FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008. The registrant, FS Investment Corporation (formerly Franklin Square Investment Corporation), is a newly organized, non-diversified, closed-end investment company incorporated in Maryland on December 21, 2007. The company has elected to be regulated as a Business Development Company (BDC) under the Investment Company Act of 1940 and intends to qualify as a Regulated Investment Company (RIC) for tax purposes. As of the reporting date, the company has not commenced primary investment operations and is in the pre-offering phase, having raised initial seed capital but not yet meeting the minimum offering requirement to activate its investment advisory agreement.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Balance Sheet (Sep 30, 2008) |
|---|---|---|---|
| Revenue (Interest Income) | $8,000 | $19,000 | N/A |
| Operating Expenses (Organization Costs) | $127,000 | $477,000 | N/A |
| Net Loss | $(119,000) | $(458,000) | N/A |
| Loss Per Share (Basic & Diluted) | $(1.07) | $(4.75) | N/A |
| Cash and Cash Equivalents | N/A | N/A | $1,019,000 |
| Total Assets | N/A | N/A | $1,019,000 |
| Total Stockholders' Equity | N/A | N/A | $1,019,000 |
| Net Asset Value (NAV) per Share | N/A | N/A | $9.17 |
| Shares Outstanding | 111,112 | 111,112 | 111,112 |
Note: All financial figures are in thousands, except per share data. The company reported no debt or long-term liabilities as of September 30, 2008.
Material Changes vs. Prior Period
The company was inactive prior to its incorporation in late 2007. Consequently, the balance sheet as of December 31, 2007, showed zero assets and zero equity. The material changes in the nine months ended September 30, 2008, include:
- Capital Formation: The company raised $1,000,000 through the issuance of common stock and received $1,633,000 in capital contributions from its investment advisor (FB Income Advisor, LLC).
- Organization Costs: The company incurred $477,000 in organization costs, primarily legal and incorporation fees, which were funded by the investment advisor and recorded as a contribution to capital.
- Offering Costs: $1,156,000 in offering costs were incurred and offset against capital in excess of par value.
- Liquidity: Cash and cash equivalents increased from $0 to $1,019,000, driven entirely by financing activities.
Guidance, Outlook, and Risks
Outlook and Strategy: The company intends to provide debt and equity financing to small and middle-market private U.S. companies. It plans to generate revenue through interest, dividends, and capital gains once investments are made. The company has not yet met the minimum offering requirement of $2.5 million in gross proceeds from unrelated outside investors; therefore, the investment advisory agreement is not yet effective, and no management fees have been paid.
Market Conditions: Management notes that global credit markets have suffered substantial stress and illiquidity since late 2007. While this poses risks to financing, management believes current market dislocations present attractive investment opportunities for new capital.
Risks and Contingencies:
- Operational Status: Primary operating activities have not commenced. The company relies on raising the minimum $2.5 million to activate its investment strategy.
- Related Party Dependence: The investment advisor has funded all organization and offering costs to date. Reimbursement to the advisor is contingent on meeting the minimum offering requirement.
- Valuation Uncertainty: The company has adopted SFAS 157 (Fair Value Measurement). Valuation of non-publicly traded securities will require significant judgment by the board of directors, particularly in dislocated markets.
- Legal Proceedings: No material legal proceedings are currently pending.
Investor Verification Checklist
- Verify the status of the public offering and whether the $2.5 million minimum offering requirement has been met subsequent to September 30, 2008.
- Confirm the effectiveness of the Investment Advisory and Administrative Services Agreement with FB Income Advisor, LLC.
- Review the allocation of the $1,019,000 cash balance to ensure it is held in a secure, short-term instrument as disclosed.
- Monitor the company's ability to qualify as a Regulated Investment Company (RIC) to maintain tax-exempt status.
- Assess the impact of the 2008 financial crisis on the company's ability to deploy capital into the target small and middle-market sectors.