of Vanguard Vinyl, Inc., an existing portfolio company, as part of a loan restructuring. The restructuring broke up Vanguard Vinyl, Inc. into two operating companies. Saddleback Fence and Vinyl Products, Inc., which is located in California, and Best Vinyl Fence & Deck, LLC, which will manage operations in Utah and Hawaii, and resulted in a restructured facility and these terms.
See notes to Consolidated Financial Statements.

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                             
Portfolio Company/Type                
of Investment(1)(2)(5)   Industry   Principal(8)   Cost   Fair Value
Control Investments(3)
                           
Lighting By Gregory, LLC(13)(14)
  Housewares &
Specialties
                       
First Lien Term Loan A, 9.75% due 2/28/2013
      $ 5,419,495     $ 4,728,589     $ 1,503,716  
First Lien Term Loan B, 14.5% due 2/28/2013
        8,575,783       6,906,440       2,196,284  
First Lien Bridge Loan, 8% due 10/15/2010
        152,312       150,000        
97.38% membership interest
                410,000        
 
                           
 
                12,195,029       3,700,000  
 
                           
Total Control Investments
              $ 12,195,029     $ 3,700,000  
 
                           
Affiliate Investments(4)
                           
O’Currance, Inc.
  Data Processing &
Outsourced Services
                       
First Lien Term Loan A, 16.875% due 3/21/2012
        10,961,448     $ 10,869,262     $ 10,805,775  
First Lien Term Loan B, 16.875%, due 3/21/2012
        1,853,976       1,828,494       1,896,645  
1.75% Preferred Membership interest in O’Currance Holding Co., LLC
                130,413       38,592  
3.3% Membership Interest in O’Currance Holding Co., LLC
                250,000        
 
                           
 
                13,078,169       12,741,012  
MK Network, LLC(13)(14)
  Education services                        
First Lien Term Loan A, 13.5% due 6/1/2012
        9,740,358       9,539,188       7,913,140  
First Lien Term Loan B, 17.5% due 6/1/2012
        4,926,187       4,748,004       3,938,660  
First Lien Revolver, Prime + 1.5% (10% floor), due 6/1/2010(10)
                     
11,030 Membership Units(6)
                771,575        
 
                           
 
                15,058,767       11,851,800  
Caregiver Services, Inc.
  Healthcare services                        
Second Lien Term Loan A, LIBOR+6.85% (12% floor) due 2/25/2013
        7,141,190       6,813,431       7,113,622  
Second Lien Term Loan B, 16.5% due 2/25/2013
        14,692,015       14,102,756       14,179,626  
1,080,399 shares of Series A Preferred Stock
                1,080,398       1,335,999  
 
                           
 
                21,996,585       22,629,247  
 
                           
Total Affiliate Investments
              $ 50,133,521     $ 47,222,059  
 
                           
Non-Control/Non-Affiliate Investments(7)
                           
CPAC, Inc.
  Household Products                        
Subordinated Term Loan, 12.5% due 6/1/2012
        1,064,910     $ 1,064,910     $ 1,064,910  
 
                           
 
                1,064,910       1,064,910  
Vanguard Vinyl, Inc.(9)(13)(14)
  Building Products                        
First Lien Term Loan, 12% due 3/30/2013
        7,000,000       6,827,373       5,812,199  
First Lien Revolver, LIBOR+7% (10% floor) due 3/30/2013
        1,250,000       1,207,895       1,029,268  
25,641 Shares of Series A Preferred Stock
                253,846        
25,641 Shares of Common Stock
                2,564        
 
                           
 
                8,291,678       6,841,467  
Repechage Investments Limited
  Restaurants                        
First Lien Term Loan, 15.5% due 10/16/2011
        3,708,971       3,475,906       3,486,342  
7,500 shares of Series A Preferred Stock of Elephant & Castle, Inc.
                750,000       354,114  
 
                           
 
                4,225,906       3,840,456  

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                             
Portfolio Company/Type                
of Investment(1)(2)(5)   Industry   Principal(8)   Cost   Fair Value
Traffic Control & Safety Corporation(9)
  Construction and
Engineering
                       
Second Lien Term Loan, 15% due 5/28/2015
        19,969,524       19,724,493       19,440,090  
Subordinated Loan, 15% due 5/28/2015
        4,577,800       4,577,800       4,404,746  
24,750 shares of Series B Preferred Stock
                247,500        
43,494 shares of Series D Preferred Stock(6)
                434,937        
25,000 shares of Common Stock
                2,500        
 
                           
 
                24,987,230       23,844,836  
Nicos Polymers & Grinding Inc.(9)(13)(14)
  Environmental &
facilities services
                       
First Lien Term Loan A, LIBOR+5% (10% floor), due 7/17/2012
        3,154,876       3,040,465       1,782,181  
First Lien Term Loan B, 13.5% due 7/17/2012
        6,180,185       5,713,125       3,347,672  
3.32% Interest in Crownbrook Acquisition I LLC
                168,086        
 
                           
 
                8,921,676       5,129,853  
TBA Global, LLC(9)
  Advertising                        
Second Lien Term Loan B, 14.5% due 8/3/2012
        10,840,081       10,594,939       10,625,867  
53,994 Senior Preferred Shares
                215,975       215,975  
191,977 Shares A Shares
                191,977       179,240  
 
                           
 
                11,002,891       11,021,082  
Fitness Edge, LLC
  Leisure Facilities                        
First Lien Term Loan A, LIBOR+5.25% (10% floor), due 8/8/2012
        1,250,000       1,245,136       1,247,418  
First Lien Term Loan B, 15% due 8/8/2012
        5,631,547       5,575,477       5,674,493  
1,000 Common Units (6)
                42,908       118,132  
 
                           
 
                6,863,521       7,040,043  
Filet of Chicken(9)
  Food Distributors                        
Second Lien Term Loan, 14.5% due 7/31/2012
        9,316,518       9,063,155       8,964,766  
 
                           
 
                9,063,155       8,964,766  
Boot Barn(9)
  Apparel, accessories &
luxury goods
                       
Second Lien Term Loan, 14.5% due 10/3/2013
        23,545,479       23,288,566       23,477,539  
247.06 shares of Series A Preferred Stock
                247,060       71,394  
1,308 shares of Common Stock
                131        
 
                           
 
                23,535,757       23,548,933  
Premier Trailer Leasing, Inc.(9)(13)(14)
  Trucking                        
Second Lien Term Loan, 16.5% due 10/23/2012
        18,452,952       17,063,645       4,597,412  
285 shares of Common Stock
                1,140        
 
                           
 
                17,064,785       4,597,412  
Pacific Press Technologies, Inc.(9)
                           
Second Lien Term Loan, 14.75% due 7/10/2013
  Industrial machinery     10,071,866       9,798,901       9,829,869  
33,786 shares of Common Stock
                344,513       402,894  
 
                           
 
                10,143,414       10,232,763  
Goldco, LLC
                           
Second Lien Term Loan, 17.5% due 1/31/2013
  Restaurants     8,355,688       8,259,479       8,259,479  
 
                           
 
                8,259,479       8,259,479  
Rail Acquisition Corp.(9)
  Electronic manufacturing
services
                       
First Lien Term Loan, 17% due 9/1/2013
        16,315,866       13,536,969       12,854,425  
First Lien Revolver, 7.85% due 9/1/2013
        5,201,103       5,201,103       5,201,103  
 
                           
 
                18,738,072       18,055,528  

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                             
Portfolio Company/Type                
of Investment(1)(2)(5)   Industry   Principal(8)   Cost   Fair Value
Western Emulsions, Inc.(9)
  Construction materials                        
Second Lien Term Loan, 15% due 6/30/2014
        17,864,713       17,475,899       17,039,751  
 
                           
 
                17,475,899       17,039,751  
Storyteller Theaters Corporation
  Movies & entertainment                        
1,692 shares of Common Stock
                169       61,613  
20,000 shares of Preferred Stock
                200,000       200,000  
 
                           
 
                200,169       261,613  
HealthDrive Corporation(9)
  Healthcare services                        
First Lien Term Loan A, 10% due 7/17/2013
        6,662,970       6,324,339       6,488,990  
First Lien Term Loan B, 13% due 7/17/2013
        10,178,726       10,068,726       9,962,414  
First Lien Revolver, 12% due 7/17/2013
        500,000       489,000       508,967  
 
                           
 
                16,882,065       16,960,371  
idX Corporation
  Distributors                        
Second Lien Term Loan, 14.5% due 7/1/2014
        13,588,794       13,350,633       13,258,317  
 
                           
 
                13,350,633       13,258,317  
Cenegenics, LLC
  Healthcare services                        
First Lien Term Loan, 17% due 10/27/2014
        20,172,004       19,257,215       19,544,864  
414,419 Common Units(6)
                598,382       1,417,886  
 
                           
 
                19,855,597       20,962,750  
IZI Medical Products, Inc.
  Healthcare technology                        
First Lien Term Loan A, 12% due 3/31/2014
        4,449,775       4,387,947       4,406,684  
First Lien Term Loan B, 16% due 3/31/2014
        17,258,033       16,702,405       17,092,868  
First Lien Revolver, 10% due 3/31/2014(11)
              (35,000 )     (35,000 )
453,755 Preferred units of IZI Holdings, LLC (6)
                453,755       676,061  
 
                           
 
                21,509,107       22,140,613  
Trans-Trade, Inc.
  Air freight & logistics                        
First Lien Term Loan, 15.5% due 9/10/2014
        12,751,463       12,536,099       12,549,159  
First Lien Revolver, 12% due 9/10/2014
        1,500,000       1,468,667       1,491,373  
 
                           
 
                14,004,766       14,040,532  
Riverlake Equity Partners II, LP
  Multi-sector holdings                        
1.87% limited partnership interest
                33,640       33,640  
 
                           
 
                33,640       33,640  
Riverside Fund IV, LP
  Multi-sector holdings                        
0.33% limited partnership interest
                135,825       135,825  
 
                           
 
                135,825       135,825  
ADAPCO, Inc.
  Fertilizers &
agricultural chemicals
                       
First Lien Term Loan A, 10% due 12/17/2014
        9,000,000       8,789,498       8,806,763  
First Lien Term Loan B, 14% due 12/17/2014
        14,225,615       13,892,772       13,897,677  
First Lien Term Revolver, 10% due 12/17/2014
        4,250,000       4,012,255       4,107,420  
 
                           
 
                26,694,525       26,811,860  

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                             
Portfolio Company/Type                
of Investment(1)(2)(5)   Industry   Principal(8)   Cost   Fair Value
Ambath/Rebath Holdings, Inc.
  Home improvement
retail
                       
First Lien Term Loan A, LIBOR+7% (10% floor) due 12/30/2014
        9,500,000       9,277,900       9,127,886  
First Lien Term Loan B, 15% due 12/30/2014
        22,423,729       21,920,479       21,913,276  
First Lien Term Revolver, LIBOR+6.5% (9.5% floor) due 12/30/2014
        1,500,000       1,432,500       1,442,696  
 
                           
 
                32,630,879       32,483,858  
JTC Education, Inc.
  Education services                        
First Lien Term Loan, LIBOR+9.5% (12.5% floor) due 12/31/2014
        31,054,688       30,243,946       30,660,049  
First Lien Revolver, LIBOR+9.5% (12.5% floor) due 12/31/2014(11)
              (401,111 )     (401,111 )
 
                           
 
                29,842,835       30,258,938  
Tegra Medical, LLC
  Healthcare equipment                        
First Lien Term Loan A, LIBOR+7% (10% floor) due 12/31/2014
        26,320,000       25,877,206       26,250,475  
First Lien Term Loan B, 14% due 12/31/2014
        22,098,966       21,729,057       22,114,113  
First Lien Revolver, LIBOR+7% (10% floor) due 12/31/2014(11)
              (66,667 )     (66,667 )
 
                           
 
                47,539,596       48,297,921  
Flatout, Inc.
  Food retail                        
First Lien Term Loan A, 10% due 12/31/2014
        7,300,000       7,120,671       7,144,136  
First Lien Term Loan B, 15% due 12/31/2014
        12,862,760       12,539,879       12,644,316  
First Lien Revolver, 10% due 12/31/2014(11)
              (38,136 )     (38,136 )
 
                           
 
                19,622,414       19,750,316  
Psilos Group Partners IV, LP
  Multi-sector holdings                        
2.53% limited partnership interest(12)
                       
 
                           
                       
 
                           
Mansell Group, Inc.
  Advertising                        
First Lien Term Loan A, LIBOR+7% (10% floor) due 4/30/2015
        5,000,000       4,909,720       4,915,885  
First Lien Term Loan B, LIBOR+9% (13.5% floor) due 4/30/2015
        4,025,733       3,952,399       3,946,765  
First Lien Revolver, LIBOR+6% (9% floor) due 4/30/2015(11)
              (36,667 )     (36,667 )
 
                           
 
                8,825,452       8,825,983  
NDSSI Holdings, Inc.
  Electronic
equipment
& instruments
                       
First Lien Term Loan, LIBOR+9.75% (13.75% floor) due 9/10/2014
        30,245,558       29,684,880       29,409,043  
First Lien Revolver, LIBOR+7% (10% floor) due 9/10/2014
        3,500,000       3,409,615       3,478,724  
 
                           
 
                33,094,495       32,887,767  
Eagle Hospital Physicians, Inc.
  Healthcare services                        
First Lien Term Loan, LIBOR+8.75% (11.75% floor) due 8/11/2015
        8,000,000       7,783,892       7,783,892  
First Lien Revolver, LIBOR+5.75% (8.75% floor) due 8/11/2015
              (64,394 )     (64,394 )
 
                           
 
                7,719,498       7,719,498  
Enhanced Recovery Company, LLC
  Diversified support
services
                       
First Lien Term Loan A, LIBOR+7% (9% floor) due 8/13/2015
        15,500,000       15,171,867       15,171,867  
First Lien Term Loan B, LIBOR+10% (13% floor) due 8/13/2015
        11,014,977       10,782,174       10,782,174  
First Lien Revolver, LIBOR+7% (9% floor) due 8/13/2015
        376,852       292,196       292,196  
 
                           
 
                26,246,237       26,246,237  

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Table of Contents

Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                             
Portfolio Company/Type                
of Investment(1)(2)(5)   Industry   Principal(8)   Cost   Fair Value
Epic Acquisition, Inc.
  Healthcare services                        
First Lien Term Loan A, LIBOR+8% (11% floor) due 8/13/2015
        7,750,000       7,554,728       7,554,728  
First Lien Term Loan B, 15.25% due 8/13/2015
        13,555,178       13,211,532       13,211,532  
First Lien Revolver, LIBOR+6.5% (9.5% floor) due 8/13/2015
        300,000       223,634       223,634  
 
                           
 
                20,989,894       20,989,894  
Specialty Bakers LLC
  Food distributors                        
First Lien Term Loan A, LIBOR+8.5% due 9/15/2015
        9,000,000       8,755,670       8,755,670  
First Lien Term Loan B, LIBOR+11% (13.5% floor) due 9/15/2015
        11,000,000       10,704,008       10,704,008  
First Lien Revolver, LIBOR+8.5% due 9/15/2015
        2,000,000       1,892,367       1,892,367  
 
                           
 
                21,352,045       21,352,045  
 
                           
Total Non-Control/Non-Affiliate Investments
              $ 530,168,045     $ 512,899,257  
 
                           
Total Portfolio Investments
              $ 592,496,595     $ 563,821,316  
 
                           
 
(1)   All debt investments are income producing unless otherwise noted in (13) or (14). Equity is non-income producing unless otherwise noted.
 
(2)   See Note 3 to the Consolidated Financial Statements for portfolio composition by geographic region.
 
(3)   Control Investments are defined by the Investment Company Act of 1940 (“1940 Act”) as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
 
(4)   Affiliate Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% of the voting securities.
 
(5)   Equity ownership may be held in shares or units of companies related to the portfolio companies.
 
(6)   Income producing through payment of dividends or distributions.
 
(7)   Non-Control/Non-Affiliate Investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
 
(8)   Principal includes accumulated PIK interest and is net of repayments.
 
(9)   Interest rates have been adjusted on certain term loans and revolvers. These rate adjustments are temporary in nature due to financial or payment covenant violations in the original credit agreements, or permanent in nature per loan amendment or waiver documents. The table below summarizes these rate adjustments by portfolio company:

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Fifth Street Finance Corp.
Consolidated Schedule of Investments
September 30, 2010
                 
Portfolio Company   Effective date   Cash interest   PIK interest   Reason
Nicos Polymers & Grinding, Inc.
  February 10, 2008       + 2.0% on Term Loan A & B   Per waiver agreement
TBA Global, LLC
  February 15, 2008       + 2.0% on Term Loan B   Per waiver agreement
Vanguard Vinyl, Inc.
  April 1, 2008   + 0.5% on Term Loan       Per loan amendment
Filet of Chicken
  January 1, 2009   + 1.0% on Term Loan       Tier pricing per waiver agreement
Boot Barn
  January 1, 2009   + 1.0% on Term Loan   + 2.5% on Term Loan   Tier pricing per waiver agreement
HealthDrive Corporation
  April 30, 2009   + 2.0% on Term Loan A       Per waiver agreement
Premier Trailer Leasing, Inc.
  August 4, 2009   + 4.0% on Term Loan       Default interest per credit agreement
Rail Acquisition Corp.
  May 1, 2010   - 4.5% on Term Loan   - 0.5% on Term Loan   Per restructuring agreement
Traffic Control & Safety Corp.
  May 28, 2010   - 4.0% on Term Loan   + 1.0% on Term Loan   Per restructuring agreement
Pacific Press Technologies, Inc.
  July 1, 2010   - 2.0% on Term Loan   - 0.75% on Term Loan   Per waiver agreement
Western Emulsions, Inc.
  September 30, 2010       + 3.0% on Term Loan   Per loan agreement
 
(10)   Revolving credit line has been suspended and is deemed unlikely to be renewed in the future.
 
(11)   Amounts represent unearned income related to undrawn commitments.
 
(12)   Represents an unfunded commitment to fund a limited partnership interest.
 
(13)   Investment was on cash non-accrual status as of September 30, 2010.
 
(14)   Investment was on PIK non-accrual status as of September 30, 2010.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
          Fifth Street Mezzanine Partners III, L.P. (the “Partnership”), a Delaware limited partnership, was organized on February 15, 2007 to primarily invest in debt securities of small and middle market companies. FSMPIII GP, LLC was the Partnership’s general partner (the “General Partner”). The Partnership’s investments were managed by Fifth Street Management LLC (the “Investment Adviser”). The General Partner and Investment Adviser were under common ownership.
     Effective January 2, 2008, the Partnership merged with and into Fifth Street Finance Corp. (the “Company”), an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 (the “1940 Act”). Fifth Street Finance Corp. is managed by the Investment Adviser. Prior to January 2, 2008, references to the Company are to the Partnership. Since January 2, 2008, references to the Company, FSC, “we” or “our” are to Fifth Street Finance Corp., unless the context otherwise requires.
     The Company also has certain wholly-owned subsidiaries, including subsidiaries that are not consolidated for income tax purposes, which hold certain portfolio investments of the Company. The subsidiaries are consolidated with the Company, and the portfolio investments held by the subsidiaries are included in the Company’s Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
     The Company’s shares are currently listed on the New York Stock Exchange under the symbol “FSC.” The following table reflects common stock offerings that have occurred since inception:
                                 
                    Offering        
Date     Transaction   Shares     price     Gross proceeds  
       
 
                       
June 17, 2008  
Initial public offering
    10,000,000     $ 14.12     $141.2 million
July 21, 2009  
Follow-on public offering (including underwriters’ exercise of over-allotment option)
    9,487,500     $ 9.25     $87.8 million
September 25, 2009  
Follow-on public offering (including underwriters’ exercise of over-allotment option)
    5,520,000     $ 10.50     $58.0 million
January 27, 2010  
Follow-on public offering
    7,000,000     $ 11.20     $78.4 million
February 25, 2010  
Underwriters’ exercise of over-allotment option
    300,500     $ 11.20     $3.4 million
June 21, 2010  
Follow-on public offering (including underwriters’ exercise of over-allotment option)
    9,200,000     $ 11.50     $105.8 million
December 2010  
At-the-Market offering
    429,110     $ 11.87 (1)   $5.1 million
 
(1)   Average offering price
     On February 3, 2010, the Company’s consolidated wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P., received a license, effective February 1, 2010, from the United States Small Business Administration, or SBA, to operate as a small business investment company, or SBIC, under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
     The SBIC license allows the Company’s SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
     SBA regulations currently limit the amount that the Company’s SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of December 31, 2010, the Company’s SBIC subsidiary had $75 million in regulatory capital. The SBA has issued a capital commitment to the Company’s SBIC subsidiary in the amount of $150 million, and $123.3 million of SBA debentures were outstanding as of December 31, 2010. $73.0 million of these debentures bore an interest rate of 3.50%, including the SBA annual charge of 0.285%, while the remainder do not yet have a locked interest rate.
     The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, the Company’s SBIC subsidiary may also be limited in its ability to make distributions to the Company if it does not have sufficient capital, in accordance with SBA regulations.
     The Company’s SBIC subsidiary is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that the SBIC subsidiary will receive SBA-guaranteed debenture funding and is dependent upon the SBIC subsidiary continuing to be in compliance with SBA regulations and policies.
     The SBA, as a creditor, will have a superior claim to the SBIC subsidiary’s assets over the Company’s stockholders in the event the Company liquidates the SBIC subsidiary or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC subsidiary upon an event of default.
     The Company has received exemptive relief from the Securities and Exchange Commission (“SEC”) to permit it to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the 200% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200% asset coverage test.
Note 2. Significant Accounting Policies
FASB Accounting Standards Codification:
          The issuance of FASB Accounting Standards Codification tm (the “Codification”) on July 1, 2009 (effective for interim or annual reporting periods ending after September 15, 2009), changes the way that U.S. generally accepted accounting principles (“GAAP”) are referenced. Beginning on that date, the Codification officially became the single source of authoritative nongovernmental GAAP; however, SEC registrants must also consider rules, regulations and interpretive guidance issued by the SEC or its staff. The switch affects the way companies refer to GAAP in financial statements and in their accounting policies. References to standards will consist solely of the number used in the Codification’s structural organization.
     Consistent with the effective date of the Codification, financial statements for periods ending after September 15, 2009, refer to the Codification structure, not pre-Codification historical GAAP.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basis of Presentation and Liquidity:
          The Consolidated Financial Statements of the Company have been prepared in accordance with GAAP and Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair presentation of the Consolidated Financial Statements have been made. The financial results of the Company’s portfolio investments are not consolidated in the Company’s Consolidated Financial Statements.
     Although the Company expects to fund the growth of its investment portfolio through the net proceeds from the recent and future equity offerings, the Company’s dividend reinvestment plan, and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, the Company cannot assure that its plans to raise capital will be successful. In addition, the Company intends to distribute to its stockholders between 90% and 100% of its taxable income each year in order to satisfy the requirements applicable to Regulated Investment Companies (“RICs”) under Subchapter M of the Internal Revenue Code (“Code”). Consequently, the Company may not have the funds or the ability to fund new investments, to make additional investments in its portfolio companies, to fund its unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of its portfolio investments may make it difficult for the Company to sell these investments when desired and, if the Company is required to sell these investments, it may realize significantly less than their recorded value.
Use of Estimates:
     The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and conditions. The most significant estimates inherent in the preparation of the Company’s Consolidated Financial Statements are the valuation of investments and revenue recognition.
     The Consolidated Financial Statements include portfolio investments at fair value of $742.4 million and $563.8 million at December 31, 2010 and September 30, 2010, respectively. The portfolio investments represent 129.1% and 99.1% of net assets at December 31, 2010 and September 30, 2010, respectively, and their fair values have been determined by the Company’s Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
     The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation; “Affiliate Investments” are defined as investments in companies in which the Company owns between 5% and 25% of the voting securities; and “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements:
          ASC 820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.
     Assets recorded at fair value in the Company’s Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
     Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
    Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
    Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
 
    Level 3 — Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
     Under ASC 820, the Company performs detailed valuations of its debt and equity investments on an individual basis, using market, income, and bond yield approaches as appropriate. In general, the Company utilizes a bond yield method for the majority of its investments, as long as it is appropriate. If, in the Company’s judgment, the bond yield approach is not appropriate, it may use the enterprise value approach, or, in certain cases, an alternative methodology potentially including an asset liquidation or expected recovery model.
     Under the market approach, the Company estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Company analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value. The Company generally requires portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
     Under the income approach, the Company generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.
     Under the bond yield approach, the Company uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Company reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.
     The Company’s Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the Company’s investments:
    The quarterly valuation process begins with each portfolio company or investment being initially valued by the deal team within the Investment Adviser responsible for the portfolio investment;

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    Preliminary valuations are then reviewed and discussed with the principals of the Investment Adviser;
 
    Separately, independent valuation firms engaged by the Board of Directors prepare preliminary valuations on a selected basis and submit the reports to the Company;
 
    The deal team compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
 
    The deal team prepares a valuation report for the Valuation Committee of the Board of Directors;
 
    The Valuation Committee of the Board of Directors is apprised of the preliminary valuations of the independent valuation firms;
 
    The Valuation Committee of the Board of Directors reviews the preliminary valuations, and the deal team responds and supplements the preliminary valuations to reflect any comments provided by the Valuation Committee;
 
    The Valuation Committee of the Board of Directors makes a recommendation to the Board of Directors; and
 
    The Board of Directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith.
     The fair value of all of the Company’s investments at December 31, 2010 was determined by the Board of Directors. The Board of Directors is solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and a consistently applied valuation process.
     The Board of Directors has engaged independent valuation firms to provide valuation assistance. Upon completion of their processes each quarter, the independent valuation firms provide the Company with written reports regarding the preliminary valuations of selected portfolio securities as of the close of such quarter. The Company will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of selected portfolio securities each quarter; however, the Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith.
     Realized gain or loss on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with the Company’s determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investment Income:
     Interest income, adjusted for amortization of premium and accretion of original issue discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. In connection with its investment, the Company sometimes receives nominal cost equity that is valued as part of the negotiation process with the particular portfolio company. When the Company receives nominal cost equity, the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. Any resulting discount from recording the loan is accreted into interest income over the life of the loan.
     Distributions of earnings from portfolio companies are recorded as dividend income when the distribution is received.
     The Company has investments in debt securities which contain a payment-in-kind or “PIK” interest provision. PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.
     Fee income consists of the monthly collateral management fees that the Company receives in connection with its debt investments and the accreted portion of the debt origination fees. The Company capitalizes upfront loan origination fees received in connection with investments. The unearned fee income from such fees is accreted into fee income, based on the straight line method or effective interest method as applicable, over the life of the investment.
     The Company has also structured exit fees across certain of its portfolio investments to be received upon the future exit of those investments. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. Exit fees are fees which are earned and payable upon the exit of a debt security and, similar to a prepayment penalty, are not accrued or otherwise included in net investment income until received. The receipt of such fees as well the timing of the Company’s receipt of such fees is contingent upon a successful exit event for each of the investments.
Cash and Cash Equivalents:
     Cash and cash equivalents consist of demand deposits and highly liquid investments with maturities of three months or less, when acquired. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation insured limit. Included in cash and cash equivalents is $0.8 million that is held at Wells Fargo Bank, National Association (“Wells Fargo”) in connection with the Company’s three-year credit facility. The Company is restricted in terms of access to this cash until such time as the Company submits its required monthly reporting schedules and Wells Fargo verifies the Company’s compliance per the terms of the credit agreement.
Deferred Financing Costs:
     Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the terms of the respective credit facilities. This amortization expense is included in interest expense in the Company’s Consolidated Statement of Operations.
Collateral posted to bank:
     Collateral posted to bank consists of cash posted as collateral with respect to the Company’s interest rate swap. The Company is restricted in terms of access to this collateral until such swap is terminated or the swap agreement expires. Cash collateral posted is held in an account at Wells Fargo.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Rate Swap:
     The Company does not utilize hedge accounting and marks its interest rate swap to fair value on a quarterly basis through operations.
Offering Costs:
     Offering costs consist of fees and expenses incurred in connection with the public offer and sale of the Company’s common stock, including legal, accounting, and printing fees. $0.3 million of offering costs have been charged to capital during the three months ended December 31, 2010.
Income Taxes:
     As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company intends to distribute between 90% and 100% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2011). The Company anticipates timely distribution of its taxable income within the tax rules; however, the Company incurred a de minimis federal excise tax for calendar years 2008 and 2009, and expects to incur a de minimis federal excise tax for the calendar year 2010. In addition, the Company may incur a federal excise tax in future years.
     The purpose of the Company’s taxable subsidiaries is to permit the Company to hold equity investments in portfolio companies which are “pass through” entities for federal tax purposes in order to comply with the “source income” requirements contained in the RIC tax requirements. The taxable subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense as a result of their ownership of certain portfolio investments. This income tax expense, if any, would be reflected in the Company’s Consolidated Statements of Operations. The Company uses the asset and liability method to account for its taxable subsidiaries’ income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences.
     ASC 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the Company’s Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Company’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2008 or 2009 or expected to be taken in the Company’s 2010 tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.
Recent Accounting Pronouncements
     In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Improving Disclosures About Fair Value Measurements (Topic 820), which provides for improving disclosures about fair value measurements, primarily significant transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for the interim and annual reporting periods beginning after December 15, 2009, while the disclosures about the purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and for the interim periods within those fiscal years. Except for certain detailed Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years, the new guidance became effective for the Company’s fiscal 2010 second quarter. The adoption of this disclosure-only guidance is included in Note 3 — Portfolio Investments and did not have an impact on the Company’s consolidated financial results.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820) — Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) which provides guidance on estimating the fair value of an alternative investment, amending ASC 820-10. The amendment is effective for interim and annual periods ending after December 15, 2009. The adoption of this guidance did not have a material impact on either the Company’s consolidated financial position or results of operations.
Note 3. Portfolio Investments
          At December 31, 2010, 129.1% of net assets or $742.4 million was invested in 45 long-term portfolio investments and 7.5% of net assets or $43.0 million was invested in cash and cash equivalents. In comparison, at September 30, 2010, 99.1% of net assets or $563.8 million was invested in 38 long-term portfolio investments and 13.5% of net assets or $76.8 million was invested in cash and cash equivalents. As of December 31, 2010, primarily all of the Company’s debt investments were secured by first or second priority liens on the assets of the portfolio companies. Moreover, the Company held equity investments in certain of its portfolio companies consisting of common stock, preferred stock or limited liability company interests designed to provide the Company with an opportunity for an enhanced rate of return. These instruments generally do not produce a current return, but are held for potential investment appreciation and capital gain.
          During the three months ended December 31, 2010, the Company recorded net realized losses on investments of $13.5 million. During the three months ended December 31, 2009, the Company recorded a $0.1 million reduction to a previously recorded realized gain. During the three months ended December 31, 2010 and 2009, the Company recorded net unrealized appreciation of $16.8 million and $1.0 million, respectively.
          The composition of the Company’s debt investments as of December 31, 2010 and September 30, 2010 at fixed rates and floating rates was as follows:
                                 
    December 31, 2010   September 30, 2010
    Fair Value   % of Portfolio   Fair Value   % of Portfolio
Fixed rate debt securities
  $ 366,003,445       50.00 %   $ 375,584,242       67.24 %
Floating rate debt securities
    366,014,988       50.00 %     182,995,709       32.76 %
     
 
                               
Total
  $ 732,018,433       100.00 %   $ 558,579,951       100.00 %
     
          The composition of the Company’s investments as of December 31, 2010 and September 30, 2010 at cost and fair value was as follows:
                                 
    December 31, 2010   September 30, 2010
    Cost   Fair Value   Cost   Fair Value
Investments in debt securities
  $ 743,136,969     $ 732,018,433     $ 585,529,301     $ 558,579,951  
Investments in equity securities
    11,827,514       10,376,902       6,967,294       5,241,365  
     
 
                               
Total
  $ 754,964,483     $ 742,395,335     $ 592,496,595     $ 563,821,316  
     
          The following table presents the financial instruments carried at fair value as of December 31, 2010, by caption on the Company’s Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820.
                                 
    Level 1   Level 2   Level 3   Total
Cash equivalents
  $  —     $     $     $  
Investments in debt securities (first lien)
                642,402,398       642,402,398  
Investments in debt securities (second lien)
                85,394,636       85,394,636  
Investments in debt securities (subordinated)
                4,221,399       4,221,399  
Investments in equity securities (preferred)
                3,963,240       3,963,240  
Investments in equity securities (common)
                6,413,662       6,413,662  
     
Total investments at fair value
  $  —     $     $ 742,395,335     $ 742,395,335  
Interest rate swap
     —       37,045             37,045  
     
 
                               
Total liabilities at fair value
  $     $ 37,045     $     $ 37,045  
     

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          The following table presents the financial instruments carried at fair value as of September 30, 2010, by caption on the Company’s Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820.
                                 
    Level 1   Level 2   Level 3   Total
Cash equivalents
  $  —     $     $     $  
Investments in debt securities (first lien)
                416,323,957       416,323,957  
Investments in debt securities (second lien)
                137,851,248       137,851,248  
Investments in debt securities (subordinated)
                4,404,746       4,404,746  
Investments in equity securities (preferred)
                2,892,135       2,892,135  
Investments in equity securities (common)
                2,349,230       2,349,230  
     
Total investments at fair value
  $  —     $     $ 563,821,316     $ 563,821,316  
Interest rate swap
     —       773,435             773,435  
     
 
                               
Total liabilities at fair value
  $     $ 773,435     $     $ 773,435  
     
          When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors are the most significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated by external sources). Accordingly, the appreciation (depreciation) in the tables below includes changes in fair value due in part to observable factors that are part of the valuation methodology.
          The following table provides a roll-forward in the changes in fair value from September 30, 2010 to December 31, 2010, for all investments for which the Company determines fair value using unobservable (Level 3) factors.
                                                 
    First     Second     Subordinated     Preferred     Common        
    Lien Debt     Lien Debt     Debt     Equity     Equity     Total  
 
                                               
Fair value as of September 30, 2010
  $ 416,323,957     $ 137,851,248     $ 4,404,746     $ 2,892,135     $ 2,349,230     $ 563,821,316  
Purchases and other increases
    231,619,326       1,973,839       177,734       1,037,112       3,823,108       238,631,119  
Redemptions, repayments and other decreases
    (7,910,103 )     (54,802,911 )                       (62,713,014 )
Net realized losses
    (13,450,219 )                             (13,450,219 )
Net unrealized appreciation (depreciation)
    15,819,437       372,460       (361,081 )     33,993       241,324       16,106,133  
Transfers into (out of) level 3
                                   
 
                                   
 
                                               
Fair value as of December 31, 2010
  $ 642,402,398     $ 85,394,636     $ 4,221,399     $ 3,963,240     $ 6,413,662     $ 742,395,335  
 
                                   
 
                                               
Net unrealized appreciation (depreciation) relating to Level 3 assets still held at December 31, 2010 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended December 31, 2010
  $ 5,559,340     $ 592,361     $ (361,081 )   $ 33,993     $ 241,324     $ 6,065,937  

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The following table provides a roll-forward in the changes in fair value from September 30, 2009 to December 31, 2009, for all investments for which the Company determines fair value using unobservable (Level 3) factors.
                                                 
    First     Second     Subordinated     Preferred     Common        
    Lien Debt     Lien Debt     Debt     Equity     Equity     Total  
 
                                               
Fair value as of September 30, 2009
  $ 142,016,942     $ 153,904,458     $     $ 2,889,471     $ 800,266     $ 299,611,137  
Purchases and other increases
    138,819,323       3,387,609                   153,972       142,360,904  
Redemptions, repayments and other decreases
    (1,711,417 )     (4,672,378 )                       (6,383,795 )
Net realized losses
          106,000                         106,000  
Net unrealized appreciation (depreciation)
    1,643,654       (470,920 )           (227,648 )     54,208       999,294  
Transfers into (out of) level 3
                                   
 
                                               
Fair value as of December 31, 2009
  $ 280,768,502     $ 152,254,769     $     $ 2,661,823     $ 1,008,446     $ 436,693,540  
 
                                               
Net unrealized appreciation (depreciation) relating to Level 3 assets still held at December 31, 2009 and reported within net unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations for the three months ended December 31, 2009
  $ 1,643,654     $ (712,563 )   $     $ (227,648 )   $ 54,208     $ 757,651  

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          Concurrent with its adoption of ASC 820, effective October 1, 2008, the Company augmented the valuation techniques it uses to estimate the fair value of its debt investments where there is not a readily available market value (Level 3). Prior to October 1, 2008, the Company estimated the fair value of its Level 3 debt investments by first estimating the enterprise value of the portfolio company which issued the debt investment. To estimate the enterprise value of a portfolio company, the Company analyzed various factors, including the portfolio companies historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues or, in limited instances, book value.
          In estimating a multiple to use for valuation purposes, the Company looked to private merger and acquisition statistics, discounted public trading multiples or industry practices. In some cases, the best valuation methodology may have been a discounted cash flow analysis based on future projections. If a portfolio company was distressed, a liquidation analysis may have provided the best indication of enterprise value.
          If there was adequate enterprise value to support the repayment of the Company’s debt, the fair value of the Level 3 loan or debt security normally corresponded to cost plus the amortized original issue discount unless the borrower’s condition or other factors lead to a determination of fair value at a different amount.
          Beginning on October 1, 2008, the Company also introduced a bond yield model to value these investments based on the present value of expected cash flows. The significant inputs into the model are market interest rates for debt with similar characteristics and an adjustment for the portfolio company’s credit risk. The credit risk component of the valuation considers several factors including financial performance, business outlook, debt priority and collateral position.
          The table below summarizes the changes in the Company’s investment portfolio from September 30, 2010 to December 31, 2010.
                                 
    Debt   Equity   Total        
     
 
                               
Fair value as of September 30, 2010
  $ 558,579,951     $ 5,241,365     $ 563,821,316          
New investments
    233,716,898       4,860,221       238,577,119          
Redemptions/ repayments
    (60,794,114 )           (60,794,114 )        
Net accrual of PIK interest income
    (1,965,334 )           (1,965,334 )        
Accretion of original issue discount
    388,637             388,637          
Net change in unearned income
    (3,478,325 )           (3,478,325 )        
Net unrealized appreciation (depreciation)
    15,830,817       275,316       16,106,133          
Net changes from unrealized to realized
    (10,260,097 )           (10,260,097 )        
     
 
                               
Fair value as of December 31, 2010
  $ 732,018,433     $ 10,376,902     $ 742,395,335          
     
          The Company’s off-balance sheet arrangements consisted of $95.3 million and $49.5 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of December 31, 2010 and September 30, 2010, respectively. Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Statement of Assets and Liabilities and are not reflected on the Company’s Consolidated Statements of Assets and Liabilities.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          A summary of the composition of the unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of December 31, 2010 and September 30, 2010 is shown in the table below:
                 
    December 31, 2010   September 30, 2010
     
 
               
HealthDrive Corporation
  $ 1,500,000     $ 1,500,000  
IZI Medical Products, Inc.
    2,500,000       2,500,000  
Trans-Trade, Inc.
    4,000,000       500,000  
Riverlake Equity Partners II, LP (limited partnership interest)
    877,895       966,360  
Riverside Fund IV, LP (limited partnership interest)
    678,583       864,175  
ADAPCO, Inc.
    5,750,000       5,750,000  
AmBath/ReBath Holdings, Inc.
    1,500,000       1,500,000  
JTC Education, Inc.
    14,000,000       9,062,453  
Tegra Medical, LLC
    4,000,000       4,000,000  
Vanguard Vinyl, Inc.
          1,250,000  
Flatout, Inc.
    1,500,000       1,500,000  
Psilos Group Partners IV, LP (limited partnership interest)
    1,000,000       1,000,000  
Mansell Group, Inc.
    2,000,000       2,000,000  
NDSSI Holdings, Inc.
    1,500,000       1,500,000  
Eagle Hospital Physicians, Inc.
    2,500,000       2,500,000  
Enhanced Recovery Company, LLC
    4,000,000       3,623,148  
Epic Acquisition, Inc.
    2,200,000       2,700,000  
Specialty Bakers, LLC
    4,000,000       2,000,000  
Rail Acquisition Corp.
    5,040,865       4,798,897  
Bunker Hill Capital II (QP), L.P. (limited partnership interest)
    1,000,000        
Nicos Polymers & Grinding Inc.
    500,000        
CRGT, Inc.
    12,500,000        
Welocalize, Inc.
    4,750,000        
Miche Bag, LLC
    5,000,000        
Dominion Diagnostics, LLC
    5,000,000        
Advanced Pain Management
    400,000        
DISA, Inc.
    4,000,000        
Best Vinyl Fence & Deck, LLC
    1,000,000        
Saddleback Fence and Vinyl Products, Inc.
    400,000        
Traffic Control & Safety Corporation
    2,250,000        
     
 
               
Total
  $ 95,347,343     $ 49,515,033  
     
          Summaries of the composition of the Company’s investment portfolio at cost and fair value as a percentage of total investments are shown in the following tables:
                                 
    December 31, 2010   September 30, 2010
     
 
                               
Cost:
                               
First lien debt
  $ 640,609,701       84.85 %   $ 430,200,694       72.61 %
Second lien debt
    96,672,806       12.80 %     150,600,807       25.42 %
Subordinated debt
    5,854,462       0.78 %     4,727,800       0.80 %
Purchased equity
    4,416,468       0.58 %     2,330,305       0.39 %
Equity grants
    6,967,524       0.92 %     4,467,524       0.75 %
Limited partnership interests
    443,522       0.07 %     169,465       0.03 %
     
 
                               
Total
  $ 754,964,483       100.00 %   $ 592,496,595       100.00 %
     

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
    December 31, 2010   September 30, 2010
     
 
                               
Fair value:
                               
First lien debt
  $ 642,402,398       86.53 %   $ 416,323,957       73.84 %
Second lien debt
    84,295,708       11.35 %     137,851,248       24.45 %
Subordinated debt
    5,320,327       0.72 %     4,404,746       0.78 %
Purchased equity
    2,955,827       0.40 %     625,371       0.11 %
Equity grants
    6,977,553       0.94 %     4,446,529       0.79 %
Limited partnership interests
    443,522       0.06 %     169,465       0.03 %
     
 
                               
Total
  $ 742,395,335       100.00 %   $ 563,821,316       100.00 %
     
          The Company invests in portfolio companies located in the United States. The following tables show the portfolio composition by geographic region at cost and fair value as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.
                                 
    December 31, 2010   September 30, 2010
Cost:
                               
Northeast
  $ 210,633,806       27.90 %   $ 175,370,861       29.60 %
Southwest
    180,442,847       23.91 %     121,104,464       20.44 %
Southeast
    158,144,424       20.95 %     108,804,931       18.36 %
West
    144,318,593       19.12 %     133,879,457       22.60 %
Midwest
    61,424,813       8.12 %     53,336,882       9.00 %
     
 
                               
Total
  $ 754,964,483       100.00 %   $ 592,496,595       100.00 %
     
                                 
    December 31, 2010   September 30, 2010
Fair value:
                               
Northeast
  $ 208,392,159       28.07 %   $ 161,264,153       28.60 %
Southwest
    167,079,771       22.51 %     107,468,588       19.07 %
Southeast
    160,412,465       21.61 %     109,457,070       19.41 %
West
    143,781,175       19.37 %     131,881,487       23.39 %
Midwest
    62,729,765       8.44 %     53,750,018       9.53 %
     
 
                               
Total
  $ 742,395,335       100.00 %   $ 563,821,316       100.00 %
     

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          The composition of the Company’s portfolio by industry at cost and fair value as of December 31, 2010 and September 30, 2010 were as follows:
                                 
    December 31, 2010   September 30, 2010
Cost:
                               
Healthcare services
  $ 150,745,526       19.97 %   $ 87,443,639       14.76 %
IT consulting & other services
    49,804,594       6.60 %           0.00 %
Healthcare equipment
    46,877,049       6.21 %     47,539,596       8.02 %
Education services
    44,774,933       5.93 %     44,901,602       7.58 %
Internet software & services
    39,924,305       5.29 %           0.00 %
Construction and engineering
    39,144,820       5.18 %     24,987,230       4.22 %
Electronic equipment & instruments
    33,018,454       4.37 %     33,094,495       5.59 %
Home improvement retail
    32,587,195       4.32 %     32,630,879       5.51 %
Apparel, accessories & luxury goods
    31,893,000       4.22 %     23,535,757       3.97 %
Food distributors
    28,501,129       3.78 %     30,415,200       5.13 %
Fertilizers & agricultural chemicals
    26,323,523       3.49 %     26,694,525       4.51 %
Diversified support services
    25,699,275       3.40 %     26,246,237       4.43 %
Healthcare technology
    21,360,961       2.83 %     21,509,107       3.63 %
Human resources & employment services
    20,774,104       2.75 %           0.00 %
Food retail
    19,412,498       2.57 %     19,622,414       3.31 %
Electronic manufacturing services
    19,001,589       2.52 %     18,738,072       3.16 %
Media — Advertising
    18,026,733       2.39 %     19,828,343       3.35 %
Air freight and logistics
    17,600,968       2.33 %     14,004,766       2.36 %
Trucking
    17,064,785       2.26 %     17,064,785       2.88 %
Distributors
    13,436,082       1.78 %     13,350,633       2.25 %
Data processing and outsourced services
    13,229,885       1.75 %     13,078,169       2.21 %
Industrial machinery
    10,221,792       1.35 %     10,143,414       1.71 %
Leisure facilities
    6,783,242       0.90 %     6,863,521       1.16 %
Building products
    6,717,698       0.89 %     8,291,678       1.40 %
Construction materials
    6,477,386       0.86 %     17,475,899       2.95 %
Environmental & facilities services
    5,125,321       0.68 %     8,921,676       1.51 %
Housewares & specialties
    4,556,187       0.60 %     12,195,029       2.06 %
Restaurants
    4,138,830       0.55 %     12,485,385       2.11 %
Household products
    1,098,928       0.15 %     1,064,910       0.18 %
Multi-sector holdings
    443,522       0.05 %     169,465       0.02 %
Movies & entertainment
    200,169       0.03 %     200,169       0.03 %
     
 
                               
Total
  $ 754,964,483       100.00 %   $ 592,496,595       100.00 %
     
                                 
    December 31, 2010   September 30, 2010
Fair Value:
                               
Healthcare services
  $ 154,124,078       20.76 %   $ 89,261,760       15.83 %
IT consulting & other services
    51,000,000       6.87 %           0.00 %
Healthcare equipment
    47,689,753       6.42 %     48,297,921       8.57 %
Education services
    40,834,373       5.50 %     42,110,738       7.47 %
Internet software & services
    40,766,797       5.49 %           0.00 %
Construction and engineering
    37,725,698       5.08 %     23,844,836       4.23 %
Electronic equipment & instruments
    32,682,427       4.40 %     32,887,767       5.83 %
Apparel, accessories & luxury goods
    32,605,394       4.39 %     23,548,933       4.18 %
Home improvement retail
    32,318,609       4.35 %     32,483,858       5.76 %
Food distributors
    28,529,313       3.84 %     30,316,811       5.38 %
Fertilizers & agricultural chemicals
    26,539,336       3.57 %     26,811,860       4.76 %
Diversified support services
    25,820,525       3.48 %     26,246,237       4.66 %

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                 
    December 31, 2010   September 30, 2010
Healthcare technology
    21,993,525       2.96 %     22,140,613       3.93 %
Human resources & employment services
    21,300,346       2.87 %           0.00 %
Food retail
    19,613,730       2.64 %     19,750,316       3.50 %
Media — Advertising
    18,144,549       2.44 %     19,847,065       3.52 %
Air freight and logistics
    17,835,145       2.40 %     14,040,532       2.49 %
Electronic manufacturing services
    16,639,539       2.24 %     18,055,528       3.20 %
Distributors
    13,415,216       1.81 %     13,258,317       2.35 %
Data processing and outsourced services
    12,796,573       1.72 %     12,741,012       2.26 %
Industrial machinery
    10,657,539       1.44 %     10,232,763       1.81 %
Leisure facilities
    6,973,522       0.94 %     7,040,043       1.25 %
Building products
    6,565,139       0.88 %     6,841,467       1.21 %
Construction materials
    6,477,386       0.87 %     17,039,751       3.02 %
Environmental & facilities services
    5,033,333       0.68 %     5,129,853       0.91 %
Trucking
    4,597,412       0.62 %     4,597,412       0.82 %
Housewares & specialties
    4,055,655       0.55 %     3,700,000       0.66 %
Restaurants
    3,856,360       0.52 %     12,099,935       2.15 %
Household products
    1,098,928       0.15 %     1,064,910       0.19 %
Multi-sector holdings
    443,522       0.08 %     169,465       0.01 %
Movies & entertainment
    261,613       0.04 %     261,613       0.05 %
     
 
                               
Total
  $ 742,395,335       100.00 %   $ 563,821,316       100.00 %
     

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The Company’s investments are generally in small and mid-sized companies in a variety of industries. At December 31, 2010 and September 30, 2010, the Company had no single investment that represented greater than 10% of the total investment portfolio at fair value. Income, consisting of interest, dividends, fees, other investment income, and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given year can be highly concentrated among several investments. For the three months ended December 31, 2010 and December 31, 2009, no individual investment produced income that exceeded 10% of investment income.
Note 4. Fee Income
          The Company receives a variety of fees in the ordinary course of business. Certain fees, such as origination fees, are capitalized and amortized in accordance with ASC 310-20 Nonrefundable Fees and Other Costs. In accordance with ASC 820, the net unearned fee income balance is netted against the cost of the respective investments. Other fees, such as servicing and collateral management fees, are classified as fee income and recognized as they are earned on a monthly basis.
          Accumulated unearned fee income activity for the three months ended December 31, 2010 and December 31, 2009 was as follows:
                 
    Three months     Three months  
    ended December 31,     ended December 31,  
    2010     2009  
     
 
               
Beginning unearned fee income balance
  $ 11,900,871     $ 5,589,630  
Net fees received
    4,706,689       4,861,907  
Unearned fee income recognized
    (1,228,366 )     (915,129 )
     
 
               
Ending unearned fee income balance
  $ 15,379,194     $ 9,536,408  
     
     As of December 31, 2010, the Company had structured $7.6 million in aggregate exit fees across 10 portfolio investments upon the future exit of those investments. These fees are to be paid to the Company upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. Exit fees are fees which are earned and payable upon the exit of a debt security and, similar to a prepayment penalty, are not accrued or otherwise included in net investment income until received. The receipt of such fees as well the timing of the Company’s receipt of such fees is contingent upon a successful exit event for each of the investments.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 5. Share Data
     Effective January 2, 2008, the Partnership merged with and into the Company. At the time of the merger, all outstanding partnership interests in the Partnership were exchanged for 12,480,972 shares of common stock of the Company. An additional 26 fractional shares were payable to the stockholders in cash.
     On June 17, 2008, the Company completed an initial public offering of 10,000,000 shares of its common stock at the offering price of $14.12 per share. The net proceeds totaled $129.5 million after deducting investment banking commissions of $9.9 million and offering costs of $1.8 million.
     On July 21, 2009, the Company completed a follow-on public offering of 9,487,500 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $9.25 per share. The net proceeds totaled $82.7 million after deducting investment banking commissions of $4.4 million and offering costs of $0.7 million.
     On September 25, 2009, the Company completed a follow-on public offering of 5,520,000 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $10.50 per share. The net proceeds totaled $54.9 million after deducting investment banking commissions of $2.8 million and offering costs of $0.3 million.
     On January 27, 2010, the Company completed a follow-on public offering of 7,000,000 shares of its common stock at the offering price of $11.20 per share, with 300,500 additional shares being sold as part of the underwriters’ partial exercise of their over-allotment option on February 25, 2010. The net proceeds totaled $77.5 million after deducting investment banking commissions of $3.7 million and offering costs of $0.5 million.
     On April 20, 2010, at the Company’s 2010 Annual Meeting, the Company’s stockholders approved, among other things, amendments to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 49,800,000 shares to 150,000,000 shares and to remove the Company’s authority to issue shares of Series A Preferred Stock.
     On June 21, 2010, the Company completed a follow-on public offering of 9,200,000 shares of its common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $11.50 per share. The net proceeds totaled $100.5 million after deducting investment banking commissions of $4.8 million and offering costs of $0.5 million.
     On December 7, 2010, the Company entered into an at-the-market equity offering sales agreement relating to shares of its common stock. Throughout the month of December 2010, the Company sold 429,110 shares of its common stock at an average offering price of $11.87 per share. The net proceeds totaled $5.0 million after deducting fees and commissions of $0.1 million. The Company terminated the at-the-market equity offering sales agreement effective January 20, 2011 and did not sell any shares of the Company’s common stock pursuant thereto subsequent to December 31, 2010.
     No dilutive instruments were outstanding and therefore none were reflected in the Company’s Consolidated Statement of Assets and Liabilities at December 31, 2010. The following table sets forth the weighted average common shares outstanding for computing basic and diluted earnings per common share for the three months ended December 31, 2010 and December 31, 2009:
                 
    Three months   Three months
    ended December 31, 2010   ended December 31, 2009
     
 
               
Weighted average common shares outstanding, basic and diluted
    54,641,164       37,880,435  
     

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          The following table reflects the dividend distributions per share that the Board of Directors of the Company has declared and the Company has paid, including shares issued under the dividend reinvestment plan (“DRIP”), on its common stock from inception to December 31, 2010:
                                                 
    Record   Payment   Amount   Cash   DRIP Shares   DRIP Shares
Date Declared   Date   Date   per Share   Distribution   Issued   Value
5/1/2008
    5/19/2008       6/3/2008     $ 0.30     $1.9 million     133,317     $1.9 million
8/6/2008
    9/10/2008       9/26/2008       0.31     5.1 million     196,786 (1)   1.9 million
12/9/2008
    12/19/2008       12/29/2008       0.32     6.4 million     105,326     0.8 million
12/9/2008
    12/30/2008       1/29/2009       0.33     6.6 million     139,995     0.8 million
12/18/2008
    12/30/2008       1/29/2009       0.05     1.0 million     21,211     0.1 million
4/14/2009
    5/26/2009       6/25/2009       0.25     5.6 million     11,776     0.1 million
8/3/2009
    9/8/2009       9/25/2009       0.25     7.5 million     56,890     0.6 million
11/12/2009
    12/10/2009       12/29/2009       0.27     9.7 million     44,420     0.5 million
1/12/2010
    3/3/2010       3/30/2010       0.30     12.9 million     58,689     0.7 million
5/3/2010
    5/20/2010       6/30/2010       0.32     14.0 million     42,269     0.5 million
8/2/2010
    9/1/2010       9/29/2010       0.10     5.2 million     25,425     0.3 million
8/2/2010
    10/6/2010       10/27/2010       0.10     5.5 million     24,850     0.3 million
8/2/2010
    11/3/2010       11/24/2010       0.11     6.0 million     26,569     0.3 million
8/2/2010
    12/1/2010       12/29/2010       0.11     6.0 million     28,238     0.3 million
 
(1)   Shares were purchased on the open market and distributed.
          In October 2008, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $8 million of the Company’s outstanding common stock. Stock repurchases under this program were made through the open market at times and in such amounts as Company management deemed appropriate. The stock repurchase program expired December 2009. In October 2008, the Company repurchased 78,000 shares of common stock on the open market as part of its share repurchase program.
     In October 2010, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $20 million of the Company’s outstanding common stock. Stock repurchases under this program are to be made through the open market at times and in such amounts as the Company’s management deems appropriate, provided it is below the most recently published net asset value per share. The stock repurchase program expires December 31, 2011 and may be limited or terminated by the Board of Directors at any time without prior notice.
Note 6. Lines of Credit
     On November 16, 2009, Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding”), and the Company entered into a Loan and Servicing Agreement (“Agreement”), with respect to a three-year credit facility (“Wells Fargo facility”) with Wells Fargo, as successor to Wachovia Bank, National Association (“Wachovia”), Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time, in the amount of $50 million, with an accordion feature which allowed for potential future expansion of the facility up to $100 million. The facility bore interest at LIBOR plus 4.0% per annum and had a maturity date of November 16, 2012.
     On May 26, 2010, the Company amended the Wells Fargo facility to expand the borrowing capacity under that facility. Pursuant to the amendment, the Company received an additional $50 million commitment, thereby increasing the size of the facility from $50 million to $100 million, with an accordion feature that allows for potential future expansion of that facility from a total of $100 million up to a total of $150 million. In addition, the interest rate of the Wells Fargo facility was reduced from LIBOR plus 4% per annum to LIBOR plus 3.5% per annum, with no LIBOR floor, and the maturity date of the facility was extended from November 16, 2012 to May 26, 2013. The facility may be extended for up to two additional years upon the mutual consent of Wells Fargo and each of the lender parties thereto.
     On November 5, 2010, the Company amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of the Company’s portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     In connection with the Wells Fargo facility, the Company concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which the Company will sell to Funding certain loan assets it has originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which the Company pledged all of its equity interests in Funding as security for the payment of Funding’s obligations under the Agreement and other documents entered into in connection with the Wells Fargo facility.
     The Agreement and related agreements governing the Wells Fargo facility required both Funding and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of their businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or the Company to materially perform under the Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the Wells Fargo facility.
     The Wells Fargo facility is secured by all of the assets of Funding, and all of the Company’s equity interest in Funding. The Company intends to use the net proceeds of the Wells Fargo facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. The Company cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of December 31, 2010, the Company had $38.0 million of borrowings outstanding under the Wells Fargo facility.
     On May 27, 2010, the Company entered into a three-year secured syndicated revolving credit facility (“ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows for the Company to borrow money at a rate of either (i) LIBOR plus 3.5% per annum or (ii) 2.5% per annum plus an alternate base rate based on the greatest of the Prime Rate, Federal Funds Rate plus 0.5% per annum or LIBOR plus 1% per annum, and has a maturity date of May 27, 2013. The ING facility also allows the Company to request letters of credit from ING Capital LLC, as the issuing bank. The initial commitment under the ING facility is $90 million, and the ING facility includes an accordion feature that allows for potential future expansion of the facility up to a total of $150 million. The ING facility is secured by substantially all of the Company’s assets, as well as the assets of two of the Company’s wholly-owned subsidiaries, FSFC Holdings, Inc. and FSF/MP Holdings, Inc., subject to certain exclusions for, among other things, equity interests in the Company’s SBIC subsidiary and equity interests in Funding as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., FSF/MP Holdings, Inc., ING Capital LLC, as collateral agent, and the Company. Neither the Company’s SBIC subsidiary nor Funding is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that the Company may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Pursuant to the ING Security Agreement, FSFC Holdings, Inc. and FSF/MP Holdings, Inc. guaranteed the obligations under the ING Security Agreement, including the Company’s obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, the Company pledged its entire equity interests in FSFC Holdings, Inc. and FSF/MP Holdings, Inc. to the collateral agent pursuant to the terms of the ING Security Agreement.
     The ING Credit Agreement and related agreements governing the ING facility required FSFC Holdings, Inc., FSF/MP Holdings, Inc. and the Company to, among other things (i) make representations and warranties regarding the collateral as well as each of the Company’s businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by the Company to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. The Company is currently in compliance with all financial covenants under the ING facility.
     Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the ING facility at any particular time or at all.
     As of December 31, 2010, the Company had $51.0 million of borrowings outstanding under the ING facility.
     As of December 31, 2010, except for assets that were funded through the Company’s SBIC subsidiary, substantially all of the Company’s assets were pledged as collateral under the Wells Fargo facility or the ING facility.
     Interest expense for the three months ended December 31, 2010 and December 31, 2009 was $1.9 million and $0.1 million, respectively.
Note 7. Interest and Dividend Income
     Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. In accordance with the Company’s policy, accrued interest is evaluated periodically for collectability. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.
     The Company holds debt in its portfolio that contains a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company generally ceases accruing PIK interest if there is insufficient value to support the accrual or if the Company does not expect the portfolio company to be able to pay all principal and interest due. The Company’s decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; the Company’s assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by the Company in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, the Company determines whether to cease accruing PIK interest on a loan or debt security. The Company’s determination to cease accruing PIK interest on a loan or debt security is generally made well before the Company’s full write-down of such loan or debt security.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Accumulated PIK interest activity for the three months ended December 31, 2010 and December 31, 2009 was as follows:
                 
    Three months ended   Three months ended
    December 31, 2010   December 31, 2009
PIK balance at beginning of period
  $ 19,300,954     $ 12,059,478  
Gross PIK interest accrued
    3,384,078       2,430,656  
PIK income reserves
    (240,390 )     (468,882 )
PIK interest received in cash
    (5,109,022 )     (525,194 )
Adjustments due to loan exits
          (530,061 )
     
 
               
PIK balance at end of period
  $ 17,335,620     $ 12,965,997  
     
     As of December 31, 2010, the Company had stopped accruing cash interest, PIK interest and original issue discount (“OID”) on three investments that did not pay all of their scheduled monthly cash interest payments for the period ended December 31, 2010. As of December 31, 2009, the Company had stopped accruing PIK interest and OID on five investments, including two investments that had not paid all of their scheduled monthly cash interest payments.
     The non-accrual status of the Company’s portfolio investments as of December 31, 2010, September 30, 2010 and December 31, 2009 was as follows:
                         
    December 31, 2010     September 30, 2010     December 31, 2009  
Lighting by Gregory, LLC
  Cash non-accrual     Cash non-accrual     Cash non-accrual  
CPAC, Inc.
              PIK non-accrual  
Martini Park, LLC
              PIK non-accrual  
Nicos Polymers & Grinding, Inc.
        Cash non-accrual     PIK non-accrual  
MK Network, LLC
  Cash non-accrual     Cash non-accrual        
Premier Trailer Leasing, Inc.
  Cash non-accrual     Cash non-accrual     Cash non-accrual  
Vanguard Vinyl, Inc.
        Cash non-accrual        
     Income non-accrual amounts for the three months ended December 31, 2010 and December 31, 2009 were as follows:
                 
    Three months ended   Three months ended
    December 31, 2010   December 31, 2009
 
               
Cash interest income
  $ 2,106,432     $ 1,134,564  
PIK interest income
    240,390       468,882  
OID income
    30,138       103,911  
     
 
               
Total
  $ 2,376,960     $ 1,707,357  
     
Note 8. Taxable/Distributable Income and Dividend Distributions
     Taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in taxable income until they are realized; (2) origination fees received in connection with investments in portfolio companies, which are amortized into interest income over the life of the investment for book purposes, are treated as taxable income upon receipt; (3) organizational and deferred offering costs; (4) recognition of interest income on certain loans; and (5) income or loss recognition on exited investments.
     At September 30, 2010, the Company has a net loss carryforward of $1.5 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will expire in the Company’s tax year ending September 30, 2017. During the year ended September 30, 2010, the Company realized capital losses from the sale of investments after October

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
31 and prior to year end (“post-October capital losses”) of $12.9 million, which for tax purposes are treated as arising on the first day of the following year.
     Listed below is a reconciliation of “net increase in net assets resulting from operations” to taxable income for the three months ended December 31, 2010.
         
    Three months ended  
    December 31, 2010  
 
       
Net increase in net assets resulting from operations
  $ 17,448,000  
Net unrealized appreciation
    (16,843,000 )
Book/tax difference due to deferred loan origination fees, net
    3,478,000  
Book/tax difference due to organizational and deferred offering costs
    (22,000 )
Book/tax difference due to interest income on certain loans
    1,051,000  
Book/tax difference due to capital losses not recognized
    13,450,000  
Other book-tax differences
    131,000  
 
     
 
       
Taxable/Distributable Income (1)
  $ 18,693,000  
 
     
 
(1)   The Company’s taxable income for 2011 is an estimate and will not be finally determined until the Company files its tax return for the fiscal year ended September 30, 2011. Therefore, the final taxable income may be different than the estimate.
     Distributions to stockholders are recorded on the record date. The Company is required to distribute annually to its stockholders at least 90% of its net ordinary income and net realized short-term capital gains in excess of net realized long-term capital losses for each taxable year in order to be eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a dividend all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors and is based on management’s estimate of the Company’s annual taxable income. The Company maintains an “opt out” dividend reinvestment plan for its stockholders.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
To date, the Company’s Board of Directors declared the following distributions:
                                 
Dividend Type   Date Declared   Record Date   Payment Date   Amount per Share
Quarterly
    5/1/2008       5/19/2008       6/3/2008     $ 0.30  
Quarterly
    8/6/2008       9/10/2008       9/26/2008     $ 0.31  
Quarterly
    12/9/2008       12/19/2008       12/29/2008     $ 0.32  
Quarterly
    12/9/2008       12/30/2008       1/29/2009     $ 0.33  
Special
    12/18/2008       12/30/2008       1/29/2009     $ 0.05  
Quarterly
    4/14/2009       5/26/2009       6/25/2009     $ 0.25  
Quarterly
    8/3/2009       9/8/2009       9/25/2009     $ 0.25  
Quarterly
    11/12/2009       12/10/2009       12/29/2009     $ 0.27  
Quarterly
    1/12/2010       3/3/2010       3/30/2010     $ 0.30  
Quarterly
    5/3/2010       5/20/2010       6/30/2010     $ 0.32  
Quarterly
    8/2/2010       9/1/2010       9/29/2010     $ 0.10  
Monthly
    8/2/2010       10/6/2010       10/27/2010     $ 0.10  
Monthly
    8/2/2010       11/3/2010       11/24/2010     $ 0.11  
Monthly
    8/2/2010       12/1/2010       12/29/2010     $ 0.11  
Monthly
    11/30/2010       1/4/2011       1/31/2011     $ 0.1066  
Monthly
    11/30/2010       2/1/2011       2/28/2011     $ 0.1066  
Monthly
    11/30/2010       3/1/2011       3/31/2011     $ 0.1066  
     For income tax purposes, the Company estimates that its distributions will be composed entirely of ordinary income, and will be reflected as such on the Form 1099-DIV for the calendar years 2010 and 2011. The Company anticipates declaring further distributions to its stockholders to meet the RIC distribution requirements.
     As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis. Because the Company did not satisfy these distribution requirements for calendar years 2008 and 2009, the Company incurred a de minimis federal excise tax for those calendar years, and the Company expects to incur a de minimis federal excise tax for the calendar year 2010.
Note 9. Realized Gains or Losses from Investments and Net Change in Unrealized Appreciation or Depreciation from Investments
     Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with the Company’s determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules. Net change in unrealized appreciation or depreciation from investments reflects the net change in the valuation of the portfolio pursuant to the Company’s valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation on exited investments.
     During the three months ended December 31, 2010, the Company recorded the following investment realization events:
    In October 2010, the Company received a cash payment of $8.7 million from Goldco, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
 
    In November 2010, the Company received a cash payment of $11.0 million from TBA Global, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
 
    In November 2010, the Company restructured its investment in Vanguard Vinyl, Inc. The restructuring resulted in a material modification of the terms of the loan agreement. As such, the Company recorded a realized loss in the

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      amount of $1.7 million in accordance with ASC 470-50;
 
    In December 2010, the Company restructured its investment in Nicos Polymers & Grinding, Inc. The restructuring resulted in a material modification of the terms of the loan agreement. As such, the Company recorded a realized loss in the amount of $3.9 million in accordance with ASC 470-50;
 
    In December 2010, the Company received a cash payment of $25.3 million from Boot Barn in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on this transaction;
 
    In December 2010, the Company received a cash payment of $11.7 million from Western Emulsions, Inc. in partial satisfaction of the obligations under the loan agreement. No realized gain or loss was recorded on this transaction; and
 
    In December 2010, the Company restructured its investment in Lighting by Gregory, LLC. The restructuring resulted in a material modification of the terms of the loan agreement. As such, the Company recorded a realized loss in the amount of $7.8 million in accordance with ASC 470-50.
     During the three months ended December 31, 2009, the Company recorded the following investment realization events:
    In October 2009, the Company received a cash payment in the amount of $0.1 million representing a payment in full of all amounts due in connection with the cancellation of its loan agreement with American Hardwoods Industries, LLC. The Company recorded a $0.1 million reduction to the previously recorded $10.4 million realized loss on the investment in American Hardwoods; and
 
    In October 2009, the Company received a cash payment of $3.9 million from Elephant & Castle, Inc. in partial satisfaction of the obligations under the loan agreement. No realized gain or loss was recorded on this transaction.
Note 10. Concentration of Credit Risks
     The Company places its cash in financial institutions and at times such balances may be in excess of the FDIC insured limit. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions and monitoring their financial stability.
Note 11. Related Party Transactions
     The Company has entered into an investment advisory agreement with the Investment Adviser. Under the investment advisory agreement, the Company pays the Investment Adviser a fee for its services under the investment advisory agreement consisting of two components — a base management fee and an incentive fee.
Base management Fee
     The base management fee is calculated at an annual rate of 2% of the Company’s gross assets, which includes any borrowings for investment purposes. The base management fee is payable quarterly in arrears, and will be calculated based on the value of the Company’s gross assets at the end of each fiscal quarter, and appropriately adjusted on a pro rata basis for any equity capital raises or repurchases during such quarter. The base management fee for any partial month or quarter will be appropriately prorated.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     On January 6, 2010, the Company announced that the Investment Adviser had voluntarily agreed to take the following actions:
    To waive the portion of its base management fee for the quarter ended December 31, 2009 attributable to four new portfolio investments, as well as cash and cash equivalents. The amount of the management fee waived was $727,000; and
 
    To permanently waive that portion of its base management fee attributable to the Company’s assets held in the form of cash and cash equivalents as of the end of each quarter beginning March 31, 2010.
     For purposes of the waiver, cash and cash equivalents is as defined in the notes to the Company’s Consolidated Financial Statements.
     For the three months ended December 31, 2010 and December 31, 2009, base management fees were $3.8 million, and $1.5 million, respectively. At December 31, 2010, the Company had a liability on its Consolidated Statement of Assets and Liabilities in the amount of $3.8 million reflecting the unpaid portion of the base management fee payable to the Investment Adviser.
Incentive Fee
     The incentive fee portion of the investment advisory agreement has two parts. The first part is calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net Investment Income” for the immediately preceding fiscal quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the Company’s administration agreement with FSC, Inc., and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding fiscal quarter, will be compared to a “hurdle rate” of 2% per quarter (8% annualized), subject to a “catch-up” provision measured as of the end of each fiscal quarter. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of its gross assets used to calculate the 2% base management fee. The operation of the incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income for each quarter is as follows:
    No incentive fee is payable to the Investment Adviser in any fiscal quarter in which the Company’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2% (the “preferred return” or “hurdle”);
 
    100% of the Company’s Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the “catch-up.” The “catch-up” provision is intended to provide the Investment Adviser with an incentive fee of 20% on all of the Company’s Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company’s Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
    20% of the amount of the Company’s Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved (20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Investment Adviser).
     The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date), commencing on September 30, 2008, and equals 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
     For the three months ended December 31, 2010 and December 31, 2009, incentive fees were $3.5 million and $2.1 million, respectively. At December 31, 2010, the Company had a liability on its Consolidated Statement of Assets and Liabilities in the amount of $3.5 million reflecting the unpaid portion of the incentive fee payable to the Investment Adviser.
Indemnification
     The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, the Company’s Investment Adviser and its officers, managers, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Investment Adviser’s services under the investment advisory agreement or otherwise as the Company’s Investment Adviser.
Administration Agreement
     The Company has also entered into an administration agreement with FSC, Inc. under which FSC, Inc. provides administrative services for the Company, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreement, FSC, Inc. also performs or oversees the performance of the Company’s required administrative services, which includes being responsible for the financial records which the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, FSC, Inc. assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company reimburses FSC, Inc. the allocable portion of overhead and other expenses incurred by FSC, Inc. in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the costs of compensation and related expenses of the Company’s chief financial officer and chief compliance officer and their staffs. FSC, Inc. has voluntarily determined to forgo receiving reimbursement for the services performed for the Company by its chief compliance officer. However, although FSC, Inc. currently intends to forgo its right to receive such reimbursement, it is under no obligation to do so and may cease to do so at any time in the future. FSC, Inc. may also provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. The administration agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.
     For the three months ended December 31, 2010, the Company accrued administrative expenses of $0.8 million, including $0.4 million of general and administrative expenses, that are due to FSC, Inc. At December 31, 2010, $1.3 million was included in Due to FSC, Inc. in the Consolidated Statement of Assets and Liabilities.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 12. Financial Highlights
                 
    Three   Three
    months ended   months ended
Per share data:   December 31, 2010   December 31, 2009
Net asset value at beginning of period
  $ 10.43     $ 10.84  
Net investment income
    0.26       0.22  
Net unrealized appreciation on investments and interest rate swap
    0.31       0.03  
Net realized loss on investments
    (0.24 )      
Dividends declared
    (0.32 )     (0.27 )
Issuance of common stock
           
Net asset value at end of period
  $ 10.44     $ 10.82  
 
               
Per share market value at beginning of period
  $ 11.14     $ 10.93  
Per share market value at end of period
  $ 12.14     $ 10.74  
Total return (1)
    11.93 %     0.68 %
Common shares outstanding at beginning of period
    54,550,290       37,878,987  
Common shares outstanding at end of period
    55,059,057       37,923,407  
 
               
Net assets at beginning of period
  $ 569,172,105     $ 410,556,071  
Net assets at end of period
  $ 574,921,159     $ 410,257,351  
Average net assets (2)
  $ 572,151,947     $ 409,840,589  
Ratio of net investment income to average net assets (3)
    9.75 %     8.08 %
Ratio of total expenses to average net assets (3)
    7.82 %     4.74 %
Ratio of portfolio turnover to average investments at fair value
    2.17 %     0.00 %
Weighted average outstanding debt (4)
  $ 102,678,261     $ 500,000  
Average debt per share
  $ 1.86     $ 0.01  
 
(1)   Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company’s dividend reinvestment plan. Total return is not annualized.
 
(2)   Calculated based upon the daily weighted average net assets for the period.
 
(3)   Interim periods are annualized.
 
(4)   Calculated based upon the daily weighted average of loans payable for the period.

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FIFTH STREET FINANCE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13. Preferred Stock
     The Company’s restated certificate of incorporation had not authorized any shares of preferred stock. However, on April 4, 2008, the Company’s Board of Directors approved a certificate of amendment to its restated certificate of incorporation reclassifying 200,000 shares of its common stock as shares of non-convertible, non-participating preferred stock, with a par value of $0.01 and a liquidation preference of $500 per share (“Series A Preferred Stock”) and authorizing the issuance of up to 200,000 shares of Series A Preferred Stock. A certificate of amendment was also approved by the holders of a majority of the shares of the Company’s outstanding common stock through a written consent first solicited on April 7, 2008.
     On April 20, 2010, at the Company’s 2010 Annual Meeting, the Company’s stockholders approved, among other things, amendments to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 49,800,000 shares to 150,000,000 shares and to remove the Company’s authority to issue shares of Series A Preferred Stock.
Note 14. Interest Rate Swaps
     In August 2010, the Company entered into a three-year interest rate swap agreement to mitigate its exposure to adverse fluctuations in interest rates for a total notional amount of $100.0 million. Under the interest rate swap agreement, the Company will pay a fixed interest rate of 0.99% and receive a floating rate based on the prevailing one-month LIBOR, which as of December 31, 2010 was 0.26%. For the three months ended December 31, 2010, the Company recorded $0.7 million of unrealized appreciation related to this swap agreement. As of December 31, 2010, this swap agreement had a fair value of ($37,000), which is included in “accounts payable, accrued expenses and other liabilities” in the Company’s Consolidated Statements of Assets and Liabilities.
     As of December 31, 2010, the Company posted $1.5 million of cash as collateral with respect to the interest rate swap. The Company is restricted in terms of access to this collateral until such swap is terminated or the swap agreement expires. Cash collateral posted is held in an account at Wells Fargo.
     Swaps contain varying degrees of off-balance sheet risk which could result from changes in the market values of underlying assets, indices or interest rates and similar items. As a result, the amounts recognized in the Consolidated Statement of Assets and Liabilities at any given date may not reflect the total amount of potential losses that the Company could ultimately incur.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.
     Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
    our future operating results and dividend projections;
 
    our business prospects and the prospects of our portfolio companies;
 
    the impact of the investments that we expect to make;
 
    the ability of our portfolio companies to achieve their objectives;
 
    our expected financings and investments;
 
    the adequacy of our cash resources and working capital; and
 
    the timing of cash flows, if any, from the operations of our portfolio companies.
     In addition, words such as “anticipate,” “believe,” “expect,” “project”and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2010 and elsewhere in this quarterly report on Form 10-Q. Other factors that could cause actual results to differ materially include:
    changes in the economy and the financial markets;
 
    risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;
 
    future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies, small business investment companies, or SBICs, and regulated investment companies, or RICs; and
 
    other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.
     We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
     Except as otherwise specified, references to “the Company,” “we,” “us,” and “our,” refer to Fifth Street Finance Corp.

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Overview
     We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity investments.
     We were formed as a Delaware limited partnership (Fifth Street Mezzanine Partners III, L.P.) on February 15, 2007. Effective as of January 2, 2008, Fifth Street Mezzanine Partners III, L.P. merged with and into Fifth Street Finance Corp. At the time of the merger, all outstanding partnership interests in Fifth Street Mezzanine Partners III, L.P. were exchanged for 12,480,972 shares of common stock in Fifth Street Finance Corp.
     Our consolidated financial statements prior to January 2, 2008 reflect our operations as a Delaware limited partnership (Fifth Street Mezzanine Partners III, L.P.) prior to our merger with and into a corporation (Fifth Street Finance Corp.).
     On June 17, 2008, we completed an initial public offering of 10,000,000 shares of our common stock at the offering price of $14.12 per share. Our shares are listed on the New York Stock Exchange under the symbol “FSC.”
     On July 21, 2009, we completed a follow-on public offering of 9,487,500 shares of our common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $9.25 per share.
     On September 25, 2009, we completed a follow-on public offering of 5,520,000 shares of our common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $10.50 per share.
     On January 27, 2010, we completed a follow-on public offering of 7,000,000 shares of our common stock, which did not include the underwriters’ exercise of their over-allotment option, at the offering price of $11.20 per share. On February 25, 2010, we sold 300,500 shares of our common stock at the offering price of $11.20 per share upon the underwriters’ exercise of their over-allotment option in connection with this offering.
     On June 21, 2010, we completed a follow-on public offering of 9,200,000 shares of our common stock, which included the underwriters’ exercise of their over-allotment option, at the offering price of $11.50 per share.
     On December 7, 2010, we entered into an at-the-market equity offering sales agreement relating to shares of our common stock. Throughout the month of December 2010, we sold 429,110 shares of our common stock at an average offering price of $11.87 per share. We terminated the at-the-market equity offering sales agreement effective January 20, 2011 and did not sell any shares of our common stock pursuant thereto subsequent to December 31, 2010.
Current Market Conditions
     Since mid-2007, the global financial markets have experienced stress, volatility, illiquidity, and disruption. This turmoil appears to have peaked in the fall of 2008, resulting in several major financial institutions becoming insolvent, being acquired, or receiving government assistance. While the turmoil in the financial markets appears to have abated somewhat, the global economy continues to experience economic uncertainty. Economic uncertainty impacts our business in many ways, including changing spreads, structures, and purchase multiples as well as the overall supply of investment capital.
     Despite the economic uncertainty, our deal pipeline remains robust, with high quality transactions backed by private equity sponsors in small to mid-sized companies. As always, we remain cautious in selecting new investment opportunities, and will only deploy capital in deals which are consistent with our disciplined philosophy of pursuing superior risk-adjusted returns.
     As evidenced by our recent investment activities, we expect to grow the business in part by increasing the average investment size when and where appropriate. At the same time, we expect to focus more on first lien transactions. Although we believe that we currently have sufficient capital available to fund investments, a prolonged period of market disruptions may cause us to reduce the volume of loans we originate and/or fund, which could have an adverse effect

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on our business, financial condition, and results of operations. In this regard, because our common stock has at times traded at a price below our then current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.
Critical Accounting Policies
FASB Accounting Standards Codification
     The issuance of FASB Accounting Standards Codification tm (the “Codification”) on July 1, 2009 (effective for interim or annual reporting periods ending after September 15, 2009), changes the way that U.S. generally accepted accounting principles (“GAAP”) are referenced. Beginning on that date, the Codification officially became the single source of authoritative nongovernmental GAAP; however, SEC registrants must also consider rules, regulations, and interpretive guidance issued by the SEC or its staff. The switch affects the way companies refer to GAAP in financial statements and in their accounting policies. References to standards will consist solely of the number used in the Codification’s structural organization.
     Consistent with the effective date of the Codification, financial statements for periods ending after September 15, 2009, refer to the Codification structure, not pre-Codification historical GAAP.
Basis of Presentation
     The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the Consolidated Financial Statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Investment Valuation
     We are required to report our investments that are not publicly traded or for which current market values are not readily available at fair value. The fair value is deemed to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
     Under Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”), which we adopted effective October 1, 2008, we perform detailed valuations of our debt and equity investments on an individual basis, using market based, income based, and bond yield approaches as appropriate. In general, we utilize a bond yield method for the majority of our investments, as long as it is appropriate. If, in our judgment, the bond yield approach is not appropriate, we may use the enterprise value approach, or, in certain cases, an alternative methodology potentially including an asset liquidation or expected recovery model.
     Under the market approach, we estimate the enterprise value of the portfolio companies in which we invest. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, we analyze various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), cash flows, net income, revenues, or in limited cases, book value. We generally require portfolio companies to provide annual audited and quarterly and monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
     Under the income approach, we generally prepare and analyze discounted cash flow models based on our projections of the future free cash flows of the business. Under the bond yield approach, we use bond yield models to determine the present

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value of the future cash flow streams of our debt investments. We review various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assess the information in the valuation process.
     Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:
    Our quarterly valuation process begins with each portfolio company or investment being initially valued by the deal team within our investment adviser responsible for the portfolio investment;
 
    Preliminary valuations are then reviewed and discussed with the principals of our investment adviser;
 
    Separately, independent valuation firms engaged by our Board of Directors prepare preliminary valuations on a selected basis and submit reports to us;
 
    The deal team compares and contrasts its preliminary valuations to the preliminary valuations of the independent valuation firms;
 
    The deal team prepares a valuation report for the Valuation Committee of our Board of Directors;
 
    The Valuation Committee of our Board of Directors is apprised of the preliminary valuations of the independent valuation firms;
 
    The Valuation Committee of our Board of Directors reviews the preliminary valuations, and the deal team responds and supplements the preliminary valuations to reflect any comments provided by the Valuation Committee;

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    The Valuation Committee of our Board of Directors makes a recommendation to the Board of Directors; and
 
    Our Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith.
     The fair value of all of our investments at December 31, 2010, and September 30, 2010, was determined 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 our consistently applied valuation process.
     Our Board of Directors has engaged independent valuation firms to provide us with valuation assistance. Upon completion of their processes each quarter, the independent valuation firms provide us with written reports regarding the preliminary valuations of selected portfolio securities as of the close of such quarter. We will continue to engage independent valuation firms to provide us with assistance regarding our determination of the fair value of selected portfolio securities each quarter; however, our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith.
     The portions of our portfolio valued, as a percentage of the portfolio at fair value, by independent valuation firms by period were as follows:
         
For the quarter ending December 31, 2007
    91.9 %
For the quarter ending March 31, 2008
    92.1 %
For the quarter ending June 30, 2008
    91.7 %
For the quarter ending September 30, 2008
    92.8 %
For the quarter ending December 31, 2008
    100.0 %
For the quarter ending March 31, 2009
    88.7 %(1)
For the quarter ending June 30, 2009
    92.1 %
For the quarter ending September 30, 2009
    28.1 %
For the quarter ending December 31, 2009
    17.2 %(2)
For the quarter ending March 31, 2010
    26.9 %
For the quarter ending December 31, 2009
    53.1 %
For the quarter ending September 30, 2010
    61.8 %
For the quarter ending December 31, 2010
    73.9 %
 
(1)   96.0% excluding our investment in IZI Medical Products, Inc., which closed on December 31, 2009 and therefore was not part of the independent valuation process
 
(2)   24.8% excluding four investments that closed in December 2009 and therefore were not part of the independent valuation process
     Our $50 million credit facility with Bank of Montreal was terminated effective September 16, 2009. The facility required independent valuations for at least 90% of the portfolio on a quarterly basis. With the termination of this facility, this valuation test is no longer required. However, we still intend to have a portion of the portfolio valued by an independent third party on a quarterly basis, with a substantial portion being valued on an annual basis.
     As of December 31, 2010 and September 30, 2010, approximately 92.9% and 86.5%, respectively, of our total assets represented investments in portfolio companies valued at fair value.
Revenue Recognition
     Interest and Dividend Income
     Interest income, adjusted for amortization of premium and accretion of original issue discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Distributions from portfolio companies are recorded as dividend income when the distribution is received.

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     Fee Income
     We receive a variety of fees in the ordinary course of business. Certain fees, such as origination fees, are capitalized and amortized in accordance with ASC 310-20 Nonrefundable Fees and Other Costs. In accordance with ASC 820, the net unearned fee income balance is netted against the cost and fair value of the respective investments. Other fees, such as servicing fees, are classified as fee income and recognized as they are earned on a monthly basis.
     We have also structured exit fees across certain of our portfolio investments to be received upon the future exit of those investments. These fees are to be paid to us upon the sooner to occur of (i) a sale of the borrower or substantially all of the assets of the borrower, (ii) the maturity date of the loan, or (iii) the date when full prepayment of the loan occurs. Exit fees are fees which are earned and payable upon the exit of a debt security and, similar to a prepayment penalty, are not accrued or otherwise included in net investment income until received. The receipt of such fees as well as the timing of our receipt of such fees is contingent upon a successful exit event for each of the investments.
     Payment-in-Kind (PIK) Interest
     Our loans typically contain a contractual PIK interest provision. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; our assessment of the portfolio company’s business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan; information obtained by us in connection with periodic formal update interviews with the portfolio company’s management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we determine whether to cease accruing PIK interest on a loan or debt security. Our determination to cease accruing PIK interest on a loan or debt security is generally made well before our full write-down of such loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest.
     For a discussion of risks we are subject to as a result of our use of PIK interest in connection with our investments, see “Risk Factors — Risks Relating to Our Business and Structure — We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income,” “— We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive” and “— Our incentive fee may induce our investment adviser to make speculative investments” in our annual report on Form 10-K for the year ended September 30, 2010. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest.
     To maintain our status as a RIC, PIK income must be paid out to our stockholders in the form of dividends even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $17.3 million and represented 2.3% of the fair value of our portfolio of investments as of December 31, 2010 and $19.3 million or 3.4% as of September 30, 2010. The net increase in loan balances as a result of contracted PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.
Portfolio Composition
     Our investments principally consist of loans, purchased equity investments and equity grants in privately-held companies. Our loans are typically secured by either a first or second lien on the assets of the portfolio company and generally have terms of up to six years (but an expected average life of between three and four years). We are currently focusing our new debt origination efforts on first lien loans because we believe that the risk-adjusted returns from these loans are superior to second lien and unsecured loans at this time and offer superior credit quality. However, we may choose to originate second lien and unsecured loans in the future.

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     A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:
                 
    December 31,     September 30,  
    2010     2010  
 
               
Cost:
               
First lien debt
    84.85 %     72.61 %
Second lien debt
    12.80 %     25.42 %
Subordinated debt
    0.78 %     0.80 %
Purchased equity
    0.58 %     0.39 %
Equity grants
    0.92 %     0.75 %
Limited partnership interests
    0.07 %     0.03 %
 
           
 
               
Total
    100.00 %     100.00 %
 
           
                 
    December 31,     September 30,  
    2010     2010  
 
               
Fair value:
               
First lien debt
    86.53 %     73.84 %
Second lien debt
    11.35 %     24.45 %
Subordinated debt
    0.72 %     0.78 %
Purchased equity
    0.40 %     0.11 %
Equity grants
    0.94 %     0.79 %
Limited partnership interests
    0.06 %     0.03 %
 
           
 
               
Total
    100.00 %     100.00 %
 
           
The industry composition of our portfolio at cost and fair value as a percentage of total investments were as follows:
                 
    December 31, 2010   September 30, 2010
Cost:
               
Healthcare services
    19.97 %     14.76 %
IT consulting & other services
    6.60 %     0.00 %
Healthcare equipment
    6.21 %     8.02 %
Education services
    5.93 %     7.58 %
Internet software & services
    5.29 %     0.00 %
Construction and engineering
    5.18 %     4.22 %
Electronic equipment & instruments
    4.37 %     5.59 %
Home improvement retail
    4.32 %     5.51 %
Apparel, accessories & luxury goods
    4.22 %     3.97 %
Food distributors
    3.78 %     5.13 %
Fertilizers & agricultural chemicals
    3.49 %     4.51 %
Diversified support services
    3.40 %     4.43 %
Healthcare technology
    2.83 %     3.63 %
Human resources & employment services
    2.75 %     0.00 %
Food retail
    2.57 %     3.31 %
Electronic manufacturing services
    2.52 %     3.16 %
Media — Advertising
    2.39 %     3.35 %
Air freight and logistics
    2.33 %     2.36 %
Trucking
    2.26 %     2.88 %
Distributors
    1.78 %     2.25 %
Data processing and outsourced services
    1.75 %     2.21 %
Industrial machinery
    1.35 %     1.71 %
Leisure facilities
    0.90 %     1.16 %
Building products
    0.89 %     1.40 %
Construction materials
    0.86 %     2.95 %
Environmental & facilities services
    0.68 %     1.51 %
Housewares & specialties
    0.60 %     2.06 %
Restaurants
    0.55 %     2.11 %
Household products
    0.15 %     0.18 %
Multi-sector holdings
    0.05 %     0.02 %
Movies & entertainment
    0.03 %     0.03 %
 
               
Total
    100.00 %     100.00 %
     

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    December 31, 2010   September 30, 2010
Fair Value:
               
Healthcare services
    20.76 %     15.83 %
IT consulting & other services
    6.87 %     0.00 %
Healthcare equipment
    6.42 %     8.57 %
Education services
    5.50 %     7.47 %
Internet software & services
    5.49 %     0.00 %
Construction and engineering
    5.08 %     4.23 %
Electronic equipment & instruments
    4.40 %     5.83 %
Apparel, accessories & luxury goods
    4.39 %     4.18 %
Home improvement retail
    4.35 %     5.76 %
Food distributors
    3.84 %     5.38 %
Fertilizers & agricultural chemicals
    3.57 %     4.76 %
Diversified support services
    3.48 %     4.66 %
Healthcare technology
    2.96 %     3.93 %
Human resources & employment services
    2.87 %     0.00 %
Food retail
    2.64 %     3.50 %
Media — Advertising
    2.44 %     3.52 %
Air freight and logistics
    2.40 %     2.49 %
Electronic manufacturing services
    2.24 %     3.20 %
Distributors
    1.81 %     2.35 %
Data processing and outsourced services
    1.72 %     2.26 %
Industrial machinery
    1.44 %     1.81 %
Leisure facilities
    0.94 %     1.25 %
Building products
    0.88 %     1.21 %
Construction materials
    0.87 %     3.02 %
Environmental & facilities services
    0.68 %     0.91 %
Trucking
    0.62 %     0.82 %
Housewares & specialties
    0.55 %     0.66 %
Restaurants
    0.52 %     2.15 %
Household products
    0.15 %     0.19 %
Multi-sector holdings
    0.08 %     0.01 %
Movies & entertainment
    0.04 %     0.05 %
     
 
               
Total
    100.00 %     100.00 %
     

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Portfolio Asset Quality
          We employ a grading system to assess and monitor the credit risk of our investment portfolio. We rate all investments on a scale from 1 to 5. The system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loan, and other factors considered relevant to making a credit judgment.
    Investment Rating 1 is used for investments that are performing above expectations and/or a capital gain is expected.
 
    Investment Rating 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risk at the time of the original investment. All new investments are initially rated 2.
 
    Investment Rating 3 is used for investments that are performing below our expectations and that require closer monitoring, but where we expect no loss of investment return (interest and/or dividends) or principal. Companies with a rating of 3 may be out of compliance with financial covenants.
 
    Investment Rating 4 is used for investments that are performing below our expectations and for which risk has increased materially since the original investment. We expect some loss of investment return, but no loss of principal.
 
    Investment Rating 5 is used for investments that are performing substantially below our expectations and whose risks have increased substantially since the original investment. Investments with a rating of 5 are those for which some loss of principal is expected.
               The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value, as of December 31, 2010 and September 30, 2010:
                                                 
    December 31, 2010   September 30, 2010
            Percentage of   Leverage           Percentage of   Leverage
    Fair Value   Total Portfolio   Ratio   Fair Value   Total Portfolio   Ratio
 
                                               
1
  $ 80,790,254       10.88 %     3.00     $ 89,150,457       15.81 %     2.97  
2
    620,901,779       83.63 %     3.40       424,494,799       75.29 %     4.31  
3
    21,672,872       2.92 %   11.16       18,055,528       3.20 %     13.25  
4
          0.00 %           23,823,120       4.23 %     8.13  
5
    19,030,430       2.57 %   NM  (1)     8,297,412       1.47 %   NM  (1)
     
 
                                               
Total
  $ 742,395,335       100.00 %     3.25     $ 563,821,316       100.00 %     4.53  
     
 
(1)   Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.
     We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of December 31, 2010, we had modified the payment terms of our investments in four portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.
Loans and Debt Securities on Non-Accrual Status
     As of December 31, 2010, we had stopped accruing cash interest, PIK interest and original issue discount (“OID”) on three investments that did not pay all of their scheduled monthly cash interest payments for the period ended December 31, 2010. As of December 31, 2009, we had stopped accruing PIK interest and OID on five investments, including two investments that had not paid all of their scheduled monthly cash interest payments.

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     The non-accrual status of our portfolio investments as of December 31, 2010, September 30, 2010 and December 31, 2009 was as follows:
                         
    December 31, 2010     September 30, 2010     December 31, 2009  
     
 
                       
Lighting by Gregory, LLC
  Cash non-accrual     Cash non-accrual     Cash non-accrual  
CPAC, Inc.
              PIK non-accrual  
Martini Park, LLC
              PIK non-accrual  
Nicos Polymers & Grinding, Inc.
        Cash non-accrual     PIK non-accrual  
MK Network, LLC
  Cash non-accrual     Cash non-accrual        
Premier Trailer Leasing, Inc.
  Cash non-accrual     Cash non-accrual     Cash non-accrual  
Vanguard Vinyl, Inc.
        Cash non-accrual        
     Non-accrual interest amounts related to the above investments for the three months ended December 31, 2010 and December 31, 2009 were as follows:
                 
    Three months ended   Three months ended
    December 31, 2010   December 31, 2009
     
 
               
Cash interest income
  $ 2,106,432     $ 1,134,564  
PIK interest income
    240,390       468,882  
OID income
    30,138       103,911  
     
 
               
Total
  $ 2,376,960     $ 1,707,357  
     

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Discussion and Analysis of Results and Operations
Results of Operations
     The principal measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfolio and derivative instruments.
Comparison of the three months ended December 31, 2010 and December 31, 2009
Total Investment Income
          Total investment income includes interest and dividend income on our investments, fee income and other investment income. Fee income consists principally of loan and arrangement fees, administrative fees, unused fees, amendment fees, equity structuring fees, exit fees, prepayment fees, and waiver fees. Other investment income consists primarily of dividend income received from certain of our equity investments and interest on cash and cash equivalents on deposit with financial institutions.
          Total investment income for the three months ended December 31, 2010 and December 31, 2009 was $25.3 million and $13.2 million, respectively. For the three months ended December 31, 2010, this amount primarily consisted of $20.8 million of interest income from portfolio investments (which included $3.1 million of PIK interest), and $4.5 million of fee income. For the three months ended December 30, 2009, total investment income primarily consisted of $12.3 million of interest income from portfolio investments (which included $2.0 million of PIK interest), and $0.9 million of fee income.
          The increase in our total investment income for the three months ended December 31, 2010 as compared to the three months ended December 31, 2009 was primarily attributable to higher average levels of outstanding debt investments, which was principally due to an increase of 13 investments in our portfolio in the year-over-year period, partially offset by scheduled amortization repayments received and other debt payoffs during the same period.
Expenses
          Expenses (net of the permanently waived portion of the base management fee) for the three months ended December 31, 2010 and December 31, 2009 were $11.3 million and $4.9 million, respectively. Expenses increased for the three months ended December 31, 2010 as compared to the three months ended December 31, 2009 by $6.4 million, primarily as a result of increases in the base management fee, the incentive fee, interest expense, professional fees, and other general and administrative expenses.
     The increase in base management and incentive fees resulted from an increase in our total assets as reflected in the growth of the investment portfolio, offset partially by our investment adviser’s unilateral decision to waive $0.7 million of the base management fee for the three months ended December 31, 2009. The increase in interest expense resulted from a $174.3 million increase in debt levels in the year-over-year period.
Net Investment Income
          As a result of the $12.1 million increase in total investment income as compared to the $6.4 million increase in net expenses, net investment income for the three months ended December 31, 2010 reflected a $5.7 million, or 68.4%, increase compared to the three months ended December 31, 2009.
Realized Gain (Loss) on Sale of Investments
     Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
     During the three months ended December 31, 2010, we recorded the following investment realization events:

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    In November 2010, we restructured our investment in Best Vinyl, Inc., which resulted in a material modification of the terms of the loan agreement. As such, we recorded a realized loss in the amount of $1.7 million in accordance with ASC 470-50;
 
    In December 2010, we restructured our investment in Nicos Polymers & Grinding Inc., which resulted in a material modification of the terms of the loan agreement. As such, we recorded a realized loss in the amount of $3.9 million in accordance with ASC 470-50;
 
    In December 2010, we cancelled Lighting by Gregory, LLC’s entire Term Loan B balance and $1.5 million of Term Loan A. We recorded a realized loss on this investment in the amount of $7.8 million.
     During the three months ended December 31, 2009, we received a cash payment in the amount of $0.1 million, representing a payment in full of all amounts due in connection with the cancellation of our loan agreement with American Hardwoods Industries, LLC. We recorded a $0.1 million reduction to the previously recorded $10.4 million realized loss on this investment.
Net Unrealized Appreciation or Depreciation on Investments and Interest Rate Swaps
          Net unrealized appreciation or depreciation is the net change in the fair value of our investment portfolio and our interest rate swaps during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
          During the three months ended December 31, 2010, we recorded net unrealized appreciation of $16.8 million. This consisted of $10.3 million of reclassifications to realized losses, $5.5 million of net unrealized appreciation on debt investments, $0.3 million of net unrealized appreciation on equity investments and $0.7 million of net unrealized appreciation on interest rate swaps. During the three months ended December 31, 2009, we recorded net unrealized appreciation of $1.0 million. This consisted of $1.2 million of net unrealized appreciation on debt investments, partially offset by $0.2 million of net unrealized depreciation on equity investments.
Financial Condition, Liquidity and Capital Resources
Cash Flows
          We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt, or funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction.
     For the three months ended December 31, 2010, we experienced a net decrease in cash and cash equivalents of $33.7 million. During that period, we used $159.4 million of cash in operating activities, primarily for the funding of $238.6 million of investments, partially offset by $57.6 million of principal payments received and $14.1 million of net investment income. During the same period cash provided by financing activities was $125.6 million, primarily consisting of $89.0 million of net borrowings under our credit facilities, $50.3 million of SBA borrowings, and $5.0 million of proceeds from issuances of our common stock, partially offset by $16.5 million of cash dividends paid, $0.2 million of offering costs paid and $2.0 million of deferred financing costs paid. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity offerings or credit facilities, as we deem appropriate.
     For the three months ended December 31, 2009, we experienced a net decrease in cash and cash equivalents of $101.4 million. During that period, we used $129.4 million of cash in operating activities, primarily for the funding of $144.2 million of investments, partially offset by $5.9 million of principal payments received and $8.3 million of net investment income. During the same period cash provided by financing activities was $28.0 million, primarily $38.0 million of net borrowings on our credit facility partially offset by $9.7 million of cash dividends paid.
     As of December 31, 2010, we had $43.0 million in cash and cash equivalents, portfolio investments (at fair value) of $742.4 million, $4.7 million of interest and fees receivable, $123.3 million of SBA debentures payable, $89.0 of borrowings outstanding under our credit facilities, and unfunded commitments of $95.3 million.
     As of September 30, 2010, we had $76.8 million in cash and cash equivalents, portfolio investments (at fair value) of $563.8 million, $3.8 million of interest and fees receivable, $73.0 million of SBA debentures payable, and unfunded commitments of $49.5 million.

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Other Sources of Liquidity
          We intend to continue to generate cash primarily from cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities. In the future, we may also securitize a portion of our investments in first and second lien senior loans or unsecured debt or other assets. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. Our primary use of funds is investments in our targeted asset classes and cash distributions to holders of our common stock.
     Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan, and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.
     In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. See “Regulated Investment Company Status and Distributions” below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
     Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. As of December 31, 2010, we were in compliance with this requirement. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
     Finally, through a wholly-owned subsidiary, we sought and obtained a license from the SBA to operate an SBIC. In this regard, on February 3, 2010, our wholly-owned subsidiary, Fifth Street Mezzanine Partners IV, L.P., received a license, effective February 1, 2010, from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
     The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
     SBA regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of December 31, 2010, our SBIC subsidiary had $75 million in regulatory capital. The SBA has issued a capital commitment to our SBIC subsidiary in the amount of $150 million, and $123.3 million of SBA debentures were outstanding as of December 31, 2010. $73.0 million of these debentures bore an interest rate of 3.50%, including the SBA annual charge of 0.285%, while the remainder do not yet have a locked interest rate.
     We have received exemptive relief from the Securities and Exchange Commission (“SEC”) to permit us to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test.
Significant capital transactions that occurred from October 1, 2008 through December 31, 2010

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     The following table reflects the dividend distributions per share that our Board of Directors has declared on our common stock from October 1, 2008 through December 31, 2010:
                                         
Date   Record   Payment   Amount   Cash   DRIP Shares   DRIP Shares
Declared   Date   Date   per Share   Distribution   Issued   Value
December 9, 2008
  December 19, 2008   December 29, 2008   $ 0.32     $6.4 million     105,326     $0.8 million
December 9, 2008
  December 30, 2008   January 29, 2009     0.33     6.6 million     139,995     0.8 million
December 18, 2008
  December 30, 2008   January 29, 2009     0.05     1.0 million     21,211     0.1 million
April 14, 2009
  May 26, 2009   June 25, 2009     0.25     5.6 million     11,776     0.1 million
August 3, 2009
  September 8, 2009   September 25, 2009     0.25     7.5 million     56,890     0.6 million
November 12, 2009
  December 10, 2009   December 29, 2009     0.27     9.7 million     44,420     0.5 million
January 12, 2010
  March 3, 2010   March 30, 2010     0.30     12.9 million     58,689     0.7 million
May 3, 2010
  May 20, 2010   June 30, 2010     0.32     14.0 million     42,269     0.5 million
August 2, 2010
  September 1, 2010   September 29, 2010     0.10     5.2 million     25,425     0.3 million
August 2, 2010
  October 6, 2010   October 27, 2010     0.10     5.5 million     24,850     0.3 million
August 2, 2010
  November 3, 2010   November 24, 2010     0.11     6.0 million     26,569     0.3 million
August 2, 2010
  December 1, 2010   December 29, 2010     0.11     6.0 million     28,238     0.3 million
November 30, 2010
  January 4, 2011   January 31, 2011     0.1066     5.4 million     24,850     0.5 million
November 30, 2010
  February 1, 2011   February 28, 2011     0.1066                    
November 30, 2010
  March 1, 2011   March 31, 2011     0.1066                    
The following table reflects shareholder transactions that occurred from October 1, 2008 through December 31, 2010:
                                 
Date   Transaction   Shares   Share Price   Gross Proceeds (Uses)
October 27, 2008  
Repurchase shares
    39,000     $ 5.96     $(0.2 million)
October 28, 2008  
Repurchase shares
    39,000       5.89     (0.2 million)
July 21, 2009  
Public offering 1
    9,487,500       9.25     87.8 million
September 25, 2009  
Public offering 1
    5,520,000       10.50     58.0 million
January 27, 2010  
Public offering
    7,000,000       11.20     78.4 million
February 25, 2010  
Underwriters’ exercise of over-allotment
    300,500       11.20     3.4 million
June 21, 2010  
Public offering 1
    9,200,000       11.50     105.8 million
December 2010  
At-the-market offering
    429,110       11.87 2   5.1 million
 
1   Includes the underwriters’ full exercise of their over-allotment option
 
2   Average offering price
Borrowings
     On November 16, 2009, Fifth Street Funding, LLC, a consolidated wholly-owned bankruptcy remote, special purpose subsidiary (“Funding”), and we entered into a Loan and Servicing Agreement (“Agreement”), with respect to a three-year credit facility (“Wells Fargo facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), as successor to Wachovia Bank, National Association (“Wachovia”), Wells Fargo Securities, LLC, as administrative agent, each of the additional institutional and conduit lenders party thereto from time to time, and each of the lender agents party thereto from time to time, in the amount of $50 million, with an accordion feature which allowed for potential future expansion of the facility up to $100 million. The facility bore interest at LIBOR plus 4.0% per annum and had a maturity date of November 16, 2012.
     On May 26, 2010, we amended the Wells Fargo facility to expand the borrowing capacity under that facility. Pursuant to the amendment, we received an additional $50 million commitment, thereby increasing the size of the facility from $50 million to $100 million, with an accordion feature that allows for potential future expansion of that facility from a total

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of $100 million up to a total of $150 million. In addition, the interest rate of the Wells Fargo facility was reduced from LIBOR plus 4% per annum to LIBOR plus 3.5% per annum, with no LIBOR floor, and the maturity date of the facility was extended from November 16, 2012 to May 26, 2013. The facility may be extended for up to two additional years upon the mutual consent of Wells Fargo and each of the lender parties thereto.
     On November 5, 2010, we amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.
     In connection with the Wells Fargo facility, we concurrently entered into (i) a Purchase and Sale Agreement with Funding, pursuant to which we will sell to Funding certain loan assets we have originated or acquired, or will originate or acquire and (ii) a Pledge Agreement with Wells Fargo, pursuant to which we pledged all of our equity interests in Funding as security for the payment of Funding’s obligations under the Agreement and other documents entered into in connection with the Wells Fargo facility.
     The Agreement and related agreements governing the Wells Fargo facility required both Funding and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) comply with various covenants, servicing procedures, limitations on acquiring and disposing of assets, reporting requirements and other customary requirements for similar credit facilities. The Wells Fargo facility agreements also include usual and customary default provisions such as the failure to make timely payments under the facility, a change in control of Funding, and the failure by Funding or us to materially perform under the Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
     The Wells Fargo facility is secured by all of the assets of Funding, and all of our equity interest in Funding. We intend to use the net proceeds of the Wells Fargo facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot be assured that Funding will be able to borrow funds under the Wells Fargo facility at any particular time or at all. As of December 31, 2010, we had $38.0 million of borrowings outstanding under the Wells Fargo facility.
          On May 27, 2010, we entered into a three-year secured syndicated revolving credit facility (“ING facility”) pursuant to a Senior Secured Revolving Credit Agreement (“ING Credit Agreement”) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING facility allows for us to borrow money at a rate of either (i) LIBOR plus 3.5% per annum or (ii) 2.5% per annum plus an alternate base rate based on the greatest of the Prime Rate, Federal Funds Rate plus 0.5% per annum or LIBOR plus 1% per annum, and has a maturity date of May 27, 2013. The ING facility also allows us to request letters of credit from ING Capital LLC, as the issuing bank. The initial commitment under the ING facility is $90 million, and the ING facility includes an accordion feature that allows for potential future expansion of the facility up to a total of $150 million. The ING facility is secured by substantially all of our assets, as well as the assets of two of our wholly-owned subsidiaries, FSFC Holdings, Inc. and FSF/MP Holdings, Inc., subject to certain exclusions for, among other things, equity interests in our SBIC subsidiary and equity interests in Fifth Street Funding, LLC (the special purpose subsidiary established pursuant to the Wells Fargo facility) as further set forth in a Guarantee, Pledge and Security Agreement (“ING Security Agreement”) entered into in connection with the ING Credit Agreement, among FSFC Holdings, Inc., FSF/MP Holdings, Inc., ING Capital LLC, as collateral agent, and us. Neither our SBIC subsidiary nor Fifth Street Funding, LLC is party to the ING facility and their respective assets have not been pledged in connection therewith. The ING facility provides that we may use the proceeds and letters of credit under the facility for general corporate purposes, including acquiring and funding leveraged loans, mezzanine loans, high-yield securities, convertible securities, preferred stock, common stock and other investments.

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     Pursuant to the ING Security Agreement, FSFC Holdings, Inc. and FSF/MP Holdings, Inc. guaranteed the obligations under the ING Security Agreement, including our obligations to the lenders and the administrative agent under the ING Credit Agreement. Additionally, we pledged our entire equity interests in FSFC Holdings, Inc. and FSF/MP Holdings, Inc. to the collateral agent pursuant to the terms of the ING Security Agreement.
     The ING Credit Agreement and related agreements governing the ING facility required FSFC Holdings, Inc., FSF/MP Holdings, Inc. and us to, among other things (i) make representations and warranties regarding the collateral as well as each of our businesses, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The ING facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility, the occurrence of a change in control, and the failure by us to materially perform under the ING Credit Agreement and related agreements governing the facility, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
     Each loan or letter of credit originated under the ING facility is subject to the satisfaction of certain conditions. We cannot be assured that we will be able to borrow funds under the ING facility at any particular time or at all.
     As of December 31, 2010, we had $51.0 million of borrowings outstanding under the ING facility.
     As of December 31, 2010, except for assets that were funded through our SBIC subsidiary, substantially all of our assets were pledged as collateral under the Wells Fargo facility or the ING facility.
     Interest expense for the three months ended December 31, 2010 and 2009 was $1.9 million and $0.1 million, respectively.
     The following table describes significant financial covenants with which we must comply under each of our credit facilities on a quarterly basis:
                 
    Financial            
Facility   Covenant   Description   Target Value   Reported Value (1)
Wells Fargo facility
  Minimum shareholders’ equity (inclusive of affiliates)   Net assets shall not be less than $200 million plus 75% of the aggregate net proceeds of all sales of equity interests after November 16, 2009   $338 million   $569 million
 
  Minimum shareholders’ equity (exclusive of affiliates)   Net assets exclusive of affiliates other than Funding shall not be less than $250 million   $250 million   $494 million
 
  Asset coverage ratio   Asset coverage ratio shall not be less than 2.00:1   2.00:1   2.78:1
ING facility
  Minimum shareholders’ equity   Net assets shall not be less than the greater of (a) 55% of total assets; and (b) $385 million plus 50% of the aggregate net proceeds of all sales of equity interests after February 24, 2010   $436 million   $569 million
 
  Asset coverage ratio   Asset coverage ratio shall not be less than 2.25:1   2.25:1   8.80:1
 
  Interest coverage ratio   Interest coverage ratio shall not be less than 2.50:1   2.50:1   43.18:1
 
  Eligible portfolio
investments test
  Aggregate value of (a) Cash and cash equivalents and (b) Portfolio investments rated 1, 2 or 3 shall not be less than $175 million   $175 million   $288 million
 
(1)   As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Form 10-K for the year ended September 30, 2010.

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     The following table reflects credit facility and debenture transactions that occurred from October 1, 2008 through December 31, 2010. Amounts available and drawn are as of December 31, 2010:
                             
            Total                
            Facility   Upfront       Amount   Interest
            Amount   fee Paid   Availability   Drawn   Rate
Bank of Montreal
  December 30, 2008   Renewed credit facility   $50 million   $0.3 million   $ —   $ —   LIBOR + 3.25%
 
  September 16, 2009   Terminated credit facility                    
Wells Fargo facility
  November 16, 2009   Entered into credit
facility
  50 million   0.8 million           LIBOR + 4.00%
 
  May 26, 2010   Expanded credit facility   100 million   0.9 million   91 million (1)   38 million   LIBOR + 3.50%
ING facility
  May 27, 2010   Entered into credit
facility
  90 million   0.8 million   90 million   51 million   LIBOR + 3.50%
SBA
  February 16, 2010   Received capital commitment   75 million   0.8 million            
 
  September 21, 2010   Received capital
commitment
  150 million   0.8 million   150 million   123.3 million   3.50% (2)
 
(1)   Availability to increase upon our decision to further collateralize the facility.
 
(2)   Includes the SBA annual charge of 0.285%.
     Off-Balance Sheet Arrangements
     We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2010, our only off-balance sheet arrangements consisted of $95.3 million of unfunded commitments, which was comprised of $91.8 million to provide debt financing to certain of our portfolio companies and $3.6 million related to unfunded limited partnership interests. As of September 30, 2010, our only off-balance sheet arrangements consisted of $49.5 million, which was comprised of $46.7 million to provide debt financing to certain of our portfolio companies and $2.8 million related to unfunded limited partnership interests. Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Statement of Assets and Liabilities and are not reflected on our Consolidated Statement of Assets and Liabilities.
     Contractual Obligations
     On February 3, 2010, our SBIC subsidiary received a license, effective February 1, 2010, from the SBA to operate as an SBIC. The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. As of December 31, 2010, we had $123.3 million of SBA debentures payable. $73.0 million of these debentures bore an interest rate of 3.50%, including the SBA annual charge of 0.285%, while the remainder do not yet have a locked interest rate.
     On November 16, 2009, we entered into the Wells Fargo facility in the amount of $50 million with an accordion feature, which allowed for potential future expansion of the Wells Fargo facility up to $100 million. The Wells Fargo facility bore interest at LIBOR plus 4% per annum and had a maturity date of November 26, 2012. On May 26, 2010, we amended the Wells Fargo facility to expand our borrowing capacity under that facility. Pursuant to the amendment, we received an additional $50 million commitment, thereby increasing the size of the Wells Fargo facility from $50 million to $100 million, with an accordion feature that allows for potential future expansion of that facility from a total of $100 million up to a total of $150 million. In addition, the interest rate of the Wells Fargo facility was reduced from LIBOR plus 4% per annum to

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LIBOR plus 3.5% per annum, with no LIBOR floor, and the maturity date of the facility was extended from November 16, 2012 to May 26, 2013. On November 5, 2010, we amended the Wells Fargo facility to, among other things, provide for the issuance from time to time of letters of credit for the benefit of our portfolio companies. The letters of credit are subject to certain restrictions, including a borrowing base limitation and an aggregate sublimit of $15.0 million.
     On May 27, 2010, we entered into the ING facility, which allows for us to borrow money at a rate of either (i) LIBOR plus 3.5% per annum or (ii) 2.5% per annum plus an alternate base rate based on the greatest of the Prime Rate, Federal Funds Rate plus 0.5% per annum or LIBOR plus 1% per annum, and has a maturity date of May 27, 2013. The ING facility also allows us to request letters of credit from ING Capital LLC, as the issuing bank. The initial commitment under the ING facility is $90 million, and the ING facility includes an accordion feature that allows for potential future expansion of the facility up to a total of $150 million.
     As of December 31, 2010, we had $51.0 million of borrowings outstanding under the ING facility and $38.0 million of borrowings outstanding under the Wells Fargo facility.
     The table below reflects the following for the SBA debentures payable, the Wells Fargo facility and the ING facility:
    Debt outstanding as of September 30, 2010;
 
    Debt outstanding as of December 31, 2010;
 
    Weighted average debt outstanding for the three months ended December 31, 2010;
 
    Maximum debt outstanding during the three months ended December 31, 2010;
                                 
                    Weighted average debt outstanding   Maximum debt outstanding
    Debt Outstanding as of   Debt Outstanding as of   for the three months ended   for the three months ended
    September 30, 2010   December 31, 2010   December 31, 2010   December 31, 2010
     
SBA debentures payable
  $ 73,000,000     $ 123,300,000     $ 81,276,087     $ 123,300,000  
Wells Fargo facility
          38,000,000       16,380,435       75,000,000  
ING facility
          51,000,000       5,021,739       51,000,000  
Total debt
    73,000,000       212,300,000       102,678,261       234,300,000  
     The following table reflects our contractual obligations arising from the SBA debentures payable, the Wells Fargo facility and the ING facility:
                                         
    Payments due by period as of December 31, 2010
    Total   < 1 year   1-3 years   3-5 years   > 5 years
SBA debentures payable
  $ 123,300,000     $     $     $     $ 123,300,000  
Interest due on SBA debentures
    42,112,568       3,237,603       8,642,822       8,631,000       21,601,143  
Wells Fargo facility
    38,000,000             38,000,000              
Interest due on Wells Fargo facility
    5,266,012       2,179,039       3,086,972              
ING facility
    51,000,000             51,000,000              
Interest due on ING facility
    5,686,226       2,352,921       3,333,305              
Total
  $ 265,364,806     $ 7,769,563     $ 104,063,099     $ 8,631,000     $ 144,901,143  
     A summary of the composition of unfunded commitments (consisting of revolvers, term loans and limited partnership interests) as of December 31, 2010 and September 30, 2010 is shown in the table below:
                 
    December 31, 2010   September 30, 2010
     
HealthDrive Corporation
  $ 1,500,000     $ 1,500,000  
IZI Medical Products, Inc.
    2,500,000       2,500,000  
Trans-Trade, Inc.
    4,000,000       500,000  
Riverlake Equity Partners II, LP (limited partnership interest)
    877,895       966,360  
Riverside Fund IV, LP (limited partnership interest)
    678,583       864,175  
ADAPCO, Inc.
    5,750,000       5,750,000  
AmBath/ReBath Holdings, Inc.
    1,500,000       1,500,000  
JTC Education, Inc.
    14,000,000       9,062,453  
Tegra Medical, LLC
    4,000,000       4,000,000  
Vanguard Vinyl, Inc.
          1,250,000  
Flatout, Inc.
    1,500,000       1,500,000  
Psilos Group Partners IV, LP (limited partnership interest)
    1,000,000       1,000,000  
Mansell Group, Inc.
    2,000,000       2,000,000  
NDSSI Holdings, Inc.
    1,500,000       1,500,000  
Eagle Hospital Physicians, Inc.
    2,500,000       2,500,000  
Enhanced Recovery Company, LLC
    4,000,000       3,623,148  
Epic Acquisition, Inc.
    2,200,000       2,700,000  
Specialty Bakers, LLC
    4,000,000       2,000,000  
Rail Acquisition Corp.
    5,040,865       4,798,897  
Bunker Hill Capital II (QP), L.P. (limited partnership interest)
    1,000,000        
Nicos Polymers & Grinding Inc.
    500,000        
CRGT, Inc.
    12,500,000        
Welocalize, Inc.
    4,750,000        
Miche Bag, LLC
    5,000,000        
Dominion Diagnostics, LLC
    5,000,000        
Advanced Pain Management
    400,000        
DISA, Inc.
    4,000,000        
Best Vinyl Fence & Deck, LLC
    1,000,000        
Saddleback Fence and Vinyl Products, Inc.
    400,000        
Traffic Control & Safety Corporation
    2,250,000        
     
Total
  $ 95,347,343     $ 49,515,033  
     

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Regulated Investment Company Status and Dividends
     We elected, effective as of January 2, 2008, to be treated as a RIC under Subchapter M of the Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
     Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
     To maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). As a RIC, we are also subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis (e.g., calendar year 2011). We anticipate timely distribution of our taxable income within the tax rules; however, we expect to incur a de minimis U.S. federal excise tax for the calendar year 2010. We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, in future periods, we will be partially dependent on our SBIC subsidiary for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiary may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiary to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. Also, the covenants under the Wells Fargo facility could, under certain circumstances, restrict Fifth Street Funding, LLC from making distributions to us and, as a result, hinder our ability to satisfy the distribution requirement. Similarly, the covenants contained in the ING facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
     We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in our credit facilities. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
     Pursuant to a recent revenue procedure (Revenue Procedure 2010-12), or the Revenue Procedure, issued by the Internal Revenue Service, or IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including BDCs) that are paid part in cash and part in stock as dividends that would satisfy the RIC’s annual distribution requirements and qualify for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure requires that at least 10% of the total distribution be payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to

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receive cash may receive less than 10% of such stockholder’s distribution in cash). This Revenue Procedure applies to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011. We have no current intention of paying dividends in shares of our stock.
Related Party Transactions
          We have entered into an investment advisory agreement with Fifth Street Management LLC, our investment adviser. Fifth Street Management is controlled by Leonard M. Tannenbaum, its managing member and the chairman of our Board of Directors and our chief executive officer. Pursuant to the investment advisory agreement, fees payable to our investment adviser will be equal to (a) a base management fee of 2.0% of the value of our gross assets, which includes any borrowings for investment purposes, and (b) an incentive fee based on our performance. Our investment adviser agreed to permanently waive that portion of its base management fee attributable to our assets held in the form of cash and cash equivalents as of the end of each quarter beginning March 31, 2010. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “Pre-Incentive Fee Net Investment Income” for the immediately preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our “Incentive Fee Capital Gains,” which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee.
     The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three months ended December 31, 2010, we paid our investment adviser $7.3 million under the investment advisory agreement.
     Pursuant to the administration agreement with FSC, Inc., which is controlled by Mr. Tannenbaum, FSC, Inc. will furnish us with the facilities and administrative services necessary to conduct our day-to-day operations, including equipment, clerical, bookkeeping and recordkeeping services at such facilities. In addition, FSC, Inc. will assist us in connection with the determination and publishing of our net asset value, the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders. We will pay FSC, Inc. our allocable portion of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including a portion of the rent and the compensation of our chief financial officer and chief compliance officer and their respective staffs. FSC, Inc. has voluntarily determined to forgo receiving reimbursement for the services performed for us by our chief compliance officer. Although FSC, Inc. currently intends to forgo its right to receive such reimbursement, it is under no obligation to do so and may cease to do so at any time in the future. The administration agreement may be terminated by either party without penalty upon no fewer than 60 days’ written notice to the other. During the three months ended December 31, 2010, we paid FSC, Inc. $0.8 million under the administration agreement.
     We have also entered into a license agreement with Fifth Street Capital LLC pursuant to which Fifth Street Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Fifth Street.” Under this agreement, we will have a right to use the “Fifth Street” name, for so long as Fifth Street Management LLC or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the “Fifth Street” name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, its managing member.

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Recent Developments
     On January 4, 2011, we drew $22.0 million on the Wells Fargo facility. On January 28, 2011, we drew $25.0 million on the Wells Fargo facility. As of January 31, 2011, we had $85.0 million outstanding under the facility.
     On January 4, 2011, we closed a $19.0 million senior secured debt facility to support the acquisition of a technology-enabled home-delivery pharmacy. The investment is backed by a private equity sponsor and $17.0 million was funded at closing. The terms of this investment include a $2.0 million revolver at an interest rate of LIBOR+6.0% per annum and a $17.0 million Term Loan at an interest rate of LIBOR+10.5% per annum. This is a first lien facility with a scheduled maturity of five years.
     On January 6, 2011, we closed a $14.0 million senior secured debt facility to support the acquisition of a provider of outsourced Medicaid eligibility services. The investment is backed by a private equity sponsor and $12.0 million was funded at closing. The terms of this investment include a $2.0 million revolver at an interest rate of LIBOR+6.5% per annum with a 1.75% LIBOR floor, and a $12.0 million Term Loan at an interest rate of LIBOR+10.0% per annum with a 1.75% LIBOR floor. This is a first lien facility with a scheduled maturity of five years.
     On January 6, 2011, we closed a $20.0 million senior secured debt facility to support the acquisition of a manager and administrator of investment products. The investment is backed by a private equity sponsor and $11.7 million was funded at closing. The terms of this investment include a $20.0 million Term Loan at an interest rate of LIBOR+9.5% per annum with a 2% LIBOR floor. This is a first lien facility with a scheduled maturity of five years.
     On January 14, 2011, we drew $12.0 million on the ING facility. On January 31, 2011, we drew $27.0 million on the ING facility. As of January 31, 2011, we had $90.0 million outstanding under the facility.
     On January 14, 2011, we closed a $13.3 million senior secured debt facility to support the acquisition of a provider of non-destructive pipe testing services. The investment is backed by a private equity sponsor and $11.3 million was funded at closing. The terms of this investment include a $2.0 million revolver at an interest rate of LIBOR+8.0% per annum with a 2% LIBOR floor, a $5.3 million Term Loan A at an interest rate of LIBOR+8.0% per annum with a 2% LIBOR floor, and a $6.0 million Term Loan B at an interest rate of LIBOR+12% per annum with a 2% LIBOR floor. This is a first lien facility with a scheduled maturity of five years.
     On January 20, 2011, we closed a $10.0 million senior secured debt facility to support the acquisition of an acquirer and operator of specialty pharmaceutical companies. The investment is backed by a private equity sponsor and $10.0 million was funded at closing. The terms of this investment include a $10.0 million Term Loan at an interest rate of LIBOR+6.25% per annum with a 2% LIBOR floor. This is a first lien facility with a scheduled maturity of five years.
     On January 30, 2011, our Board of Directors declared the following dividends:
    $0.1066 per share, payable on April 29, 2011 to stockholders of record on April 1, 2011;
 
    $0.1066 per share, payable on May 31, 2011 to stockholders of record on May 2, 2011; and
 
    $0.1066 per share, payable on June 30, 2011 to stockholders of record on June 1, 2011.
     On January 31, 2011, we paid a dividend in the amount of $0.1066 per share to stockholders of record on January 4, 2011.
     We are currently in negotiations with the lenders to the ING facility and new lender parties thereto to potentially more than double our borrowing capacity under the ING facility, although we have not yet obtained a commitment from these lenders for any such increase. As a result, there are no assurances that we will be successful in our negotiations with these lenders or that we will ultimately enter into any agreement with the lenders to expand our borrowing capacity under the ING facility at all. In addition, any such agreement by these lenders to increase our borrowing capacity under the ING facility may also be accompanied by other changes to the ING facility, including changes to the maturity date of the ING facility.
     In addition, we are also in the process of preparing an application to the SBA for a second SBIC license. If approved, this license would provide us with the capability to issue an additional $75 million of SBA-guaranteed debentures beyond the $150 million of SBA-guaranteed debentures we, through our wholly-owned subsidiary, currently have the ability to issue. However, there are no assurances that we will be successful in obtaining a second SBIC license from the SBA.
Recently Issued Accounting Standards
     See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the Consolidated Financial Statements.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk
     We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent any of our debt investments include floating interest rates. As of December 31, 2010, 50.0% of our debt investment portfolio (at fair value) and 48.5% of our debt investment portfolio (at cost) bore interest at floating rates. As of December 31, 2010, based on our applicable levels of floating-rate debt investments, a 1.0% change in interest rates would not have a material effect on our level of interest income from debt investments.
     Based on our review of interest rate risk, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. On August 16, 2010, we entered into an interest rate swap agreement that expires on August 15, 2013, for a total notional amount of $100 million, for the purposes of hedging the interest rate risk related to the Wells facility and the ING facility. Under the interest rate swap agreement, we will pay a fixed interest rate of 0.99% and receive a floating rate based on the prevailing one-month LIBOR.
     Our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act (See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investment Valuation”). Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments. Assuming no changes in our investment and capital structure, a hypothetical increase or decrease in discount rates of 100 basis points would increase or decrease our net assets resulting from operations by $17 million.
Item 4. Controls and Procedures
  (a)   As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely identifying, recording, processing, summarizing, and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.
 
  (b)   Changes in Internal Controls
     There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
     Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.
Item 1A. Risk Factors.
     There have been no material changes during the three months ended December 31, 2010 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2010.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     We issued a total of 79,657 shares of common stock under our dividend reinvestment plan during the three months ended December 31, 2010. This issuance was not subject to the registration requirements of the Securities Act of 1933. The aggregate price for the shares of common stock issued under the dividend reinvestment plan was $0.9 million.

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Item 6. Exhibits.
     
Exhibit    
Number   Description of Exhibit
10.1*
  Custody Agreement, dated January 31, 2011, by and between Fifth Street Finance Corp. and U.S. Bank National Association
 
   
31.1*
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
31.2*
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
32.1*
  Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
   
32.2*
  Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
*   Submitted herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Fifth Street Finance Corp.
 
 
Date: January 31, 2011  /s/ Leonard M. Tannenbaum    
  Leonard M. Tannenbaum   
  Chairman and Chief Executive Officer   
 
     
Date: January 31, 2011  /s/ William H. Craig    
  William H. Craig   
  Chief Financial Officer   

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EXHIBIT INDEX
     
Exhibit    
Number   Description of Exhibit
10.1*
  Custody Agreement, dated January 31, 2011, by and between Fifth Street Finance Corp. and U.S. Bank National Association
 
   
31.1*
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
31.2*
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
32.1*
  Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
   
32.2*
  Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
*   Submitted herewith.

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