Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2013

 

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

COMMISSION FILE NUMBER: 814-00813

 

 

OFS CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   46-1339639

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2850 West Golf Road, 5th Floor

Rolling Meadows, Illinois 60008

(Address of principal executive office)

(847) 734-2060

(Registrant’s telephone number, including area code)

 

 

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 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

The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of May 3, 2013 was 9,624,990.

 

 

 


Table of Contents

OFS CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION      1   
Item 1.    Financial Statements      1   
   Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012      1   
  

Consolidated Statements of Operations for the Three Months Ended March 31, 2013 (unaudited) and 2012 (unaudited)

     2   
  

Consolidated Statements of Changes in Net Assets for the Three Months Ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited)

     3   
  

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 (unaudited) and 2012 (unaudited)

     4   
   Consolidated Schedules of Investments as of March 31, 2013 (unaudited) and December 31, 2012      6   
   Notes to Unaudited Consolidated Financial Statements      14   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      34   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      50   
Item 4.    Controls and Procedures      51   
PART II. OTHER INFORMATION      51   
Item 1.    Legal Proceedings      51   
Item 1A.    Risk Factors      51   
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds      51   
Item 3.    Defaults Upon Senior Securities      51   
Item 4.    Mine Safety Disclosures      51   
Item 5.    Other Information      51   
Item 6.    Exhibits      52   
SIGNATURES      52   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

OFS Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

     March 31,
2013
    December 31,
2012
 
     (unaudited)        

Assets

    

Investments, at fair value

    

Non-affiliate investments (cost of $224,313 and $231,781, respectively)

   $ 221,247      $ 227,542   

Affiliate investments (cost of $7,667 and $5,049, respectively)

     7,526        4,657   
  

 

 

   

 

 

 

Total investments at fair value

     228,773        232,199   

Cash and cash equivalents

     12,168        8,270   

Restricted cash and cash equivalents

     623        623   

Interest receivable

     895        1,292   

Prepaid expenses and other assets

     263        326   

Deferred financing costs, net of accumulated amortization of $1,805 and $1,336, respectively

     2,370        2,839   
  

 

 

   

 

 

 

Total assets

   $ 245,092      $ 245,549   
  

 

 

   

 

 

 

Liabilities

    

Accrued professional fees

   $ 353      $ 463   

Interest payable

     822        1,222   

Dividend payable

     3,269        1,628   

Management fee payable

     870        667   

Administration fee payable

     280        110   

Other payables

     162        223   

Due to affiliated entities, net

     —          9   

Deferred loan fee revenue

     244        204   

Revolving line of credit

     97,190        99,224   
  

 

 

   

 

 

 

Total liabilities

     103,190        103,750   
  

 

 

   

 

 

 

Net Assets

    

Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2013 and December 31, 2012

     —          —     

Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 9,613,582 and 9,578,691 shares issued and outstanding as of March 31, 2013 and December 31, 2012

     96        96   

Paid-in capital in excess of par

     142,909        142,408   

Distributions in excess of net investment income

     (1,916     (94

Net unrealized appreciation (depreciation) on investments

     813        (611
  

 

 

   

 

 

 

Total net assets

     141,902        141,799   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 245,092      $ 245,549   
  

 

 

   

 

 

 

Number of shares outstanding

     9,613,582        9,578,691   
  

 

 

   

 

 

 

Net asset value per share

   $ 14.76      $ 14.80   
  

 

 

   

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

1


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

(Amounts in thousands, except share and per share data)

 

            Pre-IPO prior to
becoming a Business
Development
Company(1)
 
     Three Months Ended
March 31, 2013
     Three Months Ended
March 31, 2012
 

Investment income

     

Interest income from non-affiliate investments

   $ 4,365       $ 578   

Dividend and fee income

     —           46   
  

 

 

    

 

 

 

Total investment income

     4,365         624   
  

 

 

    

 

 

 

Expenses

     

Interest expense

     847         —     

Amortization of deferred financing closing costs

     469         —     

Management fee

     807         357   

Professional fees

     250         15   

Administrative fee

     280         —     

General and administrative expenses

     270         37   
  

 

 

    

 

 

 

Total expenses

     2,923         409   
  

 

 

    

 

 

 

Net investment income

     1,442         215   
  

 

 

    

 

 

 

Net realized and unrealized gain (loss) on investments

     

Net realized gain on non-affiliate investments

     5         —     

Net change in unrealized depreciation on non-affiliate investments

     1,173         —     

Net change in unrealized depreciation on affiliate investments

     251         —     
  

 

 

    

 

 

 

Net realized and unrealized gain on investments

     1,429         —     
  

 

 

    

 

 

 

Other income prior to becoming a business development company

     

Income from equity interest in OFS Capital WM

     —           2,645   
  

 

 

    

 

 

 

Total other income prior to becoming a business development company

     —           2,645   
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 2,871       $ 2,860   
  

 

 

    

 

 

 

Net investment income per common share—basic and diluted

   $ 0.15      
  

 

 

    

Net increase in net assets resulting from operations per common share—basic and diluted

   $ 0.30      
  

 

 

    

Dividend declared per common share—basic and diluted

   $ 0.34      
  

 

 

    

Basic and diluted weighted average shares outstanding

     9,601,952      
  

 

 

    

 

(1) For historical periods that include financial results prior to November 7, 2012, the Company did not have common shares outstanding or an equivalent and, therefore, earnings per share, dividends declared per common shares and weighted average shares outstanding information for periods that include financial results prior to November 7, 2012 are not provided.

See Notes to Unaudited Consolidated Financial Statements.

 

2


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets (unaudited)

(Amounts in thousands, except share and per share data)

 

     Member’s
Equity
    Common Stock      Paid-in
Capital in
Excess
of Par
     Distributions
in Excess of
Net
Investment
Income
    Accumulated
Net Realized
Gain
    Net
Unrealized
Appreciation
(Depreciation)
on
Investments
    Total Net
Assets
 
       Shares      Par              

Balance at January 1, 2012

   $ 54,719        —         $ —         $ —         $ —        $ —        $ —        $ 54,719   

Net income

     2,860        —           —           —           —          —          —          2,860   

Distributions

     (1,152     —           —           —           —          —          —          (1,152
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 56,427        —           —           —           —          —          —          56,427   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

   $ —          9,578,691       $ 96       $ 142,408       $ (94   $ —        $ (611   $ 141,799   

Net increase in net assets resulting from operations

     —          —           —           —           1,442        5        1,424        2,871   

Stock issued in connection with dividend reinvestment plan

     —          34,891         —           501         —          —          —          501   

Dividend payable

     —          —           —           —           (3,264     (5     —          (3,269
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ —          9,613,582       $ 96       $ 142,909       $ (1,916   $ —        $ 813        141,902   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

3


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

           Pre-IPO prior to
becoming a Business
Development
Company
 
     Three Months Ended
March 31, 2013
    Three Months Ended
March 31, 2012
 

Cash Flows From Operating Activities

    

Net increase in net assets resulting from operations

   $ 2,871      $ 2,860   

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:

    

Amortization and write-off of deferred financing closing costs

     469        —     

Amortization of discounts and premium

     (329     —     

Amortization of deferred fee revenue

     (38     (41

Cash collection of deferred fee revenue

     77        —     

Net realized gain on non-affiliate investments

     (5     —     

Net change in unrealized depreciation on non-affiliate investments

     (1,173     —     

Net change in unrealized depreciation on affiliate investments

     (251     —     

Purchase of portfolio investments

     (7,507     —     

Proceeds from principal payments on portfolio investments

     10,596        —     

Proceeds from sale of portfolio investments

     4,713        —     

Income from equity investment in OFS Capital WM

     —          (2,645

Changes in operating assets and liabilities:

    

Interest receivable and other assets

     397        4   

Accrued paid-in-kind interest

     —          (94

Prepaid expenses and other current assets

     63        —     

Accrued professional fees

     (110     —     

Due to/from affiliated entities, net

     (9     414   

Interest payable

     (400     —     

Management fee payable

     203        —     

Administration fee payable

     170        —     

Other payables

     (61     —     
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,676        498   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Advances and other assets

     —          (8

Distribution from OFS Capital WM

     —          1,225   

Additional equity investment in Tamarix LP

     (2,618     —     

Consolidation of cash from OFS Capital WM

     —          9,581   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (2,618     10,798   
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net repayments under revolving lines of credit

     (2,033     —     

Other liabilities

     —          207   

Cash dividend paid

     (1,127     —     

Deferred offering costs

     —          (105
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (3,160     102   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     3,898        11,398   

Cash and cash equivalents—beginning of period

     8,270        814   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 12,168      $ 12,212   
  

 

 

   

 

 

 

(Continued)

 

4


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

            Pre-IPO prior to
becoming a Business
Development
Company
 
     Three Months Ended
March 31, 2013
     Three Months Ended
March 31, 2012
 

Supplemental Disclosure of Cash Flow Information:

     

Cash paid during the period for interest

   $ 1,247       $ —     

Supplemental Disclosure of Noncash Financing and Investing Activities:

     

Accrued deferred offering costs

   $ —         $ 3,140   

Dividends paid by issuance of common stock

     501         —     

Dividend payable

     3,269         —     

Member distribution payable

     —           1,152   

Elimination of equity investment in OFS Capital WM and consolidation of assets and liabilities of OFS Capital WM effective March 30, 2012:

     

Restricted cash and cash equivalents

     —           623   

Interest receivable

     —           920   

Investments, at fair value

     —           197,765   

Deferred financing costs, net of accumulated amortization

     —           2,637   

Revolving line of credit—Wells Fargo

     —           134,123   

Revolving line of credit—Madison Capital

     —           30,752   

Interest payable

     —           1,647   

Management fee payable

     —           314   

Due to affiliated entity

     —           18   

Accrued expenses and other liabilities

     —           132   

See Notes to Unaudited Consolidated Financial Statements.

 

5


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments (unaudited)

March 31, 2013

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Interest
Rate(1)
     Spread
Above

Index(1)
     Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Non-affiliate Investments(5)

                       

Accounts Receivable Management Services

                    

Revspring Inc.

  

Senior Secured

Term Loan

     6.25%         (L +5.00%)         08/03/17         $4,876         $4,839         $4,715         3.3 %   
              

 

 

    

 

 

    

 

 

    

 

 

 

Aerospace & Defense

                    

Whitcraft LLC

  

Senior Secured

Term Loan

     6.26%         (L +4.75%)         12/16/15         4,373         4,328         4,298         3.0   
              

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management & Custody Banks

                    

Townsend Acquisition LLC

  

Senior Secured

Term Loan

     6.25%         (L +4.75%)         05/18/16         4,750         4,665         4,652         3.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management Services

                    

Cetera Financial Group, Inc.

  

Senior Secured

Term Loan A

     6.50%         (L +5.00%)         06/22/17         4,813         4,793         4,694         3.3   

H.D. Vest, Inc.

   Senior Secured Term Loan      7.00%         (L +5.50%)         10/03/17         4,750         4,696         4,698         3.3   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 9,563         9,489         9,392         6.6   
              

 

 

    

 

 

    

 

 

    

 

 

 

Automobile

                    

Tectum Holdings Inc (Extang)

   Senior Secured Term Loan A      7.50%         (L +5.25%)         12/03/15         3,132         3,112         3,096         2.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Automotive Aftermarket Manufacturing

                    

Trico Products Corporation

   Senior Secured Term Loan      6.26%         (L +4.75%)         07/22/16         4,685         4,636         3,960         2.8   
              

 

 

    

 

 

    

 

 

    

 

 

 

Beverage, Food and Tobacco

                    

Columbus Manufacturing, Inc.

   Senior Secured Term Loan B      6.50%         (L +5.25%)         04/17/18         3,990         3,935         3,885         2.7   
              

 

 

    

 

 

    

 

 

    

 

 

 

Broadcasting and Entertainment

                    

Campus Televideo Inc. (F/K/A: Lamont Digital Systems, Inc.)

   Senior Secured Term Loan      7.25%         (L +5.75%)         10/23/17         4,572         4,468         4,554         3.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Busines Equipment & Services

                    

Dorner MFG, Corp.

   Senior Secured Term Loan      6.25%         (L +4.75%)         06/15/17         3,354         3,298         3,245         2.3   

Tharpe Company, Inc.

   Senior Secured Term Loan      7.00%         (L +5.75%)         10/19/17         4,392         4,333         4,322         3.0   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 7,746         7,631         7,567         5.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Chemical / Plastics

                    

Actagro, LLC

   Senior Secured Term Loan      7.00%         (L +5.50%)         12/30/16         1,950         1,926         1,942         1.4   

Fluoro-Seal International LLC

   Senior Secured Term Loan A      9.00%         (L +7.50%)         01/04/17         2,924         2,892         2,943         2.1   

ICM Products Inc

   Senior Secured Term Loan      8.50%         (L +7.00%)         02/01/17         2,375         2,339         2,390         1.7   

VanDeMark Chemical Inc.

   Senior Secured Term Loan      6.50%         (L +5.25%)         11/30/17         2,977         2,922         2,898         2.0   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 10,226         10,079         10,173         7.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Fastener Manufactuing

                    

Elgin Fasteners Group

   Senior Secured Term Loan      7.02%         (L +5.50%)         08/26/16         4,634         4,536         4,536         3.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Distributors

                    

Diversified Foodservice Supply, Inc. F/K/

   Senior Secured Term Loan      6.75%         (L +5.00%)         01/27/16         4,523         4,483         4,497         3.2   

Lindstrom Metric, LLC

   Senior Secured Term Loan      6.26%         (L +4.75%)         07/12/16         4,621         4,581         4,518         3.2   

Phillips Feed & Pet Supply

   Senior Secured Term Loan      7.50%         (L +5.25%)         10/13/17         3,265         3,227         3,180         2.2   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 12,409         12,291         12,195         8.6   
              

 

 

    

 

 

    

 

 

    

 

 

 

Diversified Commercial & Professional Services

                    

Royal Adhesives

   Senior Secured Term Loan A      7.25%         (L +5.50%)         11/29/15         4,424         4,387         4,448         3.1   
              

 

 

    

 

 

    

 

 

    

 

 

 

Diversified/Conglomerate Manufacturing

                    

Revere Industries, LLC

   Senior Secured Rollover Loans      9.00%         (L +6.00%)         06/30/13         1,889         1,890         1,889         1.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Electrical Components & Equipment

                    

B&B Electronics Manufacturing Company

   Senior Secured Term Loan A      6.50%         (L +5.00%)         04/04/15         2,858         2,827         2,836         2.0   

Barcodes LLC

   Senior Secured Term Loan      7.25%         (L +6.00%)         11/02/17         3,063         3,021         3,049         2.2   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 5,921         5,848         5,885         4.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

 

6


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments (unaudited)—Continued

March 31, 2013

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Interest
Rate(1)
   

Spread
Above
Index(1)

   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Energy: Oil & Gas

  

                

ANS Distributing, INC.

   Senior Secured Term Loan      8.00   (L +6.50%)      11/01/17         3,209         3,151         3,230         2.3   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Consulting & Services

  

                

Apex Companies, LLC.

   Senior Secured Term Loan      7.51   (L +5.75%)      12/10/16         4,145         4,105         4,172         2.9   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Equipment Manufacturer

  

                

JWC Environmental, LLC.

   Senior Secured Term Loan      6.00   (L +4.50%)      08/03/16         4,197         4,168         4,067         2.9   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Industries

                      

Aero-Metric, Inc.

   Senior Secured Term Loan      6.75   (L +5.25%)      08/27/17         2,819         2,782         2,776         2.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Financial Intermediaries

                      

CSI Financial Services, LLC(6)

   Senior Secured Term Loan      7.25   (L +6.00%)      12/07/17         3,485         3,428         3,483         2.5   
             

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Equipment

                      

Hygenic Corporation

   Senior Secured Term Loan      5.76   (L +4.50%)      10/11/18         4,925         4,857         4,857         3.4   

MedTech Group, Inc.

   Senior Secured Term Loan      7.00   (L +5.50%)      09/07/16         4,759         4,710         4,743         3.3   

NeuroTherm, Inc

   Senior Secured Term Loan      6.50   (L +5.00%)      02/01/16         4,334         4,289         4,187         3.0   
             

 

 

    

 

 

    

 

 

    

 

 

 
                14,018         13,856         13,787         9.7   
             

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Services

                      

Aegis Sciences Corporation

   Senior Secured Term Loan A      6.75   (L +5.50%)      10/21/16         4,813         4,749         4,749         3.3   

Elements Behavioral Health, Inc.

   Senior Secured Term Loan A      7.50   (L +6.00%)      08/14/17         4,876         4,813         4,908         3.5   

MCMC LLC

   Senior Secured Term Loan A      7.50   (L +6.00%)      09/30/16         4,503         4,454         4,503         3.2   

Studer Group LLC

   Senior Secured Term Loan      7.00   (L +5.50%)      09/28/16         4,483         4,434         4,465         3.1   
             

 

 

    

 

 

    

 

 

    

 

 

 
                18,675         18,450         18,625         13.1   
             

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Supplies

                      

The Ritedose Corporation

   Senior Secured Term Loan      7.69   (L +6.00%)      11/10/16         3,368         3,327         2,899         2.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare

                      

Cambridge Major Labs, Inc

   Senior Secured Term Loan      6.25   (L +5.00%)      12/31/17         3,625         3,512         3,512         2.5   

Strata Pathology Services, Inc.

   Senior Secured Term Loan      9.00   (L +7.50%)      06/30/16         4,874         4,816         3,386         2.4   
             

 

 

    

 

 

    

 

 

    

 

 

 
                8,499         8,328         6,898         4.9   
             

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare Facilities

                      

Accelerated Health Systems LLC

   Senior Secured Term Loan      5.75   (L +4.50%)      07/22/17         4,925         4,888         4,840         3.4   
             

 

 

    

 

 

    

 

 

    

 

 

 

High Tech Industries

                      

OnePath Systems, LLC

   Senior Secured Term Loan      7.50   (L +6.00%)      06/06/17         2,438         2,397         2,453         1.7   
             

 

 

    

 

 

    

 

 

    

 

 

 

Household Products

                      

Phoenix Brands LLC

   Senior Secured Term Loan A      6.75   (L +5.25%)      01/31/16         3,594         3,557         3,565         2.5   
             

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Conglomerates

                      

Jameson LLC

   Senior Secured Term Loan      9.50   (L +7.50%)      10/01/15         2,344         2,320         2,136         1.5   
             

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Gases

                      

Engineered Controls International, LLC

   Senior Secured Term Loan      6.50   (L +4.75%)      08/05/16         4,363         4,319         4,289         3.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Insurance

                      

Captive Resources Midco LLC

   Senior Secured Term Loan      6.75   (L +5.50%)      10/31/18         4,988         4,918         4,879         3.4   
             

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments (unaudited)—Continued

March 31, 2013

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Interest
Rate(1)
    Spread
Above

Index(1)
    Maturity      Principal
Amount
     Cost     Fair Value     Percent of
Net Assets
 

Insurance Brokerage

  

             

Assured Partners Capital, Inc.

   Senior Secured Term Loan A      6.50     (L +5.25 %)      05/01/18         4,864         4,864        4,712        3.3   

Frenkel Benefits LLC

   Senior Secured Term Loan A      6.25     (L +5.00 %)      12/28/15         3,729         3,687        3,665        2.6   

Personable Holdings, Inc.

   Senior Secured Term Loan      8.00     (L +6.50 %)      05/16/17         3,738         3,700        3,762        2.7   
            

 

 

    

 

 

   

 

 

   

 

 

 
               12,331         12,251        12,139        8.6   
            

 

 

    

 

 

   

 

 

   

 

 

 

Media: Advertising, Printing & Publishing

  

             

Content Marketing, LLC

   Senior Secured Term Loan      7.50     (L +6.25 %)      12/21/17         3,986         3,930        3,930        2.8   
            

 

 

    

 

 

   

 

 

   

 

 

 

North American Commodities Brokerage

  

             

Charter Brokerage LLC

   Senior Secured Term Loan A      8.00     (L +6.50 %)      10/10/16         4,522         4,466        4,551        3.2   
            

 

 

    

 

 

   

 

 

   

 

 

 

Personal Products

  

             

Mold-Rite Plastics, LLC

   Senior Secured Term Loan      6.25     (L +4.50 %)      06/30/16         4,462         4,417        4,366        3.1   

Pacific World

   Senior Secured Term Loan      7.00     (L +5.50 %)      10/31/16         4,888         4,824        4,870        3.4   
            

 

 

    

 

 

   

 

 

   

 

 

 
               9,350         9,241        9,236        6.5   
            

 

 

    

 

 

   

 

 

   

 

 

 

Printing & Publishing

  

             

Pamarco Technologies, Inc.

   Senior Secured Revolver      N/A        (L +3.75 %)      12/31/14         —           (7     (21 )(2)      —     

Pamarco Technologies, Inc.

   Senior Secured Term Loan A      6.00     (L +3.75 %)      12/31/14         2,431         2,420        2,396        1.7   
            

 

 

    

 

 

   

 

 

   

 

 

 
               2,431         2,413        2,375        1.7   
            

 

 

    

 

 

   

 

 

   

 

 

 

Property & Casualty Insurance

  

             

MYI Acquiror Limited(6)

   Senior Secured Term Loan A      6.25     (L +4.75 %)      09/13/16         4,937         4,882        4,815        3.4   
            

 

 

    

 

 

   

 

 

   

 

 

 

Publishing

  

             

Media Source

   Senior Secured Term Loan A      6.75     (L +5.25 %)      11/07/16         1,479         1,457        1,465        1.0   

Media Source

   Senior Secured Term Loan B      7.50     (L +6.00 %)      11/07/16         3,487         3,435        3,509        2.5   
            

 

 

    

 

 

   

 

 

   

 

 

 
               4,966         4,892        4,974        3.5   
            

 

 

    

 

 

   

 

 

   

 

 

 

Rehabilitation Products and Services

  

             

Behavioral Health Group

   Senior Secured Term Loan A      5.75     (L +4.50 %)      08/18/16         4,925         4,890        4,739        3.4   
            

 

 

    

 

 

   

 

 

   

 

 

 

Telecommunications

  

             

ConvergeOne Holdings Corporation

   Senior Secured Term Loan A      8.50     (L +7.00 %)      06/08/17         2,310         2,291        2,310        1.6   

NHR Holdings, LLC

   Senior Secured Term Loan A      6.50     (L +5.25 %)      11/30/18         2,483         2,448        2,401        1.7   

NHR Holdings, LLC

   Senior Secured Term Loan B      6.50     (L +5.25 %)      11/30/18         2,517         2,481        2,433        1.7   
            

 

 

    

 

 

   

 

 

   

 

 

 
               7,310         7,220        7,144        5.0   
            

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total Non-affiliate Investments

  

       227,015         224,313        221,247        155.9   
            

 

 

    

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments (unaudited)—Continued

March 31, 2013

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Principal
Amount
     Cost     Fair Value     Percent of
Net Assets
 

Affiliate Investments

            

Finance

            

Tamarix Capital
Partners, L.P.(6)

   67.5%
Limited Partnership Interest
     N/A         7,667        7,526        5.3   
        

 

 

   

 

 

   

 

 

 

Sub-total Affiliate Investments

           7,667        7,526        5.3   
        

 

 

   

 

 

   

 

 

 

Money Market

            

WF Prime INVT MM #1752(5)

   Money Market      N/A         9,293 (3)      9,293 (3)      6.5   

WFB Secured Institutional MM(5)

   Money Market      N/A         623 (4)      623 (4)      0.5   

US Bank Money Market Deposit

   Money Market      N/A         990 (3)      990 (3)      0.7   
        

 

 

   

 

 

   

 

 

 

Sub-total Money Market

           10,906        10,906        7.7   
     

 

 

    

 

 

   

 

 

   

 

 

 

Total Investments (United States)

      $ 227,015       $ 242,886      $ 239,679        168.9
     

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) The majority of the investments bear interest at a rate that may be determined by reference to LIBOR (L) or Prime and which is reset daily, quarterly or semi-annually. For each investment, we have provided the spread over LIBOR and current interest rate in effect at March 31, 2013. Certain investments are subject to a LIBOR or Prime interest rate floor.
(2) The negative fair value is the result of the unfunded commitment being valued below par.
(3) Included in cash and cash equivalents on the consolidated balance sheets.
(4) Included in restricted cash and cash equivalents on the consolidated balance sheets.
(5) Pledged as collateral under the OFS Capital WM Credit Facility.
(6) Indicates assets that the Company deems not “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets.

See Notes to Unaudited Consolidated Financial Statements.

 

9


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

  

Interest
Rate(1)

  

Spread
Above

Index(1)

   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 
Non-affiliate Investments(5)                  

Accounts Receivable Management Services

              

Revspring Inc.

   Senior Secured Term Loan    6.25%    (L +5.00%)      08/03/17       $ 4,907       $ 4,868       $ 4,673         3.3
              

 

 

    

 

 

    

 

 

    

 

 

 

Aerospace & Defense

                       

Whitcraft LLC

   Senior Secured Term Loan    6.25%    (L +4.75%)      12/16/15         4,565         4,514         4,440         3.1   
              

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management & Custody Banks

                 

Townsend Acquisition LLC

   Senior Secured Term Loan    6.25%    (L +4.75%)      05/18/16         4,750         4,658         4,598         3.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management Services

                       

Cetera Financial Group, Inc.

   Senior Secured Term Loan A    6.50%    (L +5.00%)      06/22/17         4,875         4,854         4,699         3.3   

H.D. Vest, Inc.

   Senior Secured Term Loan    7.00%    (L +5.50%)      10/03/17         4,813         4,755         4,706         3.3   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 9,688         9,609         9,405         6.6   
              

 

 

    

 

 

    

 

 

    

 

 

 

Automobile

                       

BBB Industries, LLC

   Senior Secured Term Loan    6.50%    (L +4.50%)      06/29/13         4,713         4,704         4,671         3.3   

Tectum Holdings Inc (Extang)

   Senior Secured Term Loan A    7.50%    (L +5.25%)      12/03/15         3,172         3,149         3,149         2.2   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 7,885         7,853         7,820         5.5   
              

 

 

    

 

 

    

 

 

    

 

 

 

Automotive Aftermarket Manufacturing

                 

Trico Products Corporation

   Senior Secured Term Loan    6.25%    (L +4.75%)      07/22/16         4,685         4,632         3,798         2.7   
              

 

 

    

 

 

    

 

 

    

 

 

 

Beverage, Food and Tobacco

                 

Columbus Manufacturing, Inc.

   Senior Secured Term Loan B   

6.50%

   (L +5.25%)      04/17/18         4,000         3,942         3,942         2.8   
              

 

 

    

 

 

    

 

 

    

 

 

 

Broadcasting and Entertainment

                 

Lamont Digital Systems, Inc.

   Senior Secured Term Loan    7.25%    (L +5.75%)      10/23/17         4,661         4,549         4,549         3.2   
              

 

 

    

 

 

    

 

 

    

 

 

 

Busines Equipment & Services

                 

Dorner MFG, Corp.

   Senior Secured Term Loan    6.25%    (L +4.75%)      06/15/17         3,398         3,338         3,274         2.3   

Tharpe Company, Inc.

   Senior Secured Term Loan    7.00%    (L +5.75%)      10/19/17         5,000         4,928         4,928         3.5   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 8,398         8,266         8,202         5.8   
              

 

 

    

 

 

    

 

 

    

 

 

 

Chemical / Plastics

                 

Actagro, LLC

   Senior Secured Term Loan    7.00%    (L +5.50%)      12/30/16         1,950         1,925         1,920         1.4   

Fluoro-Seal International LLC

   Senior Secured Term Loan A    9.00%    (L +7.50%)      01/04/17         2,964         2,930         3,024         2.1   

ICM Products Inc

   Senior Secured Term Loan    8.50%    (L +7.00%)      02/01/17         2,406         2,368         2,406         1.7   

VanDeMark Chemical Inc.

   Senior Secured Term Loan    7.50%    (L +5.25%)      11/30/17         3,015         2,956         2,956         2.1   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 10,335         10,179         10,306         7.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Fastener Manufactuing

                 

Elgin Fasteners Group

   Senior Secured Term Loan    7.00%    (L +5.50%)      08/26/16         4,695         4,588         4,633         3.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Distributors

                       

Diversified Foodservice

   Senior Secured Term Loan    6.75%    (L +5.00%)      01/27/16         4,580         4,536         4,508         3.2   

Lindstrom Metric, LLC

   Senior Secured Term Loan    6.26%    (L +4.75%)      07/12/16         4,747         4,702         4,586         3.2   

Phillips Feed & Pet Supply

   Senior Secured Term Loan    7.50%    (L +5.25%)      10/13/17         3,265         3,224         3,130         2.2   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 12,592         12,462         12,224         8.6   
              

 

 

    

 

 

    

 

 

    

 

 

 

Diversified Commercial & Professional Services

                 

Kellermeyer Building

   Senior Secured Term Loan    6.50%    (L +4.75%)      12/17/15         4,609         4,546         4,511         3.2   

Royal Adhesives

   Senior Secured Term Loan A    7.25%    (L +5.50%)      11/29/15         4,498         4,457         4,485         3.1   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 9,107         9,003         8,996         6.3   
              

 

 

    

 

 

    

 

 

    

 

 

 

Diversified/Conglomerate Manufacturing

                 

Phillips Plastics

   Senior Secured Term Loan    6.50%    (L +5.00%)      02/12/17         1,707         1,673         1,649         1.2   

Revere Industries, LLC

   Senior Secured Rollover    9.00%    (L +6.00%)      06/30/13         1,889         1,891         1,895         1.3   
              

 

 

    

 

 

    

 

 

    

 

 

 
                 3,596         3,564         3,544         2.5   
              

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments—Continued

December 31, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Interest
Rate(1)
   

Spread
Above
Index(1)

   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Electrical Components & Equipment

              

B&B Electronics

   Senior Secured
Term Loan A
     6.50   (L +5.00%)      04/04/15         2,905         2,870         2,858         2.0   

Barcodes LLC

   Senior Secured
Term Loan
     7.25   (L +6.00%)      11/02/17         3,089         3,044         3,044         2.1   
             

 

 

    

 

 

    

 

 

    

 

 

 
                5,994         5,914         5,902         4.1   
             

 

 

    

 

 

    

 

 

    

 

 

 

Energy: Oil & Gas

                      

ANS Distributing, INC.

   Senior Secured
Term Loan
     8.00   (L +6.50%)      11/01/17         3,250         3,187         3,187         2.2   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Consulting & Services

  

                

Apex Companies, LLC.

   Senior Secured
Term Loan
     7.50   (L +5.75%)      12/10/16         4,347         4,302         4,339         3.1   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Equipment Manufacturer

  

                

JWC Environmental, LLC.

   Senior Secured
Term Loan
     6.00   (L +4.50%)      08/03/16         4,441         4,407         4,245         3.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Industries

  

                

Aero-Metric, Inc.

   Senior Secured
Term Loan
     6.75   (L +5.25%)      08/27/17         2,819         2,780         2,737         1.9   
             

 

 

    

 

 

    

 

 

    

 

 

 

Financial Intermediaries

  

                

CSI Financial Services, LLC

   Senior Secured
Term Loan
     7.25   (L +6.00%)      12/07/17         3,485         3,425         3,425         2.4   

Health Care Equipment

                      

Hygenic Corporation

   Senior Secured
Term Loan
     6.25   (L +5.00%)      10/11/18         5,000         4,928         4,928         3.5   

MedTech Group, Inc.

   Senior Secured
Term Loan
     7.00   (L +5.50%)      09/07/16         4,808         4,755         4,740         3.3   

NeuroTherm, Inc

   Senior Secured
Term Loan
     6.50   (L +5.00%)      02/01/16         4,529         4,478         4,326         3.1   
             

 

 

    

 

 

    

 

 

    

 

 

 
                14,337         14,161         13,994         9.9   
             

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Services

                      

Aegis Sciences Corporation

   Senior Secured
Term Loan A
     7.00   (L +5.50%)      10/21/16         4,850         4,781         4,779         3.4   

Elements Behavioral Health,

   Senior Secured
Term Loan A
     7.50   (L +6.00%)      08/14/17         4,938         4,870         4,920         3.5   

MCMC LLC

   Senior Secured
Term Loan A
     7.50   (L +6.00%)      09/30/16         4,635         4,581         4,627         3.3   

Studer Group LLC

   Senior Secured
Term Loan
     7.00   (L +5.50%)      09/28/16         4,604         4,551         4,538         3.2   
             

 

 

    

 

 

    

 

 

    

 

 

 
                19,027         18,783         18,864         13.4   
             

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Supplies

                      

The Ritedose Corporation

   Senior Secured
Term Loan
     6.50   (L +4.75%)      11/10/16         3,592         3,545         2,881         2.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare

                      

Strata Pathology Services,

   Senior Secured
Term Loan
     8.00   (L +6.50%)      06/30/16         4,874         4,811         4,202         3.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare Facilities

                      

Accelerated Health Systems

   Senior Secured
Term Loan
     7.25   (L +5.75%)      07/22/17         4,950         4,911         4,896         3.5   
             

 

 

    

 

 

    

 

 

    

 

 

 

High Tech Industries

                      

OnePath Systems, LLC

   Senior Secured
Term Loan
     7.50   (L +6.00%)      06/06/17         2,438         2,395         2,431         1.7   
             

 

 

    

 

 

    

 

 

    

 

 

 

Household Products

                      

Phoenix Brands LLC

   Senior Secured
Term Loan A
     7.00   (L +5.50%)      01/31/16         3,781         3,739         3,307         2.3   
             

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Conglomerates

                      

Jameson LLC

   Senior Secured
Term Loan
     9.52   (L +7.50%)      10/01/15         2,487         2,460         2,240         1.6   
             

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Gases

                      

Engineered Controls

   Senior Secured
Term Loan
     6.50   (L +4.75%)      08/05/16         4,362         4,316         4,242         3.0   
             

 

 

    

 

 

    

 

 

    

 

 

 

Insurance

                      

Captive Resources Midco LLC

   Senior Secured
Term Loan
     6.75   (L +5.50%)      10/31/18         4,987         4,915         4,915         3.5   
             

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments—Continued

December 31, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Investment Type

   Interest
Rate(1)
   

Spread
Above
Index(1)

   Maturity      Principal
Amount
     Cost     Fair Value     Percent of
Net Assets
 

Insurance Brokerage

  

              

AssuredPartners Capital, Inc.

   Senior Secured Term Loan A      6.50   (L +5.25%)      05/01/18         4,877         4,877        4,651        3.3   

Frenkel Benefits LLC

   Senior Secured Term Loan A      6.25   (L +5.00%)      12/28/15         3,938         3,890        3,831        2.7   

Personable Holdings, Inc.

   Senior Secured Term Loan      8.00   (L +6.50%)      05/16/17         3,785         3,745        3,841        2.7   
             

 

 

    

 

 

   

 

 

   

 

 

 
                12,600         12,512        12,323        8.7   
             

 

 

    

 

 

   

 

 

   

 

 

 

North American Commodities Brokerage

  

              

Charter Brokerage LLC

   Senior Secured Term Loan A      8.00   (L +6.50%)      10/10/16         4,580         4,520        4,652        3.3   
             

 

 

    

 

 

   

 

 

   

 

 

 

Personal Products

  

              

Mold-Rite Plastics, LLC

   Senior Secured Term Loan      6.25   (L +4.50%)      06/30/16         4,527         4,477        4,379        3.1   

Pacific World

   Senior Secured Term Loan      7.00   (L +5.50%)      10/31/16         4,950         4,881        4,879        3.4   
             

 

 

    

 

 

   

 

 

   

 

 

 
                9,477         9,358        9,258        6.5   
             

 

 

    

 

 

   

 

 

   

 

 

 

Printing & Publishing

  

              

Pamarco Technologies, Inc.

   Senior Secured Revolver      N/A      (L +3.75%) (Unused Fee 0.50%)      12/31/14         —           (8     (33 )(2)      —     

Pamarco Technologies, Inc.

   Senior Secured Term Loan A      6.00   (L +3.75%)      12/31/14         2,885         2,871        2,821        2.0   
             

 

 

    

 

 

   

 

 

   

 

 

 
                2,885         2,863        2,788        2.0   
             

 

 

    

 

 

   

 

 

   

 

 

 

Property & Casualty Insurance

  

              

MYI Acquiror Limited

   Senior Secured Term Loan A      6.25   (L +4.75%)      09/13/16         4,962         4,903        4,777        3.4   
             

 

 

    

 

 

   

 

 

   

 

 

 

Publishing

  

              

Media Source

   Senior Secured Term Loan B      7.50   (L +6.00%)      11/07/16         3,496         3,440        3,502        2.5   

Media Source

   Senior Secured Term Loan A      6.75   (L +5.25%)      11/07/16         1,322         1,301        1,293        0.9   
             

 

 

    

 

 

   

 

 

   

 

 

 
                4,818         4,741        4,795        3.4   
             

 

 

    

 

 

   

 

 

   

 

 

 

Rehabilitation Products and Services

  

              

Behavioral Health Group

   Senior Secured Term Loan A      5.75   (L +4.50%)      08/18/16         4,938         4,900        4,699        3.3   
             

 

 

    

 

 

   

 

 

   

 

 

 

Telecommunications

 

              

ConvergeOne Holdings

   Senior Secured Term Loan A      8.50   (L +7.00%)      06/08/17         2,340         2,320        2,387        1.7   

NHR Holdings, LLC

   Senior Secured Term Loan A      6.50   (L +5.25%)      11/30/18         2,483         2,446        2,446        1.7   

NHR Holdings, LLC

   Senior Secured Term Loan B      6.50   (L +5.25%)      11/30/18         2,517         2,480        2,480        1.7   
             

 

 

    

 

 

   

 

 

   

 

 

 
                7,340         7,246        7,313        5.1   
             

 

 

    

 

 

   

 

 

   

 

 

 

Sub-total Non-affiliate Investments

        234,635         231,781        227,542        160.5   
             

 

 

    

 

 

   

 

 

   

 

 

 

 

12


Table of Contents

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments—Continued

December 31, 2012

(dollar amounts in thousands)

 

Name of Portfolio Company

  

Investment Type

   Principal
Amount
     Cost     Fair Value     Percent of
Net Assets
 
Affiliate Investments             

Finance

            

Tamarix Capital
Partners, L.P.

   67.5%
Limited Partnership Interest
     N/A         5,049        4,657        3.3   
        

 

 

   

 

 

   

 

 

 

Sub-total Affiliate Investments

  

     5,049        4,657        3.3   
        

 

 

   

 

 

   

 

 

 
Money Market             

WF Prime INVT MM #1752(5)

   Money Market      N/A         2,450 (3)      2,450 (3)      1.7   

WFB Secured Institutional MM(5)

   Money Market      N/A         623 (4)      623 (4)      0.5   

US Bank Money Market Deposit

   Money Market      N/A         3,030 (3)      3,030 (3)      2.1   
        

 

 

   

 

 

   

 

 

 

Sub-total Money Market

           6,103        6,103        4.3   
     

 

 

    

 

 

   

 

 

   

 

 

 

Total Investments (United States)

   $ 234,635       $ 242,933      $ 238,302        168.1
     

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) The majority of the investments bear interest at a rate that may be determined by reference to LIBOR (L) or Prime and which is reset daily, quarterly or semi-annually. For each investment, we have provided the spread over LIBOR and current interest rate in effect at December 31, 2012. Certain investments are subject to a LIBOR or Prime interest rate floor.
(2) The negative fair value is the result of the unfunded commitment being valued below par.
(3) Included in cash and cash equivalents on the consolidated balance sheets.
(4) Included in restricted cash and cash equivalents on the consolidated balance sheets.
(5) Pledged as collateral under the OFS Capital WM Credit Facility.

 

13


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

Note 1. Organization

OFS Capital Corporation (“OFS Capital”, the “Company”, or “we”) is a Delaware corporation formed on November 7, 2012 and is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, the Company will elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

From time to time, the term OFS Capital, the Company, or we may be used herein to refer to OFS Capital, individually, or OFS Capital and/or its subsidiaries either collectively or individually, as well as, with respect to all periods prior to the IPO date, OFS Capital, LLC.

On November 7, 2012, the Company priced its initial public offering (“IPO”) selling 6,666,667 shares of its common stock at a public offering price of $15 per share, raising $100 million in gross proceeds. Immediately prior to the IPO, on November 7, 2012, OFS Capital, LLC converted from a limited liability company to a corporation, as a result of which the sole membership interest held in OFS Capital, LLC by Orchard First Source Asset Management, LLC (“OFSAM”) prior to the conversion was exchanged for 2,912,024 shares of common stock in the Company.

On September 28, 2010, OFS Capital, LLC became the 100% equity owner of OFS Capital WM, LLC (“OFS Capital WM”). On September 29, 2011, OFS Capital, LLC became the primary beneficiary in Tamarix Capital Partners, LP (“Tamarix LP”), a variable interest entity (“VIE”) under the applicable provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810, “Consolidation” (ASC Topic 810). On May 10, 2012, upon Tamarix LP’s receipt of a Small Business Investment Company (“SBIC”) license, OFS Capital, LLC became an approximately 68% limited partner in Tamarix LP (see Note 4 for more detail).

The Company’s investment strategy is to invest primarily in senior secured debt investments to middle-market companies and, to a lesser extent, junior capital, including mezzanine debt and preferred and common equity. The Company has entered into an investment advisory and management agreement with OFS Capital Management, LLC (the “Investment Advisor”), under which the Investment Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company (see Note 5 for more detail).

Note 2. Summary of Significant Accounting Policies

Election to become a Business Development Company: The results of operations for the three months ended March 31, 2013 reflect the Company’s results as a BDC under the 1940 Act, whereas the operating results for the three months ended March 31, 2012 reflect the Company’s results prior to operating as a BDC under the 1940 Act. Accounting principles used in the preparation of these two periods are different and, therefore, the financial position and results of operations for those periods are not directly comparable. The primary difference in accounting principles relates to the carrying value of debt and equity investments.

Basis of presentation: The accompanying interim consolidated financial statements of the Company and related financial information have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments consisting only of normal recurring accruals and adjustments except OFS Capital’s consolidation of the financial statements of OFS Capital WM effective March 30, 2012 (see Note 3), which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

14


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Principles of consolidation: The Company’s March 31, 2013 consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, OFS Capital WM and OFS Funding, LLC. The Company consolidates an affiliated subsidiary if it owns more than 50 percent of the subsidiary’s equity and holds the controlling financial interest in such subsidiary. The Company also consolidates a VIE if it is the primary beneficiary in the VIE. Effective March 30, 2012, the Company consolidated the financial statements of OFS Capital WM into its own (see Note 3). Effective July 27, 2012, the Company deconsolidated the financial statements of Tamarix LP from its own (see Note 4).

Cumulative effect of accounting change prior to become a BDC: Equity contributions made by potential investors in Tamarix LP prior to issuance of the SBIC license on May 10, 2012 were contingent upon receipt of the SBIC license, and were fully refundable in the event that Tamarix LP failed to obtain such license. As a result, prior to May 10, 2012, Tamarix LP was not deemed to be an investment company and accordingly, followed the same accounting principles as its primary beneficiary, OFS Capital, to account for its loans receivable at cost, and its equity interests under the cost method of accounting, on the consolidated financial statements of OFS Capital. On May 10, 2012, upon receipt of the SBIC license, Tamarix LP was deemed to be an investment company under Accounting Standards Codification 946, “Financial Services – Investment Companies” (“ASC Topic 946”), and began reporting its investment assets at fair value. Accordingly, effective May 10, 2012, Tamarix LP changed its accounting principle from cost to fair value for measuring its portfolio investments, and recorded a cumulative effect of accounting change in the amount of $570 to reflect the difference between the fair value and cost basis of its portfolio investments at May 10, 2012.

Fair value of financial instruments: The Company applies fair value to substantially all of its financial instruments in accordance with Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the market participant which holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3 (i.e., those instruments valued using non-observable inputs).

Changes to the valuation policy are reviewed by management and the Company’s board of directors (the “Board”) to confirm that the changes are justified. As markets change, new products develop and the pricing for products becomes more or less transparent, the Company will continue to refine its valuation methodologies.

Use of estimates: The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reporting segments: In accordance with segment guidance set by Accounting Standards Codification 280, “Segment Reporting” (“ASC Topic 280”), the Company has determined that it has a single reporting segment and operating unit structure.

Cash and cash equivalents: Cash and cash equivalents consist of cash and highly liquid investments not held for resale with original maturities at the time of acquisition of three months or less. The Company places its cash in financial institutions and at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.

 

15


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Restricted cash and cash equivalents: Restricted cash and cash equivalents represent amounts maintained in the Unfunded Exposure Account of OFS Capital WM as defined by the Loan Sale Agreement and other applicable transaction documents and are subject to the lien of the trustee for the benefit of the secured parties of OFS Capital WM. Proceeds in the Unfunded Exposure Account, along with advances under the OFS Capital WM Credit Facility (see Note 9), are utilized to fund an eligible loan owned by OFS Capital WM that has an unfunded revolving commitment.

Investments and related investment income: Investments are recorded at fair value. The Company’s Board determines the fair value of its portfolio investments. The determination of the fair value of the portfolio investments includes an analysis of the value of any unfunded loan commitments. Interest income is accrued based upon the outstanding principal amount and contractual interest terms of debt investments. The Company accrues interest income until certain events take place, which may place a loan into a non-accrual status. Premiums, discounts and origination fees are amortized or accreted into interest income over the life of the respective debt investment. As of March 31, 2013 and December 31, 2012, unamortized discounts and origination fees on debt investments amounted to $2,701 and $2,854, respectively. For the three months ended March 31, 2013 and 2012, the Company recognized net loan origination fee income of $366 and $41, respectively.

For investments with contractual payment-in-kind interest (“PIK”), which represent contractual interest accrued and added to the principal balance that generally becomes due at maturity (or at some other stipulated date), the Company will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. For the three months ended March 31, 2013 and 2012, the Company recognized PIK interest in the amount of $0 and $94, respectively. Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net changes in unrealized appreciation (depreciation) on non-affiliate investments or unrealized depreciation on affiliate investments in the consolidated statement of operations.

Non-accrual loans: Loans on which the accrual of interest income has been discontinued are designated as non-accrual loans, and further designated as either non-accrual cash method or non-accrual cost recovery method. Loans are generally placed on non-accrual when a loan either: (i) is delinquent for 90 days or more on principal or interest based on contractual terms of the loan (unless well secured and in the process of collection), or (ii) in the opinion of the Company’s management, there is reasonable doubt about the collectability. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Interest accruals are resumed on non-accrual loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. There was one non-accrual loan with a fair value of $3,386 at March 31, 2013. There were no non-accrual loans at December 31, 2012.

Allowances for loan losses: Prior to the Company’s election to become a BDC, the allowance for loan losses represented management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date. When determining the adequacy of the allowance for loan losses, the following factors were considered: historical internal experience and current industry conditions, economic conditions and trends, credit quality trends and other factors deemed relevant. Additions to the allowance were charged to current period earnings through the provision for loan losses. Periodically, management might have determined that it was appropriate to charge-off a portion of an existing loan. Upon the resolution of a loan that had remaining outstanding amounts that had been reserved for and were determined to be uncollectible, such amounts were charged off directly against the allowance for loan losses. To the extent that an amount was not reserved, then this amount was charged off through the provision for loan losses on the consolidated statement of operations.

 

16


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Income taxes: The Company will elect to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company has made, and intends to continue to make, the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to its stockholders.

Depending on the level of taxable income earned in a tax year, the Company may choose to retain taxable income in excess of current year dividend distributions into the next tax year in an amount less than what would trigger payments of federal income tax under subchapter M of the Code. The Company would then pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income may exceed estimated current year dividend distributions, the Company accrues excise tax, on estimated excess taxable income as taxable income is earned. At December 31, 2012, the Company accrued for $63 of U.S. federal excise tax, which was paid in March 2013.

The Company accounts for income taxes in conformity with Accounting Standards Codification 740, “Income Taxes” (“ASC Topic 740”). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain income tax positions at March 31, 2013 and December 31, 2012. The current and prior three tax years remain subject to examination by U.S. federal and most state tax authorities.

Prior to the Company’s election to become a BDC, the Company, as a limited liability company, did not record a provision for federal income taxes or deferred tax benefits because its income was taxable to its members. Therefore, no federal or state income tax provision had been recorded for the three months ended March 31, 2012.

Dividends and distributions: Dividends and distributions to common stockholders are recorded on the declaration date. The amount to be paid out as a dividend or distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of any distributions the Company declares in cash on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes and the Company declares a cash distribution, then stockholders who have not “opted out” of the DRIP will have their cash distribution automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend.

The Company may use newly issued shares under the guidelines of the DRIP, or the Company may purchase shares in the open market in connection with the obligations under the plan.

On March 26, 2013, the Company declared a dividend of $0.34 per share for the quarter ended March 31, 2013, payable on April 30, 2013 to stockholders of record as of the close of business on April 17, 2013. The total amount of the dividend was $3,269 and reflected as dividend payable on the Company’s accompanying unaudited consolidated balance sheet as of March 31, 2013.

Deferred offering costs: The Company defers costs related to its public offerings until completion of the offerings. These costs include professional fees, registration costs, printing, and other miscellaneous offering costs. Deferred offering costs are charged against the proceeds from equity offerings when received.

 

17


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Deferred financing closing costs: Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts are amortized over the estimated average life of the borrowings. As of March 31, 2013 and December 31, 2012, unamortized deferred financing costs recorded by the Company amounted to $2,370 and $2,839, respectively. For the three months ended March 31, 2013, the Company recorded amortization expense of $469 on its deferred financing costs.

Equity investments: Historically, the Company had received various equity ownership interests from its borrowers as partial consideration for loan modifications or restructurings or from exercising its rights under various loan documents. The Company applied foreclosure accounting and recorded these equity interests at fair value at the time of the loan restructurings. Prior to the Company’s election to become a BDC, equity interests were reviewed subsequently for potential impairment. There were none of these types of equity interests at March 31, 2013 and December 31, 2012.

In connection with certain lending arrangements, the Company may receive warrants to purchase shares of stock from the borrowers. Because the warrant agreements typically contain net exercise or “cashless” exercise provisions, the warrants qualify as derivative instruments under Accounting Standards Codification 815, “Derivatives and Hedging” (“ASC Topic 815”). Such warrants are considered loan fees and are recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. As such warrants held are deemed to be derivative, they are periodically measured at fair value. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on warrants. For the three months ended March 31, 2013 and 2012, the Company did not recognize any unrealized gain or loss on warrants.

For the three months ended March 31, 2012, under the equity method of accounting, the Company’s 100% share of the net income or loss of OFS Capital WM was included in “Income from equity interests in OFS Capital WM” in the consolidated statements of operations. Commencing with the execution of the WM 2012 Loan Amendment, effective April 1, 2012, OFS Capital consolidated the statement of operations of OFS Capital WM into its own (see Note 3).

In September and November 2011, in connection with its loan originations, Tamarix LP received a 14.9% LLC membership interest in one borrower and a 19.8% preferred stock ownership interest in another borrower which were valued at $500 and $1,955, respectively, at the date of the respective loan origination. The Company applied cost method of accounting to these equity interests until May 10, 2012, when Tamarix LP became an investment company and adopted fair value accounting on its portfolio investments.

Effective July 27, 2012, the Company deconsolidated the financial statements of Tamarix LP from its own, and adopted the equity method of accounting to account for its investment in Tamarix LP (see Note 4) through November 7, 2012. Commencing November 8, 2012, upon the Company’s election to become a BDC, the Company accounts for its equity investment in Tamarix LP at fair value.

Interest expense: Interest expense is recognized on the accrual basis.

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal.

Note 3. OFS Capital WM

Consolidation of OFS Capital WM

OFS Capital WM is a wholly owned subsidiary of OFS Capital formed in August 2010 with the limited purpose of holding, acquiring, managing and financing senior secured loan investments to middle-market companies in the United States. Prior to March 30, 2012, the Company determined that OFS Capital WM was a VIE of OFS Capital under the applicable provisions of ASC Topic 810. OFS Capital, as the owner of 100% of the equity of OFS Capital WM, has the obligation to absorb losses and the right to receive

 

18


Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 3. OFS Capital WM (Continued)

 

benefits, either of which could be significant to OFS Capital WM. However, prior to March 30, 2012, despite its 100% equity interest in OFS Capital WM, OFS Capital was not the primary beneficiary of OFS Capital WM as OFS Capital lacked the power, through voting interests or similar rights, to direct the activities of OFS Capital WM that most significantly impact its economic performance. The Company had concluded that MCF Capital Management, LLC (the “Loan Manager”) was the primary beneficiary of OFS Capital WM, because (1) under the terms of the loan facility of OFS Capital WM, the Loan Manager had the sole authority to service, administer and exercise rights and remedies in respect of the assets in OFS Capital WM’s portfolio; (2) the Loan Manager had the sole authority to determine whether to cause assets to be sold or acquired by OFS Capital WM, subject to certain limited circumstances where the Company had consent rights, as administrative manager of OFS Capital WM; (3) OFS Capital, as the administrative manager of OFS Capital WM, carried out duties of OFS Capital WM primarily limited to administrative matters, and (4) for its service, the Loan Manager receives a fee. The Company had determined the Loan Manager’s right to receive a loan management fee from OFS Capital WM, the interest of its related party in the class B loans of OFS Capital WM, and the implicit financial responsibility of the Loan Manager to ensure the VIE operated as designed were significant to OFS Capital WM. Since the Loan Manager was the primary beneficiary of OFS Capital WM, prior to March 30, 2012, the Company did not consolidate the financial statements of OFS Capital WM but instead accounted for its ownership interest under the equity method of accounting.

Through March 30, 2012, OFS Capital WM’s loan portfolio was essentially fully funded, which makes future management activities a critical component to ensure satisfactory credit quality and profitability of OFS Capital WM’s loan portfolio. Effective March 30, 2012, OFS Capital entered into an agreement with OFS Capital WM and the Loan Manager to amend the credit facility of OFS Capital WM (WM 2012 Loan Amendment), as a result of which, (1) instead of the Loan Manager having the sole authority to determine actions on any proposed amendment, modification, restructuring, and waiver of loans, the Loan Manager is required to consult with OFS Capital before taking any such actions with a borrower; (2) instead of the Loan Manager having the sole authority to call or waive any default with respect to any loan, the Loan Manager is required to consult with OFS Capital before taking any such actions with a borrower, and (3) instead of the Loan Manager having the sole authority to vote to accelerate the maturity of any loan, the Loan Manager is required to consult with OFS Capital before taking any such actions with a borrower. If OFS Capital indicates in writing that it is dissatisfied with any actions in respect of the foregoing ultimately taken by the Loan Manager, pursuant to the WM 2012 Loan Amendment, the Loan Manager may pursue the course of action which it has recommended; however, the Loan Manager will also be obligated to promptly engage a third party broker/dealer to sell the loan in question, with OFS Capital possessing the sole right to negotiate and approve the terms of any such sale transaction (including price), as well as the sole right to terminate any loan sale discussions and to block any prospective loan sale. In consideration for the rights received as a result of the WM 2012 Loan Amendment, OFS Capital agreed to give up a right of first refusal that it possessed with respect to future transactions substantially similar to the September 28, 2010 loan sale transaction OFS Capital conducted with OFS Capital WM that the Loan Manager and/or its affiliates may seek to conduct with third parties.

The WM 2012 Loan Amendment granted OFS Capital significant participating rights. Additionally, owing to: (1) the significant repayment since September 28, 2010 of the preponderant portion of the loans transferred to OFS Capital WM on that date and over which OFS Capital did not have the right to consent to, or withhold consent from, loan purchase or sale recommendations made by the Loan Manager, as well as (2) the nearly full ramping and funding of OFS Capital WM’s loan portfolio as of March 2012, OFS Capital now has the right to consent to, or withhold consent from, purchase or sale recommendations made by the Loan Manager with respect to a very high percentage of loans in the OFS Capital WM loan portfolio. Therefore, effective March 30, 2012, OFS Capital possesses the power to direct the activities of OFS Capital WM that most significantly impact OFS Capital WM’s economic performance. This resulted in OFS Capital’s succeeding to the controlling financial interest in OFS Capital WM, OFS Capital WM’s discontinuation as a VIE, and OFS Capital’s consolidation of OFS Capital WM, effective March 30, 2012.

The following pro forma presentation assumes OFS Capital’s consolidation of OFS Capital WM took place on January 1, 2012.

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 3. OFS Capital WM (Continued)

 

     Three Months Ended March 31, 2012  
     (unaudited)  
            Pro Forma        
     Historical      Adjustments     Pro Forma  

Investment income

       

Interest income from non-affiliate investments

   $ 578       $ 4,269 (1)    $ 4,847   

Dividend and fee income

     46         —          46   
  

 

 

    

 

 

   

 

 

 

Total investment income

     624         4,269        4,893   
  

 

 

    

 

 

   

 

 

 

Expenses

       

Interest expense

     —           1,730 (1)      1,730   

Amortization of deferred financing closing costs

     —           143 (1)      143   

Management fee

     357         267 (1)      624   

Professional fees

     15         (2 )(1)      13   

General and administrative expenses

     37         34 (1)      71   
  

 

 

    

 

 

   

 

 

 

Total expenses

     409         2,172        2,581   
  

 

 

    

 

 

   

 

 

 

Net investment income

     215         2,097        2,312   
  

 

 

    

 

 

   

 

 

 

Net realized and unrealized gain on investments

       

Net change in unrealized depreciation on non-affiliate investments

     —           548 (1)      548   
  

 

 

    

 

 

   

 

 

 

Net realized and unrealized gain on investments

     —           548        548   
  

 

 

    

 

 

   

 

 

 

Other income (loss) prior to becoming a business development company

       

Income from equity interest in OFS Capital WM

     2,645         (2,645 )(1)      —     
  

 

 

    

 

 

   

 

 

 

Total other income (loss) prior to becoming a business development company

     2,645         (2,645     —     
  

 

 

    

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 2,860       $ —        $ 2,860   
  

 

 

    

 

 

   

 

 

 

 

(1) To eliminate OFS Capital’s income from equity investment in OFS Capital WM and consolidate OFS Capital WM’s statement of operations into OFS Capital’s for the three months ended March 31, 2012.

Note 4. Tamarix LP

Tamarix LP is a Delaware limited partnership formed in January 2010, which commenced operations in September 2011. Tamarix LP applied for an SBIC license from the Small Business Administration (“SBA”), in order to become a SBIC regulated fund under the Small Business Investment Company Act of 1958 (the “SBIC Act”). In September and November 2011, OFS Capital entered into loan agreements with Tamarix LP pursuant to which OFS Capital lent an aggregate of $16,750 to Tamarix LP. Tamarix LP utilized these funds to originate loans with an aggregate face value of $14,750 and acquire equity interests in its borrowers for $2,455. OFS Capital’s loans to Tamarix LP were fully secured by pledges of Tamarix LP’s loans and equity interests in its borrowers.

On May 10, 2012, Tamarix LP received the SBIC license. From September 29, 2011 through May 10, 2012, Tamarix LP was deemed to be a VIE of OFS Capital under ASC Topic 810 as the equity interests in Tamarix LP had not been called and, accordingly, it

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 4. Tamarix LP (Continued)

 

would not be possible for Tamarix LP to finance its activities without additional subordinated financial support. OFS Capital’s debt interest was considered the sole variable interest in Tamarix LP and OFS Capital was deemed to be the primary beneficiary in Tamarix LP for the period from September 29, 2011 to May 10, 2012. The investment and exit decisions, day-to-day investment activities and underlying assets of Tamarix LP are managed by its general partner, Tamarix Capital G.P., LLC (“Tamarix GP”), which is controlled by three individuals (“Tamarix Individuals) who were employed by an affiliate of OFS Capital, each of whom, together with Glenn Pittson, OFS Capital’s Chief Executive Officer, have previously been approved by the SBA to manage Tamarix LP. For accounting purposes, however, as secured lender to Tamarix LP, as well as employer (through affiliated entity) of the three individuals, OFS Capital ultimately was deemed under the applicable accounting literature to have the power to direct the activities of Tamarix LP that most significantly impacted Tamarix LP’s economic performance. Further, OFS Capital had the obligation as a secured lender to absorb losses of Tamarix LP that could potentially be significant to Tamarix LP.

Since, upon its licensure as an SBIC fund on May 10, 2012, (1) Tamarix LP had (and continues to have) sufficient equity at risk to finance its future activities without additional subordinated financial support, and (2) there continued to be a controlling financial interest holder in Tamarix LP, effective May 10, 2012, Tamarix LP was no longer a VIE, but instead a limited partnership guided under ASC Topic 810. Subsequent to May 10, 2012, OFS Capital was deemed under the applicable accounting literature to continue to hold the controlling financial interest in Tamarix LP since OFS Capital continued to have the power to direct the activities of Tamarix LP that most significantly impacted Tamarix LP’s economic performance, and the obligation to absorb losses that could potentially be significant to Tamarix LP. In addition, as the then 68.4% limited partner in Tamarix LP, OFS Capital also possessed the right to receive benefits from Tamarix LP that could potentially be significant to Tamarix LP. Therefore, subsequent to May 10, 2012, OFS Capital continued to consolidate the financial statements of Tamarix LP into its own.

In June 2012, Tamarix LP received a $30,110 SBA leverage commitment, which is issuable by the SBA in the form of debenture securities and which terminates in September 2016. The SBA may limit the amount that may be drawn each year under this commitment, and each issuance of leverage is conditioned on Tamarix LP’s full compliance, as determined by the SBA, with the terms and conditions set forth under the SBIC Act. On July 27, 2012, Tamarix LP made a $14,000 leverage draw. In March 2013, Tamarix LP made an additional $1,000 leverage draw.

The objective of Tamarix LP is to generate attractive returns for investors by making investments in United States-based, lower-middle-market companies. These investments typically will be comprised of debt-related securities with warrant coverage. The term of Tamarix LP runs through the later of March 2022 or two years after all of Tamarix LP’s Outstanding Leverage (as defined in the limited partnership agreement of Tamarix LP) has matured. Pursuant to the limited partnership agreement of Tamarix LP and the SBIC Act, a limited partner may not sell, transfer, assign, pledge, subdivide for resale or otherwise dispose of all or any part of its interest in Tamarix LP without the prior written consent of Tamarix GP, the granting or denying of which consent will be in Tamarix GP’s sole and absolute discretion. In addition, a limited partner may not transfer any interest of ten percent or more in the capital of Tamarix LP without the prior approval of the SBA.

Deconsolidation of Tamarix LP

On July 27, 2012, utilizing the $14,000 in leverage draw from the SBA, Tamarix LP repaid its loans due to OFS Capital, including accrued interest, in the total amount of approximately $16,577. Also effective July 27, 2012, Tamarix Individuals resigned as employees from the affiliated entity of OFS Capital.

Due to the resignation of Tamarix Individuals, effective July 27, 2012, OFS Capital was no longer deemed to have the power to direct the activities of Tamarix LP that most significantly impacted Tamarix LP’s economic performance. Effective July 27, 2012, Tamarix GP, as the general partner of Tamarix LP controlled by Tamarix Individuals, obtained the power from OFS Capital to direct the activities of Tamarix LP that most significantly impacted Tamarix LP’s economic performance. In addition, because of Tamarix LP’s payoff of its loans due to OFS Capital, OFS Capital no longer had the obligation to absorb losses from Tamarix LP that could be potentially significant to Tamarix LP as it had prior to July 27, 2012 as a secured lender to Tamarix LP. As a result, effective July 27, 2012, OFS Capital was no longer deemed to hold the controlling interest in Tamarix LP.

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 4. Tamarix LP (Continued)

 

Since OFS Capital no longer held the controlling interest in Tamarix LP, effective July 27, 2012, OFS Capital deconsolidated Tamarix LP’s financial statements from its own, and adopted the equity method of accounting to record its equity investment in Tamarix LP. Accordingly, the Company’s March 31, 2013 and December 31, 2012 consolidated balance sheets no longer included the accounts of Tamarix LP. Commencing November 8, 2012, as a result of the Company’s election to become a BDC, it accounts for its equity investment in Tamarix LP at fair value.

Note 5. Related Party Transactions

Investment Advisory and Management Agreement: On November 7, 2012, OFS Capital entered into an Investment Advisory and Management Agreement (“Advisory Agreement”) with OFS Capital Management, the Company’s Investment Advisor, under which the Investment Advisor manages the day-to-day operations of, and provides investment advisory services to OFS Capital. Under the terms of the Advisory Agreement and subject to the overall supervision of our Board, the Investment Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. The Investment Advisor is a subsidiary of OFSAM and a registered investment advisor under the Investment Advisers Act of 1940, as amended.

The Investment Advisor’s services under the Advisory Agreement are not exclusive to the Company, and the Investment Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. The Investment Advisor receives fees for providing services, consisting of two components—a base management fee and an incentive fee. From the completion of the Company’s IPO through October 31, 2013, the base management fee is calculated at an annual rate of 0.875% based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters. After October 31, 2013, the base management fee will be calculated at an annual rate of 1.75% based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears. The base management fee expense was $512 for the three months ended March 31, 2013.

The incentive fee has two parts. The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).

Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter. The incentive fee with respect to the pre-incentive fee net income is 20.00% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.00% (which is 8.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Investment Advisor receives no incentive fee until the net investment income equals the hurdle rate of 2.00%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, the Investment Advisor will receive 20.00% of the pre-incentive fee net investment.

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 5. Related Party Transactions (Continued)

 

Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

The second part of the incentive fee (the “Capital Gain Fee”) is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), commencing on December 31, 2012, and equals 20% of the Company’s aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the capital gain incentive fee; provided that the incentive fee determined as of December 31, 2012 was calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation for the period beginning on the date of the Company’s election to be a BDC and ending December 31, 2012.

The Company did not incur any incentive fee expense for the three months ended March 31, 2013.

Prior to the Company’s election to become a BDC, the Investment Advisor served as its advisor effective September 28, 2010, under an Investment Advisory Agreement pursuant to which OFS Capital paid an annual base management fee to the Investment Advisor to compensate for its investment advisory services. The base management fee was calculated initially at 2% per annum of the Company’s average total assets (excluding cash) at the end of the two most recently completed calendar quarters and was amended on March 30, 2012, whereby OFS Capital paid a base management fee at 2% per annum of its average total assets excluding cash and the assets held by OFS Capital WM. For the assets held by OFS Capital WM at the subsidiary level, OFS Capital paid a base management fee of 0.5% per annum on the average total assets (excluding cash) of OFS Capital WM. For the three months ended March 31, 2012, the Company incurred management fee expense to its investment advisor in the amount of $357.

Administration Agreement: On November 7, 2012, OFS Capital entered into an administration agreement (“Administration Agreement”) with OFS Capital Services, LLC (“OFS Capital Services” or the “Administrator”), a wholly-owned subsidiary of OFSAM. Pursuant to the Administration Agreement, the Administrator furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, the Administrator performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, the Administrator assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversee the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, the Administrator also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. For the three months ended March 31, 2013, the Company incurred an administration fee expense of $280, which was accrued for at March 31, 2013.

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 5. Related Party Transactions (Continued)

 

Other Related Party Transactions:

Distributions from OFS Capital WM

In January 2012, OFS Capital received a cash distribution from OFS Capital WM in the amount of $1,225.

Investment in and Due from Tamarix GP

OFS Capital holds a 23.35% membership interest in Tamarix GP. The membership interest in Tamarix GP was carried at $11 and zero ($0) as of March 31, 2013 and December 31, 2012, respectively. Through December 31, 2012, OFS Capital had funded $20 for its investment in Tamarix GP. During the three months ended March 31, 2013, OFS Capital funded an additional $11 in Tamarix GP. In April 2012, OFS Capital received a tax distribution from Tamarix GP in the amount of $52.

During 2012, OFS Capital made advances totaling $69 to Tamarix GP for certain operating expenses paid by OFS Capital for the benefit of Tamarix GP, which amount was outstanding at March 31, 2013.

Investment in Tamarix Associates, LLC

OFS Capital holds a 23.33% membership interest in Tamarix Associates, LLC (“Tamarix Manager”), the investment manager for Tamarix LP, which is controlled by the three Tamarix Individuals, who, together with Glenn Pittson, OFS Capital’s Chief Executive Officer, own the remaining membership interests. As of March 31, 2013 and December 31, 2012, OFS Capital was not obligated to make any capital contribution to Tamarix Manager, and its equity investment in Tamarix Manager was carried at zero ($0) at March 31, 2013.

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

Note 6. Investments

At March 31, 2013, investments consisted of the following:

 

     Principal      Cost      Fair Value  

Senior secured debt

   $ 227,015       $ 224,313       $ 221,247   

Equity investment in Tamarix LP

     N/A         7,667         7,526   
  

 

 

    

 

 

    

 

 

 

Total

   $ 227,015       $ 231,980       $ 228,773   
  

 

 

    

 

 

    

 

 

 

At March 31, 2013, the industry compositions of the Company’s portfolio were as follows:

 

     Cost     Fair Value  

Accounts Receivable Management Services

   $ 4,839         2.1   $ 4,715         2.1

Aerospace & Defense

     4,328         1.9        4,298         1.9   

Asset Management & Custody Banks

     4,665         2.0        4,652         2.0   

Asset Management Services

     9,489         4.1        9,392         4.1   

Automobile

     3,112         1.3        3,096         1.4   

Automotive Aftermarket Manufacturing

     4,636         2.0        3,960         1.7   

Beverage, Food and Tobacco

     3,935         1.7        3,885         1.7   

Broadcasting and Entertainment

     4,468         1.9        4,554         2.0   

Business Equipment & Services

     7,631         3.3        7,567         3.3   

Chemical / Plastics

     10,079         4.3        10,173         4.4   

Commercial Fastener Manufacturing

     4,536         2.0        4,536         2.0   

Distributors

     12,291         5.3        12,195         5.3   

Diversified Commercial & Professional Services

     4,387         1.9        4,448         1.9   

Diversified/Conglomerate Manufacturing

     1,890         0.8        1,889         0.8   

Electrical Components & Equipment

     5,848         2.5        5,885         2.6   

Energy: Oil & Gas

     3,151         1.4        3,230         1.4   

Environmental Consulting & Services

     4,105         1.8        4,172         1.8   

Environmental Equipment Manufacturer

     4,168         1.8        4,067         1.8   

Environmental Industries

     2,782         1.2        2,776         1.2   

Finance

     7,667         3.3        7,526         3.3   

Financial Intermediaries

     3,428         1.5        3,483         1.5   

Health Care Equipment

     13,856         6.0        13,787         6.0   

Health Care Services

     18,450         8.0        18,625         8.1   

Health Care Supplies

     3,327         1.4        2,899         1.3   

Healthcare

     8,328         3.6        6,898         3.0   

Healthcare Facilities

     4,888         2.1        4,840         2.1   

High Tech Industries

     2,397         1.0        2,453         1.1   

Household Products

     3,557         1.5        3,565         1.6   

Industrial Conglomerates

     2,320         1.0        2,136         0.9   

Industrial Gases

     4,319         1.9        4,289         1.9   

Insurance

     4,918         2.1        4,879         2.1   

Insurance Brokerage

     12,251         5.3        12,139         5.3   

Media: Advertising, Printing & Publishing

     3,930         1.7        3,930         1.7   

North American Commodities Brokerage

     4,466         1.9        4,551         2.0   

Personal Products

     9,241         4.0        9,236         4.0   

Printing & Publishing

     2,413         1.0        2,375         1.0   

Property & Casualty Insurance

     4,882         2.1        4,815         2.1   

Publishing

     4,892         2.1        4,974         2.2   

Rehabilitation Products and Services

     4,890         2.1        4,739         2.1   

Telecommunications

     7,220         3.1        7,144         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 231,980         100.0   $ 228,773         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

OFS Capital Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 6. Investments (Continued)

 

At December 31, 2012, investments consisted of the following:

 

     Principal      Cost      Fair Value  

Senior secured debt

   $ 234,635       $ 231,781       $ 227,542   

Equity investment in Tamarix LP

     N/A         5,049         4,657   
  

 

 

    

 

 

    

 

 

 

Total

   $ 234,635       $ 236,830       $ 232,199   
  

 

 

    

 

 

    

 

 

 

At December 31, 2012, the industry compositions of the Company’s portfolio were as follows:

 

     Cost     Fair Value  

Accounts Receivable Management Services

   $ 4,868         2.1   $ 4,673