UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 8-K

 

Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported)

 

March 11, 2016

 

OFS CAPITAL CORPORATION

 

(Exact name of registrant as specified in its charter)

 

Delaware   814-00813   46-1339639
(State or other jurisdiction   (Commission File No.)   (I.R.S. Employer
of incorporation)       Identification No.)

 

10 S. Wacker Drive, Suite 2500
Chicago, Illinois 60606
(Address of principal executive offices and zip code)

 

(Registrant’s telephone number, including area code) (847) 734-2000

 

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 

 

  Item 2.02 Results of Operations and Financial Condition

 

On March 11, 2016, OFS Capital Corporation (the “Company”) issued a press release announcing its financial results for the quarter and year ended December 31, 2015. On March 7, 2016, the Company’s board of directors declared a 2016 first quarter distribution of $0.34 per share, payable March 31, 2016 to shareholders of record as of March 17, 2016. The text of the press release is included as Exhibit 99.1 to this Form 8-K.

 

The information disclosed under this Item 2.02, including Exhibit 99.1 hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and shall not be deemed incorporated by reference into any filing made under the Securities Exchange Act of 1933, except as expressly set forth by specific reference in such filing.

 

 

 

 

  Item 9.01. Financial Statements and Exhibits.

 

  (a)

Not applicable. 

 

  (b)

Not applicable. 

 

  (c)

Not applicable. 

 

  (d)

Exhibits. 

 

Exhibit
No.
  Description
   
99.1   Press Release dated March 11, 2016

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: March 11, 2016 OFS CAPITAL CORPORATION  
     
  /s/ Bilal Rashid  
     
  Bilal Rashid  
  Chief Executive Officer  

 

 

 

 

Exhibit 99.1

 

 

OFS CAPITAL CORPORATION ANNOUNCES FOURTH QUARTER AND FULL YEAR 2015 FINANCIAL RESULTS

 

Declares a $0.34 Per Share Distribution

 

Fourth Quarter Net Investment Income of $0.44 Increased 56% Year-Over-Year

 

Chicago, IL—March 11, 2016—OFS Capital Corporation (NASDAQ: OFS) (“OFS Capital”, “we”, “us”, or “our”) today announced its financial results for the fiscal quarter and the full year ended December 31, 2015.

 

FOURTH QUARTER AND FULL YEAR 2015 FINANCIAL HIGHLIGHTS

 

·Fourth quarter net investment income of $4.3 million, or $0.44 per share—an increase of 56% year-over-year and above the $0.34 distribution.
·Fourth quarter adjusted net investment income (a non-GAAP measure described below) of $4.4 million, or $0.46 per share—an increase of 40% year-over-year.
·Full year 2015 adjusted net investment income (a non-GAAP measure described below) of $14.3 million, or $1.47 per share—an increase of 48% year-over-year.
·Net asset value per share increased to $14.76 at December 31, 2015 from $14.46 at September 30, 2015 and $14.24 per share at December 31, 2014.
·Non-accruals represented less than 1% of the fair value of investment assets, and OFS had no investments in the oil and gas sector.
·The weighted average yield to fair value of the loan portfolio was 12.01% as of December 31, 2015.
·The weighted average interest rate on the SBA debentures as of December 31, 2015 was 3.18%—100% of debt is fixed rate through SBIC financing with no maturities until 2022.
·On March 7, 2016, OFS Capital’s Board of Directors declared a distribution of $0.34 per share for the first quarter of 2016, payable on March 31, 2016 to shareholders of record as of March 17, 2016.

 

“We were excited to end a solid 2015 with a particularly strong fourth quarter,” said Bilal Rashid, OFS Capital's Chairman and Chief Executive Officer. “We believe the increase in our net asset value during a volatile time in the credit market is a testament to the strength and longevity of our investment platform. We will continue to be thoughtful, deliberate, and patient, investing shareholder capital with an emphasis on capital preservation. Given that our external manager owns more than 30% of outstanding shares, it has an alignment of interest with other shareholders. We believe that we are well positioned to continue to originate quality loans and maintain our dividend given the amount of cash we had at quarter-end, the ability to monetize our remaining portfolio of lower-yielding loans, and our significant capacity to borrow additional capital.”

 

 

 

 

HIGHLIGHTS

($ in millions, except for per share data)

 

Portfolio Overview  At December 31, 2015 
Total assets  $298.1 
Investment portfolio, at fair value  $257.3 
Net assets  $143.0 
Net asset value per share  $14.76 
Weighted average yield on debt investments (at fair value)   12.01%

 

   Quarter ended December 31,   Year ended December 31, 
Operating Results  2015   2014   2015   2014 
Total investment income  $8.9   $7.0   $32.3   $22.8 
Net investment income  $4.3   $2.7   $13.4   $9.1 
Net investment income per common share, basic and diluted  $0.44   $0.28   $1.39   $0.95 
Adjusted net investment income (a Non-GAAP measure described below)  $4.4   $3.1   $14.3   $9.5 
Adjusted net investment income (a Non-GAAP measure described below) per share, basic and diluted  $0.46   $0.33   $1.47   $0.99 
Net increase in net assets resulting from operations  $6.2   $3.5   $18.2   $9.9 

 

   Quarter ended December 31,   Year ended December 31, 
Portfolio Activity  2015   2014   2015   2014 
Number of new portfolio companies   5    9    13    19 
Investments in new portfolio companies  $42.8   $70.7   $79.4   $157.7 
Investments in existing portfolio companies  $-   $1.9   $45.6   $6.1 
Number of portfolio companies at end of period   39    62    39    62 

 

PORTFOLIO AND INVESTMENT ACTIVITIES

 

During the fourth quarter of 2015, OFS Capital closed new investments in five portfolio companies totaling $42.8 million consisting of $36.4 million of senior secured debt investments and $6.4 million of equity investments.

 

The total fair value of OFS Capital’s investment portfolio was approximately $257.3 million at December 31, 2015, which was equal to 102% of cost. The portfolio consisted of outstanding loans to 38 portfolio companies, totaling approximately $228.8 million in aggregate principal amount (with aggregate fair value of $224.7 million) as of December 31, 2015. At December 31, 2015, OFS Capital also held equity investments with an aggregate fair value of $32.6 million which included one equity investment in which we did not also hold a debt investment. Of this $32.6 million, $30.7 million was invested in 15 portfolio companies in which OFS Capital also held debt investments and $1.9 million was invested in one portfolio company in which OFS Capital solely held an equity investment.

 

As of December 31, 2015, floating rate loans comprised 59% of OFS Capital’s debt investment portfolio, with the remaining 41% in fixed rate loans, as a percentage of fair value. As of December 31, 2015, 62% of OFS Capital’s investment portfolio at fair value was comprised of senior secured loans, 25% of subordinated loans, and 13% of equity investments. The weighted average yield on debt investments was 12.01% at December 31, 2015. OFS Capital had unfunded commitments of $3.8 million in three portfolio companies at quarter’s end.

 

 

 

 

RESULTS OF OPERATIONS

 

Interest Income:

Interest income increased by $7.6 million, or 36%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to the increase in our average portfolio yield.

 

Dividend Income:

We generated dividend income of $1.4 million and $0.6 million for the years ended December 31, 2015 and 2014, respectively. The increase of $0.8 million was primarily due to a full year recognition of PIK dividends in 2015 from equity investments purchased in 2014.

 

Fee Income:

We generated fee income of $1.9 million and $0.9 million for the years ended December 31, 2015 and 2014, respectively. The increase of $1.0 million was primarily due to an increase in prepayment fees received which are earned when a portfolio company repays its debt obligation prior to maturity. We did not recognize any prepayment fees during the year ended December 31, 2014.

 

Total expenses

Total expenses increased by $5.2 million, or 38%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014.

 

Interest expense increased by $0.6 million for the year ended December 31, 2015, compared to the year ended December 31, 2014. The $0.6 million increase was due to an increase of $2.7 million in interest expense incurred on our SBA debentures, which was due to an increase of $99.5 million in the weighted average SBA debentures outstanding during 2015 compared to 2014. The increase in interest on our SBA dentures was offset by a decrease of approximately $2.1 million in interest expense on our revolving credit facility (the “WM Credit Facility’) due to a decrease of approximately $66.9 million in weighted average borrowings on the facility in 2015 compared to 2014 driven by repayments throughout 2015, including termination of the facility on May 28, 2015.

 

Amortization and write-off of deferred financing closing costs increased by $0.8 million for the year ended December 31, 2015, compared to the year ended December 31, 2014. The increase was due to increased write-offs of $1.0 million in deferred financing closing costs in connection with permanent reductions of the WM Credit Facility, an increase of $0.2 million in amortization on the deferred financing closing costs incurred upon the draw of SBA debentures, offset by a decrease of $0.4 million in amortization of deferred financing closing costs on the WM Credit Facility due to a lower average balance of deferred financing closing costs in 2015 as a result of the permanent reductions made to the WM Credit Facility in 2015.

 

Management fee expense of $5.2 million for the year ended December 31, 2015, consisted of $4.9 million of base management fee expense we incurred to our investment advisor (“OFS Advisor”) and $0.3 million of loan management fee charged by MCF Capital Management, LLC, the loan manager for our wholly-owned subsidiary OFS Capital WM, LLC (“OFS Capital WM”). Management fee expense totaled $2.9 million for the year ended December 31, 2014, consisting of $2.2 million of base management fee expense we incurred to OFS Advisor and $0.7 million of loan management fee charged by MCF Capital Management, LLC. The base management fee to OFS Advisor increased by approximately $2.7 million, of which approximately $0.5 million was due to an increase in our average total assets during the year ended December 31, 2015 as compared to our average total assets during the year ended December 31, 2014 and approximately $2.2 million was due to the reset of our base management fee to 0.4375% per quarter effective January 1, 2015 as compared with 0.145833% effective April 1, 2014. The decrease of approximately $0.4 million of loan management fee charged by MCF Capital Management, LLC was due to a decreased amount of portfolio investments subject to the loan management fee during 2015 and the termination of the WM Credit Facility on May 28, 2015.

 

For the year ended December 31, 2015, we incurred an incentive fee expense to OFS Advisor in the amount of approximately $2.6 million, compared to the incentive fee expense of $1.3 million incurred for the year ended December 31, 2014. The increase of approximately $1.4 million was primarily a result of an increase in our pre-incentive fee net investment income for the applicable quarters during the year ended December 31, 2015, as compared with the year ended December 31, 2014.

 

 

 

 

Administrative fee expense increased by $0.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to an increase in the allocable amount of the salary and incentives of our officers and their respective staffs, which OFS Capital Services, LLC passed along to us under an administration agreement.

 

Net gain on investments

We recorded net realized losses of $1.6 million and net unrealized appreciation of $6.4 million on our investments for the year ended December 31, 2015. The most significant realized gains and losses and cumulative changes in unrealized appreciation/depreciation for the year ended December 31, 2015 are described below.

 

In connection with settlement of Strata Pathology Services, Inc., we recognized a realized loss of $3.9 million and reversed $3.2 million of previously recognized cumulative unrealized depreciation. We sold five debt investments and recognized a realized gain of $0.1 million. We recorded a realized gain of $2.3 million from equity investments that we sold or were redeemed by the underlying portfolio company and reversed $0.6 million of previously recognized unrealized appreciation. In addition, we recorded $3.2 million of net unrealized appreciation on investments that we held on our balance sheet at December 31, 2015. The $3.2 million net unrealized appreciation was due to an increase of $5.5 million from our equity investments primarily due to the positive performance of the applicable underlying portfolio companies offset by a decrease of $2.3 from our debt investments in which we do not also hold an equity investment primarily due to widening market spreads and negative performance of the applicable underlying portfolio companies.

 

We recorded a net realized loss of $3.4 million and net unrealized appreciation of $4.2 million on our investments for the year ended December 31, 2014. The most significant realized gains and losses and cumulative changes in unrealized appreciation/depreciation for the year ended December 31, 2014 are described below.

 

In connection with the restructuring of Tangible Software, Inc. (“Tangible Restructuring”), we recorded a $3.6 million realized loss. The $3.6 million realized loss reflected a reversal of (1) approximately $1.8 million of unrealized losses recorded on this investment during the year ended December 31, 2013, (2) approximately $1.7 million of additional unrealized losses recorded from January 1, 2014 through December 17, 2014, the Tangible Restructuring date, and (3) approximately $0.1 million of additional losses we recognized on the Tangible Restructuring date, which represented the difference between the fair value of consideration we received in connection with the Tangible Restructuring and the fair value of the pre-restructured investments on the restructuring date. In addition, we recorded $2.5 million of additional net unrealized appreciation on investments we held at December 31, 2014 and reversed $0.1 million of previously recognized unrealized appreciation associated with investments paid off or sold during 2014.

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company generates cash through operations from net investment income and the net liquidation of portfolio investments, and uses cash in its operations in the net purchase of portfolio investments. The Company must distribute its substantially all its taxable income which approximates, but will not always equal, the cash it generates from net investment income to maintain its RIC status. The Company’s distributions for the years ended December 31, 2015, 2014 and 2013, resulted in distributions in excess of taxable income. The Company has no history of net taxable gains. The Company also obtains and uses cash in the net borrowing of funds from the SBA and commercial sources of debt. These principal sources and uses of cash and liquidity are presented below (in thousands):

 

   Year ended December 31, 
   2015   2014   2013 
Cash from net investment income  $12,541   $8,522   $7,051 
Net purchases (liquidations) of portfolio investments   71,197    (73,731)   22,127 
Net cash provided by (used in) operating activities   83,738    (65,209)   29,178 
Cash dividends and distributions paid   (12,690)   (12,847)   (10,724)
Net borrowings   (50,027)   64,952    9,731 

  

At December 31, 2015, we had cash and cash equivalents of $32.7 million. During the year ended December 31, 2015, net liquidations of portfolio investments were primarily due to cash collections of $98.9 million from sale and redemption of our portfolio investments, including $7.2 million of cash collection from an investment we sold in December 2014, $67.3 million from the WM Asset Sale, and $5.6 million from the sale (including partial-sale) and redemption of our equity interests in six portfolio companies; and $96.1 million of cash we received from principal payments on our portfolio investments. These cash receipts were offset by $124.0 million of cash we used to purchase portfolio investments. These funds were principally used to pay-down debt.

 

Net repayment of borrowings of $50.0 million for the year ended December 31, 2015 is primarily attributable to the $73.8 million of net repayments on the WM Credit Facility which was paid in full and retired on May 28, 2015 offset by $22.6 million of draws from our SBA debentures (net of the fees).

 

At December 31, 2014, we had cash and cash equivalents of $12.4 million. During the year ended December 31, 2014, we had net purchases of portfolio investments of $73.7 million, primarily due to $162.8 million of cash we used to purchase portfolio investments, offset by net proceeds of $79.6 million we received from principal payments on our portfolio investments, cash collections of $9.5 million from sale of our portfolio investments.

 

Net borrowings of $65.0 million for the year ended December 31, 2014 is primarily attributable to $101.3 million of draws from our SBA debentures (net of the fees), offset by the $36.3 million of net repayments on the WM Credit Facility.

 

For the year ended December 31, 2015, we made total distributions of $13.2 million, of which $2.2 million represented a return of capital and $11.0 represented ordinary income.

 

CONFERENCE CALL

 

OFS Capital will host a conference call to discuss these results on Friday, March 11, 2016 at 11:00 AM Eastern Time. Interested parties may participate in the call via the following:

 

INTERNET: Log on to www.ofscapital.com at least 15 minutes prior to the start time of the call to register, download, and install any necessary audio software. A replay will be available for 90 days on the Company’s website at www.ofscapital.com.

 

TELEPHONE: Dial (877) 510-7674 (Domestic) or (412) 902-4139 (International) approximately 15 minutes prior to the call. A telephone replay of the conference call will be available through March 21, 2016 at 9:00 AM Eastern Time and may be accessed by calling (877) 344-7529 (Domestic) or (412) 317-0088 (International) and utilizing conference ID #10081844.

 

For more detailed discussion of the financial and other information included in this press release, please refer to OFS Capital’s Form 10-K for the year ended December 31, 2015, which is to be filed with the Securities and Exchange Commission.

 

 

 

 

OFS Capital Corporation and Subsidiaries

 

Condensed Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)  

 

   December 31, 
   2015   2014 
Assets          
Investments, at fair value          
Non-control/non-affiliate investments (amortized cost of $175,529 and $258,004, respectively)  $177,290   $254,666 
Affiliate investments (amortized cost of $63,113 and $55,569, respectively)   66,393    57,568 
Control investment (amortized cost of $13,613 and $0, respectively)   13,613    - 
Total investments at fair value (amortized cost of $252,255 and $313,573, respectively)   257,296    312,234 
Cash and cash equivalents   32,714    12,447 
Interest receivable   789    676 
Receivable from investment sold   -    7,223 
Prepaid expenses and other assets   3,692    3,924 
Deferred financing closing costs, net of accumulated amortization of $427 and $2,540, respectively   3,605    4,972 
Total assets  $298,096   $341,476 
           
Liabilities          
Accrued professional fees  $433   $462 
Interest payable   1,548    1,315 
Management and incentive fees payable   2,238    1,229 
Administration fee payable   488    273 
Other payables   211    247 
Deferred loan fee revenue   286    572 
SBA debentures   149,880    127,295 
Revolving line of credit   -    72,612 
Total liabilities   155,084    204,005 
           
Commitments and Contingencies          
           
Total net assets   143,012    137,471 
           
Total liabilities and net assets  $298,096   $341,476 
           
Number of shares outstanding   9,691,170    9,650,834 
Net asset value per share  $14.76   $14.24 

 

 

 

 

OFS Capital Corporation and Subsidiaries

 

Condensed Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)

 

   Three Months Ended December 31,   Twelve Months Ended December 31, 
   2015   2014   2015   2014 
                 
Investment income                    
Interest income                    
Non-control/non-affiliate investments  $6,169   $5,117   $23,488   $16,847 
Affiliate investments   1,279    1,131    5,341    3,646 
Control investment   141    -    141    843 
Total interest income   7,589    6,248    28,970    21,336 
Dividend income   12    176    1,361    570 
Fee income   1,272    529    1,933    914 
                     
Total investment income   8,873    6,953    32,264    22,820 
                     
Expenses                    
Interest expense   1,200    1,235    4,842    4,224 
Amortization and write-off of deferred financing closing costs   113    885    2,117    1,354 
Amortization of intangible asset   49    48    195    209 
Management fees   1,124    575    5,225    2,916 
Incentive fee   1,113    530    2,627    1,253 
Professional fees   257    405    1,114    1,517 
Administration fee   489    273    1,637    1,245 
General and administrative expenses   248    259    1,096    967 
                     
Total expenses   4,593    4,210    18,853    13,685 
                     
Net investment income   4,280    2,743    13,411    9,135 
                     
Net gain on investments   1,896    754    4,820    805 
                     
Net increase in net assets resulting from operations  $6,176   $3,497   $18,231   $9,940 
                     
Net investment income per common share - basic and diluted  $0.44   $0.28   $1.39   $0.95 
Net increase in net assets resulting from operations                    
per common share - basic and diluted  $0.64   $0.36   $1.89   $1.03 
Dividends and distributions declared per common share  $0.34   $0.34   $1.36   $1.36 
Basic and diluted weighted average shares outstanding   9,690,140    9,638,200    9,670,153    9,634,471 

 

 

 

 

Non-GAAP Financial Measure – Adjusted Net Investment Income (“Adjusted NII”)

 

On a supplemental basis, we disclose Adjusted NII (including on a per share basis), which is a financial measure calculated and presented on a basis of methodology other than in accordance with generally accepted accounting principles of the United States of America (“non-GAAP”). Adjusted NII represents net investment income, (1) excluding write-offs of deferred financing closing costs associated with our permanent reductions of the WM Credit Facility, (2) adding back the amount of net investment income incentive fee expenses associated with the write-offs that we would have incurred had the write-offs not occurred, and (3) excluding the net capital gains incentive fee. The management agreement with the Company’s advisor provides that a capital gains incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital gains) to the extent such realized capital gains exceed realized and unrealized capital losses for such year. Management believes that Adjusted NII is a useful indicator of operations exclusive of any net capital gains incentive fee as net investment income does not include gains associated with the capital gains incentive fee. In addition, management believes that providing Adjusted NII may facilitate a more complete analysis and greater transparency into OFS Capital’s ongoing operations, particularly in comparing underlying results from period to period, and afford investors a view of results that may be more easily compared to those of other companies.

 

The following table provides a reconciliation from net investment income (the most comparable GAAP measure) to Adjusted NII for the periods presented:

 

   Quarter Ended December 31,   Year Ended December 31, 
   2015   2014   2015   2014 
   (Dollar amounts in thousands, except per share data) 
                 
Net investment income  $4,280   $2,743   $13,411   $9,135 
                     
Write-off of deferred financing closing costs   -    665    1,646    665 
Incentive fee   -    (265)   (945)   (265)
Write-off of deferred financing closing costs, net   -    400    701    400 
                     
Capital gains incentive fee   139    -    139    - 
                     
Adjusted net investment income  $4,419   $3,143   $14,251   $9,535 
                     
Adjusted net investment income per common share:                    
Basic and diluted  $0.46   $0.33   $1.47   $0.99 
                     
Weighted average shares outstanding:                    
Basic and diluted   9,690,140    9,638,200    9,670,153    9,634,471 

 

 

 

 

ABOUT OFS CAPITAL

 

OFS Capital is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company. OFS Capital's investment objective is to provide shareholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. OFS Capital invests primarily in privately-held middle-market companies in the United States, including lower-middle-market companies, targeting investments of $3 to $20 million in companies with annual EBITDA between $3 million and $50 million. OFS Capital offers flexible solutions through a variety of asset classes including senior secured loans, which includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other minority equity securities. OFS Capital's investment activities are managed by OFS Capital Management, LLC, an investment adviser registered under the Investment Advisers Act of 1940 and headquartered in Chicago, Illinois, with additional offices in New York and Los Angeles.

 

FORWARD-LOOKING STATEMENTS

Statements made in this press release may contain forward-looking statements that involve substantial risks and uncertainties, some of which are beyond the control of OFS Capital’s management, and are difficult to predict.  Such forward-looking statements are not historical facts but, rather, reflect assumptions, estimates, and projections by OFS Capital concerning anticipated results and provide no guarantee of future performance.  All forward-looking statements speak only as of the date of this press release, and OFS Capital undertakes no duty to update any forward-looking statements herein made.

 

INVESTOR RELATIONS CONTACT:

Steve Altebrando

646-652-8473

saltebrando@ofsmanagement.com