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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14 - OFS Capital Corpd447948dex312.htm
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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 - OFS Capital Corpd447948dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2012

 

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

COMMISSION FILE NUMBER: 001-35728

 

 

OFS CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   46-1339639

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2850 West Golf Road, 5th Floor

Rolling Meadows, Illinois 60008

(Address of principal executive office)

(847) 734-2060

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of December 13, 2012 was 9,578,691.

 

 

 


Table of Contents

OFS CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION      1   
Item 1.    Financial Statements      1   
   Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011      1   
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)

    
2
  
  

Consolidated Statements of Changes in Member’s equity for the nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)

    
3
  
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)

    
4
  
   Notes to Unaudited Consolidated Financial Statements      7   
   Consolidated Schedules of Investments as of September 30, 2012 (unaudited) and December 31, 2011      31   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      57   
Item 4.    Controls and Procedures      57   
PART II. OTHER INFORMATION      59   
Item 1.    Legal Proceedings      59   
Item 1A.    Risk Factors      59   
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds      59   
Item 3.    Defaults Upon Senior Securities      59   
Item 4.    Mine Safety Disclosures      59   
Item 5.    Other Information      59   
Item 6.    Exhibits      59   
SIGNATURES      62   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Consolidated Balance Sheets

(Amounts in thousands)

 

     September 30,
2012
     December 31,
2011
 
     (unaudited)         

Assets

     

Cash and cash equivalents

   $ 13,957       $ 814   

Restricted cash and cash equivalents

     623         —     

Loans receivable, net of allowance for losses of $0 at September 30, 2012 and $219 at December 31, 2011

     —           13,804   

Receivable for investment sold—related party

     792         —     

Investments, at fair value (cost of $211,213)

     207,196         —     

Interest receivable and other assets

     769         468   

Deferred offering costs

     5,235         4,253   

Deferred financing costs, net of accumulated amortization of $1,151 at September 30, 2012

     3,025         —     

Equity investment in OFS Capital WM

     —           43,120   

Equity investment in Tamarix LP

     5,049         —     

Other equity investments

     —           2,455   
  

 

 

    

 

 

 

Total assets

   $ 236,646       $ 64,914   
  

 

 

    

 

 

 

Liabilities and Member’s Equity

     

Liabilities

     

Revolving line of credit—Wells Fargo

   $ 134,123       $ —     

Revolving line of credit—Madison Capital

     37,038         —     

Interest payable

     1,509         —     

Management fee payable—Loan Manager

     333         —     

Due to affiliated entities, net

     325         7,114   

Member distribution payable

     4,000         —     

Accrued expenses and other liabilities

     4,632         3,081   
  

 

 

    

 

 

 

Total liabilities

     181,960         10,195   
  

 

 

    

 

 

 

Commitments and Contingencies

     

Member’s equity

     54,686         54,719   
  

 

 

    

 

 

 

Total liabilities and member’s equity

   $ 236,646       $ 64,914   
  

 

 

    

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

1


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Consolidated Statements of Operations (unaudited)

(Amounts in thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Interest, dividend, and fee income

   $ 4,035      $ 287      $ 9,197      $ 1,276   

Interest expense on borrowed funds

     1,511        —          2,956        831   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     2,524        287        6,241        445   

Loan loss provision (recovery) on loans receivable and loans receivable pledged to creditors

     —          287        —          (418
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision (recovery)

     2,524        —          6,241        863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Gain on payable under securities loan agreement

     —          —          —          71   

Income from equity interest in OFS Capital WM

     —          —          2,645        —     

Income from equity interest in Tamarix LP

     378        —          378        —     

Net change in unrealized appreciation on investments

     1,173        —          234        —     

Other income

     32        —          29        89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,583        —          3,286        160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

        

Amortization of deferred financing closing costs

     144        —          287        —     

Loss from equity interest in OFS Capital WM

     —          4,748        —          3,268   

Loss on sale of loans to OFS Capital WM

     —          —          —          889   

Net realized loss on investments—related party

     92        —          1,257        —     

Unrealized loss on warrants

     —          —          —          156   

Management fee expense—Loan Manager

     261        —          514        —     

Management fee expense—related parties

     481        319        1,668        1,063   

Professional fees

     86        31        489        115   

Other administrative expenses

     115        78        493        231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     1,179        5,176        4,708        5,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before cumulative effect of accounting change

     2,928        (5,176     4,819        (4,699

Cumulative effect of accounting change

     —          —          570        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2,928        (5,176     5,389        (4,699

Less: Net loss attributable to the non-controlling interests

     (32     —          (61     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to OFS Capital

   $ 2,960      $ (5,176   $ 5,450      $ (4,699
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

2


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Consolidated Statements of Changes in Member’s Equity (unaudited)

(Amounts in thousands)

 

     Nine Months Ended September 30,  
     2012     2011  
     Member’s
Interest
    Non-
Controlling
Interests
    Total     Member’s
Interest
    Non-
Controlling
Interests
     Total  

Balance at January 1, 2012 and 2011, respectively

   $ 54,719      $ —        $ 54,719      $ 69,522      $ —         $ 69,522   

Net income (loss)

     5,450        (61     5,389        (4,699     —           (4,699

Member/non-controlling interest contributions

     1,227        2,790        4,017        —          —           —     

Syndication costs

     (209     (121     (330     —          —           —     

Distributions

     (6,710     (225     (6,935     (12,617     —           (12,617

Deconsolidation of Tamarix LP adjustment on July 27, 2012

             

Net income (loss)

     —          61        61        —          —           —     

Non-controlling interests contributions

     —          (2,790     (2,790     —          —           —     

Syndication costs

     209        121        330        —          —           —     

Distributions

     —          225        225        —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total deconsolidation of Tamarix LP adjustment

     209        (2,383     (2,174     —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012 and 2011, respectively

   $ 54,686      $ —        $ 54,686      $ 52,206      $ —         $ 52,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

3


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Cash Flows From Operating Activities

    

Net income (loss)

   $ 5,389      $ (4,699

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Amortization of deferred financing closing costs

     287        —     

Amortization of discounts and premium

     (541     2   

Amortization and write-off of of deferred fee revenue

     (146     (134

Cash collection of deferred fee revenue

     194        —     

Reversal of paid-in-kind interest income on non-accrual loans

     —          110   

Loan loss recovery on loans receivable and loans receivable pledged to creditors

     —          (418

Loss on sale of loans to OFS Capital WM

     —          889   

Net realized loss on investments—related party

     1,257        —     

Gain on payable under securities loan agreement

     —          (71

Net change in unrealized appreciation on investments

     (234     —     

(Income) loss from equity investments in OFS Capital WM

     (2,645     3,268   

Income from equity investments in Tamarix LP

     (378     —     

Unrealized loss on warrants

     —          156   

Purchase of portfolio investments

     (34,110     —     

Proceeds from principal payments on portfolio investments

     17,791        —     

Proceeds from sale of portfolio investments—related party

     4,157        —     

Other income

     (29     (89

Write-off of uncollectible receivables

     290        —     

Cumulative effect of accounting change

     (570     —     

Changes in operating assets and liabilities:

    

Interest receivable and other assets, net

     (55     (123

Accrued paid-in-kind interest

     (193     (145

Due to/from affiliated entities, net

     211        526   

Interest payable

     (138     —     

Management fee payable

     646        —     

Accrued expenses and accounts payable

     98        (4
  

 

 

   

 

 

 

Net cash used in operating activities

     (8,719     (732
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Loan receivables originations

     —          (9,900

Loan receivables collections and payoffs

     —          3,393   

Collections and payoffs on loans receivable pledged to creditors

     —          5,906   

Collections on interest receivable pledged to creditors

     —          65   

Advances and other assets

     (99     (203

Distribution from OFS Capital WM

     1,225        7,970   

Distribution from Tamarix GP

     52        —     

Consolidation of cash from OFS Capital WM

     9,581        —     

Deconsolidation of cash of Tamarix LP

     (711     —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     10,048        7,231   
  

 

 

   

 

 

 

(Continued)

 

4


Table of Contents

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

      Nine Months Ended
September 30,
 
     2012     2011  

Cash Flows From Financing Activities

    

Net proceeds from revolving lines of credit

     6,286        —     

Notes payable due to the SBA

     14,000        —     

Repayment of advance due to affiliated entities

     (6,796     (1,767

Advance from affiliated entities

     —          1,497   

Distributions to member

     (2,710     —     

Contributions from non-controlling interests

     2,590        —     

Distributions to non-controlling interests

     (225     —     

Syndication costs

     (209     —     

Syndication costs allocated to non-controlling interests

     (121     —     

Repayment of payable under loan securities agreement

     —          (6,335

Deferred offering costs

     (361     (602

Deferred financing costs

     (640     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     11,814        (7,207
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     13,143        (708

Cash and cash equivalents—beginning of period

     814        942   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 13,957      $ 234   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for interest

   $ 3,092      $ —     

Supplemental Disclosure of Noncash Financing and Investing Activities:

    

Accrued deferred offering costs

   $ 3,665      $ 2,961   

Member distribution payable

     4,000        —     

Equity contribution from member recognized due to the difference between the purchase price and fair value of the loan investment purchased from OFS Capital WM

     1,227        —     

Equity interests received in connection with loan purchase and restructuring

     539        —     

Reclasification of other liabilities to capital contribution from non-controlling interests

     206        —     

Capital contribution from non-controlling interests via a reduction of management fee payable—related party

     200        —     

Receivable from investment sold to a related party

     792        —     

Derecognition of payable under securities loan agreement under sale accounting

     —          74,945   

Derecognition of loans receivable pledged to creditors under sale accounting

     —          77,055   

Derecognition of interest receivable pledged to creditors under sale accounting

     —          212   

Loans distributed from OFS Capital WM on June 30, 2011

     —          7,245   

(Continued)

 

5


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Supplemental Disclosure of Noncash Financing and Investing Activities:

    

Reduction of equity investments in OFS Capital WM as a result of the June 30, 2011 loan distributions

     —          6,656   

Deferred fee revenue recognized as a result of the June 30, 2011 loan distributions

     —          589   

Reclassification of deferred offering costs to other assets

     —          13   

Loan principal collection due from OFS Capital WM as a result of the June 30, 2011 loan distributions

     —          5   

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

    

Restricted cash and cash equivalents

     623        —     

Interest receivable

     920        —     

Investments, at fair value

     197,765        —     

Deferred financing costs, net of accumulated amortization

     2,637        —     

Revolving line of credit—Wells Fargo

     134,123        —     

Revolving line of credit—Madison Capital

     30,752        —     

Interest payable

     1,647        —     

Management fee payable

     314        —     

Due to affiliated entity

     18        —     

Accrued expenses and other liabilities

     132        —     

Deconsolidation of assets and liabilities of Tamarix LP and recording of an equity investment in Tamarix LP under the equity method of accounting effective July 27, 2012:

    

Interest receivable and other assets

     240        —     

Investments, at fair value

     20,109        —     

Deferred financing costs, net of accumulated amortization

     640        —     

Notes payable due to the SBA

     14,000     

Management fee payable

     427        —     

Accrued expenses and other liabilities

     428        —     

Syndication costs

     (209     —     

Non-controlling interests

     2,383        —     

Loans distributed to member

     —          8,588   

Reversal of loan loss reserve for loans distributed to member

     —          314   

Adjustments to loan discounts and fees upon member loan distribution, net

     —          534   

Equity Interests distributed to member

     —          4,688   

Equity Interests distributed to member

     —          189   

Equity interests received in connection with a newly originated loan

     —          500   

See Notes to Unaudited Consolidated Financial Statements.

 

6


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

Note 1. Nature of Business

Organization: OFS Capital Corporation (F/K/A: OFS Capital, LLC) and its subsidiaries (“OFS Capital”, the “Company”, or “we”) invest primarily in middle-market loans in the United States. On December 31, 2009, the Company completed a corporate reorganization (“Reorganization”), whereby OFS Capital and its wholly owned subsidiary transferred substantially all of their assets to the parent of OFS Capital, Orchard First Source Asset Management, LLC (“OFSAM”).

On September 28, 2010, as a result of the OFS Capital WM Transaction (as defined and described in more detail in Note 3), OFS Capital became the 100% equity owner of OFS Capital WM, LLC (“OFS Capital WM”).

On September 29, 2011, OFS Capital became the primary beneficiary in Tamarix Capital Partners, LP (F/K/A: Tamarix Financial Partners, LP, “Tamarix LP”), a variable interest entity (“VIE”) under the applicable provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810, “Consolidation” (ASC Topic 810). On May 10, 2012, upon Tamarix LP’s receipt of a Small Business Investment Company (“SBIC”) license, OFS Capital became a 68.4% limited partner in Tamarix LP (see Note 4 for more detail).

On November 7, 2012, in connection with its initial public offering (“IPO”), the Company converted from a limited liability company to a corporation and changed its name to OFS Capital Corporation (see Note 10 for more detail related to the IPO).

From time to time, the term OFS Capital, the Company, or we may be used herein to refer to OFS Capital, individually, or OFS Capital and/or its subsidiaries either collectively or individually.

Note 2. Summary of Significant Accounting Policies

Interim financial statements: The unaudited consolidated financial statements of the Company as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011, have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments except: (1) OFS Capital’s consolidation of the financial statements of OFS Capital WM effective March 30, 2012 (see Note 3); (2) cumulative effect of accounting change to convert from cost to fair value accounting on Tamarix LP’s portfolio investments effective May 10, 2012, as a result of Tamarix LP’s receipt of the SBIC license and conversion to an investment company (see Cumulative effect of accounting change section below); (3) deconsolidation of the financial statements of Tamarix LP effective July 27, 2012 (see Note 4), and (4) the sale accounting treatment of the OFS Capital WM Transaction effective February 23, 2011 (see Note 3), which are, in the opinion of management, necessary to fairly state the operating results for the respective periods). These operating results are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2012. The notes to the unaudited consolidated financial statements should be read in conjunction with the notes to OFS Capital’s December 31, 2011 audited consolidated financial statements, as well as OFS Capital WM’s December 31, 2011 audited financial statements, both of which are contained within the registration statement on Form N-2 that the Company has filed with the SEC.

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

Cumulative effect of accounting change: Equity contributions made by potential investors in Tamarix LP prior to issuance of the SBIC license on May 10, 2012 were contingent upon receipt of the SBIC license, and were fully refundable in the event that Tamarix LP failed to obtain such license. As a result, prior to May 10, 2012, Tamarix LP was not deemed to be an investment company and

 

7


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

accordingly, followed the same accounting principles as its primary beneficiary, OFS Capital, to account for its loans receivable at cost, and its equity interests under the cost method of accounting, on the consolidated financial statements of OFS Capital. On May 10, 2012, upon receipt of the SBIC license, Tamarix LP was deemed to be an investment company under Accounting Standards Codification 946, “Financial Services – Investment Companies” (“ASC Topic 946”), and began reporting its investment assets at fair value. Accordingly, effective May 10, 2012, Tamarix LP changed its accounting principle from cost to fair value for measuring its portfolio investments, and recorded a cumulative effect of accounting change in the amount of $570 to reflect the difference between the fair value and cost basis of its portfolio investments at May 10, 2012.

The cumulative effect of accounting change at May 10, 2012 reflects the effect of Tamarix LP’s conversion to an investment company as follows:

Cumulative Effect of Conversion to an Investment Company

 

Effect of recording loans at fair value

   $ 211   

Effect of recording equity investments at fair value

     140   

Elimination of allowance for loan losses

     219   
  

 

 

 
   $ 570   
  

 

 

 

Fair value of financial instruments: Investments held by OFS Capital WM and Tamarix LP are recorded at their estimated fair value under ASC Topic 810. See Note 7 for more detailed disclosure.

Use of estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

Restricted cash and cash equivalents: Restricted cash and cash equivalents represent amounts maintained in the Unfunded Exposure Account of OFS Capital WM as defined by the Loan Sale Agreement and other applicable transaction documents and are subject to the lien of the trustee for the benefit of the secured parties of OFS Capital WM (see Note 3). Proceeds in the Unfunded Exposure Account along with advances under the OFS Capital WM Credit Facility (see Note 8) are utilized to fund certain eligible loans owned by OFS Capital WM that have unfunded revolving commitments.

Loans receivable: Loans receivable are recorded at unpaid principal balance less allowance for loan losses and net unamortized deferred loan origination fees and costs, or at adjusted cost if charge-offs have been applied on a specific loan basis.

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

 

8


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

The Company focuses its lending activities in the commercial loan category, which includes loans for general business purposes, including financing for acquisitions, recapitalizations, and working capital. The Company assesses risk in its commercial loans based generally on the financial condition, operating performance, enterprise value, and repayment prospects of the underlying obligors.

The allowance for loan losses consists of two components, a general reserve component and a specific reserve component.

The general component of the allowance for loan losses is determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies (ASC Topic 450). The general component represents a company’s estimate of losses inherent, but unidentified, in its portfolio as of the balance sheet date. The general component of the allowance for loan losses is estimated based upon a review of the loan portfolio’s risk characteristics and analysis of the loans in the portfolio to arrive at an estimated probability of default and estimated severity of loss based, among other things, on loan type, internal risk rating, and overall consideration of general economic conditions and trends.

The specifically allocated component of the allowance for loan losses is generated from individual loans that are impaired and is determined in accordance with Accounting Standards Codification 310, “Receivables” (“ASC Topic 310”). The Company considers a loan to be impaired when, based on current information and events, it believes it is probable that it will be unable to collect all contractual principal and interest amounts due on the loan.

Loan origination fees and costs: Loan origination fees and costs are deferred, recorded as part of loans receivable and amortized over the life of the loan as an adjustment to the yield in interest income. On February 23, 2011, under the sale accounting treatment, as a result of the OFS Capital WM Transaction (see Note 3), the Company wrote off all unamortized loan origination fees and costs on loans sold to OFS Capital WM in the net amount of $283. On June 30, 2011, in connection with the loan distribution by OFS Capital WM to the Company, the Company recorded deferred revenue in the amount of $589. As of December 31, 2011, unamortized loan origination fees and costs were $803.

Investments and related investment income: OFS Capital determines the fair value of the portfolio investments held by OFS Capital WM and Tamarix LP. The determination of the fair value of the portfolio investments includes an analysis of the value of any unfunded loan commitments. Interest income is accrued based upon the outstanding principal amount and contractual interest terms of debt investments. The Company accrues interest income until certain events take place, which may place a loan into a non-accrual status. Premiums, discounts and origination fees are amortized or accreted into interest income over the life of the respective debt investment. As of September 30, 2012, unamortized discounts and origination fees on debt investments held by OFS Capital WM amounted to $2,541. For the three and nine months ended September 30, 2012, the Company recognized net loan origination fee income of $206 and $687, respectively. For the three and nine months ended September 30, 2011, the Company recognized net loan origination fee income of $53 and $132, respectively.

For investments with contractual payment-in-kind interest (“PIK”), which represent contractual interest accrued and added to the principal balance that generally becomes due at maturity, the Company will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. For the three and nine months ended September 30, 2012, the Company recognized PIK interest in the amount of $99 and $193, respectively. For the three and nine months ended September 30, 2011, the Company recognized PIK interest in the amount of $35. Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statement of operations.

Non-accrual loans: Loans on which the accrual of interest income has been discontinued are designated as non-accrual loans, and further designated as either non-accrual cash method or non-accrual cost recovery method. Loans are generally placed on non-accrual when a loan either: (i) is delinquent for 90 days or more on principal or interest based on contractual terms of the loan (unless

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

well secured and in the process of collection), or (ii) in the opinion of the Company’s management, there is reasonable doubt about the collectability. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Interest accruals are resumed on non-accrual loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. There were no non-accrual loans at September 30, 2012 and December 31, 2011.

Deferred offering costs: The Company defers costs related to its proposed public offering until completion of the offering. These costs include professional fees, registration costs, printing, and other miscellaneous offering costs. As of September 30, 2012 and December 31, 2011, the Company had recorded $5,235 and $4,253, respectively, of deferred offering costs, of which $3,665 and $3,078 was unpaid and accrued for at September 30, 2012 and December 31, 2011, respectively.

Deferred financing closing costs: Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These amounts are amortized over the estimated average life of the borrowings. As of September 30, 2012, unamortized deferred financing costs recorded by OFS Capital WM amounted to $3,025. For the three and nine months ended September 30, 2012, the Company recorded amortization expense of $144, and $287, respectively, on its deferred financing costs.

Equity investments: Historically, the Company had received various equity ownership interests from its borrowers as partial consideration for loan modifications or restructurings or from exercising its rights under various loan documents. The Company applied foreclosure accounting and recorded these equity interests at fair value at the time of the loan restructurings. Equity interests were reviewed subsequently for potential impairment, and there were no such equity interests at September 30, 2012 and 2011.

In connection with certain lending arrangements, the Company may receive warrants to purchase shares of stock from the borrowers. Because the warrant agreements typically contain net exercise or “cashless” exercise provisions, the warrants qualify as derivative instruments under Accounting Standards Codification 815, “Derivatives and Hedging” (“ASC Topic 815”). Such warrants are considered loan fees and are recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. As such warrants held are deemed to be derivative, they are periodically measured at fair value. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss on warrants. For the three and nine months ended September 30, 2011, the Company recognized an unrealized loss on warrants in the amount of $0 and $156, respectively. For the three and nine months ended September 30, 2012, the Company did not recognize any unrealized gain or loss on warrants.

For the three months ended March 31, 2012, and three and nine months ended September 30, 2011, under the equity method of accounting, the Company’s 100% share of the net income or loss of OFS Capital WM was included in “Income (loss) from equity interests in OFS Capital WM” in the consolidated statements of operations. Commencing with the execution of the WM 2012 Loan Amendment, effective April 1, 2012, OFS Capital consolidated the statement of operations of OFS Capital WM into its own.

Effective July 27, 2012, the Company deconsolidated the financial statements of Tamarix LP from its own, and adopted the equity method of accounting to account for its investment in Tamarix LP (see Note 4). Accordingly, commencing July 27, 2012, the Company’s share of the net income or loss of Tamarix LP was included in “Income from Tamarix LP” in the consolidated statements of operations.

Interest income on loans receivable: Interest on loans receivable is credited to income as earned. Interest receivable is accrued only if deemed collectible. The Company accrues interest income until certain events take place, which may place a loan into a non-accrual status. For loans with contractual payment-in-kind interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, the Company will not accrue payment-in-kind interest if the portfolio company valuation indicates that the payment-in-kind interest is not collectible.

 

10


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

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

Syndication costs: Costs incurred in the private placement offering of Tamarix LP’s interests were charged against partners’ capital as incurred.

Organization costs: Costs incurred in organizing Tamarix LP were expensed as incurred and are included in other administrative expenses on the Company’s consolidated statements of operations.

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.

Income taxes: The Company does not record a provision for federal income taxes or deferred tax benefits because its income is taxable to its member. The financial statements, therefore, reflect the Company’s transactions without adjustments required for federal income tax purposes.

The Company follows the guidance in Accounting Standards Codification 740, “Income Taxes” (“ASC Topic 740”). ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in companies’ financial statements in accordance with tax accounting standards. There were no material uncertain income tax positions as of and for the three and nine months ended September 30, 2012 and 2011. The Company is not subject to examination by U.S. federal or state tax authorities for tax years before 2009.

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

Transfers of financial assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loans receivable), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale.

Recent accounting pronouncements: In January 2011, the FASB issued ASU No. 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU 2011-1). The FASB determined that certain provisions relating to Troubled Debt Restructurings (“TDRs”) should be deferred until additional guidance and clarification on the definition of TDRs were issued. In April 2011, the FASB issued ASU No. 2011-2, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-2). ASU 2011-2 amends ASC Topic 310 — Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-2 also makes disclosure requirements deferred under ASU 2011-1 effective for interim and annual periods beginning on or after June 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03). The amendments in this update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets.

 

11


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities was not permitted. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In November 2011, the FASB issued ASU 2011-11 — Balance Sheet (Topic 210) containing new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual and interim periods beginning on or after January 1, 2013. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently assessing the impact of ASU 2011-11 on its future consolidated financial statements.

Reclassifications: Certain amounts previously reported have been reclassified where appropriate to conform to the current year’s presentation. These reclassifications have no effect on the reported net income (loss) for three and nine months ended September 30, 2012 and 2011.

Note 3. OFS Capital WM

OFS Capital WM Transaction

On September 28, 2010, OFS Capital entered into a Loan Sale Agreement with OFS Capital WM, pursuant to which OFS Capital transferred eligible loans or its 100% participating interest in certain loans as defined by the agreement (“Eligible Loans”) with $96,906 in principal to OFS Capital WM in exchange for cash of $36,255 and a 100% ownership interest in OFS Capital WM (“OFS Capital WM Transaction”).

The OFS Capital WM Transaction was a true sale for legal purposes. Under the Loan Sale Agreement and other applicable transaction documents between the Company and OFS Capital WM (collectively, the “Loan Documents”), dated September 28, 2010, OFS Capital is not permitted to revoke the sale. Wells Fargo Delaware Trust Company, N.A., acts as the trustee for the benefit of the lenders under the credit facility that forms part of the Loan Documents. The Eligible Loans are pledged by OFS Capital WM to the trustee for the benefit of the lenders. OFS Capital is not entitled or obligated to repurchase or redeem the Eligible Loans, other than a customary obligation to repurchase loans for breach of representations and warranties with respect to the eligibility of such loans. In addition, OFS Capital had the right, at its option, to purchase loans then owned by OFS Capital WM, at fair value, subject to a 20% purchase and substitution limit as prescribed in the Loan Documents (the “Call Right”).

OFS Capital accounted for the OFS Capital WM Transaction as a secured borrowing in accordance with the relevant provisions under ASC Topic 860 (Transfers and Servicing). Accordingly, on September 28, 2010, OFS Capital reclassified the loans it transferred to OFS Capital WM to loans receivable pledged to creditors on its consolidated balance sheet. In addition, on September 28, 2010, in consideration for the cash and 100% equity interest in OFS Capital WM, the Company recorded a corresponding payable under securities loan agreement.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 3. OFS Capital WM (Continued)

 

Effective February 23, 2011, the Company amended the Loan Documents pursuant to which the Call Right and certain other rights of OFS Capital were removed. This amendment was entered into to ensure that the original intent of the parties to treat the OFS Capital WM Transaction as a true sale for both legal and accounting purposes was satisfied and to eliminate any provision that may be interpreted as contrary to that intent. For the period January 1, 2011 through February 23, 2011, OFS Capital recognized interest income on loans pledged to creditors in the amount of $831 and recorded interest expense of $831 on the payable under securities loan agreement for the same period. On February 23, 2011, as a result of the amendment to the Loan Documents, under the sale accounting treatment, the Company derecognized the loans pledged to creditors in the carrying value of $75,621 (net of loan loss allowance of $1,151 and net deferred revenue of $283), interest receivable pledged to creditors in the amount of $213, and the payable under securities agreement in the amount of $74,945. The difference between the receivables pledged to creditors and payable under securities agreement, was recognized as a loss from the sale in the amount of $889.

Consolidation of OFS Capital WM

OFS Capital WM is a wholly owned subsidiary of OFS Capital formed in August 2010 with the limited purpose of holding, acquiring, managing and financing senior secured loan investments to middle-market companies in the United States. Prior to March 30, 2012, the Company determined that OFS Capital WM was a VIE of OFS Capital under the applicable provisions of ASC Topic 810. OFS Capital, as the owner of 100% of the equity of OFS Capital WM, has the obligation to absorb losses and the right to receive benefits, either of which could be significant to the VIE. However, prior to March 30, 2012, despite its 100% equity interest in OFS Capital WM, OFS Capital was not the primary beneficiary of OFS Capital WM as OFS Capital lacked the power, through voting interests or similar rights, to direct the activities of OFS Capital WM that most significantly impact its economic performance. The Company had concluded that MCF Capital Management, LLC (the “Loan Manager”) was the primary beneficiary of OFS Capital WM, because (1) under the terms of the loan facility of OFS Capital WM, the Loan Manager had the sole authority to service, administer and exercise rights and remedies in respect of the assets in OFS Capital WM’s portfolio; (2) the Loan Manager had the sole authority to determine whether to cause assets to be sold or acquired by OFS Capital WM, subject to certain limited circumstances where the Company has consent rights, as administrative manager of OFS Capital WM; (3) OFS Capital, as the administrative manager of OFS Capital WM, carried out duties of OFS Capital WM primarily limited to administrative matters, and (4) for its service, the Loan Manager receives a fee. The Company had determined the Loan Manager’s right to receive a loan management fee from OFS Capital WM, the interest of its related party in the class B loans of OFS Capital WM, and the implicit financial responsibility of the Loan Manager to ensure the VIE operates as designed were significant to OFS Capital WM. Since the Loan Manager was the primary beneficiary of OFS Capital WM, prior to March 30, 2012, the Company did not consolidate the financial statements of OFS Capital WM but instead accounted for its ownership interest under the equity method of accounting.

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

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 3. OFS Capital WM (Continued)

 

sale discussions and to block any prospective loan sale. In consideration for the rights received as a result of the WM 2012 Loan Amendment, OFS Capital agreed to give up a right of first refusal that it possessed with respect to future transactions substantially similar to the OFS Capital WM Transaction that the Loan Manager and/or its affiliates may seek to conduct with third parties.

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

The following pro forma presentation assumes OFS Capital’s consolidation of OFS Capital WM took place on January 1, 2012 and 2011, respectively, and shows the pro forma effect on income (loss) from operations. The pro forma statement of operations for the three months ended September 30, 2012 is not presented, as OFS Capital’s historical statement of operations for such period has already reflected its consolidation of the operations of OFS Capital WM.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 3. OFS Capital WM (Continued)

 

     Nine Months Ended September 30, 2012  
     (Unaudited)  
           Pro Forma        
     Historical     Adjustments     Pro Forma  

Interest, dividend, and fee income

   $ 9,197        4,269  (1)    $ 13,466   

Interest expense on borrowed funds

     2,956        1,730  (1)      4,686   
  

 

 

   

 

 

   

 

 

 

Net interest income

     6,241        2,539        8,780   
  

 

 

   

 

 

   

 

 

 

Non-interest income:

      

Income from equity interest in OFS Capital WM

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

Income from equity interest in Tamarix LP

     378        —          378   

Other income

     29        —          29   

Net change in unrealized appreciation on investments

     234        548  (1)      782   
  

 

 

   

 

 

   

 

 

 

Total non-interest income

     3,286        (2,097     1,189   
  

 

 

   

 

 

   

 

 

 

Non-interest expenses:

      

Amortization of deferred financing closing costs

     287        143  (1)      430   

Net realized loss on investments—related party

     1,257        —          1,257   

Management fee expense—Loan Manager

     514        267  (1)      781   

Management fee expense—related parties

     1,668        —          1,668   

Professional fees

     489        (2 )(1)      487   

Other administrative expenses

     493        34  (1)      527   
  

 

 

   

 

 

   

 

 

 

Total non-interest expense

     4,708        442        5,150   
  

 

 

   

 

 

   

 

 

 

Net income (loss) before cumulative effect of accounting change

     4,819        —          4,819   

Cumulative effect of accounting change

     570        —          570   
  

 

 

   

 

 

   

 

 

 

Net income

     5,389        —          5,389   

Less: Net loss attributable to the non-controlling interests

     (61     —          (61
  

 

 

   

 

 

   

 

 

 

Net income attributable to OFS Capital

   $ 5,450      $ —        $ 5,450   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 3. OFS Capital WM (Continued)

 

     Three Months Ended September 30,
2011 (unaudited)
    Nine Months Ended September 30,
2011 (unaudited)
 
     Historical     Pro Forma
Adjustments
    Pro
Forma
    Historical     Pro Forma
Adjustments
    Pro
Forma
 

Interest, dividend, and fee income

   $ 287      $ 3,019 (1)    $ 3,306      $ 1,276      $ 10,122 (1)    $ 11,398   

Interest expense on borrowed funds

     —          958 (1)      958        831        3,081 (1)      3,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     287        2,061        2,348        445        7,041        7,486   

Loan loss provision (recovery) on loans receivable and loans receivable pledged to creditors

     287        —          287        (418     —          (418
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision (recovery)

     —          2,061        2,061        863        7,041        7,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

            

Gain on payable under securities loan agreement

     —          —          —          71        (71 )(1)      —     

Other income

     —          —          —          89        —          89   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     —          —          —          160        (71     89   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

            

Amortization of deferred financing closing costs

     —          144 (1)      144        —          428 (1)      428   

Loss from equity interest in OFS Capital WM

     4,748        (4,748 )(1)      —          3,268        (3,268 )(1)      —     

Loss on sale of loans to OFS Capital WM

     —          —          —          889        (889 )(1)      —     

Net realized loss on investments

     —          —          —          —          991 (1)      991   

Net realized loss on investments—related party

     —          —          —          —          248 (1)      248   

Unrealized loss on warrants

     —          —          —          156        —          156   

Net change in unrealized depreciation on investments

     —          6,439 (1)      6,439        —          7,566 (1)      7,566   

Management fee expense—related party

     319        —          319        1,063        —          1,063   

Management fee expense—Loan Manager

     —          150 (1)      150        —          650 (1)      650   

Professional fees

     31        48 (1)      79        115        255 (1)      370   

Other administrative expenses

     78        28 (1)      106        231        100 (1)      331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     5,176        2,061        7,237        5,722        6,081        11,803   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,176   $ —        $ (5,176   $ (4,699   $ 889      $ (3,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Adjustments:

 

(1) To eliminate OFS Capital’s income (loss) from equity investment in OFS Capital WM and consolidate OFS Capital WM’s statement of operations into OFS Capital’s for the nine months ended September 30, 2012, as well as for the three and nine months ended September 30, 2011. To eliminate loss on sale of loans to OFS Capital WM for the nine months ended September 30, 2011.

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 4. Tamarix LP

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

On May 10, 2012, Tamarix LP received the SBIC license. From September 29, 2011 through May 10, 2012, Tamarix LP was deemed to be a VIE of OFS Capital under ASC Topic 810 as the equity interests in Tamarix LP had not been called and, accordingly, it would not be possible for Tamarix LP to finance its activities without additional subordinated financial support. OFS Capital’s debt interest was considered the sole variable interest in Tamarix LP and OFS Capital was deemed to be the primary beneficiary in Tamarix LP for the period from September 29, 2011 to May 10, 2012. The investment and exit decisions, day-to-day investment activities and underlying assets of Tamarix LP are managed by its general partner, Tamarix Capital G.P., LLC (“Tamarix GP”), which is controlled by three individuals (“Tamarix Individuals) who were employed by an affiliate of OFS Capital, each of whom, together with Glenn Pittson, OFS Capital’s Chief Executive Officer, have previously been approved by the SBA to manage Tamarix LP. For accounting purposes, however, as secured lender to Tamarix LP, as well as employer (through affiliated entity) of the three individuals, OFS Capital ultimately was deemed under the applicable accounting literature to have the power to direct the activities of Tamarix LP that most significantly impacted Tamarix LP’s economic performance. Further, OFS Capital had the obligation as a secured lender to absorb losses of Tamarix LP that could potentially be significant to Tamarix LP.

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

In June 2012, Tamarix LP received a $30,110 SBA leverage commitment, which is issuable by the SBA in the form of debenture securities and which terminates in September 2016. The SBA charges a 3% leverage fee and a 0.425% underwriter’s fee on these commitments. The fee is payable in two stages: (1) 1% of the committed amount when the leverage commitment is received and (2) the remaining 2% plus the underwriting fee as funds are drawn. The SBA may limit the amount that may be drawn each year under this commitment, and each issuance of leverage is conditioned on Tamarix LP’s full compliance, as determined by the SBA, with the terms and conditions set forth under the SBIC Act. In June 2012, Tamarix LP paid the 1% fee in the amount of $301 to the SBA. On July 27, 2012, in connection with a $14,000 leverage draw, Tamarix LP was charged fees of $339 by the SBA. The foregoing fees are recorded by Tamarix LP as deferred financing costs and will be amortized on a straight-line basis over a period of ten years as Tamarix LP draws down the leverage commitment.

Deconsolidation of Tamarix LP

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

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 4. Tamarix LP (Continued)

 

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

Since OFS Capital no longer held the controlling interest in Tamarix LP, effective July 27, 2012, OFS Capital deconsolidated Tamarix LP’s financial statements from its own, and adopted the equity method of accounting to record its equity investment in Tamarix LP. Accordingly, the Company’s September 30, 2012 consolidated balance sheet no longer includes the accounts of Tamarix LP, and the Company’s consolidated statements of operations for the three and nine months ended September 30, 2012 reflect the statements of operations from Tamarix LP only through July 27, 2012.

The following pro forma presentation assumes OFS Capital’s deconsolidation of Tamarix LP took place on January 1, 2012 and shows the pro forma effect on income (loss) from operations. The pro forma statements of operations for the three and nine months ended September 30, 2011 are not presented, as Tamarix LP had minimal activities that affected its net income during such periods.

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 4. Tamarix LP (Continued)

 

     Three Months Ended September 30,
2012 (unaudited)
     Nine Months Ended September 30,
2012 (unaudited)
 
     Historical     Pro Forma
Adjustments
    Pro
Forma
     Historical     Pro Forma
Adjustments
    Pro
Forma
 

Interest, dividend, and fee income

   $ 4,035      $ (98 )(1)    $ 3,937       $ 9,197      $ (428 )(1)    $ 8,769   

Interest expense on borrowed funds

     1,511        (3 )(1)      1,508         2,956        (3 )(1)      2,953   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     2,524        (95     2,429         6,241        (425     5,816   

Non-interest income:

             

Income from equity interests in OFS Capital WM

     —          —          —           2,645        —          2,645   

Income (loss) from equity interests in Tamarix LP

     378        (31 )(1)      347         378        (62 )(1)      316   

Net change in unrealized appreciation on investments

     1,173        —          1,173         234        273 (1)      507   

Other income

     32        —          32         29        —          29   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,583        (31     1,552         3,286        211        3,497   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Non-interest expenses:

             

Amortization of deferred financing closing costs

     144        —          144         287        —          287   

Net realized loss on investments—related party

     92        —          92         1,257        —          1,257   

Unrealized loss on warrants

     —          —          —           —          —          —     

Management fee expense—Loan Manager

     261        —          261         514        —          514   

Management fee expense—related parties

     481        (150 )(1)      331         1,668        (627 )(1)      1,041   

Professional fees

     86        (5 )(1)      81         489        (45 )(1)      444   

Other administrative expenses

     115        (3 )(1)      112         493        (173 )(1)      320   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

     1,179        (158     1,021         4,708        (845     3,863   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) before cumulative effect of accounting change

     2,928        32        2,960         4,819        631        5,450   

Cumulative effect of accounting change

     —          —   (1)      —           570        (570 )(1)      —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     2,928        32        2,960         5,389        61        5,450   

Less: Net loss attributable to the non-controlling interests

     (32     32 (1)      —           (61     61 (1)      —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to OFS Capital

   $ 2,960      $ —        $ 2,960       $ 5,450      $ —        $ 5,450   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Pro Forma Adjustments:

 

(1) To deconsolidate the statement of operations of Tamarix LP for the period January 1, 2012 through July 27, 2012 from OFS Capital’s consolidated statements of operations for the three and nine months ended September 30, 2012.

Note. 5 Loans Receivable

At September 30, 2012, the Company had no loans receivable.

As a result of the February 23, 2011 amendment to the Loan Documents (see Note 3), which resulted in the derecognition of the loans receivable pledged to creditors under the sale accounting, there were no outstanding balance on loans receivable pledged to creditors at either September 30, 2012 or December 31, 2011.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note. 5 Loans Receivable (Continued)

 

Average impaired loans during the nine months ended September 30, 2011 totaled $1,370. Average impaired loans, net of the allowance for loan loss, during the nine months ended September 30, 2011 was $1,205. Income recognized on the sole impaired loan, which was repaid on June 30, 2011, on the cash and accrual basis for the three and nine months ended September 30, 2011 was $0.

There were no TDRs with respect to the Company’s loans during the nine months ended September 30, 2011. As of December 31, 2011, OFS Capital had no past due loans.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all loans receive a financial review no less frequently than quarterly to monitor and adjust, if necessary, the credit’s risk categorization.

The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:

1 (Low Risk) – A risk rated 1, or Low Risk, credit is a credit that has most satisfactory asset quality and liquidity, good leverage capacity. It maintains predictable and strong cash flows from operations. The trends and outlook for the credit’s operations, balance sheet, and industry are neutral to favorable. Collateral, if appropriate, has maintained value and would be capable of being liquidated on a timely basis. Overall a 1 rated credit would be considered to be of investment grade quality.

2 (Below Average Risk) – A risk rated 2, or Below Average Risk, credit is a credit that has acceptable asset quality, moderate excess liquidity, modest leverage capacity. It could have some financial/non-financial weaknesses which are offset by strengths; however, the credit demonstrates an ample current cash flow from operations. The trends and outlook for the credit’s operations, balance sheet, and industry are generally positive or neutral to somewhat negative. Collateral, if appropriate, has maintained value and would be capable of being liquidated successfully on a timely basis.

3 (Average) – A risk rated 3, or Average, credit is a credit that has acceptable asset quality, somewhat strained liquidity, minimal leverage capacity. It is at times characterized by just acceptable cash flows from operations. Under adverse market conditions, carrying the current debt service could pose difficulties for the borrower. The trends and conditions of the credit’s operations and balance sheet are neutral to slightly negative.

4 (Special Mention) – A risk rated 4, or Special Mention, credit is a credit with no apparent loss of principal or interest envisioned. Nonetheless, it possesses credit deficiencies or potential weaknesses which deserve management’s close and continued attention. The credit’s operations and/or balance sheet have demonstrated an adverse trend or deterioration which, while serious, has not reached the point where the liquidation of debt is jeopardized. These weaknesses are generally considered correctable by the borrower in the normal course of business but may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position.

5 (Substandard) – A risk rated 5, or Substandard, credit is a credit inadequately protected by the current enterprise value or paying capacity of the obligor or of the collateral, if any. These credits have well-defined weaknesses based upon objective evidence, such as recurring or significant decreases in revenues and cash flows. These assets are characterized by the possibility that the Company may sustain loss if the deficiencies are not corrected. The possibility that liquidation would not be timely (e.g. bankruptcy or foreclosure) requires a Substandard classification even if there is little likelihood of loss.

6 (Doubtful) – A risk rated 6, or Doubtful, credit is a credit with all the weaknesses inherent in those classified as Substandard, with the additional factor that the weaknesses are pronounced to the point that collection or liquidation in full, on the basis of currently existing facts, conditions and values is deemed uncertain. The possibility of loss on a Doubtful asset is high but, because of certain important and reasonably specific pending factors which may strengthen the asset, its classification as an estimated loss is deferred until its more exact status can be determined.

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note. 5 Loans Receivable (Continued)

 

7 (Loss) – A risk rated 7, or Loss, credit is a credit considered almost fully uncollectible and of such little value that its continuance as an asset is not warranted. It is generally a credit that is no longer supported by an operating company, a credit where the majority of the Company’s assets have been liquidated or sold and a few assets remain to be sold over many months or even years, or a credit where the remaining collections are expected to be minimal or highly contingent based on intangible assets or performance based measures.

At December 31, 2011, the Company had two loans receivable, both of which had a risk rating of 3.The details of loan loss allowance for loans receivable for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012      2011     2012     2011  

Balance—beginning of period

   $ —         $ 27      $ 219      $ 356   

Net provision charged to expense

     —           287        —          287   

Recoveries

     —          
—  
  
    —          (439

Write-offs

     —           (314     —          (314

Reversal upon conversion from cost to fair value accounting on loan investments

    
—  
  
     —          (219     —     

Paid-in-kind interest income reversed on non-accrual loans

     —          
—  
  
    —          110   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance—end of period

   $ —         $ —        $ —        $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

As a result of the cumulative effect of the accounting change to convert Tamarix LP’s loan from cost to fair value, on May 10, 2012, OFS Capital reversed the $219 loan loss allowance on the loans held by Tamarix LP. OFS Capital did not hold any loans receivable thereafter and, therefore, did not record any loan loss provision for the three month period ending September 30, 2012.

The details of loan loss allowance for loans receivable pledged to creditors for the nine months ended September 30, 2012 and 2011 are summarized as follows:

 

     Nine Months Ended
September 30,
 
     2012      2011  

Balance—beginning of period

   $ —         $ 1,417   

Net provision (benefit) charged to expense

     —           (266

Write-offs

     —           (1,151
  

 

 

    

 

 

 

Balance—end of period

   $ —         $ —     
  

 

 

    

 

 

 

For the nine months ended September 30, 2011, the $1,151 write-off was related to the OFS Capital WM Transaction. Under the sale accounting treatment, effective February 23, 2011, the loan loss allowance was written off upon the sale of the loans to OFS Capital WM.

Note 6. Commitments and Contingencies

At September 30, 2012 and December 31, 2011, the Company had $1,500 of unused lines of credit granted to borrowers.

On March 27, 2012, we entered into a new subscription agreement (“Subscription Agreement”) with respect to an investment in Tamarix LP, which superseded prior agreements and was contingent upon issuance of the license from the SBA. Under the terms of the Subscription Agreement, our investment in Tamarix LP will not exceed $25,000. On April 2, 2012, OFS Capital funded $1,584 to Tamarix LP. In March and April 2012, Tamarix LP also received an aggregate of $207 and $709, respectively, from other investors. These funds, totaling $2,500, were called by Tamarix LP as requested by the SBA and would be used as initial capital of Tamarix LP

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 6. Commitments and Contingencies (Continued)

 

once Tamarix LP received the SBIC license. On May 10, 2012, as a result of Tamarix LP’s receipt of the SBIC license, our equity investment in Tamarix LP was no longer contingent, and our advance to Tamarix LP in the amount of $1,584 was reclassified to an equity investment in Tamarix LP. In July 2012, we made an additional equity investment of $3,242 in Tamarix LP. As of September 30, 2012, our committed but uncalled capital investment in Tamarix LP was approximately $20,100.

From time to time, Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company.

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company expects the risk of any future obligation under these indemnifications to be remote.

Note 7. Fair Value of Financial Instruments

The Company follows the guidance in ASC Topic 820 for measuring the fair value of the portfolio investments held by OFS Capital WM and Tamarix LP. The Company also follows the guidance in ASC Topic 820 in disclosing the fair value reported for all financial instruments that are either impaired or available for sale securities, using the definitions provided in ASC Topic 320. Fair value is 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 and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined under ASC Topic 820 as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under ASC Topic 820 are described below:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to 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; and fair value is determined through the use of models or other valuation methodologies.

Level 3: Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. 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.

The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest in time to the actual date of the event or change in circumstances that caused the transfer. There were no transfers among Level 1, 2 and 3 during the nine months ended September 30, 2012. 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.

Investments for which prices are not observable are generally private investments in the equity and debt securities of operating companies. The primary analytical method used to estimate the fair value of Level 3 investments is the discounted cash flow method (although in certain instances a liquidation analysis or other methodology may be most appropriate). The discounted cash flow

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 7. Fair Value of Financial Instruments (Continued)

 

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 assumed growth rate (in cash flows) 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. 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, and financing transactions subsequent to the acquisitions of the investment. Application of these valuation methodologies involves a significant degree of judgment by management.

The fair value of equity securities, including warrants, in portfolio companies may also consider the market approach—that is, through analyzing, and applying to the underlying portfolio companies, market valuation multiples of publicly-traded firms engaged in businesses similar to those of the portfolio companies. The market approach to determining the fair value of a portfolio company’s equity security (or securities) will typically involve: (1) applying to the portfolio company’s trailing twelve months (or current year projected) EBITDA a low to high range of enterprise value to EBITDA multiples that are derived from an analysis of publicly-traded comparable companies, in order to arrive at a range of enterprise values for the portfolio company; (2) subtracting from the range of calculated enterprise values the outstanding balances of any debt or equity securities that would be senior in right of payment to the equity securities held by the Company; and (3) multiplying the range of equity values derived therefrom by the Company’s ownership share of such equity tranche in order to arrive at a range of fair values for the Company’s equity security (or securities). Application of these valuation methodologies involves a significant degree of judgment by management.

Equity in a portfolio company that invests in loans, will typically be valued by arriving at a fair value of such vehicle’s loan assets (plus, when appropriate, the carrying value of certain other assets), and deducting the book value or fair value (as appropriate) of such vehicle’s liabilities to arrive at a fair value for the equity. When appropriate, in order to recognize value that would be created by growth opportunities of such portfolio company, equity in a portfolio company may also be valued by taking into consideration the magnitude, timing, and effective life of its expected future investments in loans.

Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a ready market 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. With respect to level 3 investments, where sufficient market quotations are not readily available or for which no or an insufficient number of indicative prices from pricing services or brokers or dealers have been received, the Company undertakes, on a quarterly basis, a valuation process as described below:

 

   

For each debt investment, a basic credit rating review process (consistent with the process described in Note 5 for assessing the credit quality of the Company’s loans receivable) is completed. The risk rating on every credit facility is reviewed and either reaffirmed or revised by the Company’s investment committee. This process will establish base information for the quarterly valuation process.

 

   

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

 

   

Preliminary valuation conclusions are then documented and discussed with individual members of the investment committee.

 

   

The preliminary valuations are then submitted to the investment committee for ratification.

 

   

Third party valuation firm(s) will be engaged to provide valuation services as requested, by reviewing the investment committee’s preliminary valuations. The investment committee’s preliminary fair value conclusions on each of the Company’s assets, as well as each investment asset of OFS Capital WM, for which sufficient market quotations are not readily available will be reviewed and assessed by a third-party valuation firm at least once in every 12 month period,

 

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OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 7. Fair Value of Financial Instruments (Continued)

 

 

and more often as required by the Company’s fair value policy, or the Company’s board of directors, which is ultimately responsible for the fair value of the Company’s investments. 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 of directors.

 

   

The Company’s board of directors will discuss valuations and determine the fair value of each investment in the portfolio in good faith based on the input of OFS Capital Management and, where appropriate, the respective independent valuation firms.

The Company’s investments are subject to market risk. Market risk is the potential for changes in the value of investments due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded. The Company manages its exposure to market risk related to its investments through monitoring the financial condition of its investments, as well as the volatility and liquidity trends of the markets in which it trades.

Assets Recorded at Fair Value on a Recurring Basis

The following tables summarize assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

 

     September 30, 2012  
     Fair Value Measurements Using         

Description

   (Level I)      (Level II)      (Level III)      Total  

Assets:

           

Debt investments

   $ —         $ —         $ 207,196       $ 207,196   

Money market funds *

     2,600         —           —           2,600   
  

 

 

    

 

 

    

 

 

    

 

 

 
              —     

Total

   $ 2,600       $ —         $ 207,196       $ 209,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* included in cash and cash equivalents and restricted cash and cash equivalents on the consolidated balance sheet.

The Company had one category of debt investments at September 30, 2012, consisting of commercial loans to 52 portfolio companies. The debt investments were measured at fair value via application of the discounted cash flow method, based on discount rates (derived primarily from unobservable credit quality and unobservable market interest rate inputs) ranging from 7.55% to 13.69%, with a weighted average rate of 8.25% and unobservable EBITDA multiple inputs ranging from 3.78 to 9.50, with a weighted average multiple of 6.29. Changes in credit quality (which would impact the discount rate) and, to a lesser extent, changes in EBITDA multiples, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to changes in the discount rate.

 

      December 31, 2011  
     Fair Value Measurements Using  

Description

   (Level I)      (Level II)      (Level III)      Total  

Money market funds *

   $ 12       $ —         $ —         $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12       $ —         $ —         $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* included in cash and cash equivalents on the consolidated balance sheet.

The following tables present additional information about assets measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value.

 

24


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 7. Fair Value of Financial Instruments (Continued)

 

 

     For the Nine Months Ended
September 30, 2012
 
     Debt
Investments
    Equity
Investments
 

Level 3 assets, beginning of period

   $ —        $ —     

Net change in unrealized appreciation (depreciation) on investments

     460        (226

Net realized loss on investment—related party

     (1,257     —     

Consolidation of investments held by OFS Capital WM

     197,765        —     

Purchase of portfolio investments by OFS Capital WM

     30,839        —     

Purchase of portfolio investments by Tamarix LP

     2,999        —     

Accrued PIK

     99        —     

Portfolio investments of Tamarix LP converted from cost to fair value accounting

     14,382        2,596   

Proceeds from principal payments on portfolio investments held by OFS Capital WM

     (17,476     —     

Proceeds from principal payments on portfolio investments held by Tamarix LP

     (315     —     

Sale of portfolio investments—related party

     (3,722     —     

Portfolio investment received in connection with debt acquisition and restructuring by Tamarix LP

     —          539   

Deconsolidation of investments in Tamarix LP

     (17,200     (2,909

Amortization of discounts and premium

     622        —     
  

 

 

   

 

 

 

Level 3 assets, end of period

   $ 207,196      $ —     
  

 

 

   

 

 

 

 

     For the Year
Ended December 31,
2011
 

Level 3 assets, beginning of period

   $ 156   

Unrealized loss on warrants included in earnings

     (156
  

 

 

 

Level 3 assets, end of period

   $ —     
  

 

 

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost. As of September 30, 2012 and December 31, 2011, the Company had no assets valued on a non-recurring basis.

The Company discloses fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The estimated fair value amounts have been measured as of September 30, 2012 and December 31, 2011, and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than amounts reported at September 30, 2012 and December 31, 2011.

 

25


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 7. Fair Value of Financial Instruments (Continued)

 

The information presented should not be interpreted as an estimate of the fair value of the entire company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

As of September 30, 2012 and December 31, 2011, the recorded book balances and estimated fair values of the Company’s financial instruments were as follows:

 

     September 30, 2012      December 31, 2011  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

Financial assets:

           

Cash and cash equivalents

   $ 13,957       $ 13,957       $ 814       $ 814   

Restricted cash and cash equivalents

     623         623         —           —     

Loans receivable, net

     —           —           13,804         14,565   

Investments

     207,196         207,196         —           —     

Equity investment in OFS Capital WM

     —           —           43,120         41,217   

Equity investment in OFS Tamarix LP

     5,049         5,049         —           —     

Other equity interests

     —           —           2,455         2,619   

Receivable for investment sold—related party

     792         792         —           —     

Interest receivable and other assets

     769         769         468         468   

Financial liabilities:

           

Revolving line of credit—Wells Fargo

   $ 134,123       $ 134,123       $ —         $ —     

Revolving line of credit—Madison Capital

     37,038         37,038         —           —     

Interest payable

     1,509         1,509         —           —     

Note 8. OFS Capital WM Facility

On September 28, 2010, OFS Capital WM entered into a $180,000 secured revolving credit facility (the “WM Credit Facility”) with Wells Fargo and Madison Capital, with the Class A lenders (initially Wells Fargo) providing up to $135,000 in the Class A loans and the Class B lenders (initially Madison Capital) providing up to $45,000 in Class B loans to OFS Capital WM. The WM Credit Facility is secured by the Eligible Loans transferred to OFS Capital WM by OFS Capital on the date of the OFS Capital WM Transaction and any eligible loan assets subsequently acquired by OFS Capital WM. The loan facilities with Wells Fargo and Madison Capital had five- and six-year terms, respectively, and both facilities provided a one-year option for extension upon the approval of the Class A and Class B lenders. The loan facilities had a reinvestment period of two years after the closing date of the WM Credit Facility, which could be extended by one year with the consent of each lender. Outstanding borrowings on the loan facilities are limited to the lesser of (1) $180,000 and (2) the borrowing base as defined by the Loan Documents. OFS Capital WM is obligated to pay interest on outstanding Class A loans and Class B loans on each quarterly payment date. Prior to September 28, 2012, Outstanding Class A loans accrued interest equal to LIBOR plus 3.00% per annum. Outstanding Class B loans accrued interest equal to LIBOR plus 4.00% per annum. OFS Capital WM has the right to repay loans outstanding under the facility in part from time to time, subject to applicable prepayment fee. The unused commitment fee on the Class A loan facility is (1) 0.5% per annum of the first $25,000 of the unused facility and (2) 2% per annum of the balance in excess of $25,000. The unused commitment fee on the Class B loan facility is 0.5% per annum. In connection with the WM Credit Facility, OFS Capital WM incurred financing costs of $3,501, which were deferred and amortized over the terms of WM Credit Facility.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 8. OFS Capital WM Facility (Continued)

 

Under the OFS Capital WM Credit Facility, the Loan Manager charges both a senior and subordinated management fee to OFS Capital WM for its services, each at 0.25% per annum of the assigned value of the underlying portfolio investments, which value is determined by the Controlling Lender (as defined in the OFS Capital WM loan documents), plus an accrued fee that is deferred until after the end of the investment period of the portfolio investments. For the three and nine months ended September 30, 2012, the Company incurred management fee expense of $261 and $514, respectively, to the Loan Manager.

On September 28, 2012, the WM Credit Facility was amended (“Amended WM Credit Facility”). Under the Amended WM Credit Facility, (1) the loans with both Wells Fargo and Madison Capital were extended to December 31, 2016, and both loans provided for a one-year option for extension upon the approval of the Class A and Class B lenders; (2) the reinvestment period for both loans was extended to December 31, 2013, which can be further extended by one year with the consent of each lender; (3) accrued interest rate on outstanding Class A loans was amended to LIBOR plus 2.75% per annum, and (4) accrued interest rate on outstanding Class B loans was amended to LIBOR plus 6.50%. In connection with the Amended WM Credit Facility, OFS Capital WM incurred financing costs of $675, which is deferred and accrued for at September 30, 2012. The deferred financing costs under the Amended WM Credit Facility, together with the unamortized deferred financing costs under the WM Credit Facility of $2,350 at September 28, 2012, are being amortized over the Amended WM Credit Facility.

Note 9. Related Party Transactions and Subsequent Events

Due to OFSAM

As of September 30, 2012 and December 31, 2011, OFS Capital owed $0 and $6,808 to OFSAM, respectively, due to advances of funds and repayment of funds advanced.

Member Distributions

On March 31, 2012, OFS Capital declared a distribution payable to OFSAM in the amount of $1,152, which was paid to OFSAM in April 2012.

In July 2012, OFS Capital made a distribution to OFSAM in the amount of $1,558.

On September 30, 2012, OFS Capital declared a distribution payable to OFSAM in the amount of $4,000, which was paid to OFSAM in October 2012.

Due to Orchard First Source Capital, Inc. (“OFSC”)

As of September 30, 2012 and December 31, 2011, OFS Capital owed a total of $49 and $21, respectively, to OFSC, a wholly owned subsidiary of OFSAM, for operating expenses paid by OFSC for the benefit of OFS Capital.

Due to OFS Capital Management, LLC

Effective September 28, 2010, OFS Capital entered into an Investment Advisory Agreement with OFS Capital Management, LLC (“OFS Capital Management”), an affiliated entity and wholly owned subsidiary of OFSAM, pursuant to which OFS Capital agreed to pay an annual base management fee to OFS Capital Management to compensate for its investment advisory services. The base management fee was calculated at 2% per annum of the Company’s average total assets (excluding cash) at the end of the two most recently completed calendar quarters, and payable quarterly in arrears.

On March 30, 2012, the Investment Advisory Agreement between OFS Capital and OFS Capital Management was amended whereby OFS Capital would pay a base management fee at 2% per annum of its average total assets excluding cash and the assets held by OFS Capital WM. For the assets held by OFS Capital WM at the subsidiary level, OFS Capital would pay a base management fee of 0.5% per annum on the average total assets (excluding cash) of OFS Capital WM. For the three months ended September 30, 2012 and 2011, the Company incurred management fee expenses of $331 and $319, respectively. For the nine months ended September 30, 2012 and 2011, the Company incurred management fee expenses of $1,041 and $1,063, respectively. As of September 30, 2012 and December 31, 2011, the Company had accrued and unpaid management fees of $331 and $302, respectively, due to OFS Capital Management. The September 30, 2012 accrued management fee was subsequently paid to OFS Capital Management in October 2012.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 9. Related Party Transactions and Subsequent Events (Continued)

 

Distributions from OFS Capital WM

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

Sale of Debt Investments by OFS Capital WM

In May 2012, OFS Capital WM sold a debt investment to OFS Funding I, LLC (“OFS Funding I”), a wholly owned subsidiary of OFSAM, for cash proceeds of $4,157. The debt investment had a carrying value of $4,095 and fair value of $2,930, respectively, on the date of the sale. OFS Capital WM recognized a realized loss of $1,165 from the sale for the difference between the carrying and fair value of the debt investment on the date of the sale. In addition, OFS Capital recorded an equity contribution of $1,227 from its parent to account for the difference between the fair value of the debt investment sold and cash proceeds received by OFS Capital WM from OFS Funding I.

In September 2012, OFS Capital WM sold a debt investment to OFS Funding I for $792. The debt investment had a carrying value of $884. OFS Capital WM recognized a realized loss of $92 on the sale. At September 30, 2012, OFS Capital WM recorded a receivable from the sale of $792, which it subsequently received in October 2012.

Investment in and Due from Tamarix GP

OFS Capital holds a 23.35% membership interest in Tamarix GP and accounts for this investment under the equity method of accounting. The membership interest in Tamarix GP was zero ($0) as of September 30 2012. As of September 30, 2012, OFS Capital had funded $20 for its investment in Tamarix GP. For the three and nine months ended September 30, 2012, OFS Capital recorded income from its equity investment in Tamarix GP of $32 and $29, respectively. In April 2012, OFS Capital received a tax distribution from Tamarix GP in the amount of $52.

At September 30, 2012, OFS Capital had a receivable of $55 due from Tamarix GP for certain operating expenses paid by OFS Capital for the benefit of Tamarix GP.

Investment in Tamarix Associates, LLC

OFS Capital holds a 23.33% membership interest in Tamarix Associates, LLC, the investment manager for Tamarix LP (“Tamarix Manager”), which is controlled by the three Tamarix individuals, who, together with Glenn Pittson, OFS Capital’s Chief Executive Officer, own the remaining membership interests. As of September 30, 2012, OFS Capital was not obligated to make any capital contribution to Tamarix Manager, and its equity investment in Tamarix Manager was carried at zero at September 30, 2012.

Management Fee Payable—Related Party

Tamarix LP is charged a management fee by Tamarix Manager. During the investment period as defined under the SBIC Act, Tamarix LP incurs a management fee to Tamarix Manager at a per annum rate of 2.0% of the sum of Tamarix LP’s 1) unreduced regulatory capital as defined under the SBIC Act plus 2) the assumed leverage from the SBA equal to two times Tamarix LP’s unreduced regulatory capital. Thereafter, Tamarix LP will need to pay Tamarix Manager an annual management fee equal to 2.0% of Tamarix LP’s cost of loans and investments in active small businesses. Prior to the deconsolidation of Tamarix LP, for the period January 1, 2012 through July 27, 2012, OFS Capital recorded management fee expense in the amount of $627 on its consolidated statement of operations.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 10. Subsequent Events Not Disclosed Elsewhere

 

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition and/or disclosure.

Distribution

On November 26, 2012, the Company announced that it had declared an initial dividend of $0.34 per share for the quarter ending December 31, 2012 (such amount to be proportionately reduced to reflect the number of days remaining in such quarter after the completion of the Company’s initial public offering), payable on January 31, 2013 to stockholders of record as of the close of business on January 17, 2013. Based on the November 14, 2012 closing of the Company’s initial public offering, stockholders of record on January 17, 2013 will receive a dividend of $0.17 per share in respect of the quarter ending December 31, 2012.

Initial Public Offering

In connection with the IPO, on November 7, 2012, OFS Capital converted from a limited liability company to a corporation, as a result of which the sole membership interest held by OFSAM prior to the conversion was exchanged for 2,912,024 shares of common stock in the Company. In connection with the IPO, the Company elected to be treated as a BDC under the Investment Company Act of 1940, as amended, or the 1940 Act. On November 14, 2012, OFS Capital completed its IPO selling 6,666,667 shares of its common stock at a public offering price of $15 per share, raising $100 million in gross proceeds. The Company also granted the underwriters an option to purchase up to an additional 1,000,000 shares of its common stock at the public offering price, less the sales load payable by the Company. This option expired on December 7, 2012. The Company incurred approximately $6.2 million of sales load and $5.8 million of offering related costs in connection with the IPO. The Company utilized approximately $90 million of the IPO proceeds to pay down the OFS Capital WM Facility. The WM Credit Facility indebtedness repaid included approximately $48.0 million of class A loans and approximately $42.0 million of class B loans.

The following pro forma balance sheet assumes the IPO took place on September 30, 2012 and reflects the pro forma effect of the IPO on the Company’s September 30, 2012 consolidated balance sheet.

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC) and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Amounts in thousands)

 

Note 10. Subsequent Events Not Disclosed Elsewhere (Continued)

 

     Historical      Pro Forma
Adjustments
    Pro
Forma
 
            (Unaudited)        

Assets

       

Cash and cash equivalents

   $ 13,957       $ 100,000  (1)    $ 14,061   
        (6,230 )(2)   
        (3,666 )(4)   
        (90,000 )(6)   

Restricted cash and cash equivalents

     623         —          623   

Receivable for investment sold—related party

     792         —          792   

Investments, at fair value (cost of $211,213)

     207,196         —          207,196   

Interest receivable and other assets

     769         —          769   

Deferred offering costs

     5,235         (5,235 )(3)      —     

Deferred financing costs

     3,025         —          3,025   

Equity investment in Tamarix LP

     5,049         —          5,049   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 236,646       $ (5,131   $ 231,515   
  

 

 

    

 

 

   

 

 

 

Liabilities and Member’s Equity/Shareholders’ Equity

       

Liabilities

       

Revolving line of credit—Wells Fargo

   $ 134,123         (52,962 )(6)    $ 81,161   

Revolving line of credit—Madison Capital

     37,038         (37,038 )(6)      —     

Interest payable

     1,509         —          1,509   

Management fee payable—Loan Manager

     333         —          333   

Due to affiliated entities, net

     325         —          325   

Member distribution payable

     4,000         —          4,000   

Accrued expenses and other liabilities

     4,632         (3,666 )(4)      966   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     181,960         (93,666     88,294   
  

 

 

    

 

 

   

 

 

 

Commitments and Contingencies

       

Member’s Equity/Shareholders’ Equity

       

Member’s equity

     54,686         (54,686 )(5)      —     

Common stock

     —           67  (1)      67   
        29  (5)      29   

Additional paid-in Capital

     —           54,657  (5)      143,125   
        99,933  (1)   
        (6,230 )(2)   
        (5,235 )(3)   
  

 

 

    

 

 

   

 

 

 

Total liabilities and member’s equity/shareholders’ equity

   $ 236,646       $ (5,131   $ 231,515   
  

 

 

    

 

 

   

 

 

 

Pro Forma Adjustments:

(1) To record the receipt of gross proceeds of $100,000 from the public investors.
(2) To record the payment of the IPO sales load.
(3) To reclassify the deferred offering costs against additional paid-in capital.
(4) To record the payment of the accrued offering related costs.
(5) To convert OFSAM's membership interest in OFS Capital to stock ownership interest.
(6) To record the paydown of the Wells Fargo and Madison Capital revolving lines utilizing the IPO proceeds.

 

30


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC)

Consolidated Schedule of Investments (unaudited)

September 30, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Type of

Investment

  

Interest (1)

   Maturity      Principal
Amount/
Shares
     Cost      Fair Value      Percent  of
Member’s
Equity
 
United States                     
Loans Receivable                     

Accounts Receivable Management Services

              

Revspring Inc. (f/k/a

   Senior Secured    6.25%      8/3/2017       $ 4,937       $ 4,896       $ 4,672         8.5

Dantom Systems, Inc.)

   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,937         4,896         4,672         8.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Aerospace & Defense

              

Whitcraft LLC

   Senior Secured    6.25%      12/16/2015         4,627         4,571         4,479         8.2   
   Term Loan    (LIBOR +4.75%)               
      (Prime +3.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,627         4,571         4,479         8.2   
           

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management & Custody Banks

              

Townsend Acquisition

   Senior Secured    7.00%      5/18/2016         4,812         4,713         4,630         8.5   

LLC

   Term Loan    (LIBOR +4.75%)               
      (Prime +3.75%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,812         4,713         4,630         8.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Asset Management Services

              

H.D. Vest, Inc.

   Senior Secured    7.00%      10/3/2017         4,875         4,813         4,735         8.7   
   Term Loan    (LIBOR +5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,875         4,813         4,735         8.7   
           

 

 

    

 

 

    

 

 

    

 

 

 

Automobile

              

BBB Industries, LLC

   Senior Secured    5.64%      6/29/2013         4,725         4,712         4,652         8.5   
   Term Loan (First    (LIBOR +3.25%)               
  

Lien)

   (Prime +3.25%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,725         4,712         4,652         8.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Automotive Aftermarket Manufacturing

              

Trico Products

   Senior Secured    6.26%      7/22/2016         4,811         4,753         3,916         7.2   

Corporation

   Term Loan    (LIBOR +4.75%)               
      (Prime +3.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,811         4,753         3,916         7.2   
           

 

 

    

 

 

    

 

 

    

 

 

 

Busines Equipment & Services

              

Dorner MFG, Corp.

   Senior Secured    6.50%      6/15/2017         3,441         3,377         3,377         6.2   
   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,441         3,377         3,377         6.2   
           

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC)

Consolidated Schedule of Investments (unaudited)—Continued

September 30, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Type of
Investment

  

Interest (1)

   Maturity      Principal
Amount/
Shares
     Cost      Fair Value      Percent  of
Member’s
Equity
 

Chemical / Plastics

              

Actagro, LLC

   Senior Secured    7.16%      12/30/2016         2,567         2,531         2,513         4.6   
   Term Loan    (LIBOR+5.50%)               
      (Prime +4.50%)               

Fluoro-Seal International

   Senior Secured    9.00%      1/4/2017         2,991         2,954         3,051         5.6   

LLC

   Term Loan A    (LIBOR +7.50%)               
      (Prime +6.50%)               

ICM Products Inc

   Senior Secured    8.50%      2/1/2017         2,437         2,396         2,436         4.5   
   Term Loan    (LIBOR +7.00%)               
      (Prime +6.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              7,995         7,881         8,000         14.7   
           

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Fastener Manufactuing

              

Elgin Fasteners Group

   Senior Secured    7.00%      8/26/2016         4,757         4,642         4,671         8.5   
   Term Loan    (LIBOR+5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,757         4,642         4,671         8.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Communications Equipment Provider & Services

              

Strategic Products and

   Senior Secured    7.00%      10/21/2016         4,962         4,922         4,864         8.9   

Services, LLC.

   Term Loan    (LIBOR+5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,962         4,922         4,864         8.9   
           

 

 

    

 

 

    

 

 

    

 

 

 

Distributors

              

Consolidated Equipment

   Senior Secured    6.75%      1/27/2016         4,580         4,533         4,487         8.2   

Parts Inc

   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               

Lindstrom Metric, LLC

   Senior Secured    6.25%      7/12/2016         4,747         4,699         4,557         8.3   
   Term Loan    (LIBOR +4.75%)               
      (Prime +3.50%)               

Phillips Feed & Pet

   Senior Secured    7.50%      10/13/2017         3,286         3,240         3,210         5.9   

Supply

   Term Loan    (LIBOR +5.25%)               
      (Prime +4.25%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              12,613         12,472         12,254         22.4   
           

 

 

    

 

 

    

 

 

    

 

 

 

Diversified Commercial & Professional Services

              

Kellermeyer Building

   Senior Secured    6.75%      12/17/2015         4,672         4,603         4,581         8.4   

Services, LLC

   Term Loan    (LIBOR +5.00%)               
      (Prime +3.75%)               

Royal Adhesives

   Senior Secured    7.25%      11/29/2015         4,560         4,515         4,532         8.3   
   Term Loan A    (LIBOR +5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              9,232         9,118         9,113         16.7   
           

 

 

    

 

 

    

 

 

    

 

 

 

Diversified/Conglomerate Manufacturing

              

Phillips Plastics

   Senior Secured    6.50%      2/12/2017         1,712         1,675         1,641         3.0   
   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               

Revere Industries, LLC

   Senior Secured    9.00%      6/30/2013         1,889         1,893         1,906         3.5   
   Rollover Loans    (LIBOR +6.00%)               
      (Prime +5.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,601         3,568         3,547         6.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC)

Consolidated Schedule of Investments (unaudited)—Continued

September 30, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Type of

Investment

  

Interest (1)

   Maturity      Principal
Amount/
Shares
     Cost      Fair Value      Percent  of
Member’s
Equity
 

Electrical Components & Equipment

              

B&B Electronics

   Senior Secured    6.50%      4/4/2015         2,953         2,913         2,913         5.3   

Manufacturing Company

   Term Loan A    (LIBOR +5.00%)               
      (Prime +4.00%)               

Barcodes, LLC

   Senior Secured    6.50%      7/27/2015         3,755         3,716         3,675         6.7   
   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              6,708         6,629         6,588         12.0   
           

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Consulting & Services

              

Apex Companies, LLC.

   Senior Secured    7.50%      12/10/2016         4,430         4,381         4,401         8.0   
   Term Loan    (LIBOR +5.75%)               
      (Prime +4.75%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,430         4,381         4,401         8.0   
           

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Equipment Manufacturer

              

JWC Environmental, LLC.

   Senior Secured    6.00%      8/3/2016         4,610         4,573         4,374         8.0   
   Term Loan    (LIBOR +4.50%)               
      (Prime +3.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,610         4,573         4,374         8.0   
           

 

 

    

 

 

    

 

 

    

 

 

 

Environmental Industries

              

Aero-Metric, Inc.

   Senior Secured    6.75%      8/27/2017         2,892         2,849         2,849         5.2   
   Term Loan    (LIBOR +5.25%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              2,892         2,849         2,849         5.2   
           

 

 

    

 

 

    

 

 

    

 

 

 

Financial Intermediaries

              

Personable Holdings, Inc.

   Senior Secured    8.00%      5/16/2017         3,785         3,743         3,743         6.8   
   Term Loan    (LIBOR +6.50%)               
      (Prime +5.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,785         3,743         3,743         6.8   
           

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Equipment

              

Cambridge Major

   Senior Secured    6.50%      8/11/2015         4,120         4,077         4,025         7.4   

Laboratories, Inc

   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               

NeuroTherm, Inc

   Senior Secured    6.50%      2/1/2016         4,529         4,474         4,405         8.1   
   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              8,649         8,551         8,430         15.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Health Care Services

              

Aegis Sciences

   Senior Secured    7.00%      10/21/2016         4,887         4,813         4,765         8.7   

Corporation

   Term Loan A    (LIBOR +5.50%)               
      (Prime +4.50%)               

Elements Behavioral

   Senior Secured    7.50%      8/14/2017         4,937         4,866         4,890         8.9   

Health, Inc.

   Term Loan A    (LIBOR +6.00%)               
      (Prime +5.00%)               

MCMC LLC

   Senior Secured    7.50%      9/30/2016         4,635         4,577         4,609         8.4   
   Term Loan A    (LIBOR +6.00%)               
      (Prime +5.00%)               

Studer Group LLC

   Senior Secured    7.00%      9/28/2016         4,604         4,547         4,515         8.3   
   Term Loan    (LIBOR +5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              19,063         18,803         18,779         34.3   
           

 

 

    

 

 

    

 

 

    

 

 

 

 

33


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC)

Consolidated Schedule of Investments (unaudited)—Continued

September 30, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Type of
Investment

  

Interest (1)

   Maturity      Principal
Amount/
Shares
     Cost      Fair Value      Percent of
Member’s
Equity
 

Health Care Supplies

              

The Ritedose

   Senior Secured    6.50%      11/10/2016         3,669         3,618         3,548         6.5   

Corporation

   Term Loan    (LIBOR +4.75%)               
      (Prime +3.75%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,669         3,618         3,548         6.5   
           

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare

              

Strata Pathology

   Senior Secured    8.00%      6/30/2016         4,899         4,832         4,215         7.7   

Services, Inc.

   Term Loan    (LIBOR +6.50%)               
      (Prime +5.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,899         4,832         4,215         7.7   
           

 

 

    

 

 

    

 

 

    

 

 

 

Healthcare Facilities

              

Accelerated Health

   Senior Secured    7.25%      7/22/2017         4,950         4,908         4,862         8.9   

Systems LLC

   Term Loan    (LIBOR +5.75%)               
      (Prime +4.75%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,950         4,908         4,862         8.9   
           

 

 

    

 

 

    

 

 

    

 

 

 

High Tech Industries

              

OnePath Systems, LLC

   Senior Secured    7.50%      6/6/2017         2,469         2,423         2,423         4.4   
   Term Loan    (LIBOR +6.00%)               
      (Prime +5.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              2,469         2,423         2,423         4.4   
           

 

 

    

 

 

    

 

 

    

 

 

 

Household Products

              

Phoenix Brands LLC

   Senior Secured    7.00%      1/31/2016         3,969         3,920         3,483         6.4   
   Term Loan A    (LIBOR +5.50%)               
      (Prime +4.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,969         3,920         3,483         6.4   
           

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Conglomerates

              

Jameson LLC

   Senior Secured    9.51%      10/1/2015         2,557         2,526         2,378         4.3   
   Term Loan    (LIBOR +7.50%)               
      (Prime +6.50%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              2,557         2,526         2,378         4.3   
           

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Gases

              

Engineered Controls

   Senior Secured    6.75%      8/5/2016         4,586         4,533         4,445         8.1   

International, LLC

   Term Loan    (LIBOR +5.00%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              4,586         4,533         4,445         8.1   
           

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Machinery and Equipment

              

FCX Performance, Inc

   Senior Secured    7.25%      10/6/2016         3,921         3,888         3,843         7.0   
   Term Loan    (LIBOR +5.25%)               
      (Prime +4.00%)               
           

 

 

    

 

 

    

 

 

    

 

 

 
              3,921         3,888         3,843         7.0   
           

 

 

    

 

 

    

 

 

    

 

 

 

 

34


Table of Contents

OFS Capital Corporation (F/K/A: OFS Capital, LLC)

Consolidated Schedule of Investments (unaudited)—Continued

September 30, 2012

(dollar amounts in thousands)

 

Name of Portfolio

Company

  

Type of

Investment

  

Interest (1)

   Maturity      Principal
Amount/
Shares
     Cost     Fair Value     Percent of
Member’s
Equity
 

Insurance Brokerage

            

AssuredPartners

   Senior Secured    7.25%      9/30/2016         1,149         1,132        1,136        2.1   

Capital, Inc.

   Term Loan    (LIBOR +5.75%)             
      (Prime +4.75%)             

AssuredPartners

   Senior Secured    7.75%      3/31/2017         3,740         3,740        3,763        6.9   

Capital, Inc.

   Term Loan B    (LIBOR +6.25%)             
      (Prime +5.25%)             

Cetera Financial Group,

   Senior Secured    6.50%      6/22/2017         4,938         4,915        4,915        9.0   

Inc.

   Term Loan A    (LIBOR +5.00%)             
      (Prime +4.00%)             

Frenkel Benefits LLC

   Senior Secured    6.25%      12/28/2015         3,993         3,940        3,866        7.1   
   Term Loan A    (LIBOR +5.00%)             
      (Prime +4.00%)             
           

 

 

    

 

 

   

 

 

   

 

 

 
              13,820         13,727        13,680        25.1   
           

 

 

    

 

 

   

 

 

   

 

 

 

North American Commodities Brokerage

            

Charter Brokerage LLC

   Senior Secured    7.50%      7/13/2016         4,638         4,574        4,617        8.4   
   Term Loan A    (LIBOR +6.00%)             
      (Prime +5.00%)             
           

 

 

    

 

 

   

 

 

   

 

 

 
              4,638         4,574        4,617