Fifth Street Finance Corp.'s Upcoming Q2 2013 Income Statement Estimation

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Fifth Street Finance Corp. (FSC) is a business development company which lends to and invests in small and mid-sized companies whose annual revenues are $25-$250 million. Their investment objective is to maximize their portfolio's total return by generating income through their debt investments and also through capital appreciation from equity investments. FSC's fiscal year end is September 30th of a given year. Therefore, FSC's Q1 2013 quarter ended 12/31/2012.

Historically, FSC has had an attractive dividend yield of 10% -13%. FSC distributes between 90% - 100% of its taxable income each year to stockholders in order to satisfy the requirements of a regulated investment company under the internal revenue code.

The focus of this article is to estimate FSC's Q2 2013 entire income statement. FSC's second fiscal quarter (Q2 2013) has recently come to an end (3/31/2013). Before results are provided to the public in early May, via their quarterly press release, I would like to project/analyze FSC's Q2 2013 Income Statement; broken down by the following accounts:

A) Total Investment Income

B) Net Investment Income (Loss)

C1) Net Increase (Decrease) in Net Assets Resulting From Operations

C2) Net Increase (Decrease) in Net Assets Resulting From Operations, as adjusted

In a future article, I will project FSC's net asset value for Q2 2013 (NAV at 3/31/2013).

Note: Predicting FSC's income statement can be difficult in regards to a few specific accounts. Some examples of difficult accounts to estimate are: 1) fee income; 2) unrealized appreciation (depreciation) on investments; and 3) realized gain (loss) on investments. There are several assumptions + estimates that are used when performing such an analysis. Actual values may differ significantly from the following estimated values and all readers should be aware as such. These projections are my personal estimates and all figures detailed below should not solely be used for an investor's buying or selling decisions. Unless otherwise noted, all figures are for the "3-months ended" (quarterly) time frame.

FSC's income statement is represented by the three tables below. FSC's past quarterly income statements (ACTUAL) are for the trailing 12-month time period. My projections (ESTIMATE) are for the Q2 2013 quarter ending 3/31/2013. The income statement (ACTUAL) quarterly figures are derived from FSC's quarterly submissions (via their 10-Q's / 10-K) for the trailing 12-month time period. The income statement (ESTIMATE) quarterly figures are derived from my own personal research and tables created. Some tables I have created will be shown in this article as support while others will not.

Table 1

Table 2

Table 3

A) Total Investment Income: [Estimate of $58.3 Million; Range $56.3 - $60.3 Million] [Confidence Within Range = High] [See Table 1 at Top of Article; Red Reference "A" Next to the March 31, 2013 Column]

FSC's total investment income figure consists of the following four revenue accounts: 1) interest income; 2) payment-in-kind (PIK) interest income; 3) fee income; and 4) dividend and other income.

The first two revenue accounts, interest income and PIK interest income, will be discussed together below.

1) Interest Income: [Estimate of $40.7 Million; Range $38.7 - $40.7 Million] [Confidence Within Range = High]

2) Payment-In-Kind (PIK) Income: [Estimate of $4.2 Million; Range $3.7 - $4.7 Million] [Confidence Within Range = High]

FSC's interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. FSC stops accruing interest on investments when it is determined that interest is no longer collectible. It then is classified as on "non-accrual" status. FSC's interest income account is broken down into four subcategories: a) control investments; b) affiliate investments; c) non-control / non-affiliate investments; and d) interest on cash and cash equivalents. The fourth account, d) interest on cash and cash equivalents, is immaterial and won't be mentioned again.

FSC also has some investments that contain a "payment-in-kind" (PIK) interest provision. PIK interest income is computed at the contractual rate specified in certain investment agreements and is added to the principal balance of these specific investments each quarter. The other side of the entry is recorded into income. FSC's PIK interest income figure is broken down into three subcategories: a) control investments; b) affiliate investments; and c) non-control / non-affiliate investments.

I based my estimation of FSC's Q2 2013 interest + PIK interest income on the summarized table I have created below. In order to show all subcategories within one table, I had to hide all the investments classified as "non-control / non-affiliate investments" for this quarterly interest calculation. Otherwise, the table would be far too large for this article. However, I do show the total within of this subcategory. FSC does not provide any detailed quarterly interest calculations/breakouts for their investment portfolio. I base my estimates for all quarterly interest calculations from FSC's table labeled "consolidated schedule of investments" via their quarterly 10-Q + 10-K submissions. For precise accuracy, this includes the footnotes to this table to see all amendments to their existing investments that may have happened in a current quarter. Therefore, there will not be an identical sheet FSC provides that matches the data I have prepared below.

From the table directly above, in my first column, I estimate the total combined quarterly income (interest + PIK interest) that FSC should receive. In the second column, I break out this income between interest income (1a, 2a, 3a) and payment-in-kind (PIK) interest income (1b, 2b, 3b). These amounts labeled in the second column directly tie back to table 1 at the top of the article under their representative 1) interest income and 2) payment-in-kind (PIK) income accounts.

a) Control Investments - At 12/31/2012, there were two investments regarded as control investments. This was Coll Materials Group and Traffic Solutions Holdings, Inc. Coll Materials Group's entire investment is currently amended to be all PIK interest income. However, this investment is also currently on PIK "non-accrual" status. Therefore, Coll Materials Group has no interest or PIK interest income for the quarter. The second control investment is Traffic Solutions Holdings, Inc. This investment's interest income should be approximately 1a) $743 thousand and PIK interest income should be 1b) $131 thousand for the quarter.

b) Affiliate Investments - At 12/31/2012, there was only one investment regarded as an affiliate investment. This was Ambath/Rebath Holdings, Inc. This investment's interest income should approximately be 2a) $539 thousand and PIK interest income should be 1b) $476 thousand for the quarter.

c) Non-Control / Non-Affiliate Investments - This is the majority of FSC's investment portfolio. Again, as noted earlier, if I were to show all of the investments within this subcategory, the table would be far too large for this article. My estimated quarterly interest + PIK interest income includes two additional figures added to this subcategory's balance. These two figures are "estimated interest income from new investments, net (Q2 2013)" (reference "D" in table above) and "revolver interest income (Q2 2013)" (reference "E" in table above).

This first figure, "estimated interest income from new investments, net (Q2 2013)" is needed for this subcategory because I am estimating approximately $300 million of new loan originations for Q2 2013. This includes the recent FSC announcement that they have closed two separate financing facilities during Q2 2013 valued at over $100 million each. The remaining $100 million is from various other new loan originations for the quarter. In FSC's recent monthly newsletter for March 2013, they raised their "exit portfolio" range from $50-100 million to $50-150 million. I am cautiously estimating that there will be $150 million worth of investments exited during Q2 2013. For a proper quarterly estimation, one needs to consider the new loan originations and loan exits in a given quarter. Therefore, there will be approximately $150 million in new loan originations, net. I am using an annual weighted average interest rate of 9.81% and using 45 days (half of a quarter) for a precise quarterly interest estimation. From this calculation, the interest and PIK interest income associated with new loan originations, net for Q2 2013 will approximately be $1.8 million (Reference "D" in table above).

I'm also adding a quarterly revolver interest income figure of $1.5 million (Reference "E" in table above). Many investments in this subcategory use revolver loans throughout the quarter and FSC receives interest income on use of these revolvers. When adding all these figures up within this subcategory, I am usually pretty close to what FSC reports each quarter. When adding up all these figures for non-control / non-affiliate subcategory (Reference "C + D + E" in table above), the interest income amount should be approximately 3a) $39.4 million and PIK income should be 3b) $3.6 million for the quarter.

3) Fee Income: [Estimate of $13.2 Million; Range $11.2 - $15.2 Million] [Confidence Within Range = Moderate to High]

FSC's fee income consists of monthly servicing fees, advisory fees, structuring fees, and prepayment fees. It also includes structured exit fees within some of their portfolio investments. Exit fees are fees which are payable upon the exit of a debt investment. These fees are paid to FSC when there's a sale of the borrower, when the loan's maturity date is reached, or when the loan is prepaid in full. These exit fees are included in fee income and accrued over the life of the loan.

a) Control Investments - As mentioned earlier, as of 12/31/2012, there were two investments regarded as control investments. This was Coll Materials Group and Traffic Solutions Holdings, Inc. I'm estimating a fee income of approximately $150 thousand for the quarter for this category.

b) Affiliate Investments - As mentioned earlier, as of 12/31/2012, there was only one investment regarded as an affiliate investment. Ambath/Rebath Holdings, Inc.'s fee income should be approximately $30 thousand for the quarter.

c) Non-Control / Non-Affiliate Investments - As mentioned earlier, this is the majority of FSC's investment portfolio. FSC's investment portfolio balance increased $293 million during fiscal Q1 2013 (12/31/2012). This was an approximate 24% increase in their portfolio investment balance. This was a very large increase for one quarter. Therefore, monthly servicing and advisory fees should increase due to the portfolio's large increase from last quarter. Furthermore, as stated earlier in the interest income and PIK interest income discussion, I am estimating an approximate $300 million in new quarterly loan originations and $150 million of loan investment exits for the quarter. Compared to past quarters, these figures are very large as well. Therefore, FSC should receive rather large structuring fees in regards to the $300 million in new loan origination fees and some exit fees in conjunction with the $150 million in loan exits. When adding up all the figures for this account, the non-control / non-affiliate investments fee income should be approximately $13 million for the quarter. This $13 million could in fact be a rather cautious or rather aggressive figure, depending on the actual quarterly loan originations and exits. Therefore, this account is one of the accounts that have to have a larger range.

4) Dividend Income: [Estimate of $250 Thousand; Range $100 - $400 Thousand] [Confidence Within Range = High]

FSC's dividend income consists of dividends received through equity investments in certain current and prior investments. I don't believe there will be a dividend for any a) control investments or b) affiliate investments. I am estimating a cautious $250 thousand for c) non-control / non-affiliate investments for the quarter. Further discussion of this account is immaterial for purposes of this article.

B) Net Investment Income (Loss): [Estimate of $30.6 Million; Range $28.6 - $32.6 Million] [See Table 2 at Top of Article; Red Reference "B" Next to the March 31, 2013 Column] [Earnings Per Common Share - Basic of $0.288 per share; range $0.268-$0.308 per share] [See Table 3 at Top of Article; Red + Blue Reference (B / D) Next to the March 31, 2013 Column] [Earnings Per Common Share - Diluted of $0.269 per share; range $0.249-$0.289 per share] [See Table 3 at Top of Article; Red + Blue Reference (B / E) Next to the March 31, 2013 Column] [Confidence Within Ranges = High]

FSC's net investment income (loss) figure is FSC's "A) total investment income" amount (calculated above) less their net expense amount (to be discussed below). FSC's net expense figure consists of the following seven expense accounts: 1) base management fee; 2) incentive fee; 3) professional fees; 4) board of director fees; 5) interest expense; 6) administrator expense; and 7) g&a expenses.

1) Base Management Fee: [Estimate of $8.96 Million; Range $8.95 - $9.0 Million] [Confidence Within Range = High] [See Table 2 at Top of Article; Blue Reference"4" Next to the March 31, 2013 Column]

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

I base my estimation of this figure on the table I have created below. FSC does not provide a specific table/calculation in regards to this figure. Therefore, there will not be an identical sheet FSC provides that matches the data I have prepared below. My projection for Q2 2013 (ESTIMATE) is based on the recalculation of the management fee expense.

2) Incentive Fee: [Estimate of $7.7 Million; Range $7.2 - $8.2 Million] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

The incentive fee calculation 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 preceding fiscal quarter. This calculation is rather complicated and entails several "hurdle-rate" calculations. 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, less the aggregate amount of any previously paid capital gain incentive fees. The detail of this fee calculation is extremely detailed. The table I have which calculates this expense is too large for this article. Therefore, I have to omit this table from this article.

I am estimating an increase in incentive fee expense of approximately $1.1 million from last quarter. This comes out to be about a 14% increase in this expense quarter over quarter. This percentage seems to be in line with the increase in investment portfolio holdings I am predicting in Q2 2013.

3) Professional Fees: [Estimate of $800 Thousand; Range $0.6 - $1.0 Million] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

FSC's professional fees mainly consist of all accounting, audit, and legal services rendered. Due to the immateriality of this account, I am simply estimating a professional fees expense of $800 thousand. This is a $300 thousand decrease from last quarter's amount due to the fact this expense account usually sees a spike in fiscal Q4 (quarter ending 9/30/xx) from higher quarterly audit fees associated with issuance of the annual 10-K.

4) Board of Director Fees: [Estimate of $125 Thousand; Range $75 - $175 Thousand] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

FSC's board of director fees mainly consists of expenses in relation to all duties + services rendered that must be performed by each board of director member (compensation fees). This is a 588k decrease from last quarter's amount due to the fact this expense account usually sees a spike in fiscal Q4 (quarter ending 9/30/xx) from stock options granted within this quarter. However, this amount is higher than most quarters in fiscal 2012 because in January 2013, FSC's board of directors increased from six members to eight.

5) Interest Expense: [Estimate of $8.3 Million; Range $7.8 - $8.8 Million] [Confidence Within Range = High] [See Table 2 at Top of Article; Blue Reference"5" Next to the March 31, 2013 Column]

FSC's interest expense consists of the quarterly accrued interest on the following debt liabilities: a) 4 separate Small Business Administration (SBA) debentures; b) Wells Fargo, ING, and Sumitomo Mitsui Banking Corp.'s credit facilities; c) convertible senior notes; and d) 2 separate unsecured notes payable.

In the table below, I estimate FSC's quarterly accrued interest expense. The SBA debentures, convertible senior notes, and unsecured notes payable all are a fixed amount at a set date. The 3 credit facilities are basically a revolver. Therefore, a level of estimation is needed on the weighted average balances within these three credit facilities for a given quarter. Due to the rather large Q1 2013 net loan originations, along with a rather sizable projected Q2 2013 net loan origination figure, I have increased the weighted average amount of debt outstanding in these 3 credit facilities when compared to last quarter. Therefore, a larger interest expense has been estimated.

I have estimated an interest expense of $8.3 million for the quarter. This is an increase of $1.1 million over last quarter. This comes out to be about a 14% increase in this expense. This percentage seems to be in line with the percentage increase in portfolio holdings I am predicting in Q2 2013 (hence larger debt balances due to the fact there were no Q2 2013 equity raises).

6) Administrator Expense: [Estimate of $900 Thousand; Range $0.8 - $1.0 Million] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

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 $900 thousand. This is a $30 thousand increase from last quarter's amount due to the fact FSC has continued to expand their operations with a slow, gradual increase in the number of employees they have working for them.

7) G&A Expenses: [Estimate of $1 Million; Range $0.8 - $1.2 Million] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

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. Due to the immateriality of this account, I am estimating a professional fees expense of $1 million for the quarter. This is a 139 thousand decrease from last quarter's amount due to the fact this expense account usually sees a spike in fiscal Q4 (quarter ending 9/30/xx) from the extra hours put in from FSC's staff due to the issuance of the 10-K and various year-end agendas. This amount is a overall increase when compared to the average expense in fiscal year 2012 because FSC has continued to expand their operations with a slow, gradual increase in the number of employees they have working for them.

After adding up all these seven expense accounts [1) base management fee; 2) incentive fee; 3) professional fees; 4) board of director fees; 5) interest expense; 6) administrator expense; and 7) g&a expenses], FSC's total/net expense figure is estimated at $27.8 million (See Table 2 at top of article). One other account needs to be briefly discussed before FSC's Net Investment Income (Loss) can be obtained.

Gain on extinguishment of convertible senior notes: [Estimate of $0] [Confidence Within Range = High] [See Table 2 at Top of Article Next to the March 31, 2013 Column]

This account is in regards to FSC's convertible senior notes. FSC may repurchase its convertible senior notes at anytime prior to maturity in 2016. If the 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, net the proportionate amount of unamortized debt issuance costs.

Since FSC's stock market price stayed above their net asset value price of $9.88 per share throughout Q2 2013, they will not repurchase any of their convertible senior notes during Q2 2013 hence this balance should be $0.

C1) Net Increase (Decrease) in Net Assets Resulting From Operations: [Estimate of $28.7 million; range $25.7 - $31.7 million] [See Table 3 at Top of Article; Red Reference"C1" Next to the March 31, 2013 Column] [Earnings Per Common Share - Basic of $0.27 per share; range $0.24-$0.30 per share] [See Table 3 at Top of Article; Red + Blue Reference (C1 / D) Next to the March 31, 2013 Column] [Confidence Within Ranges = Moderate]

Having established a A) total investment income and B) net investment income estimate for Q2 2013, let's look at my projection in regards to C1) net increase (decrease) in net assets resulting from operations. 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 estimate a figure due to the overall nature of the accounts.

1) Net Unrealized Appreciation (Depreciation) on Investments: [Estimate of ($2.4) Million; Range ($0.4 - $4.4) Million] [Confidence Within Range = Moderate] [See Table 3 at Top of Article Next to the March 31, 2013 Column]

On each investments within the portfolio, FSC's board of directors meets quarterly to value each investment (pursuant to FSC guidelines). The board of directors meets after internal management and an independent, external assessment has been performed on the portfolio. After these assessments have been reviewed, the board of directors deem an appropriate fair market value "write-down" (unrealized depreciation) or FMV "write-up" (unrealized appreciation) on each specific investment. The Board of Directors determines the fair value of each investment in the FSC's portfolio in good faith.

a) Control Investments - As mentioned earlier, as of 12/31/2012, there were two investments regarded as control investments. This was Coll Materials Group and Traffic Solutions Holdings, Inc. I'm estimating an unrealized depreciation of approximately ($0.4) million for the quarter. This is a continued FMV write-down on the balance of Coll Materials Group. As of 12/31/2012, this investment had a principal balance of $9.8 million, a total cost (debt + equity) balance of $12.2 million, and a FMV estimate of only $1.1 million. Basically, 90% of this investment has been written-off and deemed worthless. I see no conditions that would offset this trend. FSC usually gradually writes-off these loans, therefore, I am not estimating the entire 1.1 million be written-off this quarter, but eventually will be.

In regards to Traffic Solutions Holdings, Inc., this company recently declared bankruptcy and is in the process of reorganization. As recently as FSC's fiscal Q4 2012 (9/30/2012), this investment's remaining fair market value of $10.9 million was written-off before this restructuring occurred. After the restructuring, the current principal outstanding balance at 12/31/2012 is $27.2 million (debt only) with a total cost (which includes equity holdings) of $46 million. In most of FSC's previous restructurings, FSC slowly writes down the fair market value of both its debt + equity investments after the loan goes through a couple of quarter's worth of time. This will be a company to watch out for in the next year or so for future FMV write-downs. Restructured/reorganized companies often have trouble stemming the tide and returning to profitability. It does not help that this company is in the construction/engineering business in California. California's state government already has massive debt problems and this company's main business is through the state. However, due to the recent restructuring in Q4 2012, I do not believe a FMV write-down will happen in Q2 2013 because it's still too early in the loan's life-frame.

b) Affiliate Investments - As mentioned earlier, as of 12/31/2012, there was only one investment regarded as an affiliate investment. 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 their principal and cost balance. In Q1 2013, there was a ($240) thousand FMV write-down to this investment. At 12/31/2012, the FMV of both Ambath/Rebath Holdings, Inc's. loans were about 98.5% of their principal balance. A minor hit to FMV this quarter seems to be reasonable due to the past activities within the specific investment.

c) Non-Control / Non-Affiliate Investments - As mentioned earlier, this is the majority of FSC's investment portfolio. I'm estimating an unrealized depreciation of approximately ($1.5) million for the quarter. One good thing FSC has going for them is that in Q4 2012, the remaining holdings within FSC's original portfolio (pre IPO) were either sold off for losses, or completely written-off. After their June 2008 IPO, FSC used their expansion of capital + expertise to structure deals with more caution and wherewithal. As a result, their "first lien" portfolio (lower risk, slightly lower interest rates) has increased (in % of holdings) while their riskier "second lien" portfolio (higher risk, slightly higher interest rates) has lowered (mainly from older, pre IPO investments). Only recently, due to an increased risk appetite, has FSC begun to delve back into the second lien market for a greater weighted average return in this current low-interest rate environment.

I am estimating a FMV write-down of ($1.0) million each for Eagle Hospital Physicians, Inc. and Titan Fitness, LLC. Eagle Hospital Physicians, Inc. had a FMV write-down in Q1 2013 of ($3.2) million. This was a rather large hit to FMV for this investment. Also, this was the first time such a major FMV write-down occurred on this investment. Their first lien loan's FMV decreased ($2.1) million and their first lien revolver's FMV decreased ($1.1) million to a balance of $0 (worthless). This could be somewhat troubling for this investment, as having seen what usually happens to most investments within FSC's portfolio when the revolver is deemed worthless and unrecoverable. Titan Fitness, LLC. had a FMV write-down in Q1 2013 of ($0.7) million. This was the first time such a FMV write-down occurred on this investment as well. Even though it was minor, this could be the start in a trend for this particular investment.

For the remainder of the portfolio, I'm estimating a FMV appreciation of $0.5 million. This will be net of numerous minor FMV mark-ups and write-downs throughout the portfolio. This includes all equity gains or losses attained through the quarter. Again, this estimate is fairly cautious and listing all these changes would be too tedious for this particular article. Usually, most major write-downs or write-offs occur in FSC's fiscal Q4 prior to issuance of their annual 10-K report (audited).

2) Net Realized Gain (Loss) on Investments: [Estimate of $500 Thousand; Range ($1.5) - $2.5 Million] [Confidence Within Range = Moderate] [See Table 3 at Top of Article Next to the March 31, 2013 Column]

Net realized gain (loss) is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with FSC's determination that certain investments are considered worthless and meet the conditions for loss recognition. This account also includes any amounts reclassified out of the net unrealized appreciation (depreciation) on investments account upon sale/disposition/write-off.

a) Control Investments - As mentioned earlier, as of 12/31/2012, there were two investments regarded as control investments. This was Coll Materials Group and Traffic Solutions Holdings, Inc. I'm estimating no realized activity in this category for the quarter.

b) Affiliate Investments - As mentioned earlier, as of FSC's Q1 2013 fiscal quarter ended (12/31/2012), there was only one investment regarded as b) affiliate investments. This was Ambath/Rebath Holdings, Inc. I'm estimating no realized activity in this category for the quarter.

c) Non-Control / Non-Affiliate Investments - As mentioned earlier, this is the majority of FSC's investment portfolio. I'm estimating a realized gain of approximately $0.5 million for the quarter. In particular, these gains will arise from the various debt instruments sold to 3rd parties throughout Q2 2013 for slight gains. In regards to the $150 million worth of loans I'm estimating that will be exited in the current quarter, these prepaid loans/investments will be exited at par with no gain or (loss) recorded.

C2) Net Increase (Decrease) in Net Assets Resulting From Operations, as adjusted [Estimate of $30.2 million; range $27.2 - $33.2 million] [See Table 3 at Top of Article; Red Reference"C2" Next to the March 31, 2013 Column] [Earnings Per Common Share - Diluted of $0.265 per share; range $0.235-$0.295 per share] [See Table 3 at Top of Article; Red + Blue Reference (C2 / E) Next to the March 31, 2013 Column] [Confidence Within Ranges = Moderate]

Having established a A) total investment income, B) net investment income, and C1) net increase (decrease) in net assets resulting from operations estimate for Q2 2013, let's look at my projection for C2) net increase (decrease) in net assets resulting from operations - as adjusted. In order to estimate an amount for this figure, one needs to establish FSC's 1) adjustments for interest on convertible senior notes. Furthermore, one must compute a new weighted average common shares outstanding for the quarter due to the dilutive nature of the convertible senior notes via the 2) net adjustments for dilutive effect of convertible notes figure.

1) Adjustments for Interest on Convertible Senior Notes: [Estimate of $1.5 Million; Range $1.3 - $1.7 Million] [Confidence Within Range = High] [See Table 3 at Top of Article Next to the March 31, 2013 Column]

Simply put, this will mainly be the quarterly interest on the convertible senior notes that was already calculated within the interest expense account earlier in this article. Therefore, we already know this projection will be $1.5 million. There are other minor adjustments that are immaterial for purposes of an income statement estimation figure.

2) Net adjustments for dilutive effect of convertible notes: [Estimate of 7.8 Million Shares; Range 7.6 - 8.0 Million Shares] [Confidence Within Range = High] [See Table 3 at Top of Article; Blue Reference "D1" Next to the March 31, 2013 Column]

This figure is the computation needed for a new weighted average common shares outstanding figure for the 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 their convertible senior notes for shares of common stock. These holders may convert their senior convertible 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 (equivalent to a conversion price of approximately $14.76 per share of common stock). Since the current market value of the stock is nowhere near this conversion price, these senior convertible notes won't be converted any time soon. However, under GAAP, this conversion must be shown as having being exercised:

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

Since there will not be any changes in the amount of senior convertible notes outstanding in Q2 2013 (discussed earlier in this article under "gain on extinguishment of convertible senior notes"), the adjustment figure should remain roughly the same at 7.8 million additional shares. Therefore, the "weighted average common shares outstanding - diluted" will approximately be 113,801,574 shares. I project an issuance of 65,000 additional shares issued each month due to the dividend reinvestment program.

Conclusion: To sum up all the information above, I am estimating FSC will report the following figures for Q2 2013:

A) Quarterly Total Investment Income of $58.3 million

B) Quarterly Net Investment Income of 30.6 million [$0.288 per common share - basic] [$0.269 per common share - diluted]

C1) Quarterly Net Increase (Decrease) in Net Assets Resulting From Operations of $28.7 million [$0.27 per common share - basic]

C2) Quarterly Net Increase (Decrease) in Net Assets Resulting From Operations, as adjusted [$0.269 per common share - diluted]

Therefore, it looks like FSC will be in line with most analysts' estimates. Total investment income in Q2 2013 will be $58.3 million, thus showing a modest increase of $6.5 million from Q1 2013. The total investment income per common share - basic of $0.288 per share is a $0.01 per share increase from last quarter. Total investment income per common share - diluted of $0.269 is basically the same as last quarter's $0.271 per common share amount.

All in all, it looks to be a good quarter for FSC (not great, not bad). The recent net investment increases in FSC's portfolio has increased their investment income, along with a modest increase in expenses (due to additional increase in portfolio size). In my opinion, I do not see any reason why FSC will not continue to expand their market capitalization within the BDC sector. They are ramping up activities in their Midwestern (Chicago) and Western (Los Angeles) base of operations. Just recently (April 2013), FSC completed an equity offering of 13.5 million shares at a gross price of $10.85 per share. This will be accretive to net asset value in Q3 2013. This capital raise should help fuel their continued market expansion.

In my next article for FSC, I will predict FSC's Q2 2013 net asset value (NAV at 3/31/2013) and summarize points mentioned in both articles. This will include a detailed discussion of FSC's dividend rate, yield, and sustainability.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company, whose stock is mentioned in this article.