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Author's Note: PART 2 of this article is a continuation from PART 1, which was discussed in a previous publication. Please see PART 1 of this article to fully understand the topics and discussion points to be covered below in relation to Fifth Street Finance Corp. (NASDAQ:FSC) and my income statement projection for the fiscal third quarter of 2013. The link to this article is provided below:

PART 1 - Fifth Street Finance Corp.'s. Upcoming Fiscal Q3 2013 Income Statement Projection

B) Net Investment Income (Loss):

- Net Investment Income Estimate of $31.9 Million; Range $29.9 - $33.9 Million

- Confidence Within Range = Moderate to High

- See Red Reference "B" in Table 3 Below Next to the June 30, 2013 Column for Reference

- Net Investment Income of $0.269 Per Common Share - Basic; Range $0.249 - $0.289 Per Share

- See Red Reference "(B / E)" in Table 6 Below Next to the June 30, 2013 Column for Reference

- Net Investment Income of $0.264 Per Common Share - Diluted; Range $0.244 - $0.284 Per Share

- See Red Reference "(B / G)" in Table 6 Below Next to the June 30, 2013 Column for Reference

Having established a total investment income estimate for the third fiscal quarter of 2013 (see red reference "A" in Table 1, PART 1 of article), let us now look at my projection in regards to FSC's "net investment income (loss)" figure (see red reference "B" in Table 3 below). The net investment income (ACTUAL) figures are derived from FSC's quarterly SEC submissions via its 10-Q or 10-K where applicable.

Table 3 - FSC Quarterly Net Investment Income Projection

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FSC's net investment income (loss) figure is FSC's "total investment income" (discussed in PART 1 of article) less its "net expenses" and any "gain on extinguishment of convertible senior notes" figure (to be discussed below). By looking at Table 3 above, one will notice FSC's net expenses figure consists of the following seven expense accounts and an eighth contra-expense account: 1) base management fee; 2) incentive fee; 3) professional fees; 4) board of director fees; 5) interest expense; 6) administrator expense; 7) general and administrative (g&a) expenses; and 8) base management fee waived.

1) Base Management Fee:

- Estimate of $9.5 Million; Range $9.3 - $9.7 Million

- Confidence Within Range = High

- See Boxed Blue Reference "4" in Table 3 Above and Table 4 Below Next to the June 30, 2013 Column for Reference

FSC has a base management fee calculated at an annual rate of 2% (0.50% quarterly) of its gross assets at the end of each quarter less any cash and cash equivalents balance. This is a pretty simple calculation. The base management fee is payable quarterly in arrears.

Table 4 - FSC Quarterly Base Management Fee Projection

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I base my estimation of FSC's base management fee in Table 4 above. FSC does not provide a specific table/calculation in regards to this figure. As such, there will not be an identical sheet FSC provides that matches the data I have prepared above. My projection for the third fiscal quarter of 2013 (ESTIMATE) is based on the recalculation of the management fee expense using the formula FSC has stated within its quarterly SEC submissions (10-Q or 10-K where applicable).

As Table 4 indicates, I am projecting a quarterly base management fee of $9.5 million for the third fiscal quarter of 2013. This is based on a projected total gross assets figure of $1.95 billion and cash and cash equivalents amount of $52.8 million at 6/30/2013. Any actual variances to these two figures would cause a slight variance in the quarterly base management fee payable and has been taken into consideration regarding my ranges for this account.

2) Incentive Fee:

- Estimate of $7.4 Million; Range $7.1 - $7.7 Million

- Confidence Within Range = Moderate to High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

FSC's incentive fee calculation has two parts. The first part is calculated and payable quarterly in arrears based on the FSC's "pre-incentive fee net investment income" from the preceding fiscal quarter. This calculation is rather complicated and considers several "hurdle-rate" scenarios. The second part of the incentive fee is determined and payable in arrears and equals 20% of FSC's realized capital gains (on a cumulative basis from inception through the end of each fiscal year), net of all realized capital losses and unrealized capital depreciation. This calculated figure is then subtracted by the aggregate amount of any previously paid capital gain incentive fees. The analysis for this fee calculation is extremely detailed. The specific table I have created which calculates this expense is too large to include within this article.

I am projecting a quarterly incentive fee of $7.4 million for the third fiscal quarter of 2013. This is an increase of approximately $400 thousand from the prior quarter. This comes out to be about a 6% increase for this expense when compared to the second fiscal quarter of 2013. This percentage increase seems to be in line with the percentage increase I am projecting for FSC's total investment portfolio in the third fiscal quarter of 2013.

3) Professional Fees:

- Estimate of $0.8 Million; Range $0.5 - $1.1 Million

- Confidence Within Range = Moderate to High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

FSC's professional fees mainly consist of all accounting, audit, and legal services rendered. Due to the overall immateriality of this account, I am simply estimating a professional fees expense of $800 thousand. This is a $26 thousand increase from last quarter's amount due to the continued expansion of the company as a whole and due to the fact an equity raise occurred during the current quarter.

This fee could further increase in direct relation to FSC's specific portfolio acquisition of Healthcare Finance Group, LLC ('HFG'). For this portfolio acquisition, Greenhill & Co. acted as financial advisor and Proskauer Rose LLP served as legal advisor for FSC. The cost associated with the portfolio acquisition of HFG has been taken into consideration regarding my ranges for this account.

4) Board of Director Fees:

- Estimate of $200 Thousand; Range $50 - $350 Thousand

- Confidence Within Range = High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

FSC's board of director fees mainly consist of expenses in relation to all duties and services rendered that must be performed by each board of director member (including compensation fees). The projected quarterly board of director fees of $200 thousand is basically in line with a weighted average expense over the twelve-month period going back to the third fiscal quarter of 2012. Further discussion of this account will be omitted from this article due to immateriality.

5) Interest Expense:

- Estimate of $8.3 Million; Range $7.8 - $8.8 Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "5" in Table 3 Above and Table 5 Below Next to the June 30, 2013 Column for Reference

FSC's interest expense consists of the quarterly accrued interest on the following debt instruments (balances as of 3/31/2013): 1) four separate Small Business Administration (SBA) debenture loans totaling $181.8 million; 2) three credit facilities with Well Fargo, ING, and Sumitomo Mitsui Banking Corp. totaling $373.5 million; 3) convertible senior notes outstanding of $115 million; and 4) unsecured notes payable totaling $75 million.

It should be noted on 4/4/2013, FSC issued an additional $86.3 million worth of 6.125% unsecured notes due in 2028. This is the second issuance of unsecured notes and FSC will begin to incur an interest expense on these notes during the third fiscal quarter of 2013 (88 days of accrued interest).

Table 5 - FSC Quarterly Interest Expense Projection

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I base my estimation of FSC's quarterly accrued interest expense in Table 5 above. FSC does not provide a specific table/calculation in regards to this figure. As such, there will not be an identical sheet FSC provides that matches the data I have prepared above. My projection for the third fiscal quarter of 2013 (ESTIMATE) is based on the recalculation of the interest expense using data FSC has stated within its quarterly SEC submissions (10-Q or 10-K where applicable).

Side Note: FSC amended the terms of its credit facility with Wells Fargo on 6/20/2013. One key amendment was the reduction of its annual interest rate to LIBOR plus 2.50% (a 25 basis point reduction). Since this interest rate reduction would only be in effect for 10 days for FSC's third fiscal quarter of 2013, this interest rate amendment has been excluded from Table 5's calculation due to immateriality.

FSC's SBA debentures, convertible senior notes, and unsecured notes all have an annual fixed interest rate. Also, the balances on these specific debt instruments should not be paid down or increase in the current quarter. However, the three credit facilities are basically a credit revolver. Therefore, a level of estimation is needed on the weighted average balances within these three credit facilities for any given quarter. Even though I am projecting a net loan origination increase of $125 million for the current quarter (stated in PART 1 of this article), I have decreased the weighted average amount of debt outstanding in the three credit facilities when compared to the prior quarter. I am making this assumption based on two events that occurred during FSC's third fiscal quarter of 2013. The first event (mentioned above) was the issuance of $86.3 million of unsecured notes in early April. The second event was FSC's equity offering of 14.4 million shares of common stock, which provided net equity proceeds of approximately $151.5 million. From these two added sources of capital, reliance on the three credit revolvers should be modestly lower throughout the third fiscal quarter of 2013. Taking all these events and assumptions into consideration, I am projecting a modest increase in interest expense for the current quarter.

As Table 5 highlights, I am projecting an accrued interest expense of $8.3 million for the third fiscal quarter of 2013. This is a $0.5 million increase when compared to the prior quarter. The $1.3 million projected accrued interest on the newly issued $86.3 million of unsecured notes is partially offset by the decrease in the weighted average balance of each of FSC's three credit facilities.

This comes out to be an approximate 6% increase in this expense when compared to the prior quarter. This percentage seems to be in line with the percentage increase in portfolio holdings I am projecting for the third fiscal quarter of 2013.

6) Administrator Expense:

- Estimate of $0.8 Million; Range $0.6 - $1.0 Million

- Confidence Within Range = Moderate to High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

FSC has an administration agreement with FSC, Inc. under which FSC, Inc. provides administrative services to FSC. This includes office facilities, equipment, clerical, bookkeeping, and other miscellaneous services. Due to the immateriality of this account, I am estimating an administrator expense of $800 thousand. This is a $130 thousand increase from last quarter's amount due to the fact FSC continues to ramp up operations in its Midwestern (Chicago), Western (Los Angeles), and main office (White Plains, NY).

7) G&A Expenses:

- Estimate of $1.7 Million; Range $1.4 - $2.0 Million

- Confidence Within Range = Moderate to High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

This account is basically a "sublet" of the administrator expense account. As stated above, FSC has an administration agreement with FSC, Inc. under which FSC, Inc. provides administrative services to FSC. This includes office facilities, equipment, clerical, bookkeeping, and other miscellaneous services. I am estimating g&a expenses of $1.7 million for the quarter. This is an approximate $250 thousand increase from last quarter's amount. This increase can directly be attributed to the additional work performed by FSC in regards to the following: 1) its April unsecured notes issuance and 2) its 14.4 million equity share offering. Furthermore (as stated above), FSC has continued to expand its operations with a gradual increase in the number of employees it has working for them.

After adding up all seven expense accounts discussed above, FSC's total expenses figure is projected to be $28.7 million for the third fiscal of 2013 (See Table 2 at top of article). However, one other account needs to be briefly discussed before FSC's net expenses figure can be obtained (which will ultimately determine its net investment income (loss) amount).

8) Base Management Fee Waived:

- Estimate of ($1.4) Million; Range ($2.0) Million - $0

- Confidence Within Range = High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

For the second fiscal quarter of 2013, FSC voluntarily agreed to waive a portion of the base management fee attributable to certain new investments that closed near the quarter's end. As such, FSC reduced their base management fee by ($1.3) million in the prior quarter. This was the first time in several years FSC allowed such a waiver to occur. I personally suspect FSC suggested such a waiver to ensure it reported figures in line with the market's quarterly per share expectations. Per an accounting standpoint, as long as these "waived" management fees were never actually paid to FSC's management, this occurrence should not be a cause for concern (actually benefits shareholders).

After projecting the rest of FSC's income statement for the current quarter, I am assuming such a "waiver" of a portion of base management fee will be induced once again. I believe such a "waiver" is needed to satisfy both FSC's and the market's expectations for the third fiscal quarter of 2013. I am also assuming several loan originations will be closed near the quarter's close of 6/30/2013. However, these are merely general assumptions on my part. Therefore, I must include in my quarterly range for this account a figure of $0. This would indicate no such waiver of the base management fee for the third fiscal quarter of 2013. Only FSC knows how many deals will be closed near the quarter's end thus introducing the possibility of a waiver for the current quarter.

After adding a projected base management waiver of ($1.4) million, FSC's net expenses figure is projected to be $27.3 million (See Table 2 at top of article). Now, only one remaining account needs to be briefly discussed before FSC's net investment income (loss) figure can be obtained.

9) Gain on Extinguishment of Convertible Senior Notes:

- Estimate of $0; No Range

- Confidence Within Range = High

- See Table 3 Above Next to the June 30, 2013 Column for Reference

This account is in relation to FSC's convertible senior notes. As of 3/31/2013, FSC had an outstanding balance of $115 million in regards to its convertible senior notes (indicated earlier within interest expense analysis). FSC may repurchase its convertible senior notes at its leisure prior to maturity in 2016. If a repurchase occurs at a purchase price below par value, a gain on the extinguishment is recorded. The amount of the gain recorded is the difference between the reacquisition price and the net carrying amount of the convertible senior notes less the proportionate amount of unamortized debt issuance costs.

Since FSC's stock market price basically stayed above its net asset value ('NAV') of $9.90 per share throughout the third fiscal quarter of 2013, FSC most likely did not repurchase any of its convertible senior notes during the current quarter. There were three days within the current quarter where the intraday or closing price of FSC's stock was lower than $9.90 per share. These dates were the following: 1) 6/13/2013; 2) 6/20/013; and 3) 6/24/2013. If a repurchase were to occur during those three days, the intraday stock price was only a few cents below NAV. As such, any gain on the extinguishment of convertible senior notes would be immaterial for purposes of this article. Therefore, this specific account should have no activity (remain $0) once again this quarter.

After taking FSC's total investment income of $59.2 million (discussed in PART 1) and subtracting the net expenses amount of $27.3 million (discussed above), FSC will have a projected net investment income amount of $31.9 million for the third fiscal quarter of 2013. As just discussed above, the gain on extinguishment of convertible note should remain $0 during this quarter. As indicated near the beginning of this article, FSC's net investment income of $31.9 million can be seen in Table 3 above under the red reference "B."

C) Net Increase (Decrease) in Net Assets Resulting From Operations:

- Net Increase in Net Assets Resulting From Operations Estimate of $29.2 Million; Range $26.2 - $32.2 Million

- Confidence Within Range = Moderate

- See Red Reference "C" in Table 6 Below Next to the June 30, 2013 Column for Reference

- Earnings of $0.246 Per Common Share - Basic; Range $0.216 - $0.276 Per Share

- See Red Reference "(C / E)" in Table 6 Below Next to the June 30, 2013 Column for Reference

Having established a total investment income (see red reference "A" in Table 1, PART 1 of article) and net investment income (see red reference "B" in Table 3 above) estimate for the third fiscal quarter of 2013, let us now look at my projection in regards to the "net increase (decrease) in net assets resulting from operations" figure (see red reference "C" in Table 6 below). The net increase in net assets resulting from operations (ACTUAL) figure is derived from FSC's quarterly SEC submissions via its 10-Q or 10-K where applicable.

Table 6 - FSC Quarterly Net Increase in Net Assets Resulting From Operations Projected (Including "as Adjusted")

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To project FSC's net increase in net assets resulting from operations figure, the following two accounts will need to be determined: 1) net unrealized appreciation (depreciation) on investments and 2) net realized gain (loss) on investments. These two accounts will be the most difficult to make an estimate for due to the overall nature of the accounts.

1) Net Unrealized Appreciation (Depreciation) on Investments:

- Net Unrealized (Depreciation) Estimate of ($3.0) Million; Range ($9.0) - $3.0 Million

- Confidence Within Range = Moderate

- See Table 6 Above Next to the June 30, 2013 Column for Reference

Let us start the discussion of this account by understanding how FSC's investment portfolio is valued. At the end of each quarter, FSC's Board of Directors performs an appropriate fair market value ('FMV') analysis of its investment portfolio. This analysis begins with each investment being initially valued by FSC's finance department. These initial valuations are reviewed by upper-level internal management. An independent external valuation firm is also called upon by the Board of Directors to prepare preliminary valuations (on a selected basis). FSC's finance department then compares its preliminary valuations to the independent external valuation firm's results. Taking both viewpoints into consideration, FSC's finance department then prepares a valuation report for FSC's Audit Committee. FSC's Audit Committee is basically a sub-committee of its Board of Directors. FSC's Audit Committee, using both sets of analysis, makes a recommendation to FSC's Board of Directors in regards to the FMV of its portfolio investments. After these assessments have been reviewed, FSC's Board of Directors deems an appropriate FMV "write-up" (unrealized appreciation) or "write-down" (unrealized depreciation) on each specific investment. The Board of Directors determines the FMV of each investment within FSC's portfolio in "good faith."

Now that we have a good understanding of FSC's quarterly valuation process, let us begin an analysis of its investment portfolio for the third fiscal quarter of 2013.

a) Control Investments - As of 3/31/2013, there were two investments regarded as control investments (mentioned in PART 1 of article). This was Coll Materials Group and Traffic Solutions Holdings, Inc. I'm estimating an unrealized depreciation of approximately ($1.0) million for the current quarter within this sub-classification. This projection is for a FMV write-down on the equity balance of Traffic Solutions Holdings, Inc.

Traffic Solutions Holdings, Inc. recently declared bankruptcy (under a different company name) and is in the process of finishing its reorganization process. As recently as FSC's fiscal fourth quarter of 2012, this investment's remaining FMV of $10.9 million was written-off before this restructuring occurred. As of 3/31/2013, the current principal outstanding balance on this investment portfolio's newly-issued debt investments was $28.8 million (post-restructuring). FSC's total investment, which includes both debt and equity investments, was $46.1 million as of 3/31/2013. Due to the recent restructuring in the fourth quarter of 2012, I still do not believe a FMV write-down will happen on FSC's debt investments in the third fiscal quarter of 2013. In my personal opinion, it is still too early in the loan's life cycle to record such a write-down.

However, FSC's equity investment in Traffic Solutions Holdings, Inc. needs to be addressed. As of 12/31/2012 (post-restructuring), FSC had a common stock cost basis of $5.3 million with a FMV of $7.0 million within this investment. By 3/31/2013, the FMV of the common stock rapidly increased to $11.4 million. As such, FSC accounted for a material unrealized appreciation of $4.4 million for the second fiscal quarter of 2013 within this investment's common stock account. For a single quarter's worth of activity, this was a huge unrealized FMV appreciation.

Typically, restructured/reorganized companies often have trouble stemming the tide and returning to profitability. I fear this investment may be no different. It does not help that this company's operations are in the construction/engineering business based in California. California's state government has debt problems and this company's main business is through the state. State budget deficits/tightening may cause a reduction in business for Traffic Solutions Holdings, Inc. for a prolonged period of time. Furthermore, in regards to past restructurings, FSC always wrote-down the FMV of its equity investments after an initial material "spike" in equity appreciation.

Taking these various assumptions into consideration, I personally feel FSC may have once again "over-valued" their equity investment within this investment. For the third fiscal quarter of 2013, I am projecting a slight ($1.0) write-down of FSC's equity investment in Traffic Solutions Holdings, Inc.

b) Affiliate Investments - As of 3/31/2013, there was only one investment regarded as an affiliate investment (mentioned in PART 1 of article). This was Ambath/Rebath Holdings, Inc. I'm estimating an unrealized depreciation of approximately ($0.5) million for the quarter. Ambath/Rebath Holdings, Inc's. FMV has hovered around its principal and cost balance during past quarters. In the first fiscal quarter of 2013, there was a ($240) thousand FMV write-down to this investment. An additional minor FMV write-down to this specific investment seems reasonable for the fiscal third quarter of 2013 due to the past tendencies. Again, this is merely a general assumption on my part.

c) Non-Control / Non-Affiliate Investments - This classification contains the majority of FSC's investment portfolio (mentioned in PART 1 of article). I'm estimating a total unrealized depreciation of ($1.0) million for the quarter. One good thing FSC has going for them is that by the fiscal fourth quarter of 2012, the holdings within FSC's original portfolio (pre-IPO) were either sold to independent parties for substantial losses (Lighting by Gregory, O'Currance, Rail Acquisition, Rose Tarlow) or completely written-off altogether upon bankruptcy (Premier Trailing Leasing, Martini Park, Repcharge Investments, MK Network). After its June 2008 IPO, FSC used its expansion of capital and expertise to structure deals with more caution and wherewithal. As a result, its "first lien" portfolio (lower risk, slightly lower interest rates) has increased while its riskier "second lien" portfolio (higher risk, slightly higher interest rates) has lowered. Only recently, from an increased risk appetite, FSC has begun to increase its second lien exposure in order to obtain a higher weighted average yield due to the prolonged low interest rate environment.

Specifically, I am projecting a FMV write-down of ($2.5) million for Eagle Hospital Physicians, Inc. for the third fiscal quarter of 2013. Eagle Hospital Physicians, Inc. had a FMV write-down in first fiscal quarter of 2013 of ($3.2) million. Eagle Hospital Physicians, Inc. then had another FMV write-down in second fiscal quarter of 2013 of ($3.3) million. Last quarter, I correctly projected this particular investment sustaining an additional FMV write-down. However, the actual ($3.3) million FMV write-down was an even larger reduction than I anticipated for this specific investment. This does not bode particularly well for this investment in regards to FSC recuperating its original principal loan balance. As of 3/31/2013, FSC had a principle debt balance of $25.4 million with a FMV of only $18.7 million for Eagle Hospital Physicians, Inc. When calculated, the FMV of this investment dropped down to 73.9% of its outstanding principal balance as of 3/31/2013. This is a troubling sign for this investment, as having seen what usually happens to most investments within FSC's portfolio when the FMV falls below 80% of its outstanding principal balance. This particular investment should be monitored in upcoming quarters for possible unrecoverable losses/further FMV write-downs. Starting last quarter, even FSC acknowledged this loan was beginning to show signs of trouble (after I predicted as such). During the second fiscal quarter of 2013, FSC placed Eagle Hospital Physicians, Inc. on a "cash non-accrual" status.

For the remainder of the portfolio, I'm projecting a FMV appreciation of $1.0 million. This will be comprised of numerous FMV appreciations and depreciations throughout the portfolio. This includes all equity valuation changes occurring during the quarter. Again, this estimate is fairly cautious. The specific table I have created which tracks and estimates each investment's appreciation or (depreciation) is too large to include within this article and cannot be compressed into an "article-friendly" table. Typically, most major FMV write-downs or write-offs occur in FSC's fiscal fourth quarter prior to issuance of its annual 10-K report (due to FSC's financial statements being "audited" as opposed to just "reviewed").

2) Net Realized Gain (Loss) on Investments:

- Net Realized Gain Estimate of $0.3 Million; Range ($1.3) - $1.3 Million

- Confidence Within Range = Moderate

- See Table 6 Above Next to the June 30, 2013 Column for Reference

FSC's net realized gain (loss) on investments amount is the difference between the proceeds received from dispositions of portfolio investments and its stated costs. Realized losses may also be recorded in connection with FSC's determination that certain investments are considered worthless and meet the conditions for loss recognition under Generally Accepted Accounting Principles (GAAP). This account also includes all amounts reclassified out of the net unrealized appreciation (depreciation) on investments account (discussed above) upon the sale, disposition, or write-off of a specific investment within the portfolio.

a) Control Investments - As mentioned earlier, there were two investments regarded as control investments as of 3/31/2013. This was Coll Materials Group and Traffic Solutions Holdings, Inc. I'm estimating no realized activity within this classification for the third fiscal quarter of 2013.

b) Affiliate Investments - As mentioned earlier, there was only one investment regarded as an affiliate investment as of 3/31/2013. This was Ambath/Rebath Holdings, Inc. I'm estimating no realized activity within this classification for the third fiscal quarter of 2013.

c) Non-Control / Non-Affiliate Investments - As mentioned earlier, this is the majority of FSC's investment portfolio as of 3/31/2013. I'm estimating a net realized gain of approximately $0.3 million for the third fiscal quarter of 2013. In particular, these gains will be in conjunction with the partial sales of several debt investments in the open market during the current quarter. This would result in various minor gains. In regards to my projected $150 million worth of investment loans that will be exited in the current quarter (discussed in PART 1 of this article), the prepayment of these debt investments will be exited at par with no gain or loss recorded.

After taking FSC's net investment income amount of $31.9 (see red reference "B" in Table 3 above) and subtracting the net unrealized depreciation amount of ($3.0) million (discussed under "1)" above) and adding the realized appreciation amount of $0.3 million (discussed under "2)" above), FSC will have a projected net increase in net assets resulting from operations amount of $29.2 million (see red reference "C" in Table 6 above).

D) Net Increase (Decrease) in Net Assets Resulting From Operations, as Adjusted:

- Net Increase in Net Assets Resulting From Operations, as Adjusted Estimate of $30.8 Million; Range $27.8 - $33.8 Million

- Confidence Within Range = Moderate

- See Red Reference "D" in Table 6 Above Next to the June 30, 2013 Column for Reference

- Earnings of $0.243 Per Common Share - Diluted; Range $0.213 - $0.273 Per Share

- See Red Reference "(D / G)" in Table 6 Above Next to the June 30, 2013 Column for Reference

Having established a total investment income (see red reference "A" in Table 1, PART 1 of article), net investment income (see red reference "B" in Table 3 above), and a net increase in net assets resulting from operations (see red reference "C" in Table 6 above) estimate for the third fiscal quarter of 2013, let us now look at my projection in regards to the "net increase (decrease) in net assets resulting from operations, as adjusted" figure (see red reference "D" in Table 6 above). The net increase in net assets resulting from operations, as adjusted (ACTUAL) figure is derived from FSC's quarterly SEC submissions via its 10-Q or 10-K where applicable.

To obtain FSC's net increase in net assets resulting from operations, as adjusted figure, the following two accounts will need to be determined: 1) adjustments for interest and gain on extinguishment of convertible senior notes and 2) adjustments for dilutive effect of convertible senior notes. This second account needs to be determined because a new weighted average common shares outstanding amount needs to be computed due to the dilutive nature of the convertible senior notes.

1) Adjustments for Interest and Gain on Extinguishment of Convertible Senior Notes:

- Estimate of $1.6 Million; Range $1.3 - $1.9 Million

- Confidence Within Range = High

- See Table 6 Above Next to the June 30, 2013 Column for Reference

Basically, this will be the quarterly interest on the convertible senior notes that has already been calculated within the interest expense analysis earlier in this article (see Table 5 above). Also (as discussed earlier), there will be no gain on extinguishment of convertible senior notes for the current quarter. Therefore, the projection for this account is $1.6 million. There are a few other minor adjustments within this account that are immaterial for projection purposes.

2) Adjustments for Dilutive Effect of Convertible Senior Notes:

- Estimate of 7.8 Million Shares; No Range

- Confidence Within Range = High

- See Red Reference "F" in Table 6 Above Next to the June 30, 2013 Column for Reference

This figure is the computation needed for a new weighted average common shares outstanding figure for the current quarter due to the dilutive nature of the convertible senior notes. The convertible senior notes have a callable feature that states preceding 1/1/2016, holders may convert the convertible senior notes for shares of common stock. Holders may convert these convertible senior notes at any time. Upon conversion, FSC will deliver shares of its common stock at a conversion rate of 67.7415 shares of common stock per $1,000 principal amount of senior convertible notes. This computes to a conversion price of approximately $14.76 per share of common stock. Since FSC's stock price was well below this conversion price throughout the quarter, no senior convertible notes will be converted for the fiscal third quarter of 2013. However, under GAAP, this conversion must be shown as having been exercised:

67.7415 shares x ($115,000,000 / $1,000) = 7,790,500 shares

Since there will not be any changes in the amount of senior convertible notes outstanding in third fiscal quarter of 2013 (discussed earlier in this article under the gain on extinguishment of convertible senior notes account), this adjustment to the number of outstanding common shares should remain the same. Therefore, I am projecting the "weighted average common shares outstanding - diluted" figure will be approximately 126.6 million shares for the fiscal third quarter of 2013 (see red reference "(E + F = G)" in Table 6 above).

Conclusions Drawn:

To sum up all the projections above (including PART 1 of this article), I am estimating FSC will report the following figures for the third fiscal quarter of 2013:

A) Quarterly Total Investment Income of $59.2 million

B) Quarterly Net Investment Income of $31.9 million

- $0.269 Per Common Share - Basic

- $0.264 Per Common Share - Diluted

C) Quarterly Net Increase in Net Assets Resulting From Operations of $29.2 million

- $0.246 per common share - basic

D) Quarterly Net Increase in Net Assets Resulting From Operations, as Adjusted of $30.8 million

- $0.243 per common share - diluted

Therefore, it looks like FSC will be slightly under to "in-line" with most analysts' estimates. Total investment income in third fiscal quarter of 2013 is projected to be $59.2 million. This is a modest increase of $4.5 million when compared to the second fiscal quarter of 2013. The total investment income per common share - basic of $0.269 per share is a $0.01 per share decrease when compared to the previous quarter. Total investment income per common share - diluted of $0.264 is basically the same as last quarter's $0.269 per common share amount.

All in all, it looks to be a good quarter for FSC. The recent net investment income increase in FSC's portfolio has increased its investment income, along with a modest increase in its expenses. This can be mainly attributed to FSC's additional net increase in portfolio size of approximately $125 for the current quarter. In my opinion, I do not see any reason why FSC will not continue to expand its market capitalization within the BDC sector. FSC continues to ramp up activities in its Midwestern (Chicago) and Western (Los Angeles) base of operations. FSC's April 2013 equity offering of 14.4 million shares and completion of $86.3 million worth of senior unsecured notes should help fuel its continued market expansion.

As mentioned in PART 1 of this article, Fifth Street created a second separate BDC called "Fifth Street Senior Floating Rate Corporation" (NASDAQ:FSFR). Fifth Street seems to be expanding its entire base of operations by creation of FSFR. Investors with an eye on FSC should definitely be on the lookout for this newly-created BDC in the coming quarters.

In my next article, I will predict FSC's third fiscal quarter of 2013 net asset value ('NAV') as of 6/30/2013. FSC's NAV article should be out sometime in the near future (prior to FSC's press release in early August).

Author's Side Note: As mentioned earlier in this article, FSC recently completed its acquisition of Healthcare Finance Group, LLC ('HFG') in June 2013. Fifth Street invested $114 million to complete this transaction thus adding HFG to its list or portfolio investments. HFG is a specialty lender providing lending and term loan products to the healthcare industry. HFG's total outstanding loan portfolio consisted of 57 loans with an approximate value of $270 million as of 5/6/2013.

For FSC's current quarter projections, I placed all projections regarding HFG within "non-control / non-affiliate investments." However, HFG will most likely go under FSC's "control" or "affiliates" sub-classification. This would affect the following accounts on FSC's income statement: 1) interest income; 2) PIK interest income (see PART 1 of this article); and 3) net unrealized appreciation (depreciation) on investments (see above). I am uncertain which specific sub-classification FHG will be placed into without additional information/disclosures from FSC. For overall projection purposes, it is not essential to know what sub-classification a specific portfolio investment is grouped into because all three sub-classifications "roll-up" into the same numerical figure/account on the income statement. With that being said, I still think readers should be aware as such.

Full Disclosure of "No Position" in Regards to FSC: Even though I do not currently have any positions within FSC, I have previously owned this stock at varying times since early 2010. I typically purchased shares of FSC when I felt the stock was underpriced (discount to NAV). I usually sold a partial or an entire position when I felt the stock was highly overpriced (high premium to NAV). I have taken both cash and reinvested stock dividends depending on the stock price of FSC when the monthly (or quarterly prior to fiscal 2011) dividends were distributed.

Source: Fifth Street Finance Corp.'s Upcoming Fiscal Q3 2013 Income Statement Projection (Part 2)