FS KKR Capital Corp. II - FORM 10-Q

Attached files

file	filename
EX-32.1 - EX-32.1 - FS KKR Capital Corp. II	d819560dex321.htm
EX-31.1 - EX-31.1 - FS KKR Capital Corp. II	d819560dex311.htm
EX-31.2 - EX-31.2 - FS KKR Capital Corp. II	d819560dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-00926

FS Investment Corporation II

(Exact name of registrant as specified in its charter)

Maryland

80-0741103

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


Cira Centre
2929 Arch Street, Suite 675
Philadelphia, Pennsylvania		19104
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (215) 495-1150

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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 ¨ No ¨

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.


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The issuer had 310,840,986 shares of common stock outstanding as of November 7, 2014.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013		1
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013		2
	Unaudited Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2014 and 2013		3
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013		4
	Consolidated Schedules of Investments as of September 30, 2014 (Unaudited) and December 31, 2013		5
	Notes to Unaudited Consolidated Financial Statements		25
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		58
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		85
ITEM 4.	CONTROLS AND PROCEDURES		86

PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		87
ITEM 1A.	RISK FACTORS		87
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		87
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		87
ITEM 4.	MINE SAFETY DISCLOSURES		87
ITEM 5.	OTHER INFORMATION		87
ITEM 6.	EXHIBITS		88
	SIGNATURES		93

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FS Investment Corporation II

Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	September 30, 2014 (Unaudited)			December 31, 2013
Assets
Investments, at fair value (amortized cost—$4,028,635 and $2,626,969, respectively)	$	4,112,314		$	2,655,828
Cash		309,814			581,632
Collateral held at broker for open credit default swap contracts		27,660			—
Receivable for investments sold and repaid		3,613			52,817
Interest receivable		41,864			29,855
Receivable for common stock purchased		—			532
Deferred financing costs		6,037			1,273
Receivable on credit default swaps		60			—
Prepaid expenses and other assets		61			30

Total assets	$	4,501,423		$	3,321,967

Liabilities
Payable for investments purchased	$	188,760		$	163,785
Repurchase agreement payable⁽¹⁾		550,000			550,000
Credit facilities payable		707,494			170,494
Stockholder distributions payable		19,432			17,826
Management fees payable		21,780			15,013
Accrued capital gains incentive fees⁽²⁾		19,694			9,234
Subordinated income incentive fees payable⁽²⁾		8,419			—
Administrative services expense payable		1,614			571
Interest payable		7,212			2,858
Directors’ fees payable		185			183
Unamortized credit default swap premiums received		15,262			—
Unrealized depreciation on credit default swaps		2,652			—
Other accrued expenses and liabilities		1,951			1,018

Total liabilities		1,544,455			930,982

Commitments and contingencies⁽³⁾

Stockholders’ equity
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value, 450,000,000 shares authorized, 309,258,060 and 254,572,096 shares issued and outstanding, respectively		309			255
Capital in excess of par value		2,881,006			2,363,943
Accumulated undistributed (distributions in excess of) net realized gains on investments and credit default swaps and gain/loss on foreign currency⁽⁴⁾		(7,435	)		7,911
Accumulated undistributed (distributions in excess of) net investment income⁽⁴⁾		2,066			(9,983	)
Net unrealized appreciation (depreciation) on investments and credit default swaps and unrealized gain/loss on foreign currency		81,022			28,859

Total stockholders’ equity		2,956,968			2,390,985

Total liabilities and stockholders’ equity	$	4,501,423		$	3,321,967

Net asset value per share of common stock at period end	$	9.56		$	9.39

(1)	See Note 8 for a discussion of the Company’s repurchase transaction.

(2)	See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

(3)	See Note 10 for a discussion of the Company’s commitments and contingencies.

(4)	See Note 5 for a discussion of the sources of distributions paid by the Company.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Investment income
Interest income	$	89,295		$	47,105		$	237,945		$	89,381
Fee income		12,924			14,167			44,329			17,090
Dividend income		—			—			526			—

Total investment income		102,219			61,272			282,800			106,471

Operating expenses
Management fees		21,780			11,067			59,270			23,647
Capital gains incentive fees⁽¹⁾		(1,861	)		1,042			10,460			2,062
Subordinated income incentive fees⁽¹⁾		8,419			8,871			18,098			8,871
Administrative services expenses		1,092			777			3,682			1,882
Stock transfer agent fees		729			561			2,429			1,608
Accounting and administrative fees		187			175			854			395
Interest expense		9,187			3,563			22,340			6,674
Directors’ fees		180			177			638			480
Other general and administrative expenses		1,241			594			3,511			1,748

Operating expenses		40,954			26,827			121,282			47,367
Add: Expense recoupment to sponsor⁽²⁾		—			—			—			2,041

Total operating expenses		40,954			26,827			121,282			49,408

Net investment income (loss)		61,265			34,445			161,518			57,063

Realized and unrealized gain/loss
Net realized gain (loss) on investments		(2,005	)		1,114			(2,215	)		2,773
Net realized gain (loss) on total return swap⁽³⁾		—			—			—			19,689
Net realized gain (loss) on credit default swaps		2,401			—			2,401			—
Net realized gain (loss) on foreign currency		(43	)		(44	)		(37	)		(144	)
Net change in unrealized appreciation (depreciation) on investments		(6,987	)		4,090			54,820			2,832
Net change in unrealized appreciation (depreciation) on total return swap⁽³⁾		—			—			—			(5,641	)
Net change in unrealized appreciation (depreciation) on credit default swaps		(2,652	)		—			(2,652	)		—
Net change in unrealized gain (loss) on foreign currency		5			(20	)		(5	)		130

Total net realized and unrealized gain (loss) on investments		(9,281	)		5,140			52,312			19,639

Net increase (decrease) in net assets resulting from operations	$	51,984		$	39,585		$	213,830		$	76,702

Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share)	$	0.17		$	0.24		$	0.72		$	0.64

Weighted average shares outstanding		307,734,691			165,565,150			298,451,718			119,689,382

(1)	See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.

(2)	See Note 4 for a discussion of expense reimbursements payable to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates.

(3)	On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)


	Nine Months Ended September 30,
	2014			2013
Operations
Net investment income (loss)	$	161,518		$	57,063
Net realized gain (loss) on investments, total return swap, credit default swaps and foreign currency⁽¹⁾		149			22,318
Net change in unrealized appreciation (depreciation) on investments		54,820			2,832
Net change in unrealized appreciation (depreciation) on total return swap⁽¹⁾		—			(5,641	)
Net change in unrealized appreciation (depreciation) on credit default swaps		(2,652	)		—
Net change in unrealized gain (loss) on foreign currency		(5	)		130

Net increase (decrease) in net assets resulting from operations		213,830			76,702

Stockholder distributions⁽²⁾
Distributions from net investment income		(149,469	)		(56,457	)
Distributions from net realized gain on investments		(15,495	)		(11,854	)

Net decrease in net assets resulting from stockholder distributions		(164,964	)		(68,311	)

Capital share transactions
Issuance of common stock⁽³⁾		442,395			1,312,484
Reinvestment of stockholder distributions⁽³⁾		87,432			37,108
Repurchases of common stock⁽³⁾		(11,024	)		(1,141	)
Offering costs		(1,686	)		(4,600	)

Net increase in net assets resulting from capital share transactions		517,117			1,343,851

Total increase in net assets		565,983			1,352,242
Net assets at beginning of period		2,390,985			527,727

Net assets at end of period	$	2,956,968		$	1,879,969

Accumulated undistributed (distributions in excess of) net investment income⁽²⁾	$	2,066		$	(2,876	)

(1)	On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A.

(2)	See Note 5 for a discussion of the sources of distributions paid by the Company.

(3)	See Note 3 for a discussion of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2014 and 2013.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations	$	213,830		$	76,702
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
Purchases of investments		(2,373,986	)		(2,051,561	)
Paid-in-kind interest		(7,265	)		(308	)
Proceeds from sales and repayments of investments		987,191			394,681
Net realized (gain) loss on investments		2,215			(2,773	)
Net change in unrealized (appreciation) depreciation on investments		(54,820	)		(2,832	)
Net change in unrealized (appreciation) depreciation on total return swap⁽¹⁾		—			5,641
Net change in unrealized (appreciation) depreciation on credit default swaps		2,652			—
Accretion of discount		(9,821	)		(8,291	)
Amortization of deferred financing costs		1,370			306
(Increase) decrease in due from counterparty		—			97,441
(Increase) decrease in collateral held at broker for open swap contracts		(27,660	)		—
(Increase) decrease in receivable for investments sold and repaid		49,204			(205	)
(Increase) decrease in expense reimbursement due from sponsor⁽²⁾		—			1,635
(Increase) decrease in interest receivable		(12,009	)		(26,633	)
(Increase) decrease in receivable due on total return swap⁽¹⁾		—			396
(Increase) decrease in receivable on credit default swaps		(60	)		—
(Increase) decrease in prepaid expenses and other assets		(31	)		75
Increase (decrease) in payable for investments purchased		24,975			(1,710	)
Increase (decrease) in management fees payable		6,767			8,600
Increase (decrease) in accrued capital gains incentive fees		10,460			1,584
Increase (decrease) in subordinated income incentive fees payable		8,419			8,871
Increase (decrease) in administrative services expense payable		1,043			639
Increase (decrease) in interest payable		4,354			1,799
Increase (decrease) in directors’ fees payable		2			180
Increase (decrease) in unamortized swap premiums received		15,262			—
Increase (decrease) in other accrued expenses and liabilities		933			283

Net cash used in operating activities		(1,156,975	)		(1,495,480	)

Cash flows from financing activities
Issuance of common stock		442,927			1,312,916
Reinvestment of stockholder distributions		87,432			37,108
Repurchases of common stock		(11,024	)		(1,141	)
Offering costs		(1,686	)		(4,600	)
Stockholder distributions		(163,358	)		(71,655	)
Borrowings under credit facilities⁽³⁾		537,000			170,494
Borrowings under repurchase agreement⁽⁴⁾		—			432,500
Deferred financing costs paid		(6,134	)		(1,557	)

Net cash provided by financing activities		885,157			1,874,065

Total increase (decrease) in cash		(271,818	)		378,585
Cash at beginning of period		581,632			107,157

Cash at end of period	$	309,814		$	485,742

Supplemental disclosure
Local and excise taxes paid	$	469		$	74

(1)	On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A.

(2)	See Note 4 for a discussion of expense reimbursements payable to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates.

(3)	See Note 8 for a discussion of the Company’s credit facilities. During the nine months ended September 30, 2014 and 2013, the Company paid $3,061 and $345, respectively, in interest expense on the credit facilities.

(4)	See Note 8 for a discussion of the Company’s repurchase transaction. During the nine months ended September 30, 2014 and 2013, the Company paid $13,555 and $4,224, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Senior Secured Loans—First Lien—66.3%
A.T. Cross Co.	(e)(g)	Retailing	L+825				9/6/19	$	36,630	$	36,630	$	36,264
A.T. Cross Co.	(p)	Retailing	L+825				9/6/19		20,000		20,000		19,800
Air Medical Group Holdings, Inc.	(g)	Health Care Equipment & Services	L+400		1.0	%	6/30/18		5,440		5,515		5,460
Alon USA Partners, L.P.	(e)(l)	Energy	L+800		1.3	%	11/26/18		4,094		3,935		4,176
Alvogen Pharma US, Inc.	(g)(i)	Pharmaceuticals, Biotechnology & Life Sciences	L+575		1.3	%	5/23/18		9,183		9,139		9,286
American Tire Distributors, Inc.	(g)	Automobiles & Components	L+475		1.0	%	6/1/18		1,284		1,281		1,285
AP Exhaust Acquisition, LLC	(e)(h)(i)	Automobiles & Components	L+775		1.5	%	1/16/21		155,000		155,000		153,450
Apex Tool Group, LLC	(i)	Capital Goods	L+325		1.3	%	1/31/20		5,260		5,239		5,091
ARG IH Corp.	(h)	Consumer Services	L+375		1.0	%	11/15/20		1,390		1,386		1,390
Ascend Learning, LLC	(i)	Software & Services	L+500		1.0	%	7/31/19		3,924		3,908		3,946
Ascension Insurance, Inc.	(e)(f)	Insurance	L+825		1.3	%	3/5/19		78,845		77,713		78,057
Aspect Software, Inc.	(h)(i)	Software & Services	L+550		1.8	%	5/7/16		7,570		7,591		7,577
Attachmate Corp.	(g)(h)	Software & Services	L+575		1.5	%	11/22/17		6,724		6,781		6,744
Avaya Inc.	(i)	Technology Hardware & Equipment	L+450				10/26/17		3,953		3,745		3,777
Azure Midstream Energy LLC	(g)	Energy	L+550		1.0	%	11/15/18		4,331		4,276		4,299
Boomerang Tube, LLC	(e)	Energy	L+950		1.5	%	10/11/17		4,500		4,407		4,039
BPA Laboratories, Inc.	(e)	Pharmaceuticals, Biotechnology & Life Sciences	2.5%				7/3/17		3,763		3,427		3,415
BRG Sports, Inc.	(g)(h)	Consumer Durables & Apparel	L+550		1.0	%	4/15/21		5,711		5,602		5,754
Cactus Wellhead, LLC	(g)(h)	Energy	L+600		1.0	%	7/31/20		12,750		12,501		12,559
Cadillac Jack, Inc.	(e)(g)(h)(i)(l)	Consumer Services	L+850		1.0	%	5/15/19		163,963		162,111		169,496
Caesars Entertainment Operating Co., Inc.	(l)	Consumer Services	L+575				3/1/17		15,620		14,766		14,259
Caesars Entertainment Operating Co., Inc.	(l)	Consumer Services	L+675				3/1/17		15,707		14,934		14,363
Caesars Entertainment Operating Co., Inc.	(l)	Consumer Services	L+850		2.0	%	10/31/16		2,671		2,701		2,571
Caesars Entertainment Operating Co., Inc.	(e)(g)(i)(j)(l)	Consumer Services	L+875		1.0	%	3/1/17		68,749		68,256		65,337
Caesars Entertainment Resort Properties, LLC	(e)(f)(g)	Consumer Services	L+600		1.0	%	10/11/20		58,650		55,490		56,304
Cengage Learning Acquisitions, Inc.	(g)(j)	Media	L+600		1.0	%	3/6/20		5,378		5,354		5,385
Community Health Systems, Inc.	(g)(l)	Health Care Equipment & Services	L+325		1.0	%	1/17/21		4,010		3,992		4,003
Corner Investment PropCo, LLC	(e)(g)	Consumer Services	L+975		1.3	%	11/2/19		41,000		41,552		41,718
CoSentry.Net, LLC	(e)(f)(i)	Software & Services	L+800		1.3	%	12/31/19		58,091		58,091		58,382
Crestwood Holdings LLC	(g)	Energy	L+600		1.0	%	6/19/19		5,523		5,501		5,597
Cumulus Media Inc.	(h)(l)	Media	L+325		1.0	%	12/23/20		3,794		3,760		3,736
DAE Aviation Holdings, Inc.	(h)(i)(l)	Capital Goods	L+400		1.0	%	11/2/18		3,895		3,887		3,915
Del Monte Foods Consumer Products, Inc.	(i)(l)	Food, Beverage & Tobacco	L+325		1.0	%	12/6/20		2,795		2,782		2,626
Drew Marine Group Inc.	(h)(l)	Energy	L+350		1.0	%	11/19/20		2,647		2,644		2,627

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Eastman Kodak Co.	(g)	Consumer Durables & Apparel	L+625		1.0	%	9/3/19	$	7,182	$	7,059	$	7,245
EnergySolutions, LLC	(g)	Energy	L+575		1.0	%	5/29/20		4,353		4,267		4,426
EquiPower Resources Holdings, LLC	(g)	Utilities	L+325		1.0	%	12/21/18		1,458		1,484		1,454
ERC Ireland Holdings Ltd.	(l)	Telecommunication Services	EURIBOR+450				9/30/19	€	9,927		8,041		12,112
Extreme Reach, Inc.	(g)	Media	L+575		1.0	%	1/24/20	$	2,810		2,772		2,824
FairPoint Communications, Inc.	(e)(h)(l)	Telecommunication Services	L+625		1.3	%	2/14/19		21,547		21,706		21,911
Filtration Group Corp.	(h)	Energy	L+350		1.0	%	11/20/20		2,431		2,420		2,425
FR Dixie Acquisition Corp.	(g)	Energy	L+475		1.0	%	12/18/20		4,179		4,160		4,185
FR Utility Services LLC	(g)	Energy	L+575		1.0	%	10/18/19		5,573		5,533		5,601
Fram Group Holdings Inc.	(g)	Automobiles & Components	L+500		1.5	%	7/29/17		2,005		2,027		2,010
iHeartCommunications, Inc.	(e)	Media	L+365				1/29/16		2,982		2,688		2,959
Ikaria Acquisition Inc.	(g)	Pharmaceuticals, Biotechnology & Life Sciences	L+400		1.0	%	2/12/21		4,420		4,400		4,421
Industrial Group Intermediate Holdings, LLC	(h)(i)	Materials	L+800		1.3	%	5/31/20		84,570		84,570		84,570
Industry City TI Lessor, L.P.		Consumer Services	10.3%				6/30/26		9,825		9,825		9,825
Internap Network Services Corp.	(g)(l)	Software & Services	L+500		1.0	%	11/26/19		9,925		9,839		9,950
Intralinks, Inc.	(g)(h)(l)	Software & Services	L+525		2.0	%	2/24/19		24,875		24,654		24,751
Intrawest Operations Group, LLC	(i)(k)	Consumer Services	L+450		1.0	%	12/9/20		8,428		8,360		8,456
Kanders C3 Holdings, LLC	(e)(f)	Capital Goods	L+900		1.3	%	12/19/18		21,000		20,852		22,050
Kanders C3 Holdings, LLC	(e)(f)	Capital Goods	L+900		1.3	%	12/19/18		1,765		1,753		1,765
Kanders C3 Holdings, LLC	(p)	Capital Goods	L+900		1.3	%	12/19/18		10,204		10,204		10,204
Lantiq Deutschland GmbH	(e)(l)	Software & Services	L+900		2.0	%	11/16/15		1,521		1,471		1,513
Larchmont Resources, LLC	(g)	Energy	L+725		1.0	%	8/7/19		7,336		7,274		7,464
MB Precision Holdings LLC	(e)(h)(i)	Capital Goods	L+725		1.3	%	1/23/20		62,528		62,528		61,902
MMI International Ltd.	(g)(l)	Technology Hardware & Equipment	L+600		1.3	%	11/20/18		6,180		6,041		6,195
MMM Holdings, Inc.	(g)	Health Care Equipment & Services	L+825		1.5	%	12/12/17		2,768		2,782		2,766
MModal Inc.	(e)(g)	Health Care Equipment & Services	L+775		1.3	%	1/31/20		10,111		10,062		10,111
Mood Media Corp.	(g)(l)	Media	L+600		1.0	%	5/1/19		1,812		1,795		1,785
Moxie Liberty LLC	(g)(i)	Energy	L+650		1.0	%	8/21/20		11,853		11,899		12,120
Moxie Patriot LLC	(i)	Energy	L+575		1.0	%	12/19/20		5,556		5,505		5,681
MSO of Puerto Rico, Inc.	(g)	Health Care Equipment & Services	L+825		1.5	%	12/12/17		2,013		2,023		2,011
New HB Acquisition, LLC	(h)(i)	Food, Beverage & Tobacco	L+550		1.3	%	4/9/20		3,877		3,845		3,978
New Star Metals Inc.	(e)(g)(h)(i)	Capital Goods	L+800		1.3	%	3/20/20		110,025		110,025		110,025
Nexeo Solutions, LLC	(h)(i)	Capital Goods	L+350		1.5	%	9/8/17		2,440		2,432		2,422
Nova Wildcat Amerock, LLC	(e)(g)(h)	Consumer Durables & Apparel	L+814		1.3	%	9/10/19		75,000		75,000		74,250
Opal Acquisition, Inc.	(h)(i)	Consumer Services	L+400		1.0	%	11/27/20		10,864		10,787		10,857

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Panda Sherman Power, LLC	(e)	Energy	L+750		1.5	%	9/14/18	$	3,810	$	3,808		$	3,898
Panda Temple Power, LLC (TLA)	(e)	Energy	L+700		1.5	%	7/17/18		1,722		1,734			1,760
Payless ShoeSource, Inc.	(g)	Consumer Durables & Apparel	L+400		1.0	%	3/5/21		5,345		5,320			5,158
PeroxyChem LLC	(h)(i)	Capital Goods	L+650		1.0	%	2/28/20		9,950		9,766			10,099
PharMEDium Healthcare Corp.	(g)	Health Care Equipment & Services	L+325		1.0	%	1/22/21		723		719			710
PHRC License, LLC	(f)(h)(i)	Consumer Services	L+900		1.5	%	8/14/20		60,000		60,000			60,000
Production Resource Group, LLC	(g)(h)(i)	Media	L+750		1.0	%	7/23/19		47,500		47,500			46,431
Professional Plumbing Group, Inc.	(e)(g)	Capital Goods	L+875		0.8	%	7/31/19		29,158		29,158			29,596
PRV Aerospace, LLC	(g)	Capital Goods	L+525		1.3	%	5/9/18		2,973		2,993			2,966
Reddy Ice Holdings, Inc.	(g)	Food & Staples Retailing	L+550		1.3	%	5/1/19		1,173		1,163			1,120
RGL Reservoir Operations Inc.	(g)(h)(l)	Energy	L+500		1.0	%	8/13/21		6,857		6,654			6,803
Serena Software, Inc.	(g)(h)	Software & Services	L+650		1.0	%	4/14/20		18,000		17,659			18,084
Sirius Computer Solutions, Inc.	(e)	Software & Services	L+575		1.3	%	12/7/18		7,519		7,463			7,623
Smile Brands Group Inc.	(e)(f)(g)(h)(i)	Health Care Equipment & Services	L+625		1.3	%	8/15/19		43,746		43,191			42,907
Sorenson Communications, Inc.	(e)(g)(h)(i)	Telecommunication Services	L+575		2.3	%	4/30/20		101,755		101,279			104,299
Southcross Holdings Borrower LP		Energy	L+500		1.0	%	8/4/21		317		315			317
Sports Authority, Inc.	(g)	Consumer Durables & Apparel	L+600		1.5	%	11/16/17		7,818		7,876			7,467
Sprint Industrial Holdings LLC	(g)	Energy	L+575		1.3	%	11/14/19		7,247		7,196			7,266
Stallion Oilfield Holdings, Inc.	(e)(g)	Energy	L+675		1.3	%	6/19/18		9,646		9,571			9,761
SunGard Availability Services, Inc.	(j)(k)	Software & Services	L+500		1.0	%	3/31/19		4,987		4,618			4,629
Swift Worldwide Resources US Holdings Corp.	(g)(i)	Energy	L+800		1.3	%	4/30/19		19,937		19,938			19,738
Therakos, Inc.	(e)(g)	Pharmaceuticals, Biotechnology & Life Sciences	L+625		1.3	%	12/27/17		6,443		6,362			6,500
ThermaSys Corp.	(g)	Capital Goods	L+400		1.3	%	5/3/19		4,936		4,940			4,929
U.S. Xpress Enterprises, Inc.	(e)(h)(i)	Transportation	L+850, 1.5% PIK (1.5% Max PIK)		1.5	%	5/30/19		95,000		95,000			95,000
UTEX Industries, Inc.		Energy	L+400		1.0	%	5/21/21		1,151		1,145			1,149
Waste Pro USA, Inc.	(e)(h)(i)(k)	Commercial & Professional Services	L+750		1.0	%	9/30/20		119,778		119,778			119,778
Waste Pro USA, Inc.	(k)(p)	Commercial & Professional Services	L+750		1.0	%	9/30/20		12,222		12,222			12,222

Total Senior Secured Loans—First Lien											1,991,348			2,003,122
Unfunded Loan Commitments											(42,426	)		(42,426	)

Net Senior Secured Loans—First Lien											1,948,922			1,960,696

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Senior Secured Loans—Second Lien—39.7%
Accellent Inc.		Health Care Equipment & Services	L+650		1.0	%	3/11/22	$	8,814	$	8,793	$	8,544
Advantage Sales & Marketing Inc.	(g)(j)	Commercial & Professional Services	L+650		1.0	%	7/25/22		4,236		4,205		4,187
Alison US LLC	(g)(l)	Capital Goods	L+850		1.0	%	8/29/22		4,444		4,267		4,317
Alliance Laundry Systems LLC	(e)	Capital Goods	L+825		1.3	%	12/10/19		3,450		3,422		3,491
American Energy—Marcellus, LLC	(g)	Energy	L+750		1.0	%	8/4/21		3,333		3,284		3,314
American Energy—Utica, LLC	(e)(f)	Energy	L+400, 5.5% PIK (5.5% Max PIK)		1.5	%	9/30/18		105,187		105,187		105,713
American Energy—Utica, LLC	(f)	Energy	L+400, 5.5% PIK (5.5% Max PIK)		1.5	%	9/30/18		71,428		71,428		71,785
AssuredPartners, Inc.		Insurance	L+675		1.0	%	3/31/22		7,000		6,933		6,930
Asurion, LLC		Insurance	L+750		1.0	%	3/3/21		15,957		15,733		16,177
Attachmate Corp.	(e)(k)	Software & Services	L+950		1.5	%	11/22/18		53,729		54,364		54,669
Berlin Packaging LLC		Commercial & Professional Services	Prime+650		3.3	%	4/2/20		3,571		3,631		3,556
BlackBrush Oil & Gas, L.P.		Energy	L+650		1.0	%	7/30/21		6,637		6,588		6,554
BPA Laboratories, Inc.	(e)	Pharmaceuticals, Biotechnology & Life Sciences	2.5%				7/3/17		3,272		2,540		2,699
Brasa (Holdings) Inc.	(e)	Consumer Services	L+950		1.5	%	1/20/20		621		601		628
BRG Sports, Inc.		Consumer Durables & Apparel	L+925		1.0	%	4/15/22		12,500		12,198		12,563
Byrider Finance, LLC	(f)	Automobiles & Components	L+1000		1.3	%	8/22/20		16,667		16,667		16,667
Camp International Holding Co.	(g)	Capital Goods	L+725		1.0	%	11/29/19		1,106		1,106		1,118
Capital Automotive L.P.	(e)(g)(k)	Real Estate	L+500		1.0	%	4/30/20		10,038		9,984		10,188
Catalina Marketing Corp.		Media	L+675		1.0	%	4/1/22		10,000		9,929		9,625
Centaur Acquisition, LLC		Consumer Services	L+750		1.3	%	2/20/20		15,585		15,871		15,838
Cervalis LLC	(e)(f)	Commercial & Professional Services	L+875		1.3	%	2/8/19		30,000		29,670		30,300
CHG Buyer Corp.	(e)	Health Care Equipment & Services	L+775		1.3	%	11/19/20		5,747		5,665		5,855
Chief Exploration & Development LLC	(g)	Energy	L+650		1.0	%	5/16/21		2,259		2,237		2,263
Colouroz Investment 2 LLC	(i)(k)(l)	Materials	L+725		1.0	%	9/5/22		5,714		5,671		5,636
Consolidated Precision Products Corp.	(e)	Capital Goods	L+775		1.0	%	4/30/21		16,750		16,675		16,819
Crossmark Holdings, Inc.		Commercial & Professional Services	L+750		1.3	%	12/21/20		7,778		7,797		7,720
CT Technologies Intermediate Holdings, Inc.		Software & Services	L+800		1.3	%	10/2/20		5,000		4,932		5,000
DAE Aviation Holdings, Inc.	(l)	Capital Goods	L+675		1.0	%	7/30/19		18,750		18,580		18,962
Del Monte Foods Consumer Products, Inc.	(l)	Food, Beverage & Tobacco	L+725		1.0	%	6/6/21		3,333		3,303		3,045
Devix US, Inc.		Health Care Equipment & Services	L+700		1.0	%	5/2/22		1,364		1,350		1,363
Drew Marine Group Inc.	(l)	Energy	L+700		1.0	%	5/19/21		2,500		2,495		2,514
Eastman Kodak Co.	(j)	Consumer Durables & Apparel	L+950		1.3	%	9/3/20		25,000		24,442		25,281

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Extreme Reach, Inc.		Media	L+950		1.0	%	1/22/21	$	10,000	$	9,817	$	10,075
Filtration Group Corp.		Energy	L+725		1.0	%	11/21/21		5,158		5,173		5,177
Flexera Software LLC		Software & Services	L+700		1.0	%	4/2/21		10,000		9,953		9,800
Ikaria Acquisition Inc.	(j)	Pharmaceuticals, Biotechnology & Life Sciences	L+775		1.0	%	2/14/22		5,000		4,965		5,075
Inmar Acquisition Sub, Inc.		Software & Services	L+700		1.0	%	1/27/22		2,830		2,804		2,816
Jazz Acquisition, Inc.	(g)	Capital Goods	L+675		1.0	%	6/19/22		4,200		4,262		4,184
Kronos Inc.		Software & Services	L+850		1.3	%	4/30/20		9,914		9,921		10,236
Leedsworld Inc.	(e)(f)(g)	Retailing	L+875		1.3	%	6/28/20		62,500		62,500		62,500
LM U.S. Member LLC	(e)	Transportation	L+725		1.0	%	10/26/20		15,137		15,214		15,188
MD America Energy, LLC		Energy	L+850		1.0	%	8/4/19		12,500		11,890		12,224
Mitchell International, Inc.		Software & Services	L+750		1.0	%	10/11/21		10,000		10,232		10,013
Neff Rental LLC		Capital Goods	L+625		1.0	%	6/9/21		14,493		14,423		14,565
Nielsen & Bainbridge, LLC	(f)	Consumer Services	L+925		1.0	%	8/15/21		15,000		14,778		14,850
Onex Carestream Finance L.P.	(e)(f)(k)	Health Care Equipment & Services	L+850		1.0	%	12/5/19		9,435		9,278		9,502
P2 Upstream Acquisition Co.		Energy	L+800		1.0	%	4/30/21		14,500		14,759		14,645
Paw Luxco II Sarl	(l)	Consumer Durables & Apparel	EURIBOR+950				1/29/19	€	5,727		7,050		6,865
Payless ShoeSource, Inc.		Consumer Durables & Apparel	L+750		1.0	%	3/4/22	$	14,092		13,958		13,388
Peak 10, Inc.	(j)	Software & Services	L+725		1.0	%	6/17/22		5,500		5,446		5,459
Pelican Products, Inc.		Capital Goods	L+825		1.0	%	4/9/21		5,438		5,399		5,458
Penton Media, Inc.	(j)	Media	L+775		1.3	%	10/2/20		9,000		8,881		9,034
Printpack Holdings, Inc.	(e)(i)	Materials	L+875		1.0	%	5/28/21		60,000		58,841		60,300
PSAV Acquisition Corp.	(e)	Technology Hardware & Equipment	L+825		1.0	%	1/24/22		80,000		78,872		81,200
Redtop Acquisitions Ltd.	(l)	Consumer Services	L+725		1.0	%	5/22/21		7,463		7,378		7,537
Renaissance Learning, Inc.		Software & Services	L+700		1.0	%	4/11/22		12,857		12,735		12,616
Road Infrastructure Investment, LLC		Consumer Services	L+675		1.0	%	9/21/21		7,759		7,722		7,540
Securus Technologies Holdings, Inc.		Telecommunication Services	L+775		1.3	%	4/30/21		2,000		1,983		1,993
Sensus USA Inc.	(f)	Capital Goods	L+725		1.3	%	5/9/18		2,050		2,055		2,045
Sequential Brands Group, Inc.	(e)(i)	Consumer Durables & Apparel	L+800		1.0	%	8/15/20		50,000		50,000		50,000
The Telx Group, Inc.	(j)	Software & Services	L+650		1.0	%	4/2/21		7,000		6,934		6,985
Templar Energy LLC	(h)(k)	Energy	L+750		1.0	%	11/25/20		29,231		28,581		28,390
Therakos, Inc.	(e)	Pharmaceuticals, Biotechnology & Life Sciences	L+1000		1.3	%	6/27/18		28,000		27,438		28,700
TNS, Inc.	(f)(h)	Telecommunication Services	L+800		1.0	%	8/14/20		51,469		50,996		50,954
TriZetto Group, Inc.	(e)	Software & Services	L+725		1.3	%	3/28/19		12,558		12,521		12,652
Ultima US Holdings LLC	(l)	Capital Goods	L+850		1.0	%	12/31/20		57,000		56,006		55,860
US Renal Care, Inc.	(i)	Health Care Equipment & Services	L+750		1.0	%	7/3/20		2,500		2,457		2,534

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor			Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
UTEX Industries, Inc.		Energy	L+725		1.0	%	5/20/22	$	1,909	$	1,900	$	1,922
Vantage Energy II, LLC	(i)	Energy	L+750		1.0	%	5/8/17		13,000		13,000		13,000
Vantage Energy, LLC	(i)	Energy	L+750		1.0	%	12/20/18		18,323		18,165		18,277
Vertafore, Inc.	(f)	Software & Services	L+825		1.5	%	10/27/17		830		831		838
Winebow Holdings, Inc.	(g)	Retailing	L+750		1.0	%	1/2/22		2,775		2,754		2,761
WNA Holdings, Inc.		Materials	L+725		1.3	%	12/7/20		5,000		4,956		4,950

Total Senior Secured Loans—Second Lien											1,166,376		1,175,429

Senior Secured Bonds—8.7%
Advanced Lighting Technologies, Inc.	(e)(f)	Materials	10.5%				6/1/19		35,500		31,640		27,158
Allen Systems Group, Inc.	(f)(m)(q)	Software & Services	10.5%				11/15/16		14,225		10,243		7,610
Altice Financing S.A.	(j)(l)	Media	7.8%				5/15/22		7,000		7,000		7,131
Aspect Software, Inc.	(f)(j)(k)	Software & Services	10.6%				5/15/17		8,005		8,286		8,005
Avaya Inc.	(e)(j)	Technology Hardware & Equipment	7.0%				4/1/19		14,500		13,971		14,119
Avaya Inc.	(e)	Technology Hardware & Equipment	9.0%				4/1/19		6,500		6,480		6,654
Caesars Entertainment Resort Properties, LLC	(e)(f)(j)	Consumer Services	11.0%				10/1/21		70,460		71,165		67,102
CEVA Group Plc	(j)(l)	Transportation	9.0%				9/1/21		2,000		2,000		2,015
Erickson Air-Crane Inc.	(e)	Capital Goods	8.3%				5/1/20		6,402		6,166		6,130
FourPoint Energy, LLC	(f)	Energy	8.5%				12/31/20		14,625		12,835		12,833
Global A&T Electronics Ltd.	(f)(l)	Technology Hardware & Equipment	10.0%				2/1/19		9,000		9,000		8,114
iHeartCommunications, Inc.	(e)	Media	9.0%				12/15/19		1,844		1,724		1,867
JW Aluminum Co.	(e)(f)	Materials	11.5%, 1.0% PIK (1.0% Max PIK)				11/15/17		17,550		17,526		17,945
Light Tower Rentals, Inc.	(j)	Capital Goods	8.1%				8/1/19		2,100		2,100		2,100
Logan’s Roadhouse Inc.	(f)(j)	Consumer Services	10.8%				10/15/17		36,814		32,020		27,887
Modular Space Corp.	(j)	Capital Goods	10.3%				1/31/19		9,950		10,248		10,099
Prince Mineral Holding Corp.	(e)	Materials	11.5%				12/15/19		2,750		2,725		3,094
Quiksilver, Inc.	(j)(l)	Consumer Durables & Apparel	7.9%				8/1/18		2,500		2,308		2,244
Signode Industrial Group US Inc.	(j)	Commercial & Professional Services	6.4%				5/1/22		4,900		4,900		4,680
Sorenson Communications, Inc.	(e)(f)(j)	Telecommunication Services	9.0%				10/31/20		18,877		18,154		18,499
WMG Acquisition Corp.	(j)	Media	5.6%				4/15/22		650		650		655

Total Senior Secured Bonds											271,141		255,941

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Subordinated Debt—13.9%
Acosta, Inc.	(j)	Consumer Services	7.8%		10/1/22	$	4,800	$	4,800	$	4,788
The AES Corp.	(j)(l)	Energy	5.5%		3/15/24		1,950		1,950		1,906
American Energy—Woodford, LLC	(j)	Energy	9.0%		9/15/22		3,750		3,597		3,502
Armored AutoGroup Inc.	(j)	Household & Personal Products	9.3%		11/1/18		2,544		2,657		2,627
Atlas Energy Holdings Operating Co., LLC	(j)(l)	Energy	7.8%		1/15/21		5,000		5,000		4,975
Aurora Diagnostics, LLC	(e)	Pharmaceuticals, Biotechnology & Life Sciences	10.8%		1/15/18		7,000		7,031		5,810
Avaya Inc.	(j)	Technology Hardware & Equipment	10.5%		3/1/21		9,950		9,077		8,744
Beazer Homes USA, Inc.	(j)(l)	Capital Goods	7.3%		2/1/23		2,750		2,750		2,764
Brocade Communications Systems, Inc.	(j)(l)	Telecommunication Services	4.6%		1/15/23		2,750		2,750		2,647
Brooklyn Basketball Holdings, LLC	(f)(i)	Consumer Services	L+800		10/15/19		39,746		39,746		39,746
BWAY Holding Co.	(j)	Materials	9.1%		8/15/21		6,250		6,211		6,250
Cadillac Jack, Inc.	(f)(l)	Consumer Services	6.0%, 7.0% PIK (7.0% Max PIK)		5/15/20		51,350		35,183		54,302
Calumet Specialty Products Partners, L.P.	(j)(l)	Energy	6.5%		4/15/21		2,500		2,500		2,395
CEC Entertainment, Inc.	(j)	Consumer Services	8.0%		2/15/22		11,000		11,019		10,368
Compressco Partners, LP	(j)(l)	Energy	7.3%		8/15/22		4,000		3,941		4,030
DigitalGlobe, Inc.	(j)(l)	Software & Services	5.3%		2/1/21		1,100		1,100		1,059
Elizabeth Arden, Inc.	(f)(j)(k)(l)	Food & Staples Retailing	7.4%		3/15/21		3,170		2,882		2,829
Entegris, Inc.	(j)(l)	Technology Hardware & Equipment	6.0%		4/1/22		3,750		3,750		3,797
Era Group Inc.	(j)(l)	Energy	7.8%		12/15/22		7,250		7,142		7,649
First Data Corp.	(j)	Software & Services	11.8%		8/15/21		650		671		750
Global Jet Capital, Inc.		Commercial & Professional Services	8.0% PIK (8.0% Max PIK)		11/1/14		313		313		313
Hub International Ltd.	(j)	Insurance	7.9%		10/1/21		3,500		3,500		3,583
Hub International Ltd.	(j)	Insurance	8.1%, 0.8% PIK (0.8% Max PIK)		7/15/19		6,000		5,985		5,933
Jefferies Finance LLC	(j)(l)	Diversified Financials	7.4%		4/1/20		1,500		1,500		1,543
Jefferies Finance LLC	(j)(l)	Diversified Financials	6.9%		4/15/22		950		950		940
Jupiter Resources Inc.	(i)(j)(l)	Energy	8.5%		10/1/22		20,000		19,165		17,913
The Kenan Advantage Group, Inc.	(e)(j)	Transportation	8.4%		12/15/18		6,250		6,412		6,531
Kinetic Concepts, Inc.	(f)	Health Care Equipment & Services	12.5%		11/1/19		7,800		8,111		8,670
Legacy Reserves L.P.	(e)(l)	Energy	8.0%		12/1/20		8,250		8,102		8,600
Mood Media Corp.	(e)(f)(j)(l)	Media	9.3%		10/15/20		46,207		45,586		38,405
MultiPlan Holdings, Inc.	(j)	Software & Services	6.6%		4/1/22		950		950		963

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
NRG Energy, Inc.	(j)(l)	Energy	6.3%		7/15/22	$	4,750	$	4,750	$	4,859
Nuveen Investments, Inc.	(e)	Diversified Financials	9.1%		10/15/17		12,000		12,000		12,883
Ocean Rig UDW Inc	(j)(l)	Energy	7.3%		4/1/19		4,700		4,700		4,324
Opal Acquisition, Inc.	(j)	Consumer Services	8.9%		12/15/21		27,000		27,000		28,249
Resolute Energy Corp.	(j)(l)	Energy	8.5%		5/1/20		5,800		5,859		5,816
Rex Energy Corp.	(e)(l)	Energy	8.9%		12/1/20		15,000		14,910		16,245
Rex Energy Corp.	(j)(l)	Energy	6.3%		8/1/22		3,950		3,950		3,846
Rockies Express Pipeline LLC	(j)	Energy	6.0%		1/15/19		3,250		3,250		3,411
Sidewinder Drilling Inc.	(e)	Capital Goods	9.8%		11/15/19		1,872		1,872		1,881
Sophia Holding Finance, L.P.	(f)	Software & Services	9.6%		12/1/18		2,750		2,726		2,784
Sorenson Communications, Inc.	(e)(f)(j)	Telecommunication Services	13.0%		10/31/21		14,346		13,370		14,490
Southern Graphics Inc.	(e)	Media	8.4%		10/15/20		1,000		1,000		1,044
Spirit AeroSystems Holdings, Inc.	(j)(l)	Capital Goods	5.3%		3/15/22		750		750		754
Tenet Healthcare Corp.	(j)(l)	Health Care Equipment & Services	8.1%		4/1/22		5,500		5,500		6,084
TMS International Corp.	(j)	Energy	7.6%		10/15/21		1,250		1,250		1,328
Triangle USA Petroleum Corp.	(j)(l)	Energy	6.8%		7/15/22		2,350		2,350		2,309
U.S. Coatings Acquisition Inc.	(j)	Capital Goods	7.4%		5/1/21		2,000		2,000		2,145
Warren Resources, Inc.	(j)(l)	Energy	9.0%		8/1/22		11,650		11,489		11,504
Windstream Corp.	(j)(l)	Telecommunication Services	6.4%		8/1/23		2,600		2,600		2,558
WMG Acquisition Corp.	(j)	Media	6.8%		4/15/22		6,000		6,000		5,775
Wok Acquisition Corp.	(f)(j)(k)	Consumer Services	10.3%		6/30/20		10,468		10,797		10,468
York Risk Services Holding Corp.	(j)	Insurance	8.5%		10/1/22		3,350		3,350		3,333

Total Subordinated Debt									395,804		410,422

Collateralized Securities—6.0%
AMMC 2012 CDO 11A Class Subord.	(l)	Diversified Financials	11.5%		10/30/23		6,000		4,152		4,649
Apidos CLO XIV Class E	(l)	Diversified Financials	L+440		4/15/25		6,000		5,369		5,361
Ares 2012 CLO 2A Class Subord.	(l)	Diversified Financials	6.3%		10/12/23		8,500		6,784		6,106
CGMS CLO 2013-3A Class E	(l)	Diversified Financials	L+525		7/15/25		5,000		4,485		4,402
CGMS CLO 2013-3A Class Subord.	(l)	Diversified Financials	16.8%		7/15/25		22,000		16,642		21,096
Halcyon Loan Advisors Funding 2013-2 Class Subord.	(l)	Diversified Financials	17.1%		8/1/25		15,000		11,862		14,934
JPMorgan Chase Bank, N.A. Credit-Linked Notes	(l)	Diversified Financials	14.6%		12/20/21		76,260		75,514		78,929
Octagon CLO 2012-1A Class Income	(l)	Diversified Financials	16.2%		1/15/24		4,650		3,091		3,866
Wind River CLO Ltd. 2013-1A Class Subord. B	(l)	Diversified Financials	12.8%		4/20/25		40,720		33,646		37,386

Total Collateralized Securities									161,545		176,729

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Number of Shares/Contracts		Cost		Fair Value^(d)
Equity/Other—4.5%
A.T. Cross Co., Common Equity, Class A Units	(m)	Retailing		1,000,000	$	1,000	$	1,000
Amaya Gaming Group Inc., Warrants	(l)(m)	Consumer Services		2,000,000		16,832		41,490
American Energy Ohio Holdings, LLC, Common Equity	(m)(n)	Energy		12,900,000		12,900		12,900
AP Exhaust Acquisition, LLC, Common Equity	(m)(o)	Automobiles & Components		8,378		8,378		6,786
BPA Laboratories, Inc., Series A Warrants	(e)(m)	Pharmaceuticals, Biotechnology & Life Sciences		10,924		—		—
BPA Laboratories, Inc., Series B Warrants	(e)(m)	Pharmaceuticals, Biotechnology & Life Sciences		17,515		—		—
Burleigh Point, Ltd., Warrants	(l)(m)	Retailing		17,256,081		1,898		6,385
CoSentry.Net, LLC, Preferred Equity	(m)	Software & Services		2,632		2,500		3,337
Eastman Kodak Co., Common Equity	(m)	Consumer Durables & Apparel		1,846		36		41
ERC Ireland Holdings Ltd., Warrants	(l)(m)	Telecommunication Services		4,943		551		836
ERC Ireland Holdings Ltd., Common Equity	(k)(l)(m)	Telecommunication Services		22,401		2,595		3,790
FourPoint Energy, LLC, Common Equity	(m)(o)	Energy		2,437		1,610		3,033
Industrial Group Intermediate Holdings, LLC, Common Equity	(m)(o)	Materials		2,107,438		2,107		2,213
Kanders C3 Holdings, LLC, Common Equity	(f)	Capital Goods		60,872		5,000		852
MB Precision Holdings LLC, Common Equity	(m)	Capital Goods		2,100,000		2,100		1,890
MModal Inc. Common Equity	(e)(g)(m)	Health Care Equipment & Services		132,235		2,182		2,485
New Star Metals Inc. Common Equity		Capital Goods		2,223,246		2,250		3,335
Professional Plumbing Group, Inc. Common Equity	(m)	Capital Goods		3,000,000		3,000		3,600
PSAV Holdings LLC, Common Equity	(m)	Technology Hardware & Equipment		10,000		10,000		14,000
Sorenson Communications, Inc., Common Equity	(e)(f)(m)	Telecommunication Services		43,796		—		14,510
Swift Worldwide Resources Holdco Limited, Common Equity	(l)(m)	Energy		1,250,000		2,010		2,129
Therakos, Inc., Common Equity		Pharmaceuticals, Biotechnology & Life Sciences		14,366		1,478		4,715
Weight Watchers International, Inc., Put Option	(l)(m)(r)	Food & Staples Retailing		4,000		2,894		1,520
Weight Watchers International, Inc., Put Option	(l)(m)(r)	Food & Staples Retailing		5,000		2,022		1,350
Weight Watchers International, Inc., Put Option	(l)(m)(r)	Food & Staples Retailing		5,000		1,504		900

Total Equity/Other						84,847		133,097

TOTAL INVESTMENTS—139.1%					$	4,028,635		4,112,314

LIABILITIES IN EXCESS OF OTHER ASSETS—(39.1%)	(s)							(1,155,346	)

NET ASSETS—100.0%							$	2,956,968

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)

Credit Default Swaps on Corporate Issues—Sell Protection


Reference Entity	Counterparty		Implied Credit Spread at September 30, 2014^(t)	Industry		Fixed Deal Received Rate	Maturity	Notional^(u)		Market Value^(d)			Unamortized Premiums Paid (Received)			Unrealized Appreciation (Depreciation)
Caesars Entertainment Operating Co., Inc.		JPMorgan Chase Bank, N.A.	100.8%		Consumer Services	5.0%	12/20/14	$	2,000	$	(348	)	$	(194	)	$	(154	)
Caesars Entertainment Operating Co., Inc.		JPMorgan Chase Bank, N.A.	125.4%		Consumer Services	5.0%	6/20/15		15,000		(6,837	)		(5,807	)		(1,030	)
Caesars Entertainment Operating Co., Inc.		JPMorgan Chase Bank, N.A.	107.6%		Consumer Services	5.0%	9/20/15		22,000		(10,729	)		(9,261	)		(1,468	)

(a)	Security may be an obligation of one or more entities affiliated with the named company.

(b)

Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly-disclosed base rate plus a basis point spread. As of September 30, 2014, the three-month London Interbank Offered Rate was 0.24%, the Euro Interbank Offered Rate was 0.08% and the U.S. Prime Lending Rate was 3.25%.

(c)	Denominated in U.S. dollars unless otherwise noted.

(d)	Fair value and market value are determined by the Company’s board of directors (see Note 7).

(e)	Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

(f)	Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

(g)	Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).

(h)	Security or portion thereof held within Wissahickon Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8).

(i)	Security or portion thereof held within Darby Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

(j)	Security or portion thereof held within Dunning Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

(k)	Position or portion thereof unsettled as of September 30, 2014.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of September 30, 2014

(in thousands, except share amounts)

(l)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. As of September 30, 2014, 79.0% of the Company’s total assets represented qualifying assets.

(m)	Security is non-income producing.

(n)	Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

(o)	Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company.

(p)	Security is an unfunded loan commitment.

(q)	Security was on non-accrual status as of September 30, 2014.

(r)	Put options expire January 15, 2016. The strike prices are $20.00, $17.50 and $15.00, respectively.

(s)	Includes the effect of credit default swap positions.

(t)

Implied credit spread, represented in absolute terms, utilized in determining the market value of the credit default swap agreements as of period end serves as an indicator of the current status of the payment/performance risk and represents the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required in connection with the entrance into the agreement. Wider credit spreads generally represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring, as defined under the terms of the applicable agreement.

(u)	The maximum potential amount the Company could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of the applicable agreement.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor			Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Senior Secured Loans—First Lien—53.0%
A.T. Cross Co.	(d)(f)	Retailing	L+825				9/6/19	$	36,908	$	36,908	$	36,908
A.T. Cross Co.	(d)(f)	Retailing	L+825				9/6/19		20,000		20,000		20,000
Advantage Sales & Marketing Inc.	(g)	Commercial & Professional Services	L+325		1.0	%	12/18/17		2,107		2,097		2,120
Air Medical Group Holdings, Inc.	(f)(g)	Health Care Equipment & Services	L+400		1.0	%	6/30/18		5,474		5,566		5,546
Alcatel-Lucent USA Inc.	(d)(f)(h)	Technology Hardware & Equipment	L+475		1.0	%	1/30/19		8,138		8,182		8,188
Alon USA Partners, L.P.	(d)(h)	Energy	L+800		1.3	%	11/26/18		4,125		3,944		4,256
Alvogen Pharma US, Inc.	(f)(g)	Pharmaceuticals, Biotechnology & Life Sciences	L+575		1.3	%	5/23/18		9,781		9,724		9,927
Apex Tool Group, LLC		Capital Goods	L+325		1.3	%	1/31/20		5,300		5,276		5,334
ARG IH Corp.		Consumer Services	L+400		1.0	%	11/15/20		1,400		1,397		1,410
Ascension Insurance, Inc.	(d)(e)	Insurance	L+825		1.3	%	3/5/19		79,423		78,097		78,628
Aspect Software, Inc.	(g)	Software & Services	L+525		1.8	%	5/7/16		7,873		7,902		7,915
Attachmate Corp.	(f)	Software & Services	L+575		1.5	%	11/22/17		2,607		2,637		2,660
Audio Visual Services Group, Inc.	(d)(f)	Technology Hardware & Equipment	L+550		1.3	%	11/9/18		10,107		10,110		10,182
Audio Visual Services Group, Inc.		Technology Hardware & Equipment	L+550		1.3	%	11/9/17		7,500		7,500		7,479
Avaya Inc.	(d)(g)	Technology Hardware & Equipment	L+450				10/26/17		7,340		6,809		7,200
Avaya Inc.	(d)(f)	Technology Hardware & Equipment	L+675		1.3	%	3/31/18		11,896		11,318		12,092
Azure Midstream Energy LLC	(f)	Energy	L+550		1.0	%	11/15/18		4,500		4,434		4,534
BlackBrush TexStar L.P.	(d)(f)	Energy	L+650		1.3	%	6/4/19		14,179		14,049		14,311
Blue Coat Systems, Inc.	(d)	Software & Services	L+350		1.0	%	5/31/19		2,121		2,121		2,132
Boomerang Tube, LLC	(d)	Energy	L+950		1.5	%	10/11/17		4,688		4,573		4,523
Bright Horizons Family Solutions LLC		Health Care Equipment & Services	L+300		1.0	%	1/30/20		1,003		994		1,011
Cadillac Jack, Inc.	(d)(f)(h)	Consumer Services	L+700		1.0	%	12/20/17		125,000		123,770		123,750
Caesars Entertainment Operating Co.	(g)(h)	Consumer Services	L+425				1/26/18		5,000		4,731		4,744
Caesars Entertainment Resort Properties, LLC	(d)(e)(f)	Consumer Services	L+600		1.0	%	10/1/20		59,093		55,624		58,908
Cenveo Corp.	(f)	Commercial & Professional Services	L+500		1.3	%	2/13/17		2,822		2,810		2,845
Clear Channel Communications, Inc.	(d)	Media	L+365				1/29/16		6,156		5,267		5,974
Clover Technologies Group, LLC	(f)	Commercial & Professional Services	L+550		1.3	%	5/7/18		5,772		5,772		5,772
Collective Brands, Inc.	(d)(f)	Consumer Durables & Apparel	L+600		1.3	%	10/9/19		18,768		18,814		18,862
Corner Investment PropCo, LLC	(d)(f)(g)	Consumer Services	L+975		1.3	%	11/2/19		41,000		41,624		41,820
CoSentry.Net, LLC	(e)	Software & Services	L+800		1.3	%	12/31/19		54,500		54,500		54,500

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor			Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Crestwood Holdings LLC	(f)	Energy	L+600		1.0	%	6/19/19	$	5,735	$	5,709	$	5,907
Cumulus Media Inc.	(g)(h)	Media	L+325		1.0	%	12/23/20		7,865		7,786		7,924
DAE Aviation Holdings, Inc.	(h)	Capital Goods	L+500		1.3	%	11/2/18		3,928		3,964		3,969
Del Monte Foods Consumer Products, Inc.	(g)(h)	Food, Beverage & Tobacco	L+325		1.0	%	12/6/20		2,809		2,795		2,828
DigitalGlobe, Inc.	(d)(h)	Software & Services	L+275		1.0	%	1/31/20		2,528		2,528		2,545
Drew Marine Group Inc.	(h)	Energy	L+350		1.0	%	11/19/20		2,667		2,663		2,680
Drumm Investors LLC		Health Care Equipment & Services	L+375		1.3	%	5/4/18		1,471		1,421		1,447
Eastman Kodak Co.	(f)	Consumer Durables & Apparel	L+625		1.0	%	9/3/19		7,236		7,098		7,229
Education Management LLC	(f)(h)	Consumer Services	L+400				6/1/16		3,967		3,573		3,819
Edwards (Cayman Island II) Ltd.	(f)(h)	Capital Goods	L+350		1.3	%	3/26/20		3,195		3,166		3,203
EFS Cogen Holdings I LLC	(g)	Energy	L+275		1.0	%	12/17/20		1,852		1,833		1,868
EquiPower Resources Holdings, LLC	(f)	Utilities	L+325		1.0	%	12/21/18		1,463		1,494		1,471
ERC Ireland Holdings Ltd.	(h)	Telecommunication Services	EURIBOR+300, 1.0% PIK				9/30/17	€	11,298		11,389		18,514
FairPoint Communications, Inc.	(d)(h)	Telecommunication Services	L+625		1.3	%	2/14/19	$	13,027		12,910		13,492
Filtration Group Corp.		Energy	L+350		1.0	%	11/20/20		2,449		2,437		2,447
FR Utility Services LLC	(f)	Energy	L+575		1.0	%	10/18/19		4,630		4,584		4,630
Fram Group Holdings Inc.	(f)	Automobiles & Components	L+500		1.5	%	7/29/17		2,015		2,042		2,003
Hamilton Lane Advisors, LLC	(f)	Diversified Financials	L+400		1.3	%	2/23/18		1,726		1,739		1,739
Harlan Sprague Dawley, Inc.	(d)	Pharmaceuticals, Biotechnology & Life Sciences	L+550				7/11/14		7,041		6,747		6,337
Ikaria Acquisition Inc.	(f)	Pharmaceuticals, Biotechnology & Life Sciences	L+600		1.3	%	7/3/18		7,088		6,990		7,141
ILC Industries, LLC	(f)	Capital Goods	L+650		1.5	%	7/11/18		4,786		4,772		4,798
Inmar, Inc.	(f)	Software & Services	L+525		1.3	%	8/4/17		4,874		4,903		4,896
Internap Network Services Corp.	(f)(h)	Software & Services	L+500		1.0	%	11/26/19		10,000		9,901		9,988
Intrawest Operations Group, LLC		Consumer Services	L+450		1.0	%	12/9/20		7,500		7,425		7,594
Kanders C3 Holdings, LLC	(d)(e)	Capital Goods	L+900		1.3	%	12/19/18		24,565		24,362		24,381
Kanders C3 Holdings, LLC	(d)(e)	Capital Goods	L+900		1.3	%	12/19/18		10,204		10,204		10,128
Keystone Automotive Operations, Inc.	(f)	Automobiles & Components	L+575		1.3	%	8/15/19		4,988		4,916		5,023
Lantiq Deutschland GmbH	(d)(h)	Software & Services	L+900		2.0	%	11/16/15		1,521		1,445		1,475
Larchmont Resources, LLC	(f)	Energy	L+725		1.0	%	8/7/19		7,391		7,321		7,530
MetoKote Corp.	(d)(f)	Materials	L+800		1.3	%	9/30/19		85,000		85,000		85,850

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor			Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
MetoKote Corp.	(d)(f)	Materials	L+800		1.3	%	9/30/19	$	16,190	$	16,190	$	16,352
MMI International Ltd.	(f)(g)(h)	Technology Hardware & Equipment	L+600		1.3	%	11/20/18		11,550		11,244		11,254
MMM Holdings, Inc.	(f)	Health Care Equipment & Services	L+825		1.5	%	12/12/17		3,012		3,030		3,036
MModal Inc.	(d)(f)	Health Care Equipment & Services	L+650		1.3	%	8/16/19		16,801		16,469		14,480
Moxie Liberty LLC	(f)(g)	Energy	L+650		1.0	%	8/21/20		11,853		11,901		12,179
Moxie Patriot, LLC	(g)	Energy	L+575		1.0	%	12/18/20		5,556		5,500		5,694
MSO of Puerto Rico, Inc.	(f)	Health Care Equipment & Services	L+825		1.5	%	12/12/17		2,191		2,204		2,208
National Mentor Holdings, Inc.	(f)	Health Care Equipment & Services	L+525		1.3	%	2/9/17		7,899		8,003		7,964
National Vision, Inc.	(f)	Health Care Equipment & Services	L+575		1.3	%	8/2/18		2,336		2,363		2,343
New HB Acquisition, LLC		Food, Beverage & Tobacco	L+550		1.3	%	4/9/20		3,896		3,860		4,042
Nexeo Solutions, LLC	(d)	Capital Goods	L+350		1.5	%	9/8/17		6,903		6,823		6,911
Nova Wildcat Amerock, LLC	(d)(f)	Consumer Durables & Apparel	L+825		1.3	%	9/10/19		75,000		75,000		75,000
Opal Acquisition, Inc.	(g)	Consumer Services	L+400		1.0	%	11/27/20		14,946		14,821		14,983
Panda Sherman Power, LLC	(d)	Energy	L+750		1.5	%	9/14/18		3,818		3,816		3,933
Panda Temple Power, LLC (TLA)	(d)	Energy	L+700		1.5	%	7/17/18		2,000		2,017		2,054
Patheon Inc.	(d)(h)	Pharmaceuticals, Biotechnology & Life Sciences	L+600		1.3	%	12/14/18		10,156		9,892		10,275
Professional Plumbing Group, Inc.	(d)(f)	Capital Goods	L+875		0.8	%	7/31/19		32,419		32,419		32,743
PRV Aerospace, LLC	(f)	Capital Goods	L+525		1.3	%	5/9/18		3,039		3,063		3,053
Reddy Ice Holdings, Inc.	(f)	Food & Staples Retailing	L+550		1.3	%	5/1/19		1,182		1,170		1,181
Sheridan Holdings, Inc.	(g)	Health Care Equipment & Services	L+350		1.0	%	6/29/18		2,035		2,025		2,046
Sheridan Holdings, Inc.	(g)	Health Care Equipment & Services	L+350		1.0	%	6/29/18		1,680		1,672		1,680
Sirius Computer Solutions, Inc.	(d)	Software & Services	L+575		1.3	%	12/7/18		8,096		8,027		8,228
Smile Brands Group Inc.	(d)(e)(f)	Health Care Equipment & Services	L+625		1.3	%	8/15/19		39,090		38,429		38,650
Sorenson Communication, Inc.	(d)(f)	Telecommunication Services	L+825		1.3	%	10/31/14		29,754		29,830		30,200
Sports Authority, Inc.	(f)	Consumer Durables & Apparel	L+600		1.5	%	11/16/17		8,222		8,293		8,212
Sprint Industrial Holdings LLC	(f)	Energy	L+575		1.3	%	11/14/19		6,396		6,338		6,476
Stallion Oilfield Holdings, Inc.	(d)(f)	Energy	L+675		1.3	%	6/19/18		9,950		9,859		10,174
Swift Worldwide Resources US Holdings Corp. A		Energy	L+800		1.3	%	4/30/19		20,088		20,088		20,088
Technicolor SA	(d)(f)(g)(h)	Media	L+600		1.3	%	7/10/20		32,194		31,776		32,544
Therakos, Inc.	(d)(f)	Pharmaceuticals, Biotechnology & Life Sciences	L+625		1.3	%	12/27/17		6,605		6,503		6,630
Totes Isotoner Corp.	(e)	Consumer Durables & Apparel	L+575		1.5	%	7/7/17		911		910		916

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor			Maturity	Principal Amount^(b)		Amortized Cost			Fair Value^(c)
TravelCLICK, Inc.	(f)	Consumer Services	L+450		1.3	%	3/16/16	$	1,969	$	1,970		$	1,988
Tri-Northern Acquisition, Inc.	(d)(e)(f)	Retailing	L+800		1.3	%	7/1/19		89,550		89,550			89,550
Tri-Northern Acquisition, Inc.	(d)(e)(f)	Retailing	L+800		1.3	%	7/1/19		18,621		18,621			18,621
UTEX Industries, Inc.	(f)	Energy	L+325		1.3	%	4/10/20		2,689		2,677			2,705

Total Senior Secured Loans—First Lien											1,316,020			1,334,780
Unfunded Loan Commitments											(66,687	)		(66,687	)

Net Senior Secured Loans—First Lien											1,249,333			1,268,093

Senior Secured Loans—Second Lien—29.2%
Advantage Sales & Marketing Inc.	(e)	Commercial & Professional Services	L+725		1.0	%	6/12/18		471		471			479
Alliance Laundry Systems LLC	(d)	Capital Goods	L+825		1.3	%	12/10/19		3,450		3,419			3,499
American Energy—Utica, LLC	(d)(e)	Energy	L+950		1.5	%	9/30/18		100,919		100,919			100,919
Attachmate Corp.	(d)	Software & Services	L+950		1.5	%	11/22/18		17,223		17,246			16,907
Audio Visual Services Group, Inc.	(d)	Technology Hardware & Equipment	L+950		1.3	%	5/9/18		15,320		15,195			15,818
Berlin Packaging LLC		Commercial & Professional Services	L+750		1.3	%	4/2/20		3,571		3,638			3,665
Brasa (Holdings) Inc.	(d)	Consumer Services	L+950		1.5	%	1/20/20		1,118		1,079			1,129
Camp International Holding Co.	(e)(f)(g)	Capital Goods	L+725		1.0	%	11/29/19		2,106		2,106			2,152
Capital Automotive L.P.	(f)	Real Estate	L+500		1.0	%	4/30/20		7,895		7,858			8,171
Centaur Acquisition, LLC	(g)	Consumer Services	L+750		1.3	%	2/20/20		13,585		13,840			13,993
Cervalis LLC	(d)(e)	Commercial & Professional Services	L+875		1.3	%	2/8/19		30,000		29,615			30,000
CHG Buyer Corp.	(d)	Health Care Equipment & Services	L+775		1.3	%	11/19/20		5,747		5,655			5,847
Citrus Energy Appalachia, LLC	(d)	Energy	L+850		1.3	%	7/26/18		15,430		14,979			15,392
Consolidated Precision Products Corp.	(d)	Capital Goods	L+775		1.0	%	4/30/21		16,750		16,668			17,085
CT Technologies Intermediate Holdings, Inc.		Software & Services	L+800		1.3	%	10/2/20		5,000		4,927			5,016
Del Monte Foods Consumer Products, Inc.	(g)(h)	Food, Beverage & Tobacco	L+725		1.0	%	6/6/21		3,333		3,300			3,375
Digital Insight Corp.		Software & Services	L+775		1.0	%	10/16/20		12,000		12,253			12,255
Drew Marine Group Inc.	(h)	Energy	L+700		1.0	%	5/19/21		2,500		2,494			2,519
Eastman Kodak Co.		Consumer Durables & Apparel	L+950		1.3	%	9/3/20		25,000		24,395			25,219
Filtration Group Corp.	(g)	Energy	L+725		1.0	%	11/21/21		5,158		5,174			5,287
ILC Industries, LLC	(e)	Capital Goods	L+1000		1.5	%	7/11/19		3,024		2,869			2,903
Keystone Automotive Operations, Inc.	(d)(e)	Automobiles & Components	L+950		1.3	%	8/15/20		44,500		43,644			46,169

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor			Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Kronos Inc.		Software & Services	L+850		1.3	%	4/30/20	$	7,715	$	7,644	$	7,999
Leedsworld Inc.	(d)(e)(f)	Retailing	L+875		1.3	%	6/28/20		62,500		62,500		62,500
LM U.S. Member LLC	(d)	Transportation	L+825		1.3	%	10/26/20		15,137		15,221		15,355
Onex Carestream Finance L.P.	(d)(e)	Health Care Equipment & Services	L+850		1.0	%	12/5/19		9,700		9,519		9,906
P2 Upstream Acquisition Co.		Energy	L+800		1.0	%	4/30/21		14,500		14,788		14,790
Paw Luxco II Sarl	(h)	Consumer Durables & Apparel	EURIBOR+950				1/29/19	€	7,000		8,524		8,709
Penton Media, Inc.		Media	L+775		1.3	%	10/2/20	$	9,000		8,868		9,000
Redtop Acquisitions Ltd.	(g)(h)	Consumer Services	L+725		1.0	%	5/22/21		7,500		7,406		7,622
Renaissance Learning, Inc.	(g)	Software & Services	L+775		1.0	%	4/24/21		7,000		6,895		7,083
Sabine Oil & Gas LLC		Energy	L+750		1.3	%	12/31/18		1,907		1,891		1,931
Securus Technologies Holdings, Inc.		Telecommunication Services	L+775		1.3	%	4/30/21		4,000		3,963		3,979
Sensus USA Inc.	(e)	Capital Goods	L+725		1.3	%	5/9/18		2,050		2,056		2,050
SESAC Holdings Inc.	(d)	Media	L+875		1.3	%	7/12/19		2,000		1,974		2,050
Sheridan Holdings, Inc.	(g)	Health Care Equipment & Services	L+725		1.0	%	12/20/21		10,784		10,730		10,885
StoneRiver Group, L.P.	(e)	Software & Services	L+725		1.3	%	5/30/20		7,246		7,212		7,323
Teine Energy Ltd.	(e)(h)	Energy	L+625		1.3	%	5/17/19		5,459		5,385		5,541
Templar Energy LLC		Energy	L+700		1.0	%	11/25/20		19,231		18,849		19,339
Therakos, Inc.	(d)	Pharmaceuticals, Biotechnology & Life Sciences	L+1000		1.3	%	6/27/18		28,000		27,310		28,677
TNS, Inc.	(e)	Telecommunication Services	L+800		1.0	%	8/14/20		30,469		30,056		30,878
Travelport LLC	(e)	Consumer Services	L+800		1.5	%	1/31/16		5,119		5,216		5,313
Travelport LLC	(d)	Consumer Services	4.0%, 4.4% PIK				12/1/16		8,207		7,282		8,381
TriZetto Group, Inc.	(d)	Software & Services	L+725		1.3	%	3/28/19		4,186		4,133		4,019
Ultima US Holdings LLC	(h)	Capital Goods	L+850		1.0	%	12/31/20		57,000		55,919		55,860
US Renal Care, Inc.		Health Care Equipment & Services	L+750		1.0	%	7/3/20		2,500		2,452		2,538
UTEX Industries, Inc.		Energy	L+750		1.3	%	4/10/21		3,243		3,228		3,324
Vantage Energy, LLC	(g)	Energy	L+750		1.0	%	12/20/18		18,462		18,277		18,462
Vertafore, Inc.	(e)	Software & Services	L+825		1.5	%	10/27/17		830		831		846
WNA Holdings, Inc.		Materials	L+725		1.3	%	12/7/20		5,000		4,952		5,081

Total Senior Secured Loans—Second Lien											684,825		697,240

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Senior Secured Bonds—8.5%
Advanced Lighting Technologies, Inc.	(d)(e)	Materials	10.5%		6/1/19	$	35,500	$	31,238	$	25,561
Allen Systems Group, Inc.	(e)	Software & Services	10.5%		11/15/16		14,225		9,814		8,037
Avaya Inc.	(d)(e)	Technology Hardware & Equipment	7.0%		4/1/19		16,000		14,990		15,760
Avaya Inc.	(d)(e)	Technology Hardware & Equipment	9.0%		4/1/19		8,000		7,955		8,400
Caesars Entertainment Operating Co.	(h)	Consumer Services	9.0%		2/15/20		10,000		9,593		9,741
Caesars Entertainment Resort Properties, LLC	(d)(e)	Consumer Services	11.0%		10/1/21		45,000		44,910		46,484
Clear Channel Communications, Inc.	(d)	Media	9.0%		12/15/19		1,844		1,712		1,892
Erickson Air-Crane Inc.	(d)(h)	Capital Goods	8.3%		5/1/20		13,312		13,053		13,811
Global A&T Electronics Ltd.	(e)(h)	Technology Hardware & Equipment	10.0%		2/1/19		9,000		9,000		7,920
JW Aluminum Co.	(d)(e)	Materials	11.5%		11/15/17		11,750		11,722		11,735
Logan’s Roadhouse Inc.	(e)	Consumer Services	10.8%		10/15/17		26,564		23,779		19,883
Neff Rental LLC	(e)	Capital Goods	9.6%		5/15/16		3,750		3,785		3,975
Prince Mineral Holding Corp.	(d)	Materials	11.5%		12/15/19		2,750		2,722		3,053
Sorenson Communication, Inc.	(d)(e)	Telecommunication Services	10.5%		2/1/15		37,000		34,302		27,675

Total Senior Secured Bonds									218,575		203,927

Subordinated Debt—11.6%
Accellent Inc.		Health Care Equipment & Services	10.0%		11/1/17		10,000		9,989		10,375
Alliant Holdings I, Inc.	(d)	Insurance	7.9%		12/15/20		4,000		4,000		4,220
Atlas Energy Holdings Operating Co., LLC	(h)	Energy	7.8%		1/15/21		5,000		5,000		4,773
Aurora Diagnostics, LLC	(d)	Pharmaceuticals, Biotechnology & Life Sciences	10.8%		1/15/18		7,000		7,039		5,180
Beazer Homes USA, Inc.	(h)	Capital Goods	7.3%		2/1/23		2,750		2,750		2,750
BOE Intermediate Holding Corp.		Materials	9.8% PIK		11/1/17		6,012		5,960		6,297
Brocade Communications Systems, Inc.	(h)	Telecommunication Services	4.6%		1/15/23		2,750		2,750		2,532
CrownRock, L.P.	(d)(e)	Energy	7.1%		4/15/21		30,000		30,000		29,827
Diamondback Energy, Inc.	(h)	Energy	7.6%		10/1/21		4,250		4,250		4,483
DigitalGlobe, Inc.	(h)	Software & Services	5.3%		2/1/21		1,100		1,100		1,077
EPE Holdings LLC	(d)	Energy	8.9% PIK		12/15/17		4,357		4,340		4,537
EPL Oil & Gas, Inc.	(e)(h)	Energy	8.3%		2/15/18		2,150		2,133		2,317

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Era Group Inc.	(h)	Energy	7.8%		12/15/22	$	7,250	$	7,136	$	7,540
First Data Corp.	(g)	Software & Services	11.8%		8/15/21		1,000		1,035		1,057
Halcon Resources Corp.	(d)(h)	Energy	8.9%		5/15/21		2,250		2,353		2,276
Hub International Ltd.		Insurance	7.9%		10/1/21		3,500		3,500		3,618
Jefferies Finance LLC	(h)	Diversified Financials	7.4%		4/1/20		1,500		1,500		1,564
The Kenan Advantage Group, Inc.	(d)	Transportation	8.4%		12/15/18		6,250		6,436		6,609
Kinetic Concepts, Inc.	(e)	Health Care Equipment & Services	12.5%		11/1/19		7,800		8,145		8,795
LBC Tank Terminals Holding Netherlands BV	(e)(h)	Materials	6.9%		5/15/23		1,000		1,000		1,038
Legacy Reserves L.P.	(d)(h)	Energy	8.0%		12/1/20		8,250		8,089		8,524
Legacy Reserves L.P.	(d)(h)	Energy	6.6%		12/1/21		4,900		4,826		4,740
Memorial Production Partners L.P.	(d)(h)	Energy	7.6%		5/1/21		2,600		2,564		2,678
Memorial Resource Development LLC		Energy	10.8% PIK		12/15/18		6,700		6,566		6,700
Mood Media Corp.	(d)(e)(h)	Media	9.3%		10/15/20		46,207		45,524		40,662
NeuStar, Inc.	(h)	Software & Services	4.5%		1/15/23		2,750		2,750		2,499
Nuveen Investments, Inc.	(d)(e)	Diversified Financials	9.1%		10/15/17		15,000		15,000		15,082
Opal Acquisition, Inc.		Consumer Services	8.9%		12/15/21		27,000		27,000		27,169
Resolute Energy Corp.	(h)	Energy	8.5%		5/1/20		5,800		5,864		6,106
Revlon Consumer Products Corp.	(h)	Household & Personal Products	5.8%		2/15/21		5,050		5,050		5,000
Rex Energy Corp.	(d)(h)	Energy	8.9%		12/1/20		15,000		14,904		16,425
Rockies Express Pipeline LLC		Energy	6.0%		1/15/19		3,250		3,250		3,024
Sidewinder Drilling Inc.	(d)	Capital Goods	9.8%		11/15/19		2,000		2,000		1,770
Six Flags Entertainment Corp.	(h)	Consumer Services	5.3%		1/15/21		2,500		2,500		2,456
Sophia Holding Finance, L.P.	(e)	Software & Services	9.6%		12/1/18		9,750		9,653		10,067
Southern Graphics Inc.	(d)	Media	8.4%		10/15/20		1,000		1,000		1,025
Tenet Healthcare Corp.	(h)	Health Care Equipment & Services	8.1%		4/1/22		5,500		5,500		5,940
TMS International Corp.		Energy	7.6%		10/15/21		1,250		1,250		1,331
U.S. Coatings Acquisition Inc.		Capital Goods	7.4%		5/1/21		2,000		2,000		2,143
Windstream Corp.	(h)	Telecommunication Services	6.4%		8/1/23		2,600		2,600		2,434

Total Subordinated Debt									278,306		276,640

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity	Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Collateralized Securities—7.6%
AMMC 2012 CDO 11A Class Subord.	(h)	Diversified Financials	14.2%		10/30/23	$	6,000	$	4,527	$	4,906
Apidos CLO XIV Class E	(h)	Diversified Financials	L+440		4/15/25		6,000		5,331		5,421
Ares 2012 CLO 2A Class Subord.	(h)	Diversified Financials	7.1%		10/12/23		8,500		7,569		6,855
CGMS CLO 2013-3A Class E	(h)	Diversified Financials	L+525		7/15/25		5,000		4,457		4,453
CGMS CLO 2013-3A Class Subord.	(h)	Diversified Financials	12.8%		7/15/25		22,000		20,653		23,313
Halcyon Loan Advisors Funding 2013-2 Class Subord.	(h)	Diversified Financials	13.1%		8/1/25		15,000		13,472		15,651
JPMorgan Chase Bank, N.A. Credit-Linked Notes	(h)	Diversified Financials	11.2%		12/20/21		76,260		76,125		76,260
Octagon CLO 2012-1A Class Income	(h)	Diversified Financials	17.7%		1/15/24		4,650		3,454		4,111
Wind River CLO Ltd. 2013-1A Class Subord. B	(h)	Diversified Financials	13.1%		4/20/25		40,720		36,677		41,130

Total Collateralized Securities									172,265		182,100


						Number of Shares		Cost		Fair Value^(c)
Equity/Other—1.2%
A.T. Cross Co., Common Equity, Class A Units	(i)	Retailing					1,000,000		1,000		1,200
American Energy Ohio Holdings, LLC, Common Equity	(i)(j)	Energy					6,743,362		6,743		6,743
Burleigh Point, Ltd., Warrants	(h)(i)	Retailing					17,256,081		1,898		4,659
CoSentry.Net, LLC, Preferred Equity	(i)	Software & Services					2,632		2,500		2,500
Eastman Kodak Co., Common Equity	(i)	Consumer Durables & Apparel					1,846		36		64
ERC Ireland Holdings Ltd., Warrants	(h)(i)	Telecommunication Services					4,943		—		—
ERC Ireland Holdings Ltd., Common Equity	(h)(i)	Telecommunication Services					21,099		—		—
Kanders C3 Holdings, LLC, Common Equity	(e)	Capital Goods					60,872		5,000		3,756
Professional Plumbing Group, Inc., Common Equity	(i)	Capital Goods					3,000,000		3,000		3,000
Swift Worldwide Resources US Holdings Corp. B, Common Equity	(h)(i)	Energy					1,250,000		2,010		2,072
Therakos, Inc., Common Equity		Pharmaceuticals, Biotechnology & Life Sciences					14,366		1,478		3,834

Total Equity/Other									23,665		27,828

TOTAL INVESTMENTS—111.1%								$	2,626,969		2,655,828

LIABILITIES IN EXCESS OF OTHER ASSETS—(11.1%)											(264,843	)

NET ASSETS—100.0%										$	2,390,985

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

(a)	Security may be an obligation of one or more entities affiliated with the named company.

(b)	Denominated in U.S. dollars unless otherwise noted.

(c)	Fair value determined by the Company’s board of directors (see Note 7).

(d)	Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

(e)	Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

(f)	Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the obligations of Cooper River LLC under the revolving credit facility with Citibank, N.A. (see Note 8).

(g)	Position or portion thereof unsettled as of December 31, 2013.

(h)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. As of December 31, 2013, 79.0% of the Company’s total assets represented qualifying assets.

(i)	Security is non-income producing.

(j)	Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

See notes to unaudited consolidated financial statements.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

FS Investment Corporation II, or the Company, was incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of shares of its common stock in its continuous public offering to persons who were not affiliated with the Company or the Company’s investment adviser, FSIC II Advisor, LLC, or FSIC II Advisor, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company.

The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of September 30, 2014, the Company had six wholly-owned financing subsidiaries, two wholly-owned subsidiaries through which it holds interests in certain non-controlled and non-affiliated portfolio companies and another wholly-owned subsidiary through which it may hold certain investments in portfolio companies from time to time. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of September 30, 2014. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes.

The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or may issue loans to its target companies as primary market or directly originated investments.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the fiscal year ended December 31, 2013 included in the Company’s annual report on Form 10-K. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014. The December 31, 2013 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the fiscal

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

year ended December 31, 2013. The Company has evaluated the impact of subsequent events through the date the unaudited consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.

Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded and all amounts are in thousands, except share and per share amounts.

Capital Gains Incentive Fee: The Company entered into an investment advisory and administrative services agreement with FSIC II Advisor, dated as of February 8, 2012, or the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if the Company’s entire portfolio were liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

In addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which was terminated on June 13, 2013), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their interpretation of the applicable language in the Advisers Act that the Company should “look through” the TRS in calculating its capital gains incentive fee. Under this “look through” methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a “look through” basis under which the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a “look through” basis.

Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Credit Default Swaps: When the Company is the buyer of a credit default swap contract, the Company is entitled to receive the par (or other agreed-upon) value of a referenced debt obligation (or basket of debt obligations) from the counterparty to the contract if a specified credit event with respect to the issuer of the debt obligation, such as a U.S. or foreign corporate issuer or sovereign issuer, occurs. In return, the Company pays the counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no specified credit event occurs, the Company would have paid the stream of payments and received no proceeds from the contract. When the Company is the seller of a credit default swap contract, it receives the stream of payments, but is obligated to pay to the buyer of the protection an amount up to the notional amount of the swap and, in certain instances, take delivery of securities of the reference entity upon the occurrence of a credit event, as defined under the terms of that particular swap agreement. Credit events are contract specific but may include bankruptcy, failure to pay principal or interest, restructuring, obligation acceleration and repudiation or moratorium. If the Company is a seller of protection and a credit event occurs, the maximum potential amount of future payments that the Company could be required to make would be an amount equal to the notional amount of the agreement. This potential amount would be partially offset by any recovery value of the respective referenced obligation, or net amount received from the settlement of a buy protection credit default swap agreement entered into by the Company for the same referenced obligation. As the seller of a credit default swap contract, the Company may create economic leverage because, in addition to its total net assets, the Company is subject to investment exposure on the notional amount of the swap. The interest fee paid or received on the swap contract, which is based on a specified interest rate on a fixed notional amount, is accrued daily and is recorded as realized loss or gain. The Company records an increase or decrease to unrealized appreciation (depreciation) on credit default swaps in an amount equal to the change in daily valuation. Upfront payments or receipts, if any, are recorded as unamortized swap premiums paid or received, respectively, and are amortized over the life of the swap contract as realized losses or gains. For financial reporting purposes, unamortized upfront payments, if any,

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

are netted with unrealized appreciation (depreciation) on credit default swaps to determine the market value of swaps as presented in Note 7 and Note 9. The Company will segregate assets in the form of cash and/or liquid securities in an amount equal to any unrealized depreciation on the credit default swaps of which it is the buyer, marked-to-market on a daily basis. The Company segregates assets in the form of cash and/or liquid securities in an amount equal to the notional amount of the credit default swaps of which it is the seller. These transactions involve certain risks, including the risk that the seller may be unable to fulfill the transaction.

Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three and nine months ended September 30, 2013 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and nine months ended September 30, 2014. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2014 and 2013:


	Nine Months Ended September 30,
	2014						2013
	Shares			Amount			Shares			Amount
Gross Proceeds from Offering		46,680,052		$	486,879			139,570,349		$	1,447,980
Reinvestment of Distributions		9,155,924			87,432			3,940,816			37,108

Total Gross Proceeds		55,835,976			574,311			143,511,165			1,485,088
Commissions and Dealer Manager Fees		—			(44,484	)		—			(135,496	)

Net Proceeds to Company		55,835,976			529,827			143,511,165			1,349,592
Share Repurchase Program		(1,150,012	)		(11,024	)		(121,500	)		(1,141	)

Net Proceeds from Share Transactions		54,685,964		$	518,803			143,389,665		$	1,348,451

Public Offering of Shares

In March 2014, the Company closed its continuous public offering of shares of common stock to new investors. The Company sold 302,266,066 shares of common stock for gross proceeds of $3,112,692 in its continuous public offering, including shares issued pursuant to its distribution reinvestment plan. Following the closing of its continuous public offering, the Company has continued to issue shares pursuant to its distribution reinvestment plan. As of November 7, 2014, the Company had sold a total of 312,860,686 shares of common stock and raised total gross proceeds of $3,212,935, including $200 of seed capital contributed by the principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from the principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of the Company’s board of directors and certain individuals and entities affiliated with GSO / Blackstone Debt Funds Management LLC, or GDFM, the Company’s investment sub-adviser, in a private placement completed in June 2012 (see Note 4).

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

During the nine months ended September 30, 2014 and 2013, the Company sold 55,835,976 and 143,511,165 shares of common stock for gross proceeds of $574,311 and $1,485,088, respectively, at an average price per share of $10.29 and $10.35, respectively. The gross proceeds received during the nine months ended September 30, 2014 and 2013 include reinvested stockholder distributions of $87,432 and $37,108, respectively, for which the Company issued 9,155,924 and 3,940,816 shares of common stock, respectively. During the period from October 1, 2014 to November 7, 2014, the Company issued 2,168,068 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $20,900 at an average price per share of $9.64.

The proceeds from the issuance of common stock as presented on the Company’s unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $44,484 and $135,496 for the nine months ended September 30, 2014 and 2013, respectively.

Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:

•

the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);

•

the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);

•

the Company’s investment plans and working capital requirements;

•

the relative economies of scale with respect to the Company’s size;

•

the Company’s history in repurchasing shares of common stock or portions thereof; and

•

the condition of the securities markets.

The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the issuance of shares of common stock under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above.

On February 24, 2014, the Company amended the terms of its share repurchase program. The amendment to the share repurchase program became effective as of the Company’s quarterly repurchase offer for the second quarter of 2014, which was completed in June 2014. Prior to the amendment of the share repurchase program, the Company offered to repurchase shares of common stock on each date of repurchase at a price equal to 90% of the share price in effect on the date of repurchase. Under the amended share repurchase program, the Company intends to offer to repurchase shares of common stock on each date of repurchase at a price equal to the price at

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

which shares of common stock are issued pursuant to the Company’s distribution reinvestment plan on the distribution date coinciding with the applicable share repurchase date. The repurchase price will be determined by the Company’s board of directors or a committee thereof, in its sole discretion, and will be (i) not less than the net asset value per share of the Company’s common stock (as determined in good faith by the Company’s board of directors or a committee thereof, in its sole discretion) immediately prior to the repurchase date and (ii) not more than 2.5% greater than the net asset value per share as of such date.

The Company’s board of directors may amend, suspend or terminate the share repurchase program at any time upon 30 days’ notice. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Company’s October 1, 2012 semi-monthly closing.

The following table provides information concerning the Company’s repurchases of shares of common stock pursuant to its share repurchase program during the nine months ended September 30, 2014 and 2013:


For the Three Months Ended	Repurchase Date	Shares Repurchased		Percentage of Shares Tendered That Were Repurchased			Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
Fiscal 2013
December 31, 2012⁽¹⁾	January 2, 2013		—		—		$	9.225		—
March 31, 2013	April 1, 2013		76,086		100	%	$	9.360	$	712
June 30, 2013	July 1, 2013		45,414		100	%	$	9.450	$	429
Fiscal 2014
December 31, 2013	January 2, 2014		135,094		100	%	$	9.450	$	1,277
March 31, 2014	April 1, 2014		372,394		100	%	$	9.540	$	3,553
June 30, 2014	July 1, 2014		642,524		100	%	$	9.640	$	6,194

(1)	No shares were tendered for repurchase in connection with the quarterly tender offer.

On October 1, 2014, the Company repurchased 585,142 shares of common stock (representing 100% of the shares of common stock tendered for repurchase) at $9.64 per share for aggregate consideration totaling $5,641.

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company’s gross assets and an incentive fee based on the Company’s performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of the Company’s investment operations. Base management fees are paid on a quarterly basis in arrears.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. This “catch-up” feature allows FSIC II Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Note 2 for a discussion of the treatment of the TRS (which was terminated on June 13, 2013) with respect to the calculation of the capital gains incentive fee.

The Company reimburses FSIC II Advisor for expenses necessary to perform services related to the Company’s administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisor’s actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to the Company based on factors such as assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company’s sponsor and an affiliate of FSIC II Advisor, has funded certain of the Company’s offering costs and organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in the Company’s continuous public offering until all offering and organization costs funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On June 18, 2012, the Company satisfied the minimum offering requirement. During the nine months ended

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

September 30, 2014 and 2013, Franklin Square Holdings did not fund any of the Company’s offering and organization costs, and the Company did not pay any reimbursements to FSIC II Advisor and its affiliates for offering and organization costs previously funded.

The dealer manager for the Company’s continuous public offering was FS² Capital Partners, LLC, or FS², which is one of the Company’s affiliates. Under the dealer manager agreement among the Company, FSIC II Advisor and FS², FS² was entitled to receive selling commissions and dealer manager fees in connection with the sale of shares of common stock in the Company’s continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.

The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and nine months ended September 30, 2014 and 2013:


			Three Months Ended September 30,					Nine Months Ended September 30,
Related Party	Source Agreement	Description	2014			2013		2014		2013
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee⁽¹⁾	$	21,780		$	11,067	$	59,270	$	23,647
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Capital Gains Incentive Fee⁽²⁾	$	(1,861	)	$	1,042	$	10,460	$	2,062
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income⁽³⁾	$	8,419		$	8,871	$	18,098	$	8,871
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses⁽⁴⁾	$	1,092		$	777	$	3,682	$	1,882
FS²	Dealer Manager Agreement	Dealer Manager Fee⁽⁵⁾	$	—		$	11,388	$	8,821	$	26,068

(1)	During the nine months ended September 30, 2014 and 2013, $52,503 and $15,047, respectively, in base management fees were paid to FSIC II Advisor. As of September 30, 2014, $21,780 in base management fees were payable to FSIC II Advisor.

(2)

During the nine months ended September 30, 2014 and 2013, the Company accrued capital gains incentive fees of $10,460 and $2,062, respectively, based on the performance of its portfolio, all of which was based on unrealized gains. No such fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the “look through” methodology described more fully in Note 2. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, the Company reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

effective as of March 31, 2013. The Company did not pay any capital gains incentive fees to FSIC II Advisor during the nine months ended September 30, 2014. The Company paid FSIC II Advisor $37 in capital gains incentive fees during the nine months ended September 30, 2013. As of September 30, 2014, the Company had accrued capital gains incentive fees of $19,694 based on the performance of its portfolio, all of which was based on unrealized gains.

(3)	During the nine months ended September 30, 2014 and 2013, $9,679 and $0, respectively, of subordinated incentive fees on income were paid to FSIC II Advisor. As of September 30, 2014, a subordinated incentive fee on income of $8,419 was payable to FSIC II Advisor.

(4)

During the nine months ended September 30, 2014 and 2013, $3,338 and $1,551, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC II Advisor and the remainder related to other reimbursable expenses. The Company paid $2,639 and $1,243 in administrative services expenses to FSIC II Advisor during the nine months ended September 30, 2014 and 2013, respectively.

(5)	Represents aggregate dealer manager fees retained by FS² and not re-allowed to selected broker-dealers.

Capital Contribution by FSIC II Advisor and GDFM

In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Company’s investment adviser.

In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Company’s investment adviser. In connection with the same private placement, certain members of the Company’s board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, the Company issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of November 7, 2014, the Company had sold an aggregate of 3,336,408 shares of common stock for aggregate gross proceeds of $30,524 to members of the Company’s board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold to Messrs. Forman and Adelman in December 2011 and shares sold in the private placement completed in June 2012.

Potential Conflicts of Interest

FSIC II Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings’ other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

III and FS Global Credit Opportunities Fund. While none of FSIC II Advisor, FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FSIC II Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FSIC II Advisor or its management team. In addition, even in the absence of FSIC II Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FSIC II Advisor, including FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers, or, collectively, the Company’s co-investment affiliates. The Company believes this relief has and may continue to enhance its ability to further its investment objectives and strategies, and may also increase favorable investment opportunities for the Company, in part by allowing it to participate in larger investments, together with the Company’s co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, it will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, dated as of May 10, 2012 and amended and restated as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company’s distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company’s distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.

Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Company’s cumulative distributions paid to its stockholders in each quarter, less the sum of its net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.

Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company’s net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company’s average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company’s average net assets attributable to its shares of common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. “Other operating expenses” means the Company’s total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Company’s conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

Franklin Square Holdings is controlled by the Company’s chairman, president and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Company’s expenses in future quarters.

As of December 31, 2012, the Company had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisor’s voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

Franklin Square Holdings. During the three months ended March 31, 2013, this balance was offset against expense recoupment payable to sponsor. For the nine months ended September 30, 2013, the Company accrued an expense recoupment payable to sponsor of $2,041, which the Company offset against the reimbursements due on the Company’s consolidated balance sheet as of December 31, 2012. As of September 30, 2014, no further amounts remained subject to repayment by the Company to Franklin Square Holdings in the future.

FS Benefit Trust

On May 30, 2013, FS Benefit Trust was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of Franklin Square Holdings and its affiliates. In connection with the Company’s semi-monthly closing that occurred on June 17, 2013, FS Benefit Trust purchased approximately $34 of the Company’s shares at a purchase price equal to 90% of the offering price in effect on such date, or $9.45 per share.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the nine months ended September 30, 2014 and 2013:


	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2013
March 31, 2013	$	0.1871	$	14,791
June 30, 2013	$	0.1883	$	22,647
September 30, 2013	$	0.1837	$	30,873
Fiscal 2014
March 31, 2014	$	0.1740	$	49,274
June 30, 2014	$	0.1885	$	57,604
September 30, 2014	$	0.1885	$	58,086

On October 10, 2014, the Company’s board of directors declared a regular monthly cash distribution of $0.06283 per share, which was paid on October 31, 2014 to stockholders of record on October 30, 2014. On November 6, 2014, the Company’s board of directors declared a regular monthly cash distribution of $0.06283 per share, which will be paid on or about November 28, 2014 to stockholders of record on November 26, 2014. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of shares of the Company’s common stock, borrowings, net investment

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

income from operations, capital gains proceeds from the sale of assets, gains from credit default swaps, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions.

For a period of time following commencement of the Company’s continuous public offering, substantial portions of the Company’s distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that were subject to repayment by the Company within three years. The purpose of this arrangement was to ensure that no portion of the Company’s distributions to stockholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on the Company’s investment performance. No portion of the distributions paid during the nine months ended September 30, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, the Company’s repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that stockholders may otherwise have received during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, the Company did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that the Company will continue to achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the nine months ended September 30, 2014 and 2013:


	Nine Months Ended September 30,
	2014					2013
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income⁽¹⁾		149,469		91	%		56,457		83	%
Short-term capital gains proceeds from the sale of assets		14,999		9	%		11,854		17	%
Long-term capital gains proceeds from the sale of assets		496		0	%		—		—
Gains from credit default swaps (ordinary income for tax)		—		—			—		—
Non-capital gains proceeds from the sale of assets		—		—			—		—
Distributions on account of preferred and common equity		—		—			—		—
Expense reimbursement from sponsor		—		—			—		—

Total	$	164,964		100	%	$	68,311		100	%

(1)

During the nine months ended September 30, 2014 and 2013, 93.9% and 91.9%, respectively, of the Company’s gross investment income was attributable to cash interest earned, 3.5% and 7.8%, respectively, was attributable to non-cash accretion of discount and 2.6% and 0.3%, respectively, was attributable to paid-in-kind, or PIK, interest.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

The Company’s net investment income on a tax basis for the nine months ended September 30, 2014 and 2013 was $172,386 and $69,384, respectively. As of September 30, 2014 and December 31, 2013, the Company had $23,933 and $15,495, respectively, of undistributed net investment income and realized gains on a tax basis. The Company’s undistributed net investment income on a tax basis as of December 31, 2013 was adjusted following the filing of the Company’s 2013 tax return in September 2014. The adjustment was primarily due to tax-basis income received by the Company during the year ended December 31, 2013 on account of certain collateralized securities and interests in partnerships held in its investment portfolio during such period exceeding GAAP-basis income with respect to such investments during the same period. The tax notices for such collateralized securities and interests in partnerships were received by the Company subsequent to the filing of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes, the reclassification of realized gains on credit default swaps to income for tax purposes and, with respect to the nine months ended September 30, 2013, the inclusion of a portion of the periodic net settlement payments due on the Company’s total return swap in tax-basis net investment income.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the nine months ended September 30, 2014 and 2013:


	Nine Months Ended September 30,
	2014			2013
GAAP-basis net investment income	$	161,518		$	57,063
Reversal of incentive fee accrual on unrealized gains		10,460			2,062
Reclassification of unamortized original issue discount		(3,231	)		—
Reclassification of realized gains on credit default swaps		2,401			—
Tax-basis net investment income portion of total return swap payments		—			10,269
Other miscellaneous differences		1,238			(10	)

Tax-basis net investment income	$	172,386		$	69,384

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

As of September 30, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows:


	September 30, 2014 (Unaudited)			December 31, 2013
Distributable ordinary income (income and short-term capital gains)	$	23,687		$	14,999
Distributable realized gains (long-term capital gains)		246			496
Incentive fee accrual on unrealized gains		(19,694	)		(9,234	)
Unamortized organization costs		(193	)		(203	)
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency⁽¹⁾		75,544			20,729
Net unrealized appreciation (depreciation) on credit default swaps⁽¹⁾		(2,652	)		—

Total	$	76,938		$	26,787

(1)

As of September 30, 2014 and December 31, 2013, the gross unrealized appreciation on the Company’s investments and credit default swaps and unrealized gain on foreign currency was $128,628 and $53,965, respectively. As of September 30, 2014 and December 31, 2013, the gross unrealized depreciation on the Company’s investments and credit default swaps and unrealized loss on foreign currency was $55,736 and $33,236, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $4,036,765 and $2,642,956 as of September 30, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency on a tax basis was $75,544 and $20,729 as of September 30, 2014 and December 31, 2013, respectively. The net unrealized appreciation (depreciation) on credit default swaps on a tax basis was $(2,652) and $0 as of September 30, 2014 and December 31, 2013, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2014 and December 31, 2013:


	September 30, 2014 (Unaudited)							December 31, 2013
	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	1,948,922	$	1,960,696		48	%	$	1,249,333	$	1,268,093		48	%
Senior Secured Loans—Second Lien		1,166,376		1,175,429		29	%		684,825		697,240		26	%
Senior Secured Bonds		271,141		255,941		6	%		218,575		203,927		8	%
Subordinated Debt		395,804		410,422		10	%		278,306		276,640		10	%
Collateralized Securities		161,545		176,729		4	%		172,265		182,100		7	%
Equity/Other		84,847		133,097		3	%		23,665		27,828		1	%

Total	$	4,028,635	$	4,112,314		100	%	$	2,626,969	$	2,655,828		100	%

(1)	Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (continued)

As of September 30, 2014, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities.

The Company’s investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2014, the Company had three senior secured loan investments with aggregate unfunded commitments of $42,426. As of December 31, 2013, the Company had five senior secured loan investments with aggregate unfunded commitments of $66,687 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $6,157. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2014 and December 31, 2013:


	September 30, 2014 (Unaudited)					December 31, 2013
Industry Classification	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Automobiles & Components	$	180,198		4	%	$	53,195		2	%
Capital Goods		417,129		10	%		199,070		8	%
Commercial & Professional Services		170,534		4	%		44,881		2	%
Consumer Durables & Apparel		210,256		5	%		144,211		5	%
Consumer Services		785,369		19	%		401,187		15	%
Diversified Financials		192,095		5	%		200,485		8	%
Energy		547,176		13	%		417,589		16	%
Food & Staples Retailing		7,719		0	%		1,181		0	%
Food, Beverage & Tobacco		9,649		0	%		10,245		0	%
Health Care Equipment & Services		113,005		3	%		133,025		5	%
Household & Personal Products		2,627		0	%		5,000		0	%
Insurance		114,013		3	%		86,466		3	%
Materials		212,116		5	%		138,777		5	%
Media		146,731		4	%		101,071		4	%
Pharmaceuticals, Biotechnology & Life Sciences		70,621		2	%		78,001		3	%
Real Estate		10,188		0	%		8,171		0	%
Retailing		108,710		3	%		194,817		7	%
Software & Services		298,791		7	%		181,024		7	%
Technology Hardware & Equipment		146,600		4	%		104,293		4	%
Telecommunication Services		248,599		6	%		129,704		5	%
Transportation		118,734		3	%		21,964		1	%
Utilities		1,454		0	%		1,471		0	%

Total	$	4,112,314		100	%	$	2,655,828		100	%

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of September 30, 2014 and December 31, 2013, the Company’s investments were categorized as follows in the fair value hierarchy:


Valuation Inputs	September 30, 2014 (Unaudited)		December 31, 2013
Level 1—Price quotations in active markets	$	3,811	$	64
Level 2—Significant other observable inputs		—		—
Level 3—Significant unobservable inputs		4,108,503		2,655,764

Total	$	4,112,314	$	2,655,828

As of September 30, 2014, the Company’s credit default swaps were categorized as follows in the fair value hierarchy:


	September 30, 2014 (Unaudited)
Valuation Inputs	Asset		Liability
Level 1—Price quotations in active markets	$	—	$	—
Level 2—Significant other observable inputs		—		—
Level 3—Significant unobservable inputs		—		(17,914	)

Total	$	—	$	(17,914	)

The Company’s investments as of September 30, 2014 consisted primarily of debt securities that were either traded on a private over-the-counter market for institutional investors or acquired directly from the issuer.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

Twenty-one senior secured loan investments, one senior secured bond investment, three subordinated debt investments and one collateralized security were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues, book value or liquidation value. Four equity/other investments, which were traded on active public markets, were valued at their closing price as of September 30, 2014. One senior secured loan investment, which was newly-issued and purchased near September 30, 2014, was valued at cost, as the Company’s board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, the Company valued its other investments and credit default swaps, including two equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

The Company’s investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Thirteen senior secured loan investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of the Company’s equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues, book value or liquidation value. One equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Company’s valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

The following is a reconciliation for the nine months ended September 30, 2014 and 2013 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:


	For the Nine Months Ended September 30, 2014
	Senior Secured Loans—First Lien			Senior Secured Loans—Second Lien			Senior Secured Bonds			Subordinated Debt			Collateralized Securities			Equity/ Other		Total
Fair value at beginning of period	$	1,268,093		$	697,240		$	203,927		$	276,640		$	182,100		$	27,764	$	2,655,764
Accretion of discount (amortization of premium)		3,895			2,675			2,297			888			66			—		9,821
Net realized gain (loss)		(2,885	)		1,263			(4,957	)		4,364			—			—		(2,215	)
Net change in unrealized appreciation (depreciation)		(6,986	)		(3,362	)		(552	)		16,284			5,349			46,760		57,493
Purchases		1,242,440			633,244			150,428			273,843			12,849			54,762		2,367,566
Paid-in-kind interest		188			5,434			—			1,643			—			—		7,265
Sales and redemptions		(544,049	)		(161,065	)		(95,202	)		(163,240	)		(23,635	)		—		(987,191	)
Net transfers in or out of Level 3		—			—			—			—			—			—		—

Fair value at end of period	$	1,960,696		$	1,175,429		$	255,941		$	410,422		$	176,729		$	129,286	$	4,108,503

The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date	$	4,230		$	4,763		$	(9,022	)	$	15,466		$	5,349		$	46,760	$	67,546


	For the Nine Months Ended September 30, 2013
	Senior Secured Loans—First Lien			Senior Secured Loans—Second Lien			Senior Secured Bonds			Subordinated Debt			Collateralized Securities			Equity/ Other		Total
Fair value at beginning of period	$	159,824		$	149,497		$	48,608		$	107,407		$	18,308		$	4,998	$	488,642
Accretion of discount (amortization of premium)		4,424			1,366			2,064			106			331			—		8,291
Net realized gain (loss)		(93	)		776			1,069			1,021			—			—		2,773
Net change in unrealized appreciation (depreciation)		10,128			5,308			(10,895	)		(8,685	)		5,526			1,440		2,822
Purchases		1,013,999			575,478			174,559			187,785			84,063			15,641		2,051,525
Paid-in-kind interest		86			—			51			171			—			—		308
Sales and redemptions		(150,251	)		(160,364	)		(16,491	)		(63,786	)		(3,789	)		—		(394,681	)
Net transfers in or out of Level 3		—			—			—			—			—			—		—

Fair value at end of period	$	1,038,117		$	572,061		$	198,965		$	224,019		$	104,439		$	22,079	$	2,159,680

The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date	$	11,345		$	6,476		$	(10,166	)	$	(8,328	)	$	5,526		$	1,440	$	6,293

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

The following is a reconciliation for the nine months ended September 30, 2014 of credit default swaps for which significant unobservable inputs (Level 3) were used in determining market value:


	Nine Months Ended September 30, 2014
	Credit Default Swaps
Market value at beginning of period	$	—
Net realized gain (loss)		2,401
Net change in unrealized appreciation (depreciation)		(2,652	)
Unamortized swap premiums received		(17,420	)
Coupon payments received		(243	)
Premiums paid on exit		—
Net transfers in or out of Level 3		—

Market value at end of period	$	(17,914	)

The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to credit default swaps still held at the reporting date	$	(2,652	)

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of September 30, 2014 and December 31, 2013 were as follows:


Type of Investment	Fair Value or Market Value at September 30, 2014 (Unaudited)			Valuation Technique⁽¹⁾	Unobservable Input	Range	Weighted Average
Senior Secured Loans—First Lien	$	1,064,170		Market Comparables	Market Yield (%)	4.5% – 11.8%		8.9	%
		776,748		Market Quotes	Indicative Dealer Quotes	88.0% – 103.3%		99.0	%
		119,778		Cost	Cost	100.0% – 100.0%		100.0	%
Senior Secured Loans—Second Lien		349,965		Market Comparables	Market Yield (%)	8.3% – 11.5%		10.2	%
		825,464		Market Quotes	Indicative Dealer Quotes	81.5% – 103.9%		99.9	%
Senior Secured Bonds		12,833		Market Comparables	Market Yield (%)	11.0% – 11.5%		11.3	%
		243,108		Market Quotes	Indicative Dealer Quotes	52.0% – 113.0%		91.4	%
Subordinated Debt		94,048		Market Comparables	Market Yield (%)	8.5% – 9.5%		9.0	%
		316,061		Market Quotes	Indicative Dealer Quotes	82.0% – 115.7%		98.3	%
		313		Cost	Cost	100.0% – 100.0%		100.0	%
Collateralized Securities		78,929		Market Comparables	Market Yield (%)	11.0% – 12.0%		11.5	%
		97,800		Market Quotes	Indicative Dealer Quotes	71.8% – 99.6%		91.3	%
Equity/Other		122,175		Market Comparables	EBITDA Multiples (x)	5.5x – 11.5x		7.3x
					Production Multiples (Mmb/d)	$57,500.0 – $62,500.0	$	60,000.0
					Proved Reserves Multiples (Mmboe)	$10.3 – $10.8	$	10.5
					PV-10 Multiples (x)	1.5x – 1.6x		1.5x
				Discounted Cash Flow	Discount Rate (%)	29.2% – 34.2%		31.7	%
				Option Valuation Model	Volatility (%)	52.5% – 58.5%		56.6	%
		7,111		Market Quotes	Indicative Dealer Quotes	$17.8 – $135.8	$	93.7

Total	$	4,108,503

Credit Default Swaps	$	(17,914	)	Market Quotes	Indicative Dealer Quotes	(48.8%) – (17.4%)		(45.9	%)

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

(1)

Investments and credit default swaps using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

Type of Investment⁽¹⁾

Fair Value at
December 31,
2013⁽²⁾

Valuation
Technique⁽³⁾

Unobservable Input

Range

Weighted
Average

Senior Secured Loans—First Lien

686,413

Market Comparables

Market Yield (%)

8.3% – 10.8%

9.2

Senior Secured Loans—Second Lien

193,419

Market Comparables

Market Yield (%)

9.8% – 11.3%

10.5

Collateralized Securities

76,260

Market Comparables

Market Yield (%)

11.5% – 12.5%

12.0

Equity/Other

27,764

Market Comparables

EBITDA Multiples (x)

5.5x – 11.3x

7.7x

Discounted Cash Flow

Discount Rate (%)

19.3% – 24.3%

21.8

Option Valuation Model

Volatility (%)

60.0% – 61.5%

60.8

(1)	Table includes only those Level 3 assets that were valued by an independent valuation firm as of December 31, 2013.

(2)

The remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers as of December 31, 2013, which were provided by independent third-party pricing services and screened for validity by such services. As of December 31, 2013, $65,015 of the senior secured loans—first lien investments valued by the independent valuation firm consisted of unfunded loan commitments.

(3)

For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements

The following table presents summary information with respect to the Company’s outstanding financing arrangements as of September 30, 2014. For additional information regarding these financing facilities, please see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form 10-K for the fiscal year ended December 31, 2013 and the additional disclosure set forth in this Note 8.


Facility	Type of Facility	Rate	Amount Outstanding		Amount Available		Maturity Date
JPM Facility	Repurchase	3.25%	$	550,000	$	—	May 20, 2017
Cooper River Credit Facility	Revolving	L + 1.75%	$	170,494	$	29,506	March 27, 2016
Wissahickon Creek Credit Facility	Revolving	L + 1.50% to L + 2.50%	$	112,500	$	137,500	February 19, 2019
Darby Creek Credit Facility	Revolving	L + 2.75%	$	217,000	$	33,000	February 20, 2018
Dunning Creek Credit Facility	Revolving	L + 1.55%	$	207,500	$	42,500	May 14, 2015

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the nine months ended September 30, 2014 were $916,148 and 3.02%, respectively. As of September 30, 2014, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.04%.

JPM Financing

On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Lehigh River LLC, or Lehigh River, and Cobbs Creek LLC, or Cobbs Creek, the Company entered into an amendment, or the April 2013 amendment, to its debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which the Company originally entered into with JPM on October 26, 2012 (and previously amended on February 6, 2013). The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $300,000 to $550,000; and (ii) extended the final repurchase date under the financing arrangement from February 20, 2017 to May 20, 2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.

Pursuant to the financing arrangement, the assets held by Lehigh River secure the obligations of Lehigh River under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Lehigh River to Cobbs Creek pursuant to an Amended and Restated Indenture, dated as of February 6, 2013, as supplemented by Supplemental Indenture No. 1, dated as of April 23, 2013, with Citibank, N.A., or Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Lehigh River from time to time is $660,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of May 20, 2024. Cobbs Creek will purchase the Class A Notes to be issued by Lehigh River from time to time at a purchase price equal to their par value.

Cobbs Creek, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, or, collectively, the JPM facility. The assets held by Cobbs Creek secure the obligations of Cobbs Creek under the JPM facility. Pursuant to the JPM facility, JPM has agreed to purchase from time to time Class A Notes held by Cobbs Creek for an aggregate purchase price equal

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM facility is $660,000. Accordingly, the maximum amount payable at any time to Cobbs Creek under the JPM facility is $550,000.

Under the JPM facility, Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than May 20, 2017. The repurchase price paid by Cobbs Creek to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing May 20, 2015, Cobbs Creek will be permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM facility applied to the amount of such reduction.

As of September 30, 2014 and December 31, 2013, Class A Notes in the aggregate principal amount of $660,000 had been purchased by Cobbs Creek from Lehigh River and subsequently sold to JPM under the JPM facility for aggregate proceeds of $550,000. The carrying amount outstanding under the JPM facility approximates its fair value. The Company funded each purchase of Class A Notes by Cobbs Creek through a capital contribution to Cobbs Creek. As of September 30, 2014 and December 31, 2013, Cobbs Creek’s liability under the JPM facility was $550,000, plus $2,085 of accrued interest expense. The Class A Notes issued by Lehigh River and purchased by Cobbs Creek eliminate in consolidation on the Company’s financial statements.

As of September 30, 2014 and December 31, 2013, the fair value of assets held by Lehigh River was $1,309,270 and $1,217,548, respectively, which included assets purchased by Lehigh River with proceeds from the issuance of Class A Notes. As of September 30, 2014 and December 31, 2013, the fair value of assets held by Cobbs Creek was $389,189 and $345,492, respectively.

The Company incurred costs of $159 in connection with obtaining and amending the JPM facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM facility. As of September 30, 2014, $84 of such deferred financing costs had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2014 and 2013, the components of total interest expense for the JPM facility were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Direct interest expense	$	4,568	$	2,604	$	13,555	$	5,305
Amortization of deferred financing costs		9		9		29		29

Total interest expense	$	4,577	$	2,613	$	13,584	$	5,334

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

For the nine months ended September 30, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM facility were as follows:


	Nine Months Ended September 30,
	2014			2013
Cash paid for interest expense⁽¹⁾	$	13,555		$	4,224
Average borrowings under the facility	$	550,000		$	215,304
Effective interest rate on borrowings		3.25	%		3.25	%
Weighted average interest rate		3.25	%		3.25	%

(1)	Interest under the JPM facility is payable quarterly in arrears and commenced in May 2013.

Amounts outstanding under the JPM facility are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Cooper River Credit Facility

On March 27, 2013, the Company’s wholly-owned, special-purpose financing subsidiary, Cooper River LLC, or Cooper River, entered into a revolving credit facility, or the Cooper River facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Cooper River facility provides for borrowings in an aggregate principal amount up to $200,000 on a committed basis.

The Company may contribute cash or debt securities to Cooper River from time to time, subject to certain restrictions set forth in the Cooper River facility, and will retain a residual interest in any assets contributed through its ownership of Cooper River or will receive fair market value for any debt securities sold to Cooper River. Cooper River may purchase additional debt securities from various sources. Cooper River has appointed the Company to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Cooper River’s obligations to the lenders under the Cooper River facility are secured by a first priority security interest in substantially all of the assets of Cooper River, including its portfolio of debt securities. The obligations of Cooper River under the Cooper River facility are non-recourse to the Company and the Company’s exposure under the Cooper River facility is limited to the value of the Company’s investment in Cooper River.

Borrowings under the Cooper River facility accrue interest at a rate equal to the three-month London Interbank Offered Rate, or LIBOR, plus 1.75% per annum during the first two years of the Cooper River facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the Cooper River facility are subject to compliance with an equity coverage ratio with respect to the current value of Cooper River’s portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Cooper River’s portfolio.

Beginning on June 24, 2013, Cooper River became subject to a non-usage fee of 0.50% per annum to the extent that the aggregate principal amount available under the Cooper River facility is not borrowed. Outstanding borrowings under the Cooper River facility will be amortized beginning June 27, 2015. Any amounts borrowed under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

As of September 30, 2014 and December 31, 2013, $170,494 was outstanding under the Cooper River facility. The carrying amount outstanding under the Cooper River facility approximates its fair value. The Company incurred costs of $1,557 in connection with obtaining the Cooper River facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2014, $772 of such deferred financing costs had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2014 and 2013, the components of total interest expense for the Cooper River facility were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Direct interest expense	$	857	$	745	$	2,558	$	982
Non-usage fees		38		73		112		81
Amortization of deferred financing costs		131		132		388		267

Total interest expense	$	1,026	$	950	$	3,058	$	1,330


	Nine Months Ended September 30,
	2014			2013
Cash paid for interest expense⁽¹⁾	$	2,680		$	345
Average borrowings under the facility⁽²⁾	$	170,494		$	92,996
Effective interest rate on borrowings (including the effect of non-usage fees)		2.06	%		2.14	%
Weighted average interest rate (including the effect of non-usage fees)		2.07	%		2.19	%

(1)	Interest under the Cooper River facility is payable quarterly in arrears and commenced on March 27, 2013.

(2)	Average borrowings under the facility for the nine months ended September 30, 2013 are calculated since the inception date of the facility, or March 27, 2013.

Borrowings of Cooper River are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Wissahickon Creek Credit Facility

On February 19, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Wissahickon Creek LLC, or Wissahickon Creek, entered into a revolving credit facility, or the Wissahickon Creek facility, with Wells Fargo Securities, LLC, as administrative agent, each of the conduit lenders and institutional lenders from time to time party thereto and Wells Fargo Bank, National Association, or, collectively with Wells Fargo Securities, LLC, Wells Fargo, as the collateral agent, account bank and collateral custodian under the Wissahickon Creek facility. The Wissahickon Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

The Company may contribute cash, loans or bonds to Wissahickon Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Wissahickon Creek or will receive fair market value for any assets sold to Wissahickon Creek. Wissahickon Creek may purchase additional assets from various sources. Wissahickon Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of a collateral management agreement. Wissahickon Creek’s obligations to Wells Fargo under the Wissahickon Creek facility are secured by a first priority security interest in substantially all of the assets of Wissahickon Creek, including its portfolio of assets. The obligations of Wissahickon Creek under the Wissahickon Creek facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of its investment in Wissahickon Creek.

Pricing under the Wissahickon Creek facility is based on LIBOR for a three-month interest period, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of assets for the relevant period. Beginning June 19, 2014, Wissahickon Creek became subject to a non-usage fee to the extent the aggregate principal amount available under the facility is not borrowed. The non-usage fee equals 0.50% per annum on unborrowed amounts up to and including $25,000 and 2.00% on unborrowed amounts exceeding $25,000. Any amounts borrowed under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019. Borrowings under the Wissahickon Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Wissahickon Creek varies depending upon the types of assets in Wissahickon Creek’s portfolio.

As of September 30, 2014, $112,500 was outstanding under the Wissahickon Creek facility. The carrying amount outstanding under the Wissahickon Creek facility approximates its fair value. The Company incurred costs of $3,307 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2014, $2,907 of such deferred financing costs had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2014, the components of total interest expense for the Wissahickon Creek facility were as follows:


	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Direct interest expense	$	658	$	916
Non-usage fees		638		726
Amortization of deferred financing costs		164		400

Total interest expense	$	1,460	$	2,042

For the nine months ended September 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wissahickon Creek facility were as follows:


	Nine Months Ended September 30, 2014
Cash paid for interest expense⁽¹⁾	$	381
Average borrowings under the facility⁽²⁾	$	103,760
Effective interest rate on borrowings (including the effect of non-usage fees)		4.61	%
Weighted average interest rate (including the effect of non-usage fees)		4.49	%

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

(1)	Interest under the Wissahickon Creek facility is payable quarterly in arrears and commenced on May 27, 2014.

(2)	The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to September 30, 2014.

Borrowings of Wissahickon Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Darby Creek Credit Facility

On February 20, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Darby Creek LLC, or Darby Creek, entered into a revolving credit facility, or the Darby Creek facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent, each of the lenders from time to time party thereto, the other agents party thereto and Wells Fargo Bank, National Association, as the collateral agent and collateral custodian under the Darby Creek facility. The Darby Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

The Company may contribute assets to Darby Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Darby Creek or will receive fair market value for any assets sold to Darby Creek. Darby Creek may purchase additional assets from various sources. Darby Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Darby Creek’s obligations to Deutsche Bank under the Darby Creek facility are secured by a first priority security interest in substantially all of the assets of Darby Creek, including its portfolio of assets. The obligations of Darby Creek under the Darby Creek facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of its investment in Darby Creek.

Pricing under the Darby Creek facility is based on LIBOR for a three-month interest period (for each committed lender) or the commercial paper rate of each conduit lender, plus, in each case, a spread of 2.75% per annum. Darby Creek is subject to a non-usage fee of 0.75% per annum to the extent the aggregate principal amount available under the facility is not borrowed. In addition, Darby Creek is subject to a make-whole fee on a quarterly basis effectively equal to a portion of the spread that would have been payable if the full amount under the facility had been borrowed, less the non-usage fee accrued during such quarter. Any amounts borrowed under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018. Borrowings under the Darby Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Darby Creek varies depending upon the types of assets in Darby Creek’s portfolio.

As of September 30, 2014, $217,000 was outstanding under the Darby Creek facility. The carrying amount outstanding under the Darby Creek facility approximates its fair value. The Company incurred costs of $2,117 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2014, $1,820 of such deferred financing costs had yet to be amortized to interest expense.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

For the three and nine months ended September 30, 2014, the components of total interest expense for the Darby Creek facility were as follows:


	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Direct interest expense	$	1,270		$	1,580
Non-usage and make-whole fees⁽¹⁾		(199	)		562
Amortization of deferred financing costs		124			297

Total interest expense	$	1,195		$	2,439

(1)

The Darby Creek facility was subject to a make whole fee for the three months ended June 30, 2014 and, accordingly, Darby Creek accrued such fee. Due to increased usage of the facility during the three months ended September 30, 2014, the facility was no longer subject to such fee and, as a result, the accrual of the make whole fee was reversed during the period.

For the nine months ended September 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Darby Creek facility were as follows:


	Nine Months Ended September 30, 2014
Cash paid for interest expense⁽¹⁾	$	—
Average borrowings under the facility⁽²⁾	$	140,707
Effective interest rate on borrowings (including the effect of non-usage fees)		2.86	%
Weighted average interest rate (including the effect of non-usage fees)		3.73	%

(1)	Interest under the Darby Creek facility is payable quarterly in arrears and commenced on February 20, 2014.

(2)	The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to September 30, 2014.

Borrowings of Darby Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Dunning Creek Credit Facility

On May 14, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Dunning Creek LLC, or Dunning Creek, entered into a revolving credit facility, or the Dunning Creek facility, with Deutsche Bank, as administrative agent and lender, and each of the other lenders from time to time party thereto. The Dunning Creek facility originally provided for borrowings in an aggregate principal amount up to $150,000 on a committed basis. On June 4, 2014, the Dunning Creek facility was amended to increase the maximum commitments available under the facility to $250,000.

The Company may contribute cash, loans or bonds to Dunning Creek from time to time, subject to certain restrictions set forth in the Dunning Creek facility, and will retain a residual interest in any assets contributed through its ownership of Dunning Creek or will receive fair market value for any debt securities sold to Dunning Creek. Dunning Creek may purchase additional assets from various sources. Dunning Creek has appointed the

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Dunning Creek’s obligations to the lenders under the Dunning Creek facility are secured by a first priority security interest in substantially all of the assets of Dunning Creek, including its portfolio of assets. The obligations of Dunning Creek under the Dunning Creek facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of its investment in Dunning Creek.

Pricing under the Dunning Creek facility is based on LIBOR for an interest period reasonably close to the weighted average LIBOR applicable to the assets held by Dunning Creek, plus a spread of 1.55% per annum. Any amounts borrowed under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2015. Borrowings under the Dunning Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Dunning Creek varies depending upon the types of assets in Dunning Creek’s portfolio.

As of September 30, 2014, $207,500 was outstanding under the Dunning Creek facility. The carrying amount outstanding under the Dunning Creek facility approximates its fair value. The Company incurred costs of $710 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of September 30, 2014, $454 of such deferred financing costs had yet to be amortized to interest expense.

For the three and nine months ended September 30, 2014, the components of total interest expense for the Dunning Creek facility were as follows:


	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Direct interest expense	$	748	$	961
Amortization of deferred financing costs		181		256

Total interest expense	$	929	$	1,217

For the nine months ended September 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Dunning Creek facility were as follows:


	Nine Months Ended September 30, 2014
Cash paid for interest expense⁽¹⁾	$	—
Average borrowings under the facility⁽²⁾	$	144,829
Effective interest rate on borrowings		1.77	%
Weighted average interest rate		1.77	%

(1)	Interest under the Dunning Creek facility is payable quarterly in arrears and commenced on May 14, 2014.

(2)	The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to September 30, 2014.

Borrowings of Dunning Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 9. Financial Instruments

The Company is subject to credit risk in the normal course of pursuing its investment objectives. The Company may enter into credit default swap contracts to manage its credit risk, to gain exposure to a credit in which it may otherwise invest or to enhance its returns, which may involve elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Company has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered.

The Company may enter into swap contracts containing provisions allowing the counterparty to terminate the contract under certain conditions, including, but not limited to, a decline in the Company’s net asset value below a certain level over a certain period of time, which would trigger a payment by the Company for those swaps in a liability position.

The fair value of open derivative instruments (which are not considered to be hedging instruments for accounting disclosure purposes) whose primary underlying risk exposure is credit risk as of September 30, 2014 was as follows:


	Fair Value
Derivative	Asset Derivative		Liability Derivative⁽¹⁾
Credit default swap contracts	$	—	$	17,914

(1)	Unaudited Consolidated Balance Sheet location: Unamortized swap premiums received and unrealized depreciation on credit default swaps.

The Company’s derivative assets and liabilities at fair value by risk, which are reported on a gross basis on its unaudited consolidated balance sheet, are presented in the table above. The following tables present the Company’s derivative assets and liabilities by counterparty, net of amounts available for offset under a master netting agreement and net of the related collateral received by the Company for assets or pledged by the Company for liabilities as of September 30, 2014:


Counterparty	Derivative Assets Subject to Master Netting Agreement		Derivatives Available for Offset		Non-cash Collateral Received⁽¹⁾		Cash Collateral Received⁽¹⁾		Net Amount of Derivative Assets⁽²⁾
JPMorgan Chase Bank, N.A.	$	—	$	—	$	—	$	—	$	—

Counterparty	Derivative Liabilities Subject to Master Netting Agreement		Derivatives Available for Offset		Non-cash Collateral Pledged⁽¹⁾		Cash Collateral Pledged⁽¹⁾		Net Amount of Derivative Liabilities⁽³⁾
JPMorgan Chase Bank, N.A.	$	17,914	$	—	$	—	$	17,914	$	—

(1)	In some instances, the actual amount of the collateral received and/or pledged may be more than the amount shown due to overcollateralization.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 9. Financial Instruments (continued)

(2)	Net amount of derivative assets represents the net amount due from the counterparty to the Company in the event of default.

(3)	Net amount of derivative liabilities represents the net amount due from the Company to the counterparty in the event of default.

The effect of derivative instruments (which are not considered to be hedging instruments for accounting disclosure purposes) on the Company’s unaudited consolidated statements of operations whose primary underlying risk exposure is credit risk for the nine months ended September 30, 2014 was as follows:


Derivative	Realized Gain (Loss) on Derivatives Recognized in Income⁽¹⁾		Change in Unrealized Appreciation (Depreciation) on Derivatives Recognized in Income⁽²⁾
Credit default swap contracts	$	2,401	$	(2,652	)

(1)	Unaudited Consolidated Statement of Operations location: Net realized gain (loss) on credit default swaps.

(2)	Unaudited Consolidated Statement of Operations location: Net change in unrealized appreciation (depreciation) on credit default swaps.

The average notional amount of credit default swap contracts outstanding during the nine months ended September 30, 2014, which is indicative of the volume of this derivative type, was approximately $35,500.

Note 10. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of FSIC II Advisor has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.

See Note 6 for a discussion of the Company’s unfunded commitments.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 11. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2014 and the year ended December 31, 2013:


	Nine Months Ended September 30, 2014 (Unaudited)			Year Ended December 31, 2013
Per Share Data:⁽¹⁾
Net asset value, beginning of period	$	9.39		$	9.16
Results of operations⁽²⁾
Net investment income (loss)		0.54			0.62
Net realized and unrealized appreciation (depreciation) on investments, total return swap and credit default swaps and unrealized gain/loss on foreign currency		0.18			0.27

Net increase (decrease) in net assets resulting from operations		0.72			0.89

Stockholder distributions⁽³⁾
Distributions from net investment income		(0.50	)		(0.69	)
Distributions from net realized gain on investments		(0.05	)		(0.07	)

Net decrease in net assets resulting from stockholder distributions		(0.55	)		(0.76	)

Capital share transactions
Issuance of common stock⁽⁴⁾		0.01			0.15
Repurchases of common stock⁽⁵⁾		—			—
Offering costs⁽²⁾		(0.01	)		(0.05	)

Net increase (decrease) in net assets resulting from capital share transactions		—			0.10

Net asset value, end of period	$	9.56		$	9.39

Shares outstanding, end of period		309,258,060			254,572,096

Total return⁽⁶⁾		7.67	%		10.81	%

Ratio/Supplemental Data:
Net assets, end of period	$	2,956,968		$	2,390,985

Ratio of net investment income to average net assets⁽⁷⁾		5.67	%		6.60	%

Ratio of operating expenses to average net assets⁽⁷⁾		4.26	%		5.46	%
Ratio of expense recoupment payable to sponsor to average net assets⁽⁷⁾		—			0.15	%

Ratio of total operating expenses to average net assets⁽⁷⁾		4.26	%		5.61	%

Portfolio turnover⁽⁸⁾		27.89	%		46.38	%

(1)	Per share data may be rounded in order to recompute the ending net asset value per share.

(2)	The per share data was derived by using the weighted average shares outstanding during the applicable period.

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 11. Financial Highlights (continued)

(3)	The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.

(4)

The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous public offering and pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at an offering price, net of selling commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share.

(5)	The per share impact of the Company’s repurchases of common stock was a reduction to net asset value of less than $0.01 per share during each period.

(6)

The total return for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return does not consider the effect of the sales load from the sale of the Company’s common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Company’s future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and are calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders.

(7)	Weighted average net assets during the applicable period is used for this calculation. Ratios for the nine months ended September 30, 2014 are not annualized. The following is a schedule of supplemental ratios for the nine months ended September 30, 2014 and the year ended December 31, 2013:


	Nine Months Ended September 30, 2014 (Unaudited)			Year Ended December 31, 2013
Ratio of accrued capital gains incentive fees to average net assets		0.37	%		0.45	%
Ratio of subordinated income incentive fees to average net assets		0.64	%		0.65	%
Ratio of interest expense to average net assets		0.78	%		0.89	%

(8)	Portfolio turnover for the nine months ended September 30, 2014 is not annualized.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts)

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

Forward-Looking Statements

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

•

our future operating results;

•

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

•

the impact of the investments that we expect to make;

•

the ability of our portfolio companies to achieve their objectives;

•

our current and expected financings and investments;

•

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

•

the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

•

our contractual arrangements and relationships with third parties;

•

actual and potential conflicts of interest with FSIC II Advisor, FB Income Advisor, LLC, FS Investment Corporation, FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities Fund, FS Global Credit Opportunities Fund—A, FS Global Credit Opportunities Fund—D, GDFM or any of their affiliates;

•

the dependence of our future success on the general economy and its effect on the industries in which we may invest;

•

our use of financial leverage;

•

the ability of FSIC II Advisor to locate suitable investments for us and to monitor and administer our investments;

•

the ability of FSIC II Advisor or its affiliates to attract and retain highly talented professionals;

•

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

•

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, and the rules and regulations issued thereunder;

•

the effect of changes to tax legislation and our tax position; and

•

the tax status of the enterprises in which we may invest.

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

•

changes in the economy;

•

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

•

future changes in laws or regulations and conditions in our operating areas.

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

Overview

We were incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012 upon raising gross proceeds in excess of $2,500 from sales of shares of our common stock in our continuous public offering to persons who were not affiliated with us or FSIC II Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. In March 2014, we closed our continuous public offering of shares of common stock to new investors.

Our investment activities are managed by FSIC II Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory and administrative services agreement, we have agreed to pay FSIC II Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FSIC II Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FSIC II Advisor in identifying investment opportunities and makes investment recommendations for approval by FSIC II Advisor according to guidelines set by FSIC II Advisor.

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

Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not expect to make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders and collateralized loan obligations, or CLOs.

In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market’s apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other

corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company’s financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.

We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FSIC II Advisor and GDFM.

In addition, our relationship with GSO Capital Partners LP, the parent of GDFM and one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities.

Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.

Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or may issue loans to our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity or other equity-related securities in our target companies, generally in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, other debt securities and derivatives, including total return swaps and credit default swaps.

The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans in which we invest may be rated by a nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service, Inc., or Moody’s, or lower than “BBB-” by Standard & Poor’s Ratings Services). We also invest in non-rated debt securities.

Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on total

return swap, net realized gain or loss on credit default swaps, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments, net unrealized appreciation or depreciation on total return swap, net unrealized appreciation or depreciation on credit default swaps and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on total return swap is the net monthly settlement payments received on the TRS. Net gain or loss on credit default swaps represents the amortized portion of swap premiums received and the periodic payments received on our credit default swaps. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized appreciation or depreciation on total return swap is the net change in the fair value of the TRS. Net unrealized appreciation or depreciation on credit default swaps is the net change in the market value of our credit default swaps. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. In future periods, we do not expect our revenues to include net realized gain or loss on total return swap or net unrealized appreciation or depreciation on total return swap as a result of the termination of our TRS on June 13, 2013. We may, however, elect to utilize a total return swap in the future.

We principally generate revenues in the form of interest income on the debt investments we hold. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FSIC II Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FSIC II Advisor is responsible for compensating our investment sub-adviser.

We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FSIC II Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FSIC II Advisor assists us in calculating our net asset value, oversees the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. See “—Related Party Transactions” for additional information regarding the reimbursements payable to FSIC II Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the fiscal year ended December 31, 2013.

In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review

by FSIC II Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.

Expense Reimbursement

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

Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.

Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. “Other operating expenses” means our total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin

Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.

As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisor’s voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the three months ended March 31, 2013, this balance was offset against expense recoupment payable to sponsor. For the nine months ended September 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. As of September 30, 2014 and December 31, 2013, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for a discussion of the methodology employed by us in calculating the capital gains incentive fee.

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

During the nine months ended September 30, 2014, we made investments in portfolio companies totaling $2,373,986. During the same period, we sold investments for proceeds of $404,728 and received principal repayments of $582,463. As of September 30, 2014, our investment portfolio, with a total fair value of $4,112,314, consisted of interests in 217 portfolio companies (48% in first lien senior secured loans, 29% in second lien senior secured loans, 6% in senior secured bonds, 10% in subordinated debt, 4% in collateralized securities and 3% in equity/other securities). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $257.4 million. As of September 30, 2014, the investments in our portfolio were purchased at a weighted average price of 98.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 44.2% of our portfolio based on the fair value of our investments) was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), was 9.5% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders.

Based on our regular monthly cash distribution rate of $0.06283 per share as of September 30, 2014 and our last offered price of $10.60 per share, the annualized distribution rate to stockholders as of September 30, 2014 was 7.11%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors’ capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the sections entitled “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,838,032. During the same period, we sold investments for proceeds of $337,169 and received principal repayments of $374,483. As of December 31, 2013, our investment portfolio, with a total fair value of $2,655,828, consisted of interests in 179 portfolio companies (48% in first lien senior secured loans, 26% in second lien senior secured loans, 8% in senior secured bonds, 10% in subordinated debt, 7% in collateralized

securities and 1% in equity/other securities). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $242.1 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 98.0% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 54.0% of our portfolio based on the fair value of our investments) was B3 based upon the Moody’s scale and our estimated gross annual portfolio yield, prior to leverage, was 9.5% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2013. The portfolio yield does not represent an actual investment return to stockholders.

Based on our regular weekly cash distribution rate of $0.0145 per share as of December 31, 2013 and our public offering price of $10.50 per share as of such date, the annualized distribution rate to stockholders as of December 31, 2013 was 7.18%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors’ capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the sections entitled “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three and nine months ended September 30, 2014:


Net Investment Activity	For the Three Months Ended September 30, 2014			For the Nine Months Ended September 30, 2014
Purchases	$	618,206		$	2,373,986
Sales and Redemptions		(267,158	)		(987,191	)

Net Portfolio Activity	$	351,048		$	1,386,795


	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
New Investment Activity by Asset Class	Purchases		Percentage			Purchases		Percentage
Senior Secured Loans—First Lien	$	300,249		49	%	$	1,242,440		52	%
Senior Secured Loans—Second Lien		141,349		23	%		633,244		27	%
Senior Secured Bonds		28,877		5	%		150,428		6	%
Subordinated Debt		132,671		21	%		273,843		12	%
Collateralized Securities		12,849		2	%		12,849		0	%
Equity/Other		2,211		0	%		61,182		3	%

Total	$	618,206		100	%	$	2,373,986		100	%

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


	September 30, 2014 (Unaudited)							December 31, 2013
	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	1,948,922	$	1,960,696		48	%	$	1,249,333	$	1,268,093		48	%
Senior Secured Loans—Second Lien		1,166,376		1,175,429		29	%		684,825		697,240		26	%
Senior Secured Bonds		271,141		255,941		6	%		218,575		203,927		8	%
Subordinated Debt		395,804		410,422		10	%		278,306		276,640		10	%
Collateralized Securities		161,545		176,729		4	%		172,265		182,100		7	%
Equity/Other		84,847		133,097		3	%		23,665		27,828		1	%

Total	$	4,028,635	$	4,112,314		100	%	$	2,626,969	$	2,655,828		100	%

(1)	Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

The following table presents certain selected information regarding the composition of our investment portfolio as of September 30, 2014 and December 31, 2013:


	September 30, 2014	December 31, 2013
Number of Portfolio Companies	217	179
% Variable Rate (based on fair value)	77.1%	74.0%
% Fixed Rate (based on fair value)	19.7%	24.9%
% Income Producing Equity or Other Investments (based on fair value)	0.2%	0.3%
% Non-Income Producing Equity or Other Investments (based on fair value)	3.0%	0.8%
Average Annual EBITDA of Portfolio Companies	$257,400	$242,100
Weighted Average Purchase Price of Investments (as a % of par or stated value)	98.1%	98.0%
Weighted Average Credit Rating of Investments that were Rated	B3	B3
% of Investments on Non-Accrual	0.2%	—
Gross Portfolio Yield Prior to Leverage (based on amortized cost)	9.5%	9.5%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets	9.7%	9.5%

Direct Originations

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


Net Direct Originations	For the Three Months Ended September 30, 2014			For the Nine Months Ended September 30, 2014
Total Commitments (including unfunded commitments)	$	365,225		$	1,434,737
Exited Investments (including partial paydowns)		(94,625	)		(263,963	)

Net Direct Originations	$	270,600		$	1,170,774


New Direct Originations by Asset Class (including unfunded commitments)	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
	For the Three Months Ended September 30, 2014					For the Nine Months Ended September 30, 2014
	Commitment Amount		Percentage			Commitment Amount		Percentage
Senior Secured Loans—First Lien	$	243,500		67	%	$	937,995		66	%
Senior Secured Loans—Second Lien		81,667		22	%		315,110		22	%
Senior Secured Bonds		—		—			33,502		2	%
Subordinated Debt		40,058		11	%		104,852		7	%
Equity/Other		—		—			43,278		3	%

Total	$	365,225		100	%	$	1,434,737		100	%


	For the Three Months Ended September 30, 2014	For the Nine Months Ended September 30, 2014
Average New Direct Origination Commitment Amount	$40,581	$59,781
Weighted Average Maturity for New Direct Originations	6/19/20	6/10/20
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period	9.1%	9.6%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period—Excluding Non-Income Producing Assets	9.1%	9.9%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period	9.3%	9.6%

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


Characteristics of All Direct Originations Held in Portfolio	September 30, 2014	December 31, 2013
Number of Portfolio Companies	33	16
Average Annual EBITDA of Portfolio Companies	$52,100	$32,100
Average Leverage through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities	5.0x	6.3x
% of Investments on Non-Accrual	—	—
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations	9.8%	9.7%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets	10.1%	9.8%

Portfolio Composition by Strategy and Industry

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


	September 30, 2014					December 31, 2013
Portfolio Composition by Strategy	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Direct Originations	$	2,202,327		54	%	$	961,269		36	%
Opportunistic		835,861		20	%		765,748		29	%
Broadly Syndicated/Other		1,074,126		26	%		928,811		35	%

Total	$	4,112,314		100	%	$	2,655,828		100	%


	September 30, 2014 (Unaudited)					December 31, 2013
Industry Classification	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Automobiles & Components	$	180,198		4	%	$	53,195		2	%
Capital Goods		417,129		10	%		199,070		8	%
Commercial & Professional Services		170,534		4	%		44,881		2	%
Consumer Durables & Apparel		210,256		5	%		144,211		5	%
Consumer Services		785,369		19	%		401,187		15	%
Diversified Financials		192,095		5	%		200,485		8	%
Energy		547,176		13	%		417,589		16	%
Food & Staples Retailing		7,719		0	%		1,181		0	%
Food, Beverage & Tobacco		9,649		0	%		10,245		0	%
Health Care Equipment & Services		113,005		3	%		133,025		5	%
Household & Personal Products		2,627		0	%		5,000		0	%
Insurance		114,013		3	%		86,466		3	%
Materials		212,116		5	%		138,777		5	%
Media		146,731		4	%		101,071		4	%
Pharmaceuticals, Biotechnology & Life Sciences		70,621		2	%		78,001		3	%
Real Estate		10,188		0	%		8,171		0	%
Retailing		108,710		3	%		194,817		7	%
Software & Services		298,791		7	%		181,024		7	%
Technology Hardware & Equipment		146,600		4	%		104,293		4	%
Telecommunication Services		248,599		6	%		129,704		5	%
Transportation		118,734		3	%		21,964		1	%
Utilities		1,454		0	%		1,471		0	%

Total	$	4,112,314		100	%	$	2,655,828		100	%

As of September 30, 2014, we did not “control” and were not an “affiliated person” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2014, we had three senior secured loan investments with aggregate unfunded commitments of $42,426. As of December 31, 2013, we had five senior secured loan investments with aggregate unfunded commitments of $66,687 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $6,157. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

Portfolio Asset Quality

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


Investment Rating		Summary Description
1		Investment exceeding expectations and/or capital gain expected.
2		Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3		Performing investment requiring closer monitoring.
4		Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
5		Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2014 and December 31, 2013:


	September 30, 2014					December 31, 2013
Investment Rating	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
1	$	380,333		9	%	$	86,131		3	%
2		3,364,277		82	%		2,286,820		86	%
3		353,432		9	%		269,660		10	%
4		5,810		0	%		13,217		1	%
5		8,462		0	%		—		—

Total	$	4,112,314		100	%	$	2,655,828		100	%

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

Results of Operations

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

Revenues

We generated investment income of $102,219 and $61,272 for the three months ended September 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds,

subordinated debt and collateralized securities in our portfolio and dividends earned on equity/other investments. Such revenues represent $95,905 and $56,136 of cash income earned as well as $6,314 and $5,136 in non-cash portions relating to accretion of discount and PIK interest for the three months ended September 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. We expect the dollar amount of interest that we earn to level off as the size of our investment portfolio stabilizes as a result of the closing of our continuous public offering in March 2014.

Expenses

Our total operating expenses were $40,954 and $26,827 for the three months ended September 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $21,780 and $11,067 for the three months ended September 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FSIC II Advisor of $1,092 and $777 for the three months ended September 30, 2014 and 2013, respectively.

FSIC II Advisor is eligible to receive incentive fees based on our performance. During the three months ended September 30, 2014 and 2013, we accrued subordinated incentive fees on income of $8,419 and $8,871, respectively, based on the performance of our portfolio. During the three months ended September 30, 2014, we reversed $1,861 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the three months ended September 30, 2013, we accrued capital gains incentive fees of $1,042 based on the performance of our portfolio. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

We recorded interest expense of $9,187 and $3,563 for the three months ended September 30, 2014 and 2013, respectively, in connection with our financing arrangements. For the three months ended September 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $187 and $175, respectively, and fees and expenses incurred with our stock transfer agent totaled $729 and $561, respectively. Fees for our board of directors were $180 and $177 for the three months ended September 30, 2014 and 2013, respectively.

Our other general and administrative expenses totaled $1,241 and $594 for the three months ended September 30, 2014 and 2013, respectively, and consisted of the following:


	Three Months Ended September 30,
	2014		2013
Expenses associated with our independent audit and related fees	$	111	$	85
Compensation of our chief compliance officer		30		39
Legal fees		308		100
Printing fees		308		109
Other		484		261

Total	$	1,241	$	594

During the three months ended September 30, 2014 and 2013, the ratio of our total operating expenses to our average net assets was 1.39% and 1.74%, respectively. During the three months ended September 30, 2014 and 2013, the ratio of our total operating expenses to average net assets included $9,187 and $3,563, respectively, related to interest expense and $6,558 and $9,913, respectively, related to accruals for incentive fees. Without such expenses, our ratio of total operating expenses to average net assets would have been 0.86% and 0.86% for the three months ended September 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Net Investment Income

Our net investment income totaled $61,265 ($0.20 per share) and $34,445 ($0.21 per share) for the three months ended September 30, 2014 and 2013, respectively. The decrease in net investment income on a per share basis can be attributed to, among other things, a decrease in fee income compared to the three months ended September 30, 2013, which was partially offset by a reduction in accruals for incentive fees.

Net Realized Gains or Losses

We sold investments and received principal repayments of $83,099 and $184,059, respectively, during the three months ended September 30, 2014, from which we realized a net loss of $2,005. During the three months ended September 30, 2014, we realized a net gain of $2,401 on our credit default swaps. During the three months ended September 30, 2014, we realized a net loss of $43 from settlements on foreign currency. We sold investments and received principal repayments of $88,193 and $110,579, respectively, during the three months ended September 30, 2013, from which we realized a net gain of $1,114. During the three months ended September 30, 2013, we realized a net loss of $44 from settlements on foreign currency.

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

For the three months ended September 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $(6,987), the net change in unrealized appreciation (depreciation) on our credit default swaps was $(2,652) and the net change in unrealized gain (loss) on foreign currency was $5. The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2014 was primarily driven by a decrease in the value of our senior secured assets offset partially by strong performance in our equity/other assets. The net change in unrealized appreciation (depreciation) on our credit default swaps during the three months ended September 30, 2014 was primarily driven by the widening of credit spreads on the applicable reference obligations during the period. For the three months ended September 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $4,090 and the net change in unrealized gain (loss) on foreign currency was $(20). The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2013 was primarily driven by tightening of credit spreads during the respective quarter.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended September 30, 2014 and 2013, the net increase in net assets resulting from operations was $51,984 ($0.17 per share) and $39,585 ($0.24 per share), respectively.

Comparison of the Nine Months Ended September 30, 2014 and 2013

Revenues

We generated investment income of $282,800 and $106,471 for the nine months ended September 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends earned on equity/other investments. Such revenues represent $265,714 and $97,872 of cash income earned as well as $17,086 and $8,599 in non-cash portions relating to accretion of discount and PIK interest for the nine months ended September 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. We expect the dollar amount of interest that we earn to level off as the size of our investment portfolio stabilizes as a result of the closing of our continuous public offering in March 2014.

Expenses

Our operating expenses were $121,282 and $47,367 for the nine months ended September 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $59,270 and $23,647 for the nine months ended September 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FSIC II Advisor of $3,682 and $1,882 for the nine months ended September 30, 2014 and 2013, respectively.

FSIC II Advisor is eligible to receive incentive fees based on our performance. During the nine months ended September 30, 2014 and 2013, we accrued subordinated incentive fees on income of $18,098 and $8,871, respectively, based on the performance of our portfolio. During the nine months ended September 30, 2014 and 2013, we accrued capital gains incentive fees of $10,460 and $2,062, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee.”

We recorded interest expense of $22,340 and $6,674 for the nine months ended September 30, 2014 and 2013, respectively, in connection with our financing arrangements. For the nine months ended September 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $854 and $395, respectively, and fees and expenses incurred with our stock transfer agent totaled $2,429 and $1,608, respectively. Fees for our board of directors were $638 and $480 for the nine months ended September 30, 2014 and 2013, respectively.

Our other general and administrative expenses totaled $3,511 and $1,748 for the nine months ended September 30, 2014 and 2013, respectively, and consisted of the following:


	Nine Months Ended September 30,
	2014		2013
Expenses associated with our independent audit and related fees	$	341	$	248
Compensation of our chief compliance officer		90		61
Legal fees		705		499
Printing fees		832		325
Other		1,543		615

Total	$	3,511	$	1,748

During the nine months ended September 30, 2014 and 2013, the ratio of our operating expenses to our average net assets was 4.26% and 4.24%, respectively. During the nine months ended September 30, 2013, the ratio of our total operating expenses to our average net assets, which included $2,041 of expense recoupments paid to Franklin Square Holdings, was 4.42%. During the nine months ended September 30, 2014 and 2013, the ratio of our operating expenses to average net assets included $22,340 and $6,674, respectively, related to interest expense and $28,558 and $10,933, respectively, related to accruals for incentive fees. Without such expenses, our ratio of operating expenses to average net assets would have been 2.47% and 2.85% for the nine months ended September 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Expense Reimbursement

Franklin Square Holdings. During the nine months ended September 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the nine months ended September 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. As of September 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see “—Overview—Expense Reimbursement.”

Net Investment Income

Our net investment income totaled $161,518 ($0.54 per share) and $57,063 ($0.48 per share) for the nine months ended September 30, 2014 and 2013, respectively. The increase in net investment income on a per share basis for the nine months ended September 30, 2014 was due primarily to an increase in the number of directly originated investments in our portfolio.

Net Realized Gains or Losses

We sold investments and received principal repayments of $404,728 and $582,463, respectively, during the nine months ended September 30, 2014, from which we realized a net loss of $2,215. During the nine months ended September 30, 2014, we realized a net gain of $2,401 on our credit default swaps. During the nine months ended September 30, 2014, we realized a net loss of $37 from settlements on foreign currency. We sold investments and received principal repayments of $208,294 and $186,387, respectively, during the nine months ended September 30, 2013, from which we realized a net gain of $2,773. During the nine months ended September 30, 2013, we earned $19,689 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net loss of $144 from settlements on foreign currency.

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

For the nine months ended September 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $54,820, the net change in unrealized appreciation (depreciation) on our credit default swaps was $(2,652) and the net change in unrealized gain (loss) on foreign currency was $(5). The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2014 was primarily driven by the performance of certain of our subordinated debt and equity/other investments. The net change in unrealized appreciation (depreciation) on our credit default swaps during the nine months ended September 30, 2014 was primarily driven by the widening of credit spreads on the applicable reference obligations during the period. For the nine months ended September 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $2,832, the net change in unrealized appreciation (depreciation) on our TRS was $(5,641) and the net change in unrealized gain (loss) on foreign currency was $130. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2013 was primarily driven by strong performance in our equity/other positions. The net change in unrealized appreciation (depreciation) on our TRS during the nine months ended September 30, 2013 was primarily driven by the termination of our TRS, which converted unrealized gains as of December 31, 2012 into realized gains.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the nine months ended September 30, 2014 and 2013, the net increase in net assets resulting from operations was $213,830 ($0.72 per share) and $76,702 ($0.64 per share), respectively.

Financial Condition, Liquidity and Capital Resources

As of September 30, 2014, we had $309,814 in cash, which we held in a custodial account, and $242,506 in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of September 30, 2014:


Facility	Type of Facility		Rate	Amount Outstanding		Amount Available		Maturity Date
JPM Facility		Repurchase	3.25%	$	550,000	$	—	May 20, 2017
Cooper River Credit Facility		Revolving	L + 1.75%	$	170,494	$	29,506	March 27, 2016
Wissahickon Creek Credit Facility		Revolving	L + 1.50% to L + 2.50%	$	112,500	$	137,500	February 19, 2019
Darby Creek Credit Facility		Revolving	L + 2.75%	$	217,000	$	33,000	February 20, 2018
Dunning Creek Credit Facility		Revolving	L + 1.55%	$	207,500	$	42,500	May 14, 2015

Our average borrowings and weighted average interest rate, including the effect of non-usage fees, for the nine months ended September 30, 2014 were $916,148 and 3.02%, respectively. As of September 30, 2014, our weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.04%.

For additional information regarding our outstanding financing facilities as of September 30, 2014, see Note 8 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.

In March 2014, we closed our continuous public offering of shares of common stock to new investors. We sold 302,266,066 shares of common stock for gross proceeds of $3,112,692 in our continuous public offering, including shares issued pursuant to our distribution reinvestment plan. Following the closing of our continuous public offering, we have continued to issue shares pursuant to our distribution reinvestment plan. As of November 7, 2014, we had sold a total of 312,860,686 shares of common stock and raised total gross proceeds of $3,212,935, including $200 of seed capital contributed by the principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from the principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of our board of directors and certain individuals and entities affiliated with GDFM in a private placement completed in June 2012.

During the nine months ended September 30, 2014, we sold 55,835,976 shares of our common stock for gross proceeds of $574,311 at an average price per share of $10.29. The gross proceeds received during the nine months ended September 30, 2014 include reinvested stockholder distributions of $87,432 for which we issued 9,155,924 shares of common stock. During the nine months ended September 30, 2014, we also incurred offering costs of $1,686 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value on our consolidated financial statements. The selling commissions and dealer manager fees related to the sale of our common stock were $44,484 for the nine months ended September 30, 2014. These selling commissions and fees include $8,821 of dealer manager fees retained by FS², which served as the dealer manager for our continuous public offering.

We generate cash primarily from the issuance of shares under our distribution reinvestment plan and from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments.

Prior to investing in securities of portfolio companies, we invest the net proceeds from the issuance of shares of our common stock under our distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.

The following table provides information concerning our repurchases of shares of common stock pursuant to our share repurchase program during the nine months ended September 30, 2014 and 2013:


For the Three Months Ended	Repurchase Date		Shares Repurchased		Percentage of Shares Tendered That Were Repurchased			Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
Fiscal 2013
December 31, 2012⁽¹⁾		January 2, 2013		—		—		$	9.225		—
March 31, 2013		April 1, 2013		76,086		100	%	$	9.360	$	712
June 30, 2013		July 1, 2013		45,414		100	%	$	9.450	$	429
Fiscal 2014
December 31, 2013		January 2, 2014		135,094		100	%	$	9.450	$	1,277
March 31, 2014		April 1, 2014		372,394		100	%	$	9.540	$	3,553
June 30, 2014		July 1, 2014		642,524		100	%	$	9.640	$	6,194

(1)	No shares were tendered for repurchase in connection with the quarterly tender offer.

On October 1, 2014, we repurchased 585,142 shares of common stock (representing 100% of the shares of common stock tendered for repurchase) at $9.64 per share for aggregate consideration totaling $5,641.

Capital Contribution by FSIC II Advisor and GDFM

In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser. In connection with the same private placement, certain members of our board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, we issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of November 7, 2014, we had sold an aggregate of 3,336,408 shares of common stock for aggregate gross proceeds of $30,524 to members of our board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold to Messrs. Forman and Adelman in December 2011 and shares sold in the private placement completed in June 2012.

RIC Status and Distributions

We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our “investment company taxable income,” as defined by the Code, each year. As long as the

distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no U.S. federal income taxes.

We declared our first distribution on June 20, 2012. Prior to the closing of our continuous public offering in March 2014, we authorized and declared regular cash distributions on a weekly or semi-monthly basis and paid such distributions on a monthly basis. Following the closing of our continuous public offering, we expect to authorize and declare regular cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis, in each case subject to our board of directors’ discretion and applicable legal restrictions. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or common stock at the discretion of our board of directors.

During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investor’s investment rather than a return of earnings or gains derived from our investment activities, and will be made after the deduction of fees and expenses, including any fees payable to FSIC II Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the nine months ended September 30, 2014 and 2013 represented a return of capital.

We intend to continue to make our regular distributions in the form of cash out of assets legally available for distribution, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

The following table reflects the cash distributions per share that we declared and paid on our common stock during the nine months ended September 30, 2014 and 2013:


	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2013
March 31, 2013	$	0.1871	$	14,791
June 30, 2013	$	0.1883	$	22,647
September 30, 2013	$	0.1837	$	30,873
Fiscal 2014
March 31, 2014	$	0.1740	$	49,274
June 30, 2014	$	0.1885	$	57,604
September 30, 2014	$	0.1885	$	58,086

On October 10, 2014, our board of directors declared a regular monthly cash distribution of $0.06283 per share, which was paid on October 31, 2014 to stockholders of record on October 30, 2014. On November 6, 2014, our board of directors declared a regular monthly cash distribution of $0.06283 per share, which will be paid on or about November 28, 2014 to stockholders of record on November 26, 2014. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a cash distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

We may fund our cash distributions to stockholders from any sources of funds legally available to us, including proceeds from the sale of shares of our common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, gains from credit default swaps, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.

For a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that were subject to repayment by us within three years. The purpose of this arrangement was to ensure that no portion of our distributions to stockholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the nine months ended September 30, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that stockholders may otherwise have received during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The following table reflects the sources of the cash distributions on a tax basis that we paid on our common stock during the nine months ended September 30, 2014 and 2013:


	Nine Months Ended September 30,
	2014					2013
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income⁽¹⁾		149,469		91	%		56,457		83	%
Short-term capital gains proceeds from the sale of assets		14,999		9	%		11,854		17	%
Long-term capital gains proceeds from the sale of assets		496		0	%		—		—
Gains from credit default swaps (ordinary income for tax)		—		—			—		—
Non-capital gains proceeds from the sale of assets		—		—			—		—
Distributions on account of preferred and common equity		—		—			—		—
Expense reimbursement from sponsor		—		—			—		—

Total	$	164,964		100	%	$	68,311		100	%

(1)

During the nine months ended September 30, 2014 and 2013, 93.9% and 91.9%, respectively, of our gross investment income was attributable to cash interest earned, 3.5% and 7.8%, respectively, was attributable to non-cash accretion of discount and 2.6% and 0.3%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the nine months ended September 30, 2014 and 2013 was $172,386 and $69,384, respectively. As of September 30, 2014 and December 31, 2013, we had $23,933 and $15,495, respectively, of undistributed net investment income and realized gains on a tax basis.

See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the nine months ended September 30, 2014 and 2013.

Critical Accounting Policies

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

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FSIC II Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts and valuations prepared by third-party valuation services.

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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

•

our quarterly valuation process begins with FSIC II Advisor’s management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable;

•

preliminary valuation conclusions are then documented and discussed with our valuation committee;

•

our valuation committee reviews the preliminary valuation and FSIC II Advisor’s management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and

•

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FSIC II Advisor, the valuation committee and any third-party valuation firm, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of directors may use independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FSIC II Advisor or any independent third-party valuation or pricing service, that it deems to be reliable in determining fair value under the circumstances. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments.

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.

For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with any third-party valuation firm, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

When we receive warrants or other equity-linked securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt

securities and any such warrants or other equity-linked securities received at the time of origination. Our board of directors will subsequently value these warrants or other equity-linked securities received at fair value.

The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Our investments as of September 30, 2014 consisted primarily of debt securities that were either traded on a private over-the-counter market for institutional investors or acquired directly from the issuer. Twenty-one senior secured loan investments, one senior secured bond investment, three subordinated debt investments and one collateralized security were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues, book value or liquidation value. Four equity/other investments, which were traded on active public markets, were valued at their closing price as of September 30, 2014. One senior secured loan investment, which was newly-issued and purchased near September 30, 2014, was valued at cost, as our board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, we valued our other investments and credit default swaps, including two equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.

Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Thirteen senior secured loan investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues, book value or liquidation value. One equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.

We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of such other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.

Revenue Recognition

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

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

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

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if our entire portfolio were liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

In addition, we historically treated all net settlement payments received by us pursuant to our TRS (which was terminated on June 13, 2013) as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the Staff informed us that it is their interpretation of the applicable language in the Advisers Act that we should “look through” the TRS in calculating our capital gains incentive fee. Under this “look through” methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP,

and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a “look through” basis under which we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a “look through” basis.

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the nine months ended September 30, 2014 and 2013, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FSIC II Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement include (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FSIC II Advisor and, to the extent it is required to provide such services, GDFM, are reimbursed for administrative expenses incurred on our behalf. For the three months ended September 30, 2014 and 2013, we incurred $21,780 and $11,067, respectively, in base management fees and $1,092 and $777, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the nine months ended September 30, 2014 and 2013, we incurred $59,270 and $23,647, respectively, in base management fees and $3,682 and $1,882, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FSIC II Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three and nine months ended September 30, 2014, we accrued a subordinated incentive fee on income of $8,419 and $18,098, respectively, based on the performance of our portfolio. During the three and nine months ended September 30, 2013, we accrued a subordinated incentive fee on income of $8,871 based on the

performance of our portfolio. During the nine months ended September 30, 2014, $9,679 was paid to FSIC II Advisor in respect of the subordinated incentive fee on income. During the three months ended September 30, 2014 we reversed $1,861 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the three months ended September 30, 2013, we accrued capital gains incentive fees of $1,042 based on the performance of our portfolio. During the nine months ended September 30, 2014 and 2013, we accrued capital gains incentive fees of $10,460 and $2,062, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. As of December 31, 2013, we had accrued capital gains incentive fees payable to FSIC II Advisor of $9,234 based on the performance of our portfolio, all of which was based on unrealized gains. We did not pay any capital gains incentive fees to FSIC II Advisor during the nine months ended September 30, 2014. As of September 30, 2014, we had accrued capital gains incentive fees of $19,694, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor.

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the JPM facility, Cooper River facility, Wissahickon Creek facility, Darby Creek facility and Dunning Creek facility at September 30, 2014 is as follows:


	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Borrowings of Cobbs Creek⁽¹⁾	$	550,000	$	550,000		—		—		—
Borrowings of Cooper River⁽²⁾	$	170,494	$	20,494	$	150,000		—		—
Borrowings of Wissahickon Creek⁽³⁾	$	112,500		—		—	$	112,500		—
Borrowings of Darby Creek⁽⁴⁾	$	217,000		—		—	$	217,000		—
Borrowings of Dunning Creek⁽⁵⁾	$	207,500	$	207,500		—		—		—

(1)

At September 30, 2014, no amounts remained unused under the JPM facility. Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction is scheduled to occur no later than May 20, 2017.

(2)	At September 30, 2014, $29,506 remained unused under the Cooper River facility. All amounts under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016. Amounts due on the facility will begin to amortize on June 27, 2015.

(3)	At September 30, 2014, $137,500 remained unused under the Wissahickon Creek facility. All amounts under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019.

(4)	At September 30, 2014, $33,000 remained unused under the Darby Creek facility. All amounts under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018.

(5)	At September 30, 2014, $42,500 remained unused under the Dunning Creek facility. All amounts under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2015.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

None.

Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of our investment operations. Management fees are paid on a quarterly basis in arrears.

The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.

We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisor’s actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to us based on factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

Franklin Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering and organization costs funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On June 18, 2012, we satisfied the minimum offering requirement. During the nine months ended September 30, 2014 and 2013, Franklin Square Holdings did not fund any of our offering and organization costs, and we did not pay any reimbursements to FSIC II Advisor and its affiliates for offering and organization costs previously funded.

The dealer manager for our continuous public offering was FS², which is one of our affiliates. Under the dealer manager agreement among us, FSIC II Advisor and FS², FS² was entitled to receive selling commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.


			Three Months Ended September 30,					Nine Months Ended September 30,
Related Party	Source Agreement	Description	2014			2013		2014		2013
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee⁽¹⁾	$	21,780		$	11,067	$	59,270	$	23,647
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Capital Gains Incentive Fee⁽²⁾	$	(1,861	)	$	1,042	$	10,460	$	2,062
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income⁽³⁾	$	8,419		$	8,871	$	18,098	$	8,871
FSIC II Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses⁽⁴⁾	$	1,092		$	777	$	3,682	$	1,882
FS²	Dealer Manager Agreement	Dealer Manager Fee⁽⁵⁾	$	—		$	11,388	$	8,821	$	26,068

(1)	During the nine months ended September 30, 2014 and 2013, $52,503 and $15,047, respectively, in base management fees were paid to FSIC II Advisor. As of September 30, 2014, $21,780 in base management fees were payable to FSIC II Advisor.

(2)

During the nine months ended September 30, 2014 and 2013, we accrued capital gains incentive fees of $10,460 and $2,062, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for a discussion of the methodology employed by us in calculating the capital gains incentive fee. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the “look through” methodology described more fully in “—Critical Accounting Policies—Capital Gains Incentive Fee”. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, we reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. We did not pay any capital gains incentive fees to FSIC II Advisor during the nine months ended September 30, 2014. We paid FSIC II Advisor $37 in capital gains incentive fees during the nine months ended September 30, 2013. As of September 30, 2014, we had accrued capital gains incentive fees of $19,694 based on the performance of our portfolio, all of which was based on unrealized gains.

(3)	During the nine months ended September 30, 2014 and 2013, $9,679 and $0, respectively, of the subordinated incentive fees on income were paid to FSIC II Advisor. As of September 30, 2014, a subordinated incentive fee on income of $8,419 was payable to FSIC II Advisor.

(4)

During the nine months ended September 30, 2014 and 2013, $3,338 and $1,551, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FSIC II Advisor and the remainder related to other reimbursable expenses. We paid $2,639 and $1,243 in administrative services expenses to FSIC II Advisor during the nine months ended September 30, 2014 and 2013, respectively.

(5)	Represents aggregate dealer manager fees retained by FS² and not re-allowed to selected broker-dealers.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of September 30, 2014, 77.1% of our portfolio investments (based on fair value) paid variable interest rates, 19.7% paid fixed interest rates, 3.0% were non-income producing equity or other investments and the remainder (0.2%) were income-producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FSIC II Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the Cooper River facility, Wissahickon Creek facility, Darby Creek facility and Dunning Creek facility, Cooper River, Wissahickon Creek, Darby Creek and Dunning Creek, respectively, borrow at a floating rate based on LIBOR. Under the terms of the JPM facility, Cobbs Creek pays interest to JPM at a fixed rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

The following table shows the effect over a twelve-month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments and our borrowing arrangements in effect as of September 30, 2014 (dollar amounts are presented in thousands):


Basis Point Change in Interest Rate	Increase (Decrease) in Interest Income			Increase (Decrease) in Interest Expense			Increase (Decrease) in Net Interest Income			Percentage Change in Net Interest Income
Down 25 basis points	$	(215	)	$	(1,840	)	$	1,625			0.5	%
No change		—			—			—			—
Up 100 basis points		4,371			7,358			(2,987	)		(0.9	)%
Up 300 basis points		63,904			22,075			41,829			12.1	%
Up 500 basis points		126,150			36,792			89,358			25.9	%

We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the nine months ended September 30, 2014 and 2013, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

Item 4.

Controls and Procedures.

As required by Rule 13a-15(b) under the Exchange Act, 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 of September 30, 2014. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the three-month period ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material adverse effect upon our financial condition or results of operations.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and quarterly report on Form 10-Q for the quarterly period ended June 30, 2014.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The table below provides information concerning our repurchases of shares of our common stock during the three months ended September 30, 2014 pursuant to our share repurchase program.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 to July 31, 2014		642,524	$	9.64		642,524		(1	)
August 1 to August 31, 2014		—		—		—		—
September 1 to September 30, 2014		—		—		—		—

Total		642,524	$	9.64		642,524		(1	)

(1)	A description of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.

See Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more detailed discussion of the terms of our share repurchase program.

Item 3.

Defaults upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits.



3.1		Articles of Amendment and Restatement of the Company. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 14, 2012.)

3.2		Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (b) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

4.1		Distribution Reinvestment Plan of the Company. (Incorporated by reference to Exhibit (e) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

4.2		Amended and Restated Distribution Reinvestment Plan of the Company, effective as of January 1, 2013. (Incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed on November 14, 2012.)

4.3		Amended and Restated Distribution Reinvestment Plan of the Company, effective as of March 26, 2014. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 24, 2014.)

10.1		Investment Advisory and Administrative Services Agreement, dated as of February 8, 2012, by and between the Company and FSIC II Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

10.2		Investment Sub-Advisory Agreement, dated as of February 8, 2012, by and between FSIC II Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

10.3		Dealer Manager Agreement, dated as of February 8, 2012, by and among the Company, FSIC II Advisor, LLC and FS² Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

10.4		Form of Follow-On Dealer Manager Agreement. (Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.)

10.5		Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

10.6		Form of Follow-On Selected Dealer Agreement (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.)

10.7		Custodian Agreement, dated as of February 8, 2012, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit (j) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)

10.8		Escrow Agreement, dated as of January 23, 2012, by and among the Company, UMB Bank, N.A. and FS² Capital Partners, LLC. (Incorporated by reference to Exhibit (k) to Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)


10.9		ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 3, 2012.)

10.10		Confirmation Letter Agreement, dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 3, 2012.)

10.11		Amended and Restated Confirmation Letter Agreement, dated as of September 12, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 12, 2012.)

10.12		Amended and Restated Confirmation Letter Agreement, dated as of September 27, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 1, 2012.)

10.13		Amended and Restated Confirmation Letter Agreement, dated as of November 15, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 15, 2012.)

10.14		Amended and Restated Confirmation Letter Agreement, dated as of December 13, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2012.)

10.15		Termination Acknowledgment (TRS), dated as of June 13, 2013, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 17, 2013.)

10.16		Investment Management Agreement, dated as of July 2, 2012, by and between the Company and Del River LLC (formerly known as IC-II Investments LLC). (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 3, 2012.)

10.17		Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Lehigh River LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.18		Indenture, dated as of October 26, 2012, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.19		Amended and Restated Indenture, dated as of February 6, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 7, 2013.)

10.20		Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)

10.21		Lehigh River LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.22		Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 7, 2013.)


10.23		Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)

10.24		TBMA/ISMA 2000 Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Confirmation thereto, each dated as of October 26, 2012. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.25		TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of February 6, 2013. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 7, 2013.)

10.26		TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)

10.27		Revolving Credit Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.28		Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.29		Collateral Management Agreement, dated as of October 26, 2012, by and between Lehigh River LLC and the Company. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.30		Collateral Administration Agreement, dated as of October 26, 2012, by and among Lehigh River LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.31		Collateral Management Agreement, dated as of October 26, 2012, by and between Cobbs Creek LLC and the Company. (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)

10.32		Loan Agreement, dated as of March 27, 2013, by and between Cooper River LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 28, 2013.)

10.33		Account Control Agreement, dated as of March 27, 2013, by and between Cooper River LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 28, 2013.)

10.34		Security Agreement, dated as of March 27, 2013, by and between Cooper River LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 28, 2013.)

10.35		Agreement and Plan of Merger, dated as of March 27, 2013, by and among Cooper River LLC, Cooper River CBNA Loan Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 28, 2013.)

10.36		Investment Management Agreement, dated as of March 27, 2013, by and between the Company and Cooper River LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 28, 2013.)


10.37		Loan and Servicing Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as borrower, Wells Fargo Securities, LLC, as administrative agent, Wells Fargo Bank, National Association, as collateral agent, account bank and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.38		Purchase and Sale Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.39		Collateral Management Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC and the Company, as collateral manager. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.40		Securities Account Control Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as pledgor, Wells Fargo Bank, National Association, as collateral agent, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.41		Loan Financing and Servicing Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.42		Sale and Contribution Agreement, dated as of February 20, 2014, by and between Darby Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.43		Investment Management Agreement, dated as of February 20, 2014, by and between Darby Creek LLC and the Company, as investment manager. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.44		Securities Account Control Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as pledgor, Wells Fargo Bank, National Association, as secured party, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

10.45		Credit Agreement, dated as of May 14, 2014, by and among Dunning Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent and lender, and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)

10.46		First Amendment to Credit Agreement, dated as of June 4, 2014, by and between Dunning Creek LLC and Deutsche Bank AG, New York Branch, as administrative agent and lender. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 6, 2014.)

10.47		Custodial Agreement, dated as of May 14, 2014, by and among Dunning Creek LLC, as borrower, the Company, as manager, Deutsche Bank AG, New York Branch, as administrative agent, and Deutsche Bank Trust Company Americas, as custodian. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)

10.48		Security Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)

10.49		Sale and Contribution Agreement, dated as of May 14, 2014, by and between the Company, as seller, and Dunning Creek LLC, as purchaser. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)


10.50		Investment Management Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC and the Company, as investment manager. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

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 on November 14, 2014.


FS INVESTMENT CORPORATION II

By:		/s/ MICHAEL C. FORMAN
		Michael C. Forman
		Chief Executive Officer
		(Principal Executive Officer)

By:		/s/ MICHAEL LAWSON
		Michael Lawson
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

FS KKR Capital Corp. II - FORM 10-Q - November 14, 2014

Attached files

FS KKR Capital Corp. II Reports

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