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 June 30, 2016

 

  ¨ 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 (I.R.S. Employer
incorporation or organization) Identification No.)

 

10 S. Wacker Drive, Suite 2500

Chicago, Illinois 60606

(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 x
       
Non-accelerated filer ¨  (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 August 2, 2016 was 9,694,322.

 

 

 

 

OFS CAPITAL CORPORATION

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Consolidated Balance Sheets as of June 30, 2016 (unaudited), and December 31, 2015 3
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited) 4
  Consolidated Statements of Changes in Net Assets for the Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited) 5
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited) 6
  Consolidated Schedules of Investments as of June 30, 2016 (unaudited), and December 31, 2015 7
  Notes to Consolidated Financial Statements (unaudited) 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
Item 4. Controls and Procedures 56
   
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 57
Item 1A. Risk Factors 57
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 3. Defaults Upon Senior Securities 57
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 57
Item 6. Exhibits 58
SIGNATURES  59

 

 2 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data) 

 

   June 30,   December 31, 
   2016   2015 
   (unaudited)     
Assets          
Investments, at fair value          
Non-control/non-affiliate investments (amortized cost of $154,289 and $175,529, respectively)  $152,800   $177,290 
Affiliate investments (amortized cost of $67,568 and $63,113, respectively)   70,068    66,393 
Control investment (amortized cost of $24,994 and $13,613, respectively)   25,963    13,613 
Total investments at fair value (amortized cost of $246,851 and $252,255 respectively)   248,831    257,296 
Cash and cash equivalents   44,588    32,714 
Interest receivable   856    789 
Prepaid expenses and other assets   4,102    3,877 
Total assets  $298,377   $294,676 
           
Liabilities          
SBA debentures (net of deferred debt issuance costs of $3,229 and $3,420, respectively)  $146,651   $146,460 
Interest payable   1,591    1,548 
Management and incentive fees payable   1,946    2,238 
Administration fee payable   380    488 
Payable for investment purchased   3,465    - 
Accrued professional fees   439    433 
Other liabilities   825    497 
Total liabilities   155,297    151,664 
           
Commitments and Contingencies (Note 8)          
           
Net Assets          
Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, -0- shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively  $-   $- 
Common stock, par value of $0.01 per share, 100,000,000 shares authorized,  9,694,322 and  9,691,170 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively   97    97 
Paid-in capital in excess of par   134,522    134,446 
Accumulated undistributed net investment income   5,160    4,612 
Accumulated undistributed net realized gain (loss)   1,321    (1,184)
Net unrealized appreciation on investments   1,980    5,041 
Total net assets   143,080    143,012 
           
Total liabilities and net assets  $298,377   $294,676 
           
Number of shares outstanding   9,694,322    9,691,170 
Net asset value per share  $14.76   $14.76 

 

See Notes to Consolidated Financial Statements.

 

 3 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Statements of Operations (unaudited)

(Dollar amounts in thousands, except per share data)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
Investment income                    
Interest income                    
Non-control/non-affiliate investments  $4,431   $6,117   $9,167   $11,932 
Affiliate investments   1,671    1,411    3,357    2,754 
Control investment   490    -    831    - 
Total interest income   6,592    7,528    13,355    14,686 
Dividend income                    
Non-control/non-affiliate investments   134    68    162    148 
Affiliate investments   294    362    823    610 
Control investments   111    -    111    - 
Total dividend income   539    430    1,096    758 
Fee income                    
Non-control/non-affiliate investments   517    33    995    138 
Affiliate investments   7    91    39    121 
Control investments   28    -    41    - 
Total fee income   552    124    1,075    259 
                     
Total investment income   7,683    8,082    15,526    15,703 
                     
Expenses                    
Interest expense   1,308    2,684    2,616    4,461 
Management fees   1,089    1,426    2,204    2,981 
Incentive fee   857    231    1,590    606 
Professional fees   303    280    617    595 
Administration fee   326    326    754    867 
General and administrative expenses   343    383    633    692 
                     
Total expenses   4,226    5,330    8,414    10,202 
                     
Net investment income   3,457    2,752    7,112    5,501 
                     
Net realized and unrealized gain (loss) on investments                    
Net realized gain (loss) on non-control/non-affiliate investments (2015 revised - Note 2)   -    (125)   2,566    (35)
Net realized gain on affiliate investments   -    1,471    -    1,471 
Net change in unrealized appreciation/depreciation on non-control/non-affiliate investments (2015 revised - Note 2)   962    2,208    (3,130)   1,855 
Net change in unrealized appreciation/depreciation on affiliate investments   296    1,096    442    1,842 
Net change in unrealized appreciation/depreciation on control investment   (377)   -    (373)   - 
                     
Net gain (loss) on investments   881    4,650    (495)   5,133 
                     
Net increase in net assets resulting from operations  $4,338   $7,402   $6,617   $10,634 
                     
Net investment income per common share - basic and diluted  $0.36   $0.28   $0.73   $0.57 
Net increase in net assets resulting from operations per common share - basic and diluted  $0.45   $0.77   $0.68   $1.10 
Distributions declared per common share  $0.34   $0.34   $0.68   $0.68 
Basic and diluted weighted average shares outstanding   9,692,346    9,663,081    9,691,764    9,657,058 

 

See Notes to Consolidated Financial Statements.

 

 4 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands) 

 

   Six Months Ended June 30, 
   2016   2015 
Increase in net assets resulting from operations:          
Net investment income  $7,112   $5,501 
Net realized gain on investments (2015 revised - Note 2)   2,566    1,436 
Net change in unrealized appreciation/depreciation on investments (2015 revised - Note 2)   (3,061)   3,697 
Net increase in net assets resulting from operations   6,617    10,634 
Distributions to shareholders from:          
Accumulated net investment income (2015 revised - Note 2)   (6,590)   (6,567)
Accumulated net realized gain (2015 revised - Note 2)   -    - 
Total distributions to shareholders   (6,590)   (6,567)
Common stock transactions:          
Reinvestment of shareholder distributions   41    302 
Net increase in net assets resulting from capital transactions   41    302 
Net increase (decrease) in net assets   68    4,369 
Net assets:          
Beginning of period  $143,012   $137,471 
End of period  $143,080   $141,840 
Accumulated undistributed net investment income  (2015 revised - Note 2)  $5,160   $1,110 
Common stock activity:          
Shares issued from reinvestment of shareholder distributions   3,152    24,940 
Shares issued and outstanding at beginning of period   9,691,170    9,650,834 
Shares issued and outstanding at end of period   9,694,322    9,675,774 

 

See Notes to Consolidated Financial Statements.

 

 5 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows (unaudited)

(Dollar amounts in thousands)

 

   Six Months Ended June 30, 
   2016   2015 
         
Cash Flows From Operating Activities          
Net increase in net assets resulting from operations  $6,617   $10,634 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:          
Net realized gain on investments(1)   (2,566)   (1,436)
Net change in unrealized appreciation/depreciation on investments(1)   3,061    (3,697)
Amortization of discounts and premiums, net   (509)   (602)
Amortization of deferred loan amendment and other fee revenue   (322)   (418)
Proceeds from collection of deferred loan fee revenue   71    36 
Payment-in-kind interest and dividend income   (1,193)   (1,229)
Amortization and write-off of deferred debt issuance costs   241    1,908 
Amortization of intangible asset   98    98 
Purchase and origination of portfolio investments   (20,290)   (45,886)
Proceeds from principal payments on portfolio investments   31,558    31,237 
Proceeds from sale or redemption of portfolio investments   2,115    89,072 
Proceeds from distribution received from portfolio company   -    51 
Changes in operating assets and liabilities:          
Interest payable   43    (36)
Management and incentive fees payable   (291)   278 
Administration fee payable   (108)   53 
Other assets and liabilities   (102)   (98)
Net cash provided by operating activities   18,423    79,965
           
Cash Flows From Financing Activities          
Distributions paid to shareholders   (6,549)   (6,265)
Borrowings under revolving line of credit   -    1,217 
Repayments under revolving line of credit   -    (73,829)
Draw down on SBA debentures   -    22,585 
Payment of debt issuance costs   -    (548)
Payment of common stock offering costs   -    (4)
Net cash used in financing activities   (6,549)   (56,844)
           
Net increase in cash and cash equivalents   11,874    23,121 
           
Cash and cash equivalents — beginning of period   32,714    12,447
           
Cash and cash equivalents — end of period  $44,588   $35,568
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during the period for interest  $2,331   $2,588 
Reinvestment of shareholder distributions  $41   $302 

 

(1)2015 revised for a revision to the 2015 consolidated statement of operations. The revision had no impact on Net cash provided by operating activities for the six months ended June 30, 2015. See Note 2 for more details.

 

 

See Notes to Consolidated Financial Statements.

 

 6 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments (unaudited)

June 30, 2016

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above Index
(1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of Net
Assets
 
                             
Non-control/Non-affiliate Investments                                
Accurate Group Holdings, Inc. (3)  Offices of Real Estate Appraisers                             
Subordinated Loan     13.00%  N/A  8/23/18  $10,000   $10,042   $9,996    7.0%
                                 
AssuredPartners, Inc  Insurance Agencies and Brokerages                             
Senior Secured Term Loan     10.00%  (L +9.00%)  10/20/23   5,000    4,844    4,902    3.4 
                                 
Armor Holdings II LLC  Other Professional, Scientific, and Technical Services                             
Senior Secured Term Loan     10.25%  (L +9.00%)  12/26/20   3,500    3,465    3,465    2.4 
                                 
BCC Software, LLC (3)  Custom Computer Programming Services                             
Senior Secured Term Loan     9.00%  (L +8.00%)  6/20/19   6,383    6,325    6,333    4.4 
Senior Secured Revolver (8)      N/A  (L +8.00%)  6/20/19   -    (10)   (8)(2)   - 
                6,383    6,315    6,325    4.4 
Community Intervention Services, Inc. (3)  Outpatient Mental Health and Substance Abuse Centers                             
Subordinated  Loan (5)(8)(9)      10.0% cash / 3.0% PIK  N/A  1/16/21   6,723    6,663    5,707    4.0 
                                 
Confie Seguros Holdings II Co.  Insurance Agencies and Brokerages                             
Senior Secured Term Loan     10.25%  (L +9.00%)  5/8/19   4,000    3,970    3,794    2.7 
                                 
C7 Data Centers, Inc. (3)  Other Computer Related Services                             
Senior Secured Term Loan (7)     12.51%  (L +8.50%)  6/22/20   13,850    13,777    13,659    9.5 
                                 
Elgin Fasteners Group  Bolt, Nut, Screw, Rivet, and Washer Manufacturing                             
Senior Secured Term Loan     6.25%  (L +5.00%)  8/27/18   4,212    4,208    4,188    2.9 
                                 
Inhance Technologies Holdings LLC  Other Basic Inorganic Chemical Manufacturing                             
Senior Secured Term Loan A     5.50%  (L +4.50%)  2/7/18   2,090    2,087    2,065    1.4 
                                 
Intelli-Mark Technologies, Inc.(3)  Other Travel Arrangement and Reservation Services                             
Senior Secured Term Loan (9)     13.00%  N/A  11/23/20   8,750    8,673    8,856    6.2 
Common Equity (2,553,089 shares) (8)                    1,500    1,671    1.2 
                8,750    10,173    10,527    7.4 
Intrafusion Holding Corp. (3) (6)  Other Outpatient Care Centers                             
Senior Secured Term Loan B     13.22%  (P +5.75%)  9/25/20   14,250    14,201    14,259    10.0 
                                 
Jobson Healthcare Information, LLC (3)  Other Professional, Scientific, and Technical Services                             
Senior Secured Term Loan (9)     10.13% cash / 2.795% PIK  (L +10.925%)  7/21/19   14,577    14,338    14,216    9.9 
Warrants (1,056,428 member units (8)                    454    316    0.2 
                14,577    14,792    14,532    10.1 
Maverick Healthcare Equity, LLC (3)  Home Health Equipment Rental                             
Preferred Equity (1,250,000 units) (8)                    900    1,486    1.0 
Class A Common Equity (1,250,000 units) (8)                    -    314    0.2 
                     900    1,800    1.2 
My Alarm Center, LLC (3)  Security Systems Services (except Locksmiths)                             
Senior Secured Term Loan     12.00%  (L +11.00%)  7/9/19   5,000    5,000    4,945    3.5 
Class A Preferred Equity (100 units) (8)                    203    213    0.1 
                5,000    5,203    5,158    3.6 

 

 7 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments (unaudited) - Continued

June 30, 2016

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above  Index
(1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of Net
Assets
 
                              
Non-control/Non-affiliate Investments - Continued                                 
MYI Acquiror Limited (4)   Insurance Agencies and Brokerages                             
Senior Secured Term Loan A      5.75%  (L +4.50%)  5/28/19   4,801    4,798    4,725    3.3 
                                  
NHR Holdings, LLC   Other Telecommunications                             
Senior Secured Term Loan A      5.50%  (L +4.25%)  11/30/18   1,496    1,487    1,475    1.0 
Senior Secured Term Loan B      5.50%  (L +4.25%)  11/30/18   1,516    1,507    1,495    1.0 
                 3,012    2,994    2,970    2.0 
NVA Holdings, Inc.   Veterinary Services                             
Senior Secured Term Loan      8.00%  (L +7.00%)  8/14/22   650    650    650    0.5 
                                  
Phoenix Brands LLC (5)   Soap and Other Detergent Manufacturing                             
Senior Secured DIP Revolver      11.25%  (P +7.75%)  9/14/16   1,030    946    928    0.6 
                                  
Planet Fitness Midwest LLC (3)   Fitness and Recreational Sports Centers                             
Senior Secured Term Loan      13.00%  N/A  12/16/21   5,000    4,950    4,950    3.5 
                                  
Quantum Spatial, Inc. (f/k/a Aero-Metric, Inc.)   Other Information Services                             
Senior Secured Term Loan      6.75% cash / 1.0% PIK  (L +6.50%)  8/27/17   2,530    2,522    2,414    1.7 
                                  
Ranpak Corp.   Packaging Machinery Manufacturing                             
Senior Secured Term Loan      8.25%  (L +7.25%)  10/3/22   2,000    1,996    1,849    1.3 
                                  
Sentry Centers Holdings, LLC   Other Professional, Scientific, and Technical Services                             
Senior Secured Loan      12.14%  (L +11.50%)  7/24/19   3,345    3,287    3,348    2.3 
                                  
smarTours, LLC (3)   Tour Operators                             
Senior Secured Loan      9.25%  N/A  10/11/18   2,439    2,415    2,439    1.8 
Preferred Equity A (500,000 units) (12)                     439    814    0.6 
                 2,439    2,854    3,253    2.4 
Southern Technical Institute, LLC (3)   Colleges, Universities, and Professional Schools                             
Subordinated Loan      9.0% cash / 4.0% PIK  (L +12.00%)  12/2/20   3,364    3,352    3,163    2.3 
1,764,720 Class SP-1 Units in Southern Technical Holdings, LLC, 15.75% PIK (12)                     1,789    1,639    1.1 
Class A Warrants (2,174,905 units) (12)                     46    91    0.1 
                 3,364    5,187    4,893    3.5 
Stancor, L.P. (3)   Pump and Pumping Equipment Manufacturing                             
Senior Secured  Term Loan      8.75%  (L +8.00%)  8/19/19   11,536    11,473    11,300    7.9 
1,250,000 Class A Units in SCT Holdings, LLC, 8% PIK (12)                     1,445    1,167    0.8 
                 11,536    12,918    12,467    8.7 
TravelCLICK, Inc.   Computer Systems Design and Related Services                             
Senior Secured Term Loan      8.75%  (L +7.75%)  11/8/21   4,000    3,867    3,618    2.5 
                                  
United Biologics Holdings, LLC (3)   Medical Laboratories                             
Subordinated  Loan      12.0% cash / 2.0% PIK  N/A  3/5/17   4,145    4,128    3,865    2.7 
Class A-1 Units (2,686 units) and Kicker Units (2,015 units) (12)                     9    14    - 
Class A-1 Warrants (2,272 units) and Kicker Warrants (1,704 units) (12)                     8    12    - 
Class A-2 Kicker Units (144,297 units) (12)                     -    -    - 
Class A Warrants (10,160 units) (12)                     67    5    - 
Class B Warrants (15,238 units) (12)                     7    8    - 
                 4,145   4,219   3,904    2.7 
VanDeMark Chemical Inc.   Other Basic Inorganic Chemical Manufacturing                             
Senior Secured Term Loan      6.50%  (L +5.25%)  11/30/17   2,475    2,461    2,454    1.7 
                                  
Total Non-control/Non-affiliate Investments                148,662    154,289    152,800    106.7 

 

 8 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments (unaudited) - Continued

June 30, 2016

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above Index
(1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of Net
Assets
 
                              
Affiliate Investments                                 
All Metals Holding, LLC (3)   Metal Service Centers and Other Metal Merchant Wholesalers                             
Senior Secured Term Loan      11.00%  N/A  3/31/21   12,067    11,609    12,247    8.6 
Subordinated Loan      14.0% PIK  N/A  11/15/16   1,191    1,135    1,657    1.2 
Performance Fee                     79    86    0.1 
Common Equity (166,049 member units) (12)                     370    568    0.4 
                 13,258    13,193    14,558    10.3 
Contract Datascan Holdings, Inc. (3)   Office Machinery and Equipment Rental and Leasing                             
Subordinated Loan      12.00%  N/A  2/5/21   8,000    7,978    7,839    5.5 
Preferred Equity A (3,061 shares, 10% PIK) (12)                     3,552    3,742    2.6 
Common Equity (11,273 shares) (12)                     104    599    0.4 
                 8,000    11,634    12,180    8.5 
Master Cutlery, LLC (3)   Sporting and Recreational Goods and Supplies Merchant Wholesalers                             
Subordinated Loan      13.00%  N/A  4/17/20   4,753    4,731    4,695    3.3 
3,723 Preferred Equity A units in MC Parent, LLC, 5% cash, 3% PIK (12)                     3,807    1,902    1.3 
15,564 Common Equity units in MC Parent, LLC (12)                     -    -    - 
                 4,753    8,538    6,597    4.6 
NeoSystems Corp. (3)   Other Accounting Services                             
Subordinated Loan      10.50% cash / 1.25% PIK  N/A  8/13/19   4,662    4,634    4,665    3.3 
Convertible Preferred Stock (521,962 shares, 10% PIK) (12)                     1,196    1,507    1.1 
                 4,662    5,830    6,172    4.4 
Pfanstiehl Holdings, Inc. (3)   Pharmaceutical Preparation Manufacturing                             
Subordinated Loan (9)      10.50%  N/A  9/29/21   3,788    3,841    3,841    2.7 
Class A Common Equity (400 shares)                     217    4,040    2.8 
                 3,788    4,058    7,881    5.5 
Strategic Pharma Solutions, Inc. (3)   Other Professional, Scientific, and Technical Services                             
Senior Secured Term Loan      11.00%  (L +10.00%)  12/18/20   8,937    8,857    8,942    6.2 
1,191 Class A Units in Strategic Pharma Solutions Holdings, LLC, 6% PIK (12)                     1,858    1,994    1.4 
                 8,937    10,715    10,936    7.6 
TRS Services, LLC (3)   Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance                             
Senior Secured Term Loan      9.75% cash / 1.5% PIK  (L +10.25%)  12/10/19   9,789    9,733    9,550    6.7 
3,000,000 Class A Units in IGT Holdings, LLC, 11% PIK (12)                     2,974    1,859    1.3 
329,266 Class AA Units in IGT Holdings, LLC, 15% PIK (12)                     321    335    0.2 
3,000,000 Common Units in IGT Holdings, LLC (12)                     572    -    - 
                 9,789    13,600    11,744    8.2 
                                  
Total Affiliate Investments                53,187    67,568    70,068    49.1 
                                  
Control Investment                                 
Malabar International (3)   Other Aircraft Parts and Auxiliary Equipment Manufacturing                             
Subordinated Loan      11.25% cash / 2.0% PIK  N/A  11/13/21   7,539    7,567    7,567    5.3 
Preferred Stock (1,644 shares, 6% cash)                     4,283    5,067    3.5 
                 7,539    11,850    12,634    8.8 
Mirage Trailers LLC (3)   Travel Trailer and Camper Manufacturing                             
Senior Secured Term Loan      12.50%  (L +11.50%)  11/25/20   10,165    10,075    10,175    7.1 
554 common equity shares in MTE Holding Corp.                     3,069    3,154    2.2 
                 10,165    13,144    13,329    9.3 
                                  
Total Control Investment                17,704    24,994    25,963    18.1 
                                  
                                  
Total Investments               $219,553   $246,851   $248,831    173.9%

 

 9 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments (unaudited) - Continued

June 30, 2016

(Dollar amounts in thousands)

 

(1) The majority of investments bear interest at a variable rate that is indexed to the London Interbank Offered Rate ("LIBOR") (L) or Prime (P), and is reset monthly or quarterly. Substantially all of the Company's LIBOR referenced investments are subject to an interest rate floor.  For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at June 30, 2016. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.
(2) The negative fair value is the result of the unfunded commitment being valued below par.
(3) Investments held by SBIC I LP.  All other investments pledged as collateral under the PWB Credit Facility.
(4) Indicates investments that the Company deems non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended ("1940 Act").  Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets. As of June 30, 2016, 98.4 % of the Company's assets were qualifying assets.
(5) Non-accrual loan.
(6) SBIC I LP has entered into a contractual arrangement whereby, subject to certain conditions being satisfied, it has agreed, with respect to the Senior Secured Tem Loan B, to receive its payment after the repayment of certain lenders pursuant to a payment waterfall.  With respect to Intrafusion Holding Corp., the reported interest rate of 13.22% at June 30, 2016 includes interest of 3.97%  per annum as specified under the contractual arrangement SBIC I LP entered into with the co-lenders in connection with the credit agreement.
(7) SBIC I LP has entered into a contractual arrangement whereby, subject to certain conditions being satisfied, it has agreed, with respect to the Senior Secured Tem Loan, to receive its payment after the repayment of certain lenders pursuant to a payment waterfall.  With respect to C7 Data Centers, Inc., the reported interest rate of 12.51% at June 30, 2016 includes interest of 3.01%  per annum as specified under the contractual arrangement SBIC I LP entered into with the co-lenders in connection with the credit agreement.
(8) Non-income producing.
(9) The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additonal securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing credit agreements as of June 30, 2016:

 

Portfolio Company  Investment Type  Range of PIK
Option
  Range of Cash
Option
  Maximum PIK
Rate Allowed
 
Community Intervention Services, Inc.  Subordinated Loan  0% or 3.00%  13.00 % or 10.00%   3.00%
Intelli-Mark Technologies, Inc.  Senior Secured Term Loan  0% or 2.00%  13.00 % or 11.50%   2.00%
Jobson Healthcare Information, LLC  Senior Secured Term Loan  0% or 2.795%  10.13% or 12.925%   2.795%
United Biologics Holdings, LLC  Subordinated Loan  0% or 2.00%  14.00% or 12.00%   2.00%

 

See Notes to Consolidated Financial Statements.

 

 10 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments

December 31, 2015

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above
Index (1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of
Net Assets
 
                             
Non-control/Non-affiliate Investments                                
Accurate Group Holdings, Inc. (3)  Offices of Real Estate Appraisers                             
Subordinated Loan     12.50%  N/A  8/23/18  $10,000   $10,050   $9,940    7.0
                                 
A.C.T. Lighting, Inc. (3)  Electrical Apparatus and Equipment, Wiring Supplies, and Related                             
Subordinated Loan     12.00% cash / 2.0% PIK  N/A  7/24/19   3,574    3,558    3,559    2.5 
                                 
All Metals Holding, LLC (3)  Metal Service Centers and Other Metal Merchant Wholesalers                             
Senior Secured Term Loan     10.50%  N/A  12/30/19   9,900    9,765    9,697    6.8 
Common Equity (69,464 member units) (9)                    69    259    0.2 
                9,900    9,834    9,956    7.0 
AssuredPartners, Inc. (3)  Insurance Agencies and Brokerages                             
Senior Secured Term Loan     10.00%  (L +9.00%)  10/22/23   3,000    2,883    2,894    2.0 
                                 
B+B SmartWorx Inc. (f/k/a B&B Electronics Manufacturing Company)  Communications Equipment Manufacturing                             
Senior Secured Term Loan A     6.50%  (L +5.00%)  3/31/16   2,257    2,257    2,257    1.6 
                                 
BCC Software, LLC (3)  Custom Computer Programming Services                             
Senior Secured Term Loan     9.00%  (L +8.00%)  6/20/19   6,573    6,504    6,355    4.4 
Senior Secured Revolver (9)     N/A  (L +8.00%)  6/20/19   -    (11)   (36)(2)   - 
                6,573    6,493    6,319    4.4 
Community Intervention Services, Inc. (f/k/a South Bay Mental Health Center, Inc.) (3)  Outpatient Mental Health and Substance Abuse Centers                             
Subordinated  Loan (10)     10.0% cash / 3.0% PIK  N/A  1/16/21   6,672    6,610    6,456    4.5 
                                 
Confie Seguros Holdings II Co.  Insurance Agencies and Brokerages                             
Senior Secured Term Loan     10.25%  (L +9.00%)  5/8/19   4,000    3,965    3,893    2.7 
                                 
C7 Data Centers, Inc. (3)(7)  Other Computer Related Services                             
Senior Secured Term Loan     13.25%  (L +8.50%)  6/22/20   11,850    11,828    11,508    8.0 
                                 
Elgin Fasteners Group  Bolt, Nut, Screw, Rivet, and Washer Manufacturing                             
Senior Secured Term Loan     6.00%  (L +4.75%)  8/27/16   4,551    4,534    4,506    3.2 
                                 
HealthFusion, Inc. (3)(8)  Software Publishers                             
Senior Secured Loan     13.00%  N/A  10/7/18   4,750    4,711    4,893    3.4 
Common Stock Warrants (2,007,360 shares) (9)                    -    2,560    1.8 
                4,750    4,711    7,453    5.2 
Inhance Technologies Holdings LLC  Other Basic Inorganic Chemical Manufacturing                             
Senior Secured Term Loan A     5.50%  (L +4.50%)  2/7/18   2,248    2,242    2,180    1.5 
                                 
Intelli-Mark Technologies, Inc.(3)  Other Travel Arrangement and Reservation Services                             
Senior Secured Term Loan (9)     13.00%  N/A  11/23/20   8,750    8,664    8,664    6.1 
Common Equity (2,553,089 shares) (9)                    1,500    1,500    1.0 
                8,750    10,164    10,164    7.1 

 

 11 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments - Continued

December 31, 2015

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above
Index (1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of
Net Assets
 
                             
Non-control/Non-affiliate Investments - Continued                                
Intrafusion Holding Corp. (3) (6)  Other Outpatient Care Centers                             
Senior Secured Term Loan B     12.84%  (P +5.75%)  9/25/20   14,250    14,196    14,059    9.8 
                                 
Jobson Healthcare Information, LLC (3)  Other Professional, Scientific, and Technical Services                             
Senior Secured Term Loan (10)     10.13% cash / 2.795% PIK  (L +10.925%)  7/21/19   14,741    14,456    14,128    9.9 
Warrants (1,056,428 member units) (9)                    454    320    0.2 
                14,741    14,910    14,448    10.1 
Maverick Healthcare Equity, LLC (3)  Home Health Equipment Rental                             
Preferred Equity (1,250,000 units) (9)                    900    1,694    1.2 
Class A Common Equity (1,250,000 units) (9)                    -    257    0.2 
                -    900    1,951    1.4 
My Alarm Center, LLC (3)  Security Systems Services (except Locksmiths)                             
Senior Secured Term Loan     12.00%  (L +11.00%)  7/9/19   5,000    5,000    5,000    3.5 
                                 
MYI Acquiror Limited (4)  Insurance Agencies and Brokerages                             
Senior Secured Term Loan A     5.75%  (L +4.50%)  5/28/19   4,826    4,815    4,710    3.3 
                                 
NHR Holdings, LLC  Other Telecommunications                             
Senior Secured Term Loan A     5.50%  (L +4.25%)  11/30/18   1,900    1,886    1,843    1.3 
Senior Secured Term Loan B     5.50%  (L +4.25%)  11/30/18   1,926    1,912    1,868    1.3 
                3,826    3,798    3,711    2.6 
                                 
Phoenix Brands LLC (5)  Soap and Other Detergent Manufacturing                             
Senior Secured Term Loan A (9)     9.25%  (L +7.75%)  1/29/16   939    937    798    0.6 
                                 
Physiotherapy Associates Holding, Inc.  Other Outpatient Care Centers                             
Senior Secured Term Loan     9.50%  (L +8.50%)  6/4/22   1,000    991    972    0.7 
                                 
Quantum Spatial, Inc. (f/k/a Aero-Metric, Inc.)  Other Information Services                             
Senior Secured Term Loan     6.75% cash / 2.0% PIK  (L +7.50%)  8/27/17   2,578    2,564    2,433    1.7 
                                 
Ranpak Corp.  Packaging Machinery Manufacturing                             
Senior Secured Term Loan     8.25%  (L +7.25%)  10/3/22   2,000    1,995    1,940    1.4 
                                 
Riveron Consulting, LLC (3)  Administrative Management and General Management Consulting                             
Subordinated Loan     13.25%  N/A  3/25/20   10,000    9,915    9,952    7.0 
                                 
Sentry Centers Holdings, LLC (3)  Other Professional, Scientific, and Technical Services                             
Senior Secured Loan     14.00%  N/A  5/29/20   6,105    6,012    6,411    4.5 
                                 
smarTours, LLC (3)  Tour Operators                             
Senior Secured Loan     9.25%  N/A  10/11/18   2,439    2,410    2,429    1.7 
Preferred Equity A (500,000 units) (9)                    439    769    0.5 
                2,439    2,849    3,198    2.2 
Southern Technical Institute, LLC (3)  Colleges, Universities, and Professional Schools                             
Subordinated Loan     10.75% cash / 2.0% PIK  (L +11.75%)  12/2/20   5,026    5,005    4,786    3.3 
                                 
Stancor, L.P. (3)  Pump and Pumping Equipment Manufacturing                             
Senior Secured  Term Loan     8.75%  (L +8.00%)  8/19/19   11,536    11,463    11,227    7.9 
1,250,000 Class A Units in SCT Holdings, LLC, 8% PIK (9)                    1,390    1,525    1.1 
                11,536    12,853    12,752    9.0 
TravelCLICK, Inc.  Computer Systems Design and Related Services                             
Senior Secured Term Loan     8.75%  (L +7.75%)  11/6/21   3,000    2,971    2,892    2.0 
                                 
United Biologics Holdings, LLC (3)  Medical Laboratories                             
Subordinated  Loan (10)     12.0% cash / 2.0% PIK  N/A  3/5/17   4,104    4,074    3,677    2.6 
Class A-1 Units (2,686 units) and Kicker Units (2,015 units) (9)                    9    -    - 
Class A-1 Warrants (2,272 units) and Kicker Warrants (1,704 units) (9)                    8    -    - 
Class A Warrants (10,160 units) (9)                    67    -    - 
Class B Warrants (15,238 units) (9)                    7    -    - 
                4,104   4,165   3,677    2.6 
VanDeMark Chemical Inc.  Other Basic Inorganic Chemical Manufacturing                             
Senior Secured Term Loan     6.50%  (L +5.25%)  11/30/17   2,543    2,524    2,515    1.8 
                                 
Total Non-control/Non-affiliate Investments               172,038    175,529    177,290    124.2 

 

 12 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments - Continued

December 31, 2015

(Dollar amounts in thousands)

 

Portfolio Company
Investment Type
  Industry  Interest Rate (1)  Spread Above
Index (1)
  Maturity  Principal
Amount
   Amortized Cost   Fair Value   Percent of
Net Assets
 
                             
Affiliate Investments                                
Contract Datascan Holdings, Inc. (3)  Office Machinery and Equipment Rental and Leasing                             
Subordinated Loan     12.00%  N/A  2/5/21   5,350    5,325    5,236    3.7 
Preferred Equity A (2,463 shares, 10% PIK) (9)                    2,712    2,772    1.9 
Common Equity (9,069 shares) (9)                    -    444    0.3 
                5,350    8,037    8,452    5.9 
Malabar International (3)  Other Aircraft Parts and Auxiliary Equipment Manufacturing                             
Subordinated Loan     12.5% cash / 2.5% PIK  N/A  5/21/17   7,450    7,487    7,496    5.2 
Preferred Stock (1,644 shares, 6% cash)                    4,283    5,316    3.7 
                7,450    11,770    12,812    8.9 
Master Cutlery, LLC (3)  Sporting and Recreational Goods and Supplies Merchant Wholesalers                             
Subordinated Loan     13.00%  N/A  4/17/20   4,777    4,752    4,705    3.3 
3,723 Preferred Equity A units in MC Parent, LLC, 5% cash, 3% PIK (9)               -    3,647    3,015    2.1 
15,564 Common Equity units in MC Parent, LLC (9)               -    -    167    0.1 
                4,777    8,399    7,887    5.5 
NeoSystems Corp. (3)  Other Accounting Services                             
Subordinated Loan     10.5% cash / 1.25% PIK  N/A  8/13/19   4,632    4,600    4,619    3.2 
Convertible Preferred Stock (521,962 shares, 10% PIK) (9)                    1,138    2,481    1.7 
                4,632    5,738    7,100    4.9 
Pfanstiehl Holdings, Inc. (3)  Pharmaceutical Preparation Manufacturing                             
Subordinated Loan (10)     13.50%  N/A  9/29/18   3,788    3,851    3,814    2.7 
Class A Common Equity (400 shares)                    217    1,884    1.3 
                3,788    4,068    5,698    4.0 
Strategic Pharma Solutions, Inc. (3)  Other Professional, Scientific, and Technical Services                             
Senior Secured Term Loan     11.00%  (L +10.00%)  12/18/20   8,937    8,848    8,848    6.2 
1,191 Class A Units in Strategic Pharma Solutions Holdings, LLC, 6% PIK (9)                    1,804    1,804    1.3 
                8,937    10,652    10,652    7.5 
TRS Services, LLC (3)  Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance                             
Senior Secured Term Loan     10.25%  (L +9.25%)  12/10/19   10,410    10,339    10,277    7.2 
Delayed Draw Senior Secured Term Loan     10.25%  (L +9.25%)  12/10/19   741    739    732    0.5 
3,000,000 Class A Units in IGT Holdings, LLC, 11% PIK (9)                    2,799    2,757    1.9 
3,000,000 Common Units in IGT Holdings, LLC (9)                    572    26    - 
                11,151    14,449    13,792    9.6 
Total Affiliate Investments               46,085    63,113    66,393    46.3 
                                 
Control Investment                                
Mirage Trailers LLC (3)  Travel Trailer and Camper Manufacturing                             
Senior Secured Term Loan     12.50%  (L +11.50%)  11/25/20   10,648    10,544    10,544    7.4 
554 common equity shares in MTE Holding Corp.) (9)                    3,069    3,069    2.0 
                10,648    13,613    13,613    9.4 
Total Control Investment               10,648    13,613    13,613    9.4 
                                 
Total Investments              $228,771   $252,255   $257,296    179.9%

 

 13 

 

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Schedule of Investments - Continued

December 31, 2015

(Dollar amounts in thousands)

 

(1)The majority of investments bear interest at a variable rate that is indexed to the London Interbank Offered Rate ("LIBOR") (L) or Prime (P), and is reset monthly or quarterly. All of the Company's LIBOR referenced investments are subject to an interest rate floor. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2015. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.
(2)The negative fair value is the result of the unfunded commitment being valued below par.
(3)Investments held by SBIC I LP. All other investments pledged as collateral under the PWB Credit Facility.
(4)Indicates investments that the Company deems non-qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended ("1940 Act"). Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets. As of December 31, 2015, 96.3 % of the Company's assets were qualifying assets.
(5)Non-accrual loan.
(6)SBIC I LP has entered into a contractual arrangement whereby, subject to certain conditions being satisfied, it has agreed, with respect to the Senior Secured Tem Loan B, to receive its payment after the repayment of certain lenders pursuant to a payment waterfall. With respect to Intrafusion Holding Corp., the reported interest rate of 12.84% at December 31, 2015 includes interest of 3.59% per annum as specified under the contractual arrangement SBIC I LP entered into with the co-lenders in connection with the credit agreement.
(7)SBIC I LP has entered into a contractual arrangement whereby, subject to certain conditions being satisfied, it has agreed, with respect to the Senior Secured Tem Loan, to receive its payment after the repayment of certain lenders pursuant to a payment waterfall. With respect to C7 Data Centers, Inc., the reported interest rate of 13.25% at December 31, 2015 includes interest of 3.75% per annum as specified under the contractual arrangement SBIC I LP entered into with the co-lenders in connection with the credit agreement.
(8)In January 2016, HealthFusion, Inc. was purchased, at which time the Common Stock Warrants were redeemed and the Senior Secured Loan was repaid at par. In connection with the loan repayment, the Company received a prepayment penalty of $143. The Common Stock Warrants were redeemed for total consideration of $2,385, which included a cash payment of $2,115 and an additional amount held in escrow valued at $270 to be released 50% in one year and the remaining amount in approximately two years. In addition, the Company could receive an earnout payment of up to approximately $230 to $460 in 2017.
(9)Non-income producing.
(10)The interest rate includes a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing credit agreements as of December 31, 2015.

  

Portfolio Company  Investment Type  Range of PIK
Option
  Range of Cash
Option
  Maximum PIK
Rate Allowed
 
Community Intervention Services, Inc.  Subordinated Loan  0% or 3.00%  13.00 % or 10.00%   3.00%
Intelli-Mark Technologies, Inc.  Senior Secured Term Loan  0% or 2.00%  13.00 % or 11.50%   2.00%
Jobson Healthcare Information, LLC  Senior Secured Term Loan  0% or 2.795%  10.13% or 12.925%   2.795%
Pfanstiehl Holdings, Inc  Subordinated Loan  0% or 1.50%  13.50% or 12.00%   1.50%
United Biologics Holdings, LLC  Subordinated Loan  0% or 2.00%  14.00% or 12.00%   2.00%

 

See Notes to Consolidated Financial Statements.

 

 14 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Note 1. Organization

 

OFS Capital Corporation (the “Company”), a Delaware corporation, is as 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 income tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Company’s strategic investment focus is primarily on debt investments and, to a lesser extent, equity investments primarily in middle-market companies in the United States. OFS Capital Management, LLC (“OFS Advisor”) manages the day-to-day operations of, and provides investment advisory services to, the Company.

 

The Company may make investments directly or through OFS SBIC I, LP (“SBIC I LP”), its investment company subsidiary licensed under the Small Business Administration’s (“SBA”) Small Business Investment Company program (the “SBIC Program”). The SBIC Program is designed to stimulate the flow of capital into eligible businesses. SBIC I LP is subject to SBA regulatory requirements, including limitations on the businesses and industries in which it can invest, requirements to invest at least 25% of its regulatory capital in eligible smaller businesses, as defined under the Small Business Investment Act of 1958 (“SBIC Act”), limitations on the financing terms of investments, and capitalization thresholds that may limit distributions to the Company; and is subject to periodic audits and examinations of its financial statements.

 

Note 2. Correction of Error

 

In the fourth quarter of 2015, the Company discovered and corrected errors impacting the classification of certain components of consolidated net assets as of December 31, 2014 and 2013, and distributions reported on the consolidated statement of changes in net assets for the year ended December 31, 2014. These reclassifications had no effect on total net assets or net asset value per share. The purpose of the reclassifications was to properly report the tax character of, and basis differences between tax and accounting principles generally accepted in the United States of America (“GAAP”) in (i) accumulated shareholder distributions, (ii) accumulated undistributed net investment income, (iii) accumulated net realized gains/losses, and (iv) net unrealized appreciation (depreciation) on investments. Accordingly, the Company has revised its December 31, 2014 consolidated balance sheet and statement of changes in net assets for the years ended December 31, 2014, 2013, and for each interim period within the year ended December 31, 2015. The effect of the reclassifications to the consolidated statement of net assets as of June 30, 2015, the consolidated statement of changes in net assets for the six months ended June 30, 2015, and the consolidated statement of operations for the three and six months ended June 30, 2015 were as follows:

 

Summary of revisions to the Statement of Net Assets

 

   As Previously Reported       Revised 
   June 30, 2015   Revisions   June 30, 2015 
Net Assets               
Preferred stock  $-   $-   $- 
Common stock   97    -    97 
Paid-in capital in excess of par   143,683    (6,967)   136,716 
Accumulated undistributed (distributions in excess of) net investment income   (8,859)   9,969    1,110 
Accumulated undistributed net realized gain (loss)   3,454    (1,894)   1,560 
Net unrealized appreciation (appreciation) on investments   3,465    (1,108)   2,357 
Total net assets  $141,840   $-   $141,840 

 

Summary of revisions to the Statement of Changes in Net Assets (affected components)

 

   As Previously Reported       Revised 
   Six Months Ended       Six Months Ended 
   June 30, 2015   Revisions   June 30, 2015 
Distributions to shareholders from:               
Accumulated net investment income  $(6,516)  $(51)  $(6,567)
Accumulated net realized gains   (51)   51    - 
Total distributions to shareholders  $(6,567)  $-   $(6,567)
                
Net assets:               
Beginning of period  $137,471   $-   $137,471 
End of period  $141,840   $-   $141,840 
Accumulated undistributed (distributions in excess of) net investment income  $(8,859)  $9,969   $1,110 

 

 15 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Summary of revisions to Statement of Operations (affected components)

 

   Previously Reported       Revised 
   Three Months Ended       Three Months Ended 
   June 30, 2015   Revisions   June 30, 2015 
Net realized and unrealized gain (loss) on investments               
Net realized gain (loss) on non-control/non-affiliate investments  $2,788   $(2,913)  $(125)
Net realized gain on affiliate investments   1,471    -    1,471 
Net change in unrealized appreciation/depreciation on non-control/non-affiliate investments   (705)   2,913    2,208 
Net change in unrealized appreciation/depreciation on affiliate investments   1,096    -    1,096 
Net gain on investments  $4,650   $-   $4,650 

 

   Previously Reported       Revised 
   Six Months Ended       Six Months Ended 
   June 30, 2015   Revisions   June 30, 2015 
Net realized and unrealized gain (loss) on investments               
Net realized gain (loss) on non-control/non-affiliate investments  $2,878   $(2,913)  $(35)
Net realized gain on affiliate investments   1,471    -    1,471 
Net change in unrealized appreciation/depreciation on non-control/non-affiliate investments   (1,058)   2,913    1,855 
Net change in unrealized appreciation/depreciation on affiliate investments   1,842    -    1,842 
Net gain on investments  $5,133   $-   $5,133 

 

Note 3. Summary of Significant Accounting Policies

 

Basis of presentation: The Company prepares its consolidated financial statements in accordance with GAAP, including Accounting Standards Codification Topic 946, Financial Services–Investment Companies, and the requirements for reporting on Form 10-Q, the 1940 Act, and Articles 6 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation in accordance with GAAP. Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.

 

Principles of consolidation: The Company consolidates majority-owned investment company subsidiaries. The Company does not own any controlled operating company whose business consists of providing services to the Company, which would require consolidation. All intercompany balances and transactions are eliminated upon consolidation.

 

Fair value of financial instruments: The Company applies fair value to substantially all of its financial instruments. Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) defines fair value, establishes a framework to measure fair value, and requires disclosures regarding fair value measurements. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined through the use of models and other valuation techniques, valuation inputs, and assumptions market participants would use to value the investment. Highest priority is given to prices for identical assets quoted in active markets (Level 1) and the lowest priority is given to unobservable valuation inputs (Level 3). The availability of observable inputs can vary significantly and is affected by a variety of factors, including the type of product, whether the product is new to the market, 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 less observable or unobservable inputs, 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), which comprise the entirety of the Company’s investments.

 

Changes to the valuation policy are reviewed by management and the Company’s board of directors (the “Board”). As the Company’s investments change, markets change, new products develop, and valuation inputs become more or less observable, the Company will continue to refine its valuation methodologies.

 

See Note 7 for more detailed disclosures of the Company’s fair value measurements of its financial instruments.

 

Investment classification:  The Company classifies its investments in accordance with the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in those companies in which the Company owns between 5% and 25% of the voting securities. “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.

 

 16 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Additionally, the Company adopted the North American Industry Classification System in the first quarter of 2016 for the purpose of industry classification of the Company's investments on the accompanying schedule of investments. The December 31, 2015 schedule of investments has been conformed to the June 30, 2016 presentation.

 

Investment risks:  The Company’s investments are subject to a variety of risks. These risks may include, but are not limited to the following:

 

Market risk - Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument due to market changes.

 

Credit risk - Credit risk represents the risk that the Company would incur if the counterparties failed to perform pursuant to the terms of their agreements with the Company.

 

Liquidity risk - Liquidity risk represents the possibility that the Company may not maintain sufficient cash balances or access to cash to meet loan and other commitments as they become due.

 

Interest rate risk - Interest rate risk represents the likelihood that a change in interest rates could have an adverse impact on the fair value of an interest-bearing financial instrument.

 

Prepayment risk - Certain of the Company’s debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the debt investments and making the instrument less likely to be an income producing instrument.

 

Off-Balance sheet risk - Some of the Company’s financial instruments contain off-balance sheet risk. Generally, these financial instruments represent future commitments to purchase other financial instruments at specific terms at specific future dates. See Note 8 for further details.

 

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 significantly from those estimates.

 

Reportable segments: The Company has a single reportable segment and single operating segment 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’s cash and cash equivalents are maintained with a member bank of the Federal Deposit Insurance Corporation (“FDIC”) and at times, such balances may be in excess of the FDIC insurance limits. Included in cash and cash equivalents was $33,460 and $32,612 held in a US Bank Money Market Deposit Account as of June 30, 2016, and December 31, 2015, respectively.

 

Revenue recognition:

 

Interest Income: Interest income is recorded on an accrual basis. Recognized interest income, if payable monthly or quarterly, is reported as interest receivable until collected. Recognized interest income due at maturity or at another stipulated date (“PIK interest”) is recorded as an adjustment to the amortized cost basis of the investment. The Company accrues interest income until events occur that place a loan into a non-accrual status (see below). Loan origination fees, original issue discount (“OID”), market discount or premium, and loan amendment fees (collectively, “net loan origination fees”) are capitalized, and the Company accretes or amortizes such amounts as an adjustment to interest income over the life of the respective debt investment using a method that approximates the effective interest method. Unamortized OID is recorded as an adjustment to the amortized cost of the investment and unamortized loan amendment fees are reported as deferred loan fee revenue. When the Company receives a loan principal payment, the unamortized OID related to the paid principal is accelerated and recognized in interest income. All other interest income is recognized as contractually earned. Further, in connection with the Company’s debt investments, the Company may receive warrants or similar equity-related securities (“Warrants”). The Company determines the cost basis of Warrants based upon their fair values on the date of receipt relative to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the Warrants is treated as OID, and accreted into interest income as described above.

 

 17 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Unamortized net loan origination fees on debt investments were $2,565 and $1,885 as of June 30, 2016, and December 31, 2015, respectively. The following table summarizes interest income recognized during the three and six months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
Interest income:                    
Cash interest income  $5,820   $6,585   $11,909   $13,057 
Net loan origination fee amortization   444    628    810    1,007 
PIK interest income   265    304    557    603 
Other interest income   63    11    79    19 
Total interest income  $6,592   $7,528   $13,355   $14,686 

 

Dividend Income and Distributions from Portfolio Companies: Dividend income on common stock, generally payable in cash, is recorded at the time dividends are declared. Dividend income on preferred equity securities is accrued as earned. Dividends on preferred equity securities may be payable in cash or in additional preferred securities, and are generally not payable unless declared or upon liquidation. Declared dividends payable in cash are reported as dividend receivables until collected. Dividends payable in the form of additional preferred securities or contractually earned but not declared (“PIK dividends”) are recorded as an adjustment to the cost basis of the investment. The Company discontinues accrual of dividends on preferred equity securities when it determines that the dividend may not be collectible. The Company assesses the collectability of the preferred dividends based on factors including the fair value of the preferred equity security, the valuation of the portfolio company’s enterprise value, and proceeds expected to be received over the life of the investment. The Company may receive cash distributions from portfolio companies that are taxed as flow-through entities. Each distribution is evaluated to determine whether it should be recorded as income or as a return of capital. Distributions classified as a return of capital are recorded as reductions in the cost basis of the investments. The following table summarizes dividend income recognized during the three and six months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
Preferred equity dividends:                    
Cash dividends  $115   $100   $328   $132 
PIK dividends   335    330    636    626 
Total preferred equity dividends   450    430    964    758 
Common stock dividends   89    -    132    - 
Total dividend income  $539   $430   $1,096   $758 

 

Fee Income: The Company generates revenue in the form of management, valuation, and other contractual fees, which is recognized as the related services are rendered. In the general course of its business, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include prepayment fees on certain loans repaid prior to their scheduled due date, which are recognized when received, and fees for capital structuring services from certain portfolio companies, which are recognized upon closing of the investment. The following table summarizes fee income recognized during the three and six months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
Fee income:                    
Management, valuation, and other  $60   $46   $98   $78 
Prepayment and structuring fees   492    78    977    181 
Total fee income  $552   $124   $1,075   $259 

 

Net Realized and Unrealized Gain or Loss on Investments: Investment transactions are reported on a trade-date basis. Unsettled trades as of the balance sheet date are included in payable for investments purchased on the consolidated balance sheets. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of the investment. Investments are valued at fair value as determined in good faith by Company management under the supervision and review of the Board. After recording all appropriate interest, dividend, and other income, some of which is recorded as an adjustment to the cost basis of the investment as described above, the Company reports changes in the fair value of investments as net changes in unrealized appreciation/depreciation on investments in the consolidated statements of operations.

 

 18 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Non-accrual loans: Loans on which the accrual of interest income has been discontinued are designated as non-accrual loans and accounted for on a non-accrual cash method. Loans are generally placed on non-accrual status when a loan either: (i) is delinquent for 90 days or more on principal or interest according to the contractual terms of the loan (unless well secured and in the process of collection), or (ii) in the opinion of management, there is reasonable doubt about its collectability. When loans are placed on non-accrual status, all interest previously accrued but not collected, other than PIK interest that has been contractually added to the principal balance prior to the designation date, is reversed against current period interest income. Interest payments subsequently 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. At June 30, 2016, two investments with an aggregate cost and fair value of $7,609 and $6,634, respectively were carried as non-accrual cash method loans. At December 31, 2015, one investment with a cost and fair value of $937 and $798, respectively, was carried as a non-accrual cash method loan.

 

Income taxes: The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements, and timely distribute at least 90% of its investment company taxable income to its shareholders. The Company has made, and intends to continue to make, the requisite distributions to its shareholders, which generally relieves the Company from U.S. federal income taxes.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to retain taxable income in an amount less than that which would trigger federal income tax liability under Subchapter M of the Code. However, the Company would be liable for a 4% excise tax on such income. Excise tax liability is recognized when the Company determines its estimated current year annual taxable income exceeds estimated current year distributions.

 

The Company may utilize wholly-owned holding companies taxed under Subchapter C of the Code when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a BDC. These “tax blocker” entities are consolidated in the Company’s GAAP financial statements and may result in the reporting of federal income tax expense with respect to income derived from those investments. Such income, net of applicable federal income tax, is not included in the Company’s tax-basis net investment income until distributed by the holding company subsidiary, which may result in temporary differences and character differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses.

 

The Company evaluates tax positions taken in the course of preparing its tax returns to determine whether they 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. The Company recognizes accrued interest and penalties related to uncertain tax benefits as income tax expense. There were no uncertain income tax positions at June 30, 2016, and December 31, 2015. The current and prior three tax years remain subject to examination by U.S. federal and most state tax authorities.

 

Distributions: Distributions to common shareholders are recorded on the declaration date. The timing of distributions as well as the amount to be paid out as a distribution is determined by the Board each quarter. Distributions from net investment income and net realized gains are determined in accordance with the Code. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. Distributions paid in excess of taxable net investment income and net realized gains are considered returns of capital to shareholders.

 

The Company has adopted a distribution reinvestment plan (“DRIP”) that provides for reinvestment of any distributions the Company declares in cash on behalf of its shareholders, unless a shareholder elects to receive cash. As a result, if the Board authorizes and the Company declares a cash distribution, then shareholders 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 distribution.

 

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 its obligations under the plan.

 

Deferred debt issuance costs: Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. Deferred debt issuance costs are presented as a direct reduction of the related debt liability on the consolidated balance sheets except for deferred debt issuance costs associated with the Company’s line of credit arrangements, which are included in prepaid expenses and other assets on the consolidated balance sheets. These amounts are amortized to interest expense over the life of the borrowings.

 

Goodwill: On December 4, 2013, in connection with acquisition of the limited partnership interests in SBIC I LP and membership interest in SBIC I GP (the “SBIC Acquisitions”), the Company recorded goodwill of $1,077, which is included in prepaid expenses and other assets on the consolidated balance sheets. Goodwill is not subject to amortization. Goodwill is evaluated for impairment annually or more frequently if events occur or circumstances change that indicate goodwill may be impaired. There have been no goodwill impairments since the date of the SBIC Acquisitions.

 

 19 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Intangible asset: On December 4, 2013, in connection with the SBIC Acquisitions, the Company recorded an intangible asset of $2,500 attributable to the SBIC license. The Company amortizes this intangible asset on a straight-line basis over its estimated useful life of 13 years. The Company expects to incur annual amortization expense of $195 in each of the years ending December 31, 2025 and $145 in 2026.

 

The Company tests its intangible asset for impairment if events or circumstances suggest that the asset carrying value may not be fully recoverable. The intangible asset, net of accumulated amortization of $502 and $405, is included in prepaid expenses and other assets at June 30, 2016, and December 31, 2015, respectively.

 

Interest expense: Interest expense is recognized on an 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.

 

 20 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

New Accounting Standards

 

The following table discusses recently issued Accounting Standards Updates (“ASU”) by the Financial Accounting Standards Board (“FASB”) adopted by the Company during 2016:

 

Standard   Description   Period of Adoption   Effect of Adoption on the the financial statements
Standards that were adopted            
ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis   Modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities   First Quarter 2016 retrospectively   No material impact to the Company's consolidated financial statements
ASU 2015-03, Interest – Imputation of Interest:  Simplifying the Presentation of Debt Issuance Costs     Changes the presentation of debt issuance costs in the financial statements where an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 did not specifically address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements   First Quarter 2016 retrospectively   Resulted in a $3,420 retrospective reduction of both net deferred financing closing costs and SBA debentures payable in the consolidated balance sheet as of December 31, 2015 and a reduction of amortization and write-off of deferred financing closing costs and corresponding increase in interest  expense in the consolidated statement of operations associated with the Company's SBA debentures and the OFS Capital WM revolving line of credit  for the three and six  months ended June 30, 2015 of $1,361 and $1,908, respectively.  Net deferred debt issuance costs of $3,229 are presented as a direct deduction from the SBA debentures payable in the consolidated balance sheet as of June 30, 2016. Amortization of deferred debt issuance costs associated with the Company’s SBA debentures was $95 and $191 for the three and six months months ended June 30, 2016 and included as interest expense in the consolidated statement of operations. There was no impact to consolidated earnings as a result of this adoption.
ASU 2015-15, Interest – Imputation of Interest:  Presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements - amendments to SEC paragraphs   Response to SEC views on ASU 2015-03. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line of credit arrangements, the SEC stated it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement   First Quarter 2016 retrospectively   Net deferred financing closing costs of $135 and $185 associated with the Company's PWB Credit Facility are presented as an asset and included in prepaid expenses and other assets in the consolidated balance sheet as of June 30, 2016 and December 31, 2015, respectively. There was no impact to consolidated earnings as a result of this adoption.

 

 21 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

The following table discusses recently issued ASUs by the FASB yet to be adopted by the Company:

 

Standard   Description   Effect of Adoption on the the financial statements
Standards that are not yet adopted        
ASU 2014-09, Revenue from Contracts with Customers    Supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle. The standard must be adopted using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures)   Annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018
ASU 2016-01, Financial Instruments – Overall   Modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value, and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820 - Fair Value Measurement, and as such these investments may be measured at cost   Annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is required to record its investments at fair value with changes in fair value recognized in net income in accordance with ASC Topic 946, Financial Services—Investment Companies. Therefore, the adoption of ASU 2016-01 is not expected to have a material effect on the Company’s consolidated financial statements

 

Note 4. OFS Capital WM

 

OFS Capital WM, LLC (“OFS Capital WM”), a wholly-owned investment company subsidiary of the Company, was formed in August 2010 with the limited purpose of acquiring, managing and financing senior secured loan investments to middle-market companies in the United States. On September 28, 2010, the Company became the owner of OFS Capital WM through a transaction in which it transferred eligible loans—or 100% of its participating interest in certain other loans—to OFS Capital WM in exchange for cash and a 100% equity ownership interest in OFS Capital WM. These loans were managed and serviced by MCF Capital Management, LLC (“MCF”) under a loan and security agreement among OFS Capital WM, MCF, Wells Fargo Securities, LLC, and Well Fargo Delaware Trust Company, N.A. (the “Loan and Security Agreement”). MCF charged a management fee of 0.25% per annum of the assigned value of the underlying portfolio investments plus an accrued fee that was deferred until termination of the Loan and Security Agreement on May 28, 2015. The Company incurred management fee expense related to this agreement of $-0- for both the three and six months ended June 30, 2016, and $150 and $288 for the three and six months ended June 30, 2015, respectively.

 

OFS Capital WM Asset Sale and Related Transactions

 

On May 28, 2015, the Company and OFS Capital WM entered into a Loan Portfolio Purchase Agreement with Madison Capital Funding LLC (“Madison”), an affiliate of MCF, pursuant to which OFS Capital WM sold a portfolio of 20 senior secured debt investments with an aggregate outstanding principal balance of $67,807 as of May 28, 2015 to Madison for cash proceeds of $67,309 (the “WM Asset Sale”). On May 28, 2015, the total fair value of the debt investments sold, applying the Company’s March 31, 2015 fair value percentages to the principal balances of the respective investments on the sale date, was approximately $66,703. The determination of the fair value of the Company’s investments is subject to the good faith determination by the Company’s Board, which is conducted no less frequently than quarterly, pursuant to the Company’s valuation policies and GAAP.

 

On May 28, 2015, pursuant to the Loan and Security Agreement, the Company applied $52,414 from the sale proceeds of the WM Asset Sale to pay in full and retire OFS Capital WM’s secured credit facility with Wells Fargo Bank, N.A. (“WM Credit Facility”). As a result of the termination of the WM Credit Facility, the Company wrote-off the remaining related unamortized deferred financing closing costs of $1,216 on the revolving line of credit, which was included in interest expense for the three and six months ended June 30, 2015.

 

On May 28, 2015, in connection with the WM Asset Sale, the Company entered into a Loan Administration Services Agreement with Madison pursuant to which Madison will provide loan servicing and other administrative services to OFS Capital WM with respect to certain of its remaining loan assets. In return for its loan administration services, Madison will receive a quarterly loan administration fee of 0.25% per annum based on the average daily principal balances of the loan assets for such quarter. The Company incurred loan administration fee expense of $13 and $26 for the three and six months ended June 30, 2016, respectively.

 

 22 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Note 5. Related Party Transactions

 

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

  

OFS Advisor’s services under the Advisory Agreement are not exclusive to the Company and OFS Advisor is free to furnish similar services to other entities so long as its services to the Company are not impaired. OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% and 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, adjusted for any share issuances or repurchases during the quarter. OFS Advisor has elected to exclude the value of the intangible asset and goodwill resulting from the SBIC Acquisitions from the base management fee calculation.

 

The base management fee is payable quarterly in arrears and was $1,089 and $2,204, for the three and six months ended June 30, 2016, respectively and $1,276 and $2,693, for the three and six months ended June 30, 2015, respectively.

 

The incentive fee has two parts. The first part (part one) 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 such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (as defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend 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 pre-incentive fee net income is 20.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor receives no incentive fee until the net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100.0% 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, OFS Advisor will receive 20.0% of the pre-incentive fee net investment income.

 

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 such quarter.

 

The second part (part two) 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 20.0% 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 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.

 

 23 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

The Company accrues the Capital Gain Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation). OFS Advisor has excluded from the Capital Gain Fee calculation any realized gain with respect to (1) the step acquisitions resulting from the SBIC Acquisitions, and (2) the WM Asset Sale.

 

The Company incurred incentive fee expense of $857 and $1,590 for the three and six months ended June 30, 2016, respectively. Incentive fees for the three and six months ended June 30, 2016, included part one incentive fees (based on net investment income) of $857 and $1,729, respectively. Part two incentive fees (based upon net realized and unrealized gains and losses, or capital gains) were $-0- and $(139) for the three and six months ended June 30, 2016, respectively which represented the reversal of the part two incentive fee accrued at December 31, 2015. The Company incurred incentive fee expense of $231 and $606 for the three and six months ended June 30, 2015, respectively, which consisted entirely of part one incentive fees.

 

Administration Agreement: OFS Capital Services, LLC (“OFS Services”), a wholly-owned subsidiary of OFSAM, furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to an administration agreement dated November 7, 2012 (“Administration Agreement”). Under the Administration Agreement, OFS Services 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 shareholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services 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 shareholders, and generally oversees 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, OFS Services 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 OFS Services’s overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services 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.

 

Administration fee expense was $326 and $754 for the three and six months ended June 30, 2016, respectively, and $326 and $867 for the three and six months ended June 30, 2015, respectively.

 

Note 6. Investments

 

As of June 30, 2016, the Company had loans to 36 portfolio companies, totaling $219,553 in aggregate principal amount, of which 75% were senior secured loans and 25% were subordinated loans, as well as equity investments in 16 of these portfolio companies. The Company also held an equity investment in one portfolio company in which it did not hold a debt interest.

 

During the six months ended June 30, 2016, the Company converted $1,765 in principal of a subordinated debt investment into preferred equity units and warrants valued at $1,765 and converted $329 in principal of a senior secured debt investment into preferred equity units valued at $335. In addition, the Company amended a senior secured debt investment for which it received preferred equity units in the same portfolio company valued at $203. At June 30, 2016, investments consisted of the following:

 

   Principal
Amount
   Amortized
Cost
   Fair Value 
Senior secured debt investments  $165,388   $163,511   $163,233 
Subordinated debt investments   54,165    54,071    52,995 
Equity investments    N/A     29,269    32,603 
Total  $219,553   $246,851   $248,831 

 

 24 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

At June 30, 2016, the Company’s investments were all domiciled in the United States and the industry compositions of the Company’s portfolio were as follows:

 

   Amortized Cost   Fair Value 
Administrative and Support and Waste Management and Remediation Services                    
Other Travel Arrangement and Reservation Services  $10,173    4.1%  $10,527    4.2%
Security Systems Services (except Locksmiths)   5,203    2.1    5,158    2.1 
Tour Operators   2,854    1.2    3,253    1.3 
Arts, Entertainment, and Recreation                    
Fitness and Recreational Sports Centers   4,950    2.0    4,950    2.0 
Education Services                    
Colleges, Universities, and Professional Schools   5,187    2.1    4,893    2.0 
Finance and Insurance                    
Insurance Agencies and Brokerages   13,612    5.5    13,421    5.4 
Health Care and Social Assistance                    
Medical Laboratories   4,219    1.7    3,904    1.6 
Other Outpatient Care Centers   14,201    5.8    14,259    5.7 
Outpatient Mental Health and Substance Abuse Centers   6,663    2.7    5,707    2.3 
Information                    
Other Information Services   2,522    1.0    2,414    1.0 
Other Telecommunications   2,994    1.2    2,970    1.2 
Manufacturing                    
Bolt, Nut, Screw, Rivet, and Washer Manufacturing   4,208    1.7    4,188    1.7 
Other Aircraft Parts and Auxiliary Equipment Manufacturing   11,850    4.8    12,634    5.1 
Other Basic Inorganic Chemical Manufacturing   4,548    1.8    4,519    1.8 
Packaging Machinery Manufacturing   1,996    0.8    1,849    0.7 
Pharmaceutical Preparation Manufacturing   4,058    1.6    7,881    3.2 
Pump and Pumping Equipment Manufacturing   12,918    5.2    12,467    5.0 
Soap and Other Detergent Manufacturing   946    0.4    928    0.4 
Travel Trailer and Camper Manufacturing   13,144    5.3    13,329    5.4 
Other Services (except Public Administration)                    
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance   13,600    5.5    11,744    4.7 
Professional, Scientific, and Technical Services                    
Computer Systems Design and Related Services   3,867    1.6    3,618    1.5 
Custom Computer Programming Services   6,315    2.6    6,325    2.5 
Other Accounting Services   5,830    2.4    6,172    2.5 
Other Computer Related Services   13,777    5.6    13,659    5.5 
Other Professional, Scientific, and Technical Services   32,259    13.0    32,281    12.9 
Veterinary Services   650    0.3    650    0.3 
Real Estate and Rental and Leasing                    
Home Health Equipment Rental   900    0.4    1,800    0.7 
Office Machinery and Equipment Rental and Leasing   11,634    4.7    12,180    4.8 
Offices of Real Estate Appraisers   10,042    4.1    9,996    4.0 
Wholesale Trade                    
Metal Service Centers and Other Metal Merchant Wholesalers   13,193    5.3    14,558    5.9 
Sporting and Recreational Goods and Supplies Merchant Wholesalers   8,538    3.5    6,597    2.6 
   $246,851    100.0%  $248,831    100.0%

 

 25 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

As of December 31, 2015, the Company had loans to 38 portfolio companies, totaling $228,771 in aggregate principal amount, of which 71% were senior secured loans and 29% were subordinated loans, at fair value, as well as equity investments in 15 of these portfolio companies. The Company also held an equity investment in one portfolio company in which it did not hold a debt interest. At December 31, 2015, investments consisted of the following:

 

   Principal
Amount
   Amortized
Cost
   Fair Value 
Senior secured debt investments  $163,398   $161,944   $160,437 
Subordinated debt investments   65,373    65,227    64,240 
Equity investments    N/A    25,084    32,619 
Total  $228,771   $252,255   $257,296 

 

At December 31, 2015, the Company’s investments were all domiciled in the United States and the industry compositions of the Company’s portfolio were as follows:

 

   Amortized Cost   Fair Value 
Administrative and Support and Waste Management and Remediation Services                    
Other Travel Arrangement and Reservation Services  $10,164    4.0%  $10,164    4.0%
Security Systems Services (except Locksmiths)   5,000    2.0    5,000    1.9 
Tour Operators   2,849    1.1    3,198    1.2 
Education Services                    
Colleges, Universities, and Professional Schools   5,005    2.0    4,786    1.9 
Finance and Insurance                    
Insurance Agencies and Brokerages   11,663    4.6    11,497    4.5 
Health Care and Social Assistance                    
Medical Laboratories   4,165    1.7    3,677    1.4 
Other Outpatient Care Centers   15,187    6.0    15,031    5.8 
Outpatient Mental Health and Substance Abuse Centers   6,610    2.6    6,456    2.5 
Information                    
Other Information Services   2,564    1.0    2,433    0.9 
Other Telecommunications   3,798    1.5    3,711    1.4 
Software Publishers   4,711    1.9    7,453    2.9 
Manufacturing                    
Bolt, Nut, Screw, Rivet, and Washer Manufacturing   4,534    1.8    4,506    1.8 
Communications Equipment Manufacturing   2,257    0.9    2,257    0.9 
Other Aircraft Parts and Auxiliary Equipment Manufacturing   11,770    4.7    12,812    4.9 
Other Basic Inorganic Chemical Manufacturing   4,766    1.9    4,695    1.8 
Packaging Machinery Manufacturing   1,995    0.8    1,940    0.8 
Pharmaceutical Preparation Manufacturing   4,068    1.6    5,698    2.2 
Pump and Pumping Equipment Manufacturing   12,853    5.1    12,752    5.0 
Soap and Other Detergent Manufacturing   937    0.4    798    0.3 
Travel Trailer and Camper Manufacturing   13,613    5.4    13,613    5.3 
Other Services (except Public Administration)                    
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance   14,449    5.7    13,792    5.3 
Professional, Scientific, and Technical Services                    
Administrative Management and General Management Consulting   9,915    3.9    9,952    3.9 
Computer Systems Design and Related Services   2,971    1.2    2,892    1.1 
Custom Computer Programming Services   6,493    2.6    6,319    2.5 
Other Accounting Services   5,738    2.3    7,100    2.8 
Other Computer Related Services   11,828    4.7    11,508    4.5 
Other Professional, Scientific, and Technical Services   31,574    12.4    31,511    12.1 
Real Estate and Rental and Leasing                    
Home Health Equipment Rental   900    0.4    1,951    0.8 
Office Machinery and Equipment Rental and Leasing   8,037    3.2    8,452    3.3 
Offices of Real Estate Appraisers   10,050    4.0    9,940    3.9 
Wholesale Trade                    
Electrical Apparatus and Equipment, Wiring Supplies, and Related   3,558    1.4    3,559    1.4 
Metal Service Centers and Other Metal Merchant Wholesalers   9,834    3.9    9,956    3.9 
Sporting and Recreational Goods and Supplies Merchant Wholesalers   8,399    3.3    7,887    3.1 
   $252,255    100.0%  $257,296    100.0%

 

 26 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

Note 7. Fair Value of Financial Instruments

 

The Company’s investments are valued at fair value as determined in good faith by Company management under the supervision and review of the Board. These fair value are determined in accordance with a documented valuation policy and a consistently applied valuation process that includes a review of each investment by an independent valuation firm at least once every 12 months.

 

Each quarter the Company assesses whether sufficient market quotations are available or whether a sufficient number of indicative prices from pricing services or brokers or dealers have been received. Investments for which sufficient market quotations are available are valued at such market quotations. With respect to investments for which market quotations are not readily available, the Company undertakes, on a quarterly basis, a multi-step valuation process as described below:

 

For each debt investment, a basic credit rating review process is completed. The risk rating on every credit facility is reviewed and either reaffirmed or revised by OFS Advisor’s investment committee.

Each portfolio company or investment is valued by an investment professional.

The preliminary valuations are documented and are then submitted to OFS Advisor’s investment committee for ratification.

Independent third-party valuation firm(s) provide valuation services as requested, by reviewing the investment committee’s preliminary valuations. OFS Advisor’s investment committee’s preliminary fair value conclusions on each of the Company’s assets for which sufficient market quotations are not readily available is reviewed and assessed by an independent third-party valuation firm at least once in every 12-month period, and more often as determined by the audit committee of the Company’s Board or required by the Company’s valuation policy. Such valuation assessment may be in the form of positive assurance, range of values or other valuation method based on the discretion of the Company’s Board.

The audit committee of the Board reviews the preliminary valuations of OFS Advisor’s investment committee and independent valuation firms and, if appropriate, recommends the approval of the valuations by the Board.

The Company’s Board discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of OFS Advisor, the audit committee and, where appropriate, the respective independent valuation firm.

 

The Company was unable to obtain sufficient market quotations or indicative prices at June 30, 2016, and December 31, 2015, and followed the multi-step valuation process.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would use to value an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.

 

Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.

 

The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

 27 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. All of the Company’s investments, which are measured at fair value, were categorized as Level 3 based upon the lowest level of significant input to the valuations. There were no transfers among Level 1, 2 and 3 for the three and six months ended June 30, 2016 and 2015. The following sections describe the valuation techniques used by the Company to measure different financial instruments at fair value and include the levels within the fair value hierarchy in which the financial instruments are categorized.

 

The primary method used to estimate the fair value of investments is the discounted cash flow method (although a liquidation analysis, option theoretical, or other methodology may be used when more appropriate). The discounted cash flow approach to determine fair value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various relevant factors depending on investment type, including the latest arm’s length or market transactions involving the subject security, a benchmark credit spread or other indication of market yields, assumed growth rate (in cash flows), company performance, and capitalization rates/multiples (for determining terminal values of underlying portfolio companies). The valuation based on the inputs determined to be the most reasonable and probable is used as the fair value of the investment, which may include a weighting factor applied to multiple valuation methods. The determination of fair value using these methodologies may take into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions after the valuation date. Application of these valuation methodologies involves a significant degree of judgment by management. Fair values of new investments or investments where an arm’s length transaction occurred in the same security are generally assumed to be equal to their cost (“Transaction Price”) for up to three months after their initial purchase.

 

Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded.

 

The following tables provide quantitative information about the Company’s significant Level 3 fair value inputs to the Company’s fair value measurements as of June 30, 2016, and December 31, 2015. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The table below is not intended to be exhaustive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.

 

   Fair Value at         Range
   June 30, 2016 (1)   Valuation technique  Unobservable inputs  (Weighted average)
              
Debt investments:              
Senior secured  $140,508   Discounted cash flow  Discount rates  6.41% - 25.00% (11.64%)
               
Subordinated   41,587   Discounted cash flow  Discount rates  12.43% - 27.47% (15.34%)
               
Equity investments   27,536   Discounted cash flow  Discount rates  15.00% - 30.00% (21.74%)
           EBITDA multiples  4.59x - 8.10x (6.19x)
           Term to Exit  0.34 years - 5.17 years (3.99 years)

 

(1)Excludes $22,725, $11,408, and $5,067 of senior secured debt investments, subordinated debt investments, and equity investments, respectively, which were valued at a Transaction Price.

 

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OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

   Fair Value at         Range
   12/31/2015 (1)   Valuation technique  Unobservable inputs  (Weighted average)
              
Debt investments:              
Senior secured  $109,315   Discounted cash flow  Discount rates  7.11% - 25.00% (12.05%)
               
Subordinated   64,240   Discounted cash flow  Discount rates  12.56% - 22.34% (15.12%)
               
Equity investments   23,686   Discounted cash flow  Discount rates  15.00% - 30.00% (20.19%)
           EBITDA multiples  3.98x - 8.08x (6.31x)
           Term to Exit  0.92 years - 5.09 years (3.09 years)

 

(1)Excludes $51,122, $0, and $8,933 of senior secured debt investments, subordinated debt investments, and equity investments, respectively, which were valued at a Transaction Price.

 

Changes in market credit spreads or the credit quality of the underlying portfolio company (both of which could impact the discount rate), as well as changes in EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA multiples, as well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA multiples, and in inverse relation to changes in the discount rate.

 

The following tables present changes in investments measured at fair value using Level 3 inputs for the six months ended June 30, 2016 and June 30, 2015.  

 

   For the Six Months Ended June 30, 2016 
   Senior
Secured Debt
Investments
   Subordinated
Debt
Investments
   Equity
Investments
   Total 
                 
Level 3 assets, January 1, 2016  $160,437   $64,240   $32,619   $257,296 
                     
Net realized gain (loss) on investments   -    7    2,559    2,566 
Net change in unrealized appreciation/depcreciation on investments   1,227    (84)   (4,204)   (3,061)
Purchase and origination of portfolio investments   19,248    3,786    750    23,784 
Equity received in connection with purchase of portfolio investments and amendments   (302)   (79)   584    203 
Conversion from debt investment to equity investment   (321)   (1,765)   2,086    - 
Capitalized PIK interest, dividends, and fees   358    525    636    1,519 
Proceeds from principal payments on portfolio investments   (17,788)   (13,770)   -    (31,558)
Sale and redemption of portfolio investments   -    -    (2,560)   (2,560)
Amortization of discounts and premium   374    135    -    509 
Other   -    -    133    133 
                     
Level 3 assets, June 30, 2016  $163,233   $52,995   $32,603   $248,831 

 

 29 

 

 

OFS Capital Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)

 

   For the Six Months Ended June 30, 2015 
   Senior
Secured Debt
Investments
   Subordinated
Debt
Investments
   Equity
Investments
   Total 
                 
Level 3 assets, January 1, 2015  $241,749   $52,453   $18,032   $312,234 
                     
Net realized loss on investments (Revised - Note 2)   (35)   -    1,471    1,436 
Net change in unrealized appreciation/depcreciation on investments (Revised - Note 2)   650    336    2,711    3,697 
Purchase and originations of portfolio investments   34,246    9,900    5,700    49,846 
Capitalized PIK interest, dividends and fees   264    396    628    1,288 
Proceeds from principal payments on portfolio investments   (31,074)   (163)   -    (31,237)
Sale of portfolio investments   (78,344)   -    (3,505)   (81,849)
Cash distribution received from equity investments   -    -    (51)   (51)
Amortization of discounts and premium   598    4    -    602 
Conversion from equity investment to debt investment   -    44