Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of Report (Date of earliest event reported): November 2, 2018
 
OFS Capital Corporation
(Exact name of Registrant as specified in its charter)
 
Delaware
814-00813
46-1339639
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
 
10 S. Wacker Drive, Suite 2500
Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (847) 734-2000
 
Not applicable
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
 
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.

Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨






 
Item 2.02
Results of Operations and Financial Condition
 
On November 2, 2018, OFS Capital Corporation (the “Company”) issued a press release announcing its financial results for the quarter ended September 30, 2018. On October 30, 2018, the Company’s board of directors declared a 2018 fourth quarter distribution of $0.34 per common share, payable December 31, 2018 to shareholders of record as of December 17, 2018. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K.
 
The information disclosed under this Item 2.02, including Exhibit 99.1 hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing made under the Securities Exchange Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

 
Item 9.01.
Financial Statements and Exhibits
 
(a)
Not applicable.
(b)
Not applicable.
(c)
Not applicable.
(d)
Exhibits.
Exhibit
No.
 
Description
 
 
99.1
 






SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
OFS Capital Corporation
 
 
 
Date: November 2, 2018
By:  
/s/ Bilal Rashid
 
 
Chief Executive Officer



Exhibit
Exhibit 99.1
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12526627&doc=3

OFS CAPITAL CORPORATION ANNOUNCES THIRD QUARTER 2018 FINANCIAL RESULTS

Declares 24th Consecutive $0.34 Per Share Distribution
Net Investment Income Exceeds Distribution

CHICAGO--(BUSINESS WIRE)--Nov. 2, 2018-- OFS Capital Corporation (NASDAQ:OFS) ("OFS Capital," the "Company," "we," "us," or "our") today announced its financial results for the third quarter ended September 30, 2018.
FINANCIAL HIGHLIGHTS
Net investment income of $4.69 million, or $0.35 per share exceeds quarterly distribution.
Net asset value ("NAV") per share increased to $13.75 at September 30, 2018 from $13.70 per share at June 30, 2018.
At September 30, 2018, 82% of our loan portfolio consisted of senior secured loans, based on fair value, and 79% were floating rate.
In October 2018 and November 2018, we issued $48.5 million of seven year, fixed-rate bonds including $5.0 million of additional notes issued pursuant to the partial exercise of the underwriters overallotment option; as of today, our long-term debt was 100% fixed rate and 92% of our debt matures in 2024 and beyond.
Closed investments in the third quarter of 2018 totaled approximately $47.5 million. As of November 2, 2018, we closed approximately $29.0 million of additional new investments during the fourth quarter of 2018.
On October 30, 2018, OFS Capital's Board of Directors declared a distribution of $0.34 per share for the fourth quarter of 2018, payable on December 31, 2018 to stockholders of record as of December 17, 2018.

"Our net investment income again exceeded our distribution," said Bilal Rashid, OFS Capital's Chairman
and Chief Executive Officer. " We have declared 24 consecutive $0.34 per share quarterly distributions since our 2012 IPO-we believe that we are part of a select group of BDCs that has been able to maintain its distribution over this time.  In total, we have declared $8.36 per share in regular and special distributions.  Given the recent decline in the broader market, we believe that our shares are now generating an attractive yield approximating 12.5%.

We have a senior secured focused loan portfolio and our NAV increased this quarter. We think our portfolio is well positioned for rising interest rates, as a vast majority of our loans are floating rate while our liabilities are fixed rate."





HIGHLIGHTS
($ in millions, except for per share data)
Portfolio Overview
 
At September 30, 2018
Total assets
 
$
408.5

Investment portfolio, at fair value
 
$
396.0

Net assets
 
$
183.6

Net asset value per share
 
$
13.75

Weighted average yield on performing debt investments (1)
 
12.14
%
Weighted average yield on total debt investments (2)
 
11.73
%
Weighted average yield on total investments (3)
 
11.00
%
(1)
The weighted average yield on our performing debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, excluding assets on non-accrual basis as of the balance sheet date.
(2)
The weighted average yield on our total debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, including assets on non-accrual basis as of the balance sheet date.
(3)
The weighted average yield on total investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees, plus the effective cash yield on our performing preferred equity investments divided by (b) amortized cost of our total investment portfolio, including assets on non-accrual basis as of the balance sheet date. The weighted average yield of investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses.
 
 
Quarter Ended September 30,
Operating Results
 
2018
 
2017
Total investment income
 
$
11.0

 
$
9.1

Net investment income
 
$
4.7

 
$
4.4

Net investment income per common share, basic and diluted
 
$
0.35

 
$
0.33

Net increase in net assets resulting from operations
 
$
5.2

 
$
1.2

 
 
Quarter Ended September 30,
Portfolio Activity
 
2018
 
2017
Number of new portfolio companies
 
6

 
3

Investments in new portfolio companies
 
$
38.2

 
$
40.5

Investments in existing portfolio companies
 
$
9.1

 
$
1.9

Number of portfolio companies at end of period
 
47

 
40






PORTFOLIO AND INVESTMENT ACTIVITIES
 
During the third quarter of 2018, OFS Capital closed $38.2 million of senior secured debt investments, in six new portfolio companies. In addition, we made $8.8 million of new senior secured debt investments in existing portfolio companies.
The total fair value of OFS Capital’s investment portfolio was $396.0 million at September 30, 2018, which was equal to approximately 99% of amortized cost. As of September 30, 2018, the fair value of OFS Capital's debt investment portfolio totaled $357.7 million in 42 portfolio companies, of which 82% and 18% were senior secured loans and subordinated loans, respectively. As of September 30, 2018, we also held approximately $38.3 million in equity investments, at fair value, in 15 portfolio companies in which we also held debt investments and 5 portfolio companies in which we solely held an equity investment. We had unfunded commitments of $8.5 million to four portfolio companies at September 30, 2018. As of September 30, 2018, floating rate loans comprised 79% of OFS Capital’s debt investment portfolio, with the remaining 21% in fixed rate loans, as a percentage of fair value.

RESULTS OF OPERATIONS
Income 
Interest Income
Interest income increased by $2.8 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, due to a $2.3 million increase in recurring interest income caused by a $81.6 million increase in the average outstanding loan balance, and an increase of $0.5 million in recurring interest income resulting from a 60 basis point increase in the weighted average yield in our portfolio. Acceleration of loan origination fees, original issue discount, market discount or premium, and loan amendment fees of approximately $132,000 and $296,000 were included in interest income for the three months ended September 30, 2018 and 2017, respectively.

Expenses
Interest expense
Interest expense for the three months ended September 30, 2018 increased $0.9 million over the corresponding period in the prior year due to an increase in borrowings under our revolving line of credit with Pacific Western Bank (the "PWB Credit Facility") and the $50.0 million issuance of the unsecured notes due April 2025. The average dollar amount of borrowings outstanding under the PWB Credit Facility during the three months ended September 30, 2018 and 2017 was $9.7 million and $11.1 million, respectively.
Management fee
Management fee expense for the three months ended September 30, 2018 increased $0.4 million over the corresponding period in the prior year due to an increase in our average total assets, primarily due to the deployment of funds from the April 2017 equity offering.
Incentive fee
Incentive fee expense increased by $0.1 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to an increase in net investment income.
Administration fee
Administration fee expense for the three months ended September 30, 2018, remained stable over the corresponding period in the prior year primarily due to similar allocable portion of OFS Capital Services’s overhead expenses.
Net Gain (Loss) on Investments
We recognized net losses of $0.4 million on senior secured debt during the three months ended September 30, 2018, primarily as a result of the net negative impact of portfolio company-specific performance factors and the impact of changes to certain market loan indices.
We recognized net losses of $0.4 million on subordinated debt during the three months ended September 30, 2018, primarily as a result of the negative impact of portfolio company-specific performance factors.
We recognized net gains of $0.1 million on preferred equity investments for the three months ended September 30, 2018, primarily as a result of unrealized depreciation on certain portfolio investments due to the net negative impact of portfolio company-specific performance factors.



We recognized net gains of $1.2 million on common equity and warrant investments for the three months ended September 30, 2018, primarily as a result of unrealized appreciation stemming from the positive impact of portfolio company-specific performance factors.
LIQUIDITY AND CAPITAL RESOURCES 
At September 30, 2018, we had $6.0 million in cash and cash equivalents, which includes cash and cash equivalents of $5.0 million held by our wholly owned small business investment company, and $149.9 million in outstanding SBA-guaranteed debentures. Our use of cash held by SBIC I LP is restricted by SBA regulation, including limitations on the amount of cash SBIC I LP can distribute to OFS Capital as parent company. As of September 30, 2018, we had $33.0 million available for additional borrowings under our PWB Credit Facility and had drawn all of our available SBA-guaranteed debentures.
RECENT DEVELOPMENTS
Registered unsecured bond offering
In October 2018 and November 2018, the Company closed the public offering of $48,525 in aggregate principal amount of its 6.5% notes due 2025 (the "Unsecured Notes Due October 2025"), which included a partial exercise of the underwriters overallotment option. The total net proceeds to the Company from the Unsecured Notes Due October 2025, after deducting underwriting discounts of approximately $1,516 and estimated offering expenses of $350, were approximately $46,659. The Unsecured Notes Due October 2025 will mature on October 31, 2025. Because the Unsecured Notes Due October 2025 are not secured by any of the Company's assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility. The Unsecured Notes Due October 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 31, 2020 at the redemption price of 100% of the aggregate principal amount thereof plus accrued and unpaid interest.

CONFERENCE CALL
 
OFS Capital will host a conference call to discuss these results on Friday, November 2, 2018, at 10:00 AM Eastern Time. Interested parties may participate in the call via the following:
 
INTERNET: Log on to www.ofscapital.com at least 15 minutes prior to the start time of the call to register, download, and install any necessary audio software. A replay will be available for 90 days on OFS Capital’s website at www.ofscapital.com.
 
TELEPHONE: Dial (877) 510-7674 (Domestic) or (412) 902-4139 (International) approximately 15 minutes prior to the call. A telephone replay of the conference call will be available through November 12, 2018 at 9:00 AM Eastern Time and may be accessed by calling (877) 344-7529 (Domestic) or (412) 317-0088 (International) and utilizing conference ID #10125833.

For more detailed discussion of the financial and other information included in this press release, please refer to OFS Capital’s Form 10-Q for the third quarter ended September 30, 2018, which will be filed with the Securities and Exchange Commission later today.




OFS Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)

September 30,
2018

December 31,
2017

(unaudited)


Assets





Investments, at fair value:





Non-control/non-affiliate investments (amortized cost of $281,575 and $209,360, respectively)
$
272,764


$
197,374

Affiliate investments (amortized cost of $106,754 and $70,402, respectively)
112,305


69,557

Control investments (amortized cost of $10,306 and $10,213, respectively)
10,964


10,568

Total investments at fair value (amortized cost of $398,635 and $289,975, respectively)
396,033


277,499

Cash and cash equivalents
6,043


72,952

Interest receivable
2,637


2,734

Prepaid expenses and other assets
3,825


4,593

Total assets
$
408,538


$
357,778







Liabilities





Revolving line of credit
$
17,000


$
17,600

SBA debentures (net of deferred debt issuance costs of $2,375 and $2,657, respectively)
147,505


147,223

Unsecured notes (net of deferred debt issuance costs of $1,688 and $0, respectively)
48,312



Interest payable
976


1,596

Payable to adviser and affiliates (Note 3)
3,348


2,463

Payable for investments purchased
6,777



Accrued professional fees
686


433

Other liabilities
336


127

Total liabilities
224,940


169,442







Commitments and contingencies











Net assets





Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, -0- shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively
$


$

Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,352,824 and 13,340,217 shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively
134


133

Paid-in capital in excess of par
187,846


187,398

Accumulated undistributed net investment income
7,599


9,404

Accumulated undistributed net realized gain (loss)
(9,120
)

3,881

Net unrealized depreciation on investments
(2,861
)

(12,480
)
Total net assets
183,598


188,336







Total liabilities and net assets
$
408,538


$
357,778







Number of shares outstanding
13,352,824


13,340,217

Net asset value per share
$
13.75


$
14.12





OFS Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts in thousands, except per share data)




Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017
Investment income











Interest income:











Non-control/non-affiliate investments
$
7,424


$
5,485


$
19,508


$
14,520

Affiliate investments
2,455


1,601


7,308


5,089

Control investment
255


236


744


1,302

Total interest income
10,134


7,322


27,560


20,911

Payment-in-kind interest and dividend income:











Non-control/non-affiliate investments
178


350


524


976

Affiliate investments
308


394


1,054


1,120

Control investment
28


27


82


104

Total payment-in-kind interest and dividend income
514


771


1,660


2,200

Dividend income:











Non-control/non-affiliate investments






50

Affiliate investments


33


130


118

Control investment
58


92


185


262

Total dividend income
58


125


315


430

Fee income:











Non-control/non-affiliate investments
251


679


664


1,027

Affiliate investments
7


208


12


431

Control investment
18


17


52


135

Total fee income
276


904


728


1,593

Total investment income
10,982


9,122


30,263


25,134

Expenses











Interest expense
2,393


1,503


6,196


4,229

Management fee
1,678


1,310


4,586


3,726

Incentive fee
1,170


1,090


3,041


2,249

Professional fees
458


284


859


840

Administration fee
311


274


1,252


982

Other expenses
282


259


1,287


1,050

Total expenses before incentive fee waiver
6,292


4,720


17,221


13,076

Incentive fee waiver




(22
)


Total expenses, net of incentive fee waiver
6,292


4,720


17,199


13,076

Net investment income
4,690


4,402


13,064


12,058













Net realized and unrealized gain (loss) on investments











Net realized loss on non-control/non-affiliate investments


(5,204
)

(5,003
)

(5,041
)
Net realized gain (loss) on affiliate investments


3,617


(4,018
)

4,491

Net unrealized appreciation (depreciation) on non-control/non-affiliate investments
(923
)

1,196


2,925


(7,350
)
Net unrealized appreciation (depreciation) on affiliate investments
1,223


(2,901
)

6,396


(2,243
)
Net unrealized appreciation on control investment
189


65


303


1,845













Net gain (loss) on investments
489


(3,227
)

603


(8,298
)












Net increase in net assets resulting from operations
$
5,179


$
1,175


$
13,667


$
3,760













Net investment income per common share – basic and diluted
$
0.35


$
0.33


$
0.98


$
1.00

Net increase in net assets resulting from operations per common share – basic and diluted
$
0.39


$
0.09


$
1.02


$
0.31

Distributions declared per common share
$
0.34


$
0.34


$
1.05


$
1.02

Basic and diluted weighted average shares outstanding
13,350,484


13,331,690


13,346,630


12,089,895







ABOUT OFS CAPITAL 
The Company is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company. The Company's investment objective is to provide stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. The Company invests primarily in privately held middle-market companies in the United States, including lower-middle-market companies, targeting investments of $3 to $20 million in companies with annual EBITDA between $3 million and $50 million. The Company offers flexible solutions through a variety of asset classes including senior secured loans, which includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other equity securities. The Company's investment activities are managed by OFS Capital Management, LLC, an investment adviser registered under the Investment Advisers Act of 1940 and headquartered in Chicago, Illinois, with additional offices in New York and Los Angeles.
FORWARD-LOOKING STATEMENTS
Statements in this press release regarding management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: OFS Capital’s results of operations, including net investment income, net asset value and net investment gains and losses and the factors that may affect such results; management's beliefs regarding the status of the Company as a result of its quarterly distributions; management's views related to the yield generated by OFS Capital's shares; and expectations regarding future portfolio performance in a rising rate environment; and other factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in OFS Capital’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by OFS Capital from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. OFS Capital is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


INVESTOR RELATIONS CONTACT:
Steve Altebrando
646-652-8473
saltebrando@ofsmanagement.com