497 1 d262597d497.htm 497 497
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Filed Pursuant to Rule 497
Registration No. 333-214182
and 333-215076

 

PROSPECTUS

LOGO

$65,000,000

6.75% Notes due 2023

We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We are an externally managed, closed end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940.

We are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle market private equity investment firm.

We are offering $65.0 million in aggregate principal amount of 6.75% notes due 2023, which we refer to as the “2023 Notes.” The 2023 Notes will mature on December 30, 2023. We will pay interest on the 2023 Notes on March 30, June 30, September 30, and December 30 of each year, beginning on March 30, 2017. We may redeem the 2023 Notes in whole or in part at any time, or from time to time on or after December 21, 2019, at the redemption price of par, plus accrued interest, as discussed under the caption “Description of the 2023 Notes—Optional Redemption” in this prospectus. The 2023 Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The 2023 Notes will be our direct unsecured obligations and rank pari passu, which means equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us, including our 7.50% fixed-rate notes due 2020 (the “2020 Notes”). The 2023 Notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. The 2023 Notes will be structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles since they are obligations exclusively of Saratoga Investment Corp. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the 2023 Notes and the 2023 Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. Because the 2023 Notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we have incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the 2023 Notes.

As of the offering date of the 2023 Notes, the 2023 Notes will rank pari passu, which means equal to, $61.8 million principal amount of our 2020 Notes and our general liabilities, and will be structurally subordinated to both $103.7 million of our SBA-guaranteed debentures and our $45.0 million credit facility with Madison Capital Funding LLC, which has a current balance of $0.0. The 2023 Notes will also rank pari passu, which means equal to, our general liabilities. In total, these general liabilities were $10.3 million as of August 31, 2016. We currently do not have outstanding debt that is subordinated to the 2023 Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the 2023 Notes. Therefore, the 2023 Notes will not be senior to any indebtedness or obligations.


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We intend to list the 2023 Notes on the New York Stock Exchange and we expect trading to commence thereon within 30 days of the original issue date under the trading symbol “SAB.” The 2023 Notes are expected to trade “flat.” This means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the 2023 Notes that is not included in the trading price. Currently, there is no public market for the 2023 Notes and there can be no assurance that one will develop.

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if rated, which are often referred to as “junk.” A majority of our debt portfolio consists of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a majority of our debt investments had variable interest rates that reset periodically based on benchmarks such as LIBOR and the prime rate. As a result, significant increases in such benchmarks in the future may make it more difficult for these borrowers to service their obligations under the debt investments that we hold.

This prospectus contains important information about us that a prospective investor should know before investing in our 2023 Notes. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information is available free of charge by contacting us at 535 Madison Avenue, New York, New York 10017, by telephone at (212) 906-7800, or on our website at http://www.saratogainvestmentcorp.com. The information on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus. The SEC also maintains a website at www.sec.gov that contains such information.

Investing in the 2023 Notes involves a high degree of risk and should be considered speculative. For more information regarding the risks you should consider, including the risk of leverage, please see “Risk Factors” beginning on page 22 of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if either this prospectus or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

     Per Note   Total

Public offering price

  100.0%   $65,000,000

Underwriting discount (sales load)

  3.125%   $  2,031,250

Proceeds to us before expenses(1)

  96.875%   $62,968,750

 

 

(1) We estimate that we will incur approximately $300,000 in offering expenses in connection with this offering. See “Underwriting.”

Ladenburg Thalmann, as representative of the underwriters, may exercise an option to purchase up to an additional $9,750,000 total aggregate principal amount of 2023 Notes offered hereby, within 30 days of the date of this prospectus. If this option is exercised in full, the total public offering price will be $74,750,000, the total underwriting discount (sales load) paid by us will be $2,335,938, and total proceeds to us, before expenses, will be $72,414,062.

THE 2023 NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

Delivery of the 2023 Notes in book-entry form only through The Depository Trust Company will be made on or about December 21, 2016.

Underwriters (Joint Book-Running Managers)

 

Ladenburg Thalmann   BB&T Capital Markets   Compass Point   William Blair

The date of this prospectus is December 13, 2016


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You should rely only on the information contained in this prospectus. We have not authorized any dealer, salesperson or other person to provide you with different information or to make representations as to matters not stated in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is not an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information in this prospectus is accurate only as of the date of this prospectus, and under no circumstances should the delivery of this prospectus or the sale of any securities imply that the information in this prospectus is accurate as of any later date or that the affairs of Saratoga Investment Corp., have not changed since the date hereof or thereof. Our business, financial condition, results of operations and prospectus may have changed since then. We will update the information in this prospectus to reflect material changes only as required by law.

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     Page  

Prospectus Summary

     1   

Specific Terms of the 2023 Notes and the Offering

     13   

Selected Financial and Other Data

     19   

Risk Factors

     22   

Use of Proceeds

     45   

Capitalization

     46   

Ratio of Earnings to Fixed Charges

     47   

Note about Forward-Looking Statements

     48   

Price Range of Common Stock and Distributions

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   

Senior Securities

     83   

Business

     84   

Our Portfolio Companies

     97   

Management Agreements

     103   

Management

     110   

Portfolio Management

     118   

Certain Relationships and Related Transactions

     119   

Control Persons and Principal Stockholders

     119   

Regulation

     122   

Material U.S. Federal Income Tax Considerations

     128   

Description of the 2023 Notes

     134   

Description of Our Capital Stock

     145   

Underwriting

     152   

Brokerage Allocation and Other Practices

     156   

Custodian, Transfer and Dividend Paying Agent and Registrar

     156   

Legal Matters

     156   

Independent Registered Public Accounting Firm

     156   

Available Information

     156   

Index to Consolidated Financial Statements

     F-1   

Index to Other Financial Statements

     S-1   


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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that is important to you. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Unless otherwise noted, the terms “we,” “us,” “our,” the “Company” and “Saratoga” refer to Saratoga Investment Corp. and its wholly owned subsidiaries, Saratoga Investment Funding LLC and Saratoga Investment Corp. SBIC LP, and does not refer to Saratoga Investment Corp. CLO 2013-1 Ltd. In addition, the terms “Saratoga Investment Advisors” and “investment adviser” refer to Saratoga Investment Advisors, LLC, our external investment adviser.

Overview

We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, which we define as companies having annual EBITDA (earnings before interest, taxes, depreciation and amortization) of between $5 million and $50 million, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle market private equity investment firm.

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Term loans are loans that do not allow the borrowers to repay all or a portion of the loans prior to maturity and then re-borrow such repaid amounts under the loan again. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt which are issued by companies with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of first or second lien security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. As of August 31, 2016, 72.2% of our debt portfolio at fair value consisted of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity.

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies (which non-investment grade debt is commonly referred to as “high yield” and “junk” debt) or, if not rated, would be rated below investment grade or “junk” if rated. In addition, 81.5% of our debt investments at August 31, 2016 had variable interest rates that reset periodically based on benchmarks such as LIBOR and the prime rate. As a result, significant increases in such benchmarks in the future may make it more difficult for these borrowers to service their obligations under the debt investments that we hold.

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of Investment Company Act of 1940 (“1940 Act”), which includes private equity funds, to no more than 15% of its net assets.

 



 

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The 2023 Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the 2023 Notes are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. Because the 2023 Notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we have incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes.

The Notes are obligations exclusively of Saratoga Investment Corp. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the 2023 Notes and the 2023 Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the 2023 Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the 2023) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the 2023 Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish.

As of August 31, 2016, we had total assets of $299.8 million and investments in 29 portfolio companies and an additional investment in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), which investment had a fair value of $11.9 million as of August 31, 2016. Our overall portfolio composition as of August 31, 2016 consisted of 3.5% of syndicated loans, 56.2% of first lien term loans, 31.9% of second lien term loans, 4.4% of subordinated notes of Saratoga CLO and 4.0% of common equity. As of August 31, 2016, the weighted average yield on all of our debt investments, including our investment in the subordinated notes of Saratoga CLO, was approximately 11.1%. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders and, among other things, is calculated before the payment of our fees and expenses. As of August 31, 2016, approximately 100.0% of our first lien debt investments, which comprises 56.2% of our portfolio, were fully collateralized in the sense that the portfolio companies in which we held such investments had an asset coverage equal to or greater than the principal amount of the related debt investment. The Company uses enterprise value to assess the level of collateralization of its portfolio companies. The enterprise value of a portfolio company is determined by analyzing various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization), cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. As a result, while we consider a portfolio company to be collateralized if its enterprise value exceeds the amount of our loan, we do not hold tangible assets as collateral in our portfolio companies that we would obtain in the event of a default. Even though these loans are fully collateralized as is the case with all of the liens on our debt investments, there can be no assurance that the value of collateral will be sufficient to allow the portfolio company to repay our first lien debt investments in the event of its default on our investment.

Saratoga CLO is an exempted company with limited liability incorporated under the laws of the Cayman Islands, which was established to acquire or participate in U.S. dollar-denominated corporate debt obligations. Saratoga CLO has issued various tranches of senior notes, held by numerous investors, and one tranche of subordinated notes, held entirely by us. As we own 100% of the subordinated notes issued by Saratoga CLO, which is junior to all of its other outstanding indebtedness, we are deemed to hold 100% of the equity interests in Saratoga CLO for tax purposes. Our investment in the subordinated notes of Saratoga CLO represents a first loss

 



 

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position in a portfolio that, at August 31, 2016, was composed of $299.5 million in aggregate principal amount of predominantly senior secured first lien term loans. A first loss position means that we will suffer the first economic losses if losses are incurred on loans held by the Saratoga CLO or losses otherwise incurred by Saratoga CLO, including its incurrence of operating expenses in excess of its operating income. As a result, this investment is subject to unique risks. See “Risk Factors—Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility” for information regarding the general risks related to our investment in Saratoga CLO. Although we believe that we have observed and will observe certain formalities and operating procedures that are generally recognized requirements for maintaining our separate existence and that our assets and liabilities can be readily identified as distinct from those of Saratoga CLO, there can be no assurance that a bankruptcy court, in the exercise of its broad equitable powers, would not order that our assets and liabilities be substantively consolidated with those of Saratoga CLO in connection with a bankruptcy proceeding involving us or Saratoga CLO, including for the purposes of making distributions under a plan of reorganization or liquidation. Substantive consolidation means that our assets are placed in a single bankruptcy estate with those of Saratoga CLO, rather than kept separate, and that the creditors of Saratoga CLO have a claim against that single estate (including our assets), as opposed to retaining their claims against only Saratoga CLO. See “Risk Factors—In the event that a bankruptcy court orders the substantive consolidation of us with Saratoga CLO, the creditors of Saratoga CLO, including the holders of $299.5 million aggregate principal amount of debt, as of August 31, 2016, issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate.”

On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO, pursuant to which we act as its collateral manager. In addition, we purchased for $30.0 million all of the outstanding subordinated notes of Saratoga CLO. The Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, we completed the second refinancing of the Saratoga CLO. The Saratoga CLO refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of approximately $300 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of 8.5%. The Class F tranche is the eighth tranche in the capital structure of Saratoga CLO and is subordinated to the other debt classes of Saratoga CLO. The Class F tranche is only senior to the subordinated notes, which is effectively the equity position in Saratoga CLO. As a result, the other tranches of debt in Saratoga CLO rank ahead of the $4.5 million Class F tranche and ahead of the aggregate principal amount of our position in the subordinated notes, which as of August 31, 2016 had a fair value of $11.9 million, with respect to priority of payments in the event of a default or a liquidation.

The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. because the Company owns all of the outstanding subordinated notes of Saratoga CLO, which is the equivalent of an equity position, and the Company manages the portfolio of Saratoga CLO. We receive a base management fee of 0.10% and a subordinated management fee of 0.40% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the 1940 Act. As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.

 



 

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We have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders if we meet certain source-of-income, distribution and asset diversification requirements.

In addition, we have a wholly-owned subsidiary that is licensed as a small business investment company (“SBIC”) and regulated by the Small Business Administration (“SBA”). See “Regulation—Small Business Investment Company Regulations.” The SBIC license allows us, through our wholly-owned subsidiary, to issue SBA-guaranteed debentures. We received exemptive relief from the Securities and Exchange Commission to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $150 million more than we would otherwise be able to absent the receipt of this exemptive relief.

Saratoga Investment Advisors

Our investment adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Our investment adviser is led by four principals, Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips, with 28, 26, 29 and 19 years of experience in leveraged finance, respectively. Our investment adviser is affiliated with Saratoga Partners, a middle market private equity investment firm. Saratoga Partners was established in 1984 to be the middle market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read since 1998. Saratoga Partners has a 28-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

We utilize the personnel, infrastructure, relationships and experience of Saratoga Investment Advisors to enhance the growth of our business. We currently have no employees and each of our executive officers is also an officer of Saratoga Investment Advisors.

We have entered into an investment advisory and management agreement (the “Management Agreement”) with Saratoga Investment Advisors. Pursuant to the Management Agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day investment-related functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.

Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $1 million made by us. In addition, all sales of our investments must be approved by three out of four investment committee members. The current members of the investment committee are Messrs. Oberbeck, Grisius, Inglesby, and Phillips.

Investments

Our portfolio is comprised primarily of investments in leveraged loans issued by middle market companies. Investments in middle market companies are generally less liquid than equivalent investments in companies with larger capitalizations. These investments are sourced in both the primary and secondary markets through a

 



 

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network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans that we purchase are generally used to finance buyouts, acquisitions, growth, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt which are issued by companies with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. For a discussion risks pertaining to our secured investments, see “Risk Factors—Our investments may be risky, and you could lose all or part of our investment.”

As part of our long-term strategy, we also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. See “Risk Factors—If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies defaults on their indebtedness.”

In general, at least 70% of a BDC’s assets must be comprised of the type of assets that are listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets. Qualifying assets are generally securities of U.S. private operating companies, or listed operating companies with an aggregate market value of outstanding voting and non-voting common equity of less than $250 million. As of August 31, 2016, with the exception of our investment in the subordinated notes of Saratoga CLO and a first lien term loan to one other portfolio company, all of our equity and debt investments constituted qualifying assets under the 1940 Act. While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

Prospective portfolio company characteristics

Our investment adviser generally selects portfolio companies with one or more of the following characteristics:

 

    a history of generating stable earnings and strong free cash flow;

 

    well-constructed balance sheets, including an established tangible liquidation value;

 

    reasonable debt-to-cash flow multiples;

 

    industry leadership with competitive advantages and sustainable market shares in attractive sectors; and

 

    capital structures that provide appropriate terms and reasonable covenants.

Investment selection

In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify portfolio companies with superior fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga Investment Advisors’ investment process emphasizes the following:

 

    bottoms-up, company-specific research and analysis;

 



 

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    capital preservation, low volatility and minimization of downside risk; and

 

    investing with experienced management teams that hold meaningful equity ownership in their businesses.

Our investment adviser’s investment process generally includes the following steps:

 

    Initial screening. A brief analysis identifies the investment opportunity and reviews the merits of the transaction. The initial screening memorandum provides a brief description of the company, its industry, competitive position, capital structure, financials, equity sponsor and deal economics. If the deal is determined to be attractive by the senior members of the deal team, the opportunity is fully analyzed.

 

    Comprehensive analysis. A comprehensive analysis includes:

 

    Business and Industry analysis—a review of the company’s business position, competitive dynamics within its industry, cost and growth drivers and technological and geographic factors. Business and industry research often includes meetings with industry experts, consultants, other investors, customers and competitors.

 

    Company analysis—a review of the company’s historical financial performance, future projections, cash flow characteristics, balance sheet strength, liquidation value, legal, financial and accounting risks, contingent liabilities, market share analysis and growth prospects. The Company considers the ability of each portfolio company to continue to make payments in an atmosphere of rising interest rates as a component of its overall diligence and monitoring process. In this regard, the Company regularly receives projections from its portfolio companies and models future performance for them in connection with its valuation process, taking into account changes in interest rates on the portfolio companies. Notwithstanding the foregoing, there can be no assurances that the portfolio companies will be able to meet their contractual obligations at any or all levels of increases in interest rates.

 

    Structural/security analysis—a thorough legal document analysis including but not limited to an assessment of financial and negative covenants, events of default, enforceability of liens and voting rights.

 

    Approval of the investment committee. The investment is then presented to the investment committee for approval. The investment committee must unanimously approve all investments in excess of $1 million made by us. In addition, all sales of our investments must be approved by four out of five investment committee members.

Investment structure

In general, our investment adviser intends to select investments with financial covenants and terms that reduce leverage over time, thereby enhancing credit quality. These methods include:

 

    maintenance leverage covenants requiring a decreasing ratio of debt to cash flow;

 

    maintenance cash flow covenants requiring an increasing ratio of cash flow to the sum of interest expense and capital expenditures; and

 

    debt incurrence prohibitions, limiting a company’s ability to re-lever.

In addition, limitations on asset sales and capital expenditures should prevent a company from changing the nature of its business or capitalization without our consent.

 



 

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Our investment adviser seeks, where appropriate, to limit the downside potential of our investments by:

 

    requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

    requiring companies to use a portion of their excess cash flow to repay debt;

 

    selecting investments with covenants that incorporate call protection as part of the investment structure; and

 

    selecting investments with affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

Valuation process

We carry our investments at fair value, as approved in good faith using written policies and procedures adopted by our board of directors. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and, on a selected basis, a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors.

Our investment in the subordinated notes of Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for Saratoga CLO’s valuation. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows from our investment in Saratoga CLO) to perform a discounted cash flows analysis on expected future cash flows from our investment in Saratoga CLO to determine a valuation for the subordinated notes of Saratoga CLO held by us.

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

    each investment is initially valued by the responsible investment professionals of Saratoga Investment Advisors and preliminary valuation conclusions are documented and discussed with our senior management; and

 

    an independent valuation firm engaged by our board of directors independently values at least one quarter of our investments each quarter so that the valuation of each investment for which market quotes are not readily available is independently valued by an independent valuation firm at least annually.

 



 

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In addition, all our investments are subject to the following valuation process:

 

    the audit committee of our board of directors reviews each preliminary valuation and our investment adviser and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

    our board of directors discusses the valuations and approves the fair value of each investment in good faith based on the input of our investment adviser, independent valuation firm (if applicable) and audit committee.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Ongoing relationships with and monitoring of portfolio companies

Saratoga Investment Advisors closely monitors each investment we make and, when appropriate, conducts a regular dialogue with both the management team and other debtholders and seeks specifically tailored financial reporting. In addition, in certain circumstances, senior investment professionals of Saratoga Investment Advisors may take board seats or board observation seats.

Risk Factors

Investing in us involves significant risks. The following is a summary of certain risks that you should carefully consider before investing in us. For a further discussion of these risk factors, please see “Risk Factors” beginning on page 22.

Risks Related to Our 2023 Notes

 

    The 2023 Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have incurred or may incur in the future.

 

    The 2023 Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

 

    The indenture under which the 2023 Notes will be issued contains limited protection for holders of the 2023 Notes, such as:

 

    there are significant protections afforded our other creditors that are not provided to the holders of the 2023 Notes.

 

    the issuance or incurrence of any debt with incremental protections which are not provided to the holders of the 2023 Notes could affect the market for and trading levels and prices of the 2023 Notes.

 

    the 2023 Notes represent our unsecured obligations. If we are unable to repay debt, lenders having secured obligation, such as Madison Capital Funding LLC (“Madison Capital Funding”) under our senior secured revolving credit facility (“the Credit Facility”) and the SBA, could proceed against the collateral securing those secured obligations.

 



 

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    There is no existing trading market for the 2023 Notes and, even if the NYSE approves the listing of the 2023 Notes, an active trading market for the 2023 Notes may not develop, which could limit your ability to sell the 2023 Notes or the market price of the 2023 Notes.

 

    We may choose to redeem the 2023 Notes when prevailing interest rates are relatively low.

 

    If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2023 Notes.

 

    We may be unable to invest a significant portion of the net proceeds from this offering, which could harm our financial condition and operating results.

Risks Related to Our Business and Structure

 

    The current state of the economy and financial markets increases the likelihood of adverse effects on our financial position and results of operations.

 

    Saratoga Investment Advisors has a limited history of managing a BDC or a RIC.

 

    We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss or there is a decline in the value of our portfolio.

 

    Under the terms of the Management Agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment.

 

    The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in the best interests of the holders of our securities.

 

    The base management fee we pay to Saratoga Investment Advisors may influence it to increase our leverage, which may be contrary to our interest.

 

    We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in our securities.

 

    Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investments Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

 

    Substantially all of our assets are subject to security interests under the Credit Facility with Madison Capital Funding, or claims of the SBA with respect to SBA-guaranteed debentures we may issue and if we default on our obligations thereunder, we may suffer adverse consequences, including Madison Capital Funding and/or the SBA foreclosing on our assets.

 

    We are exposed to risks associated with changes in interest rates, including potential effects on our cost of capital and net investment income.

 

    There are significant potential conflicts of interest which could adversely impact our investment returns.

 

    Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.

 

    We face cyber-security risks.

 



 

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    If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, our ability to conduct business may be compromised, which could impair our liquidity, disrupt our business, damage our reputation and cause losses.

 

    Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.

 

    Pending legislation may allow us to incur additional leverage.

 

    The agreement governing the Credit Facility contains various covenants that, among other things, limits our discretion in operating our business and provides for certain minimum financial covenants.

 

    A failure on our part to maintain our qualification as a BDC would significantly reduce our operating flexibility.

 

    We will be subject to corporate-level federal income tax if we fail to continue to qualify as a RIC.

 

    Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

 

    We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.

 

    Our ability to enter into transactions with our affiliates is restricted.

 

    We operate in a highly competitive market for investment opportunities.

 

    Economic recessions or downturns could impair our portfolio companies and harm our operating results.

 

    We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

 

    Our financial condition and results of operation depend on our ability to manage future investments effectively.

 

    We may experience fluctuations in our quarterly results.

 

    Substantially all of our portfolio investments are recorded at fair value as approved in good faith by our board of directors; such valuations are inherently uncertain and may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

 

    If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.

 

    If we invest in the securities and other obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than expected investment values or income potentials and resale restrictions.

 

    Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

 

    The lack of liquidity in our investments may adversely affect our business.

 

    The debt securities in which we invest are subject to credit risk and prepayment risk.

 



 

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    Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities.

 

    Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility.

 

    Our investment in Saratoga CLO has a different risk profile than would direct investments by us in the underlying loans of Saratoga CLO.

 

    Failure by Saratoga CLO to satisfy certain tests will harm our operating results.

 

    Available information about privately held companies is limited.

 

    When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

 

    Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

 

    There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

 

    Investments in equity securities involve a substantial degree of risk.

 

    Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.

 

    We may expose ourselves to risks if we engage in hedging transactions.

 

    Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

 

    We have no prior experience managing an SBIC and any failure to comply with SBA regulations, resulting from our lack of experience or otherwise, could have an adverse effect on our operations.

 

    Our investments may be risky, and you could lose all or part of your investment.

 

    Our independent auditors have not assessed our internal control over financial reporting. If our internal control over financial reporting is not effective, it could have a material adverse effect on our stock price and our ability to raise capital.

Recent Developments

On November 15, 2016, we completed the second refinancing of the Saratoga CLO. See “Prospectus Summary — Overview.”

Corporate History and Information

We commenced operations on March 23, 2007 as GSC Investment Corp. and completed an initial public offering (“IPO”) of shares of our common stock on March 28, 2007. From the date we commenced operations until July 30, 2010, we were managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, we engaged Saratoga Investment Advisors to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

The recapitalization transaction consisted of (i) the private sale of 986,842 shares of our common stock for $15 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and (ii) the

 



 

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entry into the Credit Facility with Madison Capital Funding. We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the secured Credit Facility with Madison Capital Funding to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010. In January 2011, we registered for public resale by Saratoga Investment Advisors and certain of its affiliates the 986,842 shares of our common stock issued to them in the recapitalization.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp SBIC, LP, received an SBIC license from the SBA.

Our corporate offices are located at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800. We maintain a website on the Internet at www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

 



 

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SPECIFIC TERMS OF THE 2023 NOTES AND THE OFFERING

 

Issuer

Saratoga Investment Corp.

 

Title of the Securities

6.75% 2023 Notes due 2023

 

Initial aggregate principal amount being offered

$65.0 million

 

Option to purchase additional shares

The underwriters may also purchase from us from time to time up to an additional $8.25 million aggregate principal amount of 2023 Notes within 30 days of the date of this prospectus.

 

Initial public offering price

100% of the aggregate principal amount

 

Principal payable at maturity

100% of the aggregate principal amount; the principal amount of each 2023 Note will be payable on its stated maturity date at the office of the Trustee, Paying Agent, Registrar and Transfer Agent for the 2023 Notes or at such other office in New York, New York as we may designate.

 

Type of note

Fixed rate note

 

Listing

We intend to list the 2023 Notes on the New York Stock Exchange, within 30 days of the original issue date under the trading symbol “SAB.”

 

Interest Rate

6.75% per year

 

Day count basis

360-day year of twelve 30-day months

 

Original issue date

December 21, 2016

 

Stated maturity date

December 30, 2023

 

Date interest starts accruing

December 21, 2016

 

Interest payment dates

Every March 30, June 30, September 30, and December 30, beginning March 30, 2017. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

 

Interest periods

The initial interest period will be the period from and including December 21, 2016, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

 

Regular record dates for interest

March 15, June 15, September 15, and December 15, beginning March 15, 2017.

 



 

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Specified Currency

U.S. Dollars

 

Place of Payment

New York City

 

Ranking of 2023 Notes

The 2023 Notes will be our direct unsecured obligations and will rank:

 

    pari passu with, which means equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us, including our 2020 Notes (which have an aggregate principal amount of $61.8 million as of the offering date of the 2023 Notes). The 2023 Notes will also rank pari passu with, which means equal to, our general liabilities, which consist of any amounts we may be required to pay pursuant to our guaranty under the Credit Facility with Madison Capital Funding and of trade and other payables, including any outstanding dividend payable, base and incentive management fees payable, interest and debt fees payable, vendor payables and accrued expenses such as auditor fees, legal fees, director fees, etc. In total, these general liabilities were $10.3 million as of August 31, 2016.

 

    senior to any of our future indebtedness that expressly provides it is subordinated to the 2023 Notes. We currently do not have outstanding debt that is subordinated to the 2023 Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the 2023 Notes. Therefore, the 2023 Notes will not be senior to any indebtedness or obligations.

 

    effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. Because the 2023 Notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we have incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the 2023 Notes.

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles since the 2023 Notes are obligations exclusively of Saratoga Investment Corp. and not of any of our subsidiaries. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity

 



 

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with respect to the subsidiary’s assets. As of the offering date of the 2023 Notes, the 2023 Notes will be structurally subordinated to both $103.7 million of our SBA-guaranteed debentures and our $45.0 million credit facility with Madison Capital Funding LLC, which has a current balance of $0.0.

 

  Except as described under the captions “Description of the 2023 Notes—Events of Default,” “—Other Covenants,” and “—Merger or Consolidation” in this prospectus, the indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.

 

Denominations

We will issue the 2023 Notes in denominations of $25 and integral multiples of $25 in excess thereof.

 

Business Day

Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City are authorized or required by law or executive order to close.

 

Optional redemptions

The 2023 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after December 21, 2019 upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the 2023 Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.

 

  You may be prevented from exchanging or transferring the 2023 Notes when they are subject to redemption. In case any 2023 Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such 2023 Note, you will receive, without a charge, a new 2023 Note or 2023 Notes of authorized denominations representing the principal amount of your remaining unredeemed 2023 Notes.

 

  Any exercise of our option to redeem the 2023 Notes will be done in compliance with the 1940 Act. If we redeem only some of the 2023 Notes, the Trustee will determine the method for selection of the particular 2023 Notes to be redeemed, in accordance with the indenture and the 1940 Act, and in accordance with the rules of any national securities exchange or quotation system on which the 2023 Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the 2023 Notes called for redemption.

 

Sinking Fund

The 2023 Notes will not be subject to any sinking fund (i.e., no amounts will be set aside by us to ensure repayment of the 2023 Notes at maturity). As a result, our ability to repay the 2023 Notes at maturity will depend on our financial condition on the date that we are required to repay the 2023 Notes.

 



 

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Repayment at option of Holders

Holders will not have the option to have the 2023 Notes repaid prior to the stated maturity date.

 

Defeasance

The 2023 Notes are subject to defeasance by us. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the 2023 Notes when due and satisfying any additional conditions required under the indenture relating to the 2023 Notes, we will be deemed to have been discharged from our obligations under the 2023 Notes.

 

Covenant defeasance

The 2023 Notes are subject to covenant defeasance by us. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from the restrictive covenants under the indenture relating to the 2023 Notes. The consequences to the holders of the 2023 Notes is that, while they no longer benefit from the restrictive covenants under the indenture, and while the 2023 Notes may not be accelerated for any reason, the holders of 2023 Notes nonetheless are guaranteed to receive the principal and interest owed to them.

 

Form of 2023 Notes

The 2023 Notes will be represented by global securities that will be deposited and registered in the name of The Depository Trust Company (“DTC”) or its nominee. This means that, except in limited circumstances, you will not receive certificates for the 2023 Notes. Beneficial interests in the 2023 Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the 2023 Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

 

Trustee, Paying Agent, Registrar, and Transfer Agent

U.S. Bank National Association

 

Other covenants

In addition to any covenants described elsewhere in this prospectus, the following covenants shall apply to the 2023 Notes:

 

    We agree that for the period of time during which the 2023 Notes are outstanding, we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings. See “Risk Factors—Pending legislation may allow us to incur additional leverage.”

 



 

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    We agree that, if, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to holders of the 2023 Notes and the Trustee, for the period of time during which the 2023 Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

 

Events of Default

You will have rights if an Event of Default occurs with respect to the 2023 Notes.

 

  The term “Event of Default” in respect of the 2023 Notes means any of the following:

 

    We do not pay the principal (or premium, if any) of any 2023 Note when due.

 

    We do not pay interest on any 2023 Note when due, and such default is not cured within 30 days.

 

    We remain in breach of any other covenant with respect to the 2023 Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the Trustee or holders of at least 25.0% of the principal amount of the 2023 Notes.

 

    We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and in the case of certain orders or decrees entered against us under any bankruptcy law, such order or decree remains undischarged or unstayed for a period of 60 days.

 

    On the last business day of each of twenty-four consecutive calendar months, the 2023 Notes have an asset coverage, as defined in the 1940 Act, of less than 100% after giving effect to any exemptive relief granted to us by the SEC.

 

Further Issuances

We have the ability to issue additional debt securities under the indenture with terms different from the 2023 Notes and, without consent of the holders thereof, to reopen the 2023 Notes and issue additional 2023 Notes. If we issue additional debt securities, these additional debt securities could rank higher in priority of payment or have a lien or other security interest greater than that accorded to the holders of the 2023 Notes.

Global Clearance and Settlement Procedures

Interests in the 2023 Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading

 



 

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activity in such 2023 Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

Use of Proceeds

We estimate that the net proceeds we receive from the sale of the 2023 Notes will be approximately $62,668,750 ($72,114,062 if the underwriters exercise their option to purchase additional 2023 Notes in full) after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to repay all of the outstanding indebtedness under our 2020 Notes and for general corporate purposes (including investments made through our SBIC subsidiary) in accordance with our investment objective and strategies described in this prospectus. As of August 31, 2016, we had $61.8 million outstanding under the 2020 Notes.

 



 

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SELECTED FINANCIAL AND OTHER DATA

The following selected financial and other data reflects the consolidated financial condition and the consolidated statement of operations of Saratoga as of and for the years ended February 29, 2016, February 28, 2015, February 28, 2014, February 28, 2013, and February 29, 2012. The selected financial and other data have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report thereon is included in this registration statement. The financial information as of and for the six months ended August 31, 2016 and 2015 was derived from our unaudited financial statements and related notes. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included in this prospectus. The historical data is not necessarily indicative of results to be expected for any future period.

 

    Six Months
Ended

August 31,
2016
    Six Months
Ended

August 31,
2015
    Year Ended
February 29,
2016
    Year Ended
February 28,
2015
    Year Ended
February 28,
2014(5)
    Year Ended
February 28,
2013(5)
    Year Ended
February 29,
2012(5)
 
    ($ in thousands, except share and per share numbers)  

Income Statement Data:

             

Interest and related portfolio income:

             

Interest

  $ 14,585      $ 13,750      $ 26,871      $ 24,688      $ 20,187      $ 14,450      $ 11,262   

Management fee and other income

    1,771        1,569        3,179        2,687        2,706        2,557        2,250   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and related portfolio income

    16,356        15,319        30,050        27,375        22,893        17,007        13,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

             

Interest and debt financing expenses

    4,738        4,112        8,456        7,375        6,084        2,540        1,298   

Base management and incentive management
fees(1)

    4,367        4,031        6,761        6,705        4,266        4,710        3,339   

Administrator expenses

    650        525        1,175        1,000        1,000        1,000        1,000   

Administrative and other

    1,459        1,346        2,866        2,327        2,669        2,287        2,638   

Expense reimbursement

    —          —       

 

—  

  

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses after reimbursements

    11,214        10,014        19,258        17,407        14,019        10,537        8,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

    5,142        5,305        19,372        9,968        8,874        6,470        5,237   

Income tax expenses, including excise tax expense (credit)

    —          (123 )       114        294        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 5,142      $ 5,428      $ 10,678      $ 9,674      $ 8,874      $ 6,470      $ 5,237   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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    Six Months
Ended

August 31,
2016
    Six Months
Ended

August 31,
2015
    Year Ended
February 29,
2016
    Year Ended
February 28,
2015
    Year Ended
February 28,
2014(5)
    Year Ended
February 28,
2013(5)
    Year Ended
February 29,
2012(5)
 
    ($ in thousands, except share and per share numbers)  

Realized and unrealized gain (loss) on investments and derivatives:

             

Net realized gain (loss)

  $ 12,040      $ 3,783      $ 226      $ 3,276      $ 1,271      $ 431      $ (12,186

Net change in unrealized gain (loss)

    (8,623     (583     741        (1,943     (1,648     7,143        19,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net gain (loss)

    3,417        3,200        967        1,333        (377     7,574        7,574   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 8,559      $ 8,628      $ 11,645      $ 11,007      $ 8,497      $ 14,044      $ 12,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share:

             

Earnings (loss) per common share—basic and diluted(2)

  $ 1.49      $ 1.57      $ 2.09      $ 2.04      $ 1.73      $ 3.42      $ 3.73   

Net investment income per share—basic and
diluted(2)

  $ 0.90      $ 0.99      $ 1.91      $ 1.80      $ 1.80      $ 1.57      $ 1.52   

Net realized and unrealized gain (loss) per share—basic and diluted(2)

  $ 0.59      $ 0.58      $ 0.18      $ 0.24      $ (0.07   $ 1.85      $ 2.21   

Dividends declared per common share(3)

  $ 1.04      $ 1.60      $ 2.36      $ 0.40      $ 2.65      $ 4.25      $ 3.00   

Dilutive impact of dividends paid in stock on net asset value per share(4)

  $ (0.12   $ (0.25   $ (0.37   $ (0.02   $ (0.71   $ (1.40   $ (1.99

Net asset value per share

  $ 22.39      $ 22.42      $ 22.06      $ 22.70      $ 21.08      $ 22.71      $ 24.94   

Statement of Assets and Liabilities Data:

             

Investment assets at fair value

  $ 272,804      $ 252,185      $ 283,996      $ 240,538      $ 205,845      $ 155,080      $ 95,360   

Total assets

    299,847        268,313        295,047        263,560        215,168        172,321        124,291   

Total debt outstanding

    160,965        133,815        160,749        136,900        98,300        60,300        20,000   

Stockholders’ equity

    128,564        125,258        125,150        122,599        113,428        107,438        96,689   

Net asset value per common share

  $ 22.39      $ 22.42      $ 22.06      $ 22.70      $ 21.08      $ 22.71      $ 24.94   

Common shares outstanding at end of period

    5,740,810        5,586,254        5,672,227        5,401,899        5,379,616        4,730,116        3,876,661   

Other Data:

             

Investments funded

  $ 55,728      $ 42,119      $ 109,191      $ 104,872      $ 121,074      $ 71,596      $ 38,679   

Principal collections related to investment repayments or sales

  $ 70,868      $ 34,773      $ 68,174      $ 73,257      $ 71,607      $ 21,488      $ 33,568   

Number of investments at end of period

    51        60        60        64        60        47        33   

Weighted average yield of income producing debt investments—Non-control/ non-affiliate

    10.68     10.63     10.82     11.07     10.62     11.26     11.88

Weighted average yield on income producing debt investments—Control

    19.41     37.81     16.40     25.22     18.55     27.11     20.17

 



 

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(1) See note 6 in consolidated financial statements contained elsewhere herein.
(2) For the six months ended August 31, 2016 and August 31, 2015, amounts are calculated using weighted average common shares outstanding of 5,739,157 and 5,492,491, respectively. For the years ended February 29, 2016, February 28, 2015, February 28, 2014, February 28, 2013 and February 29, 2012, calculated using weighted average common shares outstanding of 5,582,453, 5,385,049, 4,920,517, 4,110,484, and 3,434,345, respectively.
(3) Calculated using the shares outstanding at ex-dividend date.
(4) Dilutive effect of the issuance of shares of common stock below net asset value per share in connection with the satisfaction of the Company’s annual RIC distribution requirement. See “Price Range of Common Stock and Distributions—Dividend Policy.”
(5) During the year ended February 28, 2015, the Company identified errors related to the accounting for the capital gains portion of the incentive fee for the years ended February 28, 2014, February 28, 2013 and February 29, 2012, as well as the cumulative impact of these errors as of February 28, 2014. The Company assessed the materiality of these errors and concluded they were not material to any prior annual periods, but the cumulative impact of correcting them would be quantitatively material to the results of operations of the Company for the year ended February 28, 2015, if the entire adjustment was recorded in that period. The corrections for the errors are reflected in the selected financial and other data.

 



 

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RISK FACTORS

Investing in our securities involves a number of significant risks. You should carefully consider these risks, together with all of the other information included in this prospectus, before making an investment in our securities. The risks set forth below are the principal risks with respect to the Company generally and with respect to business development companies, they may not be the only risks we face. This section nonetheless describes the principal risk factors associated with investment in the Company specifically, as well as those factors generally associated with investment in a company with investment objectives, investment policies, capital structure or trading markets similar to the Company’s. If any of the risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our securities could decline and you may lose all or part of your investment.

Risks Related to Our 2023 Notes

The 2023 Notes will be unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.

The 2023 Notes will not be secured by any of our assets or any of the assets of our subsidiaries, including our wholly owned subsidiaries. As a result, the 2023 Notes will be effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. Because the 2023 Notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we have incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes.

The 2023 Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The 2023 Notes will be obligations exclusively of Saratoga Investment Corp., will not be of any of our subsidiaries. None of our subsidiaries will be a guarantor of the 2023 Notes and the 2023 Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future, including indebtedness under the Credit Facility. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the 2023 Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the 2023 Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the 2023 Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and portfolio companies with respect to which we hold equity investments. In addition, our subsidiaries and these entities may incur substantial indebtedness in the future, all of which would be structurally senior to the 2023 Notes. As of August 31, 2016, there was no outstanding balance under the Credit Facility, and we had the ability to borrow up to $45.0 million under the Credit Facility, subject to certain conditions. As of August 31, 2016, we had $103.7 million in SBA-guaranteed debentures outstanding. The indebtedness under the Credit Facility and to SBA-guaranteed debentures is structurally senior to the 2023 Notes.

The indenture under which the 2023 Notes are issued contains limited protection for holders of the 2023 Notes.

The indenture under which the 2023 Notes are issued offers limited protection to holders of the 2023 Notes. The terms of the indenture and the 2023 Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material

 

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adverse impact on your investment in the 2023 Notes. In particular, the terms of the indenture and the 2023 Notes do not place any restrictions on our or our subsidiaries’ ability to:

 

    issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2023 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2023 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the 2023 Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries or the portfolio companies with respect to which we hold an equity investment that would be senior to our equity interests in those entities and therefore rank structurally senior to the 2023 Notes with respect to the assets of these entities, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions (whether or not we are subject thereto), but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings;

 

    sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

    enter into transactions with affiliates;

 

    create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

    make investments; or

 

    create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture does not require us to offer to purchase the 2023 Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the 2023 Notes do not protect holders of the 2023 Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the 2023 Notes may have important consequences for you as a holder of the 2023 Notes, including making it more difficult for us to satisfy our obligations with respect to the 2023 Notes or negatively affecting the trading value of the 2023 Notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2023 Notes, including additional covenants and events of default. For example, the indenture under which the 2023 Notes are issued does not contain cross-default provisions that are contained in the Credit Facility. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the 2023 Notes.

There is no existing trading market for the 2023 Notes, and, even if the NYSE approves the listing of the 2023 Notes, an active trading market for the 2023 Notes may not develop, which could limit your ability to sell the 2023 Notes or the market price of the 2023 Notes.

The 2023 Notes will be a new issue of debt securities for which there initially will not be a trading market. We intend to list the 2023 Notes on the NYSE within 30 days of the original issue date under the symbol “SAB.” However, there is no assurance that the 2023 Notes will be approved for listing on the NYSE.

 

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Moreover, even if the listing of the 2023 Notes is approved, we cannot provide any assurances that an active trading market will develop or be maintained for the 2023 Notes or that you will be able to sell your 2023 Notes. If the 2023 Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters have advised us that they intend to make a market in the 2023 Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the 2023 Notes at any time at their sole discretion.

Accordingly, we cannot assure you that the 2023 Notes will be approved for listing on the NYSE, that a liquid trading market will develop for the 2023 Notes, that you will be able to sell your 2023 Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the 2023 Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the 2023 Notes for an indefinite period of time.

We may choose to redeem the 2023 Notes when prevailing interest rates are relatively low.

On or after December 21, 2019, we may choose to redeem the 2023 Notes from time to time, especially when prevailing interests rates are lower than the rate borne by the 2023 Notes. If prevailing rates are lower at the time of redemption, you would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the 2023 Notes being redeemed. Our redemption right also may adversely impact your ability to sell the 2023 Notes as the optional redemption date or period approaches.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2023 Notes.

Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2023 Notes and substantially decrease the market value of the 2023 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the 2023 Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lender under the Credit Facility or other debt we may incur in the future could elect to terminate its commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, any such default may constitute a default under the 2023 Notes, which could further limit our ability to repay our debt, including the 2023 Notes. If our operating performance declines, we may in the future need to seek to obtain waivers from the lender under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Credit Facility or other debt, the lender could exercise its rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 2023 Notes, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

 

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Risks Related to Our Business and Structure

Market volatility and the condition of the debt and equity capital markets could negatively impact our financial condition and stock price.

Beginning in 2007, global credit and other financial markets began to suffer substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary levels in 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. We believe that such value declines were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain compliance with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain assets, and caused extreme economic uncertainty. If market conditions similar to these were to recur, our assets could experience a similar decline in value, among other negative impacts to the company.

Since 2009, the global credit and other financial market conditions have improved as stability has increased throughout the international financial system and many public market indices have experienced positive total returns. However, the global macroeconomic environment and recovery from the downturn has been challenging and inconsistent. Instability in the global credit markets, the impact of periodic uncertainty regarding the U.S. federal budget, the instability in the geopolitical environment in many parts of the world, sovereign debt conditions in Europe and other disruptions may continue to put pressure on economic conditions in the U.S. and abroad.

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio.

Saratoga Investment Advisors is entitled to incentive fees for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, but net of operating expenses and certain other items) above a threshold return for that quarter. Our pre-incentive fee net investment income, for incentive compensation purposes, excludes realized and unrealized capital gains or losses that we may incur in the fiscal quarter, even if such capital gains or losses result in a net gain or loss on our consolidated statements of operations for that quarter. Thus, we may be required to pay Saratoga Investment Advisors incentive fees for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.

Under the terms of the Management Agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment.

Incentive fees on capital gains paid to Saratoga Investment Advisors under the Management Agreement equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Under the Management Agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20.0% of the incentive fee capital gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date. See our Form 10-Q for the

 

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quarter ended May 31, 2010 that was filed with the SEC on July 15, 2010 for the fair value and other information related to our investments as of such date. As a result, we may be required to pay incentive fees to Saratoga Investment Advisors on the sale of an investment even if we incur a realized loss on such investment, so long as the investment is sold for an amount greater than its fair value as of May 31, 2010.

The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests.

The incentive fee payable by us to our investment adviser may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The way in which the incentive fee payable to our investment adviser is determined, which is calculated separately in two components as a percentage of the income (subject to a hurdle rate) and as a percentage of the realized gain on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded. Moreover, we pay Saratoga Investment Advisors a base management fee based on our total assets, including any investments made with borrowings, which may create an incentive for it to cause us to incur more leverage than is prudent, or not to repay our outstanding indebtedness when it may be advantageous for us to do so, in order to maximize its compensation. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our securities.

The incentive fee payable by us to our investment adviser also may create an incentive for our investment adviser to invest on our behalf in instruments that have a deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that we have not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligation to us. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a “claw back” right against our investment adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and may thereby reduce such period’s incentive fee payment.

In addition, Saratoga Investment Advisors receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the immediately preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income incentive fee return to Saratoga Investment Advisors. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it would become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Saratoga Investment Advisors will receive an income incentive fee than if interest rates on our investments remained constant or decreased. In addition, if we repurchase our outstanding debt securities, including our 7.50% 2020 Notes and such repurchase results in our recording a net gain on the extinguishment of debt for financial reporting and tax purposes, such net gain will be included in our pre-incentive fee net investment income for purposes of determining the income incentive fee payable to our investment adviser under the Management Agreement.

Moreover, our investment adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, our investment adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

 

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Our board of directors will seek to ensure that Saratoga Investment Advisors is acting in our best interests and that any conflict of interest faced by Saratoga Investment Advisors in its capacity as our investment adviser does not negatively impact us.

The base management fee we pay to Saratoga Investment Advisors may influence it to increase our leverage, which may be contrary to our interest.

We pay Saratoga Investment Advisors a quarterly base management fee based on the value of our total assets (including any assets acquired with leverage). Accordingly, Saratoga Investment Advisors has an economic incentive to increase our leverage. Our board of directors monitors the conflicts presented by this compensation structure by approving the amount of leverage that we incur. If our leverage is increased, we will be exposed to increased risk of loss, bear the increase cost of issuing and servicing such senior indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender.

We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders that is secured by a lien on our assets. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of the holders of our securities. Leverage is generally considered a speculative investment technique. Any increase in our income in excess of interest payable on our outstanding indebtedness would cause our net income to increase more than it would have had we not incurred leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments, including with respect to the 2023 Notes. There can be no assurance that our leveraging strategy will be successful.

Our outstanding indebtedness imposes, and additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC. A failure to add new debt facilities or issue additional debt securities or other evidences of indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial condition or results of operations.

As of August 31, 2016, we had $103.7 million outstanding indebtedness guaranteed by the SBA and $61.8 million of outstanding 2020 Notes. This debt requires periodic payments of interest. The weighted average interest rate charged on our borrowings as of August 31, 2016 was 4.94% per annum (exclusive of deferred financing costs). We will need to generate sufficient cash flow to make these required interest payments. In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our August 31, 2016 total assets of at least 2.7%.

As of August 31, 2016, there was no outstanding balance under the Credit Facility. As of August 31, 2016, we had issued $103.7 million SBA-guaranteed debentures and $61.8 million of the 2020 Notes. We may incur additional indebtedness in the future, including, but not limited to, up to an additional $45.0 million under the Credit Facility or the issuance of additional debt securities in one or more public or private offerings, although there can be no assurance that we will be successful in doing so. Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ at any particular time will depend on our management’s and our Board of Directors’ assessment of market and other factors at the time of any proposed borrowing.

 

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Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below:

Assumed Return on Our Portfolio(1)

(net of expenses)

 

     –10.0%     –5.0%     0.0%      5.0%     10.0%  

Corresponding net return to common stockholder

     –30.5     –18.8     –7.1      4.7     16.4

 

(1) Assumes $297.4 million in average total assets, $165.5 million in average debt outstanding, $126.9 million in average net assets and an average interest rate of 5.41%. Actual interest payments may be different.

Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investments Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

Saratoga Investment Advisors has not assumed any responsibility to us other than to render the services described in the Management Agreement. Pursuant to the Management Agreement, Saratoga Investment Advisors and its officers and employees are not liable to us for their acts under the Management Agreement absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect Saratoga Investment Advisors and its officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of Saratoga Investment Advisors not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Management Agreement. These protections may lead Saratoga Investment Advisors to act in a riskier manner when acting on our behalf than it would when acting for its own account.

Substantially all of our assets are subject to security interests under our Credit Facility or claims of the SBA with respect to SBA-guaranteed debentures we may issue and if we default on our obligations thereunder, we may suffer adverse consequences, including the foreclosure on our assets.

Substantially all of our assets are pledged as collateral under the Credit Facility or are subject to a superior claim over the holders of our common stock or the 2023 Notes by the SBA pursuant to the SBA-guaranteed debentures. If we default on our obligations under the Credit Facility or the SBA-guaranteed debentures, Madison Capital Funding and/or the SBA may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated.

In addition, if Madison Capital Funding exercises its right to sell the assets pledged under the Credit Facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Credit Facility.

We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income.

General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, an increase in interest rates would make it more

 

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expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to ten years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities.

Because we may borrow to fund our investments, a portion of our net investment income may be dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against such interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

There are significant potential conflicts of interest which could adversely impact our investment returns.

Our executive officers and directors, and the members of our investment adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Christian L. Oberbeck, our chief executive officer and managing member of our investment adviser, is the managing partner of Saratoga Partners, a middle market private equity investment firm. In addition, the principals of our investment adviser may manage other funds which may from time to time have overlapping investment objectives with those of us and accordingly invest in, whether principally or secondarily, asset classes similar to those targeted by us. If this should occur, the principals of our investment adviser will face conflicts of interest in the allocation of investment opportunities to us and such other funds. Although our investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected in the event investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and investment adviser, and the members of our investment adviser.

Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.

We are subject to regulation at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Any change in these laws or regulations, or their interpretation, or any failure by us to comply with these laws or regulations may adversely affect our business.

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data

 

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processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

    sudden electrical or telecommunications outages;

 

    natural disasters such as earthquakes, tornadoes and hurricanes;

 

    disease pandemics;

 

    events arising from local or larger scale political or social matters, including terrorist acts; and

 

    cyber-attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, results of operations or financial condition.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. Any such attack could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We face risks posed to our information systems, both internal and those provided to us by third-party service providers. We, our Adviser and its affiliates have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, may be ineffective and do not guarantee that a cyber incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an incident.

Third parties with which we do business (including those that provide services to us) may also be sources or targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes.

Regulations governing our operation as a BDC will affect our ability to raise additional capital.

Our business requires a substantial amount of additional capital. We may acquire additional capital from the issuance of senior securities or other indebtedness or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities or preferred securities, which we refer to collectively as “senior securities,” and we may borrow money from banks or other financial institutions, up to the maximum amount permitted by the 1940 Act.

 

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Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after such incurrence or issuance. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a business development company, therefore, we may need to issue equity more frequently than our privately owned competitors, which may lead to greater stockholder dilution. With respect to certain types of senior securities, we must make provisions to prohibit any dividend distribution to our stockholders or the repurchase of certain of our securities, unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous in order to make dividend distributions or repurchase certain of our securities.

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital. We do not currently have stockholder approval of issuances below net asset value.

Pending legislation may allow us to incur additional leverage.

As a business development company, we are generally not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). We have agreed in the covenant in the indenture governing the 2023 Notes not to violate this section of the 1940 Act, whether or not we continue to be subject to such provision, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Recent legislation, if passed, would modify this section of the 1940 Act and increase the amount of debt that business development companies may incur. As a result, we may be able to incur additional indebtedness in the future.

The agreement governing our Credit Facility contains various covenants that, among other things, limits our discretion in operating our business and provides for certain minimum financial covenants.

The agreement governing the Credit Facility contains customary default provisions such as the termination or departure of certain “key persons” of Saratoga Investment Advisors, a material adverse change in our business and the failure to maintain certain minimum loan quality and performance standards. An event of default under the facility would result, among other things, in termination of the availability of further funds under the facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC.

Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the facility at any particular time or at all.

 

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We will be subject to corporate-level income tax if we fail to qualify as a RIC.

We intend to maintain our qualification as a RIC under the Code. As a RIC, we do not pay federal income taxes on our income (including realized gains) that is distributed to our stockholders, provided that we satisfy certain source of income, distribution and asset diversification requirements.

The source of income requirement is satisfied if we derive at least 90.0% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.

The annual distribution requirement is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We are subject to certain asset coverage ratio requirements under the 1940 Act and covenants under our borrowing agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. In such case, if we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.

The diversification requirements will be satisfied if we diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50.0% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25.0% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other regulated investment companies, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in certain publicly traded partnerships.

Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of our RIC qualification. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset diversification requirements, it could take us time to invest such capital. During this period, we will invest the additional capital in temporary investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in leveraged loans and mezzanine debt.

If we fail to qualify as a RIC for any reason, all of our taxable income will be subject to U.S. federal income tax at regular corporate rates. The resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution to our common stockholders or payment of our outstanding indebtedness including the 2023 Notes. Such a failure would have a material adverse effect on our results of operations and financial condition.

Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

In order to qualify for the tax benefits available to RICs and to minimize corporate-level taxes, we intend to distribute to our stockholders between 90% and 100% of our annual taxable income, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we must pay income taxes at the corporate rate on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise

 

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capital from other sources to grow our business. As a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 200%. These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.

While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. Also, as a BDC, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value and share price could decline.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.

For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, we may on occasion hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest (“PIK”) or, in certain cases, increasing interest rates or issued with warrants) and we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. In addition, we may be required to accrue for federal income tax purposes amounts attributable to our investment in Saratoga CLO, a collateralized loan obligation fund, that may differ from the distributions paid in respect of our investment in the subordinated notes of such collateralized loan obligation fund because of the factors set forth above or because distributions on the subordinated notes are contractually required to be diverted for reinvestment or to pay down outstanding indebtedness.

Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

Our ability to enter into transactions with our affiliates is restricted.

Because we have elected to be treated as a BDC, we are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5.0% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25.0% of our voting securities, we are prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, directors or

 

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investment adviser or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our investment adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make in private middle market companies. We compete with other BDCs, public and private funds (including SBICs), commercial and investment banks, commercial financing companies, insurance companies, high-yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments that could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objective.

We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer.

We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than we originally anticipated, which may impact our return on these investments.

Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from adding to our investment portfolio, cause us to receive a reduced level of interest income from our portfolio companies and/or reduce the fair market value of our investments. Any of the foregoing events could adversely affect our distributable income and have a material adverse effect on our operating results.

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single

 

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economic or regulatory occurrence than a diversified investment company. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

Our financial condition and results of operations depend on our ability to manage future investments effectively.

Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Saratoga Investment Advisors’ ability to identify, invest in and monitor companies that meet our investment criteria.

Accomplishing this result on a cost-effective basis is largely a function of Saratoga Investment Advisors’ structuring of the investment process and its ability to provide competent, attentive and efficient service to us. Our executive officers and the officers and employees of Saratoga Investment Advisors have substantial responsibilities in connection with their roles at Saratoga Partners as well as responsibilities under the Management Agreement. They may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Saratoga Investment Advisors may need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will contribute to the work of Saratoga Investment Advisors. Any failure to manage our future growth effectively could have a material adverse effect on our business and financial condition.

We may experience fluctuations in our quarterly and annual results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses changes in our portfolio composition, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. In addition, any of these factors could negatively impact our ability to achieve our investment objectives, which may cause the net asset value of our common stock to decline.

Substantially all of our portfolio investments are recorded at fair value as approved in good faith by our board of directors; such valuations are inherently uncertain and may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Substantially all of our portfolio is, and we expect will continue to be, comprised of investments that are not publicly traded. The value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as approved in good faith by our board of directors. Where appropriate, Saratoga Investment Advisors may utilize the services of an independent valuation firm to aid it in determining fair value. The types of factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

 

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If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.

We make unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of middle-market companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing.

If we invest in the securities and other obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than expected investment values or income potentials and resale restrictions.

We are authorized to invest in the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income may be diminished which may affect our ability to make distributions on our common stock or make interest and principal payments of the 2023 Notes.

We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied (e.g., through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made.

Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities if we are in possession of material non-public information relating to the issuer.

Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.

 

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The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken with respect to the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

The lack of liquidity in our investments may adversely affect our business.

We primarily make investments in private companies. A portion of these securities may be subject to legal and other restrictions on resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our investment adviser has or could be deemed to have material non-public information regarding such business entity.

The debt securities in which we invest are subject to credit risk and prepayment risk.

An issuer of a debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade of a security by rating agencies may further decrease its value.

Certain debt instruments may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument’s stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher interest debt instruments with lower interest debt instruments. An issuer may also elect to refinance their debt instruments with lower interest debt instruments if the credit standing of the issuer improves. To the extent debt securities in our portfolio are called or redeemed, we may receive less than we paid for such security and we may be forced to reinvest in lower yielding securities or debt securities of issuers of lower credit quality.

Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility.

At August 31, 2016, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $11.9 million and constituted 4.4% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of August 31, 2016, was composed of $299.5 million in aggregate principal amount of primarily senior secured first lien term loans and $5.2 million in uninvested cash. A first loss position means that we will suffer the first economic losses if the value of Saratoga CLO decreases. First loss positions typically carry a higher risk and earn a higher yield. Interest payments generated from this portfolio will be used to pay the administrative expenses of Saratoga CLO and interest on the debt issued by Saratoga CLO before paying a return on the subordinated notes. Principal payments will be similarly applied to pay administrative expenses of Saratoga CLO and for reinvestment or repayment of Saratoga CLO debt before paying a return on, or repayment of, the subordinated notes. In addition, 80.0% of our fixed management fee and 100.0% our incentive management fee for acting as the collateral manager of Saratoga CLO is subordinated to the payment of interest and principal on Saratoga CLO debt. Any losses on the portfolio will accordingly reduce

 

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the cash flow available to pay these management fees and provide a return on, or repayment of, our investment. Depending on the amount and timing of such losses, we may experience smaller than expected returns and, potentially, the loss of our entire investment.

As the manager of the portfolio of Saratoga CLO we will have some ability to direct the composition of the portfolio, but our discretion is limited by the terms of the debt issued by Saratoga CLO which may limit our ability to make investments that we feel are in the best interests of the subordinated notes, and the availability of suitable investments. The performance of Saratoga CLO’s portfolio is also subject to many of the same risks sets forth in this prospectus with respect to portfolio investments in leveraged loans.

In the event that a bankruptcy court orders the substantive consolidation of us with Saratoga CLO, the creditors of Saratoga CLO, including the holders of $299.5 million aggregate principal amount of debt, as of August 31, 2016 issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate, which would include our assets.

We believe that we have observed and will observe certain formalities and operating procedures that are generally recognized requirements for maintaining our separate existence and that our assets and liabilities can be readily identified as distinct from those of Saratoga CLO. However, we cannot assure you that a bankruptcy court would agree in the event that we or Saratoga CLO became a debtor in connection with a bankruptcy proceeding. If a bankruptcy court concludes that substantive consolidation of us with Saratoga CLO is warranted, the creditors of Saratoga CLO, including the holders of $299.5 million aggregate principal amount of debt, as of August 31, 2016 issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate. Substantive consolidation means that our assets are placed in a single bankruptcy estate with those of Saratoga CLO, rather than kept separate, and that the creditors of Saratoga CLO have a claim against that single estate (including our assets), as opposed to retaining their claims against only Saratoga CLO.

Our investments in Saratoga CLO generally have a different risk profile than would investments by us outside the Saratoga CLO.

Due to our investments in the Saratoga CLO being primarily broadly syndicated loans, there may be less information available to us on those companies as compared to most investments that we make directly. For example, we will typically have fewer rights relating to how such companies manage their cash flow to repay debt, the inclusion of protective covenants, default penalties, lien protection, change of control provisions and board observation rights in deal terms, and our general ability to oversee the company’s operations. Our investment in Saratoga CLO is also subject to the risk of leverage associated with the debt issued by Saratoga CLO and the repayment priority of senior debt holders in Saratoga CLO.

The accounting and tax implications of such investments are complicated. In particular, reported earnings from the equity tranche investment of Saratoga CLO are recorded under GAAP based upon an effective yield calculation. Current taxable earnings on these investments, however, will generally not be determinable until after the end of the fiscal year of Saratoga CLO that ends within the Company’s fiscal year, even though the investment is generating cash flow. In general, the tax treatment of investment in Saratoga CLO may result in higher distributable earnings in the early years and a capital loss at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.

The senior loan portfolio of Saratoga CLO is concentrated in a limited number of industries or borrowers, which may subject Saratoga CLO, and in turn us, to a risk of significant loss if there is a downturn in a particular industry in which Saratoga CLO is concentrated.

Saratoga CLO has senior loan portfolios that are concentrated in a limited number of industries or borrowers. A downturn in any particular industry or borrower in which Saratoga CLO is heavily invested may subject Saratoga CLO, and in turn us, to a risk of significant loss and could significantly impact the aggregate

 

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returns we realize. If an industry in which Saratoga CLO is heavily invested suffers from adverse business or economic conditions, a material portion of our investment in Saratoga CLO could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

The application of the risk retention rules to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for Saratoga CLO.

Section 941 of the Dodd-Frank Act added a provision to the Securities Exchange Act of 1934, as amended, requiring the seller, sponsor or securitizer of a securitization vehicle to retain no less than five percent of the credit risk in assets it sells into a securitization and prohibits such securitizer from directly or indirectly hedging or otherwise transferring the retained credit risk. The responsible federal agencies adopted final rules implementing these restrictions on October 22, 2014. These rules will become effective with respect to CLOs two years after publication in the Federal Register. Under the final rules, the asset manager of a CLO would be considered the sponsor of a securitization vehicle and would be required to retain five percent of the credit risk in the CLO, which may be retained horizontally in the equity tranche of the CLO or vertically as a five percent interest in each tranche of the securities issued by the CLO. Although the final rules contain an exemption from such requirements for the asset manager of a CLO if, among other things, the originator or lead arranger of all of the loans acquired by the CLO retain such risk at the asset level and, at origination of such asset, takes a loan tranche of at least 20% of the aggregate principal balance, it is possible that the originators and lead arrangers of loans in this market will not agree to assume this risk or provide such retention at origination of the asset in a manner that would provide meaningful relief from the risk retention requirements for CLO managers.

We believe that the U.S. risk retention requirements imposed for CLO managers under Section 941 of the Dodd-Frank Act has created some uncertainty in the market in regard to future CLO issuance. Given that certain CLO managers may require capital provider partners to satisfy this requirement beginning on December 24, 2016, we believe that this may create additional opportunities (and additional risks) for us in the future.

Failure by Saratoga CLO to satisfy certain tests will harm our operating results.

The failure by Saratoga CLO to satisfy certain financial covenants, specifically those with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that Saratoga CLO failed these certain tests, senior debt holders may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with Saratoga CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.

Available information about privately held companies is limited.

We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of our investment adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such

 

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company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debtor ranking equally with our investments, we would have to share on an equal basis any distributions with other holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we actually render significant managerial assistance.

Investments in equity securities involve a substantial degree of risk.

We purchase common stock and other equity securities. Although equity securities have historically generated higher average total returns than fixed-income securities over the long-term, equity securities also have experienced significantly more volatility in those returns and in recent years have significantly underperformed relative to fixed-income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:

 

    any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process;

 

    to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment in equity securities; and

 

   

in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of our portfolio companies. Even if the portfolio companies are successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time

 

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before a liquidity event occurs or we can sell our equity investments. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell.

There are special risks associated with investing in preferred securities, including:

 

    preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes even though we have not received any cash payments in respect of such income;

 

    preferred securities are subordinated with respect to corporate income and liquidation payments, and are therefore subject to greater risk than debt;

 

    preferred securities may be substantially less liquid than many other securities, such as common securities or U.S. government securities; and

 

    preferred security holders generally have no voting rights with respect to the issuing company, subject to limited exceptions.

Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.

Although there are limitations on our ability to invest in foreign debt, we may, from time to time, invest in debt of foreign companies, including the debt of emerging market issuers. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Investments in the debt of emerging market issuers may subject us to additional risks such as inflation, wage and price controls, and the imposition of trade barriers. Furthermore, economic conditions in emerging market countries are, to some extent, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the debt of issuers in other countries.

Although most of our investments will be U.S. dollar-denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure you that we will fully hedge against these risks or that such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.

We may expose ourselves to risks if we engage in hedging transactions.

We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the

 

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opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated at an acceptable price.

The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not entirely related to currency fluctuations. To the extent we engage in hedging transactions, we also face the risk that counterparties to the derivative instruments we hold may default, which may expose us to unexpected losses from positions where we believed that our risk had been appropriately hedged.

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our board of directors has the authority to modify or waive our current investment objective, operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

We have limited experience in managing an SBIC and any failure to comply with SBA regulations, resulting from our lack of experience or otherwise, could have an adverse effect on our operations.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958 and is regulated by the SBA.

The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBIC requirements may cause our SBIC subsidiary to forego attractive investment opportunities that are not permitted under SBA regulations.

Further, SBA regulations require that an SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If our SBIC subsidiary fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiary is our wholly-owned subsidiary. We do not have any prior experience managing an SBIC. Our lack of experience in complying with SBA regulations may hinder our ability to take advantage of our SBIC subsidiary’s access to SBA-guaranteed debentures.

Any failure to comply with SBA regulations could have an adverse effect on our operations.

 

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Our investments may be risky, and you could lose all or part of your investment.

Substantially all of our debt investments hold a non-investment grade rating by one or more rating agencies or, where not rated by any rating agency, would be below investment grade if rated. A below investment grade rating means that, in the rating agency’s view, there is an increased risk that the obligor on such debt will be unable to pay interest and repay principal on its debt in full. We also invest in debt that defers or pays PIK interest. To the extent interest payments associated with such debt are deferred, such debt will be subject to greater fluctuations in value based on changes in interest rates, such debt could produce taxable income without a corresponding cash payment to us, and since we generally do not receive any cash prior to maturity of the debt, the investment will be of greater risk.

In addition, private middle market companies in which we invest are exposed to a number of significant risks, including:

 

    limited financial resources and an inability to meet their obligations, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;

 

    shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

    dependence on the management talents and efforts of a small group of persons; the death, disability, resignation or termination of one or more of which could have a material adverse impact on the company and, in turn, on us;

 

    less predictable operating results and, possibly, substantial additional capital requirements to support their operations, finance expansion or maintain their competitive position; and

 

    difficulty accessing the capital markets to meet future capital needs.

In addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.

Our independent auditors have not assessed our internal control over financial reporting. If our internal control over financial reporting is not effective, it could have a material adverse effect on our stock price and our ability to raise capital.

Because we are a “non-accelerated filer” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934, our independent auditors are not required to assess our internal control over financial reporting or to provide a report thereon. Although our management determined that our internal control over financial reporting was effective at August 31, 2016 (the last date that such determination was required to be made by us), there can be no assurance that our independent auditors would agree with our management’s conclusion. Furthermore, if our market capitalization, excluding affiliated stockholders, at August 31 of any fiscal year is greater than $75 million, then we will be required to obtain independent auditor certification on the adequacy of our internal control over financial reporting for that fiscal year. If our internal control over financial reporting is determined in the future to not be effective, whether by our management or by our independent auditors, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements, which could materially adversely affect our stock price and our ability to raise capital necessary to operate our business. In addition, we may be required to incur costs in improving our internal control system and hiring additional personnel.

 

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Our portfolio may continue to be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

Our portfolio may continue to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize.

As of August 31, 2016, our investments in the business services industry represented approximately 48.6% of the fair value of our portfolio and our investments in the healthcare industry represented approximately 10.4% of the fair value of our portfolio. In addition, we may from time to time invest a relatively significant percentage of our portfolio in industries we do not necessarily target. If an industry in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

 

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USE OF PROCEEDS

We intend to use all of the net proceeds from the sale of our securities to repay our 2020 Notes and for general corporate purposes. As of August 31, 2016, there was $61.8 million principal amount of 2020 Notes outstanding.

We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within three months. Pending such use, we will invest the net proceeds primarily in high quality, short-term debt securities consistent with our business development company election and our election to be taxed as a RIC. See “Regulation—Business Development Company Regulations—Temporary Investments.” Our ability to achieve our investment objective may be limited to the extent that the net proceeds from an offering, pending full investment, are held in interest-bearing deposits or other short-term instruments. See “Risk Factors—Risks Relating to Our Business and Structure—We may be unable to invest a significant portion of the net proceeds from an offering of our securities on acceptable terms within an attractive timeframe” for additional information regarding this matter.

 

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CAPITALIZATION

The following table sets forth our capitalization as of August 31, 2016, actual and as adjusted for the sale of $65.0 million aggregate principal amount of the 2023 Notes offered hereby and the repayment of the 2020 Notes. This table should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this prospectus.

 

     As of August 31, 2016  
     Actual     As Adjusted  
     (unaudited)  

Cash and cash equivalents

   $ 12,707,273      $ 13,889,398   

Cash and cash equivalents, reserve accounts

     10,173,549        10,173,549   
  

 

 

   

 

 

 

Total cash and cash equivalents

     22,880,822        24,062,947   
  

 

 

   

 

 

 

Revolving Credit Facility

     —          —     

SBA debentures payable

     103,660,000        103,660,000   

2020 Notes

     61,793,125        —     

2023 Notes offered hereby

     —          65,000,000   

Stockholders’ equity

    

Common stock, par value $0.001 per share; 100,000,000 common shares authorized, 5,740,810 shares issued and outstanding

     5,741        5,741   

Capital in excess of par value

     189,532,044        189,532,044   

Distribution in excess of net investment income

     (27,038,814     (28,226,226

Accumulated net realized loss from investments and derivatives

     (28,132,894     (28,132,894

Net unrealized appreciation on investments and derivatives

     (5,802,455     (5,802,455
  

 

 

   

 

 

 

Total net assets

   $ 128,563,622      $ 127,376,210   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 299,847,182      $ 299,385,395   
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 22.39      $ 22.19   
  

 

 

   

 

 

 

 

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RATIO OF EARNINGS TO FIXED CHARGES

For six months ended August 31, 2016, and the fiscal years ended February 29, 2016, February 28, 2015, 2014 and 2013, February 29, 2012 and February 28, 2011 and 2010, the ratios of earnings to fixed charges of the Company, computed as set forth below, were as follows:

 

    Six months
ended August 31,
2016
    Year ended
February 29,
2016
    Year ended
February 28,
2015
    Year ended
February 28,
2014
    Year ended
February 28,
2013
    Year ended
February 29,
2012
    Year ended
February 28,
2011
    Year ended
February 28,
2010
 

Earnings to Fixed Charges

    2.81        2.39        2.53        2.40        6.53        10.87        7.41        (1.55

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in net assets resulting from operations plus (or minus) income tax provision (benefit) including excise tax expense plus fixed charges. Fixed charges include interest and credit facility fees and amortization of deferred financing fees.

 

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed in the section entitled “Risk Factors.”

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

The forward-looking statements contained in this prospectus involve risks and uncertainties, including statements as to:

 

    market volatility and the condition of the debt and equity markets;

 

    our future operating results;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact of investments that we expect to make;

 

    our contractual arrangements and relationships with third parties;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    the ability of our portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    our regulatory structure and tax treatment, including our ability to operate as a business development company, a regulated investment company and a small business investment company;

 

    the adequacy of our cash resources and working capital;

 

    the timing of cash flows, if any, from the operations of our portfolio companies; and

 

    the ability of our investment adviser to locate suitable investments for us and to monitor and effectively administer our investments.

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this prospectus.

You should understand that, under Sections 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)B of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with any offering of securities pursuant to this prospectus. Any forward-looking statements contained in any reports that the Company may file under the Exchange Act will be excluded from the safe harbor protection provided by Section 21E of the Exchange Act.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on the NYSE under the symbol “SAR”. Prior to July 30, 2010, our common stock traded on the NYSE under the symbol “GNV.” The following table lists the high and low closing sales prices for the Company’s common stock and such closing sales prices’ percentage of premium or discount to NAV for the last four completed fiscal years and the current fiscal year to date. On December 12, 2016, the last reported closing sale price of our common stock was $18.58 per share which represents a discount of approximately 17.0% to the NAV reported as of August 31, 2016.

 

            Price Range               
     NAV(1)      High      Low      Percentage
of High
Sales Price
as a
Premium
(Discount)
to NAV(2)
    Percentage
of Low
Sales Price
as a

Premium
(Discount)
to NAV(2)
 

Fiscal Year ending February 28, 2017

             

First Quarter

   $ 22.11       $ 16.84       $ 14.03         (23.8 )%      (36.5 )% 

Second Quarter

   $ 22.39       $ 18.15       $ 16.37         (18.9 )%      (26.9 )% 

Third Quarter

     *       $ 20.24       $ 17.20         *        *   

Fourth Quarter (through December 12, 2016)

     *       $ 19.29       $ 18.12         *        *   

Fiscal Year ended February 29, 2016

             

First Quarter

   $ 22.75       $ 19.95       $ 15.28         (12.3 )%      (32.8 )% 

Second Quarter

   $ 22.42       $ 17.68       $ 16.83         (21.1 )%      (24.9 )% 

Third Quarter

   $ 22.59       $ 16.65       $ 14.92         (26.3 )%      (34.0 )% 

Fourth Quarter

   $ 22.06       $ 15.93       $ 13.50         (27.8 )%      (38.8 )% 

Fiscal Year ended February 28, 2015

             

First Quarter

   $ 21.41       $ 15.91       $ 15.05         (25.7 )%      (29.7 )% 

Second Quarter

   $ 22.00       $ 16.26       $ 15.15         (26.1 )%      (31.1 )% 

Third Quarter

   $ 22.45       $ 16.32       $ 15.00         (27.3 )%      (33.2 )% 

Fourth Quarter

   $ 22.70       $ 15.84       $ 14.44         (30.2 )%      (36.4 )% 

Year ended February 28, 2014

             

First Quarter

   $ 23.48       $ 19.08       $ 16.35         (18.7 )%      (30.4 )% 

Second Quarter

   $ 23.55       $ 18.70       $ 17.40         (20.6 )%      (26.1 )% 

Third Quarter

   $ 20.39       $ 19.55       $ 15.40         (4.1 )%      (24.5 )% 

Fourth Quarter

   $ 21.08       $ 16.56       $ 15.25         (21.4 )%      (27.7 )% 

Year ended February 28, 2013

             

First Quarter

   $ 25.74       $ 18.29       $ 15.15         (28.9 )%      (41.1 )% 

Second Quarter

   $ 26.96       $ 17.20       $ 16.50         (36.2 )%      (38.8 )% 

Third Quarter

   $ 21.52       $ 19.97       $ 15.17         (7.2 )%      (29.5 )% 

Fourth Quarter

   $ 22.71       $ 18.50       $ 15.07         (18.5 )%      (33.6 )% 

Year ended February 29, 2012

             

First Quarter

   $ 27.89       $ 18.26       $ 16.69         (34.5 )%      (40.2 )% 

Second Quarter

   $ 27.33       $ 17.26       $ 13.58         (36.8 )%      (50.3 )% 

Third Quarter

   $ 24.17       $ 13.82       $ 12.35         (42.8 )%      (48.9 )% 

Fourth Quarter

   $ 24.94       $ 16.15       $ 12.07         (35.2 )%      (51.6 )% 

 

* Net asset value has not yet been calculated for this period.
(1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.
(2) Calculated as the respective high or low sales price less net asset value, divided by net asset value.

Holders

The last reported price for our common stock on December 12, 2016 was $18.58 per share. As of December 12, 2016, there were 21 holders of record of our common stock.

 

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Dividend Policy

The following table summarizes our dividends or distributions declared during fiscal 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016:

 

Date Declared

   Record Date      Payment Date      Amount
per Share
 

May 22, 2008

     May 30, 2008         June 13, 2008       $ 3.90   

August 19, 2008

     August 29, 2008         September 15, 2008       $ 3.90   

December 8, 2008

     December 18, 2008         December 29, 2008       $ 2.50   
        

 

 

 

Total Dividends Declared for Fiscal 2009

         $ 10.30   
        

 

 

 

November 13, 2009

     November 25, 2009         December 31, 2009       $ 18.25 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2010

         $ 18.25   
        

 

 

 

November 12, 2010

     November 19, 2010         December 29, 2010       $ 4.40 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2011

         $ 4.40   
        

 

 

 

November 15, 2011

     November 25, 2011         December 30, 2011       $ 3.00 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2012

         $ 3.00   
        

 

 

 

November 9, 2012

     November 20, 2012         December 31, 2012       $ 4.25 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2013

         $ 4.25   
        

 

 

 

October 30, 2013

     November 13, 2013         December 27, 2013       $ 2.65 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2014

         $ 2.65   
        

 

 

 

September 24, 2014

     November 3, 2014         November 28, 2014       $ 0.18 (1) 

September 24, 2014

     February 2, 2015         February 27, 2015       $ 0.22 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2015

         $ 0.40   
        

 

 

 

April 9, 2015

     May 4, 2015         May 29, 2015       $ 0.27 (1) 

May 14, 2015

     May 26, 2015         June 5, 2015       $ 1.00 (1) 

July 8, 2015

     August 3, 2015         August 31, 2015       $ 0.33 (1) 

October 7, 2015

     November 2, 2015         November 30, 2015       $ 0.36 (1) 

January 12, 2015

     February 1, 2016         February 29, 2016       $ 0.40 (1) 
        

 

 

 

Total Dividends Declared for Fiscal 2016

         $ 2.36   
        

 

 

 

March 31, 2016

     April 15, 2016         April 27, 2016       $ 0.41 (1) 

July 7, 2016

     July 29, 2016         August 9, 2016       $ 0.43 (1) 

August 8, 2016

     August 24, 2016         September 5, 2016       $ 0.20 (1) 

October 5, 2016

     October 31, 2016         November 9, 2016       $ 0.44   
        

 

 

 

Total Dividends Declared for Fiscal 2017 (through December 9, 2016)

         $ 1.48   
        

 

 

 

 

(1) This dividend was paid by combination of shares of common stock and cash. Please see the discussion immediately following this table for more detail about the composition of this dividend.

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. The reinvested dividends under our dividend reinvestment plan increase our gross assets, which will result in higher management fees, and potentially income incentive fees and capital gains incentive fees payable to Saratoga Investment Advisors. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and made five dividend distributions (in December 2013, 2012, 2011, 2010 and 2009) to our stockholders in the form of a combination of cash and the issuance of shares of our common stock as discussed more fully below. On September 24, 2014, our board of directors adopted a new dividend policy pursuant to which we will begin to again pay a regular quarterly cash

 

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dividend to our shareholders. In this regard, as noted in the table above, our board of directors has declared a regular quarterly cash dividends to our shareholders since adopting our new dividend policy.

We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act, subject to certain exceptions, or that violate our debt covenants.

Prior to the adoption of our new dividend policy described above, our board of directors believed that using our capital resources to build and diversify our portfolio served our stockholders’ interests best by better positioning us to generate current income and capital appreciation on an increasing scale. Therefore, our board of directors determined to pay a 20.0% cash and 80.0% stock dividend with respect to a significant portion of our taxable income for our 2014, 2013, 2012, 2011 and 2010 fiscal years in accordance with an IRS revenue procedure or certain IRS private letter rulings. For more detailed information about these dividends, please see the discussion below.

In order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax. For the 2013 calendar year, the Company made distributions sufficient such that we did not incur any federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2014 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending October 31, 2014, if any, and, if we do so, we would expect to incur federal excise taxes as a result.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.

Pursuant to a revenue procedure (Revenue Procedure 2010-12), or the Revenue Procedure, issued by the Internal Revenue Service, or IRS, the IRS indicated that it would treat distributions from certain publicly traded RICs (including BDCs) that were paid part in cash and part in stock as dividends that would satisfy the RIC’s annual distribution requirements and qualify for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure required that at least 10.0% of the total distribution be payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elected to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10.0% of such stockholder’s distribution in cash). This Revenue Procedure applied to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011.

Although this Revenue Procedure is no longer available and did not apply to our distributions for our fiscal year ended February 28, 2014, the revenue procedure was based upon certain applicable provisions of the Code and the Treasury regulations pursuant to which distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends. Consistent with these provisions, the IRS has issued private letter rulings concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution.

On October 30, 2013, our board of directors declared a dividend of $2.65 per share payable on December 27, 2013, to common stockholders of record on November 13, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share.

Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of

 

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common stock comprising the stock portion was calculated based on a price of $15.439 per share, which equaled the volume weighted average trading price per share of the common stock on December 11, 13, and 16, 2013.

On November 9, 2012, our board of directors declared a dividend of $4.25 per share payable on December 31, 2012, to common stockholders of record on November 20, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share.

Based on shareholder elections, the dividend consisted of $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.

On November 15, 2011, our board of directors declared a dividend of $3.00 per share payable on December 30, 2011, to common stockholders of record on November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share.

Based on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.12 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.

On November 12, 2010, we declared a dividend of $4.40 per share which was paid on December 29, 2010. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $1.2 million or $0.44 per share.

Based on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.

On November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share.

Based on stockholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to stockholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted average trading price per share of the common stock on December 24 and 28, 2009.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors” and “Note about Forward-Looking Statements” appearing elsewhere in this prospectus.

OVERVIEW

We are a Maryland corporation that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We invest primarily in leveraged loans and mezzanine debt issued by private U.S. middle market companies, which we define as companies having EBITDA of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. We may also invest up to 30.0% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. We have elected and qualified to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

Corporate History and Recent Developments

We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering of shares of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, as described below we engaged Saratoga Investment Advisors (“SIA”) to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

As a result of the event of default under a revolving securitized credit facility with Deutsche Bank we previously had in place, in December 2008 we engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and consider alternatives for us. On April 14, 2010, GSC Investment Corp. entered into a stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates and an assignment, assumption and novation agreement with Saratoga Investment Advisors, pursuant to which GSC Investment Corp. assumed certain rights and obligations of Saratoga Investment Advisors under a debt commitment letter Saratoga Investment Advisors received from Madison Capital Funding LLC, which indicated Madison Capital Funding’s willingness to provide GSC Investment Corp. with a $40.0 million senior secured revolving credit facility, subject to the satisfaction of certain terms and conditions. In addition, GSC Investment Corp. and GSCP (NJ), L.P. entered into a termination and release agreement, to be effective as of the closing of the transaction contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction contemplated by the stock purchase agreement.

On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO, pursuant to which we act as its collateral manager. In addition, we purchased for $30.0 million all of the outstanding subordinated notes of Saratoga CLO. The Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, we completed the second refinancing of the

 

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Saratoga CLO. The Saratoga CLO refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of approximately $300 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of 8.5%.

The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.10% and a subordinated management fee of 0.40% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

On July 30, 2010, the transactions contemplated by the stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates were completed, the private sale of 986,842 shares of our common stock for $15.0 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates closed, the Company entered into the Credit Facility, and the Company began doing business as Saratoga Investment Corp.

We used the net proceeds from the private sale transaction and a portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

On August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

In January 2011, we registered for public resale of the 986,842 shares of our common stock issued to Saratoga Investment Advisors and certain of its affiliates.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received an SBIC license from the Small Business Administration (“SBA”).

In May 2013, we issued $48.3 million in aggregate principal amount of our 7.50% unsecured notes due 2020 for net proceeds of $46.1 million after deducting underwriting commissions of $1.9 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option. Interest on these 2020 Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15, at a rate of 7.50% per year, beginning August 15, 2013. The 2020 Notes mature on May 31, 2020 and since May 31, 2016, may be redeemed in whole or in part at any time or from time to time at our option. The 2020 Notes are listed on the NYSE under the trading symbol “SAQ” with a par value of $25.00 per share.

On April 3, 2015, the SBA issued a “green light” or “go forth” letter inviting us to continue our application process to obtain a license to form and operate a second SBIC subsidiary. On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license, and in order to ensure that they were reviewing the most current information available, we would need to update all previously submitted materials and invited us to reapply. As a result of this request, with which we are in the process of complying, the existing “green light” letter that the SBA issued to us will expire. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the first license.

 

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On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. Inc. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an At-the-Market (“ATM”) offering. As of August 31, 2016, the Company sold 2020 Notes with a principal of $13,493,125 at an average price of $25.31 for aggregate net proceeds of $13,385,766 (net of transaction costs).

Critical Accounting Policies

Basis of Presentation

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make certain estimates and assumptions affecting amounts reported in the Company’s consolidated financial statements. We have identified investment valuation, revenue recognition and the recognition of capital gains incentive fee expense as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Investment Valuation

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the balance sheet date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from Saratoga Investment Advisers, the audit committee of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

    Each investment is initially valued by the responsible investment professionals of Saratoga Investment Advisors and preliminary valuation conclusions are documented and discussed with our senior management; and

 

    An independent valuation firm engaged by our board of directors reviews a selection of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by the independent valuation firm at least once each fiscal year.

 

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In addition, all our investments are subject to the following valuation process:

 

    The audit committee of our board of directors reviews each preliminary valuation and Saratoga Investment Advisors and an independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

    Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of Saratoga Investment Advisors, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

Our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by SIA and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.

Revenue Recognition

Income Recognition

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums on investments.

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

Payment-in-Kind Interest

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

 

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Capital Gains Incentive Fee

The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when the unrealized gains on its investments exceed all realized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period.

Revenues

We generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on equity interests that we may acquire. We expect our debt investments, whether in the form of leveraged loans or mezzanine debt, to have terms of up to ten years, and to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases, our debt investments may provide for a portion of the interest to be PIK. To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity securities that pay dividends on a current basis.

On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO, pursuant to which we act as its collateral manager. The Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, we completed the second refinancing of the Saratoga CLO. The Saratoga CLO refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of approximately $300 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of 8.5%. The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.10% and a subordinated management fee of 0.40% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

We recognize interest income on our investment in the subordinated notes of Saratoga CLO using the effective interest method, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

Expenses

Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and officers insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrator’s overhead. Our investment advisory and management fees compensate our investment adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:

 

    organization;

 

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    calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

    expenses incurred by our investment adviser payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

    interest payable on debt, if any, incurred to finance our investments;

 

    offerings of our common stock and other securities;

 

    investment advisory and management fees;

 

    fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;

 

    transfer agent and custodial fees;

 

    federal and state registration fees;

 

    all costs of registration and listing our common stock on any securities exchange;

 

    federal, state and local taxes;

 

    independent directors’ fees and expenses;

 

    costs of preparing and filing reports or other documents required by governmental bodies (including the Securities and Exchange Commission (“SEC”) and the SBA);

 

    costs of any reports, proxy statements or other notices to common stockholders including printing costs;

 

    our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;

 

    direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

    administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of the administrator’s overhead in performing its obligations under an administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).

Pursuant to the Management Agreement that we had with GSCP (NJ), L.P., our former investment adviser and administrator, we had agreed to pay GSCP (NJ), L.P. as investment adviser a quarterly base management fee of 1.75% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters and an incentive fee.

The incentive fee had two parts:

 

    A fee, payable quarterly in arrears, equal to 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of the net assets at the end of the immediately preceding quarter, that exceeded a 1.875% quarterly hurdle rate measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, our investment adviser received no incentive fee unless our pre-incentive fee net investment income exceeded the hurdle rate of 1.875%. Amounts received as a return of capital were not included in calculating this portion of the incentive fee. Since the hurdle rate was based on net assets, a return of less than the hurdle rate on total assets could still have resulted in an incentive fee.

 

 

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    A fee, payable at the end of each fiscal year, equal to 20.0% of our net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in each case on a cumulative basis, less the aggregate amount of capital gains incentive fees paid to the investment adviser through such date.

We deferred cash payment of any incentive fee otherwise earned by our former investment adviser if, during the then most recent four full fiscal quarters ending on or prior to the date such payment was to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) (before taking into account any incentive fees payable during that period) was less than 7.5% of our net assets at the beginning of such period. These calculations were appropriately pro-rated for the first three fiscal quarters of operation and adjusted for any share issuances or repurchases during the applicable period. Such incentive fee would become payable on the next date on which such test had been satisfied for the most recent four full fiscal quarters or upon certain terminations of the Management Agreement. We commenced deferring cash payment of incentive fees during the quarterly period ended August 31, 2007, and continued to defer such payments through the quarterly period ended May 31, 2010. As of July 30, 2010, the date on which GSCP (NJ), L.P. ceased to be our investment adviser and administrator, we owed GSCP (NJ), L.P. $2.9 million in fees for services previously provided to us; of which $0.3 million has been paid by us. GSCP (NJ), L.P. agreed to waive payment by us of the remaining $2.6 million in connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this Annual Report.

The terms of the Management Agreement with Saratoga Investment Advisors, our current investment adviser, are substantially similar to the terms of the Management Agreement we had entered into with GSCP (NJ), L.P., our former investment adviser, except for the following material distinctions in the fee terms:

 

    The capital gains portion of the incentive fee was reset with respect to gains and losses from May 31, 2010, and therefore losses and gains incurred prior to such time will not be taken into account when calculating the capital gains fee payable to Saratoga Investment Advisors and, as a result, Saratoga Investment Advisors will be entitled to 20.0% of net gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 equal the fair value of such investment as of such date. Under the Management Agreement with our former investment adviser, GSCP (NJ), L.P., the capital gains fee was calculated from March 21, 2007, and the gains were substantially outweighed by losses.

 

    Under the “catch up” provision, 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income that exceeds 1.875% but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors. This will enable Saratoga Investment Advisors to receive 20.0% of all net investment income as such amount approaches 2.344% in any quarter, and Saratoga Investment Advisors will receive 20.0% of any additional net investment income. Under the Management Agreement with our former investment adviser, GSCP (NJ), L.P. only received 20.0% of the excess net investment income over 1.875%.

 

    We will no longer have deferral rights regarding incentive fees in the event that the distributions to stockholders and change in net assets is less than 7.5% for the preceding four fiscal quarters.

To the extent that any of our leveraged loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of interest rate caps, futures, options and forward contracts. Costs incurred in entering into or settling such contracts will be borne by us.

New Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Amendments to the Leases (“ASC Topic 842”), which will require for all operating leases the recognition of a right-of-use asset and

 

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a lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance is effective for annual and interim periods beginning after December 15, 2018. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact the adoption of this standard has on our consolidated financial statements and disclosures.

In August 2014, the FASB issued new accounting guidance that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments provide a definition of the term “substantial doubt” and include principles for considering the mitigating effect of management’s plans. The amendments also require an evaluation every reporting period, including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued), and certain disclosures when substantial doubt is alleviated or not alleviated. The amendments in this update are effective for reporting periods ending after December 15, 2016. Management does not believe these changes will have a material impact on the Company’s consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective periods to December 15, 2017. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

 

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Portfolio and Investment Activity

Corporate Debt Portfolio Overview

 

    At August 31,
2016
    At February 29,
2016
    At February 28,
2015
    At February 28,
2014
 
   

($ in millions)

 

Number of investments(1)

    50        59        63        59   

Number of portfolio companies(1)

    29        34        34        37   

Average investment size(1)

  $ 5.2      $ 4.6      $ 3.5      $ 3.2   

Weighted average maturity(1)

    3.5yrs        3.8yrs        3.7yrs        4.3yrs   

Number of industries(1)

    11        11        14        16   

Average investment per portfolio company(1)

  $ 9.0      $ 8.0      $ 6.6      $ 5.0   

Non-performing or delinquent
investments(1)

  $ 0.0      $ 0.0      $ 0.0      $ 0.3   

Fixed rate debt (% of interest bearing portfolio)(2)

  $ 46.3(18.5)   $ 97.9(40.0)   $ 82.5(40.6)   $ 70.6(40.1)

Weighted average current coupon(2)

    11.9     11.5     12.0     12.5

Floating rate debt (% of interest bearing
portfolio)(2)

  $ 203.5(81.5)   $ 146.8(60.0)   $ 120.8(59.4)   $ 105.4(59.9)

Weighted average current spread over LIBOR(2)

    10.0     9.1     8.7     7.3

 

(1) Excludes our investment in the subordinated notes of Saratoga CLO.
(2) Excludes our investment in the subordinated notes of Saratoga CLO and investments in equity interests.

During the three months ended August 31, 2016, we invested $55.7 million in new or existing portfolio companies and had $50.3 million in aggregate amount of exits and repayments resulting in net investments of $5.4 million for the period. During the three months ended August 31, 2015, we invested $18.9 million in new or existing portfolio companies and had $27.4 million in aggregate amount of exits and repayments resulting in net repayments of $8.5 million for the period.

During the six months ended August 31, 2016, we invested $55.7 million in new or existing portfolio companies and had $70.9 million in aggregate amount of exits and repayments resulting in net repayments of $15.2 million for the period. During the six months ended August 31, 2015, we invested $42.1 million in new or existing portfolio companies and had $34.8 million in aggregate amount of exits and repayments resulting in net investments of $7.3 million for the period.

During the fiscal year ended February 29, 2016, we invested $109.2 million in new or existing portfolio companies and had $68.2 million in aggregate amount of exits and repayments resulting in net investments of $41.0 million for the year.

During the fiscal year ended February 28, 2015, we invested $104.9 million in new or existing portfolio companies and had $73.3 million in aggregate amount of exits and repayments resulting in net investments of $31.6 million for the year.

During the fiscal year ended February 28, 2014, we invested $121.1 million in new or existing portfolio companies and had $71.6 million in aggregate amount of exits and repayments resulting in net investments of $49.5 million for the year.

 

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Our portfolio composition at August 31, 2016, February 29, 2016, February 28, 2015 and February 28, 2014 at fair value was as follows:

Portfolio Composition

 

    At August 31, 2016     At February 29, 2016     At February 28, 2015     At February 28, 2014  
    Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
    Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
    Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
    Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
 

Syndicated loans

    3.5     5.3     4.2     8.2     7.6     6.2     15.7     6.2

First lien term loans

    56.2        10.6        50.9        10.6        60.3        11.0        53.6        11.5   

Second lien term loans

    31.9        11.5        31.1        11.5        14.8        11.2        13.5        11.1   

Unsecured notes

    —          —          —          —          1.8        13.7        2.7        15.2   

Saratoga CLO subordinated notes

    4.4        19.4        4.5        16.4        7.1        25.2        9.5        18.6   

Equity interests

    4.0        N/A        9.3        N/A        8.4        N/A        5.0        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    100.0     11.1     100.0     11.1     100.0     11.8     100.0     11.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at August 31, 2016, February 29, 2016, February 28, 2015 and February 28, 2014 was composed of $299.5 million, $302.7 million, $296.9 million and $301.3 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks. (See “Risk Factors—Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility”). We do not consolidate the Saratoga CLO portfolio in our consolidated financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO portfolio investments. However, at August 31, 2016 and February 29, 2016, $289.5 million or 99.5% and $283.3 million or 99.4%, respectively, of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and there were no Saratoga CLO portfolio investments in default and one Saratoga CLO portfolio investment was in default with a fair value of $0.8 million, respectively. For more information relating to Saratoga CLO, see the audited financial statements for Saratoga CLO included elsewhere herein.

Saratoga Investment Advisors normally grades all of our investments using a credit and monitoring rating system (“CMR”). The CMR consists of a single component: a color rating. The color rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk. The color ratings are characterized as follows: (Green)—strong credit; (Yellow)—satisfactory credit; (Red)—payment default risk, in payment default and/or significant restructuring activity.

The CMR distribution of our investments at August 31, 2016, February 29, 2016 and February 28, 2015 was as follows:

Portfolio CMR Distribution

 

     At August 31, 2016     At February 29, 2016     At February 28, 2015  

Color Score

   Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
    

($ in thousands)

 

Green

   $ 249,808         91.6   $ 240,623         84.7   $ 191,606         79.7

Yellow

     —           —          4,058         1.4        11,635         4.8   

Red

     8         0.0        8         0.0        101         0.0   

N/A(1)

     22,988         8.4        39,307         13.9        37,196         15.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 272,804         100.0   $ 283,996         100.0   $ 240,538         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Comprised of our investment in the subordinated notes of Saratoga CLO and equity interests.

 

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The CMR distribution of Saratoga CLO investments at August 31, 2016, February 29, 2016 and February 28, 2015 was as follows:

Portfolio CMR Distribution

 

     At August 31, 2016     At February 29, 2016     At February 28, 2015  

Color Score

   Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
    

($ in thousands)

 

Green

   $ 256,542         88.2   $ 251,570         88.3   $ 278,769         94.4

Yellow

     32,939         11.3        31,752         11.1        12,875         4.4   

Red

     1,463         0.5        1,331         0.5        2,978         1.0   

N/A(1)

     13         0.0        192         0.1        617         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 290,957         100.0   $ 284,845         100.0   $ 295,239         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Comprised of Saratoga CLO’s equity interests.

Portfolio Composition by Industry Grouping at Fair Value

The following table shows our portfolio composition by industry grouping at fair value at August 31, 2016, February 29, 2016 and February 28, 2015:

 

    At August 31, 2016     At February 29, 2016     At February 28, 2015  
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
 
    ($ in thousands)  

Business Services

  $ 132,709        48.6   $ 88,596        31.2   $ 52,128        21.7

Consumer Services

    26,896        9.9        43,109        15.2        24,169        10.0   

Software as a Service

    —          —          39,187        13.8        53,525        22.3   

Healthcare Services

    28,249        10.4        24,635        8.7        20,641        8.6   

Media

    18,660        6.8        16,574        5.8        15,026        6.2   

Automotive Aftermarket

    —          —          14,707        5.2        10,980        4.6   

Structured Finance Securities(1)

    11,917        4.4        12,828        4.5        17,031        7.1   

Education

    10,942        4.0        10,694        3.8        101        0.0   

Metals

    8,814        3.2        10,526        3.7        15,262        6.3   

Food and Beverage

    9,277        3.4        9,131        3.2        10,348        4.3   

Consumer Products

    884        0.3        7,642        2.7        9,239        3.9   

Building Products

    2,000        0.7        6,367        2.2        3,436        1.4   

Electronics

    —          —          —         —         6,667        2.8   

Publishing

    —          —          —         —         1,985        0.8   

Aerospace and Defense

    997        0.4        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 272,804        100.0   $ 283,996        100.0   $ 240,538        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Comprised of our investment in the subordinated notes of Saratoga CLO.

 

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The following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at August 31, 2016, February 29, 2016 and February 28, 2015:

 

    At August 31, 2016     At February 29, 2016     At February 28, 2015  
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
    Investments
at
Fair Value
    Percentage
of Total
Portfolio
 
    ($ in thousands)  

Services: Business

  $ 40,272        13.7   $ 37,308        13.1   $ 42,751        14.5

Healthcare & Pharmaceuticals

    30,252        10.4        28,339        9.9        35,341        11.9   

Chemicals/Plastics

    25,190        8.7        24,714        8.7        25,758        8.7   

Retailers (Except Food and Drugs)

    12,211        4.2        18,898        6.6        22,026        7.4   

Financial Intermediaries

    8,760        3.0        13,559        4.8        10,806        3.7   

Aerospace and Defense

    12,987        4.5        12,580        4.4        7,287        2.5   

Industrial Equipment

    11,675        4.0        11,777        4.1        15,290        5.2   

Conglomerate

    12,676        4.4        11,770        4.1        19,928        6.7   

Telecommunications

    9,026        3.1        11,364        4.0        6,675        2.3   

Banking, Finance, Insurance & Real Estate

    12,553        4.3        10,175        3.6        —         —    

High Tech Industries

    14,919        5.1        9,451        3.3        —         —    

Electronics/Electric

    7,437        2.6        9,342        3.3        12,904        4.4   

Leisure Goods/Activities/Movies

    8,258        2.8        8,009        2.8        12,629        4.3   

Technology

    6,161        2.1        7,774        2.7        1,008        0.3   

Utilities

    4,339        1.5        6,975        2.4        6,281        2.1   

Food Services

    5,962        2.0        5,944        2.1        5,886        2.0   

Food Products

    3,143        1.1        5,694        2.0        5,856        2.0   

Automotive

  $ 4,984        1.7   $ 5,470        1.9   $ 6,650        2.2

Lodging and Casinos

    4,270        1.5        4,958        1.8        5,826        2.0   

Media

    10,843        3.7        4,768        1.7        2,004        0.7   

Insurance

    5,031        1.7        4,712        1.7        5,425        1.8   

Containers/Glass Products

    5,270        1.8        4,168        1.5        4,313        1.5   

Cable and Satellite Television

    2,624        0.9        3,557        1.2        2,646        0.9   

Publishing

    4,994        1.7        3,029        1.1        5,627        1.9   

Drugs

    2,957        1.0        2,873        1.0        10,091        3.4   

Construction & Building

    1,962        0.7        2,869        1.0        —         —    

Food/Drug Retailers

    2,824        1.0        2,737        1.0        5,861        2.0   

Brokers/Dealers/Investment Houses

    2,463        0.8        2,618        0.9        4,832        1.6   

Oil & Gas

    2,411        0.8        2,273        0.8        6,070        2.1   

Hotel, Gaming and Leisure

    2,647        0.9        1,917        0.7        —         —     

Nonferrous Metals/Minerals

    1,482        0.5        1,505        0.5        1,835        0.6   

Broadcast Radio and Television

    1,319        0.5        1,258        0.4        467        0.2   

Beverage, Food & Tobacco

    2,498        0.9        984        0.3        —          —    

Environmental Industries

    787        0.3        732        0.3        250        0.1   

Services: Consumer

    747        0.3        496        0.2        —         —    

Building and Development

    248        0.1        248        0.1        485        0.2   

Telecommunications/Cellular

    —          —          —          —          2,431        0.8   

Transportation

    780        0.3        —          —          —          —     

Capital

    —          —          —          —          —          —     

Equipment

    3,995        1.4        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 290,957        100.0   $ 284,845        100.0   $ 295,239        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Portfolio composition by geographic location at fair value

The following table shows our portfolio composition by geographic location at fair value at August 31, 2016, February 29, 2016 and February 28, 2015. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

     At August 31, 2016     At February 29, 2016     At February 28, 2015  
     Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
    

($ in thousands)

 

Southeast

   $ 101,174         37.1   $ 108,661         38.3   $ 92,069         38.3

Midwest

     61,810         22.7        57,553         20.3        55,767         23.2   

Northeast

     53,888         19.7        52,875         18.6        34,412         14.3   

Southwest

     25,463         9.3        25,535         9.0        —           —     

West

     16,552         6.1        24,544         8.6        40,259         16.7   

Other(1)

     11,917         4.4        12,828         4.5        17,031         7.1   

International

     2,000         0.7        2,000         0.7        1,000         0.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 272,804         100.0   $ 283,996         100.0   $ 240,538         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Comprised of our investment in the subordinated notes of Saratoga CLO.

Results of operations

Operating results for the three and six months ended August 31, 2016 and the fiscal years ended February 29, 2016, February 28, 2015 and February 28, 2014 are as follows:

 

    For the
three months
ended
    For the
six months
ended
    For the Year Ended  
    August 31, 2016     August 31, 2016     February 29, 2016     February 28, 2015     February 28, 2014  
    ($ in thousands)  

Total investment income

  $ 8,448      $ 16,356      $ 30,050      $ 27,375      $ 22,893   

Total expenses

    5,844        11,214        19,372        17,701        14,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    2,604        5,142        10,678        9,674        8,874   

Net realized gains

    5,937        12,040        226        3,276        1,271   

Net unrealized appreciation (depreciation) on investments

    (3,269     (8,623     741        (1,943     (1,648
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

  $ 5,272      $ 8,559      $ 11,645      $ 11,007      $ 8,497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As described in Note 2 to the consolidated financial statements and notes thereto, we identified errors that impacted the year ended February 28, 2014. The corrections for the errors, which we have concluded are immaterial to all prior period consolidated financial statements, are reflected in the consolidated financial statements and selected financial data included in this Form 10-K.

 

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Investment income

The composition of our investment income for the three and six months ended August 31, 2016 and the fiscal years ended February 29, 2016, February 28, 2015 and February 28, 2014 are as follows:

 

    For the
three months
ended
    For the
six months
ended
    For the Year Ended  
    August 31, 2016     August 31, 2016     February 29, 2016     February 28, 2015     February 28, 2014  
   

($ in thousands)

 

Interest from investments

  $ 7,303      $ 14,585      $ 26,871      $ 24,684      $ 20,179   

Management fee income

    375        748        1,495        1,520        1,775   

Interest from cash and cash equivalents and other income

    770        1,023        1,684        1,171        939   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 8,448      $ 16,356      $ 30,050      $ 27,375      $ 22,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended August 31, 2016, total investment income increased $0.7 million, or 8.9% compared to the three months ended August 31, 2015. Interest income from investments increased $0.5 million, or 7.1%, to $7.3 million for the three months ended August 31, 2016 from $6.8 million for the three months ended August 31, 2015. This reflects an increase of 8.2% in total investments to $272.8 million at August 31, 2016 from $252.2 million at August 31, 2015, with the weighted average current coupon increasing from 11.7% to 11.9%.

For the six months ended August 31, 2016, total investment income increased $1.0 million, or 6.8% compared to the six months ended August 31, 2015. Interest income from investments increased $0.8 million, or 6.1%, to $14.6 million for the six months ended August 31, 2016 from $13.8 million for the six months ended August 31, 2015. This reflects an increase of 8.2% in total investments to $272.8 million at August 31, 2016 from $252.2 million at August 31, 2015, with the weighted average current coupon increasing from 11.7% to 11.9%.

For the fiscal year ended February 29, 2016, total investment income increased $2.7 million, or 9.8% compared to the fiscal year ended February 28, 2015. Interest income from investments increased $2.2 million, or 8.9%, to $26.9 million for the year ended February 29, 2016 from $24.7 million for the fiscal year ended February 28, 2015. This reflects an increase of 18.1% in total investments to $284.0 million at February 29, 2016 from $240.5 million at February 28, 2015, offset by the weighted average current coupon reducing from 12.0% to 11.5%.

For the fiscal year ended February 28, 2015, total investment income increased $4.5 million, or 19.6% compared to the fiscal year ended February 28, 2014. Interest income from investments increased $4.5 million, or 22.3%, to $24.7 million for the year ended February 28, 2015 from $20.2 million for the fiscal year ended February 28, 2014. This reflects an increase of 16.9% in total investments to $240.5 million at February 28, 2015 from $205.8 million at February 28, 2014, offset by the weighted average current coupon reducing from 12.5% to 12.0%.

For the three and six months ended August 31, 2016, total PIK income was $0.2 million and $0.3 million, respectively. For the fiscal years ended February 29, 2016, February 28, 2015 and February 28, 2014, total PIK income was $1.0 million, $1.2 million, and $0.9 million, respectively.

The Saratoga CLO was initially refinanced in October 2013, and again in November 2016. As a result, proceeds from principal payments in the loan portfolio of Saratoga CLO must now be used to paydown its outstanding notes. Thus, the management fee income and investment income that we receive from Saratoga CLO has declined from historical periods, decreasing $0.03 million or 1.7% to $1.5 million and $0.3 million or 14.3% to $1.5 million, for the years ended February 29, 2016 and February 28, 2015, respectively.

 

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Operating expenses

The composition of our operating expenses for the three and six months ended August 31, 2016 and the years ended February 29, 2016, February 28, 2015 and February 28, 2014 are as follows:

Operating Expenses

 

    For the
three months
ended
    For the
six months
ended
    For the Year Ended  
    August 31, 2016     August 31, 2016     February 29, 2016     February 28, 2015     February 28, 2014  
   

($ in thousands)

 

Interest and debt financing expenses

  $ 2,370      $ 4,738      $ 8,456      $ 7,375      $ 6,084   

Base management fees

    1,203        2,430        4,529        4,157        3,327   

Professional fees

    302        662        1,336        1,302        1,212   

Incentive management fees

    1,208        1,937        2,232        2,548        939   

Administrator expenses

    325        650        1,175        1,000        1,000   

Insurance

    71        141        331        337        443   

Directors fees and expenses

    60        126        204        210        204   

Excise tax expense

    —          —          114        294        —    

General & administrative and other expenses

    305        530        995        478        810   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  $ 5,844      $ 11,214      $ 19,372      $ 17,701      $ 14,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended August 31, 2016, total operating expenses increased $1.7 million, or 42.5% compared to the three months ended August 31, 2015. For the six months ended August 31, 2016, total operating expenses increased $1.3 million, or 13.4% compared to the six months ended August 31, 2015. For the year ended February 29, 2016, total operating expenses increased $1.7 million, or 9.4% compared to the year ended February 28, 2015. For the year ended February 28, 2015, total operating expenses increased $3.7 million, or 26.3% compared to the year ended February 28, 2014.

For the three and six months ended August 31, 2016 and the years ended February 29, 2016 and February 28, 2015, the increase in interest and debt financing expenses is primarily attributable to an increase in outstanding debt as compared to the prior years, with increased levels of outstanding SBA debentures, as well as the notes payable being outstanding for the full year ended February 29, 2016, and additional notes being issued during this year. The Credit Facility decreased from $2.0 million outstanding at August 31, 2015 to $0.0 million at August 31, 2016, and from $9.6 million outstanding at February 28, 2015 to $0.0 million at February 29, 2016, while our SBA debentures increased from $79.0 million to $103.7 million and from $79.0 million to $103.7 million, respectively. The notes increased from $48.3 million as of February 28, 2015 to $57.2 million as of August 31, 2015, and remained unchanged at $61.8 million as of both February 29, 2016 and August 31, 2016. For the three months ended August 31, 2016, the weighted average interest rate on our outstanding indebtedness was 4.80% compared to 5.03% for the three months ended August 31, 2015. For the six months ended August 31, 2016, the weighted average interest rate on our outstanding indebtedness was 5.38% compared to 4.96% for the six months ended August 31, 2015. For the year ended February 29, 2016, the weighted average interest rate on our outstanding indebtedness was 4.91% compared to 4.95% for the fiscal year ended February 28, 2015 and 5.35% for the fiscal year ended February 28, 2014. This decrease was primarily driven by an increase in SBA debentures that carry a lower interest rate but now make up a higher proportion of our overall debt, increasing from 57.1% of overall debt as of August 31, 2015 to 62.7% as of August 31, 2016 and from 57.7% of overall debt as of February 28, 2015 to 62.7% as of February 29, 2016.

 

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For the three months ended August 31, 2016, base management fees increased $0.1 million, or 4.5% compared to the three months ended August 31, 2015. For the six months ended August 31, 2016, base management fees increased $0.2 million, or 6.8% compared to the six months ended August 31, 2015. The increase in base management fees results from the increase in the average value of our total assets, less cash and cash equivalents, from $261.0 million as of August 31, 2015 to $272.7 million as of August 31, 2016. For the year ended February 29, 2016, base management fees increased $0.4 million, or 8.9% compared to the fiscal year ended February 28, 2015. The increase in base management fees results from the increase in the average value of our total assets, less cash and cash equivalents, from $246.5 million as of February 28, 2015 to $266.3 million as of February 29, 2016. For the year ended February 28, 2015, base management fees increased $0.8 million, or 25.0% compared to the fiscal year ended February 28, 2014. The increase in base management fees results from the increase in the average value of our total assets, less cash and cash equivalents, from $209.2 million to $246.5 million as of February 28, 2014 and 2015, respectively.

For the three and six months ended August 31, 2016, professional fees decreased $0.05 million, or 13.5%, and decreased $0.02 million, or 3.1%, respectively, compared to the three months ended August 31, 2015. For the year ended February 29, 2016, professional fees increased $0.03 million, or 2.7% compared to the fiscal year ended February 28, 2015. For the year ended February 28, 2015, professional fees increased $0.09 million, or 7.4% compared to the fiscal year ended February 28, 2014.

For the three months ended August 31, 2016, incentive management fees increased $1.2 million as compared to the three months ended August 31, 2015. For the six months ended August 31, 2016, incentive management fees increased $0.2 million, or 10.3% compared to the six months ended August 31, 2015. For the year ended February 29, 2016, incentive management fees decreased $0.3 million, or 12.4% compared to the fiscal year ended February 28, 2015. The first part of the incentive management fees increased this year, as higher total assets has led to increased net investment income above the hurdle rate pursuant to the Management Agreement. For the three months ended August 31, 2016, incentive management fees related to capital gains changed from a $0.8 million reduction of expense to a $0.4 million increase in expense as compared to the three months ended August 31, 2015, reflecting the $2.4 million net loss on investments for the three months ended August 31, 2015, as compared to the $2.7 million net gain on investments for the three months ended August 31, 2016. For the six months ended August 31, 2016, incentive management fees in total increased $0.2 million as the incentive management fees related to capital gains increased from $0.3 million to $0.5 million compared to the six months ended August 31, 2015, reflecting the $3.2 million net gain on investments for the six months ended August 31, 2015, as compared to the $3.4 million net gain on investments for the six months ended August 31, 2016. For the year ended February 29, 2016, incentive management fees in total were more than offset as the incentive management fees related to capital gains changed from a $0.3 million increase in expense to a $0.05 million decrease in expense compared to the fiscal year ended February 28, 2015. For the year ended February 28, 2015, incentive management fees increased $1.6 million, or 171.4% compared to the fiscal year ended February 28, 2014. The increase in incentive management fees is primarily attributable to an increase in accrued incentive fees this year, as higher total assets has led to increased net investment income above the hurdle rate pursuant to the Management Agreement. In addition, for the year ended February 28, 2015, the incentive management fees related to capital gains changed from a $0.07 million reduction of expense to a $0.3 million increase in expense compared to the fiscal year ended February 28, 2014.

As discussed above, the increase in interest and debt financing expenses for the three and six months ended August 31, 2016 and the years ended February 29, 2016, February 28, 2015 and February 28, 2014 is primarily attributable to an increase in the amount of outstanding debt as compared to the prior years. For the three and six months ended August 31, 2016 and the years ended February 29, 2016, February 28, 2015 and February 28, 2014, the weighted average interest rate on the outstanding borrowings under the Credit Facility was 6.00%, 6.00%, 6.00%, 6.75% and 7.50%, respectively. For the three and six months ended August 31, 2016 and the years ended February 29, 2016, February 28, 2015 and February 28, 2014, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.19%, 3.14%, 3.12%, 2.93% and 3.03%, respectively.

 

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Net realized gains/(losses) on sales of investments

For the three months ended August 31, 2016, the Company had $50.3 million of sales, repayments, exits or restructurings resulting in $5.9 million of net realized gains. For the six months ended August 31, 2016, the Company had $70.9 million of sales, repayments, exits or restructurings resulting in $12.0 million of net realized gains. The most significant realized gains during the six months ended August 31, 2016 were as follows (dollars in thousands):

Six months ended August 31, 2016

 

Issuer

   Asset Type    Gross
Proceeds
     Cost      Net
Realized
Gain
 

Take 5 Oil Change, L.L.C

   Common Stock    $ 6,457       $ 481       $ 5,976   

Legacy Cabinets, Inc.

   Common Stock Voting A-1      2,320         221         2,099   

Legacy Cabinets, Inc.

   Common Stock Voting B-1      1,464         139         1,325   

The $6.0 million of realized gain on our investment in Take 5 Oil Change, L.L.C. was due to the completion of a sales transaction with a strategic acquirer.

The $3.4 million of realized gains on our investments in Legacy Cabinets, Inc. were due to a period of steadily improving performance, leading up to our sale of shares in Legacy Cabinets, Inc.

For the fiscal year ended February 29, 2016, the Company had $68.2 million of sales, repayments, exits or restructurings resulting in $0.2 million of net realized gains. The most significant realized gains and losses during the year ended February 29, 2016 were as follows (dollars in thousands):

Fiscal year ended February 29, 2016

 

Issuer

   Asset Type    Gross
Proceeds
     Cost      Net
Realized
Gain/
(Loss)
 

Network Communications, Inc.

   Common Stock    $ 3,206       $ —         $ 3,206   

Targus Holdings, Inc.

   Unsecured Note      —           (2,054      (2,054

Targus Holdings, Inc.

   First Lien Term Loan      —           (1,172      (1,172

Targus Holdings, Inc.

   Common Stock      —           (567      (567

The $3.2 million of realized gain on our investments in Network Communications, Inc. is due to the sale of the company to a third party and reflects the realization value pursuant to that transaction. The $3.8 million realized loss in our investments in Targus Holdings, Inc. was due to a restructuring that occurred during the quarter, resulting in the elimination of our former Unsecured Note and common equity, accompanied by a conversion of our prior first lien term loan in to a new equity.

 

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For the fiscal year ended February 28, 2015, the Company had $73.3 million of sales, repayments, exits or restructurings resulting in $3.3 million of net realized gains. The most significant realized gains during the year ended February 28, 2015 were as follows (dollars in thousands):

Fiscal year ended February 28, 2015

 

Issuer

   Asset Type    Gross
Proceeds
     Cost      Net
Realized

Gain/
(Loss)
 

Community Investors, Inc.

   Term Loan A Senior Facility    $ 6,983       $ 6,886       $ 97   

HOA Restaurant GP/Finance

   Senior Secured Notes      4,225         3,938         287   

USS Parent Holding Corp

   Non Voting Common Stock      248         133         115   

USS Parent Holding Corp

   Voting Common Stock      5,650         3,026         2,624   

For the fiscal year ended February 28, 2014, the Company had $71.6 million of sales, repayments, exits or restructurings resulting in $1.3 million of net realized gains. The most significant realized gains during the year ended February 28, 2014 were as follows (dollars in thousands):

Fiscal year ended February 28, 2014

 

Issuer

   Asset Type    Gross
Proceeds
     Cost      Net

Realized
Gain/
(Loss)
 

Penton Media, Inc.

   First Lien Term Loan    $ 4,887       $ 4,681       $ 206   

Sourcehov, LLC

   Second Lien Term Loan      3,030         2,659         371   

Worldwide Express Operations, LLC

   Warrants      128         —          128   

Net unrealized appreciation/depreciation on investments

For the three months ended August 31, 2016, our investments had net unrealized depreciation of $3.3 million versus net unrealized depreciation of $6.1 million for the three months ended August 31, 2015. For the six months ended August 31, 2016, our investments had net unrealized depreciation of $8.6 million versus net unrealized depreciation of $0.6 million for the six months ended August 31, 2015. The most significant cumulative changes in unrealized appreciation and depreciation for the six months ended August 31, 2016, were the following (dollars in thousands):

Six months ended August 31, 2016

 

Issuer

   Asset Type    Cost      Fair
Value
     Total
Unrealized
Depreciation
    YTD Change
in Unrealized
Depreciation
 

Take 5 Oil Change, L.L.C

   Common Stock    $ —         $ —         $ —        $ (5,755

Legacy Cabinets, Inc.

   Common Stock Voting A-1      —           —           —          (2,456

Legacy Cabinets, Inc.

   Common Stock Voting B-1      —           —           —          (1,550

Elyria Foundry Company, L.L.C.

   Common Stock      9,217         314         (8,903     (1,712

The $5.8 million of change in unrealized depreciation in our investment in Take 5 Oil Change, L.L.C. was driven by the completion of a sales transaction with a strategic acquirer. In realizing this gain as a result of the sale, unrealized appreciation was adjusted to zero, which resulted in a $5.8 million change in unrealized depreciation for the period.

 

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The $4.0 million of change in unrealized depreciation in our investments in Legacy Cabinets, Inc. were driven by the completion of a sales transaction. In realizing these gains as a result of the sale, unrealized appreciation was adjusted to zero, which resulted in a $4.0 million change in unrealized depreciation for the period.

The $1.7 million of change in unrealized depreciation in our investment in Elyria Foundry Company, L.L.C. was driven by a continued decline in oil and gas end markets since year-end, negatively impacting that company’s performance.

For the year ended February 29, 2016, our investments had net unrealized appreciation of $0.7 million versus net unrealized depreciation of $1.9 million for the year ended February 28, 2015. The most significant cumulative changes in unrealized appreciation and depreciation for the year ended February 29, 2016, were the following (dollars in thousands):

Fiscal year ended February 29, 2016

 

Issuer

   Asset Type    Cost      Fair
Value
     Total
Unrealized
Appreciation/
(Depreciation)
    YTD Change
in Unrealized
Appreciation/
(Depreciation)
 

Take 5 Oil Change, LLC

   Common Stock    $ 481       $   6,235       $ 5,754      $ 4,762   

Targus Holdings, Inc.

   Unsecured Notes      —           —          —          2,054   

Elyria Foundry Company, LLC

   Common Stock      9,217         2,026         (7,191     (4,735

The $4.8 million of change in unrealized appreciation in our investment in Take 5 Oil Change, LLC was driven by a transaction with a strategic acquirer.

The $2.1 million of change in unrealized appreciation in our investment in Targus Holdings, Inc. was due to a restructuring that occurred during the quarter, resulting in the elimination of our former Unsecured Note. In realizing this loss as a result of the restructuring, unrealized depreciation was adjusted to zero which resulted in a $2.1 million change in unrealized appreciation for the year.

The $4.7 million change in unrealized depreciation in our investment in the Elyria Foundry Company, LLC was primarily due to a decline in oil and gas end markets since year-end, negatively impacting that company’s performance.

For the year ended February 28, 2015, our investments had net unrealized depreciation of $1.9 million versus net unrealized depreciation of $1.6 million for the year ended February 28, 2014. The most significant cumulative changes in unrealized appreciation and depreciation for the year ended February 28, 2015, were the following (dollars in thousands):

Fiscal year ended February 28, 2015

 

Issuer

   Asset Type    Cost      Fair
Value
     Total
Unrealized
Appreciation/
(Depreciation)
    YTD Change
in Unrealized
Appreciation/
(Depreciation)
 

Legacy Cabinets, Inc.

   Common—Voting A-1    $ 221       $ 1,493       $   1,272      $ 941   

Targus Holdings, Inc.

   Common      567         —          (567     (730

Saratoga CLO

   Other/Structured Finance

Securities

     15,953         17,031         1,078        (1,935

 

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For the year ended February 28, 2014, our investments had a decrease in net unrealized depreciation of $1.6 million versus an increase in net unrealized appreciation of $7.0 million for the year ended February 28, 2013. The most significant cumulative changes in unrealized appreciation and depreciation for the year ended February 28, 2014, were the following (dollars in thousands):

Fiscal year ended February 28, 2014

 

Issuer

   Asset Type    Cost      Fair
Value
     Total
Unrealized
Appreciation/
(Depreciation)
    YTD Change
in Unrealized
Appreciation/
(Depreciation)
 

Saratoga CLO

   Other/Structured Finance

Securities

   $ 16,556       $ 19,570       $ 3,014      $ (3,558

Targus Holdings, Inc.

   Common Stock      567         730         163        (2,595

USS Parent Holding Corp.

   Voting Common Stock      3,026         5,028         2,002        2,162   

Group Dekko, Inc.

   Second Lien Term Loan      6,902         6,741         (161     (56

Elyria Foundry Company, LLC

   Senior Secured Notes      8,859         6,644         (2,215     (2,215

Changes in net assets resulting from operations

For the three months ended August 31, 2016 and the fiscal years ended February 29, 2016, February 28, 2015 and February 28, 2014, we recorded a net increase in net assets resulting from operations of $5.3 million, $11.6 million, $11.0 million and $8.5 million, respectively. Based on 5,740,816 weighted average common shares outstanding as of August 31, 2016, our per share net increase in net assets resulting from operations was $0.92 for the three months ended August 31, 2016. This compares to a per share net increase in net assets resulting from operations of $0.22 for the three months ended August 31, 2015 based on 5,583,795 weighted average common shares outstanding as of August 31, 2015. Based on 5,582,453 weighted average common shares outstanding as of February 29, 2016, our per share net increase in net assets resulting from operations was $2.09 for the fiscal year ended February 29, 2016. This compares to a per share net increase in net assets resulting from operations of $2.04 for the fiscal year ended February 28, 2015 (based on 5,385,049 weighted average common shares outstanding as of February 28, 2015), and a per share net increase in net assets resulting from operations of $1.73 for the fiscal year ended February 28, 2014 (based on 4,920,517 weighted average common shares outstanding as of February 28, 2014).

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We intend to continue to generate cash primarily from cash flows from operations, including interest earned from our investments in debt in middle market companies, interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities.

Although we expect to fund the growth of our investment portfolio through the net proceeds from SBA debenture drawdowns and future equity offerings, including our dividend reinvestment plan (“DRIP”), and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our plans to raise capital will be successful. In this regard, because our common stock has historically traded at a price below our current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital.

In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the distribution requirement applicable to RICs under Subchapter M of the Code. In satisfying this distribution requirement, we have in the past relied on IRS issued private letter rulings concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may

 

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elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution. We may rely on these IRS private letter rulings in future periods to satisfy our RIC distribution requirement.

Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. Our asset coverage ratio, as defined in the 1940 Act, was 308.1% as of August 31, 2016, 302.5% as of February 29, 2016, and 311.7% as of February 28, 2015. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable terms, if at all.

Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. Also, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

Madison revolving credit facility

Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding (the “Credit Facility”) on June 30, 2010.

Availability. The Company can draw up to the lesser of (i) $40.0 million (the “Facility Amount”) and (ii) the product of the applicable advance rate (which varies from 50.0% to 75.0% depending on the type of loan asset) and the value, determined in accordance with the Credit Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan (the “Borrowing Base”), in each case less (a) the amount of any undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account referred to below (the “Unfunded Exposure Amount”) and (b) outstanding borrowings. Each loan asset held by the Company as of the date on which the Credit Facility was closed was valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of the loan asset, and certain modifications to the terms of the loan asset.

The Credit Facility contains limitations on the type of loan assets that are “eligible” to be included in the Borrowing Base and as to the concentration level of certain categories of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size and quality, payment frequency, status and terms, average life, and collateral interests. In addition, if an asset is to remain an “eligible” loan asset, the Company may not make changes to the payment, amortization, collateral and certain other terms of the loan assets without the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.

Collateral. The Credit Facility is secured by substantially all of the assets of the Company (other than assets held by our SBIC subsidiary) and includes the subordinated notes (“CLO Notes”) issued by Saratoga CLO and the Company’s rights under the CLO Management Agreement (as defined below).

Interest Rate and Fees. Under the Credit Facility, funds are borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the

 

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applicable margin over such alternative base rate is 4.50%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Credit Facility.

Revolving Period and Maturity Date. The Company may make and repay borrowings under the Credit Facility for a period of three years following the closing of the Credit Facility (the “Revolving Period”). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the Credit Facility are due and payable in full five years after the end of the Revolving Period.

Collateral Tests. It is a condition precedent to any borrowing under the Credit Facility that the principal amount outstanding under the Credit Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the “Borrowing Base Test”). In addition to satisfying the Borrowing Base Test, the following tests must also be satisfied (together with Borrowing Base Test, the “Collateral Tests”):

 

    Interest Coverage Ratio. The ratio (expressed as a percentage) of interest collections with respect to pledged loan assets, less certain fees and expenses relating to the Credit Facility, to accrued interest and commitment fees and any breakage costs payable to the lenders under the Credit Facility for the last 6 payment periods must equal at least 175.0%.

 

    Overcollateralization Ratio. The ratio (expressed as a percentage) of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets plus the fair value of certain ineligible pledged loan assets and the CLO Notes (in each case, subject to certain adjustments) to outstanding borrowings under the Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%.

 

    Weighted Average FMV Test. The aggregate adjusted or weighted value of “eligible” pledged loan assets as a percentage of the aggregate outstanding principal balance of “eligible” pledged loan assets must be equal to or greater than 72.0% and 80.0% during the one-year periods prior to the first and second anniversary of the closing date, respectively, and 85.0% at all times thereafter.

The Credit Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the Company’s breach of its representation and warranty that pledged loan assets included in the Borrowing Base are “eligible” loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is overstated as a result of such breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.

Priority of Payments. During the Revolving Period, the priority of payments provisions of the Credit Facility require, after payment of specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections of interest from the loan assets, be applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would not otherwise be met. Similarly, following termination of the Revolving Period, collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.

Reserve Account. The Credit Facility requires the Company to set aside an amount equal to the sum of accrued interest, commitment fees and administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue, the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets which do not pay cash interest at least quarterly exceeds 15.0% of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding

 

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six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.

Unfunded Exposure Account. With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated account (the “Unfunded Exposure Account”) 100.0% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company acquires a revolver or delayed draw loan asset and requests a related borrowing under the Credit Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested borrowing and other Company funds, and if for any reason such amounts are insufficient, through application of the priority of payment provisions described above.

Operating Expenses. The priority of payments provision of the Credit Facility provides for the payment of certain operating expenses of the Company out of collections on principal and interest during the Revolving Period and out of collections on interest following the termination of the Revolving Period in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or $2.5 million for the immediately preceding period of twelve consecutive monthly payment dates. This ceiling can be increased by the lesser of 5.0% or the percentage increase in the fair market value of all the Company’s assets only on the first monthly payment date to occur after each one-year anniversary following the closing of the Credit Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required in order to pay operating expenses through the priority of payments provision.

Events of Default. The Credit Facility contains certain negative covenants, customary representations and warranties and affirmative covenants and events of default. The Credit Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of existence, negative pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Credit Facility include, among other things, the following:

 

    an Interest Coverage Ratio of less than 150.0%;

 

    an Overcollateralization Ratio of less than 175.0%;

 

    the filing of certain ERISA or tax liens;

 

    the occurrence of certain “Manager Events” such as:

 

    failure by Saratoga Investment Advisors and its affiliates to maintain collectively, directly or indirectly, a cash equity investment in the Company in an amount equal to at least $5,000,000 at any time prior to the third anniversary of the closing date;

 

    failure of the Management Agreement between Saratoga Investment Advisors and the Company to be in full force and effect;

 

    indictment or conviction of Saratoga Investment Advisors or any “key person” for a felony offense, or any fraud, embezzlement or misappropriation of funds by Saratoga Investment Advisors or any “key person” and, in the case of “key persons,” without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed to replace such key person within 30 days;

 

    resignation, termination, disability or death of a “key person” or failure of any “key person” to provide active participation in Saratoga Investment Advisors’ daily activities, all without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed within 30 days; or

 

   

occurrence of any event constituting “cause” under the Collateral Management Agreement between the Company and Saratoga CLO (the “CLO Management Agreement”), delivery of a

 

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notice under Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.

Conditions to Acquisitions and Pledges of Loan Assets. The Credit Facility imposes certain additional conditions to the acquisition and pledge of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative agent indicates in writing its satisfaction with Saratoga Investment Advisors’ policies, personnel and processes relating to the loan assets.

Fees and Expenses. The Company paid certain fees and reimbursed Madison Capital Funding for the aggregate amount of all documented, out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Madison Capital Funding in connection with the Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates. These amounts totaled $2.0 million.

On February 24, 2012, we amended our Credit Facility with Madison Capital Funding to, among other things:

 

    expand the borrowing capacity under the credit facility from $40.0 million to $45.0 million;

 

    extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may, upon the occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and

 

    remove the condition that we may not acquire additional loan assets without the prior written consent of the administrative agent.

On September 17, 2014, we entered into a second amendment to the Revolving Facility with Madison Capital Funding to, among other things:

 

    extend the commitment termination date from February 24, 2015 to September 17, 2017;

 

    extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

    reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and

 

    reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.

As of August 31, 2016, we had no outstanding borrowings under the Credit Facility and $103.7 million SBA-guaranteed debentures outstanding (which are discussed below). As of February 29, 2016, we had no outstanding borrowings under the Credit Facility and $103.7 million SBA-guaranteed debentures outstanding. As of February 28, 2015, we had $9.6 million outstanding under the Credit Facility and $79.0 million SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at August 31, 2016, February 29, 2016, and February 28, 2015 was $24.0 million, $21.8 million, and $36.3 million, respectively.

Our asset coverage ratio, as defined in the 1940 Act, was 308.1% as of August 31, 2016 and 302.5% and 311.7% for the years ended February 29, 2016 and February 28, 2015, respectively.

 

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SBA-guaranteed debentures

In addition, we, through a wholly-owned subsidiary, sought and obtained a license from the SBA to operate an SBIC. In this regard, on March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.

The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBA regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150.0 million when it has at least $75.0 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of August 31, 2016, our SBIC subsidiary had $75.0 million in regulatory capital and $103.7 million SBA-guaranteed debentures outstanding.

We received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the definition of senior securities in the 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $150.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.

On April 3, 2015, the SBA issued a “green light” or “go forth” letter inviting us to continue our application process to obtain a license to form and operate a second SBIC subsidiary. On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license, and in order to ensure that they were reviewing the most current information available, we would need to update all previously submitted materials and invited us to reapply. As a result of this request, with which we are in the process of complying, the existing “green light” letter that the SBA issued to us will expire. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the first license.

Unsecured notes

In May 2013, we issued $48.3 million in aggregate principal amount of our 7.50% unsecured notes due 2020 for net proceeds of $46.1 million after deducting underwriting commissions of $1.9 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option. Interest on these 2020 Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15, at a rate of 7.50% per year, beginning August 15, 2013. The 2020 Notes mature on May 31, 2020 and since May 31, 2016, may be redeemed in whole or in part at any time or from time to time at our option. In connection with the issuance of the 2020 Notes, we agreed to the following covenants for the period of time during which the 2020 Notes are outstanding:

 

    we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings.

 

   

we will not violate (regardless of whether we are subject to) Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to (i) any exemptive

 

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relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to the Company if it determines to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the BDC’s status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. Currently these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.

The 2020 Notes are listed on the NYSE under the trading symbol “SAQ” with a par value of $25.00 per share.

On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. Inc. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an ATM offering. As of August 31, 2016, the Company sold 2020 Notes with a principal of $13,493,125 at an average price of $25.31 for aggregate net proceeds of $13,385,766 (net of transaction costs).

Cash and Cash Equivalents

At August 31, 2016, February 29, 2016 and February 28, 2015, the fair value of investments, cash and cash equivalents and cash and cash equivalents, reserve accounts were as follows:

 

     At August 31,
2016
    At February 29,
2016
    At February 28,
2015
 
     Fair Value      Percentage
of
Total
    Fair Value      Percent
of
Total
    Fair Value      Percent
of
Total
 
    

($ in thousands)

 

Cash and cash equivalents

   $ 12,707         4.3   $ 2,440         0.8   $ 1,888         0.7

Cash and cash equivalents, reserve accounts

     10,174         3.4        4,595         1.6        18,175         7.0   

Syndicated loans

     9,516         3.2        11,868         4.1        18,302         7.0   

First lien term loans

     153,276         51.9        144,643         49.7        145,207         55.7   

Second lien term loans

     87,024         29.4        88,178         30.3        35,603         13.7   

Unsecured notes

     —           —          —           —          4,230         1.7   

Structured finance securities

     11,917         4.0        12,828         4.4        17,031         6.5   

Equity Interests

     11,071         3.8        26,479         9.1        20,165         7.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 295,685         100.0   $ 291,031         100.0   $ 260,601         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Dividends and Distributions

On September 24, 2014, we announced the approval of an open market share repurchase plan that allows it to repurchase up to 200,000 shares of our common stock at prices below our NAV as reported in its then most recently published consolidated financial statements, which was subsequently increased to 400,000 shares of our common stock. As of August 31, 2016, we purchased 138,494 shares of common stock, at the average price of $16.16 for approximately $2.2 million pursuant to this repurchase plan. On October 5, 2016, our board of directors extended the open market share repurchase plan for another year to October 15, 2017 and increased the number of shares we are permitted to repurchase at prices below our NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of our common stock.

On October 5, 2016, our board of directors declared a dividend of $0.44 per share payable on November 9, 2016, to common stockholders of record as of October 31, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP.

 

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On August 8, 2016, our board of directors declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.

On July 7, 2016, our board of directors declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.

On March 31, 2016, our board of directors declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common stockholders of record as of April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

On January 12, 2016, our board of directors declared a dividend of $0.40 per share, which was paid on February 29, 2016, to common stockholders of record as of February 1, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,764 newly issued shares of common stock, or 1.2% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.11 per share, which equaled the volume weighted average trading price per share of the common stock on February 16, 17, 18, 19, 22, 23, 24, 25, 26 and 29, 2016.

On October 7, 2015, our board of directors declared a dividend of $0.36 per share, which was paid on November 30, 2015, to common stockholders of record as of November 2, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.53 per share, which equaled the volume weighted average trading price per share of the common stock on November 16, 17, 18, 19, 20, 23, 24, 25, 27 and 30, 2015.

On July 8, 2015, our board of directors declared a dividend of $0.33 per share, which was paid on August 31, 2015, to common stockholders of record as of August 3, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.28 per share, which equaled the volume weighted average trading price per share of the common stock on August 18, 19, 20, 21, 24, 25, 26, 27, 28 and 31, 2015.

 

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On May 14, 2015, our board of directors declared a special dividend of $1.00 per share, which was paid on June 5, 2015, to common stockholders of record as of May 26, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.47 per share, which equaled the volume weighted average trading price per share of the common stock on May 22, 26, 27, 28, 29 and June 1, 2, 3, 4, and 5, 2015.

On April 9, 2015, our board of directors declared a dividend of $0.27 per share, which was paid on May 29, 2015, to common stockholders of record as of May 4, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our dividend reinvestment plan (“DRIP”). Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.78 per share, which equaled the volume weighted average trading price per share of the common stock on May 15, 18, 19, 20, 21, 22, 26, 27, 28 and 29, 2015.

On September 24, 2014, the Company declared a dividend of $0.22 per share, which was paid on February 27, 2015. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled the volume weighted average trading price per share of the common stock on February 13, 17, 18, 19, 20, 23, 24, 25, 26 and 27, 2015.

Also on September 24, 2014, the Company declared a dividend of $0.18 per share, which was paid on November 28, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled the volume weighted average trading price per share of the common stock on November 14, 17, 18, 19, 20, 21, 24, 25, 26 and 28, 2014.

On October 30, 2013, our board of directors declared a dividend of $2.65 per share, which as paid on December 27, 2013, to common stockholders of record as of November 13, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. This dividend was declared in reliance on certain private letter rulings issued by the IRS concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution.

Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.439 per share, which equaled the volume weighted average trading price per share of the common stock on December 11, 13, and 16, 2013.

 

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On November 9, 2012, our board of directors declared a dividend of $4.25 per share, which was paid on December 31, 2012, to common stockholders of record as of November 20, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share.

Based on shareholder elections, the dividend consisted of $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.

On November 15, 2011, our board of directors declared a dividend of $3.00 per share, which was paid on December 30, 2011, to common stockholders of record as of November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share.

Based on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117067 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.

On November 12, 2010, our board of directors declared a dividend of $4.40 per share to shareholders payable in cash or shares of our common stock, in accordance with the provisions of the IRS Revenue Procedure 2010-12, which allows a publicly-traded regulated investment company to satisfy its distribution requirements with a distribution paid partly in common stock provided that at least 10.0% of the distribution is payable in cash. The dividend was paid on December 29, 2010 to common shareholders of record on November 19, 2010.

Based on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.

On November 13, 2009, our board of directors declared a dividend of $18.25 per share, which was paid on December 31, 2009, to common stockholders of record as of November 25, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $0.25 per share.

Based on shareholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of

 

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shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted average trading price per share of the common stock on December 24 and 28, 2009.

We cannot provide any assurance that these measures will provide sufficient sources of liquidity to support our operations and growth.

Contractual obligations

The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2016:

 

            Payment Due by Period  
     Total      Less Than
1 Year
     1 -3
Years
     3 -5
Years
     More Than
5 Years
 
     ($ in thousands)  

Long-Term Debt Obligations

   $ 165,453       $   —        $   —        $ 61,793       $ 103,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

The Company’s off-balance sheet arrangements consisted of $8.0 million, $2.0 million, and $11.2 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of August 31, 2016, February 29, 2016, and February 28, 2015, respectively. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statement of assets and liabilities and are not reflected in the Company’s consolidated statements of assets and liabilities.

A summary of the composition of the unfunded commitments as of August 31, 2016, February 29, 2016, and February 28, 2015 is shown in the table below (dollars in thousands):

 

     As of  
     August 31,
2016
     February 29,
2016
     February 28,
2015
 

Avionte Holdings, LLC

   $ 1,000       $ 1,000       $ 1,000   

Identity Automation

     —           1,000         —     

Bristol Hospice, LLC

     —           —           7,500   

HMN Holdco, LLC

     —           —           2,400   

Knowland Technology Holdings, L.L.C.

     —           —           300   

BoardEffect, Inc.

   $ 7,000         —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,000       $ 2,000       $ 11,200   
  

 

 

    

 

 

    

 

 

 

On July 8, 2015, our board of directors, including a majority of the independent directors, approved the annual continuation of our Management Agreement with Saratoga Investment Advisors, LLC. Our board of directors also approved the renewal of the administration agreement with Saratoga Investment Advisors, LLC for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by us thereunder to $1.3 million for the additional one-year term. On October 5, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to raise the cap on the payment or reimbursement of expenses by the Company thereunder to $1.5 million for the additional one-year term, effective November 1, 2016.

 

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SENIOR SECURITIES

($ in thousands, except per share data)

Information about our senior securities is shown in the following table as of February 28/29 for the fiscal years indicated in the table, unless otherwise noted. Ernst & Young LLP’s report on the table, as of February 29, 2016, is attached as an exhibit to the registration statement of which this prospectus is a part. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial condition, liquidity and capital resources” for more detailed information regarding the senior securities.

 

Class and Year(1)(2)

   Total
Amount
Outstanding
Exclusive of
Treasury
Securities(3)
     Asset
Coverage
per Unit(4)
     Involuntary
Liquidating
Preference
per Share(5)
     Average
Market
Value per
Share(6)
 
     ($ in thousands)  

Credit Facility with Madison Capital Funding

           

Fiscal year 2017 (as of August 31, 2016, unaudited)(7)

   $ —         $ 3,081         —           N/A   

Fiscal year 2016 (as of February 29, 2016)

   $ —         $ 3,025         —           N/A   

Fiscal year 2015 (as of February 28, 2015)

   $ 9,600       $ 3,117         —           N/A   

Fiscal year 2014 (as of February 28, 2014)

   $ —         $ 3,348         —           N/A   

Fiscal year 2013 (as of February 28, 2013)

   $ 24,300       $ 5,421         —           N/A   

Fiscal year 2012 (as of February 29, 2012)

   $ 20,000       $ 5,834         —           N/A   

Fiscal year 2011 (as of February 28, 2011)

   $ 4,500       $ 20,077         —           N/A   

Fiscal year 2010 (as of February 28, 2010)

   $ —         $ —           —           N/A   

Fiscal year 2009 (as of February 28, 2009)

   $ —         $ —           —           N/A   

Fiscal year 2008 (as of February 29, 2008)

   $ —         $ —           —           N/A   

Fiscal year 2007 (as of February 28, 2007)

   $ —         $ —           —           —     

7.50% Notes due 2020

           

Fiscal year 2017 (as of August 31, 2016, unaudited)(7)

   $ 61,793       $ 3,081         —         $ 25.27 (8) 

Fiscal year 2016 (as of February 29, 2016)

   $ 61,793       $ 3,025          $ 25.24 (8) 

Fiscal year 2015 (as of February 28, 2015)

   $ 48,300       $ 3,117         —         $ 25.46 (8) 

Fiscal year 2014 (as of February 28, 2014)

   $ 48,300       $ 3,348         —         $ 25.18 (8) 

Fiscal year 2013 (as of February 28, 2013)

   $ —         $ —           —           N/A   

Fiscal year 2012 (as of February 29, 2012)

   $ —         $ —           —           N/A   

Fiscal year 2011 (as of February 28, 2011)

   $ —         $ —           —           N/A   

Fiscal year 2010 (as of February 28, 2010)

   $ —         $ —           —           N/A   

Fiscal year 2009 (as of February 28, 2009)

   $ —         $ —           —           N/A   

Fiscal year 2008 (as of February 29, 2008)

   $ —         $ —           —           N/A   

Fiscal year 2007 (as of February 28, 2007)

   $ —         $ —           —           —     

 

(1) We have excluded our SBA-guaranteed debentures from this table because the SEC has granted us exemptive relief that permits us to exclude such debentures from the definition of senior securities in the 200% asset coverage ratio we are required to maintain under the 1940 Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources.”
(2) This table does not include the senior securities of our predecessor entity, GSC Investment Corp., relating to a revolving securitized credit facility with Deutsche Bank, in light of the fact that the Company was under different management during the time that such credit facility was outstanding.
(3) Total amount of senior securities outstanding at the end of the period presented.
(4) Asset coverage per unit is the ratio of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness, calculated on a total basis.
(5) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “—” indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities.
(6) Not applicable for credit facility because not registered for public trading.
(7) (Unaudited) Total amount outstanding as of December 9, 2016, including our Credit Facility, 2020 Notes and SBA-guaranteed debentures, was $174.2 million.
(8) Based on the average daily trading price of the 2020 Notes on the NYSE.

 

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BUSINESS

General

We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, which we define as companies having annual EBITDA (earnings before interest, taxes, depreciation and amortization) of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. Our investment activities are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle market private equity investment firm.

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Term loans are loans that do not allow the borrowers to repay all or a portion of the loans prior to maturity and then re-borrow such repaid amounts under the loan again. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30.0% of our portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which includes private equity funds, to no more than 15% of its net assets.

As of August 31, 2016, we had total assets of $299.8 million and investments in 29 portfolio companies and an additional investment in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), which had a fair value of $11.9 million as of August 31, 2016. The overall portfolio composition as of August 31, 2016 consisted of 3.5% of syndicated loans, 56.2% of first lien term loans, 31.9% of second lien term loans, 4.4% of subordinated notes of Saratoga CLO and 4.0% of common equity. As of August 31, 2016 the weighted average yield on all of our debt investments, including our investment in the subordinated notes of Saratoga CLO, was approximately 11.1%. As of August 31, 2016, approximately 100.0% of our first lien debt investments were fully collateralized in the sense that the portfolio companies in which we held such investments had an enterprise value or our investment had an asset coverage equal to or greater than the principal amount of the related debt investment. We use enterprise value to assess the level of collateralization of our portfolio companies. The enterprise value of a portfolio company is determined by analyzing various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization), cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. As a result, while we consider a portfolio company to be collateralized if its enterprise value exceeds the amount of our loan, we do not hold tangible assets as collateral in our portfolio companies that we would obtain in the event of a default. Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at August 31, 2016, was composed of $299.5 million in aggregate principal amount of predominantly senior secured first lien term loans. A first loss position means that we will suffer the first economic losses if losses are incurred on loans held by the Saratoga CLO. As a result, this investment is subject to unique risks. See Part I, Item 1A. “Risk Factors—Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility.”

 

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We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after such borrowing. Pursuant to the 200.0% asset coverage ratio limitation, we are permitted to borrow one dollar to make investments for every dollar we have in assets less all liabilities and indebtedness not represented by preferred stock or debt securities issued by us or loans obtained by us so that for every one dollar of outstanding indebtedness we have two dollars of assets.

We have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). As a RIC, we generally will not have to pay corporate-level federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders if we meet certain source-of-income, distribution and asset diversification requirements.

In addition, we have a wholly-owned subsidiary that is licensed as a small business investment company (“SBIC”) and regulated by the Small Business Administration (“SBA”). See “Item 1. Business—Small Business Investment Company Regulations.” The SBIC license allows us, through our wholly-owned subsidiary, to issue SBA-guaranteed debentures. We received exemptive relief from the Securities and Exchange Commission (“SEC”) to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the 200.0% asset coverage ratio we are required to maintain under the 1940 Act. This allows us increased flexibility under the 200.0% asset coverage test by permitting us to borrow up to $150.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.

Corporate History and Information

We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering of shares of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, we engaged Saratoga Investment Advisors (“SIA”) to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

The recapitalization transaction consisted of (i) the private sale of 986,842 shares of our common stock for $15.0 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and (ii) the entry into a $40.0 million senior secured revolving Credit Facility with Madison Capital Funding. We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010. In January 2011, we registered for public resale by Saratoga Investment Advisors and certain of its affiliates the 986,842 shares of our common stock issued to them in the recapitalization.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received an SBIC license from the SBA.

 

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Our corporate offices are located at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800. We maintain a website on the Internet at www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

Saratoga Investment Advisors

General

Our investment adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Our investment adviser is led by four principals, Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips, with 28, 26, 29 and 19 years of experience in leveraged finance, respectively. Our investment adviser is affiliated with Saratoga Partners, a middle market private equity investment firm. Saratoga Partners was established in 1984 to be the middle market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read and its successor entity, SBC Warburg Dillon Read, since 1998. Saratoga Partners has a 29-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

Our Relationship with Saratoga Investment Advisors

We utilize the personnel, infrastructure, relationships and experience of Saratoga Investment Advisors to enhance the growth of our business. We currently have no employees and each of our executive officers is also an officer of Saratoga Investment Advisors.

We have entered into an investment advisory and management agreement (the “Management Agreement”) with Saratoga Investment Advisors. Pursuant to the 1940 Act, the initial term of the Management Agreement was for two years from its effective date of July 30, 2010, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. On October 5, 2016, our board of directors approved the renewal of the Management Agreement for an additional one-year term at an in-person meeting. Pursuant to the Management Agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.

Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $1.0 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The current members of the investment committee are Messrs. Oberbeck, Grisius, Inglesby, and Phillips.

We pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% of our gross assets which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.

 

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In addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

    no incentive fee in any calendar quarter in which our pre-incentive fee income does not exceed a fixed “hurdle rate” of 1.875% per quarter; and

 

    100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter is payable to the investment adviser. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.344%) as the “catch-up.” The “catch-up” provision is intended to provide our investment adviser with an incentive fee of 20.0% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, our investment adviser was only entitled to 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision; and

 

    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter is payable to the investment adviser (once the hurdle is reached and the catch-up is achieved, 20.0% of all pre-incentive fee net investment income thereafter is allocated to the investment adviser).

There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below the quarterly hurdle rate.

Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter.

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

We have also entered into a separate administration agreement with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services. The administration agreement had an initial term of two years from its effective date of July 30, 2010, with automatic one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. From the date of its initial approval and for subsequent annual renewals, the amount payable by us under the administration agreement was capped at $1.0 million for each annual term of the agreement. On October 5, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or

 

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reimbursement of expenses by us thereunder to $1.5 million for the additional one-year term, effective November 1, 2016. Under the administration agreement, Saratoga Investment Advisors also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. Payments under the administration agreement will be equal to an amount based upon the allocable portion of Saratoga Investment Advisors’ overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs relating to the performance of services under the administration agreement.

Investments

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Investments in middle market companies are generally less liquid than equivalent investments in companies with larger capitalizations. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans that we purchase are generally used to finance buyouts, acquisitions, growth, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. For a discussion of the risks pertaining to our secured investments, see Part I, Item 1A. “Risk Factors—Our investments may be risky, and you could lose all or part of your investment.”

As part of our long-term strategy, we also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. See Part I, Item 1A. “Risk Factors—If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies defaults on their indebtedness.”

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if rated, which are often referred to as “junk.” As of August 31, 2016, 72.2% of our debt portfolio at fair value consisted of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, 81.5% of our debt investments at August 31, 2016, had variable interest rates that reset periodically based on benchmarks such as LIBOR and the prime rate. As a result, significant increases in such benchmarks in the future may make it more difficult for these borrowers to service their obligations under the debt investments that we hold.

As a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70.0% of our total assets in assets of the type listed in section 55(a) of the 1940 Act, including securities of U.S. operating companies whose securities are not listed on a national securities exchange (i.e., New York Stock Exchange, NYSE MKT and The NASDAQ Stock Market), U.S. operating companies with listed securities that have market capitalizations of less than $250.0 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less, which we refer to as “qualifying assets.”

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30.0% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

 

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Leveraged loans

Our leveraged loan portfolio is comprised primarily of first lien and second lien term loans. First lien term loans are secured by a first priority perfected security interest on all or substantially all of the assets of the borrower and typically include a first priority pledge of the capital stock of the borrower. First lien term loans hold a first priority with regard to right of payment. Generally, first lien term loans offer floating rate interest payments, have a stated maturity of five to seven years, and have a fixed amortization schedule. First lien term loans generally have restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on all or substantially all of the assets of the borrower and typically include a second priority pledge of the capital stock of the borrower. Second lien term loans hold a second priority with regard to right of payment. Second lien term loans offer either floating rate or fixed rate interest payments, generally have a stated maturity of five to eight years, and may or may not have a fixed amortization schedule. Second lien term loans that do not have fixed amortization schedules require payment of the principal amount of the loan upon the maturity date of the loan. Second lien term loans have less restrictive financial and negative covenants than those that govern first lien term loans.

Mezzanine debt

Mezzanine debt usually ranks subordinate in priority of payment to senior debt and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers’ capital structure. Mezzanine debt typically has fixed rate interest payments and a stated maturity of six to eight years and does not have fixed amortization schedules.

In some cases, our debt investments may provide for a portion of the interest payable to be paid-in-kind interest (“PIK”). To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation.

Equity Investments

Equity investments may consist of preferred equity that is expected to pay dividends on a current basis or preferred equity that does not pay current dividends. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In some cases, we may acquire common equity. In general, our equity investments are not control-oriented investments and we expect that in many cases we will acquire equity securities as part of a group of private equity investors in which we are not the lead investor.

Opportunistic Investments

Opportunistic investments may include investments in distressed debt, which may include securities of companies in bankruptcy, debt and equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as collateralized loan obligation funds and debt of middle market companies located outside the United States.

On January 22, 2008, GSC Group, Inc., as asset manager, with Lehman Brothers raising the financing, entered into a collateral management agreement with Saratoga CLO. Saratoga CLO was structured with five tranches of debt, plus residual notes. Saratoga CLO’s five tranches of debt was purchased by a wide variety of CLO debt market participants. In addition, we purchased for $30.0 million all of the outstanding subordinated notes of Saratoga CLO.

Pursuant to its terms, the investment period for Saratoga CLO ended in January 2013, and certain restrictions in such terms prevented portfolio reinvestment. As a result, the Company determined that it was in its best interest to refinance Saratoga CLO given the fee income it receives for managing Saratoga CLO. The

 

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Company did not originate any of the loan assets included in the formation of Saratoga CLO, nor has it done so since the subsequent refinancing transaction. Moreover, the Company does not expect to originate any of the loans in the Saratoga CLO portfolio prospectively. The Company has from time to time co-invested in loans with the Saratoga CLO. The Company currently has no co-investments between it and Saratoga CLO.

With respect to our advisory services to Saratoga CLO, and in particular the underwriting standards used when determining which investments qualify for inclusion in the Saratoga CLO, they are substantially similar to the process employed in selecting the Company’s investments. All of the credit metrics for a Saratoga CLO investment are reviewed and documented in the same manner as they would be for an investment for the Company, with some minor differences. For example, the Saratoga CLO investment process also includes the Standard & Poors and Moody’s review of the loan investment and the assigned corporate ratings, in addition to the Standard & Poors recovery rate analysis, which typically does not apply to a prospective investment of the Company. Lastly, a Saratoga CLO investment also considers the likely secondary liquidity of the loan in considering the investment, whereas the Company’s investments are generally illiquid.

Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, we completed the second refinancing of the Saratoga CLO. The Saratoga CLO refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of approximately $300 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of 8.5%. The Class F tranche is the eighth tranche in the capital structure of Saratoga CLO and is subordinated to the other debt classes of Saratoga CLO. The Class F tranche is only senior to the subordinated notes, which is effectively the equity position in Saratoga CLO. As a result, the other tranches of debt in Saratoga CLO rank ahead of the $4.5 million Class F tranche and ahead of the aggregate principal amount of our position in the subordinated notes, which as of August 31, 2016 had a fair value of $11.9 million, with respect to priority of payments in the event of a default or a liquidation. After the reinvestment period ends in October 2018, the Company will consider refinancing the Saratoga CLO, subject to market conditions. A refinancing transaction entails finding existing and new investors that are willing to provide debt financing to Saratoga CLO on terms that are acceptable to it and in an amount sufficient to allow it to repay all of its existing debt holders. If Saratoga CLO is unable to refinance its indebtedness by October 2018, then Saratoga CLO will be required to use investment repayments by portfolio companies received thereafter to repay its outstanding indebtedness and ultimately liquidate Saratoga CLO.

The terms of the subordinated notes of Saratoga CLO entitles the Company to the residual net interest income in Saratoga CLO, which are paid on a quarterly basis after payment of all expenses, assuming that the Saratoga CLO remains in compliance with its various debt and rating agency compliance tests. The Company’s investment in the subordinated notes of Saratoga CLO can be sold or transferred at any time. The Company has held 100% of the subordinated notes of Saratoga CLO since the inception of Saratoga CLO.

Generally, the interests of the holders of the various classes of securities issued by the Saratoga CLO are aligned with the interests of the Company as holder of the subordinated notes. The investors in the various debt tranches of the securities issued by the Saratoga CLO are interested in the regular payment of interest income from the Saratoga CLO and the overcollateralization of the underlying loan assets relative to the Saratoga CLO debt issued. On the other hand, the subordinated note holders might prefer purchasing higher yielding riskier assets that could increase returns while the returns of the holders of the debt securities remain unchanged.

With respect to the collateral management agreement that the Company has entered into with Saratoga CLO, while the agreement is similar to the investment advisory and management agreement between the Company and Saratoga Investment Advisors in that it is an asset management agreement, there are material differences between the two. For example, pursuant to Section 15 of the 1940 Act, the Management Agreement

 

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with Saratoga Investment Advisors has an initial term of two years, with annual renewals to be approved by the Company’s Board of Directors. The contract can be terminated by the Company’s Board of Directors or stockholders with 60 days’ notice, with no penalty for termination. The collateral management agreement that the Company has entered into with Saratoga CLO, on the other hand, has no renewal requirement, and can be terminated without cause with the approval of two-thirds of each of the class of CLO securities, excluding votes from interested noteholders. Furthermore, the Saratoga CLO collateral management agreement cannot be terminated with cause without the approval of a majority of all of the CLO security holders voting collectively, excluding votes from interested noteholders. If the Saratoga CLO collateral management agreement is terminated, the manager remains in place until a new manager is appointed by the issuer at the direction of a majority of the noteholders, and so long as such replacement is not rejected within 20 days by the most senior class of the Saratoga CLO securities. We receive a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

The securities issued by the Saratoga CLO do not have any external credit enhancement features that would minimize the potential losses to the subordinated notes. Saratoga CLO recognized a loss of approximately $2.8 million in October 2013 upon the refinancing as a result of the legal and accounting costs associated with the refinancing and the divestiture of certain Saratoga CLO loans not eligible for the refinanced Saratoga CLO. The cost of the refinancing was effectively borne by the Company as the holder of the subordinated notes in Saratoga CLO. The indenture for the Saratoga CLO does not contemplate the issuance of additional securities while the existing Saratoga CLO securities remain outstanding. The indenture could be amended to allow the issuance of additional securities, which would require consents of the holders of the Saratoga CLO debt securities and the approval of the rating agencies. The Saratoga CLO could issue additional securities pursuant to a refinancing of the existing securities. The costs of any such future refinancing would effectively be borne by us as the holder of the subordinated notes in Saratoga CLO.

The Company does not believe that any representations or warranties made by the Company as manager of Saratoga CLO or investor in the subordinated notes could materially affect the Company. However, because the Company acts as the collateral manager to Saratoga CLO, it may be subject to claims by third-party investors in Saratoga CLO for alleged or actual negligent acts, errors or omissions or breach of fiduciary duties committed in the scope of performing its services as the collateral manager.

As of August 31, 2016, the Saratoga CLO portfolio consisted of $299.5 million in aggregate principal amount of primarily senior secured first lien term loans 98.2% of the Saratoga CLO portfolio consisted of such loans at August 31, 2016, to 180 borrowers with an average exposure to each borrower of $1.6 million. The weighted average maturity of the portfolio is 4.37 years. In addition, Saratoga CLO held $5.2 million in cash at August 31, 2016. Our investment in Saratoga CLO falls into our 30% “bucket” of non-qualifying assets under the 1940 Act and currently has a cost basis of approximately $10.9 million, which is net of all principal payments made by Saratoga CLO on the Company’s initial $30 million investment in Saratoga CLO.

Prospective portfolio company characteristics

Our investment adviser generally selects portfolio companies with one or more of the following characteristics:

 

    a history of generating stable earnings and strong free cash flow;

 

    well-constructed balance sheets, supported by sustainable enterprise values;

 

    reasonable debt-to-cash flow multiples;

 

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    industry leadership with competitive advantages and sustainable market shares and growth prospects in attractive and healthy sectors; and

 

    capital structures that provide appropriate terms and reasonable covenants.

Investment selection

In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify portfolio companies with superior fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga Investment Advisors’ investment process emphasizes the following:

 

    bottoms-up, company-specific research and analysis;

 

    capital preservation, low volatility and minimization of downside risk; and

 

    investing with experienced management teams that hold meaningful equity ownership in their businesses.

Our investment adviser’s investment process generally includes the following steps:

 

    Initial screening. A brief analysis identifies the investment opportunity and reviews the merits of the transaction. The initial screening memorandum provides a brief description of the company, its industry, competitive position, capital structure, financials, equity sponsor and deal economics. If the deal is determined to be attractive by the senior members of the deal team, the opportunity is fully analyzed.

 

    Full analysis. A full analysis includes:

 

    Business and Industry analysis—a review of the company’s business position, competitive dynamics within its industry, cost and growth drivers and technological and geographic factors. Business and industry research often includes meetings with industry experts, consultants, other investors, customers and competitors.

 

    Company analysis—a review of the company’s historical financial performance, future projections, cash flow characteristics, balance sheet strength, liquidation value, legal, financial and accounting risks, contingent liabilities, market share analysis and growth prospects.

 

    Structural/security analysis—a thorough legal document analysis including but not limited to an assessment of financial and negative covenants, events of default, enforceability of liens and voting rights.

 

    Approval of the investment committee. The investment is then presented to the investment committee for approval. The investment committee must unanimously approve all investments in excess of $1 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The members of our investment committee are Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips.

Investment structure

In general, our Investment Adviser intends to select investments with financial covenants and terms that reduce leverage over time, thereby enhancing credit quality. These methods include:

 

    maintenance leverage covenants requiring a decreasing ratio of debt to cash flow;

 

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    maintenance cash flow covenants requiring an increasing ratio of cash flow to the sum of interest expense and capital expenditures; and

 

    debt incurrence prohibitions, limiting a company’s ability to re-lever.

In addition, limitations on asset sales and capital expenditures should prevent a company from changing the nature of its business or capitalization without our consent.

Our investment adviser seeks, where appropriate, to limit the downside potential of our investments by:

 

    requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

    requiring companies to use a portion of their excess cash flow to repay debt;

 

    selecting investments with covenants that incorporate call protection as part of the investment structure; and

 

    selecting investments with affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

Valuation process

We account for our investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), as approved in good faith using written policies and procedures adopted by our board of directors. Investments for which market quotations are readily available are recorded in our consolidated financial statements at such market quotations subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and an independent valuation firm engaged by our board of directors. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors.

Our investment in the subordinated notes of Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for Saratoga CLO’s valuation. The Intex cash flow models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows from our investment in Saratoga CLO) to perform a discounted cash flow analysis on expected future cash flows from our investment in Saratoga CLO to determine a valuation for the subordinated notes of Saratoga CLO held by us.

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

    each investment is initially valued by the responsible investment professionals of Saratoga Investment Advisors and preliminary valuation conclusions are documented and discussed with our senior management; and

 

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    an independent valuation firm engaged by our board of directors independently values at least one quarter of our investments each quarter so that the valuation of each investment for which market quotes are not readily available is independently valued by an independent valuation firm at least annually.

In addition, all our investments are subject to the following valuation process:

 

    the audit committee of our board of directors reviews each preliminary valuation and our investment adviser and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

    our board of directors discusses the valuations and approves the fair value of each investment in good faith based on the input of our investment adviser, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Ongoing relationships with and monitoring of portfolio companies

Saratoga Investment Advisors will closely monitor each investment we make and, when appropriate, will conduct a regular dialogue with both the management team and other debtholders and seek specifically tailored financial reporting. In addition, in certain circumstances, senior investment professionals of Saratoga Investment Advisors may take board seats or board observation seats.

Distributions

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and thereafter paid five annual dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders since such time, which distributions were made with a combination of cash and the issuance of shares of our common stock as discussed more fully below.

On September 24, 2014, we announced the recommencement of quarterly dividends to our stockholders, and have subsequently made distributions under this new policy. We have adopted a DRIP that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.

In order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were

 

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not distributed during such years and on which we paid no federal income tax. For the 2015 calendar year, we made distributions sufficient such that we did not incur any federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2016 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending October 31, 2016, if any, and, if we do so, we would expect to incur federal excise taxes as a result.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.

We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable provisions of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20.0% of the total distribution. Under these rulings, if too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

Competition

Our primary competitors in providing financing to private middle market companies include public and private investment funds (including private equity funds, mezzanine funds, BDCs and SBICs), commercial and investment banks and commercial financing companies. Additionally, alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities at middle-market companies can be intense. However, we continue to believe that there has been an overall reduction in the amount of debt capital available on average since the downturn in the credit markets, which began in mid-2007, and that this has resulted in a somewhat less competitive environment for making new investments. While many middle-market companies were previously able to raise senior debt financing through traditional large financial institutions, we believe this approach to financing is more difficult as implementation of U.S. and international financial reforms, such as Basel 3, limits the capacity of large financial institutions to hold non-investment grade leveraged loans on their balance sheets. We believe that many of these financial institutions have de-emphasized their service and product offerings to middle-market companies in particular.

Many of our competitors are substantially larger and have considerably greater financial and marketing resources than us. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. We use the industry information available to the investment professionals of Saratoga Investment Advisors to assess investment

 

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risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the investment professionals of our investment adviser enable us to learn about, and compete effectively for, financing opportunities with attractive leveraged companies in the industries in which we seek to invest.

For additional information concerning the competitive risks we face, please see Part I, Item 1A, “Risk Factors—We operate in a highly competitive market for investment opportunities.”

Staffing

We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the administration agreement. For a discussion of the Management Agreement, see “Business—Investment Advisory and Management Agreement” below. We reimburse Saratoga Investment Advisors for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs, subject to certain limitations. For a discussion of the administration agreement, see “Business—Administration Agreement” below.

Derivatives

We may utilize hedging techniques such as interest rate swaps to mitigate potential interest rate risk on our indebtedness. Such interest rate swaps would principally be used to protect us against higher costs on our indebtedness resulting from increases in both short-term and long-term interest rates.

We also may use various hedging and other risk management strategies to seek to manage various risks, including changes in currency exchange rates and market interest rates. Such hedging strategies would be utilized to seek to protect the value of our portfolio investments, for example, against possible adverse changes in the market value of securities held in our portfolio.

 

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OUR PORTFOLIO COMPANIES

The following table sets forth certain information as of August 31, 2016 for each portfolio company in which we had a debt or equity investment. Other than these investments, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments, and the board observer or participation rights we may receive.

 

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Non-control/Non-affiliated investments—202.9%(b)

           

CAMP International Systems(d)

999 Marconi Avenue

Ronkonkoma, NY 11779

  Aerospace and Defense   Second Lien Term Loan 8.25% Cash, 8/18/2024   $ 1,000,000        995,002        997,500        0.8
       

 

 

   

 

 

   

 

 

 
    Total Aerospace and Defense       995,002        997,500        0.8
       

 

 

   

 

 

   

 

 

 

Polar Holding Company, Ltd.(a),(d),(i)

672 Kimberly Avenue

Winnipeg, Manitoba, Canada

  Building Products   First Lien Term Loan 10.00% Cash, 9/30/2016   $ 2,000,000        2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 
    Total Building Products       2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC(g)

One Embarcadero Center

Suite 1680

San Francisco, CA 94111

  Business Services   Common Stock     100,000        100,000        247,782        0.2

Avionte Holdings, LLC

One Embarcadero Center

Suite 1680

San Francisco, CA 94111

  Business Services   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 2,279,278        2,255,168        2,287,483        1.8

Avionte Holdings, LLC(j),(k)

One Embarcadero Center

Suite 1680

San Francisco, CA 94111

  Business Services   Delayed Draw Term Loan A 9.75% Cash, 1/8/2019   $ —          —          —          0.0

BoardEffect, Inc.

161 Leverington Avenue

Suite 1001

Philadelphia, PA 19127

  Business Services   First Lien Term Loan 10.00% Cash, 6/17/2021   $ 12,000,000        11,883,243        11,880,000        9.2

BoardEffect, Inc.(j),(k)

161 Leverington Avenue

Suite 1001

Philadelphia, PA 19127

  Business Services   Delayed Draw Term Loan B 10.00% Cash, 6/17/2021   $ —          —          —          0.0

BMC Software, Inc.(d)

2103 CityWest Boulevard

Houston, TX 77042

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 5,641,667        5,607,859        5,379,329        4.2

Courion Corporation

1000 Holcomb Woods Parkway

Building 400, Suite 401

Roswell, GA 30076

  Business Services   Second Lien Term Loan 11.00% Cash, 6/1/2021   $ 15,000,000        14,866,381        14,529,000        11.3

Dispensing Dynamics International(d)

1020 Bixby Drive

City of Industry, CA 91745

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 12,000,000        12,018,538        11,530,800        9.0

Easy Ice, LLC(d)

925 West Washington Street

Suite 100

Marquette, MI 49855

  Business Services   First Lien Term Loan 9.50% Cash, 1/15/2020   $ 16,000,000        15,868,493        16,057,493        12.5

Emily Street Enterprises, L.L.C.

15878 Gaither Drive

Gaithersburg, MD, 20877

  Business Services   Senior Secured Note 10.00% Cash, 1/23/2020   $ 3,300,000        3,272,264        3,355,372        2.6

 

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Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Emily Street Enterprises, L.L.C.(g)

15878 Gaither Drive

Gaithersburg, MD, 20877

  Business Services   Warrant Membership Interests     49,318        400,000        459,791        0.3

Help/Systems Holdings, Inc.(Help/Systems, LLC)

6533 Flying Cloud Drive

Eden Prairie, MN 55344

  Business Services   First Lien Term Loan 6.25% Cash, 10/8/2021   $ 4,975,000        4,887,402        4,919,031        3.8

Help/Systems Holdings, Inc.(Help/Systems, LLC)

6533 Flying Cloud Drive

Eden Prairie, MN 55344

  Business Services   Second Lien Term Loan 10.50% Cash, 10/8/2022   $ 3,000,000        2,917,626        2,850,000        2.2

Identity Automation Systems

8833 North Sam Houston

Parkway West

Houston, Texas 77064-5601

  Business Services   Convertible Promissory Note 13.50% (6.75% Cash/6.75% PIK), 8/18/2018     611,517        611,517        611,517        0.5

Identity Automation Systems(g)

8833 North Sam Houston

Parkway West

Houston, Texas 77064-5601

  Business Services   Common Stock Class A Units     232,616        232,616        495,686        0.4

Identity Automation Systems

8833 North Sam Houston

Parkway West

Houston, Texas 77064-5601

  Business Services   First Lien Term Loan 12.00% (10.25% Cash/1.75% PIK) 12/18/2020   $ 10,203,683        10,121,194        10,171,110        7.9

Knowland Technology Holdings, L.L.C.

623 H Street NW

Washington, DC 20001

  Business Services   First Lien Term Loan 9.75% Cash, 11/29/2017   $ 17,777,730        17,637,107        17,652,317        13.7

Microsystems Company

3025 Highland Parkway

Suite 450

Downers Grove, IL 60515

  Business Services   Second Lien Term Loan 11.00% Cash, 7/1/2022   $ 8,000,000        7,922,051        7,920,000        6.2

PCF Number 4, Inc.

201 North Franklin Street

Suite 200

Tampa, Fl 33602

  Business Services   Second Lien Term Loan 13.50% (12.50% Cash/1.00% PIK), 8/28/2021   $ 13,044,083        12,918,979        13,044,083        10.1

Vector Controls Holding Co., LLC(d)

2200 10th Street

Suite 300

Plano TX 75074-8023

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018     8,967,996        8,905,587        8,967,996        7.0

Vector Controls Holding Co., LLC(d),(g)

2200 10th Street

Suite 300

Plano TX 75074-8023

  Business Services   Warrants to Purchase Limited Liability Company Interests     343        —          350,212        0.3
       

 

 

   

 

 

   

 

 

 
    Total Business Services       132,426,025        132,709,002        103.2
       

 

 

   

 

 

   

 

 

 

Targus Holdings, Inc.(d),(g)

1211 North Miller

Anaheim, CA 92806

  Consumer Products   Common Stock     210,456        1,791,242        1,847        0.0

Targus Holdings, Inc.(d)

1211 North Miller

Anaheim, CA 92806

  Consumer Products   Second Lien Term Loan A-2 15.00% PIK, 12/31/2019   $ 220,644        220,644        220,644        0.2

Targus Holdings, Inc.(d)

1211 North Miller

Anaheim, CA 92806

  Consumer Products   Second Lien Term Loan B 15.00% PIK, 12/31/2019   $ 661,932        661,932        661,932        0.5
    Total Consumer Products       2,673,818        884,423        0.7

 

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Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

My Alarm Center, LLC

3803 West Chester Pike

Suite 100

Newtown Square, PA 19073

  Consumer Services   Second Lien Term Loan 12.00% Cash, 7/9/2019   $ 9,375,000        9,356,295        9,299,063        7.2

PrePaid Legal Services, Inc.(d)

One Pre-Paid Way

Ada, OK 74820

  Consumer Services   First Lien Term Loan 6.50% Cash, 7/1/2019   $ 1,489,199        1,481,070        1,482,051        1.1

PrePaid Legal Services, Inc.(d)

One Pre-Paid Way

Ada, OK 74820

  Consumer Services   Second Lien Term Loan 10.25% Cash, 7/1/2020   $ 10,000,000        9,966,163        9,846,000        7.7

Prime Security Services, LLC

1035 North 3rd Street

Suite 101

Lawrence, KS 66044

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2022   $ 6,230,769        6,138,694        6,268,416        4.9
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       26,942,222        26,895,530        20.9
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp., L.L.C.(d),(g)

235 South Maitland Avenue

Suite 215

Maitland, FL 32751

 

Education

 

Class A Common Stock

    544,761        30,241        —          0.0

M/C Acquisition Corp., L.L.C.(d)

235 South Maitland Avenue

Suite 215

Maitland, FL 32751

  Education   First Lien Term Loan 1.00% Cash, 3/31/2016   $ 2,321,073        1,193,791        8,087        0.0

Texas Teachers of Tomorrow, LLC(g),(h)

5599 San Felipe Street

Suite 1425

Houston, 77056

 

Education

 

Common Stock

    750,000        750,000        933,960        0.7

Texas Teachers of Tomorrow, LLC

5599 San Felipe Street

Suite 1425

Houston, 77056

 

Education

 

Second Lien Term Loan 10.75% Cash, 6/2/2021

  $ 10,000,000        9,910,300        10,000,000        7.8
       

 

 

   

 

 

   

 

 

 
    Total Education       11,884,332        10,942,047        8.5
       

 

 

   

 

 

   

 

 

 

TM Restaurant Group L.L.C.

6220 Shiloh Road

Suite 100

Alpharetta, GA 30005

  Food and Beverage   First Lien Term Loan 9.75% Cash, 7/16/2017   $ 9,490,507        9,428,277        9,276,541        7.2
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       9,428,277        9,276,541        7.2
       

 

 

   

 

 

   

 

 

 

Censis Technologies, Inc.

377 Riverside Drive

Suite 300

Franklin, TN 37067

  Healthcare Services   First Lien Term Loan B 11.00% Cash, 7/24/2019   $ 11,400,000        11,251,423        10,962,652        8.5

Censis Technologies, Inc.(g),(h)

377 Riverside Drive

Suite 300

Franklin, TN 37067

  Healthcare Services   Limited Partner Interests     999        999,000        704,187        0.5

Roscoe Medical, Inc.(d),(g)

21973 Commerce Parkway

Strongsville, OH 44149

  Healthcare Services   Common Stock     5,081        508,077        598,710        0.5

Roscoe Medical, Inc.

21973 Commerce Parkway

Strongsville, OH 44149

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,148,231        4,113,761        3.2

Ohio Medical, LLC(g)

1111 Lakeside Drive

Gurnee, IL

60031-4099

  Healthcare Services   Common Stock     5,000        500,000        459,409        0.4

 

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Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Ohio Medical, LLC

1111 Lakeside Drive

Gurnee, IL

60031-4099

  Healthcare Services   Senior Subordinated Note 12.00%, 7/15/2021   $ 7,300,000        7,233,876        7,273,756        5.7

Zest Holdings, LLC(d)

2061 Wineridge Place

Escondido, CA 92029

  Healthcare Services   First Lien Term Loan 5.25% Cash, 8/16/2020   $ 4,136,911        4,078,941        4,136,911        3.2
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       28,719,548        28,249,386        22.0
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

9 Old Kings Highway South

Darien, CT 06820

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 8,700,232        8,594,607        8,700,232        6.8

HMN Holdco, LLC

9 Old Kings Highway South

Darien, CT 06820

  Media   Delayed Draw First Lien Term Loan 10.00% Cash, 5/16/2019   $ 4,800,000        4,744,654        4,800,000        3.7

HMN Holdco, LLC

9 Old Kings Highway South

Darien, CT 06820

  Media   Class A Series     4,264        61,647        283,044        0.2

HMN Holdco, LLC

9 Old Kings Highway South

Darien, CT 06820

  Media   Class A Warrant     30,320        438,353        1,623,030        1.3

HMN Holdco, LLC(g)

9 Old Kings Highway South

Darien, CT 06820

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,872        —          2,802,162        2.2

HMN Holdco, LLC(g)

9 Old Kings Highway South

Darien, CT 06820

  Media   Warrants to Purchase Limited Liability Company Interests (Preferred)     8,139        —          451,308        0.3
       

 

 

   

 

 

   

 

 

 
    Total Media       13,839,261        18,659,776        14.5
       

 

 

   

 

 

   

 

 

 

Elyria Foundry Company, L.L.C.(d)

120 Filbert Street

Elyria, OH 44035

 

Metals

 

Common Stock

    35,000        9,217,564        314,300        0.2

Elyria Foundry Company, L.L.C.(d)

120 Filbert Street

Elyria, OH 44035

 

Metals

 

Revolver 10.00% Cash, 3/31/2017

  $ 8,500,000        8,500,000        8,500,000        6.6
       

 

 

   

 

 

   

 

 

 
    Total Metals       17,717,564        8,814,300        6.8
       

 

 

   

 

 

   

 

 

 

Mercury Network, LLC

501 NE 122nd

Suite D

Oklahoma City, OK 73114

  Real Estate   First Lien Term Loan 10.50% Cash, 8/24/2021   $ 20,808,696        20,619,443        20,724,932        16.1

Mercury Network, LLC(g)

501 NE 122nd

Suite D

Oklahoma City, OK 73114

  Real Estate   Common Stock     413,043        413,043        733,936        0.6
       

 

 

   

 

 

   

 

 

 
    Total Real Estate       21,032,486        21,458,868        16.7
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

          267,658,535        260,887,373        202.9
       

 

 

   

 

 

   

 

 

 

Control investments—9.3%(b)

           

Saratoga Investment Corp. CLO 2013-1, Ltd.(a),(d),(e),(f)

  Structured Finance Securities   Other/Structured Finance Securities 21.13%, 10/17/2023   $ 30,000,000        10,948,369        11,917,076        9.3
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          10,948,369        11,917,076        9.3
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—212.2%(b)

        $   278,606,904      $   272,804,449        212.2
       

 

 

   

 

 

   

 

 

 

 

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Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 
            Principal     Cost     Fair Value     % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts—17.8%

         

U.S. Bank Money Market(l)

    $   22,880,822      $ 22,880,822      $ 22,880,822        17.8
     

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

    $ 22,880,822      $ 22,880,822      $ 22,880,822        17.8
     

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 5.1% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $128,563,622 as of August 31, 2016.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 21.13% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales
(Cost)
     Interest
Income
     Management
Fee Income
     Net Realized
Gains/(Losses)
     Net
Unrealized
Appreciation
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 1,089,326       $ 748,341       $ —         $ 1,171,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(g) Non-income producing at August 31, 2016.
(h) Includes securities issued by an affiliate of the company.
(i) Non-U.S. company. The principal place of business for Polar Holding Company, Ltd. is Canada.
(j) The investment has an unfunded commitment as of August 31, 2016 (see Note 7 to the consolidated financial statements).
(k) The entire commitment was unfunded at August 31, 2016. As such, no interest is being earned on this investment.
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s Consolidated Statements of Assets and Liabilities as of August 31, 2016.

Set forth is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of August 31, 2016.

Knowland Technology Holdings, LLC

Knowland is a leading advanced data and profiling company in the hospitality industry, with the industry’s largest database of events, organizations that hold these events, and the contacts who book them. The Company’s products are SaaS based and sold primarily to hotel clients.

Mercury Network, LLC

Mercury Network, headquartered in Oklahoma City, OK, is a software as a service based appraisal vendor management platform that helps lenders and appraisal management companies (“AMCs”) manage their entire appraisal workflow in compliance with appraisal independence standards. Lenders and AMCs leverage Mercury’s network of over 25,000 registered appraisers to filter and select the best appraiser for a given assignment, place the appraisal order, manage communication with the appraiser, and run automated quality control checks on the appraisal report.

 

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Easy Ice, LLC

Easy Ice is an ice machine rental business. For a fixed monthly fee, Easy Ice “rents” an ice machine to its customers, services the machines as needed and provides bags of back-up ice during breakdowns or emergencies. This differs from a lease in that there is no specified term (the subscription is month-to-month) and the customers do not have an option to buy their machines. Easy Ice prices its monthly subscriptions to be competitive with a lease and differentiates itself with the added “insurance” of ice delivery should the machine break down.

 

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MANAGEMENT AGREEMENTS

Saratoga Investment Advisors serves as our investment adviser. Our investment adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Subject to the overall supervision of our board of directors, Saratoga Investment Advisors manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Management Agreement, Saratoga Investment Advisors:

 

    determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

 

    identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);

 

    closes and monitors the investments we make; and

 

    determines the securities and other assets that we purchase, retain or sell.

Saratoga Investment Advisors services under the Management Agreement are not exclusive, and it is free to furnish similar services to other entities.

Management Fee and Incentive Fee

Pursuant to the Management Agreement with Saratoga Investment Advisors, we pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee.

The base management fee is paid quarterly in arrears, and equals 1.75% per annum of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and calculated at the end of each fiscal quarter based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) as of the end of such fiscal quarter and the end of the immediate prior fiscal quarter.

The incentive fee has the following two parts:

The first part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding fiscal quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock or debt security, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with payment-in-kind interest, preferred stock with payment-in-kind dividends and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities) at the end of the immediately preceding fiscal quarter, is compared to a “hurdle rate” of 1.875% per quarter, subject to a “catch up” provision. The base management fee is calculated prior to giving effect to the payment of any incentive fees.

We pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each fiscal quarter as follows: (A) no incentive fee in any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate; (B) 100% of our pre-incentive fee net investment

 

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income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors; and (C) 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter. We refer to the amount specified in clause (B) as the “catch-up.” The “catch-up” provision is intended to provide Saratoga Investment Advisors with an incentive fee of 20% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below the quarterly hurdle rate. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, Saratoga Investment Advisors was only entitled to 20% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision. These calculations are appropriately pro-rated when such calculations are applicable for any period of less than three months.

The following is a graphical representation of the calculation of the income-related portion of the incentive fee subsequent to any period ending after December 31, 2010:

Quarterly Incentive Fee Based on “Pre-Incentive Fee Net Investment Income”

Pre-Incentive Fee Net Investment Income

(expressed as a percentage of the value of net assets)

 

LOGO

Percentage of Pre-Incentive Fee Net Investment

Income allocated to income-related portion of incentive fee

The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Management Agreement), and is calculated at the end of each applicable fiscal year by subtracting (1) the sum of our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our cumulative aggregate realized capital gains, in each case calculated from May 31, 2010. If such amount is positive at the end of such year, then the capital gains fee for such year is equal to 20% of such amount, less the cumulative aggregate amount of capital gains fees paid in all prior years. If such amount is negative, then there is no capital gains fee for such year.

Under the Management Agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of net capital gains that arise after May 31, 2010. In addition, the cost basis for computing our realized gains and losses on investments held by us as of May 31, 2010 equals the fair value of such investments as of such date.

 

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Examples of Quarterly Incentive Fee Calculation

Example 1: Income Related Portion of Incentive Fee(1):

Assumptions

 

    Hurdle rate = 1.875%

 

    Management fee(2) = 0.4375%

 

    Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.33%

Alternative 1

Additional Assumptions

 

    Investment income (including interest, dividends, fees, etc.) = 1.25%

 

    Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 0.4825%

Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.

Alternative 2

Additional Assumptions

 

    Investment income (including interest, dividends, fees, etc.) = 3.0%

 

    Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 2.2325%

Pre-incentive fee net investment income exceeds hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.3575%.

 

Incentive Fee    =    (100% × (pre-incentive fee net investment income – 1.875%)
   =    100%(2.2325% – 1.875%)
   =    100%(0.3575%)
   =    0.3575%

 

(1) The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.
(2) Represents 1.75% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we maintain no cash or cash equivalents.
(3) The “catch-up” provision is intended to provide our investment adviser with an incentive fee of 20% on all pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.344% in any fiscal quarter.

Alternative 3

Additional Assumptions

 

    Investment income (including interest, dividends, fees, etc.) = 3.5%

 

    Pre-Incentive Fee Net Investment Income (investment income – (management fee + other expenses) = 2.7325%

 

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Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5467%.

 

Incentive fee    =    100% × pre-incentive fee net investment income (subject to “catch-up”)(4)
Incentive fee    =    100% × “catch-up”+ (20% × (Pre-incentive fee net investment income – 2.344%))
Catch up    =    2.344% – 1.875%
   =    0.469%
Incentive fee    =    (100% × 0.469%)+(20% ×(2.7325% – 2.344%))
   =    0.469% + (20% × 0.3885%)
   =    0.469% + 0.0777%
   =    0.5467%

Example 2: Capital Gains Portion of Incentive Fee:

Alternative 1:

Assumptions(1)

 

(1) The examples assume that Investment A and Investment B were acquired by us subsequent to May 31, 2010. If Investment A and B were acquired by us prior to May 31, 2010, then the cost basis for computing our realized gains and losses on such investments would equal the fair value of such investments as of May 31, 2010.

 

    Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)

 

    Year 2: Investment A is sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million

 

    Year 3: FMV of Investment B determined to be $25 million

 

    Year 4: Investment B sold for $31 million

The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

    Year 1: None

 

    Year 2: $6 million (20% multiplied by $30 million realized capital gains on sale of Investment A)

 

    Year 3: None; $5 million (20% multiplied by ($30 million realized cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million (capital gains incentive fee paid in Year 2)

 

    Year 4: $200,000; $6.2 million (20% multiplied by $31 million cumulative realized capital gains) less $6 million (capital gains incentive fee paid in Year 2)

Alternative 2

Assumptions(1)

 

    Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25 million investment made in Company C (“Investment C”)

 

    Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million

 

    Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million

 

    Year 4: FMV of Investment B determined to be $35 million

 

    Year 5: Investment B sold for $20 million

 

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The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

    Year 1: None

 

    Year 2: $5 million (20% multiplied by $25 million ($30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on Investment B))

 

    Year 3: $1.4 million ($6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation)) less $5 million (capital gains incentive fee paid in Year 2))

 

    Year 4: None

 

    Year 5: None ($5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $6.4 million (cumulative capital gains incentive fee paid in Year 2 and Year 3))

Board Approval of the Investment Advisory and Management Agreement

The Management Agreement with Saratoga Investment Advisors was approved by our board of directors at an in-person meeting of the directors, including a majority of our independent directors, and was approved by our stockholders at the special meeting of stockholders held on July 30, 2010.

In approving this agreement, the directors considered, among other things, (i) the nature, extent and quality of the advisory and other services to be provided to us by Saratoga Investment Advisors; (ii) our investment performance and the investment performance of Saratoga Investment Advisors; (iii) the expected costs of the services to be provided by Saratoga Investment Advisors (including management fees, advisory fees and expense ratios) and the profits expected to be realized by Saratoga Investment Advisors; (iv) the limited potential for economies of scale in investment management associated with managing us; and (v) Saratoga Investment Advisors estimated pro forma profitability with respect to managing us. On July 7, 2016, our board of directors approved the renewal of the Management Agreement for an additional one-year term at an in-person meeting.

Payment of our expenses

The Management Agreement provides that all investment professionals of Saratoga Investment Advisors and its staff, when and to the extent engaged in providing investment advisory services required to be provided by Saratoga Investment Advisors, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by Saratoga Investment Advisors and not by us.

We bear all costs and expenses of our operations and transactions, including those relating to:

 

    organization;

 

    calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

    expenses incurred by Saratoga Investment Advisors payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

    interest payable on debt, if any, incurred to finance our investments;

 

    offerings of our common stock and other securities;

 

    investment advisory and management fees;

 

    fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;

 

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    transfer agent and custodial fees;

 

    federal and state registration fees;

 

    all costs of registration and listing our common stock on any securities exchange;

 

    federal, state and local taxes;

 

    independent directors’ fees and expenses;

 

    costs of preparing and filing reports or other documents required by governmental bodies (including the SEC and the SBA);

 

    costs of any reports, proxy statements or other notices to common stockholders including printing costs;

 

    our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;

 

    direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

    administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the administration agreement based upon our allocable portion of the administrator’s overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).

Duration and Termination

The Management Agreement will remain in effect continuously, unless terminated under the termination provisions of the agreement. The Management Agreement provides that it may be terminated at any time, without the payment of any penalty, upon 60 days written notice, by the vote of stockholders holding a majority of our outstanding voting securities, or by the vote of our directors or by Saratoga Investment Advisors.

The Management Agreement will, unless terminated as described above, continue in effect from year to year so long as it is approved at least annually by (i) the vote of the board of directors, or by the vote of stockholders holding a majority of our outstanding voting securities and (ii) the vote of a majority of our directors who are not parties to the Management Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the 1940 Act) of any party to such agreement, in accordance with the requirements of the 1940 Act.

Indemnification

Under the Management Agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services and except to the extent such action or omission constitutes gross negligence, willful misfeasance, bad faith or reckless disregard of its duties and obligations under the agreement.

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us. However, we would not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

 

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Organization of the Investment Adviser

Saratoga Investment Advisors is registered as an investment adviser under the Investment Advisers Act of 1940. The principal executive offices of Saratoga Investment Advisors are located at 535 Madison Avenue, New York, New York 10022.

Administration Agreement

Pursuant to a separate administration agreement, Saratoga Investment Advisors, who also serves as our administrator, furnishes us with office facilities, equipment and clerical, book-keeping and record keeping services. Under the administration agreement, our administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the administration agreement equal an amount based upon our allocable portion of our administrator’s overhead in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion is based on the proportion that our total assets bears to the total assets administered or managed by our administrator. Under the administration agreement, our administrator also provides managerial assistance, on our behalf, to those portfolio companies who accept our offer of assistance. The administration agreement may be terminated by either party without penalty upon 60 days written notice to the other party. The amount payable by us under the administration agreement was initially capped at $1.0 million for each annual term of the agreement. On October 5, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by us thereunder to $1.5 million for the additional one-year term, effective November 1, 2016.

Indemnification

Under the administration agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement.

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an administrator to us. However, we do not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

License Agreement

We entered into a trademark license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors grants us a non-exclusive, royalty-free license to use the name “Saratoga.” Under this agreement, we have a right to use the “Saratoga” name, for so long as Saratoga Investment Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Saratoga” name. Saratoga Investment Advisors has the right to terminate the license agreement if it is no longer acting as our investment adviser. In the event the Management Agreement is terminated, we would be required to change our name to eliminate the use of the name “Saratoga.”

 

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MANAGEMENT

Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors elects our officers who serve at its discretion. Our Board of Directors has five members, two of whom are “interested persons” as defined in Section 2(a)(19) of the 1940 Act and five of whom are not interested persons, whom we refer to as our independent directors.

Director and Executive Officer Information

As of December 9, 2016, our executive officers, directors and key employees and their positions are as set forth below. The address for each executive officer and director is c/o Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

 

Name

 

Age

  

Position

   Director
Since
     Expiration
of Term
 

Interested Directors

          

Christian L. Oberbeck

  56    Chairman of the Board and Chief Executive Officer      2010         2018   

Michael J. Grisius

  52    President and Director      2011         2017   

Independent Directors

          

Steven M. Looney

  66    Director      2007         2019   

Charles S. Whitman III

  74    Director      2007         2019   

G. Cabell Williams

  62    Director      2007         2017   

Name

 

Age

  

Position

             

Executive Officers

          

Christian L. Oberbeck

  56    Chief Executive Officer      

Michael J. Grisius

  52    President      

Henri J. Steenkamp

  40    Chief Financial Officer, Treasurer, Secretary and Chief Compliance Officer      

Biographical information regarding our Board and our executive officers is set forth below. We have divided the directors into two groups—independent directors and interested directors. Interested directors are “interested persons” of Saratoga Investment Corp., as defined in Section 2(a)(19) of the 1940 Act. We do not currently have any other executive officers who are not also directors.

Biographical Information

Independent Directors

Steven M. Looney—Mr. Looney, as the Chairman of the Audit Committee of the Board of Directors of the Company, presides over the executive sessions of the non-employee and independent directors of the Company. Mr. Looney is a Managing Director of Peale Davies & Co. Inc., a consulting firm with particular expertise in financial process and IT outsourcing, and is a CPA and an attorney. Mr. Looney also serves as a consultant and director to numerous companies in the healthcare, manufacturing and technology services industries, including WH Industries Inc. Between 2000 and 2005, he served as Senior Vice President and Chief Financial Officer of PCCI, Inc., a private IT staffing and outsourcing firm. Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and Administrative Officer. Mr. Looney also serves as a director of Excellent Education for Everyone, a nonprofit organization. Mr. Looney graduated summa cum laude from the University of Washington with a B.A. degree in Accounting and received a J.D. from the University of Washington School of Law where he was a member of the law review. Mr. Looney’s qualifications as director include his experience as a Managing Director of Peale Davies & Co. Inc. and as Chief Financial and Administrative Officer of WH Industries, as well as his financial, accounting and legal expertise.

 

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Charles S. Whitman III—Mr. Whitman is senior counsel (retired) at Davis Polk & Wardwell LLP. Mr. Whitman was a partner in Davis Polk’s Corporate Department for 28 years, representing clients in a broad range of corporate finance matters, including shelf registrations, securities compliance for financial institutions, foreign asset privatizations, and mergers and acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant to three successive Chairmen of the SEC. Mr. Whitman graduated from Harvard College and graduated magna cum laude from Harvard Law School with a LL.B. Mr. Whitman also received an LL.M. from Cambridge University in England. Mr. Whitman’s qualifications as director include his 28 years of experience representing clients, including AT&T, Exxon Mobil, General Motors and BP, in securities matters as a partner in Davis Polk’s corporate department.

G. Cabell Williams—Mr. Williams has served as the Managing General Partner of Williams and Gallagher, a private equity partnership located in Chevy Chase, Maryland since 2004. Mr. Williams is also a Senior Manager, Director of Farragut Capital Partners which is a Chevy Chase, Maryland based Mezzanine Fund. Since 2011, Mr. Williams has also served as a partner of Farragut Capital Partners, an investment firm based in Fairfax, VA. In 2004, Mr. Williams concluded a 23 year career at Allied Capital Corporation, a business development company based in Washington, DC, which was acquired by Ares Capital Corporation in 2010. While at Allied, Mr. Williams held a variety of positions, including President, COO and finally Managing Director following Allied’s merger with its affiliates in 1998. From 1991 to 2004, Mr. Williams either led or co-managed the firm’s Private Equity Group. For the nine years prior to 1999, Mr. Williams led Allied’s Mezzanine investment activities. For 15 years, Mr. Williams served on Allied’s Investment Committee where he was responsible for reviewing and approving all of the firm’s investments. Prior to 1991, Mr. Williams ran Allied’s Minority Small Business Investment Company. He also founded Allied Capital Commercial Corporation, a real estate investment vehicle. Mr. Williams has served on the Board of various public and private companies. Mr. Williams attended The Landon School, and graduated from Mercersburg Academy and Rollins College, receiving a B.S. in Business Administration from the latter. Mr. Williams’ qualifications as director include his over 25 years of experience managing investment activities at Allied Capital, where he served in a variety of positions, including President, COO and Managing Director.

Interested Directors

Christian L. Oberbeck—Mr. Oberbeck has over 28 years of experience in leveraged finance, from private equity to distressed debt and has been involved in originating, structuring, negotiating, consummating, managing and monitoring investments in these businesses. Mr. Oberbeck is the Managing Partner of Saratoga Partners, a middle market private equity investment firm, and has served on its investment committee since 1995. Mr. Oberbeck is also the Managing Member of Saratoga Investment Advisors, LLC, the Company’s investment adviser, and the Chief Executive Officer of the Company. Mr. Oberbeck also served as our President until February 2014.

Prior to assuming management responsibility for Saratoga Partners in 2008, Mr. Oberbeck has co-managed Saratoga Partners since 1995, when he joined Dillon Read and Saratoga Partners from Castle Harlan, Inc., a corporate buyout firm, which he had joined at its founding in 1987 and was a Managing Director, leading successful investments in manufacturing and financial services companies. Prior to joining that, he worked in the Corporate Development Group of Arthur Young and in corporate finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a director of numerous middle market companies.

Mr. Oberbeck graduated from Brown University in 1982 with a BS in Physics and a BA in Mathematics. In 1985, he earned an MBA from Columbia University. Mr. Oberbeck’s qualifications as a director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company’s operations, gained through his service as an executive officer.

Michael J. Grisius—Mr. Grisius has over 25 years of experience in leveraged finance, investment management and financial services. He has originated, structured, negotiated, consummated, managed and

 

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monitored numerous successful investments in mezzanine debt, private equity, senior debt, structured products and commercial real estate debt. Mr. Grisius is Chief Investment Officer and a Managing Director of Saratoga Investment Advisors, LLC, the Company’s investment adviser and was appointed President of the Company in February 2013. Mr. Grisius joined Saratoga Investment Advisors, LLC in July 2011.

Prior to joining Saratoga Investment Advisors, Mr. Grisius served as Managing Director at Allied Capital Corporation, where he was an investment professional for 16 years. At Allied Capital Corporation, Mr. Grisius held several senior positions including co-head of Mezzanine Finance and member of its Management Committee and its Investment Committee. In 2008, Mr. Grisius was appointed co-chairman of the Allied Capital Corporation’s Investment Committee. He also had responsibility for structuring and managing Unitranche Fund, LLC. During his tenure at Allied, Mr. Grisius built and led teams that made investments in subordinated debt, control equity and real estate mortgage debt. Mr. Grisius has served on the board of directors of numerous middle market companies. Prior to joining Allied Capital Corp., Mr. Grisius worked in leveraged finance at Chemical Bank from 1989 to 1992 and held senior accountant and consultant positions with KPMG LLP from 1985 to 1988.

Mr. Grisius graduated with a BS from Georgetown University in 1985 and earned an MBA from Cornell University’s Johnson Graduate School of Management in 1990. Mr. Grisius’ qualifications as a director include his broad experience in leverage finance, investment management, private equity and financial services.

Executive Officers

For information regarding Mr. Oberbeck, the Chairman of the Board and our Chief Executive Officer and Mr. Grisius, our President, see “—Interested directors” above.

Henri J. Steenkamp. Mr. Steenkamp, 40 years old, served as the Chief Financial Officer of MF Global Holdings Ltd., a broker in commodities and derivatives, from April 2011. Prior to that, Mr. Steenkamp held the position of Chief Accounting Officer and Global Controller at MF Global for four years. He joined MF Global, then Man Financial, in 2006 as Vice President of External Reporting and Accounting Policy. After MF Global filed for bankruptcy protection in October 2011, he continued to serve as Chief Financial Officer through January 2013. Before joining MF Global, Mr. Steenkamp spent eight years with PricewaterhouseCoopers (“PwC”), including four years in Transaction Services in its New York office, managing a variety of capital-raising transactions on a global basis. His focus was also on the SEC registration and public company filing process, including technical accounting. He spent four years with PwC in South Africa, where he served as an auditor primarily for SEC registrants and assisted South African companies as they went public in the U.S. Mr. Steenkamp is a chartered accountant and holds an honors degree in Finance.

Board Leadership and the Board’s Role in the Oversight of Risk Management

Our board of directors monitors and performs an oversight role with respect to the business and affairs of the Company, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to the Company. Among other things, our board of directors approves the appointment of our investment adviser, administrator and officers; reviews and monitors the services and activities performed by our investment adviser, administrator and officers; and approves the engagement, and reviews the performance of, our independent public accounting firm.

Under our bylaws, the Board may designate a chairman to preside over the meetings of the Board and meetings of the stockholders and to perform such other duties as may be assigned to him by the Board. The Company does not have a fixed policy as to whether the chairman of the Board should be an independent director and believes that its flexibility to select its chairman and reorganize its leadership structure from time to time is in the best interests of the Company and its stockholders.

Mr. Oberbeck, who is an “interested person” of the Company as defined in Section 2(a)(19) of the 1940 Act, serves as our chief executive officer and chairman of the Board. The Board believes that Mr. Oberbeck, as chief

 

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executive officer of the Company and as a principal of Saratoga Investment Advisors, is the director with the most knowledge of our business strategy and is best situated to serve as chairman of the Board. The Company’s Corporate Governance Guidelines provide that Mr. Steven M. Looney, as the Chairman of the Audit Committee of the Board of Directors of the Company, shall preside over the executive sessions of the non-employee and independent directors of the Company. A stockholder or interested party that desires to communicate directly with the Board of Directors or one or more of its members concerning the affairs of the Company may direct the communication in written correspondence by letter to: Saratoga Investment Corp., attention Mr. Steven M. Looney, Chairman of the Audit Committee, 535 Madison Avenue, New York, New York. We believe that our board leadership structure must be evaluated on a case-by-case basis and that our existing board leadership structure is appropriate. However, we continually re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet our needs.

The Board, directly and through the audit committee and other committees of the Board, takes an active role in the oversight of the Company’s policies with respect to the assessment and management of enterprise risk. Among other things, the Board has policies in place for identifying the senior executive responsible for key risks as well as the Board committees with oversight responsibility for particular key risks. In a number of cases, oversight is conducted by the full Board. Our Board also performs its risk oversight responsibilities with the assistance of the chief compliance officer. The chief compliance officer is designated to oversee compliance with the federal securities laws.

We believe that our Board and its committees’ role in risk oversight complements our Board’s leadership structure because it allows our independent directors, through three fully independent board committees, auditor and independent valuation providers, our chief compliance officer, and otherwise, to exercise oversight of risk without any conflict that might discourage critical review. We believe that our board leadership structure and the Board’s approach to risk oversight must be evaluated on a case-by-case basis and that the Board’s role in risk oversight is appropriate. However, we continually re-examine the manner in which the Board administers its oversight function on an ongoing basis to ensure that it continues to meet our needs.

Director Independence

In accordance with rules of the New York Stock Exchange (the “NYSE”), the Board annually determines the independence of each director. No director is considered independent unless the Board has determined that he or she has no material relationship with the Company. The Company monitors the status of its directors and officers through the activities of the Company’s Nominating and Corporate Governance Committee and through a questionnaire to be completed by each director no less frequently than annually, with updates periodically if information provided in the most recent questionnaire has changed.

In order to evaluate the materiality of any such relationship, the Board uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00 of the NYSE Listed Company Manual provides that business development companies, or BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to domestic issuers other than Sections 303A.02, the section that defines director independence. Section 303A.00 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

The Board has determined that each of the directors is independent and has no relationship with the Company, except as a director and stockholder of the Company, with the exception of Messrs. Oberbeck and Grisius, who are interested persons of the Company due to their positions as officers of the Company and/or officers of Saratoga Investment Advisors, LLC, our external investment adviser.

Corporate Governance

We maintain a corporate governance webpage at the “Corporate Governance” link under the “Investor Relations” link at http://saratogainvestmentcorp.com.

 

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Our Corporate Governance Procedures, Code of Business Conduct and Ethics, Code of Ethics and Board committee charters are available at our corporate governance webpage at http://saratogainvestmentcorp.com and are also available to any stockholder who requests them by writing to our Interim Secretary, Henri J. Steenkamp, at Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

Annual Evaluation

Our directors perform an evaluation, at least annually, of the effectiveness of the Board and its committees. This evaluation includes an annual questionnaire and Board and Board committee discussion.

Board Meetings and Committees

Our Board met 6 times during fiscal year 2016. Each director attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held while the director was a member. The Board’s standing committees are set forth below. We require each director to make a diligent effort to attend all Board and committee meetings, as well as each Annual Meeting of Stockholders. All of the five directors attended the 2016 Annual Meeting of Stockholders in person.

Communications with Directors

Stockholders and other interested parties may contact any member (or all members) of the Board by mail. To communicate with the Board, any individual directors or any group or committee of directors, correspondence should be addressed to the Board or any such individual directors or group or committee of directors by either name or title. All such correspondence should be sent to Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022, Attention: Secretary. Any communication to report potential issues regarding accounting, internal controls and other auditing matters will be directed to the Audit Committee. Appropriate personnel of the Company will review and sort through communications before forwarding them to the addressee(s).

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own 10.0% or more of our voting stock, to file reports of ownership and changes in ownership of our equity securities with the SEC. Directors, executive officers and 10.0% or more holders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of those forms furnished to us, or written representations that no such forms were required, we believe that our directors, executive officers and 10.0% or more beneficial owners complied with all Section 16(a) filing requirements during the year ended August 31, 2016.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to which applies to, among others, our executive officers, including our principal executive officer and principal financial officer, as well as every officer, director and employee of the Company. Requests for copies should be sent in writing to Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022. The Company’s Code of Business Conduct and Ethics is also available on our website at http://saratogainvestmentcorp.com.

If we make any substantive amendment to, or grant a waiver from, a provision of our Code of Business Conduct and Ethics, we will promptly disclose the nature of the amendment or waiver on our website at http://saratogainvestmentcorp.com.

Committees of the Board of Directors

Audit Committee

The current members of the audit committee are Steven M. Looney (Chairman), Charles S. Whitman III and G. Cabell Williams. The Board has determined that Mr. Looney is an “audit committee financial expert” as

 

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defined under Item 407 of Regulation S-K of the Securities Exchange Act of 1934 and that each of Messrs. Whitman and Williams are “financially literate” as required by NYSE corporate governance standards. All of these members are independent directors. The audit committee is responsible for approving our independent accountants, reviewing with our independent accountants the plans and results of the audit engagement, approving professional services provided by our independent accountants, reviewing the independence of our independent accountants and reviewing the adequacy of our internal accounting controls. The audit committee is also responsible for aiding our board of directors in determining the fair value of debt and equity investments that are not publicly traded or for which current market values are not readily available; where appropriate, the board of directors and audit committee may utilize the services of an independent valuation firm to assist them in determining the fair value of these investments. Finally, the audit committee also reviews our financial statements and the disclosure thereof and the adequacy of our disclosure controls and procedures.

Authority

The audit committee is authorized (without seeking Board approval) to retain special legal, accounting or other advisors and may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to meet with any members of, or advisors to, the audit committee. The audit committee has available appropriate funding from the Company as determined by the audit committee for payment of: (i) compensation to any accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, (ii) compensation to any advisers employed by the audit committee, and (iii) ordinary administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties. The audit committee may delegate its authority to subcommittees or the chairman of the audit committee when it deems appropriate and in the best interests of the Company.

Procedures

The audit committee meets as often as it determines is appropriate to carry out its responsibilities under its charter, but not less frequently than quarterly. The chairman of the audit committee, in consultation with the other committee members, determines the frequency and length of the committee meetings and sets meeting agendas consistent with its charter. The audit committee meets separately, periodically, with management, with internal auditors or other personnel responsible for the internal audit function and with the independent auditor. The audit committee met nine times during fiscal year 2016.

A charter of the audit committee is available in print to any stockholder who requests it and it is also available on the Company’s website at www.saratogainvestmentcorp.com.

Nominating and Corporate Governance Committee

The current members of the nominating and corporate governance committee are Charles S. Whitman III (Chairman), G. Cabell Williams and Steven M. Looney. All of these members are independent directors. The nominating and corporate governance committee is responsible for identifying individuals qualified to become board members, and recommending to the Board director nominees for election at the next annual or special meeting of shareholders at which directors are to be elected or to fill any vacancies or newly created directorships that may occur between such meetings, recommending directors for appointment to Board committees, making recommendations to the Board as to determinations of director independence, overseeing the evaluation of the Board, overseeing and setting compensation for the Company’s directors.

In making its recommendations for Board and committee membership, the nominating and corporate governance committee reviews candidates’ qualifications for membership on the Board or a committee of the Board (including making a specific determination as to the independence of each candidate) based on the criteria approved by the Board (and taking into account the enhanced independence, financial literacy and financial expertise standards required under law or the New York Stock Exchange rules for audit committee membership purposes). In evaluating current directors for re-nomination to the Board or re-appointment to any Board committees, the

 

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nominating and corporate governance committee assesses the performance of such directors, periodically reviews the composition of the Board and its committees in light of the current challenges and needs of the Board, the Company and each committee, and determines whether it may be appropriate to add or remove individuals after considering issues of judgment, diversity, age, skills, background and experience, considers rotation of committee members and committee chairmen and considers any other factors that are set forth in the Company’s corporate governance procedures or are deemed appropriate by the nominating and corporate governance committee or the Board. The nominating and corporate governance committee considers issues of judgment, diversity, age, skills, background and experience in evaluating candidates for membership on the Board.

The nominating and corporate governance committee does not have a formal policy on the consideration of director candidates recommended by stockholders. The board of directors believes that it is more appropriate to give the nominating and corporate governance committee flexibility in evaluating stockholder recommendations. In the event that a director nominee is recommended by a stockholder, the nominating and corporate governance committee will give due consideration to the director nominee and will use the same criteria used for evaluating board director nominees, in addition to considering the information relating to the director nominee provided by the stockholder.

Authority

The nominating and corporate governance committee has the sole authority to retain and terminate any search firm assisting the nominating and corporate governance committee in identifying director candidates, including sole authority to approve all such search firm’s fees and other retention terms. In addition, the nominating and corporate governance committee has the sole authority to retain and terminate any compensation consultant assisting the nominating and corporate governance committee in the evaluation of director compensation, including sole authority to approve all such compensation consultant’s fees and other retention terms. The nominating and corporate governance committee may delegate its authority to subcommittees or the chair of the nominating and corporate governance committee when it deems appropriate and in the best interests of the Company.

Procedures

The nominating and corporate governance committee meets as often as it determines is appropriate to carry out its responsibilities under its charter. The chair of the committee, in consultation with the other committee members, determines the frequency and length of the committee meetings and shall set meeting agendas consistent with its charter. The nominating and corporate governance committee met once during fiscal year 2016.

A charter of the nominating and corporate governance committee is available in print to any stockholder who requests it, and it is also available on the Company’s website at www.saratogainvestmentcorp.com.

Compensation Committee

The current members of the compensation committee are G. Cabell Williams (Chairman), Steven M. Looney and Charles S. Whitman III. All of these members are independent directors. The compensation committee is responsible for overseeing the Company’s compensation policies generally and making recommendations to the Board with respect to incentive compensation and equity-based plans of the Company that are subject to Board approval, evaluating executive officer performance and reviewing the Company’s management succession plan, overseeing and setting compensation for the Company’s directors and, as applicable, its executive officers and, as applicable, preparing the report on executive officer compensation that SEC rules require to be included in the Company’s annual proxy statement. Currently, none of our executive officers are compensated by the Company and as such the compensation committee is not required to produce a report on executive officer compensation for inclusion in our annual proxy statement.

 

 

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The compensation committee has the sole authority to retain and terminate any compensation consultant assisting the compensation committee, including sole authority to approve all such compensation consultant’s fees and other retention terms. The compensation committee may delegate its authority to subcommittees or the chairman of the compensation committee when it deems appropriate and in the best interests of the Company.

Procedures

The compensation committee shall meet as often as it determines is appropriate to carry out its responsibilities under its charter. The chairman of the compensation committee, in consultation with the other committee members, shall determine the frequency and length of the committee meetings and shall set meeting agendas consistent with its charter. No executive officer should attend that portion of any meeting where such executive’s performance (or, as applicable, compensation) is discussed, unless specifically invited by the compensation committee. The compensation committee met once during fiscal year 2016.

A charter of the compensation committee is available in print to any stockholder who requests it and is also available on the Company’s website at www.saratogainvestmentcorp.com.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2016, none of the Company’s executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the compensation committee or on the board of directors. No current or past executive officers or employees of the Company or its affiliates serve on the compensation committee.

Executive Compensation

Currently, none of our executive officers are compensated by us. We currently have no employees, and each of our executive officers is also an employee of Saratoga Investment Advisors. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the administration agreement.

Director Compensation

Our independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons.”

The following table sets forth information concerning total compensation earned by or paid to each of our directors during the fiscal year ended February 29, 2016:

 

Name

   Fees Earned or
Paid in Cash
     Total  

Interested Directors

     

Christian L. Oberbeck(1)

     —           —     

Michael J. Grisius(1)

     —           —     

Independent Directors

                     

Steven M. Looney

   $ 71,000       $ 71,000   

Charles S. Whitman III

   $ 68,000       $ 68,000   

G. Cabell Williams

   $ 68,000       $ 68,000   

 

(1) No compensation was paid to directors who are interested persons of us as defined in the 1940 Act.

 

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PORTFOLIO MANAGEMENT

The day-to-day management of our portfolio is the responsibility of Saratoga Investment Advisors and overseen by its investment committee.

Investment Committee

The members of Saratoga Investment Advisors’ investment committee include Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby and Charles G. Phillips. See the section of the prospectus entitled “Management” for biographies of Messrs. Oberbeck and Grisius. For biographical information for Messrs. Inglesby and Phillips, see “Investment Professionals” below.

Investment Professionals

Our investment adviser’s investment personnel, in addition to our investment adviser’s investment committee, are primarily responsible for the day-to-day management of our portfolio.

The members of our investment adviser’s investment committee and its investment personnel are not be employed by us, and receive no compensation from us in connection with their activities. However, they receive compensation from our investment adviser that includes an annual base salary, an annual individual performance bonus, contributions to 401(k) plans, and, in certain circumstances, a portion of the incentive fee or carried interest earned in connection with their services.

Below are the biographies for the members of our investment adviser’s investment committee whose biographies are not included elsewhere in this prospectus and the other investment professionals of our investment adviser.

Thomas V. Inglesby—Mr. Inglesby has over 25 years of investment experience including private equity and leveraged finance. Mr. Inglesby is a managing director at Saratoga Investment Advisors and is responsible for originating, structuring, negotiating, consummating, managing and monitoring middle market investments.

Prior to joining Saratoga Investment Advisors, Mr. Inglesby was a senior managing director at GSC Group, Inc. From September 2008 through July 2010, Mr. Inglesby was a senior managing director in the Recovery Investment Group at GSC Group, serving on the investment committee as an internal advisor on matters relating to GSC Group’s ongoing restructuring. From 2002 to 2008, Mr. Inglesby served as the Head of the U.S. Corporate Debt Group of GSC Group. During this period, GSC Group raised and managed $5.6 billion in capital across 12 corporate credit investment funds. From 1997 to 2002, he served as a managing director at GSC Group focused on middle market buyouts. Prior to joining GSC Group in 1997, Mr. Inglesby served as a managing director with Harbour Group from 1994 to 1997, where he focused on acquisitions of manufacturing companies in fragmented industries. From 1992 to 1994, Mr. Inglesby served as a managing director at the South Street Funds, a startup distressed debt investment fund founded by former partners at Goldman Sachs. From 1986 to 1990, Mr. Inglesby served as a vice president in the Merchant Banking Department at PaineWebber.

In September 2010, GSC Group filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.

Mr. Inglesby received a J.D. from the University of Virginia School of Law, an M.B.A. from the Darden Graduate School of Business Administration, and a B.S. in Accounting with General Honors from the University of Maryland.

Charles G. Phillips IV—Mr. Phillips has over 13 years of investment experience including private equity and leveraged finance. Mr. Phillips is a managing director at Saratoga Investment Advisors and Saratoga Partners

 

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and has been involved in originating, structuring, negotiating, consummating, managing and monitoring middle market investments. Mr. Phillips has extensive experience investing in middle-market manufacturing and service companies. He also has extensive experience in dealing with public financings and sales through his work with several portfolio companies of Saratoga Partners. Prior corporate finance experience includes mergers and acquisitions and capital markets experience in a variety of industries, including packaged foods, consumer products, cable television, energy and education. Mr. Phillips joined Saratoga Partners in 1997 after graduating from Harvard Business School. Prior to that, from 1993 to 1995, Mr. Phillips worked in Dillon Read’s corporate finance department, where he was involved in mergers and acquisitions and advisory assignments in a variety of industries. Prior experience includes McCown De Leeuw & Co., a corporate buyout firm. Mr. Phillips has served as a director of a number of Saratoga Partners’ portfolio companies.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Related Persons

We have entered into a Management Agreement with Saratoga Investment Advisors, LLC. We have also entered into a license agreement with Saratoga Investment Advisors, LLC, pursuant to which Saratoga Investment Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Saratoga.” In addition, pursuant to the terms of the administration agreement, Saratoga Investment Advisors, LLC provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Oberbeck, our chief executive officer, is the primary investor in and controls Saratoga Investment Advisors, LLC.

Review, Approval or Ratification of Transactions with Related Persons

The Audit Committee of our Board is required to review and approve any transactions with related persons (as such term is defined in Item 404 of Regulation S-K).

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

The following table sets forth, as of December 9, 2016, the beneficial ownership of each current director, the nominees for director, the Company’s executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

The percentage ownership is based on 5,748,247 shares of common stock outstanding as of December 9, 2016. Shares of common stock that are subject to warrants or other convertible securities currently exercisable or exercisable within 60 days thereof, are deemed outstanding for the purposes of computing the percentage ownership of the person holding these options or convertible securities, but are not deemed outstanding for computing the percentage ownership of any other person. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. To our knowledge, unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned. Unless otherwise indicated by footnote, the address for each listed individual is Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

 

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Name of Beneficial Owners

   Number of
Shares of
Common Stock
Beneficially Owned
    Percent of
Class
 

Interested Directors

    

Christian L. Oberbeck

     1,697,360 (1)      29.5

Michael J. Grisius

     140,585        2.4

Executive Officer

    

Henri J. Steenkamp

     5,519         

Independent Directors

    

Steven M. Looney

     2,508         

Charles S. Whitman III

     2,347         

G. Cabell Williams

     38,508         
  

 

 

   

All Directors and Executive Officers as a Group

     1,886,827        32.8

Owners of 5% or more of our common stock

    

Black Diamond Capital Management, L.L.C.(2)

     584,640        10.2

Elizabeth Oberbeck(3)

     744,183        13.0

Thomas V. Inglesby

     335,482        5.8

 

* Less than 1%

Mr. Oberbeck and Mr. Inglesby are affiliates who make up 35.3% of the ownership of SAR.

 

(1) Includes 544,251 shares of common stock directly held by Mr. Oberbeck, 193,391 shares of common stock held by Saratoga Investment Advisors, which Mr. Oberbeck controls, and 215,535 shares of common stock held by CLO Partners LLC, an entity wholly owned by Mr. Oberbeck and 744,183 shares of common stock directly held by Elizabeth Oberbeck. See footnote 3 below.
(2) Based on information included in Amendment No. 5 to Schedule 13G filed by Black Diamond Capital Management, L.L.C. with the SEC on February 12, 2016. The address of Black Diamond Capital Management, L.L.C. is One Sound Shore Drive, Suite 200, Greenwich, CT 06830.
(3) Based on information included in Amendment No. 3 to Schedule 13D filed jointly by Christian L. Oberbeck, Elizabeth Oberbeck, Saratoga Investment Advisors and CLO Partners LLC on November 4, 2014. Pursuant to an Agreement Relating to Shares of Common Stock of Saratoga Investment Corp. (the “Transfer Agreement”), Christian L. Oberbeck transferred 744,183 shares of common stock beneficially owned by him to Elizabeth Oberbeck. Elizabeth Oberbeck has full ownership rights with respect to the shares, including without limitation, the right to (A) receive any cash and/or stock dividends and distributions paid on or with respect to the shares and (B) sell the shares in accordance with the provisions of the Transfer Agreement and receive all proceeds therefrom. However, pursuant to the terms of the Transfer Agreement, Christian L. Oberbeck has retained the right to vote the shares, except that Elizabeth Oberbeck has retained the right to vote the shares on all matters submitted to shareholders with respect to any matter that could give rise to dissenters or other rights of an objecting shareholder under Maryland General Corporation Law. The Transfer Agreement also contains a right of first refusal that requires Elizabeth Oberbeck to offer Christian L. Oberbeck the opportunity to purchase any shares of Common Stock owned by her prior to her intended sale of the shares. Any such purchases may be made either directly by Mr. Oberbeck or through entities affiliated with him.

 

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Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of December 9, 2016. We are not part of a “family of investment companies” as that term is defined in the 1940 Act.

 

Name of Director

   Dollar Range of Equity Securities
Beneficially Owned(1)(2)
 

Interested Directors

  

Christian L. Oberbeck

     Over $1,000,000   

Michael J. Grisius

     Over $1,000,000   

Independent Directors

  

Steven M. Looney

     $10,001-$50,000   

Charles S. Whitman

     $10,001-$50,000   

G. Cabell Williams

     $500,001-$1,000,000   

 

(1) The dollar ranges are as follows: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000.
(2) The dollar range of equity securities beneficially owned in us is based on the closing price for our common stock of $18.84 on December 8, 2016 on the New York Stock Exchange. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

 

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REGULATION

Business Development Company Regulations

We have elected to be treated as a BDC under the 1940 Act. As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC, unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s stock present at a meeting if more than 50% of the outstanding stock of such company is present and represented by proxy or (ii) more than 50% of the outstanding stock of such company.

Qualifying Assets

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:

 

  (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

(a) is organized under the laws of, and has its principal place of business in, the United States;

(b) is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

(c) satisfies either of the following:

(i) does not have any class of securities listed on a national securities exchange;

(ii) has a class of securities listed on a national securities exchange but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;

(iii) is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company;

(iv) is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million; or

(v) meets such other criteria as may established by the SEC.

 

  (2) Securities of any eligible portfolio company which we control.

 

  (3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

  (4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own at least 60% of the outstanding equity of the eligible portfolio company.

 

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  (5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of options, warrants or rights relating to such securities.

 

  (6) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.

Managerial Assistance to Portfolio Companies

As a BDC we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Pursuant to a separate administration agreement, our investment adviser provides such managerial assistance on our behalf to portfolio companies that request this assistance, recognizing that our involvement with each investment will vary based on factors including the size of the company, the nature of our investment, the company’s overall stage of development and our relative position in the capital structure. We may receive fees for these services.

In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above under “—Qualifying assets.” BDCs generally must offer to make available to the issuer of the securities significant managerial assistance, except in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Temporary investments

As a BDC, pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury Bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the asset diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Indebtedness and senior securities

As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of shares of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must generally make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or stock unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.

 

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Common stock

We are generally not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.

Code of ethics

As a BDC, we and Saratoga Investment Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements.

Proxy voting policies and procedures

SEC registered investment advisers that have the authority to vote (client) proxies (which authority may be implied from a general grant of investment discretion) are required to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered investment advisers also must maintain certain records on proxy voting. In most cases, we will invest in securities that do not generally entitle us to voting rights in our portfolio companies. When we do have voting rights, we will delegate the exercise of such rights to our investment adviser.

Saratoga Investment Advisors has particular proxy voting policies and procedures in place. In determining how to vote, officers of Saratoga Investment Advisors will consult with each other, taking into account our interests and the interests of our investors, as well as any potential conflicts of interest. Saratoga Investment Advisors will consult with legal counsel to identify potential conflicts of interest. Where a potential conflict of interest exists, Saratoga Investment Advisors may, if it so elects, resolve it by following the recommendation of a disinterested third party, by seeking the direction of our independent directors or, in extreme cases, by abstaining from voting. While Saratoga Investment Advisors may retain an outside service to provide voting recommendations and to assist in analyzing votes, it will not delegate its voting authority to any third party.

An officer of Saratoga Investment Advisors will keep a written record of how all such proxies are voted. It will retain records of (1) proxy voting policies and procedures, (2) all proxy statements received (or it may rely on proxy statements filed on the SEC’s EDGAR system in lieu thereof), (3) all votes cast, (4) investor requests for voting information, and (5) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, Saratoga Investment Advisors may rely on such service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

Saratoga Investment Advisors’ proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, Saratoga Investment Advisors will vote our proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) it finds it necessary to vote contrary to its general guidelines to maximize stockholder value or our best interests.

 

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In reviewing proxy issues, Saratoga Investment Advisors generally will use the following guidelines:

Elections of Directors: In general, Saratoga Investment Advisors will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company’s board of directors, or Saratoga Investment Advisors determines that there are other compelling reasons for withholding our vote, it will determine the appropriate vote on the matter. It may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a majority vote requirement, (3) submit a rights plan to a stockholder vote or (4) act on tender offers where a majority of stockholders have tendered their shares. Finally, Saratoga Investment Advisors may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

Appointment of Auditors: We believe that a portfolio company remains in the best position to choose its independent auditors and Saratoga Investment Advisors will generally support management’s recommendation in this regard.

Changes in Capital Structure: Changes in a portfolio company’s organizational documents may be required by state or federal regulation. In general, Saratoga Investment Advisors will cast our votes in accordance with the management on such proposals. However, Saratoga Investment Advisors will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

Corporate Restructurings, Mergers and Acquisitions: We believe proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, Saratoga Investment Advisors will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

Proposals Affecting Stockholder Rights: We will generally vote in favor of proposals that give stockholders a greater voice in the affairs of a portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, Saratoga Investment Advisors will balance the financial impact of the proposal against any impairment of stockholder rights as well as of our investment in the portfolio company.

Corporate Governance: We recognize the importance of good corporate governance. Accordingly, Saratoga Investment Advisors will generally favor proposals that promote transparency and accountability within a portfolio company.

Anti-Takeover Measures: Saratoga Investment Advisors will evaluate, on a case-by-case basis, any proposals regarding anti-takeover measures to determine the likely effect on stockholder value dilution.

Share Splits: Saratoga Investment Advisors will generally vote with management on share split matters.

Limited Liability of Directors: Saratoga Investment Advisors will generally vote with management on matters that could adversely affect the limited liability of directors.

Social and Corporate Responsibility: Saratoga Investment Advisors will review proposals related to social, political and environmental issues to determine whether they may adversely affect stockholder value. It may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.

Privacy principles

We are committed to protecting the privacy of our stockholders. The following explains the privacy policies of Saratoga Investment Corp., Saratoga Investment Advisors and their affiliated companies.

We will safeguard, according to strict standards of security and confidentiality, all information we receive about our stockholders. The only information we collect from stockholders is the holder’s name, address, number

 

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of shares and social security number. This information is used only so that we can send annual reports and other information about us to the stockholder, and send the stockholder proxy statements or other information required by law.

We do not share this information with any non-affiliated third party except as described below.

 

    Authorized Employees of Saratoga Investment Advisors. It is our policy that only authorized employees of Saratoga Investment Advisors who need to know a stockholder’s personal information will have access to it.

 

    Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as recordkeeping, processing a stockholder’s trades, and mailing a stockholder information. These companies are required to protect our stockholders’ information and use it solely for the purpose for which they received it.

 

    Courts and Government Officials. If required by law, we may disclose a stockholder’s personal information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.

Compliance with applicable laws

As a BDC, we will be subject to periodic examination by the SEC for compliance with the 1940 Act.

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We and Saratoga Investment Advisors are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.

Co-investment

We may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. Thus, based on current SEC interpretations, co-investment transactions involving a BDC like us and an entity that is advised by Saratoga Investment Advisors or an affiliated adviser generally could not be effected without SEC relief. The staff of the SEC has, however, granted no-action relief to third parties permitting for purchases of a single class of privately-placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, currently we only expect to co-invest on a concurrent basis with affiliates of Saratoga Investment Advisors when each of us will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures.

We may in the future submit an exemptive application to the SEC to permit greater flexibility to negotiate the terms of co-investments because we believe that it will be advantageous for us to co-invest with affiliates of Saratoga Investment Advisors where such investment is consistent with the investment objective, investment positions, investment policies, investment strategies, investment restrictions, regulatory requirements and other pertinent factors applicable to us. However, there is no assurance that any application for exemptive relief, if made, would be granted by the SEC.

 

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Small Business Investment Company Regulations

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received an SBIC license from the SBA.

The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average annual fully taxed net income not exceeding $6 million for the two most recent fiscal years. In addition, an SBIC must devote 25% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6 million and has average annual fully taxed net income not exceeding $2 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150 million when it has at least $75 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $225 million in SBA-guaranteed debentures when they have at least $112.5 million in combined regulatory capital. As of June 4, 2014, our SBIC subsidiary had $32 million in regulatory capital and $64 million of SBA-guaranteed debentures outstanding. The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, our SBIC subsidiary may also be limited in its ability to make distributions to us if it does not have sufficient capital, in accordance with SBA regulations.

Our SBIC subsidiary is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that our SBIC subsidiary will receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiary continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiary’s assets over our stockholders in the event we liquidate our SBIC subsidiary or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiary upon an event of default.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a general summary of the material U.S. federal income tax considerations (and, in the case of a non-U.S. holder (as defined below), the material U.S. federal estate tax consequences) applicable to an investment in the 2023 Notes. This summary does not purport to be a complete description of the income and estate tax considerations applicable to such an investment. The discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, potentially with retroactive effect. You should consult your own tax advisor with respect to tax considerations that pertain to your purchase, ownership and disposition of our 2023 Notes.

This discussion deals only with 2023 Notes held as capital assets within the meaning of Section 1221 of the Code and does not purport to deal with persons in special tax situations, such as financial institutions, insurance companies, controlled foreign corporations, passive foreign investment companies and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the 2023 Notes as a hedge against currency risks or as a position in a “straddle,” “hedge,” “constructive sale transaction” or “conversion transaction” for tax purposes, entities that are tax-exempt for U.S. federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities, or persons whose functional currency is not the U.S. dollar. It also does not deal with beneficial owners of the 2023 Notes other than original purchasers of the 2023 Notes who acquire the 2023 Notes in this offering for a price equal to their original issue price ( i.e., the first price at which a substantial amount of the notes is sold other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). If you are considering purchasing the 2023 Notes, you should consult your own tax advisor concerning the application of the U.S. federal tax laws to you in light of your particular situation, as well as any consequences to you of purchasing, owning and disposing of the 2023 Notes under the laws of any other taxing jurisdiction.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a 2023 Note that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any State thereof or the District of Columbia, (iii) a trust (a) subject to the control of one or more U.S. persons and the primary supervision of a court in the United States, or (b) that existed on August 20, 1996 and has made a valid election (under applicable Treasury Regulations) to be treated as a domestic trust, or (iv) an estate the income of which is subject to U.S. federal income taxation regardless of its source. The term “non-U.S. holder” means a beneficial owner of a 2023 Note that is neither a U.S. holder nor a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes). An individual may, subject to exceptions, be deemed to be a resident alien, as opposed to a non-resident alien, by, among other ways, being present in the United States (i) on at least 31 days in the calendar year, and (ii) for an aggregate of at least 183 days during a three-year period ending in the current calendar year, counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year. Resident aliens are subject to U.S. federal income tax as if they were U.S. citizens.

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any 2023 Notes, the U.S. federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partners of partnerships holding 2023 Notes should consult their own tax advisors.

 

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Taxation of 2023 Note Holders

Under present law, we are of the opinion that the 2023 Notes will constitute indebtedness of us for U.S. federal income tax purposes, which the below discussion assumes. We intend to treat all payments made with respect to the 2023 Notes consistent with this characterization.

Taxation of U.S. Holders. Payments or accruals of interest on a 2023 Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

Upon the sale, exchange, redemption, retirement or other taxable disposition of a 2023 Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, which are treated as ordinary income to the extent not previously included in income) and the U.S. holder’s adjusted tax basis in the 2023 Note. A U.S. holder’s adjusted tax basis in a 2023 Note generally will equal the U.S. holder’s initial investment in the 2023 Note. Capital gain or loss generally will be long-term capital gain or loss if the 2023 Note was held for more than one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders generally are eligible for reduced rates of taxation. The distinction between capital gain or loss and ordinary income or loss is also important in other contexts; for example, for purposes of the limitations on a U.S. holder’s ability to offset capital losses against ordinary income.

Unearned Income Medicare Contribution

After December 31, 2012, a tax of 3.8% will be imposed on certain “net investment income” (or “undistributed net investment income”, in the case of estates and trusts) received by taxpayers other than corporations with adjusted gross income above certain threshold amounts. “Net investment income” as defined for U.S. federal Medicare contribution purposes generally includes interest payments and gain recognized from the sale or other disposition of the 2023 Notes. Tax-exempt trusts, which are not subject to income taxes generally, and foreign individuals will not be subject to this tax. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the 2023 Notes.

Taxation of Non-U.S. Holders. A non-U.S. holder generally will not be subject to U.S. federal income or withholding taxes on payments of principal or interest on a 2023 Note provided that (i) income on the 2023 Note is not effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States, (ii) the non-U.S. holder is not a controlled foreign corporation related to the Company through stock ownership, (iii) the non-U.S. holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code, (iv) the non-U.S. holder does not own (directly or indirectly, actually or constructively) 10% or more of the total combined voting power of all classes of stock of the Company, and (v) the non-U.S. holder has provided a statement in the year in which a payment occurs or in the preceding 3 years, on an Internal Revenue Service (IRS) Form W-8BEN, Form W-8BEN-E, or other applicable form signed under penalties of perjury that includes its name and address and certifies that the non-U.S. holder is the beneficial owner and is not a U.S. person in compliance with applicable requirements, or satisfies documentary evidence requirements for establishing that it is a non-U.S. holder.

A non-U.S. holder that is not exempt from tax under these rules generally will be subject to U.S. federal income tax withholding on payments of interest on the 2023 Notes at a rate of 30% unless (i) the income is effectively connected with the conduct of a U.S. trade or business (and, under certain income tax treaties, is attributable to a permanent establishment maintained in the U.S. by the non-U.S. holder), so long as the non-U.S. holder has provided an IRS Form W-8ECI or substantially similar substitute form stating that the interest on the 2023 Notes is effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S. in which case the interest will be subject to U.S. federal income tax on a net income basis as applicable to U.S. holders generally (unless an applicable income tax treaty provides otherwise), or (ii) an applicable income tax treaty provides for a lower rate of, or exemption from, withholding tax.

 

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In the case of a non-U.S. holder that is a corporation and that receives income that is effectively connected with the conduct of a U.S. trade or business, such income may also be subject to a branch profits tax (which is generally imposed on a non-U.S. corporation on the actual or deemed repatriation from the United States of earnings and profits attributable to a U.S. trade or business) at a 30% rate. The branch profits tax may not apply (or may apply at a reduced rate) if the non-U.S. holder is a qualified resident of a country with which the United States has an income tax treaty.

To claim the benefit of an income tax treaty or to claim exemption from withholding because income is effectively connected with a U.S. trade or business, the non-U.S. holder must timely provide the appropriate, properly executed IRS forms. The non-U.S. holder must inform the recipient of any changes on these forms within 30 days of such change. These forms may be required to be periodically updated. Also, a non-U.S. holder who is claiming the benefits of a treaty may be required to obtain a United States taxpayer identification number and to provide certain documentary evidence issued by foreign governmental authorities to prove residence in the foreign country.

Generally, a non-U.S. holder will not be subject to U.S. federal income or withholding taxes on any amount that constitutes capital gain upon the sale, exchange, redemption, retirement or other taxable disposition of a 2023 Note, provided that (i) the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. holder (or, if required by an applicable income tax treaty, is not attributable to a U.S. “permanent establishment” maintained by the non-U.S. holder) and (ii) that the non-U.S. holder is not an individual who is present in the U.S. for 183 days or more in the taxable year of the sale, exchange, or other taxable disposition and meets certain other conditions (unless such holder is eligible for relief under an applicable income tax treaty). Certain other exceptions may be applicable, and a non-U.S. holder should consult its tax advisor in this regard.

A 2023 Note that is held by an individual who, at the time of death, is not a citizen or resident of the United States (as specially defined for U.S. federal estate tax purposes) generally will not be subject to the U.S. federal estate tax, unless, at the time of death, (i) such individual directly or indirectly, actually or constructively, owns ten percent or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder or (ii) such individual’s interest in the 2023 Notes is effectively connected with the individual’s conduct of a U.S. trade or business.

Information Reporting and Backup Withholding. A U.S. holder (other than an “exempt recipient,” including a corporation and certain other persons who, when required, demonstrate their exempt status) may be subject to backup withholding on, and to information reporting requirements with respect to, payments of principal and interest on, and proceeds from the sale, exchange, redemption or retirement of, the 2023 Notes. In general, if a non-corporate U.S. holder subject to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup withholding requirements, backup withholding at the applicable rate may apply.

The amount of interest we pay to a non-U.S. holder on the 2023 Notes will be reported to such non-U.S. Holder and to the IRS annually on an IRS Form 1042-S even if the non-U.S. holder is exempt from the 30% withholding tax described above. Copies of the information returns reporting those payments and the amounts withheld, if any, may also be made available to the tax authorities in the country where the non-U.S. holder is resident under provisions of an applicable income tax treaty or agreement.

In addition, backup withholding tax and certain other information reporting requirements apply to payments of principal and interest on, and proceeds from the sale, exchange, redemption or retirement of, the 2023 Notes, unless an exemption applies. Backup withholding and information reporting will not apply to payments we make to a non-U.S. holder if such non-U.S. holder has provided to the applicable withholding agent under penalties of perjury the required certification of their non-U.S. person status as discussed above (and the applicable withholding agent does not have actual knowledge or reason to know that they are a U.S. person) or if the non-U.S. holder is an exempt recipient.

 

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If a non-U.S. holder sells or redeems a 2023 Note through a U.S. broker or the U.S. office of a foreign broker, the proceeds from such sale or redemption will be subject to information reporting and backup withholding unless such non-U.S. holder provides a withholding certificate or other appropriate documentary evidence establishing that such non-U.S. holder is not a U.S. person to the broker and such broker does not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting and backup withholding. If a non-U.S. holder sells or redeems a note through the foreign office of a broker who is a U.S. person or has certain enumerated connections with the U.S., the proceeds from such sale or redemption will be subject to information reporting unless the non-U.S. holder provides to such broker a withholding certificate or other appropriate documentary evidence establishing that the non-U.S. holder is not a U.S. person and such broker does not have actual knowledge or reason to know that such evidence is false, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting. In circumstances where information reporting by the foreign office of such a broker is required, backup withholding will be required only if the broker has actual knowledge that the non-U.S. holder is a U.S. person.

You should consult your tax advisor regarding the qualification for an exemption from backup withholding and information reporting and the procedures for obtaining such an exemption, if applicable. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner generally would be allowed as a refund or a credit against such beneficial owner’s U.S. federal income tax provided the required information is timely furnished to the IRS.

Foreign Account Tax Compliance Act

Legislation enacted in 2010 imposes a U.S. federal withholding tax of 30% on payments of interest or gross proceeds from the disposition of a debt instrument paid after December 31, 2012 to certain non-U.S. entities, including certain foreign financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its U.S. account holders and its U.S. owners. Pursuant to Treasury Regulations and other Treasury guidance, these rules generally are not effective for payments of gross proceeds, until January 1, 2017. In addition, Treasury Regulations state that even after the effective dates the new withholding obligations will not apply to payments on, or with respect to, to obligations that are outstanding on July 1, 2014. Prospective purchasers of the 2023 Notes should consult their own tax advisors regarding the new withholding and reporting provisions.

You should consult your own tax advisor with respect to the particular tax consequences to you of an investment in the 2023 Notes, including the possible effect of any pending legislation or proposed regulations.

Our Taxation as a Regulated Investment Company

As a regulated investment company (“RIC”), we generally will not have to pay corporate-level federal income taxes on any net ordinary income or realized capital gains that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain our qualification as a RIC, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).

Taxation as a Regulated Investment Company

If we:

 

    Qualify as a RIC; and

 

    Satisfy the Annual Distribution Requirement

 

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then we will not be subject to U.S. federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.

We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Excise Tax Avoidance Requirement”). We generally will endeavor in each taxable year to make sufficient distributions to our stockholders to avoid the 4% excise tax on our income. However, depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay the 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. We may, in the future, make actual distributions to our stockholders of our net capital gains.

In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:

 

    continue to qualify as a business development company under the 1940 Act at all times during each taxable year;

 

    derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); and

 

    diversify our holdings so that at the end of each quarter of the taxable year:

 

    at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

 

    no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships” (the “Diversification Tests”).

We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our net ordinary income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. If the IRS should adopt a position that a distribution of 20% cash and the balance in stock is not a distribution satisfying the Annual Distribution Requirement, we may find it more difficult to meet such requirement.

Although we do not presently expect to do so, we are authorized to borrow funds, to sell assets and to make taxable distributions of our stock and debt securities in order to satisfy distribution requirements. Our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio

 

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and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are unable to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify as a RIC and become subject to tax as an ordinary corporation.

Under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. If we are prohibited to make distributions, we may fail to qualify as a RIC and become subject to tax as an ordinary corporation.

Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions; (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited); (iv) cause us to recognize income or gain without a corresponding receipt of cash; (v) adversely affect the time as to when a purchase or sale of securities is deemed to occur; (vi) adversely alter the characterization of certain complex financial transactions; and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test described above. We will monitor our transactions and may make certain tax decisions in order to mitigate the potential adverse effect of these provisions.

If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we will be subject to U.S. federal income tax in that year on all of our taxable income, regardless of whether we make any distributions to our stockholders. If we fail to maintain RIC tax treatment for any reason and are subject to corporate-level federal income tax, the resulting corporate-level federal income tax could substantially reduce our net assets and the amount of income available to make interest and principal payments on the 2023 Notes. In contrast, assuming we qualify as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated.

 

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DESCRIPTION OF THE 2023 NOTES

The 2023 Notes will be issued under the indenture dated May 10, 2013, between us and the U.S. Bank National Association, as trustee, and a second supplemental indenture thereto, to be dated the date of issuance of the 2023 Notes. We refer to the indenture, as well as the second supplemental indenture thereto, as the indenture and to U.S. Bank National Association as the trustee. The 2023 Notes are governed by the indenture, as required by federal law for all bonds and notes of companies that are publicly offered. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “—Events of Default—Remedies if an Event of Default Occurs.” Second, the trustee performs certain administrative duties for us with respect to our 2023 Notes.

This section includes a description of the material terms of the 2023 Notes and the indenture. Because this section is a summary, however, it does not describe every aspect of the 2023 Notes and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of the 2023 Notes. The indenture has been attached as an exhibit to the registration statement of which this prospectus is a part and filed with the SEC. See “Available Information” for information on how to obtain a copy of the indenture.

General

The 2023 Notes will mature on December 30, 2023. The principal payable at maturity will be 100% of the aggregate principal amount. The interest rate of the 2023 Notes is 6.75% per year and will be paid every March 30, June 30, September 30, and December 30, beginning March 30, 2017, and the regular record dates for interest payments will be every March 15, June 15, September 15, and December 15, beginning March 15, 2017. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. The initial interest period will be the period from and including December 21, 2016, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

We will issue the 2023 Notes in denominations of $25 and integral multiples of $25 in excess thereof. The 2023 Notes will not be subject to any sinking fund and holders of the 2023 Notes will not have the option to have the 2023 Notes repaid prior to the stated maturity date.

Except as described under the captions “—Events of Default,” “ —Other Covenants,” and “—Merger or Consolidation” in this prospectus, the indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.

We have the ability to issue indenture securities with terms different from the 2023 Notes and, without the consent of the holders thereof, to reopen the 2023 Notes and issue additional 2023 Notes.

Optional Redemption

The 2023 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after December 21, 2019 upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the 2023 Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.

 

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You may be prevented from exchanging or transferring the 2023 Notes when they are subject to redemption. In case any 2023 Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such 2023 Note, you will receive, without a charge, a new 2023 Note or 2023 Notes of authorized denominations representing the principal amount of your remaining unredeemed 2023 Notes. Any exercise of our option to redeem the 2023 Notes will be done in compliance with the 1940 Act.

If we redeem only some of the 2023 Notes, the trustee will determine the method for selection of the particular 2023 Notes to be redeemed, in accordance with the indenture and the 1940 Act and in accordance with the rules of any national securities exchange or quotation system on which the 2023 Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the 2023 Notes called for redemption.

Global Securities

Each 2023 Note will be issued in book-entry form and represented by a global security that we deposit with and register in the name of The Depository Trust Company, New York, New York, known as DTC, or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the 2023 Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security. For more information about these arrangements, see “—Book-Entry Procedures” below.

Termination of a Global Security

If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated 2023 Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.

Payment and Paying Agents

We will pay interest to the person listed in the trustee’s records as the owner of the 2023 Notes at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the 2023 Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling the 2023 Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the 2023 Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

Payments on Global Securities

We will make payments on the 2023 Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants, as described under “—Book-Entry Procedures.”

 

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Payments on Certificated Securities

In the event the 2023 Notes become represented by certificated securities, we will make payments on the 2023 Notes as follows. We will pay interest that is due on an interest payment date to the holder of the 2023 Notes as shown on the trustee’s records as of the close of business on the regular record date at our office in New York, New York. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, New York and/or at other offices that may be specified in a notice to holders against surrender of the 2023 Note.

Alternatively, at our option, we may pay any cash interest that becomes due on the 2023 Notes by mailing a check to the holder at his, her or its address shown on the trustee’s records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.

Payment When Offices Are Closed

If any payment is due on the 2023 Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date. Such payment will not result in a default under the 2023 Notes or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the 2023 Notes.

Events of Default

You will have rights if an Event of Default occurs in respect of the 2023 Notes, as described later in this subsection.

The term “Event of Default” in respect of the 2023 Notes means any of the following:

 

    we do not pay the principal (or premium, if any) of any 2023 Note when due;

 

    we do not pay interest on any 2023 Note when due, and such default is not cured within 30 days;

 

    we remain in breach of a covenant in respect of the 2023 Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the 2023 Notes);

 

    we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and in the case of certain orders or decrees entered against us under bankruptcy law, such order or decree remains undischarged or unstayed for a period of 60 days; or

 

    on the last business day of each of twenty-four consecutive calendar months, the 2023 Notes have the asset coverage, as defined in the 1940 Act, of less than 100% after giving effect to any exemptive relief granted to us by the SEC.

An Event of Default for the 2023 Notes does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of the 2023 Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.

 

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Remedies if an Event of Default Occurs

If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the 2023 Notes may declare the entire principal amount of all the 2023 Notes to be due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the 2023 Notes if (1) we have deposited with the trustee all amounts due and owing with respect to the 2023 Notes (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.

Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an “indemnity”). If reasonable indemnity is provided, the holders of a majority in principal amount of the 2023 Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the 2023 Notes, the following must occur:

 

    you must give the trustee written notice that an Event of Default has occurred and remains uncured;

 

    the holders of at least 25% in principal amount of all the 2023 Notes must make a written request that the trustee take action because of the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of taking that action;

 

    the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity; and

 

    the holders of a majority in principal amount of the 2023 Notes must not have given the trustee a direction inconsistent with the above notice during that 60-day period.

However, you are entitled at any time to bring a lawsuit for the payment of money due on your 2023 Notes on or after the due date.

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the 2023 Notes, or else specifying any default.

Waiver of Default

The holders of a majority in principal amount of the 2023 Notes may waive any past defaults other than other than:

 

    the payment of principal or interest; or

 

    in respect of a covenant that cannot be modified or amended without the consent of each holder.

 

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Merger or Consolidation

Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:

 

    where we merge out of existence or convey or transfer our assets substantially as an entirety, the resulting entity must agree to be legally responsible for our obligations under the 2023 Notes;

 

    the merger or sale of assets must not cause a default on the 2023 Notes and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded; and

 

    we must deliver certain certificates and documents to the trustee.

Modification or Waiver

There are three types of changes we can make to the indenture and the 2023 Notes issued thereunder.

Changes Requiring Your Approval

First, there are changes that we cannot make to your 2023 Notes without your specific approval. The following is a list of those types of changes:

 

    change the stated maturity of the principal of or interest on the 2023 Notes;

 

    reduce any amounts due on the 2023 Notes;

 

    reduce the amount of principal payable upon acceleration of the maturity of a 2023 Note following a default;

 

    change the place or currency of payment on a 2023 Note;

 

    impair your right to sue for payment;

 

    reduce the percentage of holders of 2023 Notes whose consent is needed to modify or amend the indenture; and

 

    reduce the percentage of holders of 2023 Notes whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults.

Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the 2023 Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the 2023 Notes in any material respect.

Changes Requiring Majority Approval

Any other change to the indenture and the 2023 Notes would require the following approval:

 

    if the change affects only the 2023 Notes, it must be approved by the holders of a majority in principal amount of the 2023 Notes; and

 

    if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

 

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In each case, the required approval must be given by written consent.

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Your Approval.”

Further Details Concerning Voting

When taking a vote, we will use the following rules to decide how much principal to attribute to the 2023 Notes:

The 2023 Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. The 2023 Notes will also not be eligible to vote if they have been fully defeased as described later under “—Defeasance—Full Defeasance.”

We will generally be entitled to set any day as a record date for the purpose of determining the holders of the 2023 Notes that are entitled to vote or take other action under the indenture. However, the record date may not be more than 30 days before the date of the first solicitation of holders to vote on or take such action. If we set a record date for a vote or other action to be taken by holders of the 2023 Notes, that vote or action may be taken only by persons who are holders of the 2023 Notes on the record date and must be taken within eleven months following the record date.

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the 2023 Notes or request a waiver.

Defeasance

The following defeasance provisions will be applicable to the 2023 Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the 2023 Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the 2023 Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from the restrictive covenants under the indenture relating to the 2023 Notes. The consequences to the holders of the 2023 Notes is that, while they no longer benefit from the restrictive covenants under the indenture, and while the 2023 Notes may not be accelerated for any reason, the holders of 2023 Notes nonetheless are guaranteed to receive the principal and interest owed to them.

Covenant Defeasance

Under current U.S. federal tax law and the indenture, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the 2023 Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your 2023 Notes. If we achieve covenant defeasance and your 2023 Notes were subordinated as described under “Indenture Provisions—Ranking” below, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit described in the first bullet to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debtholders. In order to achieve covenant defeasance, we must do the following:

 

    Since the 2023 Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the 2023 Notes a combination of cash and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the 2023 Notes on their various due dates;

 

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    we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the 2023 Notes any differently than if we did not make the deposit;

 

    we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;

 

    defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our other material agreements or instruments; and

 

    no default or event of default with respect to the 2023 Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we accomplish covenant defeasance, you can still look to us for repayment of the 2023 Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. In fact, if one of the remaining Events of Default occurred (such as our bankruptcy) and the 2023 Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

Full Defeasance

If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the 2023 Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

    Since the 2023 Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the 2023 Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the 2023 Notes on their various due dates;

 

    we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the 2023 Notes any differently than if we did not make the deposit. Under current U.S. federal tax law the deposit and our legal release from the 2023 Notes would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your 2023 Notes and you would recognize gain or loss on the 2023 Notes at the time of the deposit;

 

    we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;

 

    defeasance must not result in a breach or violation of, or constitute a default under, of the indenture or any of our other material agreements or instruments; and

 

    no default or event of default with respect to the 2023 Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the 2023 Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your 2023 Notes were subordinated as described later under “—Indenture Provisions—Ranking,” such subordination would not prevent the trustee under the Indenture from applying the funds available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such 2023 Notes for the benefit of the subordinated debtholders.

 

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Other Covenants

In addition to any other covenants described in this prospectus, as well as standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment, payment of taxes by the Company and related matters, the following covenants will apply to the 2023 Notes:

 

    We agree that for the period of time during which the 2023 Notes are outstanding, we will not violate (whether or not we are subject thereto) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings. See “Risk Factors—Pending legislation may allow us to incur additional leverage.”

 

    If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the 2023 Notes and the Trustee, for the period of time during which the 2023 Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

Form, Exchange and Transfer of Certificated Registered Securities

If registered 2023 Notes cease to be issued in book-entry form, they will be issued:

 

    only in fully registered certificated form;

 

    without interest coupons; and

 

    unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.

Holders may exchange their certificated securities for 2023 Notes of smaller denominations or combined into fewer 2023 Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.

Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering 2023 Notes in the names of holders transferring 2023 Notes. We may appoint another entity to perform these functions or perform them ourselves.

Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.

 

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If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt security as described in this subsection, since it will be the sole holder of the debt security.

Resignation of Trustee

The trustee may resign or be removed with respect to the 2023 Notes provided that a successor trustee is appointed to act with respect to the 2023 Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

Indenture Provisions—Ranking

The 2023 Notes will be our direct unsecured obligations and will rank:

 

    pari passu with, which means equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us, including our 2020 Notes (which have an aggregate principal amount of $61.8 million as of the offering date of the 2023 Notes). The 2023 Notes will also rank pari passu with, which means equal to, our general liabilities, which consist of any amounts we may be required to pay pursuant to our guaranty under the Credit Facility with Madison Capital Funding and of trade and other payables, including any outstanding dividend payable, base and incentive management fees payable, interest and debt fees payable, vendor payables and accrued expenses such as auditor fees, legal fees, director fees, etc. In total, these general liabilities were $10.3 million as of August 31, 2016.

 

    senior to any of our future indebtedness that expressly provides it is subordinated to the 2023 Notes. We currently do not have outstanding debt that is subordinated to the 2023 Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the 2023 Notes. Therefore, the 2023 Notes will not be senior to any indebtedness or obligations.

 

    effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. Because the 2023 Notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we have incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the 2023 Notes.

 

    structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles since the 2023 Notes are obligations exclusively of Saratoga Investment Corp. and not of any of our subsidiaries. Structural subordination means that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets. As of the offering date of the 2023 Notes, the 2023 Notes will be structurally subordinated to both $103.7 million of our SBA-guaranteed debentures and our $45.0 million credit facility with Madison Capital Funding LLC, which has a current balance of $0.0.

Book-Entry Procedures

The 2023 Notes will be represented by global securities that will be deposited and registered in the name of The Depository Trust Company (“DTC”) or its nominee. This means that, except in limited circumstances, you will not receive certificates for the 2023 Notes. Beneficial interests in the 2023 Notes will be represented

 

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through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the 2023 Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

The 2023 Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for each issuance of the 2023 Notes, in the aggregate principal amount of such issue, and will be deposited with DTC. Interests in the 2023 Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such 2023 Notes will, therefore, be required by DTC to be settled in immediately available funds. 2023 None of the Company, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s Ratings Services’ highest rating: AAA. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the 2023 Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2023 Notes on DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2023 Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2023 Notes, except in the event that use of the book-entry system for the 2023 Notes is discontinued.

To facilitate subsequent transfers, all 2023 Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the 2023 Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2023 Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the 2023 Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

 

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Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the 2023 Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Redemption proceeds, distributions, and interest payments on the 2023 Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the Trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the Trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the 2023 Notes at any time by giving reasonable notice to us or to the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

 

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DESCRIPTION OF OUR CAPITAL STOCK

The following description is based on relevant portions of the Maryland General Corporation Law and our charter and bylaws, which we collectively refer to as our “governing documents.”

As of the date of this prospectus, our authorized stock consists of 100,000,000 shares of capital stock, $0.001 par value per share, all of which are designated as shares of common stock. Our common stock trades under the symbol “SAR” on the New York Stock Exchange. There are no outstanding options or warrants to purchase our common stock. No shares of common stock have been authorized for issuance under any equity compensation plans. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

Under our governing documents, our board of directors is authorized to create new classes or series of shares of stock and to authorize the issuance of shares of stock without obtaining stockholder approval. Our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

Common Stock

Each share of our common stock has equal rights as to earnings, assets, dividends and voting and all of our outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights.

In the event of our liquidation, dissolution or winding up, each share of common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of shares of our preferred stock, if any are outstanding at such time. Each share of our common stock entitles its holder to cast one vote on all matters submitted to a vote of stockholders, including the election and removal of directors.

The following table sets forth information regarding our authorized shares of stock under our charter and shares of stock outstanding as of the date of this prospectus.

 

Title of Class

   Shares Authorized      Amount Held by Us
or for Our Account
     Amount Outstanding
Exclusive of Amount Held
by Us or for Our Account
 

Common Stock

     100,000,000         —           5,748,247   

Preferred Stock

Our governing documents authorize our board of directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to the issuance of shares of stock of each class or series, the board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock. Thus, the board of directors could authorize the issuance of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. In addition, as a business development company, any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, the aggregate

 

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dividend or distribution on, or purchase price of, such shares of preferred stock together with all other indebtedness and senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock is in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding shares of preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

The Maryland General Corporation Law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our governing documents contain a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by the Maryland General Corporation Law, subject to the requirements of the 1940 Act.

Maryland law requires a corporation (unless its charter provides otherwise, which, our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received unless, in either case, a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

Our charter authorizes us to obligate ourselves, and our bylaws do obligate us, to the maximum extent permitted by Maryland law and subject to any applicable requirements of the 1940 Act, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (1) any present or former director or officer or (2) any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, manager, member or trustee, from and against any claim or liability to which that person may become subject for which that person may incur by reason of his or her service in such capacity. Our charter and bylaws also permit indemnification and the advancement of expenses to any person who served a predecessor to Saratoga Investment Corp. in any of the capacities described above and any of our employees or agents or any employees or agents of such predecessor.

As a business development company, and in accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

 

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In addition to the indemnification provided for in our bylaws, we have entered into indemnification agreements with each of our current directors and officers and we intend to enter into indemnification agreements with each of our future directors and officers. The indemnification agreements attempt to provide these directors and officers the maximum indemnification permitted under Maryland law and the 1940 Act. The agreements provide, among other things, for the advancement of expenses and indemnification for liabilities incurred which such person may incur by reason of his or her status as a present or former director or officer in any action or proceeding arising out of the performance of such person’s services as a present or former director or officer.

Provisions of Our Governing Documents and the Maryland General Corporation Law

Our governing documents and the Maryland General Corporation Law contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

Classified Board of Directors

Our board of directors is divided into three classes of directors serving staggered three-year terms. Directors of each class are elected to serve for three-year terms and until their successors are duly elected and qualify, and each year one class of directors is elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.

Number of Directors; Vacancies; Removal

Our governing documents provide that the number of directors will be set only by our board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than three nor more than eleven. Our charter provides that, except as may be provided by the board of directors in setting the terms of any class or series of shares of stock, so long as we have a class of securities registered under the Exchange Act and at least three independent directors, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act. If there are no directors then in office, vacancies may be filled by stockholders at a special meeting called for such purpose. Our charter provides that a director may be removed only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

Election of Directors

Our charter and bylaws provide that the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of directors will be required to elect each director. Pursuant to our charter and bylaws, our board of directors may amend the bylaws to alter the vote required to elect directors.

Action by Stockholders

All of our outstanding shares of common stock will generally be able to vote on any matter that is a proper subject for action by the stockholders of a Maryland corporation, including in respect of the election or removal of

 

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directors as well as other extraordinary matters. Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or by written or electronically-transmitted unanimous consent in lieu of a meeting. These provisions, combined with the requirements of our governing documents regarding the calling of a stockholder-requested special meeting of stockholder discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that, with respect to an annual meeting of our stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) by any stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the annual meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of our bylaws or (4) by a stockholder who is entitled to vote at the meeting in circumstances in which a special meeting of stockholders is called for the purpose of electing directors when no directors remain in office.

The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

Our bylaws provide that special meetings of our stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of our stockholders will be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting, except that, if no directors remain in office, a special meeting of our stockholders shall be called to elect directors by the secretary upon the written request of holders entitled to cast at least 10% of the votes entitled to be cast generally in the election of directors.

Amendment of Governing Documents

Under Maryland law, a Maryland corporation generally cannot dissolve or amend its charter unless the corporation’s board of directors declares the dissolution or amendment to be advisable and the dissolution or amendment is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter

 

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generally provides for approval of amendments to our charter by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. However, our charter also provides that certain charter amendments and proposals for our liquidation, dissolution or conversion, whether by merger or otherwise, from a closed-end company to an open-end company require the approval of the stockholders entitled to cast at least two-thirds percent of the votes entitled to be cast on such matter. If such amendment or proposal is approved by at least two-thirds of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are, as defined in our charter, our current directors as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the board of directors.

Our governing documents provide that the board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

Approval of Extraordinary Actions

Under Maryland law, a Maryland corporation generally cannot amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless the corporation’s board of directors declares action or transaction to be advisable and the action or transaction is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter.

Except for a merger that would result in our conversion to an open-end company, which requires the approval described above, our charter provides that we may merge, sell all or substantially all of our assets, engage in a consolidation or share exchange or engage in similar transactions, if such transaction is declared advisable by our board of directors and approved by a majority of all of the votes entitled to be cast on the matter.

No Appraisal Rights

Except with respect to appraisal rights arising in connection with the Maryland Control Share Acquisition Act discussed below, as permitted by the Maryland General Corporation Law, our governing documents provide that our stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines that such rights will apply with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise appraisal rights.

Control Share Acquisitions

The Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

 

    one-tenth or more but less than one-third;

 

    one-third or more but less than a majority; or

 

    a majority or more of all voting power.

 

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The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholder meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations, including, as provided in our bylaws, compliance with the 1940 Act, which will prohibit any such repurchase other than in limited circumstances. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholder meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our common stock. Such provision could also be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Acquisition Act only if the board of directors determines that it would be in our best interests and if the SEC does not object to our determination that our being subject to the Control Share Acquisition Act does not conflict with the 1940 Act.

Business Combinations

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

    any person who beneficially owns 10% or more of the voting power of the corporation’s stock; or

 

    an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

 

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After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

 

    80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

    two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution exempting from the provisions of the Maryland Business Combination Act any business combination between us and any other person. If our board of directors adopts resolutions causing us to be subject to the provisions of the Business Combination Act, these provisions may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Conflict with 1940 Act

Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Acquisition Act or the Business Combination Act (if we amend our bylaws to be subject to such Acts), or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.

 

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UNDERWRITING

Ladenburg Thalmann is acting as representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated December 13, 2016, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the aggregate principal amount of 2023 Notes set forth opposite the underwriter’s name.

 

Underwriter

   Principal
amount of
notes
 

Ladenburg Thalmann & Co. Inc.

   $ 39,375,000   

BB&T Capital Markets, a division of BB&T Securities, LLC

   $ 11,250,000   

Compass Point Research & Trading LLC

   $ 6,875,000   

William Blair & Company, L.L.C.

   $ 7,500,000   
  

 

 

 

Total

   $ 65,000,000   
  

 

 

 

The underwriting agreement provides that the obligations of the underwriters to purchase the 2023 Notes included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the 2023 Notes (other than those covered by the overallotment option described below) if they purchase any of the 2023 Notes.

The underwriters propose to offer some of the 2023 Notes directly to the public at the public offering price set forth on the cover page of this prospectus and some of the 2023 Notes to dealers at the public offering price less a concession not to exceed 0.5625% of the aggregate principal amount of the 2023 Notes. The underwriting discount of $0.78125 per 2023 Note is equal to 3.125% of the aggregate principal amount of the 2023 Notes. If all of the 2023 Notes are not sold at the offering price, the representative may change the public offering price and other selling terms. Investors must pay for any 2023 Notes purchased on or before December 21, 2016. The representative has advised us that the underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.

The underwriters hold an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional $6 million aggregate principal amount of the 2023 Notes at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering overallotments, if any, in connection with this offering. To the extent such option is exercised, each underwriter must purchase a number of additional 2023 Notes approximately proportionate to that underwriter’s initial purchase commitment.

We have agreed that, for a period of 90 days from the date of this prospectus supplement, such party will not, without the prior written consent of Ladenburg, on behalf of the underwriters, offer, pledge, sell, contract to sell or otherwise dispose of or agree to sell or otherwise dispose of, directly or indirectly or hedge any debt securities issued or guaranteed by us or any securities convertible into or exercisable or exchangeable for debt securities issued or guaranteed by us or file any registration statement under the Securities Act with respect to any of the foregoing. Ladenburg in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

The 90-day period in the preceding paragraph will be extended if (i) during the last 17 days of the 90-day period we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the 90-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period, in which case the restrictions described in the preceding sentence will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or the occurrence of the material event.

We intend to list the 2023 Notes on the New York Stock Exchange. We expect trading in the 2023 Notes on the New York Stock Exchange to begin within 30 days after the original issue date under the trading symbol “SAB.” We offer no assurances that an active trading market for the 2023 Notes will develop and continue after the offering.

 

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The following table shows the public offering price, the underwriting discounts and commissions to be paid to the underwriters and the proceeds, before expenses, to us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional 2023 Notes.

 

     Per Note      Without
Option
     With
Option
 

Public offering price

     100.0%       $ 65,000,000       $ 74,750,000   

Underwriting discount (sales load) paid by us(1)

     3.125%       $ 2,031,250       $ 2,335,938   

Estimated Proceeds to us, before expenses

     96.875%       $ 62,968,750       $ 72,414,062   

 

(1) The expenses associated with the offering, including the underwriting discount, are paid by us and are ultimately borne by our shareholders.

We have agreed to reimburse the underwriters for the reasonable fees and disbursements of counsel in connection with the qualification of the 2023 Notes under Blue Sky and state securities laws and in connection with the review and qualification of this offering with FINRA.

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $300,000.

We and our investment adviser have each agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

Certain underwriters may make a market in the 2023 Notes. No underwriter is, however, obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of the underwriter. No assurance can be given as to the liquidity of, or the trading market for, the 2023 Notes as a result of any market-making activities undertaken by any underwriter. This Prospectus is to be used by any underwriter in connection with the offering and, during the period in which a prospectus must be delivered, with offers and sales of the 2023 Notes in market-making transactions in the over-the-counter market at negotiated prices related to prevailing market prices at the time of the sale.

In connection with the offering, Ladenburg Thalmann & Co. Inc., on behalf of the underwriters, may purchase and sell 2023 Notes in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of 2023 Notes in excess of the number of 2023 Notes to be purchased by the underwriters in the offering, which creates a syndicate short position. “Covered” short sales are sales of 2023 Notes made in an amount up to the number of 2023 Notes represented by the underwriters’ overallotment option. In determining the source of 2023 Notes to close out the covered syndicate short position, the underwriters will consider, among other things, the price of 2023 Notes available for purchase in the open market as compared to the price at which they may purchase 2023 Notes through the overallotment option. Transactions to close out the covered syndicate short position involve either purchases of 2023 Notes in the open market after the distribution has been completed or the exercise of the overallotment option. The underwriters may also make “naked” short sales of 2023 Notes in excess of the overallotment option. The underwriters must close out any naked short position by purchasing 2023 Notes in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of 2023 Notes in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of 2023 Notes in the open market while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Ladenburg Thalmann & Co. Inc. repurchases 2023 Notes originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

 

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Any of these activities may have the effect of preventing or retarding a decline in the market price of 2023 Notes. They may also cause the price of 2023 Notes to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the New York Stock Exchange, or in the over-the-counter market, or otherwise. Trading is expected to commence on the New York Stock Exchange within 30 days after the date of initial delivery of the 2023 Notes. If the underwriters commence any of these transactions, they may discontinue them at any time.

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representative may agree to allocate a number of 2023 Notes to underwriters for sale to their online brokerage account holders. The representative will allocate 2023 Notes to underwriters that may make Internet distributions on the same basis as other allocations. In addition, 2023 Notes may be sold by the underwriters to securities dealers who resell 2023 Notes to online brokerage account holders.

We anticipate that, from time to time, certain underwriters may act as brokers or dealers in connection with the execution of Saratoga’s portfolio transactions after they have ceased to be underwriters and, subject to certain restrictions, may act as brokers while they are underwriters.

Certain underwriters may have performed investment banking and advisory services for us, our investment adviser and our affiliates from time to time, for which they have received customary fees and expenses. Certain underwriters may, from time to time, engage in transactions with or perform services for us, our investment adviser and our affiliates in the ordinary course of business.

The principal business address of Ladenburg Thalmann & Co. Inc. is 570 Lexington Avenue, 12th floor, New York, New York 10022.

Settlement

We expect that delivery of the 2023 Notes will be made against payment therefor on or about December 21, 2016, which will be the fifth business day following the date of the pricing of the 2023 Notes. Under Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise.

Other Jurisdictions

The 2023 Notes offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such 2023 Notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy the 2023 Notes offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

Potential Conflicts of Interest

Ladenburg Thalmann & Co. Inc. and its affiliates have provided, and may in the future provide, various investment banking, commercial banking, financial advisory, brokerage and other services to us and our affiliates for which services they have received, and may in the future receive, customary fees and expense reimbursement. Specifically, pursuant to an underwriting agreement dated May 2, 2013, for which Ladenburg Thalmann & Co. Inc. acted as representative of the underwriters, on May 10, 2013, we issued $42.0 million in aggregate principal amount of the 2020 Notes. In addition, on May 17, 2013, we closed an additional $6.3 million in aggregate principal amount of the 2020 Notes, pursuant to the full exercise of the underwriters’ option to purchase additional 2020 Notes. In connection with the foregoing, we paid underwriting discounts and commissions of $1,932,000 to the underwriters.

 

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On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. Inc. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an ATM offering. As of February 29, 2016, and at the close of the ATM offering, the Company had sold 2020 Notes with a total principal of $13,493,125 at an average price of $25.31 for aggregate net proceeds of $13,385,766 (net of transaction costs), and we paid Ladenburg Thalmann & Co. Inc. an agent fee of $273,184 in connection with the sales. The Company has not sold any additional 2020 Notes under this ATM offering and is no longer actively selling on this ATM offering.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the issuer, for which they received or will receive customary fees and expenses, including acting as underwriters for our securities offerings. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and such investment and securities activities may involve securities and/or instruments of our company. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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BROKERAGE ALLOCATION AND OTHER PRACTICES

Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of our business. Subject to policies established by our Board of Directors, we generally do not execute transactions through any particular broker or dealer, but seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably competitive trade execution costs, we do not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided, and our management and employees are authorized to pay such commission under these circumstances.

CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

Our investment securities are held under a custody agreement with U.S. Bank National Association. The address of the custodian is U.S. Bank National Association, Corporate Trust Services, One Federal Street, 3rd Floor, Boston, MA 02110. The transfer agent and registrar for our common stock, American Stock Transfer & Trust Company, acts as our transfer agent, dividend paying and reinvestment agent for our common stock. The principal business address of the transfer agent is 59 Maiden Lane, New York, New York 10038. U.S. Bank National Association, our trustee under an indenture and the second supplemental indenture thereto relating to the 2023 Notes, is the paying agent, registrar and transfer agent relating to the 2023 Notes. The principal business address of our trustee is 214 N. Tyron Street, 12th Floor, Charlotte, North Carolina 28202.

LEGAL MATTERS

Certain legal matters regarding the securities offered by this prospectus will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, D.C. Certain legal matters in connection with the offering will be passed upon for the underwriters by Blank Rome LLP, New York, New York.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Ernst & Young LLP, our independent registered public accounting firm, has audited our consolidated financial statements as of February 29, 2016, February 28, 2015 and February 28, 2014 and the three years ended February 29, 2016, February 28, 2015, and February 28, 2014, and the related senior securities table, as set forth in their reports. We have included our consolidated financial statements and our senior securities table in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing. Ernst  & Young LLP’s principal business address is 5 Times Square, New York, New York 10036.

AVAILABLE INFORMATION

As a public company, we file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus forms a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Unaudited Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of August 31, 2016 (unaudited) and February 29, 2016

     F-2   

Consolidated Statements of Operations for the three and six months ended August 31, 2016 and August 31, 2015 (unaudited)

     F-3   

Consolidated Schedules of Investments as of August 31, 2016 (unaudited) and February 29, 2016

     F-4   

Consolidated Statements of Changes in Net Assets for the six months ended August 31, 2016 and August 31,2015 (unaudited)

     F-11   

Consolidated Statements of Cash Flows for the six months ended August 31, 2016 and August 31, 2015 (unaudited)

     F-12   

Notes to Consolidated Financial Statements as of August 31, 2016 (unaudited)

     F-13   

Audited Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     F-52   

Consolidated Statements of Assets and Liabilities as of February  29, 2016 and February 28, 2015

     F-53   

Consolidated Statements of Operations for the years ended February  29, 2016, February 28, 2015 and February 28, 2014

     F-54   

Consolidated Schedules of Investments as of February  29, 2016 and February 28, 2015

     F-55   

Consolidated Statements of Changes in Net Assets for the years ended February 29, 2016, February 28, 2015 and February 28, 2014

     F-63   

Consolidated Statements of Cash Flows for the years ended February  29, 2016, February 28, 2015 and February 28, 2014

     F-64   

Notes to Consolidated Financial Statements

     F-65   

 

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Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

     As of  
     August 31, 2016     February 29, 2016  
     (unaudited)        

ASSETS

    

Investments at fair value

    

Non-control/Non-affiliate investments (amortized cost of $267,658,535 and $268,145,090, respectively)

   $   260,887,373      $   271,168,186   

Control investments (cost of $10,948,369 and $13,030,751, respectively)

     11,917,076        12,827,980   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $278,606,904 and $281,175,841, respectively)

     272,804,449        283,996,166   

Cash and cash equivalents

     12,707,273        2,440,277   

Cash and cash equivalents, reserve accounts

     10,173,549        4,594,506   

Interest receivable (net of reserve of $0 and $728,519, respectively)

     3,393,927        3,195,919   

Management fee receivable

     170,897        170,016   

Other assets

     312,184        350,368   

Receivable from unsettled trades

     284,903        300,000   
  

 

 

   

 

 

 

Total assets

   $ 299,847,182      $ 295,047,252   
  

 

 

   

 

 

 

LIABILITIES

    

Revolving credit facility

   $ —        $ —     

Deferred debt financing costs, revolving credit facility

     (476,221     (515,906

SBA debentures payable

     103,660,000        103,660,000   

Deferred debt financing costs, SBA debentures payable

     (2,527,859     (2,493,303

Notes payable

     61,793,125        61,793,125   

Deferred debt financing costs, notes payable

     (1,484,265     (1,694,586

Dividend payable

     1,151,061        875,599   

Base management and incentive fees payable

     6,283,519        5,593,956   

Accounts payable and accrued expenses

     631,840        855,873   

Interest and debt fees payable

     1,873,508        1,552,069   

Payable for repurchases of common stock

     —          20,957   

Directors fees payable

     45,000        31,500   

Due to manager

     333,852        218,093   
  

 

 

   

 

 

 

Total liabilities

   $ 171,283,560      $ 169,897,377   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 7)

    

NET ASSETS

    

Common stock, par value $.001, 100,000,000 common shares authorized, 5,740,810 and 5,672,227 common shares issued and outstanding, respectively

   $ 5,741      $ 5,672   

Capital in excess of par value

     189,532,044        188,714,329   

Distribution in excess of net investment income

     (27,038,814     (26,217,902

Accumulated net realized loss from investments and derivatives

     (28,132,894     (40,172,549

Accumulated net unrealized appreciation (depreciation) on investments and derivatives

     (5,802,455     2,820,325   
  

 

 

   

 

 

 

Total net assets

     128,563,622        125,149,875   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 299,847,182      $ 295,047,252   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

   $ 22.39      $ 22.06   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

     For the three months ended
August 31
    For the six months ended
August 31
 
     2016     2015     2016     2015  

INVESTMENT INCOME

        

Interest from investments

        

Non-control/Non-affiliate investments

   $ 6,561,838      $ 5,877,682      $ 13,181,951      $ 11,526,661   

Payment-in-kind interest income from Non-control/Non-affiliate investments

     184,265        262,991        313,355        954,143   

Control investments

     557,200        678,706        1,089,326        1,269,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     7,303,303        6,819,379        14,584,632        13,750,500   

Interest from cash and cash equivalents

     6,401        731        10,187        1,467   

Management fee income

     374,657        373,152        748,341        751,898   

Other income

     763,633        565,055        1,013,229        815,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     8,447,994        7,758,317        16,356,389        15,319,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Interest and debt financing expenses

     2,369,705        2,147,976        4,737,761        4,111,841   

Base management fees

     1,202,794        1,151,236        2,429,951        2,275,334   

Professional fees

     302,227        349,533        661,526        682,977   

Administrator expenses

     325,000        275,000        650,000        525,000   

Incentive management fees

     1,208,452        (41,279     1,936,732        1,756,554   

Insurance

     70,658        87,316        141,316        174,633   

Directors fees and expenses

     60,422        51,000        126,422        102,000   

General & administrative

     304,955        203,449        517,164        386,369   

Excise tax expense (credit)

     —          (123,338     —          (123,338

Other expense

     —          —          13,187        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5,844,213        4,100,893        11,214,059        9,891,370   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     2,603,781        3,657,424        5,142,330        5,428,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

        

Net realized gain from investments

     5,936,750        3,709,947        12,039,655        3,783,193   

Net unrealized depreciation on investments

     (3,268,913     (6,124,708     (8,622,780     (583,739
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) on investments

     2,667,837        (2,414,761     3,416,875        3,199,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 5,271,618      $ 1,242,663      $ 8,559,205      $ 8,627,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 0.92      $ 0.22      $ 1.49      $ 1.57   

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED

     5,740,816        5,583,795        5,739,157        5,492,491   

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Schedule of Investments

August 31, 2016

(unaudited)

 

Company

 

Industry

 

Investment
Interest Rate /

Maturity

  Principal /
Number of

Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

Non-control/Non-affiliated
investments—202.9% (b)

       

CAMP International Systems (d)

  Aerospace and Defense   Second Lien Term Loan 8.25% Cash, 8/18/2024   $ 1,000,000      $ 995,002      $ 997,500        0.8
       

 

 

   

 

 

   

 

 

 
    Total Aerospace and Defense       995,002        997,500        0.8
       

 

 

   

 

 

   

 

 

 

Polar Holding Company, Ltd. (a),(d),(i)

  Building Products   First Lien Term Loan 10.00% Cash, 9/30/2016   $ 2,000,000        2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 
    Total Building Products       2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC (g)

  Business Services   Common Stock     100,000        100,000        247,782        0.2

Avionte Holdings, LLC

  Business Services   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 2,279,278        2,255,168        2,287,483        1.8

Avionte Holdings, LLC (j),(k)

  Business Services   Delayed Draw Term Loan A 9.75% Cash, 1/8/2019   $ —          —          —          0.0

BoardEffect, Inc.

  Business Services   First Lien Term Loan 10.00% Cash, 6/17/2021   $ 12,000,000        11,883,243        11,880,000        9.2

BoardEffect, Inc. (j),(k)

  Business Services   Delayed Draw Term Loan B 10.00% Cash, 6/17/2021   $ —          —          —          0.0

BMC Software, Inc. (d)

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 5,641,667        5,607,859        5,379,329        4.2

Courion Corporation

  Business Services   Second Lien Term Loan 11.00% Cash, 6/1/2021   $ 15,000,000        14,866,381        14,529,000        11.3

Dispensing Dynamics International (d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 12,000,000        12,018,538        11,530,800        9.0

Easy Ice, LLC (d)

  Business Services   First Lien Term Loan 9.50% Cash, 1/15/2020   $ 16,000,000        15,868,493        16,057,493        12.5

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 10.00% Cash, 1/23/2020   $ 3,300,000        3,272,264        3,355,372        2.6

Emily Street Enterprises, L.L.C. (g)

  Business Services   Warrant Membership Interests     49,318        400,000        459,791        0.3

Help/Systems Holdings, Inc. (Help/Systems, LLC)

  Business Services   First Lien Term Loan 6.25% Cash, 10/8/2021   $ 4,975,000        4,887,402        4,919,031        3.8

Help/Systems Holdings, Inc. (Help/Systems, LLC)

  Business Services   Second Lien Term Loan 10.50% Cash, 10/8/2022   $ 3,000,000        2,917,626        2,850,000        2.2

Identity Automation Systems

  Business Services   Convertible Promissory Note 13.50% (6.75% Cash/6.75% PIK), 8/18/2018     611,517        611,517        611,517        0.5

Identity Automation Systems (g)

  Business Services   Common Stock Class A Units     232,616        232,616        495,686        0.4

Identity Automation Systems

  Business Services   First Lien Term Loan 12.00% (10.25% Cash/1.75% PIK) 12/18/2020   $ 10,203,683        10,121,194        10,171,110        7.9

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 9.75% Cash, 11/29/2017   $ 17,777,730        17,637,107        17,652,317        13.7

Microsystems Company

  Business Services   Second Lien Term Loan 11.00% Cash, 7/1/2022   $ 8,000,000        7,922,051        7,920,000        6.2

PCF Number 4, Inc.

  Business Services   Second Lien Term Loan 13.50% (12.50% Cash/1.00% PIK), 8/28/2021   $ 13,044,083        12,918,979        13,044,083        10.1

Vector Controls Holding Co., LLC (d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 8,967,996        8,905,587        8,967,996        7.0

Vector Controls Holding Co., LLC (d),(g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     343        —          350,212        0.3
       

 

 

   

 

 

   

 

 

 
    Total Business Services       132,426,025        132,709,002        103.2
       

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal /
Number of

Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

Targus Holdings, Inc. (d),(g)

  Consumer Products   Common Stock     210,456        1,791,242        1,847        0.0

Targus Holdings, Inc. (d)

  Consumer Products   Second Lien Term Loan A-2 15.00% PIK, 12/31/2019   $ 220,644        220,644        220,644        0.2

Targus Holdings, Inc. (d)

  Consumer Products   Second Lien Term Loan B 15.00% PIK, 12/31/2019   $ 661,932        661,932        661,932        0.5
       

 

 

   

 

 

   

 

 

 
    Total Consumer Products       2,673,818        884,423        0.7
       

 

 

   

 

 

   

 

 

 

My Alarm Center, LLC

  Consumer Services   Second Lien Term Loan 12.00% Cash, 7/9/2019   $ 9,375,000        9,356,295        9,299,063        7.2

PrePaid Legal Services, Inc. (d)

  Consumer Services   First Lien Term Loan 6.50% Cash, 7/1/2019   $ 1,489,199        1,481,070        1,482,051        1.1

PrePaid Legal Services, Inc. (d)

  Consumer Services   Second Lien Term Loan 10.25% Cash, 7/1/2020   $ 10,000,000        9,966,163        9,846,000        7.7

Prime Security Services, LLC

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2022   $ 6,230,769        6,138,694        6,268,416        4.9
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       26,942,222        26,895,530        20.9
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp., L.L.C. (d),(g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

M/C Acquisition Corp., L.L.C. (d)

  Education   First Lien Term Loan 1.00% Cash, 3/31/2016   $ 2,321,073        1,193,791        8,087        0.0

Texas Teachers of Tomorrow, LLC (g),(h)

  Education   Common Stock     750,000        750,000        933,960        0.7

Texas Teachers of Tomorrow, LLC

  Education   Second Lien Term Loan 10.75% Cash, 6/2/2021   $ 10,000,000        9,910,300        10,000,000        7.8
       

 

 

   

 

 

   

 

 

 
    Total Education       11,884,332        10,942,047        8.5
       

 

 

   

 

 

   

 

 

 

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 9.75% Cash, 7/16/2017   $ 9,490,507        9,428,277        9,276,541        7.2
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       9,428,277        9,276,541        7.2
       

 

 

   

 

 

   

 

 

 

Censis Technologies, Inc.

  Healthcare Services   First Lien Term Loan B 11.00% Cash, 7/24/2019   $ 11,400,000        11,251,423        10,962,652        8.5

Censis Technologies, Inc. (g),(h)

  Healthcare Services   Limited Partner Interests     999        999,000        704,187        0.5

Roscoe Medical, Inc. (d),(g)

  Healthcare Services   Common Stock     5,081        508,077        598,710        0.5

Roscoe Medical, Inc.

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,148,231        4,113,761        3.2

Ohio Medical, LLC (g)

  Healthcare Services   Common Stock     5,000        500,000        459,409        0.4

Ohio Medical, LLC

  Healthcare Services   Senior Subordinated Note 12.00%, 7/15/2021   $ 7,300,000        7,233,876        7,273,756        5.7

Zest Holdings, LLC (d)

  Healthcare Services   First Lien Term Loan 5.25% Cash, 8/16/2020   $ 4,136,911        4,078,941        4,136,911        3.2
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       28,719,548        28,249,386        22.0
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 8,700,232        8,594,607        8,700,232        6.8

HMN Holdco, LLC

  Media   Delayed Draw First Lien Term Loan 10.00% Cash, 5/16/2019   $ 4,800,000        4,744,654        4,800,000        3.7

HMN Holdco, LLC

  Media   Class A Series     4,264        61,647        283,044        0.2

HMN Holdco, LLC

  Media   Class A Warrant     30,320        438,353        1,623,030        1.3

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,872        —          2,802,162        2.2

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests (Preferred)     8,139        —          451,308        0.3
       

 

 

   

 

 

   

 

 

 
    Total Media       13,839,261        18,659,776        14.5
       

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Company

 

Industry

 

Investment
Interest Rate /

Maturity

  Principal /
Number of

Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

Elyria Foundry Company, L.L.C. (d)

  Metals   Common Stock     35,000        9,217,564        314,300        0.2

Elyria Foundry Company, L.L.C. (d)

  Metals   Revolver 10.00% Cash, 3/31/2017   $ 8,500,000        8,500,000        8,500,000        6.6
       

 

 

   

 

 

   

 

 

 
    Total Metals       17,717,564        8,814,300        6.8
       

 

 

   

 

 

   

 

 

 

Mercury Network, LLC

  Real Estate   First Lien Term Loan 10.50% Cash, 8/24/2021   $ 20,808,696        20,619,443        20,724,932        16.1

Mercury Network, LLC (g)

  Real Estate   Common Stock     413,043        413,043        733,936        0.6
       

 

 

   

 

 

   

 

 

 
    Total Real Estate       21,032,486        21,458,868        16.7
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

          267,658,535        260,887,373        202.9
       

 

 

   

 

 

   

 

 

 

Control investments—9.3% (b)

       

Saratoga Investment Corp. CLO 2013-1, Ltd. (a),(d),(e),(f)

  Structured Finance Securities   Other/Structured Finance Securities 21.13%, 10/17/2023   $ 30,000,000        10,948,369        11,917,076        9.3
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          10,948,369        11,917,076        9.3
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—212.2% (b)

        $   278,606,904      $   272,804,449        212.2
       

 

 

   

 

 

   

 

 

 
            Principal     Cost     Fair
Value
    % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts—17.8%

       

U.S. Bank Money Market (l)

  $ 22,880,822      $ 22,880,822      $ 22,880,822        17.8
     

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

  $   22,880,822      $ 22,880,822      $ 22,880,822        17.8
     

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 5.1% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $128,563,622 as of August 31, 2016.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 21.13% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

                   Sales      Interest      Management      Net Realized      Net Unrealized  

Company

   Purchases      Redemptions      (Cost)      Income      Fee Income      Gains (Losses)      Appreciation  

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 1,089,326       $ 748,341       $ —         $ 1,171,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(g) Non-income producing at August 31, 2016.
(h) Includes securities issued by an affiliate of the company.
(i) Non-U.S. company. The principal place of business for Polar Holding Company, Ltd. is Canada.
(j) The investment has an unfunded commitment as of August 31, 2016 (see Note 7 to the consolidated financial statements).
(k) The entire commitment was unfunded at August 31, 2016. As such, no interest is being earned on this investment.
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s Consolidated Statements of Assets and Liabilities as of August 31, 2016.

 

F-6


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2016

 

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal /
Number

of Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

Non-control/Non-affiliated investments—216.6% (b)

           

National Truck Protection Co., Inc. (d),(g)

  Automotive Aftermarket   Common Stock     1,116      $ 1,000,000      $ 1,695,303        1.4

National Truck Protection Co., Inc. (d)

  Automotive Aftermarket   First Lien Term Loan 15.50% Cash, 9/13/2018   $ 6,776,770        6,776,770        6,776,770        5.4

Take 5 Oil Change, L.L.C. (d),(g)

  Automotive Aftermarket   Common Stock     7,128        480,535        6,235,209        5.0
       

 

 

   

 

 

   

 

 

 
    Total Automotive Aftermarket       8,257,305        14,707,282        11.8
       

 

 

   

 

 

   

 

 

 

Legacy Cabinets Holdings (d),(g)

  Building Products   Common Stock Voting A-1     2,535        220,900        2,676,909        2.1

Legacy Cabinets Holdings (d),(g)

  Building Products   Common Stock Voting B-1     1,600        139,424        1,689,568        1.3

Polar Holding Company, Ltd. (a),(d),(i)

  Building Products   First Lien Term Loan 10.00% Cash, 9/30/2016   $ 2,000,000        2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 
    Total Building Products       2,360,324        6,366,477        5.0
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC (g)

  Business Services   Common Stock     100,000        100,000        169,850        0.1

Avionte Holdings, LLC

  Business Services   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 2,406,342        2,376,045        2,382,844        1.9

Avionte Holdings, LLC (j),(k)

  Business Services   Delayed Draw Term Loan A 9.75% Cash, 1/8/2019   $ —          —          —          0.0

BMC Software, Inc. (d)

  Business Services   Syndicated Loan 5.00% Cash, 9/10/2020   $ 5,671,667        5,633,920        4,520,318        3.6

Courion Corporation

  Business Services   Second Lien Term Loan 11.00% Cash, 6/1/2021   $ 15,000,000        14,856,720        14,850,000        11.9

Dispensing Dynamics International (d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 12,000,000        12,025,101        10,950,000        8.8

Easy Ice, LLC (d)

  Business Services   First Lien Term Loan 9.50% Cash, 1/15/2020   $ 14,000,000        13,873,485        13,806,098        11.0

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 10.00% Cash, 1/23/2020   $ 8,400,000        8,305,033        8,568,000        6.8

Emily Street Enterprises, L.L.C. (g)

  Business Services   Warrant Membership Interests     49,318        400,000        577,020        0.5

Finalsite Holdings, Inc.

  Business Services   Second Lien Term Loan 10.25% Cash, 5/21/2020   $ 7,500,000        7,440,729        7,500,000        6.0

Help/Systems Holdings, Inc. (Help/Systems, LLC)

  Business Services   First Lien Term Loan 6.25% Cash, 10/8/2021   $ 5,000,000        4,904,573        4,895,000        3.9

Help/Systems Holdings, Inc. (Help/Systems, LLC)

  Business Services   Second Lien Term Loan 10.50% Cash, 10/8/2022   $ 3,000,000        2,912,784        2,910,000        2.3

Identity Automation
Systems (g)

  Business Services   Common Stock Class A Units     232,616        232,616        427,409        0.3

Identity Automation Systems

  Business Services   First Lien Term Loan 10.25% Cash, 12/18/2020   $ 6,900,000        6,842,573        6,900,000        5.5

Identity Automation Systems (j),(k)

  Business Services   Delayed Draw Term Loan 10.25% Cash, 12/18/2020   $ —          —          —          0.0

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 8.00% Cash, 11/29/2017   $ 5,259,171        5,224,422        5,259,171        4.2

PCF Number 4, Inc.

  Business Services   Second Lien Term Loan 13.50% (12.50% Cash/1.00% PIK), 8/28/2021   $ 13,000,000        12,870,023        12,870,000        10.3

Vector Controls Holding Co., LLC (d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 9,035,515        8,952,442        9,035,515        7.2

Vector Controls Holding Co., LLC (d),(g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     343        —          354,819        0.3
       

 

 

   

 

 

   

 

 

 
    Total Business Services       106,950,466        105,976,044        84.6
       

 

 

   

 

 

   

 

 

 

 

F-7


Table of Contents

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal /
Number

of Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

Advanced Air & Heat of Florida, LLC

  Consumer Products   First Lien Term Loan 9.50% Cash, 7/17/2020   $ 6,800,000        6,733,661        6,800,000        5.4

Targus Holdings, Inc. (d),(g)

  Consumer Products   Common Stock     210,456        1,791,242        —          0.0

Targus Holdings, Inc. (d)

  Consumer Products   Second Lien Term Loan A-2 15.00% PIK, 12/31/2019   $ 210,456        210,456        210,456        0.2

Targus Holdings, Inc. (d)

  Consumer Products   Second Lien Term Loan B 15.00% PIK, 12/31/2019   $ 631,369        631,369        631,369        0.5
       

 

 

   

 

 

   

 

 

 
    Total Consumer Products       9,366,728        7,641,825        6.1
       

 

 

   

 

 

   

 

 

 

Expedited Travel L.L.C. (g)

  Consumer Services   Common Stock     1,000,000        1,000,000        1,647,767        1.3

Expedited Travel L.L.C.

  Consumer Services   First Lien Term Loan 10.00% Cash, 10/10/2019   $ 11,475,490        11,401,380        11,647,623        9.3

My Alarm Center, LLC

  Consumer Services   Second Lien Term Loan 12.00% Cash, 7/9/2019   $ 7,500,000        7,500,000        7,450,500        6.0

PrePaid Legal Services, Inc. (d)

  Consumer Services   First Lien Term Loan 6.50% Cash, 7/1/2019   $ 1,572,921        1,562,787        1,556,248        1.2

PrePaid Legal Services, Inc. (d)

  Consumer Services   Second Lien Term Loan 10.25% Cash, 7/1/2020   $ 10,000,000        9,962,104        9,827,000        7.9

Prime Security Services, LLC

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2022   $ 12,000,000        11,829,030        10,980,000        8.8
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       43,255,301        43,109,138        34.5
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp., L.L.C. (d),(g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

M/C Acquisition Corp., L.L.C. (d)

  Education   First Lien Term Loan 1.00% Cash, 3/31/2016   $ 2,321,073        1,193,790        8,087        0.0

Texas Teachers of Tomorrow, LLC (g),(h)

  Education   Common Stock     750        750,000        785,475        0.6

Texas Teachers of Tomorrow, LLC

  Education   Second Lien Term Loan 10.75% Cash, 6/2/2021   $ 10,000,000       9,902,816        9,900,000        7.9
       

 

 

   

 

 

   

 

 

 
    Total Education       11,876,847        10,693,562        8.5
       

 

 

   

 

 

   

 

 

 

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 9.75% Cash, 7/16/2017   $ 9,622,319        9,527,041        9,131,048        7.3
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       9,527,041        9,131,048        7.3
       

 

 

   

 

 

   

 

 

 

Bristol Hospice, LLC

  Healthcare Services   Senior Secured Note 11.00% (10.00% Cash/1.00% PIK), 11/29/2018   $ 5,404,747        5,339,820        5,404,747        4.3

Censis Technologies, Inc.

  Healthcare Services   First Lien Term Loan B 11.00% Cash, 7/24/2019   $ 11,550,000        11,377,810        11,459,418        9.2

Censis Technologies, Inc. (g),(h)

  Healthcare Services   Limited Partner Interests     999        999,000        810,642        0.7

Roscoe Medical, Inc. (d),(g)

  Healthcare Services   Common Stock     5,000        500,000        334,000        0.3

Roscoe Medical, Inc.

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,141,519        3,822,000        3.0

Ohio Medical, LLC (g)

  Healthcare Services   Common Stock     5,000        500,000        500,000        0.4

Ohio Medical, LLC

  Healthcare Services   Senior Subordinated Note 12.00%, 7/15/2021   $ 7,300,000        7,228,452        7,227,000        5.8

Smile Brands Group Inc. (d)

  Healthcare Services   Syndicated Loan 10.50% (9.00% Cash/1.50% PIK), 8/16/2019   $ 4,420,900        4,362,266        3,216,647        2.6

Zest Holdings, LLC (d)

  Healthcare Services   Syndicated Loan 5.25% Cash, 8/16/2020   $ 4,207,821        4,142,093        4,130,692        3.3
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       38,590,960        36,905,146        29.6
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 8,937,982        8,812,479        8,937,983        7.1

HMN Holdco, LLC

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 1,600,000        1,572,821        1,600,000        1.3

 

F-8


Table of Contents

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal /
Number

of Shares
    Cost     Fair
Value (c)
    % of
Net Assets
 

HMN Holdco, LLC

  Media   Class A Series     4,264        61,647        314,683        0.3

HMN Holdco, LLC

  Media   Class A Warrant     30,320        438,353        1,889,542        1.5

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,872        —          3,309,121        2.6

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests     8,139        —          523,012        0.4
       

 

 

   

 

 

   

 

 

 
    Total Media       10,885,300        16,574,341        13.2
       

 

 

   

 

 

   

 

 

 

Elyria Foundry Company, L.L.C. (d)

  Metals   Common Stock     35,000        9,217,564        2,026,150        1.6

Elyria Foundry Company, L.L.C. (d)

  Metals   Revolver 10.00% Cash, 3/31/2017   $ 8,500,000        8,500,000        8,500,000        6.8
       

 

 

   

 

 

   

 

 

 
    Total Metals       17,717,564        10,526,150        8.4
       

 

 

   

 

 

   

 

 

 

Mercury Network, LLC

  Real Estate   First Lien Term Loan 9.75% Cash, 4/24/2020   $ 9,025,000        8,944,211        9,025,000        7.2

Mercury Network, LLC (g)

  Real Estate   Common Stock     413,043        413,043        512,173        0.4
       

 

 

   

 

 

   

 

 

 
    Total Real Estate       9,357,254        9,537,173        7.6
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

          268,145,090        271,168,186        216.6
       

 

 

   

 

 

   

 

 

 

Control investments—10.3% (b)

           

Saratoga Investment Corp. CLO 2013-1, Ltd. (a),(d),(e),(f)

  Structured Finance Securities   Other/Structured Finance Securities 16.14%, 10/17/2023   $ 30,000,000        13,030,751        12,827,980        10.3
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          13,030,751        12,827,980        10.3
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—
226.9% (b)

        $   281,175,841      $ 283,996,166        226.9
       

 

 

   

 

 

   

 

 

 

 

     Principal      Cost      Fair
Value
     % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts—5.6%

           

U.S. Bank Money Market (l)

   $ 7,034,783       $ 7,034,783       $ 7,034,783         5.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

   $ 7,034,783       $ 7,034,783       $ 7,034,783         5.6
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 5.2% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $125,149,875 as of February 29, 2016.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 16.14% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales
(Cost)
     Interest
Income
     Management
Fee Income
     Net Realized
Gains (Losses)
     Net Unrealized
Depreciation
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 2,665,648       $ 1,494,779       $ —         $ (1,280,916
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-9


Table of Contents
(g) Non-income producing at February 29, 2016.
(h) Includes securities issued by an affiliate of the company.
(i) Non-U.S. company. The principal place of business for Polar Holding Company, Ltd. is Canada.
(j) The investment has an unfunded commitment as of February 29, 2016 (see Note 7 to the consolidated financial statements).
(k) The entire commitment was unfunded at February 29, 2016. As such, no interest is being earned on this investment.
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s Consolidated Statements of Assets and Liabilities as of February 29, 2016.

 

F-10


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

(unaudited)

 

     For the six months ended
August 31, 2016
    For the six months ended
August 31, 2015
 

INCREASE FROM OPERATIONS:

    

Net investment income

   $ 5,142,330      $ 5,428,114   

Net realized gain from investments

     12,039,655        3,783,193   

Net unrealized depreciation on investments

     (8,622,780     (583,739
  

 

 

   

 

 

 

Net increase in net assets from operations

     8,559,205        8,627,568   
  

 

 

   

 

 

 

DECREASE FROM SHAREHOLDER DISTRIBUTIONS:

    

Distributions declared

     (5,963,242     (8,738,812
  

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

     (5,963,242     (8,738,812
  

 

 

   

 

 

 

CAPITAL SHARE TRANSACTIONS:

    

Stock dividend distribution

     2,700,351        3,047,190   

Repurchases of common stock

     (1,882,567     (38,981

Offering costs

     —          (237,287
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     817,784        2,770,922   
  

 

 

   

 

 

 

Total increase in net assets

     3,413,747        2,659,678   

Net assets at beginning of period

     125,149,875        122,598,742   
  

 

 

   

 

 

 

Net assets at end of period

   $ 128,563,622      $ 125,258,420   
  

 

 

   

 

 

 

Net asset value per common share

   $ 22.39      $ 22.42   

Common shares outstanding at end of period

     5,740,810        5,586,254   

Distribution in excess of net investment income

   $ (27,038,814   $ (27,216,301

See accompanying notes to consolidated financial statements.

 

F-11


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

(unaudited)

 

     For the six months ended
August 31, 2016
    For the six months ended
August 31, 2015
 

Operating activities

    

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 8,559,205      $ 8,627,568   

ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

    

Payment-in-kind interest income

     (276,597     (828,420

Net accretion of discount on investments

     (254,323     (273,250

Amortization of deferred debt financing costs

     528,850        442,921   

Amortization of premium on notes

     —          (1,040

Net realized gain from investments

     (12,039,655     (3,783,193

Net unrealized depreciation on investments

     8,622,780        583,739   

Proceeds from sales and redemptions of investments

     70,867,907        34,772,774   

Purchase of investments

     (55,728,395     (42,118,806

(Increase) decrease in operating assets:

    

Cash and cash equivalents, reserve accounts

     (5,579,043     6,086,197   

Interest receivable

     (198,008     (220,056

Management fee receivable

     (881     (2,519

Other assets

     38,184        (228,717

Receivable from unsettled trades

     15,097        (100,000

Increase (decrease) in operating liabilities:

    

Base management and incentive fees payable

     689,563        201,285   

Accounts payable and accrued expenses

     (224,033     (260,729

Interest and debt fees payable

     321,439        139,806   

Payable for repurchases of common stock

     (20,957     —     

Directors fees payable

     13,500        (1,500

Due to manager

     115,759        (13,141
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     15,450,392        3,022,919   
  

 

 

   

 

 

 

Financing activities

    

Borrowings on debt

     —          10,600,000   

Paydowns on debt

     —          (18,200,000

Issuance of notes

     —          8,945,175   

Payments of deferred debt financing costs

     (313,400     (350,607

Repurchases of common stock

     (1,882,567     (38,981

Payments of cash dividends

     (2,987,429     (5,362,381
  

 

 

   

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

     (5,183,396     (4,406,794
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     10,266,996        (1,383,875

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     2,440,277        1,888,158   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 12,707,273      $ 504,283   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid during the period

   $ 3,887,472      $ 3,529,114   

Supplemental non-cash information:

    

Payment-in-kind interest income

   $ 276,597      $ 828,420   

Net accretion of discount on investments

   $ 254,323      $ 273,250   

Amortization of deferred debt financing costs

   $ 528,850      $ 442,921   

Stock dividend distribution

   $ 2,700,351      $ 3,047,190   

See accompanying notes to consolidated financial statements.

 

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SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2016

(unaudited)

Note 1. Organization

Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed-end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company commenced operations on March 23, 2007 as GSC Investment Corp. and completed the initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code”). The Company expects to continue to qualify and to elect to be treated, for tax purposes, as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments.

GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.

On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.

On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in connection with the consummation of a recapitalization transaction.

The Company is externally managed and advised by the investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant to a management agreement (the “Management Agreement”). Prior to July 30, 2010, the Company was managed and advised by GSCP (NJ), L.P.

The Company has established wholly-owned subsidiaries, SIA Avionte, Inc., SIA Mercury, Inc., SIA TT, Inc., and SIA Vector, Inc., which are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax blockers are consolidated for accounting purposes, but are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received a Small Business Investment Company (“SBIC”) license from the Small Business Administration (“SBA”).

On April 2, 2015, the SBA issued a “green light” letter inviting the Company to continue the application process to obtain a license to form and operate its second SBIC subsidiary. On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license, and in order to ensure that they were reviewing the most current information available, we would need to update all previously submitted materials and invited us to reapply. As a result of this request, with which we are in the process of complying, the existing “green light” letter that the SBA issued to us will expire. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the first license.

 

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Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), are stated in U.S. Dollars and include the accounts of the Company and its special purpose financing subsidiary, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC). All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiaries, except as stated otherwise.

The Company and SBIC LP are both considered to be investment companies for financial reporting purposes and have applied the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services—Investment Companies” (“ASC Topic 946”). There have been no changes to the Company or SBIC LP’s status as investment companies during the six months ended August 31, 2016.

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying consolidated financial statements in conformity with U.S. 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 financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as a money market fund if such investment would cause the Company to exceed any of the following limitations:

 

    we were to own more than 3.0% of the total outstanding voting stock of the money market fund;

 

    we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets; or

 

    we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10.0% of the value of our total assets.

As of August 31, 2016, the Company did not exceed any of these limitations.

Cash and Cash Equivalents, Reserve Accounts

Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts, in the form of cash and short-term liquid investments in money market funds, representing payments received on secured investments or other reserved amounts associated with our $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.

In addition, cash and cash equivalents, reserve accounts also include amounts held in designated bank accounts, in the form of cash and short-term liquid investments in money market funds, within our wholly-owned subsidiary, SBIC LP.

 

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Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.

Investment Valuation

The Company accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the balance sheet date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

    Each investment is initially valued by the responsible investment professionals of our Manager and preliminary valuation conclusions are documented and discussed with the senior management of our Manager; and

 

    An independent valuation firm, engaged by our board of directors, reviews a selection of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by the independent valuation firm at least once each fiscal year.

In addition, all our investments are subject to the following valuation process:

 

    The audit committee of our board of directors reviews and approves each preliminary valuation and our Manager and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

    Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of our Manager, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

Our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions

 

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based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Derivative Financial Instruments

We account for derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.

Investment Transactions and Income Recognition

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums on investments.

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets, (“ASC 325-40”), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

 

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Other Income

Other income includes dividends received, origination fees, structuring fees and advisory fees, and is recorded in the consolidated statements of operations when earned.

Payment-in-Kind Interest

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

Deferred Debt Financing Costs

Financing costs incurred in connection with our credit facility and notes are deferred and amortized using the straight line method over the life of the respective facility and debt securities. Financing costs incurred in connection with our SBA debentures are deferred and amortized using the effective yield method over the life of the debentures.

Accounting Standards Update (“ASU”) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company has adopted the provisions of ASU 2015-03 as of February 28, 2015, by reclassifying deferred debt financing costs from within total assets to within total liabilities as a contra-liability. Prior period amounts were reclassified to conform to the current period presentation.

Contingencies

In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.

In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.

Income Taxes

The Company has filed an election to be treated, for tax purposes, as a RIC under Subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes.

In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax

 

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on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

ASC 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the consolidated statements of operations. During the fiscal year ended February 29, 2016, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2013, 2014 and 2015 federal tax years for the Company remain subject to examination by the IRS. As of August 31, 2016 and February 29, 2016, there were no uncertain tax positions. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

Dividends

Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.

We have adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.

Capital Gains Incentive Fee

The Company records an expense accrual on the consolidated statements of operations, relating to the capital gains incentive fee payable on the consolidated statements of assets and liabilities, by the Company to its investment adviser when the net realized and unrealized gain on its investments exceed all net realized and unrealized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains, net of realized and unrealized losses for the period.

 

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New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Amendments to the Leases (“ASC Topic 842”), which will require for all operating leases the recognition of a right-of-use asset and a lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance is effective for annual and interim periods beginning after December 15, 2018. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact the adoption of this standard has on the Company’s consolidated financial statements and disclosures.

In August 2014, the FASB issued new accounting guidance that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments provide a definition of the term “substantial doubt” and include principles for considering the mitigating effect of management’s plans. The amendments also require an evaluation every reporting period, including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued), and certain disclosures when substantial doubt is alleviated or not alleviated. The amendments in this update are effective for reporting periods ending after December 15, 2016. Management does not believe these changes will have a material impact on the Company’s consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period to December 15, 2017. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

Risk Management

In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.

The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.

The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.

 

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Note 3. Investments

As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, 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.

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

    Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

    Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

    Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by a disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

The following table presents fair value measurements of investments, by major class, as of August 31, 2016 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Syndicated loans

   $ —         $ —         $ 9,516       $ 9,516   

First lien term loans

     —           —           153,276         153,276   

Second lien term loans

     —           —           87,024         87,024   

Structured finance securities

     —           —           11,917         11,917   

Equity interests

     —           —           11,071         11,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 272,804       $ 272,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents fair value measurements of investments, by major class, as of February 29, 2016 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Syndicated loans

   $ —         $ —         $ 11,868       $ 11,868   

First lien term loans

     —           —           144,643         144,643   

Second lien term loans

     —           —           88,178         88,178   

Structured finance securities

     —           —           12,828         12,828   

Equity interests

     —           —           26,479         26,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 283,996       $ 283,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2016 (dollars in thousands):

 

     Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Structured
finance
securities
    Equity
interests
    Total  

Balance as of February 29, 2016

   $ 11,868      $ 144,643      $ 88,178      $ 12,828      $ 26,479      $ 283,996   

Net unrealized appreciation (depreciation) on investments

     2,100        217        1,076        1,171        (13,187     (8,623

Purchases and other adjustments to cost

     51        44,689        10,899        —          620        56,259   

Sales and redemptions

     (4,556     (36,518     (13,269     (2,082     (14,443     (70,868

Net realized gain from investments

     53        245        140        —          11,602        12,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2016

   $ 9,516      $ 153,276      $ 87,024      $ 11,917      $ 11,071      $ 272,804   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur.

The net change in unrealized appreciation (depreciation) for the six months ended August 31, 2016 on investments still held as of August 31, 2016 was $1,772,281 and is included in net unrealized depreciation on investments in the consolidated statements of operations.

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2015 (dollars in thousands):

 

     Syndicated
loans
    First lien
term loans
    Second
lien
term loans
     Unsecured
notes
     Structured
finance
securities
     Equity
interests
    Total  

Balance as of February 28, 2015

   $ 18,302      $ 145,207      $ 35,603       $ 4,230       $ 17,031       $ 20,165      $ 240,538   

Net unrealized appreciation (depreciation) on investments

     (1,400     (726     76         656         1,372         (562     (584

Purchases and other adjustments to cost

     20        25,217        16,901         668         —           413        43,219   

 

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Table of Contents
     Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Unsecured
notes
    Structured
finance
securities
    Equity
interests
    Total  

Sales and redemptions

   $ (356   $ (13,050   $ (10,673   $ (5,784   $ (1,649   $ (3,260   $ (34,772

Net realized gain from investments

     5        94        164        261        —          3,260        3,784   

Restructures in

     —          —          —          101        —          —          101   

Restructures out

     —          —          —          —          —          (101     (101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2015

   $ 16,571      $ 156,742      $ 42,071      $ 132      $ 16,754      $ 19,915      $ 252,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur.

The net change in unrealized appreciation (depreciation) for the six months ended August 31, 2015 on investments still held as of August 31, 2015 was $(955,584) and was included in net unrealized depreciation on investments in the consolidated statements of operations.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2016 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input    Range

Syndicated loans

     9,516       Market Comparables    Third-Party Bid (%)    0.0% - 100.0%

First lien term loans

     153,276       Market Comparables    Market Yield (%)    6.3% - 15.8%
         EBITDA Multiples (x)    1.0x - 9.8x
         Third-Party Bid (%)    95.0% - 99.9%

Second lien term loans

     87,024       Market Comparables    Market Yield (%)    8.3% - 15.0%
         Third-Party Bid (%)    95.0% - 101.4%

Structured finance securities

     11,917       Discounted Cash Flow    Discount Rate (%)    18.0%

Equity interests

     11,071       Market Comparables    EBITDA Multiples (x)

Revenue Multiples (x)

   2.5x - 11.4x

0.2x - 3.4x

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2016 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input    Range

Syndicated loans

     11,868       Market Comparables    Third-Party Bid (%)    72.5% - 98.2%

First lien term loans

     144,643       Market Comparables    Market Yield (%)    6.8% - 15.5%
         EBITDA Multiples (x)    1.0x
         Revenue Multiples

Third-Party Bid (%)

   91.3% - 98.9%

Second lien term loans

     88,178       Market Comparables    Market Yield (%)    0.0% - 15.0%
         Third-Party Bid (%)    91.5% - 98.6%

Structured finance securities

     12,828       Discounted Cash Flow    Discount Rate (%)    20.0%

Equity interests

     26,479       Market Comparables    EBITDA Multiples (x)

Revenue Multiples

   6.8x - 16.4x

 

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For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the EBITDA or revenue valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing a market quote in deriving a value, a significant increase (decrease) in the market quote, in isolation, would result in a significantly higher (lower) fair value measurement.

The composition of our investments as of August 31, 2016, at amortized cost and fair value were as follows (dollars in thousands):

 

     Investments at
Amortized Cost
     Amortized Cost
Percentage of
Total Portfolio
    Investments at
Fair Value
     Fair Value
Percentage of
Total Portfolio
 

Syndicated loans

   $ 9,687         3.5   $ 9,516         3.5

First lien term loans

     154,662         55.5        153,276         56.2   

Second lien term loans

     87,256         31.3        87,024         31.9   

Structured finance securities

     10,948         3.9        11,917         4.4   

Equity interests

     16,054         5.8        11,071         4.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 278,607         100.0   $ 272,804         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The composition of our investments as of February 29, 2016, at amortized cost and fair value were as follows (dollars in thousands):

 

     Investments at
Amortized Cost
     Amortized Cost
Percentage of
Total Portfolio
    Investments at
Fair Value
     Fair Value
Percentage of
Total Portfolio
 

Syndicated loans

   $ 14,138         5.0   $ 11,868         4.2

First lien term loans

     146,246         52.0        144,643         50.9   

Second lien term loans

     89,486         31.9        88,178         31.1   

Structured finance securities

     13,031         4.6        12,828         4.5   

Equity interests

     18,275         6.5        26,479         9.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 281,176         100.0   $ 283,996         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset liquidation or expected recovery model.

For equity securities of portfolio companies and partnership interests, we determine the fair value based on the market approach with value then attributed to equity or equity like securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies

 

F-23


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for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. For the quarter ended November 30, 2013, in connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on assumptions about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at August 31, 2016. The significant inputs for the valuation model include:

 

    Default rates: 2.0%

 

    Recovery rates: 35-70%

 

    Prepayment rate: 20.0%

 

    Reinvestment rate / price: L+375bps / $99.50

Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”)

On January 22, 2008, we invested $30.0 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a collateralized loan obligation fund managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with GSC Investment Corp. CLO 2007, Ltd. pursuant to which we act as collateral manager to it. The Saratoga CLO was refinanced in October 2013 and its reinvestment period ends in October 2016. The Saratoga CLO remains 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.25% and a subordinated management fee of 0.25% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of the remaining interest proceeds and principal proceeds, if any, after the subordinated notes have realized the incentive management fee target return of 12.0%, in accordance with the priority of payments after making the prior distributions on the relevant payment date. For the three months ended August 31, 2016 and August 31, 2015, we accrued $0.4 million and $0.4 million in management fee income, respectively, and $0.6 million and $0.7 million in interest income, respectively, from Saratoga CLO. For the six months ended August 31, 2016 and August 31, 2015, we accrued $0.7 million and $0.8 million in management fee income, respectively, and $1.1 million and $1.3 million in interest income, respectively, from Saratoga CLO. We did not accrue any amounts related to the incentive management fee from Saratoga CLO as the 12.0% hurdle rate has not yet been achieved.

At August 31, 2016, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $11.9 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes

 

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Table of Contents

over the life of Saratoga CLO. At August 31, 2016, Saratoga CLO had investments with a principal balance of $299.5 million and a weighted average spread over LIBOR of 4.41%, and had debt with a principal balance of $282.4 million with a weighted average spread over LIBOR of 1.84%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At August 31, 2016, the present value of the projected future cash flows of the subordinated notes was approximately $11.9 million, using an 18.0% discount rate. Saratoga Investment Corp. invested $32.8 million into the CLO since January 2008, and to date has since received distributions of $47.9 million and management fees of $15.7 million.

Below is certain financial information from the separate financial statements of Saratoga CLO as of August 31, 2016 (unaudited) and February 29, 2016 and for the three and six months ended August 31, 2016 and August 31, 2015 (unaudited).

 

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Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

     As of  
     August 31, 2016     February 29, 2016  
     (unaudited)        

ASSETS

    

Investments

    

Fair Value Loans (amortized cost of $296,436,508 and $300,112,538, respectively)

   $ 290,944,255      $ 284,652,926   

Fair Value Other/Structured finance securities (amortized cost of $3,531,218 and $3,531,218, respectively)

     12,901        191,863   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $299,967,726 and $303,643,756, respectively)

     290,957,156        284,844,789   

Cash and cash equivalents

     5,172,517        2,349,633   

Receivable from open trades

     2,242,500        2,691,831   

Interest receivable

     1,782,055        1,698,562   
  

 

 

   

 

 

 

Total assets

   $ 300,154,228      $ 291,584,815   
  

 

 

   

 

 

 

LIABILITIES

    

Interest payable

   $ 836,806      $ 626,040   

Payable from open trades

     4,983,454        7,123,854   

Accrued base management fee

     85,448        85,008   

Accrued subordinated management fee

     85,448        85,008   

Class A-1 Notes - SIC CLO 2013-1, Ltd.

     170,000,000        170,000,000   

Discount on Class A-1 Notes - SIC CLO 2013-1, Ltd.

     (1,230,503     (1,319,258

Class A-2 Notes - SIC CLO 2013-1, Ltd.

     20,000,000        20,000,000   

Discount on Class A-2 Notes - SIC CLO 2013-1, Ltd.

     (127,550     (136,750

Class B Notes - SIC CLO 2013-1, Ltd.

     44,800,000        44,800,000   

Discount on Class B Notes - SIC CLO 2013-1, Ltd.

     (828,565     (888,328

Class C Notes - SIC CLO 2013-1, Ltd.

     16,000,000        16,000,000   

Discount on Class C Notes - SIC CLO 2013-1, Ltd.

     (515,869     (553,078

Class D Notes - SIC CLO 2013-1, Ltd.

     14,000,000        14,000,000   

Discount on Class D Notes - SIC CLO 2013-1, Ltd.

     (669,638     (717,938

Class E Notes - SIC CLO 2013-1, Ltd.

     13,100,000        13,100,000   

Discount on Class E Notes - SIC CLO 2013-1, Ltd.

     (1,262,461     (1,353,521

Class F Notes - SIC CLO 2013-1, Ltd.

     4,500,000        4,500,000   

Discount on Class F Notes - SIC CLO 2013-1, Ltd.

     (459,180     (492,300

Deferred debt financing costs, SIC CLO 2013-1, Ltd. Notes

     (1,604,034     (1,716,554

Subordinated Notes

     30,000,000        30,000,000   
  

 

 

   

 

 

 

Total liabilities

   $ 311,693,356      $ 313,142,183   
  

 

 

   

 

 

 

Commitments and contingencies

    

NET ASSETS

    

Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 issued and outstanding, respectively

   $ 250      $ 250   

Accumulated loss

     (21,557,623     (5,803,406

Net gain (loss)

     10,018,245        (15,754,212
  

 

 

   

 

 

 

Total net assets

     (11,539,128     (21,557,368
  

 

 

   

 

 

 

Total liabilities and net assets

   $   300,154,228      $  291,584,815   
  

 

 

   

 

 

 

 

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Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

(unaudited)

 

     For the three months ended
August 31
    For the six months ended
August 31
 
     2016     2015     2016      2015  

INVESTMENT INCOME

         

Interest from investments

   $ 4,028,665      $ 3,638,587      $ 7,817,001       $ 7,151,174   

Interest from cash and cash equivalents

     1,938        215        2,709         505   

Other income

     189,836        69,878        433,137         233,993   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total investment income

     4,220,439        3,708,680        8,252,847         7,385,672   
  

 

 

   

 

 

   

 

 

    

 

 

 

EXPENSES

         

Interest expense

     3,608,788        3,013,007        6,889,803         5,859,643   

Professional fees

     20,944        53,177        39,426         112,399   

Miscellaneous fee expense

     14,147        5,763        22,391         10,688   

Base management fee

     187,329        186,576        374,171         375,949   

Subordinated management fee

     187,329        186,576        374,171         375,949   

Trustee expenses

     37,839        36,737        64,527         68,021   

Amortization expense

     239,963        239,963        479,926         479,926   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     4,296,339        3,721,799        8,244,415         7,282,575   
  

 

 

   

 

 

   

 

 

    

 

 

 

NET INVESTMENT INCOME (LOSS)

     (75,900     (13,119     8,432         103,097   
  

 

 

   

 

 

   

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

         

Net realized gain on investments

     165,854        89,084        221,416         131,645   

Net unrealized appreciation (depreciation) on investments

     467,724        (3,624,214     9,788,397         (3,710,046
  

 

 

   

 

 

   

 

 

    

 

 

 

Net gain (loss) on investments

     633,578        (3,535,130     10,009,813         (3,578,401
  

 

 

   

 

 

   

 

 

    

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 557,678      $ (3,548,249   $ 10,018,245       $ (3,475,304
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

August 31, 2016

(unaudited)

 

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 

Education Management II, LLC

  Leisure Goods/Activities/Movies   A-1 Preferred Shares   Equity     0.00       6,692      $ 669,214      $ 1,673   

Education Management II, LLC

  Leisure Goods/Activities/Movies   A-2 Preferred Shares   Equity     0.00       18,975        1,897,538        —     

New Millennium Holdco, Inc.

  Healthcare & Pharmaceuticals   Common Stock   Equity     0.00       14,813        964,466        11,228   

24 Hour Holdings III, LLC

  Leisure Goods/Activities/Movies   Term Loan   Loan     4.75     5/28/2021      $ 490,000        486,449        475,912   

ABB Con-Cise Optical Group, LLC

  Healthcare & Pharmaceuticals   Term Loan B   Loan     6.00     5/28/2021      $ 2,000,000        1,987,793        2,006,260   

Acosta Holdco, Inc.

  Media   Term Loan B1   Loan     4.25     9/26/2021      $ 1,965,125        1,953,132        1,910,259   

Aspen Dental Management, Inc.

  Healthcare & Pharmaceuticals   Term Loan Initial   Loan     5.50     4/29/2022      $ 1,492,481        1,488,165        1,502,749   

Advantage Sales & Marketing, Inc.

  Services: Business   Delayed Draw Term Loan   Loan     4.25     7/25/2021      $ 2,458,719        2,455,834        2,438,434   

Aegis Toxicology Science Corporation

  Healthcare & Pharmaceuticals   Term B Loan   Loan     5.50     2/24/2021      $ 2,476,183        2,336,688        2,228,565   

Agrofresh, Inc.

  Food Services   Term Loan   Loan     5.75     7/30/2021      $ 1,980,000        1,971,495        1,950,300   

Akorn, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     5.25     4/16/2021      $ 398,056        396,816        401,539   

Albertson’s LLC

  Retailers (Except Food and Drugs)   Term Loan B-4   Loan     4.50     8/25/2021      $ 2,903,452        2,893,319        2,915,327   

Alere Inc. (fka IM US Holdings, LLC)

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.25     6/20/2022      $ 922,606        920,608        911,073   

Alion Science and Technology Corporation

  High Tech Industries   Term Loan B (First Lien)   Loan     5.50     8/19/2021      $ 2,970,000        2,957,287        2,821,500   

Alliance Healthcare Services, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.25     6/3/2019      $ 989,713        985,285        942,701   

APCO Holdings, Inc.

  Automotive   Term Loan   Loan     7.00     1/31/2022      $ 1,987,500        1,934,566        1,937,813   

American Beacon Advisors, Inc.

  Financial Intermediaries   Term Loan (First Lien)   Loan     5.50     4/30/2022      $ 242,065        241,040        239,192   

Aramark Corporation

  Food Products   U.S. Term F Loan   Loan     3.25     2/24/2021      $ 3,134,390        3,134,390        3,143,198   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Incremental Tranche B-1 Term Loan   Loan     5.00     5/24/2019      $ 2,583,471        2,563,499        2,585,487   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Term Loan B4 (First Lien)   Loan     5.00     8/4/2022      $ 2,446,875        2,436,006        2,445,994   

Auction.com, LLC

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     6.00     5/13/2019      $ 2,732,469        2,732,115        2,725,638   

Avantor Performance Materials Holdings, Inc.

  Chemicals/Plastics   Term Loan   Loan     6.00     6/21/2022      $ 2,000,000        1,993,354        1,996,260   

Bass Pro Group, LLC

  Retailers (Except Food and Drugs)   Term Loan   Loan     4.00     6/5/2020      $ 1,481,250        1,478,758        1,473,222   

Belmond Interfin Ltd.

  Lodging & Casinos   Term Loan   Loan     4.00     3/19/2021      $ 488,750        487,005        484,781   

BJ’s Wholesale Club, Inc.

  Food/Drug Retailers   New 2013 (November) Replacement Loan (First Lien)   Loan     4.50     9/26/2019      $ 1,435,957        1,435,270        1,434,564   

BMC Software

  Technology   Term Loan   Loan     5.00     9/10/2020      $ 1,969,697        1,921,390        1,874,501   

Brickman Group Holdings, Inc.

  Brokers/Dealers/Investment Houses   Initial Term Loan (First Lien)   Loan     4.00     12/18/2020      $ 1,468,699        1,457,999        1,459,667   

Brock Holdings III, Inc.

  Industrial Equipment   Term Loan (First Lien)   Loan     6.00     3/16/2017      $ 1,896,531        1,899,778        1,844,376   

 

F-28


Table of Contents

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 

BWAY Holding Company

  Leisure Goods/Activities/Movies   Term Loan B   Loan     5.50     8/14/2020      $ 953,811        946,297        956,797   

Camp International Holding Company

  Aerospace and Defense   2013 Replacement Term Loan (First Lien)   Loan     4.75     5/31/2019      $ 1,930,151        1,930,675        1,915,675   

Candy Intermediate Holdings, Inc.

  Beverage, Food & Tobacco   Term Loan   Loan     5.50     6/15/2023      $ 500,000        497,577        499,065   

Capital Automotive L.P.

  Conglomerate   Tranche B-1 Term Loan Facility   Loan     4.00     4/10/2019      $ 1,495,079        1,497,110        1,498,503   

Catalent Pharma Solutions, Inc

  Drugs   Initial Term B Loan   Loan     4.25     5/20/2021      $ 490,001        488,239        492,540   

Cengage Learning Acquisitions, Inc.

  Publishing   Term Loan   Loan     5.25     6/7/2023      $ 1,500,000        1,485,661        1,497,195   

Charter Communications Operating, LLC

  Cable and Satellite Television   Term F Loan   Loan     3.00     12/31/2020      $ 1,617,873        1,613,777        1,618,989   

CHS/Community Health Systems, Inc.

  Healthcare & Pharmaceuticals   Term G Loan   Loan     3.75     12/31/2019      $ 1,017,431        993,225        976,520   

CHS/Community Health Systems, Inc.

  Healthcare & Pharmaceuticals   Term H Loan   Loan     4.00     1/27/2021      $ 1,872,045        1,824,244        1,793,813   

Cinedigm Digital Funding I, LLC

  Services: Business   Term Loan   Loan     3.75     2/28/2018      $ 160,337        159,733        159,536   

CITGO Petroleum Corporation

  Oil & Gas   Term Loan B   Loan     4.50     7/29/2021      $ 1,974,924        1,954,351        1,939,869   

Communications Sales & Leasing, Inc.

  Telecommunications   Term Loan B (First Lien)   Loan     5.00     10/24/2022      $ 1,980,000        1,969,384        1,980,000   

Consolidated Aerospace Manufacturing, LLC

  Aerospace and Defense   Term Loan (First Lien)   Loan     4.75     8/11/2022      $ 1,437,500        1,430,957        1,336,875   

Concordia Healthcare Corporation

  Healthcare & Pharmaceuticals   Term Loan B   Loan     5.25     10/21/2021      $ 1,990,000        1,892,925        1,881,485   

CPI Acquisition Inc.

  Technology   Term Loan B (First Lien)   Loan     5.50     8/17/2022      $ 1,436,782        1,417,341        1,396,667   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

  Electronics/Electric   Term B Loan   Loan     4.25     11/17/2017      $ 1,556,222        1,556,222        1,536,769   

Crosby US Acquisition Corporation

  Industrial Equipment   Initial Term Loan (First Lien)   Loan     4.00     11/23/2020      $ 731,250        730,594        597,343   

CT Technologies Intermediate Hldgs, Inc

  Healthcare & Pharmaceuticals   Term Loan   Loan     5.25     12/1/2021      $ 1,477,575        1,465,276        1,448,024   

Culligan International Company

  Conglomerate   Dollar Loan (First Lien)   Loan     6.25     12/19/2017      $ 3,767,616        3,716,501        3,692,264   

Culligan International Company

  Conglomerate   Dollar Loan (Second Lien)   Loan     9.50     6/19/2018      $ 783,162        759,653        752,814   

Cumulus Media Holdings Inc.

  Broadcast Radio and Television   Term Loan   Loan     4.25     12/23/2020      $ 470,093        467,008        326,324   

DAE Aviation (StandardAero)

  Aerospace and Defense   Term Loan   Loan     5.25     7/7/2022      $ 1,985,000        1,976,439        1,990,459   

DCS Business Services, Inc.

  Financial Intermediaries   Term B Loan   Loan     8.75     3/19/2018      $ 2,393,304        2,383,863        2,393,304   

Dell International, LLC

  Technology   Term Loan B2   Loan     4.00     4/29/2020      $ 2,880,793        2,869,784        2,889,435   

Delta 2 (Lux) S.a.r.l.

  Lodging & Casinos   Term Loan B-3   Loan     4.75     7/30/2021      $ 1,000,000        996,178        994,250   

Deluxe Entertainment Service Group, Inc.

  Leisure Goods/Activities/Movies   Term Loan (First Lien)   Loan     6.50     2/28/2020      $ 1,882,982        1,884,133        1,835,908   

Diamond Resorts International

  Lodging & Casinos   Term Loan   Loan     5.50     5/7/2021      $ 926,971        923,536        925,210   

Diamond Resorts International

  Lodging & Casinos   Term Loan (Add-On)   Loan     5.50     5/7/2021      $ 1,000,000        982,323        996,250   

Diebold, Inc.

  High Tech Industries   Term Loan B   Loan     5.25     11/6/2023      $ 500,000        495,193        501,875   

DJO Finance, LLC

  Healthcare & Pharmaceuticals   Term Loan   Loan     4.25     6/8/2020      $ 495,000        493,182        477,056   

DPX Holdings B.V.

  Healthcare & Pharmaceuticals   Term Loan 2015 Incr Dollar   Loan     4.25     3/11/2021      $ 2,940,000        2,934,157        2,927,152   

Drew Marine Group, Inc.

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.25     11/19/2020      $ 2,456,135        2,432,203        2,400,872   

DTZ U.S. Borrower, LLC

  Construction & Building   Term Loan B Add-on   Loan     4.25     11/4/2021      $ 1,972,519        1,963,587        1,962,045   

 

F-29


Table of Contents

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 

Edelman Financial Group, Inc.

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     6.50     12/19/2022      $ 1,492,500        1,464,947        1,495,306   

Education Management II, LLC

  Leisure Goods/Activities/Movies   Term Loan A   Loan     5.50     7/2/2020      $ 501,970        487,043        126,331   

Education Management II, LLC

  Leisure Goods/Activities/Movies   Term Loan B (2.00% Cash/6.50% PIK)   Loan     8.50     7/2/2020      $ 923,048        900,098        38,463   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.50     8/1/2021      $ 482,159        480,366        482,964   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (Second Lien)   Loan     7.75     8/1/2022      $ 500,000        497,983        489,165   

Emerald 2 Limited

  Chemicals/Plastics   Term Loan B1A   Loan     5.00     5/14/2021      $ 1,000,000        992,962        906,670   

Endo International plc

  Healthcare & Pharmaceuticals   Term Loan B   Loan     3.75     9/26/2022      $ 995,000        992,780        989,090   

EnergySolutions, LLC

  Environmental Industries   Term Loan B   Loan     6.75     5/29/2020      $ 795,000        784,320        787,050   

Engility Corporation

  Aerospace and Defense   Term Loan B-1   Loan     4.88     8/12/2020      $ 250,000        248,757        251,408   

Evergreen Acqco 1 LP

  Retailers (Except Food and Drugs)   New Term Loan   Loan     5.00     7/9/2019      $ 960,094        958,777        834,321   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

  Industrial Equipment   Term Loan (First Lien)   Loan     4.75     1/15/2021      $ 1,957,368        1,953,440        1,962,261   

EWT Holdings III Corp.

  Capital Equipment   Term Loan   Loan     5.50     1/15/2021      $ 997,500        988,228        1,002,488   

Extreme Reach, Inc.

  Media   Term Loan B   Loan     7.25     2/7/2020      $ 3,000,000        2,986,651        3,018,750   

Federal-Mogul Corporation

  Automotive   Tranche C Term Loan   Loan     4.75     4/15/2021      $ 2,940,000        2,929,732        2,799,527   

First Data Corporation

  Financial Intermediaries   First Data T/L Ext (2021)   Loan     4.52     3/24/2021      $ 2,021,537        1,954,630        2,030,149   

First Eagle Investment Management

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     4.75     12/1/2022      $ 1,492,500        1,465,494        1,481,306   

Fitness International, LLC

  Leisure Goods/Activities/Movies   Term Loan B   Loan     5.50     7/1/2020      $ 1,934,146        1,907,268        1,927,376   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

  Nonferrous Metals/Minerals   Loan   Loan     3.75     6/28/2019      $ 1,490,966        1,491,981        1,482,109   

Garda World Security Corporation

  Services: Business   Term B Delayed Draw Loan   Loan     4.00     11/6/2020      $ 198,102        197,448        194,883   

Garda World Security Corporation

  Services: Business   Term B Loan   Loan     4.00     11/6/2020      $ 774,398        771,902        761,814   

Gardner Denver, Inc.

  High Tech Industries   Initial Dollar Term Loan   Loan     4.25     7/30/2020      $ 2,438,599        2,433,122        2,312,475   

Gates Global LLC

  Leisure Goods/Activities/Movies   Term Loan (First Lien)   Loan     4.25     7/5/2021      $ 484,156        479,314        476,288   

General Nutrition Centers, Inc.

  Retailers (Except Food and Drugs)   Amended Tranche B Term Loan   Loan     3.25     3/4/2019      $ 2,125,219        2,120,837        2,100,417   

Global Tel*Link Corporation

  Services: Business   Term Loan (First Lien)   Loan     5.00     5/26/2020      $ 2,682,732        2,675,684        2,557,529   

Goodyear Tire & Rubber Company, The

  Chemicals/Plastics   Loan (Second Lien)   Loan     3.75     4/30/2019      $ 2,000,000        1,976,471        2,001,500   

Grosvenor Capital Management Holdings, LP

  Brokers/Dealers/Investment Houses   Initial Term Loan   Loan     3.75     1/4/2021      $ 1,014,560        1,011,209        1,003,572   

GTCR Valor Companies, Inc.

  Services: Business   Term Loan B   Loan     7.00     5/17/2023      $ 1,500,000        1,440,274        1,423,125   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

  Publishing   Tranche B-4 Term Loan   Loan     6.99     8/2/2019      $ 2,468,750        2,378,555        2,414,758   

Headwaters Incorporated

  Building & Development   Term Loan   Loan     4.50     3/24/2022      $ 247,500        246,448        247,500   

Help/Systems Holdings, Inc.

  High Tech Industries   Term Loan   Loan     6.25     10/8/2021      $ 1,492,500        1,436,471        1,475,709   

Hemisphere Media Holdings,
LLC

  Media   Term Loan B   Loan     5.00     7/30/2020      $ 2,500,000        2,506,310        2,493,750   

Hercules Achievement Holdings, Inc.

  Retailers (Except Food and Drugs)   Term Loan B   Loan     5.00     12/10/2021      $ 248,111        245,876        248,731   

Hoffmaster Group, Inc.

  Containers/Glass Products   Term Loan   Loan     5.25     5/8/2020      $ 1,960,000        1,947,036        1,953,885   

Hostess Brand, LLC

  Beverage, Food & Tobacco   Term Loan B (First Lien)   Loan     4.50     8/3/2022      $ 992,500        990,343        997,214   

 

F-30


Table of Contents

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 

Huntsman International LLC

  Chemicals/Plastics   Term Loan B (First Lien)   Loan     3.52     4/19/2019      $ 3,305,591        3,286,001        3,308,334   

Husky Injection Molding Systems Ltd.

  Services: Business   Term Loan B   Loan     4.25     6/30/2021      $ 488,709        486,969        486,646   

Imagine! Print Solutions, Inc.

  Media   Term Loan B   Loan     7.00     3/30/2022      $ 498,750        491,671        500,620   

Infor (US), Inc. (fka Lawson Software Inc.)

  Services: Business   Tranche B-5 Term Loan   Loan     3.75     6/3/2020      $ 2,139,810        2,127,549        2,114,667   

Insight Global

  Services: Business   Term Loan   Loan     6.00     10/29/2021      $ 2,468,096        2,456,476        2,471,798   

Informatica Corporation

  High Tech Industries   Term Loan B   Loan     4.50     8/5/2022      $ 496,250        495,133        478,881   

J. Crew Group, Inc.

  Retailers (Except Food and Drugs)   Term B-1 Loan Retired 03/05/2014   Loan     4.00     3/5/2021      $ 950,619        950,619        749,563   

Jazz Acquisition, Inc

  Aerospace and Defense   First Lien 6/14   Loan     4.50     6/19/2021      $ 490,303        489,370        442,253   

J.Jill Group, Inc.

  Retailers (Except Food and Drugs)   Term Loan (First Lien)   Loan     6.00     5/9/2022      $ 990,003        985,698        970,203   

Kinetic Concepts, Inc.

  Healthcare & Pharmaceuticals   Term Loan F-1   Loan     5.00     11/4/2020      $ 2,440,214        2,432,629        2,449,365   

Koosharem, LLC

  Services: Business   Term Loan   Loan     7.50     5/15/2020      $ 2,950,075        2,930,014        2,522,314   

Kraton Polymers, LLC

  Chemicals/Plastics   Term Loan (Initial)   Loan     6.00     1/6/2022      $ 2,500,000        2,268,983        2,501,575   

Lannett Company, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     6.38     11/25/2022      $ 1,950,000        1,887,295        1,908,563   

LPL Holdings

  Banking, Finance, Insurance & Real Estate   Term Loan B (2022)   Loan     4.75     11/21/2022      $ 1,990,000        1,971,963        2,001,204   

McGraw-Hill Global Education Holdings, LLC

  Publishing   Term Loan   Loan     5.00     5/4/2022      $ 1,000,000        995,280        1,004,380   

Mauser Holdings, Inc.

  Containers/Glass Products   Term Loan   Loan     4.50     7/31/2021      $ 491,250        489,428        489,201   

Michaels Stores, Inc.

  Retailers (Except Food and Drugs)   Term B Loan   Loan     3.75     1/28/2020      $ 483,750        483,750        485,496   

Michaels Stores, Inc.

  Retailers (Except Food and Drugs)   Term Loan B-2   Loan     4.00     1/28/2020      $ 1,205,294        1,201,088        1,212,610   

Micro Holding Corporation

  High Tech Industries   Term Loan   Loan     4.75     7/8/2021      $ 987,411        983,240        983,708   

Microsemi Corporation

  Electronics/Electric   Term Loan B   Loan     3.75     1/17/2023      $ 979,015        951,794        985,026   

Midas Intermediate Holdco II, LLC

  Automotive   Term Loan (Initial)   Loan     4.50     8/18/2021      $ 245,625        244,644        246,239   

Milk Specialties Company

  Beverage, Food & Tobacco   Term Loan   Loan     6.00     8/16/2023      $ 1,000,000        990,047        1,001,250   

MSC Software Corporation

  Services: Business   Term Loan   Loan     5.00     5/29/2020      $ 1,980,000        1,937,888        1,960,200   

MWI Holdings, Inc.

  Capital Equipment   Term Loan (First Lien)   Loan     6.50     6/29/2020      $ 3,000,000        2,976,771        2,992,500   

National Veterinary Associates, Inc

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.75     8/14/2021      $ 982,534        979,601        980,893   

National Vision, Inc.

  Retailers (Except Food and Drugs)   Term Loan (Second Lien)   Loan     6.75     3/11/2022      $ 250,000        249,761        232,033   

Neptune Finco (CSC Holdings)

  Cable and Satellite Television   Term Loan   Loan     5.00     10/7/2022      $ 997,500        984,211        1,005,191   

New Millennium Holdco, Inc.

  Healthcare & Pharmaceuticals   Term Loan   Loan     7.50     12/21/2020      $ 1,997,007        1,822,451        948,578   

NorthStar Asset Management Group, Inc.

  Banking, Finance, Insurance & Real Estate   Term Loan B   Loan     4.63     1/30/2023      $ 1,995,000        1,929,403        1,986,681   

Novelis, Inc.

  Conglomerate   Term Loan B   Loan     4.00     6/2/2022      $ 4,747,083        4,726,799        4,755,248   

Novetta Solutions

  Aerospace and Defense   Term Loan (200MM)   Loan     6.00     10/16/2022      $ 1,990,000        1,971,971        1,885,525   

Novetta Solutions

  Aerospace and Defense   Term Loan (2nd Lien)   Loan     9.50     9/29/2023      $ 1,000,000        990,712        920,000   

NPC International, Inc.

  Food Services   Term Loan (2013)   Loan     4.75     12/28/2018      $ 477,298        477,298        477,097   

Numericable U.S., LLC

  Broadcast Radio and Television   Term Loan B-5   Loan     4.56     7/31/2022      $ 992,500        990,344        992,679   

NuSil Technology, LLC

  Chemicals/Plastics   Term Loan   Loan     6.00     4/5/2019      $ 2,782,343        2,767,725        2,776,556   

NVA Holdings, Inc.

  Services: Consumer   Term Loan B1   Loan     4.75     8/14/2021      $ 249,375        248,759        249,375   

Om Group

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     7.00     10/28/2021      $ 997,494        901,636        980,038   

ON Semiconductor Corporation

  High Tech Industries   Term Loan B   Loan     5.25     3/31/2023      $ 500,000        492,859        506,160   

 

F-31


Table of Contents

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair
Value
 

Onex Carestream Finance LP

  Healthcare & Pharmaceuticals   Term Loan (First Lien 2013)   Loan     5.00     6/7/2019      $ 3,723,057        3,713,318        3,534,596   

OnexYork Acquisition Co

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.75     10/1/2021      $ 491,250        488,417        435,984   

OpenLink International, LLC

  Services: Business   Term B Loan   Loan     7.75     7/29/2019      $ 2,929,160        2,928,277        2,912,083   

P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)

  Food/Drug Retailers   Term Borrowing   Loan     4.25     6/24/2019      $ 1,425,174        1,420,371        1,389,545   

P2 Upstream Acquisition Co. (P2 Upstream Canada BC ULC)

  Services: Business   Term Loan (First Lien)   Loan     5.00     10/30/2020      $ 975,000        971,514        909,188   

Petsmart, Inc. (Argos Merger Sub, Inc.)

  Retailers (Except Food and Drugs)   Term Loan B1   Loan     4.25     3/11/2022      $ 987,500        983,257        988,734   

PGX Holdings, Inc.

  Financial Intermediaries   Term Loan   Loan     5.75     9/29/2020      $ 949,643        942,884        946,481   

Phillips-Medisize Corporation

  Healthcare & Pharmaceuticals   Term Loan   Loan     4.75     6/16/2021      $ 490,000        488,213        489,182   

Planet Fitness Holdings LLC

  Leisure Goods/Activities/Movies   Term Loan   Loan     4.50     3/31/2021      $ 2,404,597        2,396,951        2,419,626   

PrePaid Legal Services, Inc.

  Services: Business   Term Loan B   Loan     6.50     7/1/2019      $ 3,393,480        3,397,685        3,389,239   

Presidio, Inc.

  Services: Business   Term Loan   Loan     5.25     2/2/2022      $ 2,391,444        2,335,704        2,384,605   

Prime Security Services (Protection One)

  Services: Business   Term Loan   Loan     4.75     7/1/2021      $ 1,990,000        1,981,620        2,006,915   

Ranpak Holdings, Inc.

  Services: Business   Term Loan   Loan     4.25     10/1/2021      $ 933,627        931,293        920,398   

Ranpak Holdings, Inc.

  Services: Business   Term Loan (Second Lien)   Loan     8.25     10/3/2022      $ 500,000        497,992        460,000   

Redtop Acquisitions Limited

  Electronics/Electric   Initial Dollar Term Loan (First Lien)   Loan     4.50     12/3/2020      $ 487,500        485,218        486,891   

Regal Cinemas Corporation

  Services: Consumer   Term Loan   Loan     3.50     4/1/2022      $ 496,250        495,132        497,987   

Research Now Group, Inc

  Media   Term Loan B   Loan     5.50     3/18/2021      $ 2,048,075        2,039,131        1,986,633   

Rexnord LLC/RBS Global, Inc.

  Industrial Equipment   Term B Loan   Loan     4.00     8/21/2020      $ 1,540,540        1,541,679        1,539,970   

Reynolds Group Holdings Inc.

  Industrial Equipment   Incremental U.S. Term Loan   Loan     4.25     2/6/2023      $ 1,765,548        1,765,548        1,767,208   

Rocket Software, Inc.

  Services: Business   Term Loan (First Lien)   Loan     5.75     2/8/2018      $ 1,891,942        1,883,013        1,894,307   

Rovi Solutions Corporation / Rovi Guides, Inc.

  Electronics/Electric   Tranche B-3 Term Loan   Loan     3.75     7/2/2021      $ 1,470,000        1,464,686        1,460,195   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.50     6/20/2022      $ 495,000        492,827        496,084   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (Second Lien)   Loan     8.50     6/19/2023      $ 500,000        496,533        492,500   

RPI Finance Trust

  Financial Intermediaries   Term B-4 Term Loan   Loan     3.50     11/9/2020      $ 3,134,220        3,134,220        3,151,207   

Russell Investment Management T/L B

  Banking, Finance, Insurance & Real Estate   Term Loan B   Loan     6.75     6/1/2023      $ 2,000,000        1,880,801        1,883,340   

Sable International Finance Ltd

  Telecommunications   Term Loan B1   Loan     5.50     12/2/2022      $ 825,000        809,076        829,472   

Sable International Finance Ltd

  Telecommunications   Term Loan B2   Loan     5.50     12/2/2022      $ 675,000        661,971        678,659   

SBP Holdings LP

  Industrial Equipment   Term Loan (First Lien)   Loan     5.00     3/27/2021      $ 977,500        974,042        762,450   

Scientific Games International, Inc.

  Electronics/Electric   Term Loan B2   Loan     6.00     10/1/2021      $ 985,000        975,913        984,320   

SCS Holdings (Sirius Computer)

  High Tech Industries   Term Loan (First Lien)   Loan     6.00     10/30/2022      $ 1,977,528        1,941,664        1,988,246   

Seadrill Operating LP

  Oil & Gas   Term Loan B   Loan     4.00     2/21/2021      $ 982,368        921,146        470,721   

Sensus USA Inc.

  Utilities   Term Loan   Loan     6.50     4/5/2023      $ 1,900,135        1,894,785        1,904,885   

ServiceMaster Company, The

  Conglomerate   Tranche B Term Loan   Loan     4.25     7/1/2021      $ 1,965,000        1,950,684        1,976,790   

Shearers Foods LLC

  Food Services   Term Loan (First Lien)   Loan     4.94     6/30/2021      $ 982,500        980,621        976,359   

Sitel Worldwide

  Telecommunications   Term Loan   Loan     6.50     9/18/2021      $ 1,985,000        1,967,812        1,971,760   

Sonneborn, LLC

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.75     12/10/2020      $ 209,075        208,675        209,075   

 

F-32


Table of Contents

Issuer Name

 

Industry

 

Asset Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Sonneborn, LLC

  Chemicals/Plastics   Initial US Term Loan   Loan     4.75     12/10/2020      $ 1,184,756        1,182,493        1,184,757   

Sophia, L.P.

  Electronics/Electric   Term Loan (Closing Date)   Loan     4.75     9/30/2022      $ 1,985,000        1,976,164        1,984,166   

SourceHOV LLC

  Services: Business   Term Loan B (First Lien)   Loan     7.75     10/31/2019      $ 1,887,500        1,848,187        1,506,848   

SRAM, LLC

  Industrial Equipment   Term Loan (First Lien)   Loan     4.00     4/10/2020      $ 2,833,435        2,826,700        2,713,014   

Steak ‘n Shake Operations, Inc.

  Food Services   Term Loan   Loan     4.75     3/19/2021      $ 928,173        921,737        914,250   

SuperMedia Inc. (fka Idearc Inc.)

  Publishing   Loan   Loan     11.60     12/30/2016      $ 200,478        200,451        77,812   

Survey Sampling International

  Services: Business   Term Loan B   Loan     6.00     12/16/2020      $ 2,735,604        2,719,614        2,715,087   

Sybil Finance BV

  High Tech Industries   Term Loan B   Loan     5.00     8/3/2022      $ 1,000,000        995,000        1,000,940   

Sybil Finance BV

  High Tech Industries   Term Loan   Loan     4.25     3/20/2020      $ 1,239,524        1,238,443        1,241,073   

Syniverse Holdings, Inc.

  Telecommunications   Initial Term Loan   Loan     4.00     4/23/2019      $ 468,977        466,513        415,927   

TaxACT, Inc.

  Services: Business   Term Loan B   Loan     7.00     1/3/2023      $ 1,475,000        1,433,967        1,482,375   

Tectum Holdings, Inc.

  Transportation   Delayed Draw Term Loan (Initial)   Loan     5.75     8/24/2023      $ 780,952        770,952        779,702   

Texas Competitive Electric Holdings Company, LLC

  Utilities   Term Loan B   Loan     5.00     10/31/2017      $ 814,286        806,539        817,543   

Texas Competitive Electric Holdings Company, LLC

  Utilities   Term Loan C   Loan     5.00     10/31/2017      $ 185,714        183,948        186,528   

TGI Friday’s, Inc.

  Food Services   Term Loan B   Loan     5.25     7/15/2020      $ 1,651,816        1,648,391        1,643,557   

Townsquare Media, Inc.

  Media   Term Loan B   Loan     4.25     4/1/2022      $ 932,522        928,672        932,522   

TPF II Power LLC and TPF II Covert Midco LLC

  Utilities   Term Loan B   Loan     5.00     10/2/2021      $ 1,423,645        1,369,789        1,429,581   

TransDigm, Inc.

  Aerospace and Defense   Tranche C Term Loan   Loan     3.75     2/28/2020      $ 4,255,246        4,265,475        4,245,076   

Travel Leaders Group, LLC

  Hotel, Gaming and Leisure   Term Loan B   Loan     7.00     12/7/2020      $ 2,667,187        2,652,367        2,647,183   

Tricorbraun, Inc. (fka Kranson Industries, Inc.)

  Containers/Glass Products   Term Loan   Loan     4.00     5/3/2018      $ 2,831,864        2,830,158        2,826,569   

Trugreen Limited Partnership

  Services: Business   Term Loan B   Loan     6.50     4/13/2023      $ 500,000        492,927        503,125   

Twin River Management Group, Inc.

  Lodging & Casinos   Term Loan B   Loan     5.25     7/10/2020      $ 866,521        867,991        869,233   

Univar Inc.

  Chemicals/Plastics   Term B Loan   Loan     4.25     7/1/2022      $ 2,977,500        2,964,666        2,972,170   

Univision Communications Inc.

  Telecommunications   Replacement First-Lien Term Loan   Loan     4.00     3/1/2020      $ 2,901,111        2,890,101        2,899,806   

Valeant Pharmaceuticals International, Inc.

  Drugs   Series D2 Term Loan B   Loan     5.00     2/13/2019      $ 2,468,720        2,459,768        2,464,598   

Verint Systems Inc.

  Services: Business   Term Loan   Loan     3.50     9/6/2019      $ 1,011,464        1,009,003        1,011,717   

Vizient Inc.

  Healthcare & Pharmaceuticals   Term Loan   Loan     6.25     2/13/2023      $ 997,500        969,696        1,008,103   

Vouvray US Finance

  Industrial Equipment   Term Loan   Loan     4.75     6/27/2021      $ 490,000        488,186        488,368   

Washington Inventory Service

  Services: Business   U.S. Term Loan (First Lien)   Loan     5.75     12/20/2018      $ 1,736,393        1,747,098        1,085,246   

Western Digital Corporation

  High Tech Industries   Term Loan B (USD)   Loan     4.50     5/1/2023      $ 1,600,000        1,568,172        1,608,288   

Windstream Services, LLC

  Telecommunications   Term Loan B6   Loan     5.75     3/29/2021      $ 249,375        243,569        250,856   

ZEP, Inc.

  Chemicals/Plastics   Term Loan B   Loan     5.50     6/27/2022      $ 2,970,000        2,957,142        2,971,871   
             

 

 

   

 

 

 
              $ 299,967,726      $ 290,957,156   
             

 

 

   

 

 

 
                            Principal     Cost     Fair Value  

Cash and cash equivalents

  

     

U.S. Bank Money Market (a)

  

  $ 5,172,517      $ 5,172,517      $ 5,172,517   
           

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

    $ 5,172,517      $ 5,172,517      $ 5,172,517   
           

 

 

   

 

 

   

 

 

 

 

(a) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of August 31, 2016.

 

F-33


Table of Contents

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2016

 

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

Education Management II, LLC

  Leisure Goods/Activities/Movies   A-1 Preferred Shares   Equity     0.00       6,692      $ 669,214      $ 1,673   

Education Management II, LLC

  Leisure Goods/Activities/Movies   A-2 Preferred Shares   Equity     0.00       18,975        1,897,538        95   

New Millennium Holdco, Inc.

  Healthcare & Pharmaceuticals   Common Stock   Equity     0.00       14,813        964,466        190,095   

24 Hour Holdings III, LLC

  Leisure Goods/Activities/Movies   Term Loan   Loan     4.75     5/28/2021      $ 492,500        488,586        455,154   

Acosta Holdco, Inc.

  Media   Term Loan B1   Loan     4.25     9/26/2021      $ 1,972,936        1,959,834        1,855,389   

Aspen Dental Management, Inc.

  Healthcare & Pharmaceuticals   Term Loan Initial   Loan     5.50     4/29/2022      $ 497,500        495,228        495,221   

Advantage Sales & Marketing, Inc.

  Services: Business   Delayed Draw Term Loan   Loan     4.25     7/25/2021      $ 2,471,231        2,468,039        2,342,826   

Agrofresh, Inc.

  Food Services   Term Loan   Loan     5.75     7/30/2021      $ 1,990,000        1,980,704        1,935,275   

Aegis Toxicology Science Corporation

  Healthcare & Pharmaceuticals   Term B Loan   Loan     5.50     2/24/2021      $ 985,000        985,000        797,850   

Akorn, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     6.00     4/16/2021      $ 398,056        396,681        396,066   

Albertson’s LLC

  Retailers (Except Food and Drugs)   Term Loan B-4   Loan     5.50     8/25/2021      $ 3,384,425        3,367,410        3,302,623   

Alere Inc. (fka IM US Holdings, LLC)

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.25     6/20/2022      $ 927,265        925,091        925,365   

Alion Science and Technology Corporation

  High Tech Industries   Term Loan B (First Lien)   Loan     5.50     8/19/2021      $ 2,985,000        2,971,074        2,824,555   

Alliance Healthcare Services, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.25     6/3/2019      $ 994,856        990,161        906,981   

Alliant Holdings I, LLC

  Banking, Finance, Insurance & Real Estate   Term Loan B (First Lien)   Loan     4.50     8/12/2022      $ 995,000        992,679        960,921   

Alvogen Pharma US, Inc

  Healthcare & Pharmaceuticals   Term Loan   Loan     6.00     4/4/2022      $ 480,447        478,240        456,425   

American Beacon Advisors, Inc.

  Financial Intermediaries   Term Loan (First Lien)   Loan     5.50     4/30/2022      $ 248,749        247,612        244,190   

Aramark Corporation

  Food Products   LC-2 Facility   Loan     0.29     7/26/2016      $ 9,447        9,445        9,305   

Aramark Corporation

  Food Products   LC-3 Facility   Loan     0.29     7/26/2016      $ 5,244        5,244        5,166   

Aramark Corporation

  Food Products   U.S. Term F Loan   Loan     3.25     2/24/2021      $ 3,150,423        3,150,423        3,126,133   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Incremental Tranche B-1 Term Loan   Loan     5.00     5/24/2019      $ 2,596,480        2,573,245        2,441,237   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Term Loan B4 (First Lien)   Loan     5.00     8/4/2022      $ 2,478,125        2,466,303        2,270,582   

Auction.com, LLC

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     6.00     5/13/2019      $ 2,522,992        2,522,722        2,491,455   

Avantor Performance Materials Holdings, Inc.

  Chemicals/Plastics   Term Loan   Loan     5.25     6/24/2017      $ 2,156,953        2,153,896        2,135,384   

Bass Pro Group, LLC

  Retailers (Except Food and Drugs)   Term Loan   Loan     4.00     6/5/2020      $ 1,488,750        1,485,895        1,397,564   

Belmond Interfin Ltd.

  Lodging & Casinos   Term Loan   Loan     4.00     3/19/2021      $ 491,249        489,361        477,127   

Berry Plastics Corporation

  Chemicals/Plastics   Term E Loan   Loan     3.75     1/6/2021      $ 1,314,499        1,305,069        1,291,903   

BJ’s Wholesale Club, Inc.

  Food/Drug Retailers   New 2013 (November) Replacement Loan (First Lien)   Loan     4.50     9/26/2019      $ 1,476,196        1,475,409        1,401,161   

Blue Coat Systems

  Technology   Term Loan B   Loan     4.50     5/20/2022      $ 997,500        995,159        945,131   

BMC Software

  Technology   Term Loan   Loan     5.00     9/10/2020      $ 1,979,798        1,926,080        1,571,821   

 

F-34


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

Brickman Group Holdings, Inc.

  Brokers/Dealers/Investment Houses   Initial Term Loan (First Lien)   Loan     4.00     12/18/2020      $ 1,476,212        1,464,327        1,426,390   

Brock Holdings III, Inc.

  Industrial Equipment   Term Loan (First Lien)   Loan     6.00     3/16/2017      $ 1,917,168        1,924,101        1,802,138   

Burlington Coat Factory Warehouse Corporation

  Retailers (Except Food and Drugs)   Term B-2 Loan   Loan     4.25     8/13/2021      $ 1,861,667        1,853,426        1,845,843   

BWAY Holding Company

  Leisure Goods/Activities/Movies   Term Loan B   Loan     5.50     8/14/2020      $ 985,000        976,335        930,826   

Caesars Entertainment Corp.

  Lodging & Casinos   Term B-7 Loan   Loan     13.25     3/1/2017      $ 995,000        991,037        814,656   

Camp International Holding Company

  Aerospace and Defense   2013 Replacement Term Loan (First Lien)   Loan     4.75     5/31/2019      $ 1,940,113        1,940,984        1,806,730   

Capital Automotive L.P.

  Conglomerate   Tranche B-1 Term Loan Facility   Loan     4.00     4/10/2019      $ 2,051,828        2,055,060        2,044,564   

Catalent Pharma Solutions, Inc

  Drugs   Initial Term B Loan   Loan     4.25     5/20/2021      $ 492,501        490,549        487,271   

Cengage Learning Acquisitions, Inc.

  Publishing   Term Loan   Loan     7.00     3/31/2020      $ 2,647,871        2,670,807        2,539,758   

Charter Communications Operating, LLC

  Cable and Satellite Television   Term F Loan   Loan     3.00     12/31/2020      $ 2,628,783        2,621,343        2,566,823   

CHS/Community Health Systems, Inc.

  Healthcare & Pharmaceuticals   Term G Loan   Loan     3.75     12/31/2019      $ 1,022,569        994,876        974,212   

CHS/Community Health Systems, Inc.

  Healthcare & Pharmaceuticals   Term H Loan   Loan     4.00     1/27/2021      $ 1,881,500        1,828,566        1,785,920   

Cinedigm Digital Funding I, LLC

  Services: Business   Term Loan   Loan     3.75     2/28/2018      $ 298,828        297,362        295,840   

CITGO Petroleum Corporation

  Oil & Gas   Term Loan B   Loan     4.50     7/29/2021      $ 1,984,975        1,962,423        1,865,876   

Communications Sales & Leasing, Inc.

  Telecommunications   Term Loan B (First Lien)   Loan     5.00     10/24/2022      $ 1,990,000        1,978,594        1,847,596   

CommScope, Inc.

  Telecommunications   Term Loan B   Loan     3.75     12/29/2022      $ 498,750        497,568        494,176   

Consolidated Aerospace Manufacturing, LLC

  Aerospace and Defense   Term Loan (First Lien)   Loan     4.75     8/11/2022      $ 1,437,500        1,430,556        1,329,688   

Concordia Healthcare Corp

  Healthcare & Pharmaceuticals   Term Loan B   Loan     5.25     10/21/2021      $ 2,000,000        1,894,483        1,920,000   

CPI Acquisition Inc.

  Technology   Term Loan B (First Lien)   Loan     5.50     8/17/2022      $ 1,436,782        1,415,977        1,396,667   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

  Electronics/Electric   Term B Loan   Loan     4.25     11/17/2017      $ 1,564,182        1,564,182        1,501,615   

Crosby US Acquisition Corp.

  Industrial Equipment   Initial Term Loan (First Lien)   Loan     4.00     11/23/2020      $ 735,000        734,245        536,550   

CT Technologies Intermediate Hldgs, Inc

  Healthcare & Pharmaceuticals   Term Loan   Loan     5.25     12/1/2021      $ 1,485,038        1,471,665        1,433,061   

Culligan International Company

  Conglomerate   Dollar Loan (First Lien)   Loan     6.25     12/19/2017      $ 771,625        742,910        721,469   

Culligan International Company

  Conglomerate   Dollar Loan (Second Lien)   Loan     9.50     6/19/2018      $ 783,162        754,065        734,214   

Cumulus Media Holdings Inc.

  Broadcast Radio and Television   Term Loan   Loan     4.25     12/23/2020      $ 470,093        466,690        304,973   

DAE Aviation (StandardAero)

  Aerospace and Defense   Term Loan   Loan     5.25     7/7/2022      $ 1,995,000        1,985,759        1,970,063   

DCS Business Services, Inc.

  Financial Intermediaries   Term B Loan   Loan     8.75     3/19/2018      $ 2,409,739        2,397,948        2,409,739   

Dell International LLC

  Technology   Term Loan B2   Loan     4.00     4/29/2020      $ 2,904,989        2,892,348        2,889,854   

Delta 2 (Lux) S.a.r.l.

  Lodging & Casinos   Term Loan B-3   Loan     4.75     7/30/2021      $ 1,000,000        995,870        925,000   

Deluxe Entertainment Service Group, Inc.

  Leisure Goods/Activities/Movies   Term Loan (First Lien)   Loan     6.50     2/28/2020      $ 1,882,983        1,884,279        1,751,174   

Diamond Resorts International

  Lodging & Casinos   Term Loan   Loan     5.50     5/7/2021      $ 926,971        923,222        897,614   

Diamond Resorts International

  Lodging & Casinos   Term Loan (Add-On)   Loan     5.50     5/7/2021      $ 1,000,000        980,687        968,330   

 

F-35


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

DJO Finance, LLC

  Healthcare & Pharmaceuticals   Term Loan   Loan     4.25     6/8/2020      $ 497,500        495,435        478,222   

DPX Holdings B.V.

  Healthcare & Pharmaceuticals   Term Loan 2015 Incr Dollar   Loan     4.25     3/11/2021      $ 2,955,000        2,948,456        2,799,863   

Drew Marine Group, Inc.

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.25     11/19/2020      $ 2,472,161        2,445,601        2,299,110   

DTZ U.S. Borrower, LLC

  Construction & Building   Term Loan B Add-on   Loan     4.25     11/4/2021      $ 2,985,000        2,970,317        2,869,331   

Edelman Financial Group, Inc.

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     6.50     12/19/2022      $ 1,500,000        1,470,617        1,459,695   

Education Management II, LLC

  Leisure Goods/Activities/Movies   Term Loan A   Loan     5.50     7/2/2020      $ 501,970        485,313        160,630   

Education Management II, LLC

  Leisure Goods/Activities/Movies   Term Loan B (2.00% Cash/6.50% PIK)   Loan     8.50     7/2/2020      $ 893,447        867,647        56,582   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.50     8/1/2021      $ 484,659        482,690        473,148   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (Second Lien)   Loan     7.75     8/1/2022      $ 500,000        497,844        468,750   

Emerald 2 Limited

  Chemicals/Plastics   Term Loan B1A   Loan     5.00     5/14/2021      $ 1,000,000        991,762        866,670   

Endo International plc

  Healthcare & Pharmaceuticals   Term Loan B   Loan     3.75     9/26/2022      $ 1,000,000        997,602        987,780   

EnergySolutions, LLC

  Environmental Industries   Term Loan B   Loan     6.75     5/29/2020      $ 937,857        923,660        731,528   

Evergreen Acqco 1 LP

  Retailers (Except Food and Drugs)   New Term Loan   Loan     5.00     7/9/2019      $ 965,081        963,406        719,951   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

  Industrial Equipment   Term Loan (First Lien)   Loan     4.75     1/15/2021      $ 1,967,406        1,962,950        1,908,383   

Federal-Mogul Corporation

  Automotive   Tranche C Term Loan   Loan     4.75     4/15/2021      $ 2,955,000        2,943,580        2,345,530   

First Data Corporation

  Financial Intermediaries   First Data Corp T/L (2018 New Dollar)   Loan     3.93     3/23/2018      $ 2,790,451        2,748,229        2,752,780   

First Data Corporation

  Financial Intermediaries   First Data T/L Ext (2021)   Loan     4.43     3/24/2021      $ 2,111,028        2,034,284        2,077,779   

First Eagle Investment Management

  Banking, Finance, Insurance & Real Estate   Term Loan   Loan     4.75     12/1/2022      $ 1,500,000        1,470,946        1,412,504   

Fitness International, LLC

  Leisure Goods/Activities/Movies   Term Loan B   Loan     5.50     7/1/2020      $ 1,976,234        1,945,935        1,850,249   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

  Nonferrous Metals/Minerals   Loan   Loan     4.25     6/28/2019      $ 1,962,387        1,962,515        1,504,738   

Garda World Security Corporation

  Services: Business   Term B Delayed Draw Loan   Loan     4.00     11/6/2020      $ 199,120        198,391        187,344   

Garda World Security Corporation

  Services: Business   Term B Loan   Loan     4.00     11/6/2020      $ 778,380        775,586        732,346   

Gardner Denver, Inc.

  High Tech Industries   Initial Dollar Term Loan   Loan     4.25     7/30/2020      $ 2,451,137        2,445,005        2,016,452   

Gates Global LLC

  Leisure Goods/Activities/Movies   Term Loan (First Lien)   Loan     4.25     7/5/2021      $ 493,750        488,813        433,883   

Generac Power Systems, Inc.

  Industrial Equipment   Term Loan B   Loan     3.50     5/31/2020      $ 693,858        684,537        676,511   

General Nutrition Centers, Inc.

  Retailers (Except Food and Drugs)   Amended Tranche B Term Loan   Loan     3.25     3/4/2019      $ 4,131,271        4,121,165        4,012,497   

Global Tel*Link Corporation

  Services: Business   Term Loan (First Lien)   Loan     5.00     5/26/2020      $ 2,725,318        2,717,647        2,237,023   

Goodyear Tire & Rubber Company, The

  Chemicals/Plastics   Loan (Second Lien)   Loan     3.75     4/30/2019      $ 2,000,000        1,974,077        2,005,000   

Grosvenor Capital Management Holdings, LP

  Brokers/Dealers/Investment Houses   Initial Term Loan   Loan     3.75     1/4/2021      $ 1,264,036        1,259,418        1,191,354   

GTCR Valor Companies, Inc.

  Services: Business   Term Loan (First Lien)   Loan     6.00     6/1/2021      $ 1,974,982        1,941,456        1,959,340   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

  Publishing   Tranche B-4 Term Loan   Loan     6.00     8/2/2019      $ 475,000        473,378        421,561   

 

F-36


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

HCA Inc.

  Healthcare & Pharmaceuticals   Tranche B-4 Term Loan   Loan     3.36     5/1/2018      $ 2,119,664        2,053,127        2,116,294   

Headwaters Incorporated

  Building & Development   Term Loan   Loan     4.50     3/24/2022      $ 248,750        247,628        248,285   

Hercules Achievement Holdings, Inc.

  Retailers (Except Food and Drugs)   Term Loan B   Loan     5.00     12/10/2021      $ 249,370        246,940        244,929   

Hertz Corporation, The

  Automotive   Tranche B-1 Term Loan   Loan     3.75     3/12/2018      $ 2,910,000        2,933,230        2,879,998   

Hoffmaster Group, Inc.

  Containers/Glass Products   Term Loan   Loan     5.25     5/8/2020      $ 1,970,000        1,955,325        1,915,825   

Hostess Brand, LLC

  Beverage, Food & Tobacco   Term Loan B (First Lien)   Loan     4.50     8/3/2022      $ 997,500        995,241        983,784   

Huntsman International LLC

  Chemicals/Plastics   Term Loan B (First Lien)   Loan     3.52     4/19/2019      $ 3,840,541        3,814,577        3,727,245   

Husky Injection Molding Systems Ltd.

  Services: Business   Term Loan B   Loan     4.25     6/30/2021      $ 491,196        489,277        465,757   

Infor (US), Inc. (fka Lawson Software Inc.)

  Services: Business   Tranche B-5 Term Loan   Loan     3.75     6/3/2020      $ 2,188,296        2,174,333        2,015,049   

Insight Global

  Services: Business   Term Loan   Loan     6.00     10/29/2021      $ 1,979,592        1,971,967        1,961,439   

Informatica Corporation

  High Tech Industries   Term Loan B   Loan     4.50     8/5/2022      $ 498,750        497,554        468,411   

J. Crew Group, Inc.

  Retailers (Except Food and Drugs)   Term B-1 Loan Retired 03/05/2014   Loan     4.00     3/5/2021      $ 955,481        955,481        639,379   

Jazz Acquisition, Inc

  Aerospace and Defense   First Lien 6/14   Loan     4.50     6/19/2021      $ 492,727        491,745        434,832   

J.Jill Group, Inc.

  Retailers (Except Food and Drugs)   Term Loan (First Lien)   Loan     6.00     5/9/2022      $ 995,000        990,362        925,350   

Kinetic Concepts, Inc.

  Healthcare & Pharmaceuticals   Dollar Term D-1 Loan   Loan     4.50     5/4/2018      $ 2,452,586        2,436,004        2,392,645   

Koosharem, LLC

  Services: Business   Term Loan   Loan     7.50     5/15/2020      $ 2,965,050        2,942,458        2,683,370   

Kraton Polymers, LLC

  Chemicals/Plastics   Term Loan (Initial)   Loan     6.00     1/6/2022      $ 2,500,000        2,252,500        2,250,000   

LPL Holdings

  Banking, Finance, Insurance & Real Estate   Term Loan B (2022)   Loan     4.75     11/21/2022      $ 2,000,000        1,980,543        1,900,000   

Mauser Holdings, Inc.

  Containers/Glass Products   Term Loan   Loan     4.50     7/31/2021      $ 493,750        491,750        475,234   

Michaels Stores, Inc.

  Retailers (Except Food and Drugs)   Term B Loan   Loan     3.75     1/28/2020      $ 486,250        486,250        479,792   

Michaels Stores, Inc.

  Retailers (Except Food and Drugs)   Term Loan B-2   Loan     4.00     1/28/2020      $ 1,212,794        1,208,220        1,201,042   

Micro Holding Corp.

  High Tech Industries   Term Loan   Loan     4.75     7/8/2021      $ 992,447        987,851        950,268   

Microsemi Corporation

  Electronics/Electric   Term Loan B   Loan     5.25     1/15/2023      $ 2,183,824        2,119,162        2,180,177   

Midas Intermediate Holdco II, LLC

  Automotive   Term Loan (Initial)   Loan     4.50     8/18/2021      $ 246,875        245,802        244,098   

MPH Acquisition Holdings, LLC

  Healthcare & Pharmaceuticals   Term Loan   Loan     3.75     3/31/2021      $ 376,136        375,400        366,500   

MSC Software Corporation

  Services: Business   Term Loan   Loan     5.00     5/29/2020      $ 985,000        977,601        886,500   

National Veterinary Associates, Inc

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.75     8/14/2021      $ 987,526        984,296        959,549   

National Vision, Inc.

  Retailers (Except Food and Drugs)   Term Loan (Second Lien)   Loan     6.75     3/11/2022      $ 250,000        249,729        218,750   

Neptune Finco (CSC Holdings)

  Cable and Satellite Television   Term Loan   Loan     5.00     10/7/2022      $ 1,000,000        985,784        989,750   

New Millennium Holdco

  Healthcare & Pharmaceuticals   Term Loan   Loan     7.50     12/21/2020      $ 2,007,042        1,811,375        1,822,655   

Nortek, Inc.

  Electronics/Electric   Term Loan B   Loan     3.50     10/30/2020      $ 985,022        974,747        939,464   

NorthStar Asset Management Group Inc.

  Banking, Finance, Insurance & Real Estate   Term Loan B   Loan     4.63     1/30/2023      $ 2,000,000        1,930,000        1,950,000   

Novelis, Inc.

  Conglomerate   Term Loan B   Loan     4.00     6/2/2022      $ 4,771,058        4,749,389        4,440,090   

Novetta Solutions

  Aerospace and Defense   Term Loan (200MM)   Loan     6.00     10/16/2022      $ 2,000,000        1,980,636        1,940,000   

Novetta Solutions

  Aerospace and Defense   Term Loan (2nd Lien)   Loan     9.50     9/29/2023      $ 1,000,000        990,269        950,000   

NPC International, Inc.

  Food Services   Term Loan (2013)   Loan     4.75     12/28/2018      $ 481,250        481,250        472,829   

NRG Energy, Inc.

  Utilities   Term Loan (2013)   Loan     2.75     7/2/2018      $ 3,821,925        3,808,282        3,751,449   

Numericable

  Broadcast Radio and Television   Term Loan B-5   Loan     4.56     7/31/2022      $ 997,500        995,164        953,171   

NuSil Technology LLC.

  Chemicals/Plastics   Term Loan   Loan     5.25     4/7/2017      $ 789,045        789,045        774,645   

Onex Carestream Finance LP

  Healthcare & Pharmaceuticals   Term Loan (First Lien 2013)   Loan     5.00     6/7/2019      $ 3,832,558        3,821,232        3,244,912   

 

F-37


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

OnexYork Acquisition Co

  Healthcare & Pharmaceuticals   Term Loan B   Loan     4.75     10/1/2021      $ 493,749        490,644        459,435   

OpenLink International, LLC

  Services: Business   Term B Loan   Loan     6.25     10/30/2017      $ 2,944,496        2,943,282        2,811,994   

P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)

  Food/Drug Retailers   Term Borrowing   Loan     4.25     6/24/2019      $ 1,432,750        1,427,110        1,336,039   

P2 Upstream Acquisition Co. (P2 Upstream Canada BC ULC)

  Services: Business   Term Loan (First Lien)   Loan     5.00     10/30/2020      $ 980,000        976,133        774,200   

Penn Products Terminal, LLC

  Chemicals/Plastics   Term Loan B   Loan     4.75     4/13/2022      $ 248,125        246,994        218,350   

PetCo Animal Supplies Stores, Inc.

  Retailers (Except Food and Drugs)   Term Loan B-1   Loan     5.75     1/15/2023      $ 1,000,000        980,217        978,590   

PetCo Animal Supplies Stores, Inc.

  Retailers (Except Food and Drugs)   Term Loan B-2   Loan     5.62     1/15/2023      $ 1,000,000        980,216        978,960   

Petsmart, Inc. (Argos Merger Sub, Inc.)

  Retailers (Except Food and Drugs)   Term Loan B1   Loan     4.25     3/11/2022      $ 992,500        987,862        961,176   

PGX Holdings, Inc.

  Financial Intermediaries   Term Loan   Loan     5.75     9/29/2020      $ 954,643        947,123        941,917   

Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)

  Conglomerate   Term Loan   Loan     4.25     8/18/2022      $ 1,920,848        1,911,850        1,872,346   

Phillips-Medisize Corporation

  Healthcare & Pharmaceuticals   Term Loan   Loan     4.75     6/16/2021      $ 492,500        490,535        458,025   

Physio-Control International, Inc.

  Healthcare & Pharmaceuticals   Term Loan B   Loan     5.50     6/6/2022      $ 498,750        496,371        498,127   

Pinnacle Foods Finance LLC

  Food Products   New Term Loan G   Loan     3.00     4/29/2020      $ 2,581,332        2,577,286        2,553,737   

Planet Fitness Holdings LLC

  Leisure Goods/Activities/Movies   Term Loan   Loan     4.75     3/31/2021      $ 2,417,118        2,410,079        2,368,776   

PrePaid Legal Services, Inc.

  Services: Business   Term Loan B   Loan     6.50     7/1/2019      $ 724,167        721,080        716,020   

Presidio, Inc.

  Services: Business   Term Loan   Loan     5.25     2/2/2022      $ 1,902,292        1,846,615        1,816,688   

Prime Security Services (Protection One)

  Services: Business   Term Loan   Loan     5.00     7/1/2021      $ 1,995,000        1,985,640        1,924,178   

Ranpak Holdings, Inc.

  Services: Business   Term Loan   Loan     4.25     10/1/2021      $ 938,354        936,008        886,745   

Ranpak Holdings, Inc.

  Services: Business   Term Loan (Second Lien)   Loan     8.25     10/3/2022      $ 500,000        497,866        400,000   

Redtop Acquisitions Limited

  Electronics/Electric   Initial Dollar Term Loan (First Lien)   Loan     4.50     12/3/2020      $ 490,000        487,461        482,444   

Regal Cinemas Corporation

  Services: Consumer   Term Loan   Loan     3.75     4/1/2022      $ 497,500        496,320        496,256   

Research Now Group, Inc

  Media   Term Loan B   Loan     5.50     3/18/2021      $ 2,058,445        2,048,627        1,996,692   

Rexnord LLC/RBS Global, Inc.

  Industrial Equipment   Term B Loan   Loan     4.00     8/21/2020      $ 1,630,123        1,631,387        1,557,647   

Reynolds Group Holdings Inc.

  Industrial Equipment   Incremental U.S. Term Loan   Loan     4.50     12/1/2018      $ 1,910,551        1,910,551        1,902,946   

Riverbed Technology, Inc.

  Technology   Term Loan B   Loan     6.00     2/25/2022      $ 992,500        988,224        970,873   

Rocket Software, Inc.

  Services: Business   Term Loan (First Lien)   Loan     5.75     2/8/2018      $ 1,901,835        1,889,759        1,889,150   

Rovi Solutions Corporation / Rovi Guides, Inc.

  Electronics/Electric   Tranche B-3 Term Loan   Loan     3.75     7/2/2021      $ 1,477,500        1,471,640        1,422,094   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.50     6/20/2022      $ 497,500        495,187        479,675   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (Second Lien)   Loan     8.50     6/19/2023      $ 500,000        496,388        478,335   

RPI Finance Trust

  Financial Intermediaries   Term B-4 Term Loan   Loan     3.50     11/9/2020      $ 5,155,193        5,155,193        5,132,665   

Sable International Finance Ltd

  Telecommunications   Term Loan B1   Loan     5.50     12/2/2022      $ 825,000        808,500        800,770   

Sable International Finance Ltd

  Telecommunications   Term Loan B2   Loan     5.50     12/2/2022      $ 675,000        661,500        655,175   

SBP Holdings LP

  Industrial Equipment   Term Loan (First Lien)   Loan     5.00     3/27/2021      $ 982,500        978,645        707,400   

 

F-38


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair
Value
 

Scientific Games International, Inc.

  Electronics/Electric   Term Loan B2   Loan     6.00     10/1/2021      $ 990,000        981,872        904,613   

SCS Holdings (Sirius Computer)

  High Tech Industries   Term Loan (First Lien)   Loan     6.00     10/30/2022      $ 1,977,528        1,939,305        1,937,978   

Seadrill Operating LP

  Oil & Gas   Term Loan B   Loan     4.00     2/21/2021      $ 987,406        919,799        407,305   

Sensus USA Inc. (fka Sensus Metering Systems)

  Utilities   Term Loan (First Lien)   Loan     4.50     5/9/2017      $ 1,905,121        1,902,477        1,826,534   

ServiceMaster Company, The

  Conglomerate   Tranche B Term Loan   Loan     4.25     7/1/2021      $ 1,975,000        1,959,254        1,956,889   

Shearers Foods LLC

  Food Services   Term Loan (First Lien)   Loan     4.94     6/30/2021      $ 987,500        985,421        952,938   

Sitel Worldwide

  Telecommunications   Term Loan   Loan     6.50     9/18/2021      $ 1,995,000        1,976,131        1,931,160   

Sonneborn, LLC

  Chemicals/Plastics   Term Loan (First Lien)   Loan     4.75     12/10/2020      $ 222,750        222,282        220,801   

Sonneborn, LLC

  Chemicals/Plastics   Initial US Term Loan   Loan     4.75     12/10/2020      $ 1,262,250        1,259,600        1,251,205   

Sophia, L.P.

  Electronics/Electric   Term Loan (Closing Date)   Loan     4.75     9/30/2022      $ 1,995,000        1,985,507        1,911,469   

SourceHOV LLC

  Services: Business   Term Loan B (First Lien)   Loan     7.75     10/31/2019      $ 1,937,500        1,891,680        1,541,281   

SRAM, LLC

  Industrial Equipment   Term Loan (First Lien)   Loan     4.00     4/10/2020      $ 2,904,577        2,896,630        2,207,479   

Staples, Inc.

  Retailers (Except Food and Drugs)   Term Loan 1/16   Loan     4.75     4/23/2021      $ 1,000,000        990,308        992,130   

Steak ‘n Shake Operations, Inc.

  Food Services   Term Loan   Loan     4.75     3/19/2021      $ 965,341        957,952        946,034   

SuperMedia Inc. (fka Idearc Inc.)

  Publishing   Loan   Loan     11.60     12/30/2016      $ 222,900        220,105        67,520   

Survey Sampling International

  Services: Business   Term Loan B   Loan     6.00     12/16/2020      $ 992,500        990,554        970,169   

Sybil Finance BV

  High Tech Industries   Term Loan   Loan     4.25     3/20/2020      $ 1,272,143        1,270,803        1,253,061   

Syniverse Holdings, Inc.

  Telecommunications   Initial Term Loan   Loan     4.00     4/23/2019      $ 479,913        476,927        311,944   

TaxACT, Inc.

  Services: Business   Term Loan B   Loan     7.00     1/3/2023      $ 1,860,000        1,805,035        1,804,200   

TGI Friday’s, Inc.

  Food Services   Term Loan B   Loan     5.25     7/15/2020      $ 1,651,816        1,647,936        1,636,669   

Townsquare Media, Inc.

  Media   Term Loan B   Loan     4.25     4/1/2022      $ 932,522        928,333        915,624   

TPF II Power LLC and TPF II Covert Midco LLC

  Utilities   Term Loan B   Loan     5.50     10/2/2021      $ 1,491,826        1,433,943        1,396,722   

TransDigm, Inc.

  Aerospace and Defense   Tranche C Term Loan   Loan     3.75     2/28/2020      $ 4,277,294        4,283,815        4,148,975   

Travel Leaders Group, LLC

  Hotel, Gaming and Leisure   Term Loan B   Loan     7.00     12/7/2020      $ 1,946,300        1,939,729        1,917,107   

Tricorbraun, Inc. (fka Kranson Industries, Inc.)

  Containers/Glass Products   Term Loan   Loan     4.00     5/3/2018      $ 1,836,625        1,831,636        1,776,935   

Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)

  Healthcare & Pharmaceuticals   New Tranche B Term Loan   Loan     4.50     6/6/2019      $ 482,603        476,598        480,494   

Twin River Management Group, Inc.

  Lodging & Casinos   Term Loan B   Loan     5.25     7/10/2020      $ 886,192        887,853        875,673   

U.S. Security Associates Holdings, Inc.

  Services: Business   Delayed Draw Loan   Loan     6.25     7/28/2017      $ 156,888        156,328        155,973   

U.S. Security Associates Holdings, Inc.

  Services: Business   Term B Loan   Loan     6.25     7/28/2017      $ 921,426        918,393        916,054   

Univar Inc.

  Chemicals/Plastics   Term B Loan   Loan     4.25     7/1/2022      $ 2,992,500        2,978,573        2,840,810   

Univision Communications Inc.

  Telecommunications   Replacement First-Lien Term Loan   Loan     4.00     3/1/2020      $ 2,916,556        2,903,859        2,832,705   

Valeant Pharmaceuticals International, Inc.

  Drugs   Series D2 Term Loan B   Loan     3.50     2/13/2019      $ 2,545,588        2,539,315        2,385,700   

Verint Systems Inc.

  Services: Business   Term Loan   Loan     3.50     9/6/2019      $ 1,014,058        1,011,203        1,005,692   

Vertafore, Inc.

  Services: Business   Term Loan (2013)   Loan     4.25     10/3/2019      $ 2,484,603        2,484,603        2,452,775   

Vizient Inc.

  Healthcare & Pharmaceuticals   Term Loan   Loan     6.25     2/13/2023      $ 1,000,000        970,144        993,750   

Vouvray US Finance

  Industrial Equipment   Term Loan   Loan     4.75     6/27/2021      $ 492,500        490,508        478,134   

 

F-39


Table of Contents

Issuer Name

 

Industry

 

Asset

Name

  Asset
Type
  Current
Rate
    Maturity
Date
    Principal /
Number
of Shares
    Cost     Fair Value  

Washington Inventory Service

  Services: Business   U.S. Term Loan (First Lien)   Loan     5.75     12/20/2018      $ 1,736,392        1,749,291        1,475,934   

West Corporation

  Telecommunications   Term B-10 Loan   Loan     3.25     6/30/2018      $ 2,534,892        2,558,782        2,490,861   

ZEP Inc.

  Chemicals/Plastics   Term Loan B   Loan     5.50     6/27/2022      $ 2,985,000        2,971,139        2,932,763   
             

 

 

   

 

 

 
              $ 303,643,756      $ 284,844,789   
             

 

 

   

 

 

 
                            Principal     Cost     Fair Value  

Cash and cash equivalents

  

     

U.S. Bank Money Market (a)

  

  $ 2,349,633      $ 2,349,633      $ 2,349,633   
           

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

  

  $ 2,349,633      $ 2,349,633      $ 2,349,633   
           

 

 

   

 

 

   

 

 

 

 

(a) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of February 29, 2016.

Note 5. Agreements and Related Party Transactions

On July 30, 2010, the Company entered into the Management Agreement with our Manager. The initial term of the Management Agreement was two years, with automatic, one-year renewals at the end of each year, subject to certain approvals by our board of directors and/or the Company’s stockholders. On July 7, 2016, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee of 1.75% is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters.

The incentive fee consists of the following two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100.0% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter (9.376% annualized); and 20.0% of the amount of the our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter (9.376% annualized).

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the

 

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capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

For the three months ended August 31, 2016 and August 31, 2015, the Company incurred $1.2 million and $1.2 million in base management fees, respectively. For the three months ended August 31, 2016 and August 31, 2015, the Company incurred $0.8 million and $0.7 million in incentive fees related to pre-incentive fee net investment income, respectively. For the three months ended August 31, 2016, we accrued $0.4 million in incentive fees related to capital gains. For the three months ended August 31, 2015, we reduced the incentive fees related to capital gains by $0.8 million. For the six months ended August 31, 2016 and August 31, 2015, the Company incurred $2.4 million and $2.3 million in base management fees, respectively. For the six months ended August 31, 2016 and August 31, 2015, the Company incurred $1.4 million and $1.4 million in incentive fees related to pre-incentive fee net investment income, respectively. For the six months ended August 31, 2016 and August 31, 2015, we accrued $0.5 million and $0.3 million in incentive fees related to capital gains, respectively. The accrual is calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of August 31, 2016, the base management fees accrual was $1.2 million and the incentive fees accrual was $5.1 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 29, 2016, the base management fees accrual was $1.2 million and the incentive fees accrual was $4.4 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.

On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement was two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company was capped at $1.0 million for the initial two year term of the Administration Agreement and subsequent renewals. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company thereunder, which had not been increased since the inception of the agreement, to $1.3 million. On July 7, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to keep the cap on the payment or reimbursement of expenses by the Company thereunder, unchanged at $1.3 million. In addition, our board of directors intends to review the cap in the next three to six months to determine whether it should be further adjusted in light of differences between our projected and actual expenses and other similar factors.

For the three months ended August 31, 2016 and August 31, 2015, we recognized $0.3 million and $0.3 million, in administrator expenses for the periods, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. For the six months ended August 31, 2016 and August 31, 2015, we recognized $0.7 million and $0.5 million, in administrator expenses for the periods, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of August 31, 2016, $0.3 million of administrator expenses and other expenses payable to the Manager were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. As of February 29, 2016, $0.2 million of administrator expenses and other expenses payable to the Manager were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. For the six months ended August 31, 2016 and August 31, 2015, the Company neither bought nor sold any investments from the Saratoga CLO.

 

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Note 6. Borrowings

Credit Facility

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral was used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.

In March 2009, we amended the Revolving Facility to increase the portion of the portfolio that could be invested in “CCC” rated investments in return for an increased interest rate and expedited amortization. As a result of these transactions, we expected to have additional cushion under our borrowing base under the Revolving Facility that would allow us to better manage our capital in times of declining asset prices and market dislocation.

On July 30, 2009, we exceeded the permissible borrowing limit under the Revolving Facility for 30 consecutive days, resulting in an event of default under the Revolving Facility. As a result of this event of default, our lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral could have had a material adverse effect on our liquidity, financial condition and operations.

On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million senior secured revolving credit facility (the “Credit Facility”) with Madison Capital Funding LLC, in each case, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets, other than those held by SBIC LP, have been pledged under the Credit Facility to secure our obligations thereunder.

On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:

 

    expand the borrowing capacity under the Credit Facility from $40.0 million to $45.0 million;

 

    extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may, upon the occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and

 

    remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.

 

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On September 17, 2014, we entered into a second amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:

 

    extend the commitment termination date from February 24, 2015 to September 17, 2017;

 

    extend the maturity date of the Credit Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

    reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and

 

    reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.

As of August 31, 2016 and February 29, 2016, there were no outstanding borrowings under the Credit Facility and the Company was in compliance with all of the limitations and requirements of the Credit Facility. Financing costs of $2.7 million related to the Credit Facility have been capitalized and are being amortized over the term of the facility. For the three months ended August 31, 2016 and August 31, 2015, we recorded $0.1 million and $0.2 million of interest expense, respectively. For the six months ended August 31, 2016 and August 31, 2015, we recorded $0.2 million and $0.4 million of interest expense, respectively. For the three months ended August 31, 2016 and August 31, 2015, we recorded $0.02 million and $0.02 million of amortization of deferred financing costs related to the Credit Facility and Revolving Facility, respectively. For the six months ended August 31, 2016 and August 31, 2015, we recorded $0.04 million and $0.04 million of amortization of deferred financing costs related to the Credit Facility and Revolving Facility, respectively. During the three and six months ended August 31, 2016, there were no outstanding borrowings under the Credit Facility. The interest rates during the three and six months ended August 31, 2015 on the outstanding borrowings under the Credit Facility were 6.00%. During the three and six months ended August 31, 2015, the average dollar amount of outstanding borrowings under the Credit Facility was $6.8 million and $8.2 million, respectively.

The Credit Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Credit Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Credit Facility has an eight year term, consisting of a three year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Credit Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50.0% to 75.0% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company will pay the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period.

Our borrowing base under the Credit Facility was $24.0 million subject to the Credit Facility cap of $45.0 million at August 31, 2016. For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (“SEC”). Accordingly, the August 31, 2016 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the period ended May 31, 2016, as filed with the SEC on July 13, 2016. The valuations presented in this Quarterly Report on Form 10-Q will not be incorporated into the borrowing base until after this Quarterly Report on Form 10-Q is filed with the SEC.

 

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SBA Debentures

SBIC LP is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. As of August 31, 2016, we have funded SBIC LP with $75.0 million of equity capital, and have $103.7 million of SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150.0 million, which is up to twice its potential regulatory capital.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to ‘‘smaller’’ concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

SBIC LP is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC LP will receive SBA-guaranteed debenture funding, which is dependent upon SBIC LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP’s assets over our stockholders and debtholders in the event we liquidate SBIC LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP upon an event of default.

The Company received exemptive relief from the SEC to permit it to exclude the debt of SBIC LP guaranteed by the SBA from the definition of senior securities in the 200.0% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200.0% asset coverage test by permitting it to borrow up to $150.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

As of August 31, 2016 and February 29, 2016, there was $103.7 million and $103.7 million outstanding of SBA debentures, respectively. The carrying amount of the amount outstanding of SBA debentures approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage. $3.9 million of financing costs related to the SBA debentures have been capitalized and are being amortized over the term of the commitment and drawdown.

For the three months ended August 31, 2016 and August 31, 2015, we recorded $0.8 million and $0.6 million of interest expense related to the SBA debentures, respectively. For the three months ended August 31, 2016 and August 31, 2015, we recorded $0.1 million and $0.1 million of amortization of deferred financing costs related to the SBA debentures, respectively. The weighted average interest rate during the three months ended August 31, 2016 and August 31, 2015 on the outstanding borrowings of the SBA debentures was 3.19% and 3.25%, respectively.

For the six months ended August 31, 2016 and August 31, 2015, we recorded $1.7 million and $1.2 million of interest expense related to the SBA debentures, respectively. For the six months ended August 31, 2016 and August 31, 2015, we recorded $0.3 million and $0.2 million of amortization of deferred financing costs related to the SBA debentures, respectively. The weighted average interest rate during the six months ended August 31,

 

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2016 and August 31, 2015 on the outstanding borrowings of the SBA debentures was 3.14% and 3.20%, respectively. During the three and six months ended August 31, 2016, the average dollar amount of SBA debentures outstanding was $103.7 million. During the three and six months ended August 31, 2015, the average dollar amount of SBA debentures outstanding was $79.0 million.

In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $350.0 million in SBA-guaranteed debentures when they have at least $175.0 million in combined regulatory capital.

On April 2, 2015, the SBA issued a “green light” letter inviting the Company to continue the application process to obtain a license to form and operate its second SBIC subsidiary. On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license, and in order to ensure that they were reviewing the most current information available, we would need to update all previously submitted materials and invited us to reapply. As a result of this request, with which we are in the process of complying, the existing “green light” letter that the SBA issued to us will expire. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the first license.

Notes

On May 10, 2013, the Company issued $42.0 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “Notes”). The Notes will mature on May 31, 2020, and since May 31, 2016, may be redeemed in whole or in part at any time or from time to time at the Company’s option. Interest will be payable quarterly beginning August 15, 2013.

On May 17, 2013, the Company closed an additional $6.3 million in aggregate principal amount of the Notes, pursuant to the full exercise of the underwriters’ option to purchase additional Notes. On May 29, 2015, the Company entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the Notes through an At-the-Market (“ATM”) offering. As of August 31, 2016, the Company sold 539,725 bonds with a principal of $13,493,125 at an average price of $25.31 for aggregate net proceeds of $13,385,766 (net of transaction costs).

As of August 31, 2016, the carrying amount and fair value of the Notes was $61.8 million and $63.3 million, respectively. The fair value of the Notes, which are publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a Level 1 liability within the fair value hierarchy. As of August 31, 2016, $2.7 million of financing costs related to the Notes (including underwriting commissions and net of issuance premiums) have been capitalized and are being amortized over the term of the Notes. For the three and six months ended August 31, 2016, we recorded $1.2 million and $2.3 million, respectively, of interest expense and $0.1 million and $0.2 million, respectively, of amortization of deferred financing costs related to the Notes. For the three and six months ended August 31, 2015, we recorded $1.1 million and $2.0 million, respectively, of interest expense and $0.1 million and $0.2 million, respectively, of amortization of deferred financing costs related to the Notes. During the three and six months ended August 31, 2016, the average dollar amount of Notes outstanding was $61.8 million. During the three and six months ended August 31, 2015, the average dollar amount of Notes outstanding was $54.4 million and $51.3 million, respectively.

 

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Note 7. Commitments and contingencies

Contractual obligations

The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2016:

 

            Payment Due by Period  
     Total      Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
 
     ($ in thousands)  

Long-Term Debt Obligations

   $ 165,453       $ —        $ —        $ 61,793       $ 103,660  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

The Company’s off-balance sheet arrangements consisted of $8.0 million and $2.0 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of August 31, 2016 and February 29, 2016, respectively. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities and are not reflected in the Company’s consolidated statements of assets and liabilities.

A summary of the composition of the unfunded commitments as of August 31, 2016 and February 29, 2016 is shown in the table below (dollars in thousands):

 

     As of  
     August 31, 2016      February 29, 2016  

Avionte Holdings, LLC

   $ 1,000       $ 1,000   

BoardEffect, Inc.

     7,000         —     

Identity Automation Systems

     —           1,000   
  

 

 

    

 

 

 

Total

   $ 8,000       $ 2,000   
  

 

 

    

 

 

 

Note 8. Directors Fees

The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three months ended August 31, 2016 and August 31, 2015, we incurred $0.06 million and $0.05 million for directors’ fees and expenses, respectively. For the six months ended August 31, 2016 and August 31, 2015, we incurred $0.1 million and $0.1 million for directors’ fees and expenses, respectively. As of August 31, 2016 and February 29, 2016, $0.05 million and $0.03 million in directors’ fees and expenses were accrued and unpaid, respectively. As of August 31, 2016, we had not issued any common stock to our directors as compensation for their services.

 

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Note 9. Stockholders’ Equity

On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of the LLC.

On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.

On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.

On November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $2.50 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 of newly issued shares of common stock.

On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million.

On August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

On November 12, 2010, we declared a dividend of $4.40 per share payable on December 29, 2010. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share. Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock.

On November 15, 2011, we declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock.

On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock.

On October 30, 2013, the Company declared a dividend of $2.65 per share payable on December 27, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock.

 

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On September 24, 2014, the Company declared a dividend of $0.18 per share payable on November 28, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock.

On September 24, 2014, the Company declared a dividend of $0.22 per share payable on February 27, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock.

On April 9, 2015, the Company declared a dividend of $0.27 per share payable on May 29, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock.

On May 14, 2015, the Company declared a special dividend of $1.00 per share payable on June 5, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock.

On July 8, 2015, the Company declared a dividend of $0.33 per share payable on August 31, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock.

On October 7, 2015, the Company declared a dividend of $0.36 per share payable on November 30, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock.

On January 12, 2016, the Company declared a dividend of $0.40 per share payable on February 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,765 newly issued shares of common stock.

On March 31, 2016, the Company declared a dividend of $0.41 per share payable on April 27, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock.

On July 7, 2016, the Company declared a dividend of $0.43 per share payable on August 9, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock.

On August 8, 2016, the Company declared a special dividend of $0.20 per share payable on September 5, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock.

On September 24, 2014, the Company announced the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then

 

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most recently published consolidated financial statements. On October 7, 2015, the Company’s board of directors extended the open market share repurchase plan for another year and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 400,000 shares of its common stock. As of August 31, 2016, the Company purchased 138,494 shares of common stock, at the average price of $16.16 for approximately $2.2 million pursuant to this repurchase plan. On October 5, 2016, the Company’s board of directors extended the open market share repurchase plan for another year to October 15, 2017 and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of its common stock.

Note 10. Earnings Per Share

In accordance with the provisions of FASB ASC 260, Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and six months ended August 31, 2016 and August 31, 2015 (dollars in thousands except share and per share amounts):

 

     For the three months ended      For the six months ended  

Basic and diluted

   August 31,
2016
     August 31,
2015
     August 31,
2016
     August 31,
2015
 

Net increase in net assets from operations

   $ 5,272       $ 1,243       $ 8,559       $ 8,628   

Weighted average common shares outstanding

     5,740,816         5,583,795         5,739,157         5,492,491   

Weighted average earnings per common share-basic and diluted

   $ 0.92       $ 0.22       $ 1.49       $ 1.57   

Note 11. Dividend

On August 8, 2016, the Company declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP.

Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.

On July 7, 2016, the Company declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP.

Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.

 

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On March 31, 2016, the Company declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common stockholders of record as of April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP.

Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

The following table summarizes dividends declared during the six months ended August 31, 2016 (dollars in thousands except per share amounts):

 

Date Declared

   Record Date      Payment Date      Amount
Per Share*
     Total
Amount
 

August 8, 2016

     August 24, 2016         September 5, 2016       $ 0.20       $ 1,151   

July 7, 2016

     July 29, 2016         August 9, 2016       $ 0.43       $ 2,466   

March 31, 2016

     April 15, 2016         April 27, 2016       $ 0.41       $ 2,346   
        

 

 

    

 

 

 

Total dividends declared

         $ 1.04       $ 5,963   
        

 

 

    

 

 

 

 

* Amount per share is calculated based on the number of shares outstanding at the date of declaration.

The following table summarizes dividends declared during the six months ended August 31, 2015 (dollars in thousands except per share amounts):

 

Date Declared

   Record Date      Payment Date      Amount
Per Share*
     Total
Amount
 

July 8, 2015

     August 3, 2015         August 31, 2015       $ 0.33       $ 1,844   

May 14, 2015

     May 26, 2015         June 5, 2015       $ 1.00       $ 5,429   

April 9, 2015

     May 4, 2015         May 29, 2015       $ 0.27       $ 1,466   
        

 

 

    

 

 

 

Total dividends declared

         $ 1.60       $ 8,739   
        

 

 

    

 

 

 

 

* Amount per share is calculated based on the number of shares outstanding at the date of declaration.

Note 12. Financial Highlights

The following is a schedule of financial highlights for the six months ended August 31, 2016 and August 31, 2015:

 

     August 31, 2016     August 31, 2015  

Per share data:

  

Net asset value at beginning of period

   $ 22.06      $ 22.70   

Net investment income(1)

     0.90        0.99   

Net realized and unrealized gains and losses on investments

     0.59        0.58   
  

 

 

   

 

 

 

Net increase in net assets from operations

     1.49        1.57   

Distributions declared from net investment income

     (1.04     (1.60
  

 

 

   

 

 

 

Total distributions to stockholders

     (1.04     (1.60

 

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     August 31, 2016     August 31, 2015  

Dilution(4)

   $ (0.12   $ (0.25

Net asset value at end of period

   $ 22.39      $ 22.42   

Net assets at end of period

   $ 128,563,622      $ 125,258,420   

Shares outstanding at end of period

     5,740,810        5,586,254   

Per share market value at end of period

   $ 17.93      $ 16.32   

Total return based on market value(2)

     34.41     13.63

Total return based on net asset value(3)

     8.19     8.38

Ratio/Supplemental data:

  

Ratio of net investment income to average net assets(8)

     9.53     10.19

Ratio of operating expenses to average net assets(7)

     7.09     6.50

Ratio of incentive management fees to average net assets(6)

     1.52     1.43

Ratio of interest and debt financing expenses to average net assets(7)

     7.40     6.65

Ratio of total expenses to average net assets(8)

     16.01     14.58

Portfolio turnover rate(5)

     20.98     13.96

 

(1) Net investment income per share is calculated using the weighted average shares outstanding during the period.
(2) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.
(3) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
(4) Represents the dilutive effect of issuing common stock below net asset value per share during the period in connection with the satisfaction of the Company’s annual RIC distribution requirement. See Note 11, Dividend.
(5) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value.
(6) Ratios are not annualized.
(7) Ratios are annualized.
(8) Ratios are annualized. Incentive management fees included within the ratio are not annualized.

Note 13. Subsequent Events

The Company has evaluated subsequent events through the filing of this Form 10-Q and determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the consolidated financial statements except for the following:

On October 5, 2016, the Company declared a dividend of $0.44 per share payable for the fiscal quarter ended August 31, 2016 to all stockholders of record at the close of business on October 31, 2016, with a payment date on November 9, 2016. Shareholders will have the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the Company’s DRIP.

On October 5, 2016, the Company’s board of directors determined to increase the cap on the payment or reimbursement of expenses by the Company under the Administration Agreement, from $1.3 million to $1.5 million, effective November 1, 2016.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Saratoga Investment Corp.

We have audited the accompanying consolidated statements of assets and liabilities of Saratoga Investment Corp. (the “Company”), including the consolidated schedules of investments, as of February 29, 2016 and February 28, 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for the years ended February 29, 2016, February 28, 2015 and February 28, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the entity’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 29, 2016, by correspondence with the custodian, debt agents and lenders. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saratoga Investment Corp. at February 29, 2016 and February 28, 2015, and the consolidated results of its operations, changes in its net assets and its cash flows for the years ended February 29, 2016, February 28, 2015 and February 28, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young

New York, New York

May 17, 2016

 

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Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

     As of  
     February 29, 2016     February 28, 2015  

ASSETS

    

Investments at fair value

    

Non-control/non-affiliate investments (amortized cost of $268,145,090 and $222,505,383, respectively)

   $ 271,168,186      $ 223,506,589   

Control investments (cost of $13,030,751 and $15,953,001, respectively)

     12,827,980        17,031,146   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $281,175,841 and $238,458,384, respectively)

     283,996,166        240,537,735   

Cash and cash equivalents

     2,440,277        1,888,158   

Cash and cash equivalents, reserve accounts

     4,594,506        18,175,214   

Interest receivable, (net of reserve of $728,519 and $309,498, respectively)

     3,195,919        2,469,398   

Management fee receivable

     170,016        171,913   

Other assets

     350,368        317,637   

Receivable from unsettled trades

     300,000        —     
  

 

 

   

 

 

 

Total assets

   $ 295,047,252      $ 263,560,055   
  

 

 

   

 

 

 

LIABILITIES

    

Revolving credit facility

   $ —        $ 9,600,000   

Deferred debt financing costs, revolving credit facility

     (515,906     (594,845

SBA debentures payable

     103,660,000        79,000,000   

Deferred debt financing costs, SBA debentures payable

     (2,493,303     (2,340,894

Notes payable

     61,793,125        48,300,000   

Deferred debt financing costs, notes payable

     (1,694,586     (1,847,564

Dividend payable

     875,599        402,200   

Base management and incentive fees payable

     5,593,956        5,835,941   

Accounts payable and accrued expenses

     908,330        835,189   

Interest and debt fees payable

     1,552,069        1,405,466   

Due to manager

     218,093        365,820   
  

 

 

   

 

 

 

Total liabilities

   $ 169,897,377      $ 140,961,313   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 8)

    

NET ASSETS

    

Common stock, par value $.001, 100,000,000 common shares authorized, 5,672,227 and 5,401,899 common shares issued and outstanding, respectively

   $ 5,672      $ 5,402   

Capital in excess of par value

     188,714,329        184,877,680   

Distribution in excess of net investment income

     (26,217,902     (23,905,603

Accumulated net realized loss from investments and derivatives

     (40,172,549     (40,458,088

Accumulated net unrealized appreciation on investments and derivatives

     2,820,325        2,079,351   
  

 

 

   

 

 

 

Total net assets

     125,149,875        122,598,742   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 295,047,252      $ 263,560,055   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

   $ 22.06      $ 22.70   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Statements of Operations

 

     For the year ended
February 29, 2016
     For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

INVESTMENT INCOME

       

Interest from investments

       

Non-control/Non-affiliate investments

   $ 23,165,823       $ 20,790,324      $ 15,832,083   

Payment-in-kind interest income from Non-control/Non-affiliate investments

     1,039,398         1,186,657        936,208   

Control investments

     2,665,648         2,707,230        3,410,868   
  

 

 

    

 

 

   

 

 

 

Total interest income

     26,870,869         24,684,211        20,179,159   

Interest from cash and cash equivalents

     5,420         3,801        7,932   

Management fee income

     1,494,779         1,520,205        1,775,141   

Other income

     1,679,602         1,167,144        931,513   
  

 

 

    

 

 

   

 

 

 

Total investment income

     30,050,670         27,375,361        22,893,745   
  

 

 

    

 

 

   

 

 

 

EXPENSES

       

Interest and debt financing expenses

     8,456,467         7,375,022        6,083,891   

Base management fees

     4,528,589         4,156,955        3,326,879   

Professional fees

     1,336,214         1,301,713        1,211,836   

Administrator expenses

     1,175,000         1,000,000        1,000,000   

Incentive management fees

     2,232,188         2,547,773        938,694   

Insurance

     330,867         337,335        442,977   

Directors fees and expenses

     204,000         210,761        204,607   

General & administrative

     995,205         478,299        789,208   

Excise tax expense

     113,808         293,653        —     

Other expense

     —           —          21,207   
  

 

 

    

 

 

   

 

 

 

Total expenses

     19,372,338         17,701,511        14,019,299   
  

 

 

    

 

 

   

 

 

 

NET INVESTMENT INCOME

     10,678,332         9,673,850        8,874,446   
  

 

 

    

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

       

Net realized gain from investments

     226,252         3,276,450        1,270,765   

Net unrealized appreciation (depreciation) on investments

     740,974         (1,942,936     (1,648,046
  

 

 

    

 

 

   

 

 

 

Net gain (loss) on investments

     967,226         1,333,514        (377,281
  

 

 

    

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 11,645,558       $ 11,007,364      $ 8,497,165   
  

 

 

    

 

 

   

 

 

 

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 2.09       $ 2.04      $ 1.73   

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED

     5,582,453         5,385,049        4,920,517   

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2016

 

Company

 

Industry

 

Investment
Interest Rate /
Maturity

  Principal/
Number of
Shares
    Cost     Fair
Value(c)
    % of
Net Assets
 

Non-control/Non-affiliated investments—216.6%(b)

           

National Truck Protection Co., Inc.(d),(g)

  Automotive Aftermarket   Common Stock     1,116      $ 1,000,000      $ 1,695,303        1.4

National Truck Protection Co., Inc.(d)

  Automotive Aftermarket   First Lien Term Loan 15.50% Cash, 9/13/2018   $ 6,776,770        6,776,770        6,776,770        5.4

Take 5 Oil Change, L.L.C.(d),(g)

  Automotive Aftermarket   Common Stock     7,128        480,535        6,235,209        5.0
       

 

 

   

 

 

   

 

 

 
    Total Automotive Aftermarket       8,257,305        14,707,282        11.8
       

 

 

   

 

 

   

 

 

 

Legacy Cabinets Holdings(d),(g)

  Building Products   Common Stock Voting A-1     2,535        220,900        2,676,909        2.1

Legacy Cabinets Holdings(d),(g)

  Building Products   Common Stock Voting B-1     1,600        139,424        1,689,568        1.3

Polar Holding Company, Ltd.(a),(i)

  Building Products   First Lien Term Loan 10.00% Cash, 9/30/2016   $ 2,000,000        2,000,000        2,000,000        1.6
       

 

 

   

 

 

   

 

 

 
    Total Building Products       2,360,324        6,366,477        5.0
       

 

 

   

 

 

   

 

 

 

BMC Software, Inc.(d)

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 5,671,667        5,633,920        4,520,318        3.6

Courion Corporation

  Business Services   Second Lien Term Loan 11.00% Cash, 6/1/2021   $ 15,000,000        14,856,720        14,850,000        11.9

Dispensing Dynamics International(d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 12,000,000        12,025,101        10,950,000        8.8

Easy Ice, LLC(d)

  Business Services   First Lien Term Loan 9.50% Cash, 1/15/2020   $ 14,000,000        13,873,485        13,806,098        11.0

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 10.00% Cash, 1/23/2020   $ 8,400,000        8,305,033        8,568,000        6.8

Emily Street Enterprises, L.L.C.(g)

  Business Services   Warrant Membership Interests     49,318        400,000        577,020        0.5

Help/Systems Holdings, Inc.(Help/Systems, LLC)(d)

  Business Services   First Lien Term Loan 6.25% Cash, 10/8/2021   $ 5,000,000        4,904,573        4,895,000        3.9

Help/Systems Holdings, Inc.(Help/Systems, LLC)(d)

  Business Services   Second Lien Term Loan 10.50% Cash, 10/8/2022   $ 3,000,000        2,912,784        2,910,000        2.3

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 8.00% Cash, 11/29/2017   $ 5,259,171        5,224,422        5,259,171        4.2

PCF Number 4, Inc.

  Business Services   Second Lien Term Loan 13.50% (12.50% Cash/1.00% PIK), 8/28/2021   $ 13,000,000        12,870,023        12,870,000        10.3

Vector Controls Holding Co., LLC(d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 9,035,515        8,952,442        9,035,515        7.2

Vector Controls Holding Co., LLC(d),(g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     343        —          354,819        0.3
       

 

 

   

 

 

   

 

 

 
    Total Business Services       89,958,503        88,595,941        70.8
       

 

 

   

 

 

   

 

 

 

Advanced Air & Heat of Florida, LLC

  Consumer Products   First Lien Term Loan 9.50% Cash, 7/17/2020   $ 6,800,000        6,733,661        6,800,000        5.4

Targus Holdings, Inc.(d),(g)

  Consumer Products   Common Stock     210,456        1,791,242        —          0.0

Targus Holdings, Inc.(d)

  Consumer Products   Second Lien Term Loan A-2 15.00% Cash, 12/31/2019   $ 210,456        210,456        210,456        0.2

 

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Company

 

Industry

 

Investment
Interest Rate /
Maturity

  Principal/
Number of
Shares
    Cost     Fair
Value(c)
    % of
Net Assets
 

Targus Holdings, Inc.(d)

  Consumer Products   Second Lien Term Loan B 15.00% Cash, 12/31/2019   $ 631,369        631,369        631,369        0.5
       

 

 

   

 

 

   

 

 

 
    Total Consumer Products       9,366,728        7,641,825        6.1
       

 

 

   

 

 

   

 

 

 

Expedited Travel
L.L.C.(g)

  Consumer Services   Common Stock     1,000,000        1,000,000        1,647,767        1.3

Expedited Travel L.L.C.

  Consumer Services   First Lien Term Loan 10.00% Cash, 10/10/2019   $ 11,475,490        11,401,380        11,647,623        9.3

My Alarm Center, LLC

  Consumer Services   Second Lien Term Loan 12.00% Cash, 7/9/2019   $ 7,500,000        7,500,000        7,450,500        6.0

PrePaid Legal Services, Inc.(d)

  Consumer Services   First Lien Term Loan 6.50% Cash, 7/1/2019   $ 1,572,921        1,562,787        1,556,248        1.2

PrePaid Legal Services, Inc.(d)

  Consumer Services   Second Lien Term Loan 10.25% Cash, 7/1/2020   $ 10,000,000        9,962,104        9,827,000        7.9

Prime Security Services, LLC

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2022   $ 12,000,000        11,829,030        10,980,000        8.8
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       43,255,301        43,109,138        34.5
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp.,
L.L.C.(d),(g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

M/C Acquisition Corp., L.L.C.(d)

  Education   First Lien Term Loan 1.00% Cash, 3/31/2016   $ 2,321,073        1,193,790        8,087        0.0

Texas Teachers of Tomorrow, LLC(g),(h)

  Education   Common Stock     750        750,000        785,475        0.6

Texas Teachers of Tomorrow, LLC

  Education   Second Lien Term Loan 10.75% Cash, 6/2/2021   $ 10,000,000        9,902,816        9,900,000        7.9
       

 

 

   

 

 

   

 

 

 
    Total Education       11,876,847        10,693,562        8.5
       

 

 

   

 

 

   

 

 

 

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 9.75% Cash, 7/16/2017   $ 9,622,319        9,527,041        9,131,048        7.3
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       9,527,041        9,131,048        7.3
       

 

 

   

 

 

   

 

 

 

Bristol Hospice, LLC

  Healthcare Services   Senior Secured Note 11.00% (10.00% Cash/1.00% PIK), 11/29/2018   $ 5,404,747        5,339,820        5,404,747        4.3

Roscoe Medical,
Inc.(d),(g)

  Healthcare Services   Common Stock     5,000        500,000        334,000        0.3

Roscoe Medical, Inc.

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,141,519        3,822,000        3.0

Ohio Medical, LLC(g)

  Healthcare Services   Common Stock     5,000        500,000        500,000        0.4

Ohio Medical, LLC

  Healthcare Services   Senior Subordinated Note 12.00% , 7/15/2021   $ 7,300,000        7,228,452        7,227,000        5.8

Smile Brands Group
Inc.(d)

  Healthcare Services   First Lien Term Loan 10.50% (9.00% Cash/1.50% PIK), 8/16/2019   $ 4,420,900        4,362,266        3,216,647        2.6

Zest Holdings, LLC(d)

  Healthcare Services   First Lien Term Loan 5.25% Cash, 8/16/2020   $ 4,207,821        4,142,093        4,130,692        3.3
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       26,214,150        24,635,086        19.7
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 8,937,982        8,812,479        8,937,983        7.1

HMN Holdco, LLC

  Media   First Lien Term Loan 10.00% Cash, 5/16/2019   $ 1,600,000        1,572,821        1,600,000        1.3

HMN Holdco, LLC

  Media   Class A Series     4,264        61,647        314,683        0.3

HMN Holdco, LLC

  Media   Class A Warrant     30,320        438,353        1,889,542        1.5

HMN Holdco, LLC(g)

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,872        —          3,309,121        2.6

 

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Table of Contents

Company

 

Industry

 

Investment
Interest Rate /
Maturity

  Principal/
Number
of Shares
    Cost     Fair
Value(c)
    % of
Net Assets
 

HMN Holdco, LLC(g)

  Media   Warrants to Purchase Limited Liability Company Interests     8,139        —          523,012        0.4
       

 

 

   

 

 

   

 

 

 
    Total Media       10,885,300        16,574,341        13.2
       

 

 

   

 

 

   

 

 

 

Elyria Foundry Company, L.L.C.

  Metals   Common Stock     35,000        9,217,564        2,026,150        1.6

Elyria Foundry Company, L.L.C.

  Metals   Revolver 10.00% Cash, 3/31/2017   $ 8,500,000        8,500,000        8,500,000        6.8
       

 

 

   

 

 

   

 

 

 
    Total Metals       17,717,564        10,526,150        8.4
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC(g)

  Software as a Service   Common Stock     100,000        100,000        169,850        0.1

Avionte Holdings, LLC

  Software as a Service   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 2,406,342        2,376,045        2,382,844        1.9

Avionte Holdings,
LLC(j),(k)

  Software as a Service   Delayed Draw Term Loan A 9.75% Cash, 1/8/2019   $ —          —          —          0.0

Censis Technologies, Inc.

  Software as a Service   First Lien Term Loan B 11.00% Cash, 7/24/2019   $ 11,550,000        11,377,810        11,459,418        9.2

Censis Technologies,
Inc.(g),(h)

  Software as a Service   Limited Partner Interests     999        999,000        810,642        0.7

Finalsite Holdings, Inc.

  Software as a Service   Second Lien Term Loan 10.25% Cash, 5/21/2020   $ 7,500,000        7,440,729        7,500,000        6.0

Identity Automation
Systems(g)

  Software as a Service   Common Stock Class A Units     232,616        232,616        427,409        0.3

Identity Automation Systems

  Software as a Service   First Lien Term Loan 10.25% Cash, 12/18/2020   $ 6,900,000        6,842,573        6,900,000        5.5

Identity Automation Systems(j),(k)

  Software as a Service   Delayed Draw Term Loan 10.25% Cash, 12/18/2020   $ —          —          —          0.0

Mercury Network, LLC

  Software as a Service   First Lien Term Loan 9.75% Cash, 4/24/2020   $ 9,025,000        8,944,211        9,025,000        7.2

Mercury Network,
LLC(g)

  Software as a Service   Common Stock     413,043        413,043        512,173        0.4
       

 

 

   

 

 

   

 

 

 
    Total Software as a Service       38,726,027        39,187,336        31.3
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

          268,145,090        271,168,186        216.6
       

 

 

   

 

 

   

 

 

 

Control investments—10.3%(b)

           

Saratoga Investment Corp. CLO 2013-1, Ltd.(a),(d),(e),(f)

  Structured Finance Securities   Other/Structured Finance Securities 16.14%, 10/17/2023   $ 30,000,000        13,030,751        12,827,980        10.3
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          13,030,751        12,827,980        10.3
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—226.9%(b)

        $ 281,175,841      $ 283,996,166        226.9
       

 

 

   

 

 

   

 

 

 

 

    Principal/
Number
of Shares
    Cost     Fair
Value(c)
    % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve
accounts—5.6%

       

U.S. Bank Money Market(l)

  $ 7,034,783      $ 7,034,783      $ 7,034,783        5.6
   

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

  $ 7,034,783      $ 7,034,783      $ 7,034,783        5.6
   

 

 

   

 

 

   

 

 

 

 

(a) Represents a non-qualifying investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 5.2% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

 

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Table of Contents
(b) Percentages are based on net assets of $125,149,875 as of February 29, 2016.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 7 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 16.14% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales (Cost)      Interest
Income
     Management
Fee Income
     Net Realized
Gains/(Losses)
     Net
Unrealized
Depreciation
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 2,665,648       $ 1,494,779       $ —         $ (202,771
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(g) Non-income producing at February 29, 2016.
(h) Includes securities issued by an affiliate of the company.
(i) Non-U.S. company. The principal place of business for Polar Holding Company, Ltd. is Canada.
(j) The investment has an unfunded commitment as of February 29, 2016 (see Note 8).
(k) The entire commitment was unfunded at February 29, 2016. As such, no interest is being earned on this investment.
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s Consolidated Statements of Assets and Liabilities as of February 29, 2016.

 

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Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2015

 

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Non-control/Non-affiliated
investments—182.3%(b)

           

National Truck Protection Co.,
Inc.(d),(g)

  Automotive Aftermarket   Common Stock     1,116      $ 1,000,000      $ 1,769,432        1.4

National Truck Protection Co., Inc.(d)

  Automotive Aftermarket   First Lien Term Loan 15.50% Cash, 9/13/2018   $ 7,737,848        7,737,848        7,737,848        6.3

Take 5 Oil Change,
L.L.C.(d),(g)

  Automotive Aftermarket   Common Stock     7,128        480,535        1,472,502        1.2
       

 

 

   

 

 

   

 

 

 
    Total Automotive Aftermarket       9,218,383        10,979,782        8.9
       

 

 

   

 

 

   

 

 

 

Legacy Cabinets
Holdings(d),(g)

  Building Products   Common Stock Voting A-1     2,535        220,900        1,493,470        1.2

Legacy Cabinets
Holdings(d),(g)

  Building Products   Common Stock Voting B-1     1,600        139,424        942,624        0.8

Polar Holding Company,
Ltd.(a),(i)

  Building Products   First Lien Term Loan 10.00% Cash, 8/13/2016   $ 1,000,000        1,000,000        1,000,000        0.8
       

 

 

   

 

 

   

 

 

 
    Total Building Products       1,360,324        3,436,094        2.8
       

 

 

   

 

 

   

 

 

 

BMC Software, Inc.(d)

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 5,731,667        5,686,622        5,478,327        4.5

Dispensing Dynamics International(d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 7,000,000        6,910,112        7,350,000        6.0

Easy Ice, LLC(d)

  Business Services   First Lien Term Loan 9.50% Cash, 1/15/2020   $ 12,000,000        11,872,639        12,000,000        9.6

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 10.00% Cash, 1/23/2020   $ 8,400,000        8,260,787        8,400,000        6.9

Emily Street Enterprises,
L.L.C.(g)

  Business Services   Warrant Membership Interests     49,318        400,000        391,584        0.3

Help/Systems Holdings, Inc.(Help/Systems, LLC)(d)

  Business Services   First Lien Term Loan 5.50% Cash, 6/28/2019   $ 1,955,051        1,941,417        1,925,725        1.6

Help/Systems Holdings, Inc.(Help/Systems, LLC)(d)

  Business Services   Second Lien Term Loan 9.50% Cash, 6/28/2020   $ 2,000,000        1,975,767        1,965,000        1.6

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 11.00% Cash, 11/29/2017   $ 5,259,171        5,205,142        5,259,171        4.3

Knowland Technology Holdings,
L.L.C.(j),(k),(l)

  Business Services   Delayed Draw Term Loan 11.00% Cash, 11/29/2017   $ —          —          —          0.0

Vector Controls Holding Co., LLC(d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 9,436,991        9,312,095        9,295,437        7.6

Vector Controls Holding Co., LLC(d),(g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     101        —          62,341        0.1
       

 

 

   

 

 

   

 

 

 
    Total Business Services       51,564,581        52,127,585        42.5
       

 

 

   

 

 

   

 

 

 

Advanced Air & Heat of Florida, LLC

  Consumer Products   First Lien Term Loan 10.00% Cash, 1/31/2019   $ 5,955,441        5,881,694        5,955,441        5.0

Targus Group International,
Inc.(d)

  Consumer Products   First Lien Term Loan, 12.00% (11.00% Cash/1.00 PIK), 5/24/2016   $ 3,569,127        3,537,732        3,283,597        2.7

Targus Holdings, Inc.(d),(g)

  Consumer Products   Common Stock     62,413        566,765        —          0.0

Targus Holdings, Inc.(d),(g)

  Consumer Products   Unsecured Note 10.00% PIK, 6/14/2019   $ 2,054,158        2,054,158        —          0.0

 

F-59


Table of Contents

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Targus Holdings, Inc.(d),(g)

  Consumer Products   Unsecured Note 16.00% PIK, 10/26/2018   $ 429,797        425,227        —          0.0
       

 

 

   

 

 

   

 

 

 
    Total Consumer Products       12,465,576        9,239,038        7.7
       

 

 

   

 

 

   

 

 

 

CFF Acquisition L.L.C.(d)

  Consumer Services   First Lien Term Loan 7.50% Cash, 7/31/2015   $ 716,179        714,270        716,179        0.6

Expedited Travel L.L.C.(g)

  Consumer Services   Common Stock     1,000,000        1,000,000        1,069,157        0.9

Expedited Travel L.L.C.

  Consumer Services   First Lien Term Loan 10.00% Cash, 10/10/2019   $ 13,750,000        13,609,579        13,750,000        11.2

PrePaid Legal Services, Inc.(d)

  Consumer Services   First Lien Term Loan 6.25% Cash, 7/1/2019   $ 3,709,677        3,680,863        3,652,919        3.0

PrePaid Legal Services, Inc.(d)

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2020   $ 5,000,000        4,937,212        4,981,000        4.1
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       23,941,924        24,169,255        22.3
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp., L.L.C.(d),(g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

M/C Acquisition Corp.,
L.L.C.(d)

  Education   First Lien Term Loan 1.00% Cash, 3/31/2015   $ 2,362,978        1,235,695        100,951        0.1
       

 

 

   

 

 

   

 

 

 
    Total Education       1,265,936        100,951        0.1
       

 

 

   

 

 

   

 

 

 

Group Dekko, Inc.(d)

  Electronics   Second Lien Term Loan 11.00% (10.00% Cash/1.00% PIK), 5/1/2016   $ 6,950,048        6,950,048        6,667,181        5.4
       

 

 

   

 

 

   

 

 

 
    Total Electronics       6,950,048        6,667,181        5.4
       

 

 

   

 

 

   

 

 

 

TB Corp.(d)

  Food and Beverage   First Lien Term Loan 5.76% Cash, 6/19/2018   $ 5,050,436        5,038,131        5,037,810        4.0

TB Corp.(d)

  Food and Beverage   Unsecured Note 13.50% (12.00% Cash/1.50% PIK), 12/20/2018   $ 2,546,121        2,512,732        2,546,121        2.1

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 7.75% Cash, 7/16/2017   $ 2,791,595        2,791,595        2,763,679        2.3
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       10,342,458        10,347,610        8.4
       

 

 

   

 

 

   

 

 

 

Bristol Hospice, LLC

  Healthcare Services   Senior Secured Note 11.00% (10.00% Cash/1.00% PIK), 11/29/2018   $ 5,459,134        5,374,249        5,459,134        4.4

Bristol Hospice, LLC(j),(l)

  Healthcare Services   Delayed Draw Term Loan 11.00% (10.00% Cash/1.00% PIK), 11/29/2018   $ —          —          —          0.0

Roscoe Medical, Inc.(d),(g)

  Healthcare Services   Common Stock     5,000        500,000        294,500        0.2

Roscoe Medical, Inc.

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,129,704        3,990,000        3.3

Smile Brands Group Inc.(d)

  Healthcare Services   First Lien Term Loan 7.50% Cash, 8/16/2019   $ 4,443,750        4,373,369        4,159,350        3.4

Surgical Specialties Corporation (US), Inc.(d)

  Healthcare Services   First Lien Term Loan 7.25% Cash, 8/22/2018   $ 2,312,500        2,295,234        2,277,813        1.9

Zest Holdings, LLC(d)

  Healthcare Services   First Lien Term Loan 5.25% Cash, 8/16/2020   $ 4,443,919        4,361,438        4,460,806        3.6
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       21,033,994        20,641,603        16.8
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

  Media   First Lien Term Loan 14.00% (12.00% Cash/2.00% PIK), 5/16/2019   $ 9,368,327        9,206,438        9,579,115        7.9

HMN Holdco, LLC

  Media   First Lien Term Loan 12.00% Cash, 5/16/2020   $ 1,600,000        1,569,149        1,576,000        1.3

HMN Holdco, LLC(j),(k)

  Media   Deferred Draw Term Loan 12.00% Cash, 5/16/2020   $ —          —          (36,000     0.0

 

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Table of Contents

Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

HMN Holdco, LLC(g)

  Media   Class A Series     4,264        61,647        223,604        0.2

HMN Holdco, LLC(g)

  Media   Class A Warrant     30,320        438,353        1,247,365        1.0

HMN Holdco, LLC(g)

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,872        —          2,085,128        1.7

HMN Holdco, LLC(g)

  Media   Warrants to Purchase Limited Liability Company Interests     8,139        —          350,464        0.3
       

 

 

   

 

 

   

 

 

 
    Total Media       11,275,587        15,025,676        12.4
       

 

 

   

 

 

   

 

 

 

Elyria Foundry Company, L.L.C.(d),(g)

  Metals   Common Stock     35,000        9,217,563        6,762,000        5.5

Elyria Foundry Company, L.L.C.(d)

  Metals   Revolver 9.00% Cash, 12/31/2020   $ 8,500,000        8,500,000        8,500,000        6.8
       

 

 

   

 

 

   

 

 

 
    Total Metals       17,717,563        15,262,000        12.3
       

 

 

   

 

 

   

 

 

 

Network Communications, Inc.(d),(g)

  Publishing   Common Stock     380,572        —          300,652        0.2

Network Communications, Inc.(d)

  Publishing   Unsecured Notes 8.60% PIK, 1/14/2020   $ 2,732,976        2,374,260        1,684,118        1.4
       

 

 

   

 

 

   

 

 

 
    Total Publishing       2,374,260        1,984,770        1.6
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC(g)

  Software as a Service   Common Stock     100,000        100,000        163,000        0.1

Avionte Holdings, LLC

  Software as a Service   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 3,000,000        2,951,759        3,000,000        2.4

Avionte Holdings, LLC(j),(l)

  Software as a Service   Delayed Draw Term Loan A 9.75% Cash, 1/8/2019   $ —           —          —          0.0

Censis Technologies, Inc.

  Software as a Service   First Lien Term Loan B 11.00% Cash, 7/24/2019   $ 11,850,000        11,634,939        11,850,000        9.7

Censis Technologies, Inc.(g),(h)

  Software as a Service   Limited Partner Interests     999        999,000        981,627        0.8

Community Investors, Inc.(g)

  Software as a Service   Common Stock     1,282        1,282        1,769        0.0

Community Investors, Inc.

  Software as a Service   First Lien, Last Out Term Loan 11.78% Cash, 9/30/2019   $ 12,000,000        12,000,000        12,000,000        9.7

Community Investors, Inc.

  Software as a Service   First Lien Term Loan B 12.25% Cash, 12/31/2020   $ 2,500,000        2,500,000        2,500,000        2.0

Community Investors, Inc.(g)

  Software as a Service   Preferred Stock 10%     63,463        149,138        87,579        0.1

Community Investors, Inc.

  Software as a Service   Preferred Stock - A2 10%     38,641        100,853        53,325        0.0

Community Investors, Inc.(g)

  Software as a Service   Preferred Stock - A Shares 10%     135,584        135,584        187,106        0.2

Finalsite Holdings, Inc.

  Software as a Service   Second Lien Term Loan 10.25% Cash, 11/21/2019   $ 7,500,000        7,429,305        7,500,000        6.1

Identity Automation Systems(g)

  Software as a Service   Common Stock Class A Units     232,616        232,616        225,638        0.2

Identity Automation Systems

  Software as a Service   First Lien Term Loan 10.25% Cash, 8/25/2019   $ 4,475,000        4,433,897        4,475,000        3.7

Pen-Link, Ltd.(d)

  Software as a Service   Second Lien Term Loan 12.50% Cash, 5/26/2019   $ 10,500,000        10,326,376        10,500,000        8.6
       

 

 

   

 

 

   

 

 

 
    Total Software as a Service       52,994,749        53,525,044        43.6
       

 

 

   

 

 

   

 

 

 

 

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Company

 

Industry

 

Investment

Interest Rate /

Maturity

  Principal/
Number of
Shares
    Cost     Fair Value(c)     % of
Net Assets
 

Sub Total Non-control/Non-affiliated investments

          222,505,383        223,506,589        182.3
       

 

 

   

 

 

   

 

 

 

Control investments—13.9%(b)

           

Saratoga Investment Corp. CLO 2013-1, Ltd.(a),(d),(e),(f)

  Structured Finance Securities   Other/Structured Finance Securities 14.32%, 10/17/2023   $ 30,000,000        15,953,001        17,031,146        13.9
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          15,953,001        17,031,146        13.9
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—196.2%(b)

        $ 238,458,384      $ 240,537,735        196.2
       

 

 

   

 

 

   

 

 

 

 

     Principal/
Number of
Shares
     Cost      Fair Value (c)      % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts—16.4%

           

U.S. Bank Money Market(m)

   $ 20,063,372       $ 20,063,372       $ 20,063,372         16.4
     

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

   $ 20,063,372       $ 20,063,372       $ 20,063,372         16.4
     

 

 

    

 

 

    

 

 

 

 

(a) Represents a non-qualifyng investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 7.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $122,598,742, as of February 28, 2015.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors. (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 7 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 14.32% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales
(Cost)
     Interest
Income
     Management
Fee Income
     Net
Realized
Gains/
(Losses)
     Net
Unrealized
Appreciation
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 2,707,230       $ 1,520,205       $ —         $ 1,078,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(g) Non-income producing at February 28, 2015.
(h) Includes securities issued by an affiliate of the company.
(i) Non-U.S. company. The principal place of business for Polar Holding Company, Ltd. is Canada.
(j) The investment has an unfunded commitment as of February 28, 2015 (See Note 8).
(k) Includes an analysis of the value of any unfunded loan commitments.
(l) The entire commitment was unfunded at February 28, 2015. As such, no interest is being earned on this investment.
(m) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s Consolidated Statements of Assets and Liabilities as of February 28, 2015.

 

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Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

 

     For the year ended
February 29, 2016
    For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

INCREASE FROM OPERATIONS:

      

Net investment income

   $ 10,678,332      $ 9,673,850      $ 8,874,446   

Net realized gain from investments

     226,252        3,276,450        1,270,765   

Net unrealized appreciation (depreciation) on investments

     740,974        (1,942,936     (1,648,046
  

 

 

   

 

 

   

 

 

 

Net increase in net assets from operations

     11,645,558        11,007,364        8,497,165   
  

 

 

   

 

 

   

 

 

 

DECREASE FROM SHAREHOLDER DISTRIBUTIONS:

  

   

Distributions declared

     (13,045,149     (2,156,740     (12,534,807
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

     (13,045,149     (2,156,740     (12,534,807
  

 

 

   

 

 

   

 

 

 

CAPITAL SHARE TRANSACTIONS:

      

Stock dividend distribution

     4,665,447        320,189        10,027,697   

Repurchases of common stock

     (356,792     —          —     

Offering costs

     (357,931     —          —     
  

 

 

   

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     3,950,724        320,189        10,027,697   
  

 

 

   

 

 

   

 

 

 

Total increase in net assets

     2,551,133        9,170,813        5,990,055   

Net assets at beginning of period

     122,598,742        113,427,929        107,437,874   
  

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ 125,149,875      $ 122,598,742      $ 113,427,929   
  

 

 

   

 

 

   

 

 

 

Net asset value per common share

   $ 22.06      $ 22.70      $ 21.08   

Common shares outstanding at end of period

     5,672,227        5,401,899        5,379,616   

Distribution in excess of net investment income

   $ (26,217,902   $ (23,905,603   $ (31,123,667

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Statements of Cash Flows

 

     For the year ended
February 29, 2016
    For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

Operating activities

      

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 11,645,558      $ 11,007,364      $ 8,497,165   

ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:

      

Paid-in-kind interest income

     (966,906     (1,204,458     (1,007,494

Net accretion of discount on investments

     (507,180     (540,069     (666,849

Amortization of deferred debt financing costs

     913,773        929,773        903,289   

Net realized gain from investments

     (226,252     (3,276,450     (1,270,765

Net unrealized (appreciation) depreciation on investments

     (740,974     1,942,936        1,648,046   

Proceeds from sale and redemption of investments

     68,174,143        73,257,332        71,606,736   

Purchase of investments

     (109,191,262     (104,872,326     (121,073,990

(Increase) decrease in operating assets:

      

Cash and cash equivalents, reserve accounts

     13,580,708        (14,882,101     8,793,029   

Interest receivable

     (726,521     102,455        317,505   

Management fee receivable

     1,897        (21,807     65,747   

Other assets

     (128,370     (34,930     68,946   

Receivable from unsettled trades

     (300,000     —          1,817,074   

Increase (decrease) in operating liabilities:

      

Management and incentive fees payable

     (241,985     482,890        (405,158

Accounts payable and accrued expenses

     73,141        10,621        389,530   

Interest and debt fees payable

     146,603        532,331        615,339   

Due to manager

     (147,727     (32,334     175,641   
  

 

 

   

 

 

   

 

 

 

NET CASH USED BY OPERATING ACTIVITIES

     (18,641,354     (36,598,773     (29,526,209
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Borrowings on debt

     35,260,000        52,300,000        18,000,000   

Paydowns on debt

     (20,200,000     (13,700,000     (28,300,000

Issuance of notes

     13,493,125        —          48,300,000   

Debt financing cost

     (1,096,556     (1,972,618     (2,821,806

Repurchases of common stock

     (356,792     —          —     

Payments of cash dividends

     (7,906,304     (1,434,349     (2,507,112
  

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     19,193,473        35,193,033        32,671,082   
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     552,119        (1,405,740     3,144,873   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     1,888,158        3,293,898        149,025   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,440,277      $ 1,888,158      $ 3,293,898   
  

 

 

   

 

 

   

 

 

 

Supplemental Information:

      

Interest paid during the period

   $ 7,396,091      $ 5,912,862      $ 4,565,262   

Supplemental non-cash information:

      

Paid-in-kind interest income

   $ 966,906      $ 1,204,458      $ 1,007,494   

Net accretion of discount on investments

   $ 507,180      $ 540,069      $ 666,849   

Amortization of deferred debt financing costs

   $ 913,773      $ 929,773      $ 903,289   

Stock dividend distribution

   $ 4,665,447      $ 320,189      $ 10,027,697   

See accompanying notes to consolidated financial statements.

 

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SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

Note 1. Organization

Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company commenced operations on March 23, 2007 as GSC Investment Corp. and completed the initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code”). The Company expects to continue to qualify and to elect to be treated for tax purposes as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments.

GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.

On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.

On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.”.

The Company is externally managed and advised by the investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant to the Management Agreement. Prior to July 30, 2010, the Company was managed and advised by GSCP (NJ), L.P.

The Company has established wholly owned subsidiaries, SIA Avionte, Inc, SIA Mercury, Inc., SIA TT Inc., and SIA Vector Inc., which are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax blockers are consolidated for accounting purposes, but are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received a Small Business Investment Company (“SBIC”) license from the Small Business Administration (“SBA”).

On April 2, 2015, the SBA issued a “green light” or “go forth” letter inviting the Company to continue the application process to obtain a license to form and operate its second SBIC subsidiary. If approved, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the first license. Receipt of a green light letter from the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license and the Company has received no assurance or indication from the SBA that it will receive an SBIC license, or of the timeframe in which it would receive a license, should one be granted.

 

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Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), are stated in U.S. dollars and include the accounts of the Company and its special purpose financing subsidiary, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC). All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiary, except as stated otherwise.

The Company and SBIC LP are both considered to be investment companies for financial reporting purposes and have applied the guidance in Topic 946, “Financial Services—Investment Companies”. There have been no changes to the Company or SBIC LP’s status as investment companies during the year ended February 29, 2016.

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying consolidated financial statements in conformity with U.S. 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 financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.

Correction of Immaterial Errors Related to Prior Period

During the year ended February 28, 2015, the Company identified errors related to the accounting for the capital gains portion of the incentive fee for the years ended February 28, 2014, February 28, 2013 and February 29, 2012, as well as the cumulative impact of these errors as of February 28, 2014.

The Company assessed the materiality of these errors and concluded they were not material to any prior annual periods, but the cumulative impact of correcting them in the year ended February 28, 2015 would be quantitatively material to the results of operations of the Company for the year then ended February 28, 2015, if the entire adjustment was recorded in that period. Therefore, the consolidated financial statements as of and for the years ended February 28, 2014 have been corrected.

The effects of these prior period errors on the consolidated financial statements are as follows (in thousands, except per share amounts):

Revised Consolidated Statement of Operations

 

     Year Ended February 28, 2014  
     As
Previously
Reported
     Adjustments      As
Revised
 

EXPENSES

        

Incentive management fees

   $ 692       $ 247       $ 939   

Total expenses

     13,772         247         14,019   

NET INVESTMENT INCOME

     9,121         (247      8,874   

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 8,744       $ (247    $ 8,497   

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 1.78       $ (0.05    $ 1.73   
  

 

 

    

 

 

    

 

 

 

 

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Revised Consolidated Statement of Changes in Net Assets

 

     Year Ended February 28, 2014  
     As
Previously
Reported
     Adjustments      As
Revised
 

INCREASE FROM OPERATIONS

        

Net investment income

   $ 9,121       $ (247    $ 8,874   

Net increase in net assets from operations

     8,744         (247      8,497   

Total increase in net assets

     6,237         (247      5,990   

Net assets at beginning of period

     108,687         (1,249      107,438   
  

 

 

    

 

 

    

 

 

 

Net assets at end of period

   $ 114,924       $ (1,496    $ 113,428   
  

 

 

    

 

 

    

 

 

 

Net asset value per common share

   $ 21.36       $ (0.28    $ 21.08   

Distribution in excess of net investment income

   $ (29,628    $ (1,496    $ (31,124

Revised Consolidated Statement of Cash Flows

 

     Year Ended February 28, 2014  
     As
Previously
Reported
     Adjustments      As
Revised
 

Operating activities

        

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 8,744       $ (247    $ 8,497   
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in operating liabilities:

        

Management and incentive fees payable

     (652      247         (405

Cash and Cash Equivalents

Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as, a money market fund if such investment would cause the Company to exceed any of the following limitations:

 

    we were to own more than 3.0% of the total outstanding voting stock of the money market fund;

 

    we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets; or

 

    we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10.0% of the value of our total assets.

As of February 29, 2016, the Company did not exceed any of these limitations.

Cash and Cash Equivalents, Reserve Accounts

Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts in the form of cash and short-term liquid investments in money market funds representing payments received on secured investments or other reserved amounts associated with our $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.

 

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Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.

Investment Valuation

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

    Each investment is initially valued by the responsible investment professionals of our Manager and preliminary valuation conclusions are documented and discussed with the senior management of our Manager; and

 

    An independent valuation firm engaged by our board of directors reviews approximately one quarter of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by the independent valuation firm at least annually.

In addition, all our investments are subject to the following valuation process:

 

    The audit committee of our board of directors reviews each preliminary valuation and our Manager and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

    Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of our Manager, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

 

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Our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Derivative Financial Instruments

We account for derivative financial instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.

Investment Transactions and Income Recognition

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets, (“ASC 325-40”), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

 

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Other Income

Other income includes dividends received, origination fees, structuring fees and advisory fees, and is recorded in the consolidated statement of operations when earned.

Paid-in-Kind Interest

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

Deferred Debt Financing Costs

Financing costs incurred in connection with our credit facility are deferred and amortized using the straight line method over the life of their respective facilities. Financing costs incurred in connection with our SBA debentures are deferred and amortized using the effective yield method over the life of the debentures.

In April 2015, the FASB has issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and early adoption is allowed, and is to be applied on a retrospective basis. The Company has adopted the provisions of ASU 2015-03 as of February 28, 2015, by reclassifying deferred debt financing costs from within total assets to within total liabilities as a contra-liability. The adoption of the provisions of ASU 2015-03 did not materially impact the Company’s consolidated financial position or results of operations. Prior period amounts were reclassified to conform to the current period presentation.

Contingencies

In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.

In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.

Income Taxes

The Company has filed an election to be treated for tax purposes as a RIC under Subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes.

In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

 

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Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

ASC 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. During the fiscal year ended February 29, 2016, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2013, 2014 and 2015 federal tax years for the Company remain subject to examination by the IRS. As of February 29, 2016 and February 28, 2015, there were no uncertain tax positions. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

Dividends

Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.

We have adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.

Capital Gains Incentive Fee

The Company records an expense accrual on the consolidated statements of operations, relating to the capital gains incentive fee payable on the consolidated statements of assets and liabilities, by the Company to its investment adviser when the net realized and unrealized gain on its investments exceed all net realized and unrealized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains net of realized and unrealized losses for the period.

 

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New Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact the adoption of this standard has on the Company’s consolidated financial statements and disclosures.

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 updates the accounting guidance included in ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated accounting guidance provided by ASU 2015-15 was the result of the Emerging Issues Task Force meeting, held on June 18, 2015, at which the SEC staff stated that the SEC would not object to an entity deferring and presenting costs related to revolving debt arrangements as an asset. As the Company previously adopted the provisions of ASU 2015-03 and reclassified all deferred debt financing costs from within total assets to within total liabilities as a contra-liability effective as of February 28, 2015, it has chosen not to avail itself of the updated accounting treatment provided by ASU 2015-15 and continues to include all deferred financing costs as a contra-liability within total liabilities.

In February 2015, the FASB issued ASU 2015-02, Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required under GAAP and ends the deferral granted to investment companies from applying the variable interest entity guidance. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015 and early adoption is permitted. Management does not believe these changes will have a material impact on the Company’s consolidated financial statements and disclosures.

In August 2014, the FASB issued new accounting guidance that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments provide a definition of the term “substantial doubt” and include principles for considering the mitigating effect of management’s plans. The amendments also require an evaluation every reporting period, including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued), and certain disclosures when substantial doubt is alleviated or not alleviated. The amendments in this update are effective for reporting periods ending after December 15, 2016. Management does not believe these changes will have a material impact on the Company’s consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, and early application is not permitted. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

 

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Risk Management

In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.

The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.

The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.

Note 3. Investments

As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, 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.

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

    Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

    Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

    Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 asset, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our Company’s valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

 

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The following table presents fair value measurements of investments, by major class, as of February 29, 2016 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Syndicated loans

   $ —        $ —        $ 11,868       $ 11,868   

First lien term loans

     —          —          144,643         144,643   

Second lien term loans

     —          —          88,178         88,178   

Structured finance securities

     —          —          12,828         12,828   

Equity interest

     —          —          26,479         26,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 283,996       $ 283,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2015 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Syndicated loans

   $ —        $ —        $ 18,302       $ 18,302   

First lien term loans

     —          —          145,207         145,207   

Second lien term loans

     —          —          35,603         35,603   

Unsecured notes

     —          —          4,230         4,230   

Structured finance securities

     —          —          17,031         17,031   

Equity interest

     —          —          20,165         20,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 240,538       $ 240,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 29, 2016 (dollars in thousands):

 

    Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Unsecured
notes
    Structured
finance
securities
    Common
stock/
equities
    Total  

Balance as of February 28, 2015

  $ 18,302      $ 145,207      $ 35,603      $ 4,230      $ 17,031      $ 20,165      $ 240,538   

Net unrealized appreciation (depreciation) on investments

    (1,914     (1,850     (1,163     3,136        (1,281     3,813        741   

Purchases and other adjustments to cost

    56        35,854        72,422        670        —         1,663        110,665   

Sales and redemptions

    (4,607     (31,280     (19,502     (5,917     (2,922     (3,946     (68,174

Net realized gain (loss) from investments

    31        (865     187        (2,220     —         3,093        226   

Transfers In

    —         —          631       101       —         1,691        2,423  

Transfers Out

    —         (2,423     —         —         —         —          (2,423
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of February 29, 2016

  $ 11,868      $ 144,643      $ 88,178      $ —        $ 12,828      $ 26,479      $ 283,996   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

 

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Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur.

The net change in unrealized appreciation (depreciation) for the year ended February 29, 2016 on investments still held as of February 29, 2016 is ($2,798,986) and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2015 (dollars in thousands):

 

    Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Unsecured
notes
    Structured
finance
securities
    Common
stock/
equities
    Total  

Balance as of February 28, 2014

  $ 32,390      $ 110,278      $ 27,804      $ 5,471      $ 19,570      $ 10,332      $ 205,845   

Net unrealized appreciation (depreciation) on investments

    (763     (206     (409     (1,458     (1,936     2,829        (1,943

Purchases and other adjustments to cost

    56        83,456        18,667        217        —         4,221        106,617   

Sales and redemptions

    (13,461     (42,445     (10,522     —         (603     (6,226     (73,257

Net realized gain from investments

    80        387        63        —         —         2,746        3,276   

Transfers In

    —         —         —         —         —         6,263        6,263   

Transfers Out

    —         (6,263     —         —         —         —          (6,263
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of February 28, 2015

  $ 18,302      $ 145,207      $ 35,603      $ 4,230      $ 17,031      $ 20,165      $ 240,538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur.

The net change in unrealized gain/(loss) for the year ended February 28, 2015 on investments still held as of February 28, 2015 is ($1,456,791) and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2016 were as follows (dollars in thousands):

 

     Fair Value     

Valuation Technique

  

Unobservable Input

  

Range

Syndicated loans

     11,868       Market Comparables    Third-Party Bid    72.5% - 98.2%

First lien term loans

     144,643       Market Comparables    Market Yield (%)    6.8% - 15.5%
         EBITDA Multiples (x)    1.0x
         Revenue Multiples Third-Party Bid    91.3 - 98.9

Second lien term loans

     88,178       Market Comparables    Market Yield (%)    0.0% - 15.0%
         Third-Party Bid    91.5% - 98.6%

Structured finance securities

     12,828       Discounted Cash Flow    Discount Rate (%)    20.0%

Equity interests

     26,479       Market Comparables    EBITDA Multiples (x) Revenue Multiples    6.8x - 16.4x

 

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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2015 were as follows (dollars in thousands):

 

     Fair Value     

Valuation Technique

  

Unobservable Input

  

Range

Syndicated loans

     18,302       Market Comparables    Third-Party Bid    93.6% - 100.4%

First lien term loans

     145,207       Market Comparables    Market Yield (%)    5.8% - 17.7%
         EBITDA Multiples (x)    3.0x
         Third-Party Bid    79.3 - 105.0

Second lien term loans

     35,603       Market Comparables    Market Yield (%)    8.5% - 15.0%
         Third-Party Bid    98.3% - 98.3%

Unsecured notes

     4,230       Market Comparables    Market Yield (%)    13.2% - 20.3%

Structured finance securities

     17,031       Discounted Cash Flow    Discount Rate (%)    12.0%

Equity interests

     20,165       Market Comparables    EBITDA Multiples (x)    5.0x - 12.1x

For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the EBITDA valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing a market quote in deriving a value, a significant increase (decrease) in the market quote, in isolation, would result in a significantly lower (higher) fair value measurement.

The composition of our investments as of February 29, 2016, at amortized cost and fair value were as follows (dollars in thousands):

 

     Investments at
Amortized Cost
     Amortized Cost
Percentage of
Total Portfolio
    Investments at
Fair Value
     Fair Value
Percentage of
Total Portfolio
 

Syndicated loans

   $ 14,138         5.0   $ 11,868         4.2

First lien term loans

     146,246         52.0        144,643         50.9   

Second lien term loans

     89,486         31.9        88,178         31.1   

Structured finance securities

     13,031         4.6        12,828         4.5   

Equity interest

     18,275         6.5        26,479         9.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 281,176         100.0   $ 283,996         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The composition of our investments as of February 28, 2015, at amortized cost and fair value were as follows (dollars in thousands):

 

     Investments at
Amortized Cost
     Amortized Cost
Percentage of
Total Portfolio
    Investments at
Fair Value
     Fair Value
Percentage of
Total Portfolio
 

Syndicated loans

   $ 18,658         7.8   $ 18,302         7.6

First lien term loans

     144,959         60.8        145,207         60.3   

Second lien term loans

     35,748         15.0        35,603         14.8   

Unsecured notes

     7,366         3.1        4,230         1.8   

Structured finance securities

     15,953         6.7        17,031         7.1   

Equity interest

     15,774         6.6        20,165         8.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 238,458         100.0   $ 240,538         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the assumptions that a hypothetical market

 

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participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset liquidation or expected recovery model.

For equity securities of portfolio companies and partnership interests, we determine the fair value based on the market approach with value then attributed to equity or equity like securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.

Our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. For the quarter ended November 30, 2013, in connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on assumptions about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at February 29, 2016. The significant inputs for the valuation model include:

 

    Default rates: 2.0%

 

    Recovery rates: 35-70%

 

    Prepayment rate: 20.0%

 

    Reinvestment rate / price: L+375bps / $97.00 Year 1, $99.00 thereafter.

Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”)

On January 22, 2008, we invested $30 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a collateralized loan obligation fund managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with GSC Investment Corp. CLO 2007, Ltd. pursuant to which we act as collateral manager to it. The Saratoga CLO was refinanced in October 2013 and its reinvestment period ends in October 2016. The Saratoga CLO remains 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.25% and a subordinated management fee of 0.25% of the fee basis amount at the beginning of the collection period, paid quarterly to the

 

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extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of the remaining interest proceeds and principal proceeds, if any, after the subordinated notes have realized the incentive management fee target return of 12.0%, in accordance with the Priority of Payments after making the prior distributions on the relevant payment date. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we accrued $1.5 million, $1.5 million, and $1.8 million in management fee income, respectively, and $2.7 million, $2.7 million, and $3.4 million in interest income, respectively, from Saratoga CLO. We did not accrue any amounts related to the incentive management fee as the 12.0% hurdle rate has not yet been achieved.

At February 29, 2016, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $12.8 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. At February 29, 2016, Saratoga CLO had investments with a principal balance of $302.7 million and a weighted average spread over LIBOR of 4.3%, and had debt with a principal balance of $282.4 million with a weighted average spread over LIBOR of 1.8%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At February 29, 2016, the total “spread”, or projected future cash flows of the subordinated notes, over the life of Saratoga CLO was $13.1 million, which had a present value of approximately $12.8 million, using a 20.0% discount rate.

At February 28, 2015, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $17.0 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. At February 28, 2015, Saratoga CLO had investments with a principal balance of $296.9 million and a weighted average spread over LIBOR of 4.3%, and had debt with a principal balance of $282.4 million with a weighted average spread over LIBOR of 1.8%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At February 28, 2015, the total “spread”, or projected future cash flows of the subordinated notes, over the life of Saratoga CLO was $17.3 million, which had a present value of approximately $17.0 million, using a 12.0% discount rate.

The separate audited financial statements of Saratoga CLO as of February 29, 2016 and February 28, 2015, pursuant to Rule 3-09 of SEC rules Regulation S-X, and for the twelve months ended February 29, 2016, February 28, 2015 and 2014, are presented on page S-1.

Note 5. Income Taxes

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.

The Company owns 100.0% of Saratoga CLO, an exempted company incorporated in the Cayman Islands. For financial reporting purposes, the Saratoga CLO is not included as part of the consolidated financial statements. For federal income tax purposes, the Company has requested and received approval from the Internal Revenue Service to treat the Saratoga CLO as a disregarded entity. As such, for federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the Saratoga CLO are included with those of the Company.

To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90.0% of its investment company taxable income, as defined by the Code.

 

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Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. As of February 29, 2016 and February 28, 2015, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible excise tax, meals & entertainment, market discount, interest income with respect to the Saratoga CLO which is consolidated for tax purposes, and the tax character of distributions as follows (dollars in thousands):

 

     February 29,
2016
     February 28,
2015
 

Accumulated net investment income/(loss)

   $ 55       $ (299

Accumulated net realized gains on investments

     59         593   

Additional paid-in-capital

     (114      (294

For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended February 29, 2016, February 28, 2015 and February 28, 2014 was as follows (dollars in thousands):

 

     February 29,
2016
     February 28,
2015
     February 28,
2014
 

Ordinary Income

   $ 13,045       $ 2,157       $ 12,535   

Capital gains

     —          —          —     

Return of capital

     —          —          —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 13,045       $ 2,157       $ 12,535   
  

 

 

    

 

 

    

 

 

 

For federal income tax purposes, as of February 29, 2016, the aggregate net unrealized depreciation for all securities is $15.4 million. The aggregate cost of securities for federal income tax purposes is $571.4 million.

For federal income tax purposes, as of February 28, 2015, the aggregate net unrealized depreciation for all securities is $3.6 million. The aggregate cost of securities for federal income tax purposes is $522.4 million.

At February 29, 2016 and February 28, 2015, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company’s consolidated statements of assets and liabilities by temporary book/tax differences primarily arising from the consolidation of the Saratoga CLO for tax purposes, market discount and original issue discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures (dollars in thousands).

 

     February 29,
2016
     February 28,
2015
 

Post October loss deferred

   $ —         $ (27,303

Accumulated capital losses

     (58,929      (32,308

Other temporary differences

     (1,941      (2,684

Undistributed ordinary income

     8,103         10,578   

Unrealized depreciation

     (15,428      (3,662
  

 

 

    

 

 

 

Total components of accumulated losses

   $ (68,195    $ (55,379
  

 

 

    

 

 

 

The Company has incurred capital losses of $19.3 million and $13.0 million, respectively, for the years ended February 28, 2011 and 2010. Such capital losses will be available to offset future capital gains if any and if unused, will expire on February 28, 2019 and 2018.

 

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At February 29, 2016 and February 28, 2015, the Company had a short term capital loss of $11.2 million and $0 million, respectively, and a long-term capital loss of $15.4 million and $0 million, respectively, available to offset future capital gains. Post RIC-modernization act losses are deemed to arise on the first day of the fund’s following fiscal year and there is no expiration for these losses.

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. Depending on the level of Investment Company Taxable Income (“ICTI”) earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI. For the calendar year ended December 31, 2015, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and subsequently paid $113,808 in federal excise taxes.

Management has analyzed the Company’s tax positions taken on federal income tax returns for all open years (fiscal years 2013-2016), and has concluded that no provision for uncertain income tax positions is required in the Company’s consolidated financial statements.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was enacted, and the provisions with the Modernization Act are effective for the Company for the year ended February 29, 2012. The Modernization Act is the first major piece of legislation affecting RICs since 1986 and it modernizes several of the federal income and excise tax provisions related to RICs. Some highlights of the enacted provisions are as follows:

New capital losses may now be carried forward indefinitely, and retain the character of the original loss. Under pre-enactment law, capital losses could be carried forward for eight years, and carried forward as short-term capital, irrespective of the character of the original loss.

The Modernization Act contains simplification provisions, which are aimed at preventing disqualification of a RIC for “inadvertent” failures of the asset diversification and/or qualifying income tests. Additionally, the Modernization Act exempts RICs from the preferential dividend rule, and repealed the 60-day designation requirement for certain types of pay-through income and gains.

Finally, the Modernization Act contains several provisions aimed at preserving the character of distributions made by a fiscal year RIC during the portion of its taxable year ending after October 31 or December 31, reducing the circumstances under which a RIC might be required to file amended Forms 1099 to restate previously reported distributions.

SIA-Avionte, Inc., SIA-Mercury, Inc., SIA-TT, Inc., and SIA-Vector, Inc., 100% owned by the Company, are each filing standalone C Corporate tax returns for federal and state purposes. As separately regarded entities for tax purposes, these entities are taxed at normal corporate rates. For tax purposes, any distributions by the entities to the parent company would generally need to be distributed to the Company’s shareholders. Generally, such distributions of the entities’ income to the Company’s shareholders will be considered as qualified dividends for tax purposes. The entities taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences adjustments. Deferred tax temporary differences may include differences for state taxes and joint venture interests.

 

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Note 6. Agreements and Related Party Transactions

On July 30, 2010, the Company entered into the Management Agreement with our Manager. The initial term of the Management Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. On July 8, 2015, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee of 1.75% is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters.

The incentive fee consists of the following two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100.0% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter (9.376% annualized); and 20.0% of the amount of the our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter (9.376% annualized).

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, the Company incurred $4.5 million, $4.2 million and $3.3 million in base management fees, respectively. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, the Company incurred $2.3 million, $2.2 million and $1.0 million in incentive fees related to pre-incentive fee net investment income. For the year ended February 29, 2016, there was a reduction of $0.05 million in incentive fees related to capital gains. For the year ended February 28, 2015, we accrued of $0.3 million in incentive fees related to capital gains. For the year ended February 28, 2014, there was a reduction of $0.1 million in incentive fees related to capital gains. The accrual is calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of February 29, 2016, the base management fees accrual was $1.2 million and the incentive fees accrual was $4.4 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 28, 2015, the base management

 

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fees accrual was $1.0 million and the incentive fees accrual was $4.8 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.

On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement was two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company was capped at $1.0 million for the initial two year term of the administration agreement and subsequent renewals. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company thereunder, which had not been increased since the inception of the agreement, to $1.3 million. In addition, our board of directors intends to review the new cap in the next three to six months to determine whether it should be further adjusted in light of differences between our projected and actual expenses and other similar factors.

For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we recognized $1.2 million, $1.0 million and $1.0 million, in administrator expenses for the periods, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of February 29, 2016, $0.2 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. As of February 28, 2015, $0.4 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. For the years ended February 29, 2016, February 28, 2015 and 2014, the Company bought investments fair valued at $0.0 million, $0.0 million, and $0.3 million, respectively, from the Saratoga CLO and sold no investments to related parties.

Note 7. Borrowings

Credit Facility

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral was used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.

In March 2009, we amended the Revolving Facility to increase the portion of the portfolio that could be invested in “CCC” rated investments in return for an increased interest rate and expedited amortization. As a result of these transactions, we expected to have additional cushion under our borrowing base under the Revolving Facility that would allow us to better manage our capital in times of declining asset prices and market dislocation.

 

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On July 30, 2009, we exceeded the permissible borrowing limit under the Revolving Facility for 30 consecutive days, resulting in an event of default under the Revolving Facility. As a result of this event of default, our lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral could have had a material adverse effect on our liquidity, financial condition and operations.

On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million senior secured revolving credit facility (the “Credit Facility”) with Madison Capital Funding LLC, in each case, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets, other than those held by SBIC LP, have been pledged under the Credit Facility to secure our obligations thereunder.

On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:

 

    expand the borrowing capacity under the credit facility from $40.0 million to $45.0 million;

 

    extend the period during which we may make and repay borrowings under the credit facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the credit facility are due and payable five years after the end of the Revolving Period; and

 

    remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.

On September 17, 2014, we entered into a second amendment to the Revolving Facility with Madison Capital Funding LLC to, among other things:

 

    extend the commitment termination date from February 24, 2015 to September 17, 2017;

 

    extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

    reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and

 

    reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.

As of February 29, 2016, there was no outstanding borrowings under the Credit Facility and the Company was in compliance with all of the limitations and requirements of the Credit Facility. As of February 28, 2015, there was $9.6 million outstanding under the Credit Facility and the Company was in compliance with all of the limitations and requirements of the Credit Facility. Financing costs of $2.7 million related to the Credit Facility have been capitalized and are being amortized over the term of the facility. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we recorded $0.7 million, $0.9 million and $1.0 million of interest expense, respectively. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we recorded $0.1 million, $0.3 million and $0.4 million of amortization of deferred financing costs related to the Credit Facility and Revolving Facility, respectively. The interest rates during the years ended February 29, 2016, February 28, 2015 and February 28, 2014 on the outstanding borrowings under the Credit Facility were 6.00%, 6.75% and 7.50%, respectively. During the years ended February 29, 2016 and February 28, 2015, the average dollar amount of outstanding borrowings under the Credit Facility was $4.4 million and $6.0 million, respectively.

 

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The Credit Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Credit Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Credit Facility has an eight year term, consisting of a three year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Credit Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50.0% to 75.0% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company will pay the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period.

Our borrowing base under the Credit Facility was $21.8 million subject to the Credit Facility cap of $45.0 million at February 29, 2016. For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the SEC. Accordingly, the February 29, 2016 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the quarter ended November 30, 2015. The valuations presented in this Annual Report on Form 10-K will not be incorporated into the borrowing base until after this Annual Report on Form 10-K is filed with the SEC.

SBA Debentures

SBIC LP is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. As of February 29, 2016, we have funded SBIC LP with $75.0 million of equity capital, and have $103.7 million of SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150.0 million, which is up to twice its potential regulatory capital.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to ‘‘smaller’’ concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

SBIC LP is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC LP will receive SBA guaranteed debenture funding, which is dependent upon SBIC LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP’s assets over our stockholders and debtholders in the event we liquidate SBIC LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP upon an event of default.

 

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The Company received exemptive relief from the Securities and Exchange Commission to permit it to exclude the debt of SBIC LP guaranteed by the SBA from the definition of senior securities in the 200.0% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200.0% asset coverage test by permitting it to borrow up to $150.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

As of February 29, 2016 and February 28, 2015, there was $103.7 million and $79.0 million outstanding of SBA debentures, respectively. The carrying amount of the amount outstanding of SBA debentures approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage, $3.6 million, of financing costs related to the SBA debentures, have been capitalized and are being amortized over the term of the commitment and drawdown. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014 we recorded $2.6 million, $2.0 million and $1.3 million of interest expense related to the SBA debentures, respectively. For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we recorded $0.4 million, $0.3 million and $0.2 million of amortization of deferred financing costs related to the SBA debentures, respectively. The weighted average interest rate during the years ended February 29, 2016 and February 28, 2015 on the outstanding borrowings of the SBA debentures was 3.12% and 2.93%, respectively. During the years ended February 29, 2016 and February 28, 2015, the average dollar amount of SBA debentures outstanding was $83.0 million and $67.9 million, respectively.

In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $350.0 million in SBA-guaranteed debentures when they have at least $175.0 million in combined regulatory capital.

On April 2, 2015, the SBA issued a “green light” or “go forth” letter inviting us to continue our application process to obtain a license to form and operate its second SBIC subsidiary. If approved, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150 million of additional SBA-guaranteed debentures in addition to the $150 million already approved under the first license. Receipt of a green light letter from the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license and we have received no assurance or indication from the SBA that it will receive an SBIC license, or of the timeframe in which it would receive a license, should one be granted.

Notes

On May 10, 2013, the Company issued $42.0 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “Notes”). The Notes will mature on May 31, 2020, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 31, 2016. Interest will be payable quarterly beginning August 15, 2013.

On May 17, 2013, the Company closed an additional $6.3 million in aggregate principal amount of the Notes, pursuant to the full exercise of the underwriters’ option to purchase additional Notes. On May 29, 2015, the Company entered into a Debt Distribution Agreement with Landenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the Notes through an At-the-Market (“ATM”) offering. As of February 29, 2016, the Company sold 539,725 bonds with a principal of $13,493,125 at an average price of $25.31 for aggregate net proceeds of $13,385,766 (net of transaction costs).

As of February 29, 2016, the carrying amount and fair value of the Notes was $61.8 million and $60.2 million, respectively. The fair value of the Notes, which are publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a level 1 liability within the fair value hierarchy. As

 

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of February 29, 2016, $2.7 million of financing costs related to the Notes (including underwriting commissions and net of issuance premiums) have been capitalized and are being amortized over the term of the Notes. For the year ended February 29, 2016, we recorded $4.3 million of interest expense and $0.4 million of amortization of deferred financing costs related to the Notes. As of February 28, 2015, the carrying amount and fair value of the Notes was $48.3 million and $49.8 million, respectively. As of February 28, 2015, $2.5 million of financing costs related to the Notes have been capitalized and are being amortized over the term of the Notes. For the years ended February 28, 2015 and February 28, 2014, we recorded $3.6 million and $2.9 million of interest expense, respectively, and $0.3 million and $0.3 million, respectively, of amortization of deferred financing costs related to the Notes. During the years ended February 29, 2016 and February 28, 2015, the average dollar amount of Notes outstanding was $55.7 million and $48.3 million, respectively.

Note 8. Commitments and contingencies

Contractual obligations

The following table shows our payment obligations for repayment of debt and other contractual obligations at February 29, 2016:

 

            Payment Due by Period  
     Total      Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
 
            ($ in thousands)  

Long-Term Debt Obligations

   $ 165,453       $ —         $ —         $ 61,793       $ 103,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

The Company’s off-balance sheet arrangements consisted of $2.0 million and $11.2 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of February 29, 2016 and February 28, 2015, respectively. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities and are not reflected in the Company’s Consolidated Statements of Assets and Liabilities.

A summary of the composition of the unfunded commitments as of February 29, 2016 and February 28, 2015 is shown in the table below (dollars in thousands):

 

     As of  
     February 29,
2016
     February 28,
2015
 

Avionte Holdings, LLC

   $ 1,000       $ 1,000   

Identity Automation

     1,000         —     

Bristol Hospice, LLC

     —           7,500   

HMN Holdco, LLC

     —           2,400   

Knowland Technology Holdings, L.L.C.

     —           300   
  

 

 

    

 

 

 

Total

   $ 2,000       $ 11,200   
  

 

 

    

 

 

 

Note 9. Directors Fees

The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the

 

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chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the years ended February 29, 2016, February 28, 2015 and February 28, 2014, we accrued $0.2 million, $0.2 million, and $0.2 million for directors’ fees expense, respectively. As of February 29, 2016 and February 28, 2015, $0.03 million and $0.03 million in directors’ fees expense were unpaid and included in accounts payable and accrued expenses in the consolidated statements of assets and liabilities. As of February 29, 2016, we had not issued any common stock to our directors as compensation for their services.

Note 10. Stockholders’ Equity

On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of the LLC.

On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.

On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.

On November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $2.50 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 of newly issued shares of common stock.

On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million.

On August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

On November 12, 2010, we declared a dividend of $4.40 per share payable on December 29, 2010. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share. Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock.

On November 15, 2011, we declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock.

 

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On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock.

On October 30, 2013, the Company declared a dividend of $2.65 per share payable on December 27, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock.

On September 24, 2014, the Company declared a dividend of $0.18 per share payable on November 28, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock.

On September 24, 2014, the Company declared a dividend of $0.22 per share payable on February 27, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock.

On September 24, 2014, the Company announced the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published consolidated financial statements. As of February 29, 2016, the Company purchased 25,417 shares of common stock, at the average price of $14.03, for approximately $0.4 million pursuant to this repurchase plan. On October 7, 2015, the Company’s board of directors extended the open market share repurchase plan for another year and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 400,000 shares of its common stock.

On April 9, 2015, the Company declared a dividend of $0.27 per share payable on May 29, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock.

On May 14, 2015, the Company declared a special dividend of $1.00 per share payable on June 5, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock.

On July 8, 2015, the Company declared a dividend of $0.33 per share payable on August 31, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock.

On October 7, 2015, the Company declared a dividend of $0.36 per share payable on November 30, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock.

 

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On January 12, 2016, the Company declared a dividend of $0.40 per share payable on February 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,764 newly issued shares of common stock.

Note 11. Earnings Per Share

In accordance with the provisions of FASB ASC 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the years ended February 29, 2016, February 28, 2015 and February 28, 2014 (dollars in thousands except share and per share amounts):

 

Basic and diluted

   February 29,
2016
     February 28,
2015
     February 28,
2014
 

Net increase in net assets from operations

   $ 11,645       $ 11,007       $ 8,497   

Weighted average common shares outstanding

     5,582,453         5,385,049         4,920,517   

Weighted average earnings per common share-basic and diluted

   $ 2.09       $ 2.04       $ 1.73   

Note 12. Dividend

On January 12, 2016, the Company’s board of directors declared a dividend of $0.40 per share payable on February 29, 2016, to all stockholders of record on February 1, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP.

Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,764 newly issued shares of common stock, or 1.2% of the Company’s outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.11 per share, which equaled the volume weighted average trading price per share of the common stock on February 16, 17, 18, 19, 22, 23, 24, 25, 26 and 29, 2016.

On October 7, 2015, the Company’s board of directors declared a dividend of $0.36 per share payable on November 30, 2015, to common stockholders of record on November 2, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP.

Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of the Company’s outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.53 per share, which equaled the volume weighted average trading price per share of the common stock on November 16, 17, 18, 19, 20, 23, 24, 25, 27 and 30, 2015.

On July 8, 2015, the Company’s board of directors declared a dividend of $0.33 per share payable on August 31, 2015, to common stockholders of record on August 3, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP.

Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of the Company’s outstanding common stock prior to the

 

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dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.28 per share, which equaled the volume weighted average trading price per share of the common stock on August 18, 19, 20, 21, 24, 25, 26, 27, 28 and 31, 2015.

On May 14, 2015, the Company’s board of directors declared a special dividend of $1.00 per share payable on June 5, 2015, to common stockholders of record on May 26, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP.

Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of the Company’s outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.47 per share, which equaled the volume weighted average trading price per share of the common stock on May 22, 26, 27, 28, 29 and June 1, 2, 3, 4, and 5, 2015.

On April 9, 2015, the Company’s board of directors declared a dividend of $0.27 per share payable on May 29, 2015, to common stockholders of record on May 4, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP.

Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of the Company’s outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.78 per share, which equaled the volume weighted average trading price per share of the common stock on May 15, 18, 19, 20, 21, 22, 26, 27, 28 and 29, 2015.

On September 24, 2014, the Company declared a dividend of $0.22 per share payable on February 27, 2015. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled the volume weighted average trading price per share of the common stock on February 13, 17, 18, 19, 20, 23, 24, 25, 26 and 27, 2015.

On September 24, 2014, the Company declared a dividend of $0.18 per share payable on November 28, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled the volume weighted average trading price per share of the common stock on November 14, 17, 18, 19, 20, 21, 24, 25, 26 and 28, 2014.

On October 30, 2013, the Company declared a dividend of $2.65 per share payable on December 27, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. This dividend was declared in reliance on certain private letter rulings issued by the IRS concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution.

Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The number

 

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of shares of common stock comprising the stock portion was calculated based on a price of $15.439 per share, which equaled the volume weighted average trading price per share of the common stock on December 11, 13, and 16, 2013.

On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share.

Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17, and 19, 2012.

On November 15, 2011, the Company declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share.

Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.1171 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.

On November 12, 2010, the Company declared a dividend of $4.40 per share payable on December 23, 2010. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share.

Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010. The consolidated financial statements for the period ended November 30, 2010 have been retroactively adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of ASC 505-20-S50 regarding disclosure of a capital structure change after the interim balance sheet but before the release of the financial statements.

 

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The following tables summarize dividends declared during the years ended February 29, 2016, February 28, 2015, February 28, 2014, February 28, 2013 and February 29, 2012 (dollars in thousands except per share amounts):

 

Date Declared

  

Record Date

  

Payment Date

   Amount
Per Share*
     Total
Amount
 

January 12, 2016

   February 1, 2016    February 29, 2016    $ 0.40       $ 2,278   

October 7, 2015

   November 2, 2015    November 30, 2015    $ 0.36       $ 2,028   

July 8, 2015

   August 3, 2015    August 31, 2015    $ 0.33       $ 1,844   

May 14, 2015

   May 26, 2015    June 5, 2015    $ 1.00       $ 5,429   

April 9, 2015

   May 4, 2015    May 29, 2015    $ 0.27       $ 1,466   
        

 

 

    

 

 

 

Total dividends declared

         $ 2.36       $ 13,045   
        

 

 

    

 

 

 

 

Date Declared

  

Record Date

  

Payment Date

   Amount
Per Share*
     Total
Amount
 

September 24, 2014

   October 30, 2014    November 28, 2014    $ 0.18       $ 968   

September 24, 2014

   January 29, 2015    February 27, 2015    $ 0.22       $ 1,189   
        

 

 

    

 

 

 

Total dividends declared

         $ 0.40       $ 2,157   
        

 

 

    

 

 

 

 

Date Declared

  

Record Date

  

Payment Date

   Amount
Per Share*
     Total
Amount
 

October 30, 2013

   November 13, 2013    December 27, 2013    $ 2.65       $ 12,535   
        

 

 

    

 

 

 

Total dividends declared

         $ 2.65       $ 12,535   
        

 

 

    

 

 

 

 

Date Declared

  

Record Date

  

Payment Date

   Amount
Per Share*
     Total
Amount
 

November 9, 2012

   November 20, 2012    December 31, 2012    $ 4.25       $ 16,476   
        

 

 

    

 

 

 

Total dividends declared

         $ 4.25       $ 16,476   
        

 

 

    

 

 

 

 

Date Declared

  

Record Date

  

Payment Date

   Amount
Per Share*
     Total
Amount
 

November 15, 2011

   November 25, 2011    December 30, 2011    $ 3.00       $ 9,831   
        

 

 

    

 

 

 

Total dividends declared

         $ 3.00       $ 9,831   
        

 

 

    

 

 

 

 

* Amount per share is calculated based on the number of shares outstanding at the date of declaration.

 

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Note 13. Financial Highlights

The following is a schedule of financial highlights for the years ended February 29, 2016, February 28, 2015, February 28, 2014, February 28, 2013 and February 29, 2012:

 

     February 29,
2016
    February 28,
2015
    February 28,
2014
    February 28,
2013
    February 29,
2012
 

Per share data:

        

Net asset value at beginning of period

   $ 22.70      $ 21.08      $ 22.71      $ 24.94      $ 26.20   

Net investment income(1)

     1.91        1.80        1.80        1.57        1.52   

Net realized and unrealized gains and losses on investments and derivatives

     0.18        0.24        (0.07     1.85        2.21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets from operations

     2.09        2.04        1.73        3.42        3.73   

Distributions declared from net investment income

     (2.36     (0.40     (2.65     (4.25     (3.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions to stockholders

     (2.36     (0.40     (2.65     (4.25     (3.00

Dilution(4)

     (0.37     (0.02     (0.71     (1.40     (1.99

Net asset value at end of period

   $ 22.06      $ 22.70      $ 21. 08      $ 22.71      $ 24.94   

Net assets at end of period

   $ 125,149,875      $ 122,598,742      $ 113,427,929      $ 107,437,874      $ 96,689,122   

Shares outstanding at end of period

     5,672,227        5,401,899        5,379,616        4,730,116        3,876,661   

Per share market value at end of period

   $ 14.22      $ 15.76      $ 15.85      $ 17.02      $ 15.88   

Total return based on market value(2)

     4.27     1.63     9.11     36.67     12.82

Total return based on net asset
value(3)

     11.10     10.09     8.75     16.12     16.98

Ratio/Supplemental data:

        

Ratio of net investment income to average, net assets

     8.52     8.11     7.97     6.26     5.64

Ratio of operating expenses to average net assets

     6.93     6.52     6.28     5.22     5.66

Ratio of incentive management fees to average net assets

     1.78     2.14     0.84     2.52     1.85

Ratio of credit facility related expenses to average net assets

     6.75     6.19     5.46     2.46     1.40

Ratio of total expenses to average net assets

     15.46     14.85     12.59     10.19     8.91

Portfolio turnover rate(5)

     26.22     31.28     37.82     17.30     36.34

As described in Note 2 to the consolidated financial statements and notes thereto, we identified errors that impacted the years ended February 28, 2014, February 28, 2013 and February 29, 2012. The corrections for the errors, which we have concluded are immaterial to all prior period consolidated financial statements, are reflected in the consolidated financial statements and selected financial data included in this Form 10-K.

 

(1) Net investment income per share is calculated using the weighted average shares outstanding during the period.

 

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(2) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.
(3) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.
(4) Represents the dilutive effect of issuing common stock below net asset value per share during the period in connection with the satisfaction of the Company’s annual RIC distribution requirement. See Note 12, Dividend.
(5) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value.

Note 14. Selected Quarterly Data (Unaudited)

 

     2016  

($ in thousands, except per share numbers)

   Qtr 4     Qtr 3      Qtr 2     Qtr 1  

Interest and related portfolio income

   $ 7,795      $ 6,936       $ 7,758      $ 7,561   

Net investment income

     3,100        2,150         3,657        1,771   

Net realized and unrealized gain (loss)

     (3,503     1,271         (2,415     5,614   

Net increase (decrease) in net assets resulting from operations

     (404     3,421         1,243        7,385   

Net investment income per common share at end of each quarter

   $ 0.54      $ 0.38       $ 0.65      $ 0.33   

Net realized and unrealized gain (loss) per common share at end of each quarter

   $ (0.62   $ 0.23       $ (0.43   $ 1.03   

Dividends declared per common share

   $ 0.40      $ 0.36       $ 0.33      $ 1.27   

Net asset value per common share

   $ 22.06      $ 22.59       $ 22.42      $ 22.75   

 

     2015  

($ in thousands, except per share numbers)

   Qtr 4     Qtr 3      Qtr 2      Qtr 1  

Interest and related portfolio income

   $ 7,451      $ 7,305       $ 6,475       $ 6,144   

Net investment income

     2,889        2,629         2,093         2,063   

Net realized and unrealized gain (loss)

     (184     756         1,064         (303

Net increase in net assets resulting from operations

     2,705        3,385         3,157         1,760   

Net investment income per common share at end of each quarter

   $ 0.50      $ 0.49       $ 0.39       $ 0.38   

Net realized and unrealized gain (loss) per common share at end of each quarter

   $ (0.03   $ 0.14       $ 0.20       $ (0.06

Dividends declared per common share

   $ 0.22      $ 0.18       $ —        $ —    

Net asset value per common share

   $ 22.70      $ 22.45       $ 22.00       $ 21.41   

 

     2014  

($ in thousands, except per share numbers)

   Qtr 4      Qtr 3     Qtr 2     Qtr 1  

Interest and related portfolio income

   $ 5,687       $ 5,801      $ 5,388      $ 6,018   

Net investment income

     1,525         2,407        2,629        2,313   

Net realized and unrealized gain (loss)

     2,236         (1,630     (2,313     1,330   

Net increase (decrease) in net assets resulting from operations

     3,761         777        316        3,644   

Net investment income per common share at end of each quarter

   $ 0.28       $ 0.50      $ 0.56      $ 0.49   

Net realized and unrealized gain (loss) per common share at end of each quarter

   $ 0.42       $ (0.34   $ (0.49   $ 0.28   

Dividends declared per common share

   $ —        $ 2.65      $ —       $ —    

Net asset value per common share

   $ 21.08       $ 20.39      $ 23.55      $ 23.48   

 

F-94


Table of Contents

As described in Note 2 to the consolidated financial statements and notes thereto, we identified errors that impacted the years ended February 28, 2014, February 28, 2013, and February 29, 2012. The corrections for the errors, which we have concluded are immaterial to all prior period consolidated financial statements, are reflected in the consolidated financial statements and selected financial data included in this Form 10-K.

Note 15. Subsequent Events

The Company has evaluated subsequent events through the filing of this Form 10-K and determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the consolidated financial statements except for the following:

On March 31, 2016, the Company declared a dividend of $0.41 per share payable on April 27, 2016, to common stockholders of record on April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

 

F-95


Table of Contents

INDEX TO OTHER FINANCIAL STATEMENTS

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

Report of Independent Auditors

     S-2   

Statements of Assets and Liabilities as of February  29, 2016 and February 28, 2015

     S-3   

Statements of Operations for the years ended February  29, 2016, February 28, 2015 and February 28, 2014

     S-4   

Schedules of Investments as of February 29, 2016 and February  28, 2015

     S-5   

Statements of Changes in Net Assets for the years ended February  29, 2016, February 28, 2015 and February 28, 2014

     S-21   

Statements of Cash Flows for the years ended February  29, 2016, February 28, 2015 and February 28, 2014

     S-22   

Notes to Financial Statements

     S-23   

IMPORTANT NOTE

In accordance with certain SEC rules, Saratoga Investment Corp. (the “Company”) is providing additional information regarding one of its portfolio companies, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”). The Company owns 100% of the subordinated notes of the Saratoga CLO. The additional financial information regarding the Saratoga CLO does not directly impact the Company’s financial position, results of operations or cash flows.

 

S-1


Table of Contents

Report of Independent Auditors

The Collateral Manager and Directors,

Saratoga Investment Corp. CLO 2013-1, Ltd.

We have audited the accompanying financial statements of Saratoga Investment Corp. CLO 2013-1, Ltd., which comprise the statements of assets and liabilities, including the schedules of investments, as of February 29, 2016 and February 28, 2015, and the statements of operations, changes in net assets and cash flows for the years ended February 29, 2016, February 28, 2015 and February 28, 2014, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saratoga Investment Corp. CLO 2013-1, Ltd. at February 29, 2016 and February 28, 2015, and the results of its operations, changes in its net assets and its cash flows for the years ended February 29, 2016, February 28, 2015 and February 28, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young

New York, New York

May 17, 2016

 

S-2


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

     As of  
     February 29, 2016     February 28, 2015  

ASSETS

    

Investments

    

Fair Value Loans (amortized cost of $300,112,538 and $295,193,588, respectively)

   $ 284,652,926      $ 294,621,817   

Fair Value Other/Structured finance securities (amortized cost of $3,531,218 and $2,566,752, respectively)

     191,863        617,451   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $303,643,756 and $297,760,340, respectively)

     284,844,789        295,239,268   

Cash and cash equivalents

     2,349,633        5,831,797   

Receivable from open trades

     2,691,831        2,119,687   

Interest receivable

     1,698,562        1,290,637   
  

 

 

   

 

 

 

Total assets

   $ 291,584,815      $ 304,481,389   
  

 

 

   

 

 

 

LIABILITIES

    

Interest payable

   $ 626,040      $ 631,886   

Payable from open trades

     7,123,854        5,214,331   

Accrued base management fee

     85,008        85,957   

Accrued subordinated management fee

     85,008        85,957   

Class A-1 Notes—SIC CLO 2013-1, Ltd.

     170,000,000        170,000,000   

Discount on Class A-1 Notes—SIC CLO 2013-1, Ltd.

     (1,319,258     (1,495,802

Class A-2 Notes—SIC CLO 2013-1, Ltd.

     20,000,000        20,000,000   

Discount on Class A-2 Notes—SIC CLO 2013-1, Ltd.

     (136,750     (155,050

Class B Notes—SIC CLO 2013-1, Ltd.

     44,800,000        44,800,000   

Discount on Class B Notes—SIC CLO 2013-1, Ltd.

     (888,328     (1,007,205

Class C Notes—SIC CLO 2013-1, Ltd.

     16,000,000        16,000,000   

Discount on Class C Notes—SIC CLO 2013-1, Ltd.

     (553,078     (627,091

Class D Notes—SIC CLO 2013-1, Ltd.

     14,000,000        14,000,000   

Discount on Class D Notes—SIC CLO 2013-1, Ltd.

     (717,938     (814,013

Class E Notes—SIC CLO 2013-1, Ltd.

     13,100,000        13,100,000   

Discount on Class E Notes—SIC CLO 2013-1, Ltd.

     (1,353,521     (1,534,650

Class F Notes—SIC CLO 2013-1, Ltd.

     4,500,000        4,500,000   

Discount on Class F Notes—SIC CLO 2013-1, Ltd.

     (492,300     (558,180

Deferred debt financing costs, SIC CLO 2013-1, Ltd. Notes

     (1,716,554     (1,941,595

Subordinated Notes

     30,000,000        30,000,000   
  

 

 

   

 

 

 

Total liabilities

   $ 313,142,183      $ 310,284,545   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 6)

    

NET ASSETS

    

Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 issued and outstanding, respectively

   $ 250      $ 250   

Accumulated loss

     (5,803,406     (3,343,488

Net loss

     (15,754,212     (2,459,918
  

 

 

   

 

 

 

Total net assets

     (21,557,368     (5,803,156
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 291,584,815      $ 304,481,389   
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

S-3


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

 

     For the year ended
February 29, 2016
    For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

INVESTMENT INCOME

      

Interest from investments

   $ 14,372,377      $ 13,091,019      $ 15,486,413   

Interest from cash and cash equivalents

     1,213        1,446        6,792   

Other income

     316,187        188,180        945,441   
  

 

 

   

 

 

   

 

 

 

Total investment income

     14,689,777        13,280,645        16,438,646   
  

 

 

   

 

 

   

 

 

 

EXPENSES

      

Interest expense

     11,696,757        9,635,136        11,678,514   

Professional fees

     292,754        219,293        433,073   

Miscellaneous fee expense

     23,742        34,303        175,283   

Base management fee

     747,390        760,102        517,563   

Subordinated management fee

     747,390        760,102        1,257,578   

Trustee expenses

     121,299        123,999        83,221   

Amortization expense

     955,858        953,862        994,602   

Loss on extinguishment of debt

     —          —          3,442,442   
  

 

 

   

 

 

   

 

 

 

Total expenses

     14,585,190        12,486,797        18,582,276   
  

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME (LOSS)

     104,587        793,848        (2,143,630
  

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

      

Net realized gain (loss) on investments

     419,096        620,817        (8,815,296

Net unrealized appreciation/(depreciation) on investments

     (16,277,895     (3,874,583     6,776,871   
  

 

 

   

 

 

   

 

 

 

Net loss on investments

     (15,858,799     (3,253,766     (2,038,425
  

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (15,754,212   $ (2,459,918   $ (4,182,055
  

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

S-4


Table of Contents

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2016

 

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Education Management II LLC

  Leisure Goods/
Activities/Movies
  A-1 Preferred Shares   Equity     0.00       6,692      $ 669,214      $ 1,673   

Education Management II LLC

  Leisure Goods/
Activities/Movies
  A-2 Preferred Shares   Equity     0.00       18,975        1,897,538        95   

New Millennium Holdco, Inc.

  Healthcare &
Pharmaceuticals
  Common Stock   Equity     0.00       14,813        964,466        190,095   

24 Hour Holdings III LLC

  Leisure Goods/
Activities/Movies
  Term Loan   Loan     4.75     5/28/2021      $ 492,500        488,586        455,154   

Acosta Holdco Inc.

  Media   Term Loan B1   Loan     4.25     9/26/2021      $ 1,972,936        1,959,834        1,855,389   

Aspen Dental Management, Inc.

  Healthcare &
Pharmaceuticals
  Term Loan Initial   Loan     5.50     4/29/2022      $ 497,500        495,228        495,221   

Advantage Sales & Marketing Inc.

  Services: Business   Delayed Draw
Term Loan
  Loan     4.25     7/25/2021      $ 2,471,231        2,468,039        2,342,826   

AgroFresh

  Food Services   Term Loan   Loan     5.75     7/30/2021      $ 1,990,000        1,980,704        1,935,275   

Aegis Toxicology Science Corporation

  Healthcare &
Pharmaceuticals
  Term B Loan   Loan     5.50     2/24/2021      $ 985,000        985,000        797,850   

Akorn, Inc.

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     6.00     4/16/2021      $ 398,056        396,681        396,066   

Albertson’s LLC

  Retailers (Except Food
and Drugs)
  Term Loan B-4   Loan     5.50     8/25/2021      $ 3,384,425        3,367,410        3,302,623   

Alere Inc. (fka IM US Holdings, LLC)

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.25     6/20/2022      $ 927,265        925,091        925,365   

Alion Science T/L B (1st Lien)

  High Tech Industries   Term Loan B
(First Lien)
  Loan     5.50     8/19/2021      $ 2,985,000        2,971,074        2,824,555   

Alliance HealthCare
T/L B

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.25     6/3/2019      $ 994,856        990,161        906,981   

Alliant Holdings T/L B (1st Lien)

  Banking, Finance,
Insurance & Real Estate
  Term Loan B
(First Lien)
  Loan     4.50     8/12/2022      $ 995,000        992,679        960,921   

Alvogen Pharma US, Inc

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     6.00     4/4/2022      $ 480,447        478,240        456,425   

American Beacon Advisors, Inc.

  Financial Intermediaries   Term Loan
(First Lien)
  Loan     5.50     4/30/2022      $ 248,749        247,612        244,190   

Aramark Corporation

  Food Products   LC-2 Facility   Loan     0.29     7/26/2016      $ 9,447        9,445        9,305   

Aramark Corporation

  Food Products   LC-3 Facility   Loan     0.29     7/26/2016      $ 5,244        5,244        5,166   

Aramark Corporation

  Food Products   U.S. Term F Loan   Loan     3.25     2/24/2021      $ 3,150,423        3,150,423        3,126,133   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Incremental Tranche
B-1 Term Loan
  Loan     5.00     5/24/2019      $ 2,596,480        2,573,245        2,441,237   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Term Loan B4
(First Lein)
  Loan     5.00     8/4/2022      $ 2,478,125        2,466,303        2,270,582   

Auction.com

  Banking, Finance,
Insurance & Real Estate
  Term Loan   Loan     6.00     5/13/2019      $ 2,522,992        2,522,722        2,491,455   

Avantor Performance Materials Holdings, Inc.

  Chemicals/Plastics   Term Loan   Loan     5.25     6/24/2017      $ 2,156,953        2,153,896        2,135,384   

Bass Pro Group, LLC

  Retailers (Except Food
and Drugs)
  Term Loan   Loan     4.00     6/5/2020      $ 1,488,750        1,485,895        1,397,564   

Belmond Interfin Ltd.

  Lodging & Casinos   Term Loan   Loan     4.00     3/19/2021      $ 491,249        489,361        477,127   

Berry Plastics Corporation

  Chemicals/Plastics   Term E Loan   Loan     3.75     1/6/2021      $ 1,314,499        1,305,069        1,291,903   

BJ’s Wholesale Club, Inc.

 

Food/Drug Retailers

  New 2013
(November)
Replacement Loan
(First Lien)
  Loan     4.50     9/26/2019      $ 1,476,196        1,475,409        1,401,161   

 

S-5


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Blue Coat Systems

  Technology   Term Loan B   Loan     4.50     5/20/2022      $ 997,500        995,159        945,131   

BMC Software

  Technology   Term Loan   Loan     5.00     9/10/2020      $ 1,979,798        1,926,080        1,571,821   

Brickman Group Holdings, Inc.

  Brokers/Dealers/
Investment Houses
  Initial Term Loan
(First Lien)
  Loan     4.00     12/18/2020      $ 1,476,212        1,464,327        1,426,390   

Brock Holdings III, Inc.

  Industrial Equipment   Term Loan (First
Lien)
  Loan     6.00     3/16/2017      $ 1,917,168        1,924,101        1,802,138   

Burlington Coat Factory Warehouse Corporation

  Retailers (Except Food
and Drugs)
  Term B-2 Loan   Loan     4.25     8/13/2021      $ 1,861,667        1,853,426        1,845,843   

BWAY Holding Company

  Leisure Goods/
Activities/Movies
  Term Loan B   Loan     5.50     8/14/2020      $ 985,000        976,335        930,826   

Caesars Entertainment Corp.

  Lodging & Casinos   Term B-7 Loan   Loan     13.25     3/1/2017      $ 995,000        991,037        814,656   

Camp International Holding Company

 

Aerospace and Defense

  2013 Replacement
Term Loan (First
Lien)
  Loan     4.75     5/31/2019      $ 1,940,113        1,940,984        1,806,730   

Capital Automotive L.P.

  Conglomerate   Tranche B-1 Term
Loan Facility
  Loan     4.00     4/10/2019      $ 2,051,828        2,055,060        2,044,564   

Catalent Pharma Solutions, Inc

  Drugs   Initial Term B Loan   Loan     4.25     5/20/2021      $ 492,501        490,549        487,271   

Cengage Learning Acquisitions, Inc.

  Publishing   Term Loan   Loan     7.00     3/31/2020      $ 2,647,871        2,670,807        2,539,758   

Charter Communications Operating, LLC

  Cable and Satellite
Television
  Term F Loan   Loan     3.00     12/31/2020      $ 2,628,783        2,621,343        2,566,823   

CHS/Community Health Systems, Inc.

  Healthcare &
Pharmaceuticals
  Term G Loan   Loan     3.75     12/31/2019      $ 1,022,569        994,876        974,212   

CHS/Community Health Systems, Inc.

  Healthcare &
Pharmaceuticals
  Term H Loan   Loan     4.00     1/27/2021      $ 1,881,500        1,828,566        1,785,920   

Cinedigm Digital Funding I, LLC

  Services: Business   Term Loan   Loan     3.75     2/28/2018      $ 298,828        297,362        295,840   

CITGO Petroleum Corporation

  Oil & Gas   Term Loan B   Loan     4.50     7/29/2021      $ 1,984,975        1,962,423        1,865,876   

Communications Sales & Leasing, Inc.

  Telecommunications   Term Loan B (First
Lien)
  Loan     5.00     10/24/2022      $ 1,990,000        1,978,594        1,847,596   

CommScope, Inc.

  Telecommunications   Term Loan B   Loan     3.75     12/29/2022      $ 498,750        497,568        494,176   

Consolidated Aerospace Manufacturing, LLC

  Aerospace and Defense   Term Loan (First
Lien)
  Loan     4.75     8/11/2022      $ 1,437,500        1,430,556        1,329,688   

Concordia Healthcare Corp

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     5.25     10/21/2021      $ 2,000,000        1,894,483        1,920,000   

CPI Acquisition Inc.

  Technology   Term Loan B (First
Lien)
  Loan     5.50     8/17/2022      $ 1,436,782        1,415,977        1,396,667   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

  Electronics/Electric   Term B Loan   Loan     4.25     11/17/2017      $ 1,564,182        1,564,182        1,501,615   

Crosby US Acquisition Corp.

  Industrial Equipment   Initial Term Loan
(First Lien)
  Loan     4.00     11/23/2020      $ 735,000        734,245        536,550   

CT Technologies Intermediate Hldgs, Inc

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     5.25     12/1/2021      $ 1,485,038        1,471,665        1,433,061   

Culligan International Company

  Conglomerate   Dollar Loan (First
Lien)
  Loan     6.25     12/19/2017      $ 771,625        742,910        721,469   

Culligan International Company

  Conglomerate   Dollar Loan (Second
Lien)
  Loan     9.50     6/19/2018      $ 783,162        754,065        734,214   

Cumulus Media Holdings Inc.

  Broadcast Radio and
Television
  Term Loan   Loan     4.25     12/23/2020      $ 470,093        466,690        304,973   

DAE Aviation (StandardAero)

  Aerospace and Defense   Term Loan   Loan     5.25     7/7/2022      $ 1,995,000        1,985,759        1,970,063   

 

S-6


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

DCS Business Services, Inc.

  Financial Intermediaries   Term B Loan   Loan     8.75     3/19/2018      $ 2,409,739        2,397,948        2,409,739   

Dell International LLC

  Technology   Term Loan B2   Loan     4.00     4/29/2020      $ 2,904,989        2,892,348        2,889,854   

Delta 2 (Lux) S.a.r.l.

  Lodging & Casinos   Term Loan B-3   Loan     4.75     7/30/2021      $ 1,000,000        995,870        925,000   

Deluxe Entertainment Service Group, Inc.

  Leisure Goods/
Activities/Movies
  Term Loan (First
Lien)
  Loan     6.50     2/28/2020      $ 1,882,983        1,884,279        1,751,174   

Diamond Resorts International

  Lodging & Casinos   Term Loan   Loan     5.50     5/7/2021      $ 926,971        923,222        897,614   

Diamond Resorts International

  Lodging & Casinos   Term Loan
(Add-On)
  Loan     5.50     5/7/2021      $ 1,000,000        980,687        968,330   

DJO Finance LLC

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     4.25     6/8/2020      $ 497,500        495,435        478,222   

DPX Holdings B.V.

  Healthcare &
Pharmaceuticals
  Term Loan 2015
Incr Dollar
  Loan     4.25     3/11/2021      $ 2,955,000        2,948,456        2,799,863   

Drew Marine Group Inc.

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.25     11/19/2020      $ 2,472,161        2,445,601        2,299,110   

DTZ U.S. Borrower LLC

  Construction & Building   Term Loan B
Add-on
  Loan     4.25     11/4/2021      $ 2,985,000        2,970,317        2,869,331   

Edelman Financial Group Inc.

  Banking, Finance,
Insurance & Real Estate
  Term Loan   Loan     6.50     12/19/2022      $ 1,500,000        1,470,617        1,459,695   

Education Management LLC

  Leisure Goods/
Activities/Movies
  Term Loan A   Loan     5.50     7/2/2020      $ 501,970        485,313        160,630   

Education Management LLC

  Leisure Goods/
Activities/Movies
  Term Loan B
(2.00% Cash/6.50%
PIK)
  Loan     8.50     7/2/2020      $ 893,447        867,647        56,582   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.50     8/1/2021      $ 484,659        482,690        473,148   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (Second
Lien)
  Loan     7.75     8/1/2022      $ 500,000        497,844        468,750   

Emerald 2 Limited

  Chemicals/Plastics   Term Loan B1A   Loan     5.00     5/14/2021      $ 1,000,000        991,762        866,670   

Endo International plc

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     3.75     9/26/2022      $ 1,000,000        997,602        987,780   

EnergySolutions, LLC

  Environmental
Industries
  Term Loan B   Loan     6.75     5/29/2020      $ 937,857        923,660        731,528   

Evergreen Acqco 1 LP

  Retailers (Except Food
and Drugs)
  New Term Loan   Loan     5.00     7/9/2019      $ 965,081        963,406        719,951   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

  Industrial Equipment   Term Loan (First
Lien)
  Loan     4.75     1/15/2021      $ 1,967,406        1,962,950        1,908,383   

Federal-Mogul Corporation

  Automotive   Tranche C Term
Loan
  Loan     4.75     4/15/2021      $ 2,955,000        2,943,580        2,345,530   

First Data Corporation

  Financial Intermediaries   First Data Corp T/L
(2018 New Dollar)
  Loan     3.93     3/23/2018      $ 2,790,451        2,748,229        2,752,780   

First Data Corporation

  Financial Intermediaries   First Data T/L Ext
(2021)
  Loan     4.43     3/24/2021      $ 2,111,028        2,034,284        2,077,779   

First Eagle Investment Management

  Banking, Finance,
Insurance & Real Estate
  Term Loan   Loan     4.75     12/1/2022      $ 1,500,000        1,470,946        1,412,504   

Fitness International, LLC

  Leisure Goods/
Activities/Movies
  Term Loan B   Loan     5.50     7/1/2020      $ 1,976,234        1,945,935        1,850,249   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

  Nonferrous Metals/
Minerals
  Loan   Loan     4.25     6/28/2019      $ 1,962,387        1,962,515        1,504,738   

Garda World Security Corporation

  Services: Business   Term B Delayed
Draw Loan
  Loan     4.00     11/6/2020      $ 199,120        198,391        187,344   

Garda World Security Corporation

  Services: Business   Term B Loan   Loan     4.00     11/6/2020      $ 778,380        775,586        732,346   

Gardner Denver, Inc.

  High Tech Industries   Initial Dollar Term
Loan
  Loan     4.25     7/30/2020      $ 2,451,137        2,445,005        2,016,452   

 

S-7


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Gates Global LLC

  Leisure Goods/
Activities/Movies
  Term Loan (First
Lien)
  Loan     4.25     7/5/2021      $ 493,750        488,813        433,883   

Generac Power Systems, Inc.

  Industrial Equipment   Term Loan B   Loan     3.50     5/31/2020      $ 693,858        684,537        676,511   

General Nutrition Centers, Inc.

  Retailers (Except Food
and Drugs)
  Amended Tranche B
Term Loan
  Loan     3.25     3/4/2019      $ 4,131,271        4,121,165        4,012,497   

Global Tel*Link Corporation

  Services: Business   Term Loan (First
Lien)
  Loan     5.00     5/26/2020      $ 2,725,318        2,717,647        2,237,023   

Goodyear Tire & Rubber Company, The

  Chemicals/Plastics   Loan (Second Lien)   Loan     3.75     4/30/2019      $ 2,000,000        1,974,077        2,005,000   

Grosvenor Capital Management Holdings, LP

  Brokers/Dealers/
Investment Houses
  Initial Term Loan   Loan     3.75     1/4/2021      $ 1,264,036        1,259,418        1,191,354   

GTCR Valor Companies, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     6.00     6/1/2021      $ 1,974,982        1,941,456        1,959,340   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

  Publishing   Tranche B-4 Term
Loan
  Loan     6.00     8/2/2019      $ 475,000        473,378        421,561   

HCA Inc.

  Healthcare &
Pharmaceuticals
  Tranche B-4 Term
Loan
  Loan     3.36     5/1/2018      $ 2,119,664        2,053,127        2,116,294   

Headwaters Incorporated

  Building &
Development
  Term Loan   Loan     4.50     3/24/2022      $ 248,750        247,628        248,285   

Hercules Achievement Holdings, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan B   Loan     5.00     12/10/2021      $ 249,370        246,940        244,929   

Hertz Corporation, The

  Automotive   Tranche B-1 Term
Loan
  Loan     3.75     3/12/2018      $ 2,910,000        2,933,230        2,879,998   

Hoffmaster Group, Inc.

  Containers/Glass
Products
  Term Loan   Loan     5.25     5/8/2020      $ 1,970,000        1,955,325        1,915,825   

Hostess Brand, LLC

  Beverage, Food &
Tobacco
  Term Loan B (First
Lien)
  Loan     4.50     8/3/2022      $ 997,500        995,241        983,784   

Huntsman International LLC

  Chemicals/Plastics   Term Loan B (First
Lien)
  Loan     3.52     4/19/2019      $ 3,840,541        3,814,577        3,727,245   

Husky Injection Molding Systems Ltd.

  Services: Business   Term Loan B   Loan     4.25     6/30/2021      $ 491,196        489,277        465,757   

Infor (US), Inc. (fka Lawson Software Inc.)

  Services: Business   Tranche B-5 Term
Loan
  Loan     3.75     6/3/2020      $ 2,188,296        2,174,333        2,015,049   

Insight Global

  Services: Business   Term Loan   Loan     6.00     10/29/2021      $ 1,979,592        1,971,967        1,961,439   

Informatica Corporation

  High Tech Industries   Term Loan B   Loan     4.50     8/5/2022      $ 498,750        497,554        468,411   

J. Crew Group, Inc.

  Retailers (Except Food
and Drugs)
  Term B-1 Loan
Retired 03/05/2014
  Loan     4.00     3/5/2021      $ 955,481        955,481        639,379   

Jazz Acquisition, Inc

  Aerospace and Defense   First Lien 6/14   Loan     4.50     6/19/2021      $ 492,727        491,745        434,832   

J.Jill Group, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan (First
Lien)
  Loan     6.00     5/9/2022      $ 995,000        990,362        925,350   

Kinetic Concepts, Inc.

  Healthcare &
Pharmaceuticals
  Dollar Term D-1
Loan
  Loan     4.50     5/4/2018      $ 2,452,586        2,436,004        2,392,645   

Koosharem, LLC

  Services: Business   Term Loan   Loan     7.50     5/15/2020      $ 2,965,050        2,942,458        2,683,370   

Kraton Polymers, LLC

  Chemicals/Plastics   Term Loan (Initial)   Loan     6.00     1/6/2022      $ 2,500,000        2,252,500        2,250,000   

LPL Holdings

  Banking, Finance,
Insurance & Real Estate
  Term Loan B (2022)   Loan     4.75     11/21/2022      $ 2,000,000        1,980,543        1,900,000   

Mauser Holdings, Inc.

  Containers/Glass
Products
  Term Loan   Loan     4.50     7/31/2021      $ 493,750        491,750        475,234   

Michaels Stores, Inc.

  Retailers (Except Food
and Drugs)
  Term B Loan   Loan     3.75     1/28/2020      $ 486,250        486,250        479,792   

Michaels Stores, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan B-2   Loan     4.00     1/28/2020      $ 1,212,794        1,208,220        1,201,042   

Micro Holding Corp.

  High Tech Industries   Term Loan   Loan     4.75     7/8/2021      $ 992,447        987,851        950,268   

Microsemi Corporation

  Electronics/Electric   Term Loan B   Loan     5.25     1/15/2023      $ 2,183,824        2,119,162        2,180,177   

 

S-8


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Midas Intermediate Holdco II, LLC

  Automotive   Term Loan (Initial)   Loan     4.50     8/18/2021      $ 246,875        245,802        244,098   

MPH Acquisition Holdings LLC

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     3.75     3/31/2021      $ 376,136        375,400        366,500   

MSC Software Corp.

  Services: Business   Term Loan   Loan     5.00     5/29/2020      $ 985,000        977,601        886,500   

National Veterinary Associates, Inc

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.75     8/14/2021      $ 987,526        984,296        959,549   

National Vision, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan (Second
Lien)
  Loan     6.75     3/11/2022      $ 250,000        249,729        218,750   

Neptune Finco (CSC Holdings)

  Cable and Satellite
Television
  Term Loan   Loan     5.00     10/7/2022      $ 1,000,000        985,784        989,750   

New Millennium Holdco

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     7.50     12/21/2020      $ 2,007,042        1,811,375        1,822,655   

Nortek, Inc.

  Electronics/Electric   Term Loan B   Loan     3.50     10/30/2020      $ 985,022        974,747        939,464   

NorthStar Asset Management Group Inc.

  Banking, Finance,
Insurance & Real Estate
  Term Loan B   Loan     4.63     1/30/2023      $ 2,000,000        1,930,000        1,950,000   

Novelis, Inc.

  Conglomerate   Term Loan B   Loan     4.00     6/2/2022      $ 4,771,058        4,749,389        4,440,090   

Novetta Solutions

  Aerospace and Defense   Term Loan
(200MM)
  Loan     6.00     10/16/2022      $ 2,000,000        1,980,636        1,940,000   

Novetta Solutions

  Aerospace and Defense   Term Loan
(2nd Lien)
  Loan     9.50     9/29/2023      $ 1,000,000        990,269        950,000   

NPC International, Inc.

  Food Services   Term Loan (2013)   Loan     4.75     12/28/2018      $ 481,250        481,250        472,829   

NRG Energy, Inc.

  Utilities   Term Loan (2013)   Loan     2.75     7/2/2018      $ 3,821,925        3,808,282        3,751,449   

Numericable

  Broadcast Radio and
Television
  Term Loan B-5   Loan     4.56     7/31/2022      $ 997,500        995,164        953,171   

NuSil Technology LLC.

  Chemicals/Plastics   Term Loan   Loan     5.25     4/7/2017      $ 789,045        789,045        774,645   

Onex Carestream Finance LP

  Healthcare &
Pharmaceuticals
  Term Loan (First
Lien 2013)
  Loan     5.00     6/7/2019      $ 3,832,558        3,821,232        3,244,912   

OnexYork Acquisition Co

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.75     10/1/2021      $ 493,749        490,644        459,435   

OpenLink International LLC

  Services: Business   Term B Loan   Loan     6.25     10/30/2017      $ 2,944,496        2,943,282        2,811,994   

P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)

  Food/Drug Retailers   Term Borrowing   Loan     4.25     6/24/2019      $ 1,432,750        1,427,110        1,336,039   

P2 Upstream Acquisition Co. (P2 Upstream Canada BC ULC)

  Services: Business   Term Loan (First
Lien)
  Loan     5.00     10/30/2020      $ 980,000        976,133        774,200   

Penn Products Terminal, LLC

  Chemicals/Plastics   Term Loan B   Loan     4.75     4/13/2022      $ 248,125        246,994        218,350   

PetCo Animal Supplies Stores, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan B-1   Loan     5.75     1/15/2023      $ 1,000,000        980,217        978,590   

PetCo Animal Supplies Stores, Inc.

  Retailers (Except Food
and Drugs)
  Term Loan B-2   Loan     5.62     1/15/2023      $ 1,000,000        980,216        978,960   

Petsmart, Inc. (Argos Merger Sub, Inc.)

  Retailers (Except Food
and Drugs)
  Term Loan B1   Loan     4.25     3/11/2022      $ 992,500        987,862        961,176   

PGX Holdings, Inc.

  Financial Intermediaries   Term Loan   Loan     5.75     9/29/2020      $ 954,643        947,123        941,917   

Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)

  Conglomerate   Term Loan   Loan     4.25     8/18/2022      $ 1,920,848        1,911,850        1,872,346   

Phillips-Medisize Corporation

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     4.75     6/16/2021      $ 492,500        490,535        458,025   

Physio-Control International, Inc.

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     5.50     6/6/2022      $ 498,750        496,371        498,127   

Pinnacle Foods Finance LLC

  Food Products   New Term Loan G   Loan     3.00     4/29/2020      $ 2,581,332        2,577,286        2,553,737   

 

S-9


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Planet Fitness Holdings LLC

  Leisure Goods/
Activities/Movies
  Term Loan   Loan     4.75     3/31/2021      $ 2,417,118        2,410,079        2,368,776   

PrePaid Legal Services, Inc.

  Services: Business   Term Loan B   Loan     6.50     7/1/2019      $ 724,167        721,080        716,020   

Presidio, Inc.

  Services: Business   Term Loan   Loan     5.25     2/2/2022      $ 1,902,292        1,846,615        1,816,688   

Prime Security Services (Protection One)

  Services: Business   Term Loan   Loan     5.00     7/1/2021      $ 1,995,000        1,985,640        1,924,178   

Ranpak Holdings, Inc.

  Services: Business   Term Loan   Loan     4.25     10/1/2021      $ 938,354        936,008        886,745   

Ranpak Holdings, Inc.

  Services: Business   Term Loan (Second
Lien)
  Loan     8.25     10/3/2022      $ 500,000        497,866        400,000   

Redtop Acquisitions Limited

  Electronics/Electric   Initial Dollar Term
Loan (First Lien)
  Loan     4.50     12/3/2020      $ 490,000        487,461        482,444   

Regal Cinemas Corporation

  Services: Consumer   Term Loan   Loan     3.75     4/1/2022      $ 497,500        496,320        496,256   

Research Now Group, Inc

  Media   Term Loan B   Loan     5.50     3/18/2021      $ 2,058,445        2,048,627        1,996,692   

Rexnord LLC/RBS Global, Inc.

  Industrial
Equipment
  Term B Loan   Loan     4.00     8/21/2020      $ 1,630,123        1,631,387        1,557,647   

Reynolds Group Holdings Inc.

  Industrial
Equipment
  Incremental U.S.
Term Loan
  Loan     4.50     12/1/2018      $ 1,910,551        1,910,551        1,902,946   

Riverbed Technology, Inc.

  Technology   Term Loan B   Loan     6.00     2/25/2022      $ 992,500        988,224        970,873   

Rocket Software, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     5.75     2/8/2018      $ 1,901,835        1,889,759        1,889,150   

Rovi Solutions Corporation / Rovi Guides, Inc.

  Electronics/Electric   Tranche B-3 Term
Loan
  Loan     3.75     7/2/2021      $ 1,477,500        1,471,640        1,422,094   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.50     6/20/2022      $ 497,500        495,187        479,675   

Royal Adhesives and Sealants

  Chemicals/Plastics   Term Loan (Second
Lien)
  Loan     8.50     6/19/2023      $ 500,000        496,388        478,335   

RPI Finance Trust

  Financial
Intermediaries
  Term B-4 Term
Loan
  Loan     3.50     11/9/2020      $ 5,155,193        5,155,193        5,132,665   

Sable International Finance Ltd

  Telecommunications   Term Loan B1   Loan     5.50     12/2/2022      $ 825,000        808,500        800,770   

Sable International Finance Ltd

  Telecommunications   Term Loan B2   Loan     5.50     12/2/2022      $ 675,000        661,500        655,175   

SBP Holdings LP

  Industrial
Equipment
  Term Loan (First
Lien)
  Loan     5.00     3/27/2021      $ 982,500        978,645        707,400   

Scientific Games International, Inc.

  Electronics/Electric   Term Loan B2   Loan     6.00     10/1/2021      $ 990,000        981,872        904,613   

SCS Holdings (Sirius Computer)

  High Tech
Industries
  Term Loan (First
Lien)
  Loan     6.00     10/30/2022      $ 1,977,528        1,939,305        1,937,978   

Seadrill Operating LP

  Oil & Gas   Term Loan B   Loan     4.00     2/21/2021      $ 987,406        919,799        407,305   

Sensus USA Inc. (fka Sensus Metering Systems)

  Utilities   Term Loan (First
Lien)
  Loan     4.50     5/9/2017      $ 1,905,121        1,902,477        1,826,534   

ServiceMaster Company, The

  Conglomerate   Tranche B Term
Loan
  Loan     4.25     7/1/2021      $ 1,975,000        1,959,254        1,956,889   

Shearers Foods LLC

  Food Services   Term Loan (First
Lien)
  Loan     4.94     6/30/2021      $ 987,500        985,421        952,938   

Sitel Worldwide

  Telecommunications   Term Loan   Loan     6.50     9/18/2021      $ 1,995,000        1,976,131        1,931,160   

Sonneborn, LLC

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.75     12/10/2020      $ 222,750        222,282        220,801   

Sonneborn, LLC

  Chemicals/Plastics   Initial US Term
Loan
  Loan     4.75     12/10/2020      $ 1,262,250        1,259,600        1,251,205   

 

S-10


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Sophia, L.P.

  Electronics/Electric   Term Loan (Closing
Date)
  Loan     4.75     9/30/2022      $ 1,995,000        1,985,507        1,911,469   

SourceHOV LLC

  Services: Business   Term Loan B
(First Lien)
  Loan     7.75     10/31/2019      $ 1,937,500        1,891,680        1,541,281   

SRAM, LLC

  Industrial
Equipment
  Term Loan (First
Lien)
  Loan     4.00     4/10/2020      $ 2,904,577        2,896,630        2,207,479   

Staples, Inc.

  Retailers (Except
Food and Drugs)
  Term Loan 1/16   Loan     4.75     4/23/2021      $ 1,000,000        990,308        992,130   

Steak ‘n Shake Operations, Inc.

  Food Services   Term Loan   Loan     4.75     3/19/2021      $ 965,341        957,952        946,034   

SuperMedia Inc. (fka Idearc Inc.)

  Publishing   Loan   Loan     11.60     12/30/2016      $ 222,900        220,105        67,520   

Survey Sampling International

  Services: Business   Term Loan B   Loan     6.00     12/16/2020      $ 992,500        990,554        970,169   

Sybil Finance BV

  High Tech
Industries
  Term Loan   Loan     4.25     3/20/2020      $ 1,272,143        1,270,803        1,253,061   

Syniverse Holdings, Inc.

  Telecommunications   Initial Term Loan   Loan     4.00     4/23/2019      $ 479,913        476,927        311,944   

TaxACT, Inc.

  Services: Business   Term Loan B   Loan     7.00     1/3/2023      $ 1,860,000        1,805,035        1,804,200   

TGI Friday’s, Inc.

  Food Services   Term Loan B   Loan     5.25     7/15/2020      $ 1,651,816        1,647,936        1,636,669   

Townsquare Media, Inc.

  Media   Term Loan B   Loan     4.25     4/1/2022      $ 932,522        928,333        915,624   

TPF II Power LLC and TPF II Covert Midco LLC

  Utilities   Term Loan B   Loan     5.50     10/2/2021      $ 1,491,826        1,433,943        1,396,722   

TransDigm, Inc.

  Aerospace and
Defense
  Tranche C Term
Loan
  Loan     3.75     2/28/2020      $ 4,277,294        4,283,815        4,148,975   

Travel Leaders Group, LLC

  Hotel, Gaming and
Leisure
  Term Loan B   Loan     7.00     12/7/2020      $ 1,946,300        1,939,729        1,917,107   

Tricorbraun, Inc. (fka Kranson Industries, Inc.)

  Containers/Glass
Products
  Term Loan   Loan     4.00     5/3/2018      $ 1,836,625        1,831,636        1,776,935   

Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)

  Healthcare &
Pharmaceuticals
  New Tranche B
Term Loan
  Loan     4.50     6/6/2019      $ 482,603        476,598        480,494   

Twin River Management Group, Inc.

  Lodging & Casinos   Term Loan B   Loan     5.25     7/10/2020      $ 886,192        887,853        875,673   

U.S. Security Associates Holdings, Inc.

  Services: Business   Delayed Draw Loan   Loan     6.25     7/28/2017      $ 156,888        156,328        155,973   

U.S. Security Associates Holdings, Inc.

  Services: Business   Term B Loan   Loan     6.25     7/28/2017      $ 921,426        918,393        916,054   

Univar Inc.

  Chemicals/Plastics   Term B Loan   Loan     4.25     7/1/2022      $ 2,992,500        2,978,573        2,840,810   

Univision Communications Inc.

  Telecommunications   Replacement First-
Lien Term Loan
  Loan     4.00     3/1/2020      $ 2,916,556        2,903,859        2,832,705   

Valeant Pharmaceuticals International, Inc.

  Drugs   Series D2 Term
Loan B
  Loan     3.50     2/13/2019      $ 2,545,588        2,539,315        2,385,700   

Verint Systems Inc.

  Services: Business   Term Loan   Loan     3.50     9/6/2019      $ 1,014,058        1,011,203        1,005,692   

Vertafore, Inc.

  Services: Business   Term Loan (2013)   Loan     4.25     10/3/2019      $ 2,484,603        2,484,603        2,452,775   

Vizient Inc.

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     6.25     2/13/2023      $ 1,000,000        970,144        993,750   

Vouvray US Finance

  Industrial
Equipment
  Term Loan   Loan     4.75     6/27/2021      $ 492,500        490,508        478,134   

 

S-11


Table of Contents

Issuer Name

  Industry     Asset Name     Asset
Type
    Current
Rate
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Washington Inventory Service

    Services: Business       
 
 
U.S. Term
Loan
(First Lien)
  
  
  
    Loan        5.75     12/20/2018      $ 1,736,392        1,749,291        1,475,934   

West Corporation

    Telecommunications       
 
Term B-10
Loan
  
  
    Loan        3.25     6/30/2018      $ 2,534,892        2,558,782        2,490,861   

ZEP Inc.

    Chemicals/Plastics       
 
Term Loan
B
  
  
    Loan        5.50     6/27/2022      $ 2,985,000        2,971,139        2,932,763   
             

 

 

   

 

 

 
              $ 303,643,756      $ 284,844,789   
             

 

 

   

 

 

 

 

    Principal/
Number
of Shares
    Cost     Fair Value  

Cash and cash equivalents

     

U.S. Bank Money Market (a)

  $ 2,349,633      $ 2,349,633      $ 2,349,633   
 

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

  $ 2,349,633      $ 2,349,633      $ 2,349,633   
 

 

 

   

 

 

   

 

 

 

 

(a) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of February 29, 2016.

 

S-12


Table of Contents

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2015

 

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Education Management II LLC

  Leisure Goods/
Activities/Movies
  A-1 Preferred Shares   Equity     0.00       6,692      $ 669,214      $ 437,188   

Education Management II LLC

  Leisure Goods/
Activities/Movies
  A-2 Preferred Shares   Equity     0.00       18,975        1,897,538        180,263   

24 Hour Holdings III LLC

  Leisure Goods/
Activities/Movies
  Term Loan   Loan     4.75     5/28/2021      $ 497,500        493,004        492,276   

Acosta Holdco Inc.

  Media   Term Loan B   Loan     5.00     9/27/2021      $ 1,995,000        1,981,328        2,004,416   

Aderant North America, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     5.25     12/20/2018      $ 3,260,898        3,260,898        3,240,517   

Advantage Sales & Marketing Inc.

  Services: Business   Delayed Draw Term
Loan
  Loan     4.25     7/25/2021      $ 1,995,000        1,993,940        1,984,287   

AECOM Technology Corporation

  Services: Business   Term Loan B   Loan     3.75     10/15/2021      $ 319,903        318,380        321,304   

Aegis Toxicology Science Corporation

  Healthcare &
Pharmaceuticals
  Term B Loan   Loan     5.50     2/24/2021      $ 995,000        995,000        997,488   

Akorn, Inc.

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.50     4/16/2021      $ 498,750        496,691        500,411   

Albertson’s LLC

  Retailers (Except
Food and Drugs)
  Term Loan B-4   Loan     5.50     8/25/2021      $ 3,410,000        3,389,632        3,437,723   

Alere Inc. (fka IM US Holdings, LLC)

  Healthcare &
Pharmaceuticals
  Incremental B-1
Term Loan
  Loan     4.25     6/30/2017      $ 1,529,610        1,529,610        1,529,610   

American Tire Distributors Inc

  Automotive   Term Loan   Loan     5.75     6/1/2018      $ 496,487        496,486        497,108   

Aramark Corporation

  Food Products   LC-2 Facility   Loan     3.74     7/26/2016      $ 79,187        79,178        78,395   

Aramark Corporation

  Food Products   LC-3 Facility   Loan     3.74     7/26/2016      $ 43,961        43,961        43,521   

Aramark Corporation

  Food Products   U.S. Term F Loan   Loan     3.25     2/24/2021      $ 3,182,489        3,182,489        3,168,581   

ARG IH Corp

  Food Services   Term Loan   Loan     4.75     11/15/2020      $ 495,000        494,038        495,312   

Asurion, LLC (fka Asurion Corporation)

  Insurance   Incremental Tranche
B-1 Term Loan
  Loan     5.00     5/24/2019      $ 5,412,086        5,370,590        5,424,642   

Auction.Com, LLC

  Services: Business   Term Loan A-4   Loan     4.40     2/28/2017      $ 914,567        914,567        905,422   

Avantor Performance Materials Holdings, Inc.

  Chemicals/Plastics   Term Loan   Loan     5.25     6/24/2017      $ 4,319,115        4,309,242        4,297,520   

Avast Software

  Electronics/Electric   Term Loan   Loan     4.75     3/20/2020      $ 1,925,000        1,923,275        1,937,031   

AZ Chem US Inc.

  Chemicals/Plastics   Term Loan   Loan     5.25     6/12/2021      $ 467,123        464,958        466,614   

Bass Pro Group, LLC

  Retailers (Except
Food and Drugs)
  New Term Loan   Loan     3.75     11/20/2019      $ 493,623        493,111        492,236   

Bayonne Energy Center

  Oil & Gas   Term Loan B   Loan     5.00     8/19/2021      $ 969,671        965,093        964,416   

Belmond Hotels

  Lodging & Casinos   Term Loan   Loan     4.00     3/19/2021      $ 496,250        494,055        495,009   

Berry Plastics Corporation

  Chemicals/Plastics   Term E Loan   Loan     3.75     1/6/2021      $ 1,814,499        1,802,403        1,812,648   

Big Heart Pet Brands (fka Del Monte Corporation)

  Food/Drug Retailers   Initial Term Loan   Loan     3.50     3/9/2020      $ 2,977,500        2,996,769        2,971,307   

Biomet, Inc.

  Healthcare &
Pharmaceuticals
  Dollar Term B-2
Loan
  Loan     3.65     7/25/2017      $ 1,840,718        1,840,718        1,838,601   

 

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Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

BJ’s Wholesale Club, Inc.

 

Food/Drug Retailers

  New 2013
(November)
Replacement Loan
(First Lien)
  Loan     4.50     9/26/2019      $ 1,489,975        1,488,922        1,483,374   

Bombardier Recreational Products Inc.

  Leisure Goods/
Activities/Movies
  Term B Loan   Loan     4.00     1/30/2019      $ 754,286        750,287        747,120   

Brickman Group Holdings, Inc.

  Brokers/Dealers/
Investment Houses
  Initial Term Loan
(First Lien)
  Loan     4.00     12/18/2020      $ 1,491,237        1,478,800        1,478,935   

Brock Holdings III, Inc.

  Industrial Equipment   Term Loan (First
Lien)
  Loan     6.00     3/16/2017      $ 1,938,503        1,952,391        1,904,580   

Burlington Coat Factory Warehouse Corporation

  Retailers (Except
Food and Drugs)
  Term B-2 Loan   Loan     4.25     8/13/2021      $ 1,945,000        1,935,814        1,942,219   

BWAY

  Leisure Goods/
Activities/Movies
  Term Loan B   Loan     5.50     8/14/2020      $ 995,000        985,881        998,423   

Caesars Entertainment Corp.

  Lodging & Casinos   Term B-7 Loan   Loan     9.75     1/28/2018      $ 995,000        989,028        917,141   

Camp International Holding Company

  Aerospace and
Defense
  2013 Replacement
Term Loan (First
Lien)
  Loan     4.75     5/31/2019      $ 1,960,046        1,965,495        1,969,846   

Capital Automotive L.P.

  Conglomerate   Tranche B-1 Term
Loan Facility
  Loan     4.00     4/10/2019      $ 2,079,313        2,083,783        2,084,511   

Catalent Pharma Solutions, Inc

  Drugs   Initial Term B Loan   Loan     4.25     5/20/2021      $ 497,500        495,170        498,401   

Celanese US Holdings LLC

  Chemicals/Plastics   Dollar Term C-2
Commitment
  Loan     2.49     10/31/2018      $ 2,154,560        2,180,598        2,157,533   

Cengage Learning

  Publishing   Term Loan   Loan     7.00     3/31/2020      $ 2,731,869        2,761,735        2,733,235   

Charter Communications Operating, LLC

  Cable and Satellite
Television
  Term F Loan   Loan     3.00     12/31/2020      $ 2,655,745        2,646,932        2,646,344   

CHS/Community Health Systems, Inc.

  Healthcare &
Pharmaceuticals
  2017 Term E Loan   Loan     3.49     1/25/2017      $ 1,097,818        1,074,945        1,097,193   

CHS/Community Health Systems, Inc.

  Healthcare &
Pharmaceuticals
  2021 Term D Loan   Loan     4.25     1/27/2021      $ 2,926,052        2,844,886        2,935,210   

Cinedigm Digital Funding I, LLC

  Services: Business   Term Loan   Loan     3.75     2/28/2018      $ 562,001        557,872        561,298   

CITGO Petroleum

  Oil & Gas   Term Loan B   Loan     4.50     7/29/2021      $ 997,500        994,095        979,106   

ClubCorp Club Operations, Inc.

  Lodging & Casinos   Term Loan B   Loan     4.50     7/24/2020      $ 500,000        496,250        500,315   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

  Electronics/Electric   Term B Loan   Loan     4.25     11/17/2017      $ 3,595,331        3,595,331        3,570,631   

Crosby US Acquisition Corp.

  Industrial Equipment   Initial Term Loan
(First Lien)
  Loan     3.75     11/23/2020      $ 742,500        741,718        681,244   

Crown Castle Operating Company

  Telecommunications/
Cellular
  Extended
Incremental Tranche
B-2 Term Loan
  Loan     3.00     1/31/2021      $ 2,435,594        2,433,546        2,430,723   

CT Technologies Intermediate Hldgs, Inc

  Healthcare &
Pharmaceuticals
  Term Loan (First
Lien)
  Loan     6.00     12/1/2021      $ 1,500,000        1,485,423        1,505,625   

Culligan International Company

  Conglomerate   Dollar Loan (First
Lien)
  Loan     6.25     12/19/2017      $ 779,642        736,275        765,998   

Culligan International Company

  Conglomerate   Dollar Loan (Second
Lien)
  Loan     9.50     6/19/2018      $ 783,162        739,367        727,033   

Cumulus Media Holdings Inc.

  Broadcast Radio and
Television
  Term Loan   Loan     4.25     12/23/2020      $ 470,093        466,100        466,863   

Custom Sensors

  Industrial Equipment   Term Loan   Loan     4.50     9/30/2021      $ 498,750        497,651        498,750   

 

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Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

DaVita HealthCare Partners Inc. (fka DaVita Inc.)

  Healthcare &
Pharmaceuticals
  Tranche B Term
Loan
  Loan     3.50     6/24/2021      $ 497,500        495,228        498,062   

DCS Business Services, Inc.

  Financial
Intermediaries
  Term B Loan   Loan     7.25     3/19/2018      $ 3,460,027        3,436,485        3,413,835   

Dealertrack Technologies, Inc.

  Leisure Goods/
Activities/Movies
  Term B Loan   Loan     3.25     2/26/2021      $ 477,011        475,991        474,230   

Dell International LLC

  Retailers (Except
Food and Drugs)
  Term B Loan   Loan     4.50     4/29/2020      $ 2,969,962        2,957,576        2,980,684   

Delos Finance SARL

  Financial
Intermediaries
  Term Loan   Loan     3.50     3/6/2021      $ 500,000        497,835        499,790   

Delta 2 (Lux) S.a.r.l.

  Lodging & Casinos   Term Loan B-3   Loan     4.75     7/30/2021      $ 1,000,000        995,314        995,630   

Deluxe Entertainment Service Group, Inc.

  Leisure Goods/
Activities/Movies
  Term Loan (First
Lien)
  Loan     6.50     2/28/2020      $ 1,882,983        1,884,624        1,835,908   

Devix US, Inc.

  Chemicals/Plastics   Term Loan   Loan     4.25     5/2/2021      $ 250,000        247,710        250,938   

Devix US, Inc.

  Chemicals/Plastics   Term Loan (Second
Lien)
  Loan     8.00     5/2/2022      $ 497,500        495,324        497,500   

Diamond Resorts International

  Lodging & Casinos   Term Loan   Loan     5.50     5/9/2021      $ 995,000        990,370        999,975   

Dollar Tree

  Retail   Term Loan B
(3950MM)
  Loan     4.25     3/9/2022      $ 1,000,000        995,000        1,007,500   

DPX Holdings B.V.

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     4.25     3/11/2021      $ 2,985,000        2,978,605        2,962,075   

Drew Marine Group Inc.

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.50     11/19/2020      $ 1,489,975        1,495,721        1,473,213   

Education Management LLC

  Leisure Goods/
Activities/Movies
  Term Loan A   Loan     5.50     7/2/2020      $ 501,970        482,120        457,295   

Education Management LLC

  Leisure Goods/
Activities/Movies
  Term Loan B   Loan    

 

 

 

8.50

(2.00

Cash/6.50

PIK


    7/2/2020      $ 836,617        805,283        672,882   

EIG Investors Corp.

  Services: Business   Term Loan   Loan     5.00     11/8/2019      $ 987,500        983,552        989,969   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     4.50     8/1/2021      $ 498,750        496,403        496,102   

Emerald Performance Materials, LLC

  Chemicals/Plastics   Term Loan (Second
Lien)
  Loan     7.75     8/1/2022      $ 500,000        497,553        484,845   

EnergySolutions, LLC

  Oil & Gas   Term Loan B   Loan     6.75     5/29/2020      $ 937,857        921,126        942,546   

Enviromental Resources Management

  Services: Business   Term Loan   Loan     5.00     5/14/2021      $ 1,000,000        990,000        985,000   

Evergreen Acqco 1 LP

  Retailers (Except
Food and Drugs)
  New Term Loan   Loan     5.00     7/9/2019      $ 975,056        972,887        955,555   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

  Industrial Equipment   Term Loan (First
Lien)
  Loan     4.75     1/15/2021      $ 1,987,481        1,982,274        1,972,575   

Federal-Mogul Corporation

  Automotive   Tranche C Term
Loan
  Loan     4.75     4/15/2021      $ 2,985,000        2,971,883        2,975,687   

First Data Corporation

  Financial
Intermediaries
  2017 Second New
Dollar Term Loan
  Loan     3.74     3/23/2018      $ 2,790,451        2,729,399        2,785,568   

First Data Corporation

  Financial
Intermediaries
  2018 Dollar Term
Loan
  Loan     4.24     3/24/2021      $ 2,111,028        2,021,476        2,115,777   

Fitness International, LLC

  Leisure Goods/
Activities/Movies
  Term Loan B   Loan     5.50     7/1/2020      $ 1,492,500        1,482,322        1,421,606   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

  Nonferrous Metals/
Minerals
  Loan   Loan     3.75     6/28/2019      $ 1,982,462        1,982,212        1,835,423   

 

S-15


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Four Seasons Holdings Inc.

  Lodging & Casinos   Term Loan (First
Lien)
  Loan     3.50     6/27/2020      $ 493,750        493,750        491,281   

Garda World Security Corporation

  Services: Business   Term B Delayed
Draw Loan
  Loan     4.00     11/6/2020      $ 201,157        200,308        199,146   

Garda World Security Corporation

  Services: Business   Term B Loan   Loan     4.00     11/6/2020      $ 786,343        783,060        778,479   

Gardner Denver, Inc.

  Oil & Gas   Initial Dollar Term
Loan
  Loan     4.25     7/30/2020      $ 2,476,212        2,467,608        2,377,164   

Gates Global LLC

  Leisure Goods/
Activities/Movies
  Term Loan (First
Lien)
  Loan     4.25     7/3/2021      $ 498,750        493,763        494,885   

Generac Power Systems, Inc.

  Industrial Equipment   Term Loan B   Loan     3.25     5/29/2020      $ 802,956        789,932        797,182   

General Nutrition Centers, Inc.

  Retailers (Except
Food and Drugs)
  Amended Tranche B
Term Loan
  Loan     3.25     3/4/2019      $ 4,724,136        4,709,712        4,649,353   

Global Tel*Link Corporation

  Services: Business   Term Loan (First
Lien)
  Loan     5.00     5/26/2020      $ 2,755,515        2,747,025        2,719,914   

Goodyear Tire & Rubber Company, The

  Chemicals/Plastics   Loan (Second Lien)   Loan     4.75     4/30/2019      $ 3,333,333        3,296,753        3,347,933   

Grosvenor Capital Management Holdings, LP

  Brokers/Dealers/
Investment Houses
  Initial Term Loan   Loan     3.75     1/4/2021      $ 3,395,892        3,381,240        3,353,443   

GTCR Valor Companies, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     6.00     6/1/2021      $ 1,995,000        1,981,582        1,965,075   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

  Publishing   Tranche B-4 Term
Loan
  Loan     6.00     8/2/2019      $ 487,500        485,460        488,963   

HCA Inc.

  Healthcare &
Pharmaceuticals
  Tranche B-4 Term
Loan
  Loan     2.99     5/1/2018      $ 5,663,006        5,409,534        5,658,872   

Hertz Corporation, The

  Automotive   Tranche B-1 Term
Loan
  Loan     4.00     3/12/2018      $ 2,940,000        2,975,234        2,927,152   

Hoffmaster Group, Inc.

  Containers/Glass
Products
  Term Loan   Loan     5.25     5/8/2020      $ 1,990,000        1,972,040        1,999,950   

Huntsman International LLC

  Chemicals/Plastics   Extended Term B
Loan
  Loan     2.69     4/19/2017      $ 3,880,270        3,866,113        3,872,199   

Husky Injection

  Services: Business   Term Loan B   Loan     4.25     6/30/2021      $ 498,099        495,886        495,818   

Ikaria, Inc.

  Healthcare &
Pharmaceuticals
  Initial Term Loan
(First Lien)
  Loan     5.00     2/12/2021      $ 435,702        433,809        434,251   

Infor (US), Inc. (fka Lawson Software Inc.)

  Services: Business   Tranche B-5 Term
Loan
  Loan     3.75     6/3/2020      $ 2,211,036        2,194,068        2,190,650   

Insight Global

  Services: Business   Term Loan   Loan     6.00     10/29/2021      $ 2,000,000        1,990,539        1,993,760   

J. Crew Group, Inc.

  Retailers (Except
Food and Drugs)
  Term B-1 Loan
Retired 03/05/2014
  Loan     4.00     3/5/2021      $ 965,206        965,206        906,493   

Jazz Acquisition, Inc

  Aerospace and
Defense
  First Lien 6/14   Loan     4.50     6/19/2021      $ 497,576        496,332        492,913   

Kinetic Concepts, Inc.

  Healthcare &
Pharmaceuticals
  Dollar Term D-1
Loan
  Loan     4.00     5/4/2018      $ 2,477,613        2,453,687        2,477,167   

Koosharem, LLC

  Services: Business   Term Loan   Loan     7.50     5/15/2020      $ 2,995,000        2,968,450        2,961,306   

La Quinta Holdings, Inc.

  Lodging & Casinos   Term Loan (First
Lien)
  Loan     4.00     4/14/2021      $ 451,283        449,626        450,719   

Level 3 Financing, Inc.

  Telecommunications   Term Loan B   Loan     4.50     1/31/2022      $ 500,000        496,541        502,085   

Mauser Holdings, Inc.

  Containers/Glass
Products
  Term Loan   Loan     4.50     7/31/2021      $ 498,750        496,409        491,269   

Michaels Stores, Inc.

  Retailers (Except
Food and Drugs)
  Term B Loan   Loan     3.75     1/28/2020      $ 491,250        491,250        488,258   

 

S-16


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Michaels Stores, Inc.

  Retailers (Except
Food and Drugs)
  Term Loan B-2   Loan     4.00     1/28/2020      $ 1,492,500        1,485,638        1,488,769   

Microsemi Corporation

  Electronics/Electric   Incremental Term
Loan
  Loan     3.50     2/19/2020      $ 2,393,981        2,389,500        2,381,509   

Microsemi Corporation

  Electronics/Electric   Term Loan   Loan     3.75     2/19/2020      $ 172,170        172,170        171,309   

Midas Intermediate Holdco II, LLC

  Automotive   Delayed Draw Term
Loan
  Loan     4.75     8/18/2021      $ 25,253        25,253        25,364   

Midas Intermediate Holdco II, LLC

  Automotive   Term Loan B   Loan     4.75     8/18/2021      $ 224,122        223,063        225,103   

Millenium Laboratories, LLC

  Drugs   Term Loan   Loan     5.25     4/16/2021      $ 1,492,500        1,479,041        1,489,396   

Mitel US Holdings, Inc.

  Telecommunications   Term Loan   Loan     5.25     1/31/2020      $ 196,558        195,710        196,411   

MPH Acquisition Holdings LLC

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     3.75     3/31/2021      $ 445,455        444,453        442,033   

MSC Software Corp.

  Services: Business   Term Loan   Loan     5.00     5/29/2020      $ 995,000        986,186        996,244   

National CineMedia, LLC

  Leisure Goods/
Activities/Movies
  Term Loan (2013)   Loan     2.95     11/26/2019      $ 1,086,207        1,058,933        1,067,198   

National Veterinary Associates, Inc

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.75     8/14/2021      $ 997,500        992,907        996,253   

National Vision, Inc.

  Retailers (Except
Food and Drugs)
  Term Loan (Second
Lien)
  Loan     6.75     3/11/2022      $ 250,000        249,730        240,418   

Newsday, LLC

  Publishing   Term Loan   Loan     3.69     10/12/2016      $ 2,215,385        2,214,305        2,201,538   

Nortek, Inc.

  Electronics/Electric   Term B Loan   Loan     3.75     10/30/2020      $ 995,000        992,803        986,921   

Novelis, Inc.

  Conglomerate   Initial Term Loan   Loan     3.75     3/10/2017      $ 4,807,530        4,817,740        4,799,502   

NPC International, Inc.

  Food Services   Term Loan (2013)   Loan     4.00     12/28/2018      $ 486,250        486,250        480,780   

NRG Energy, Inc.

  Utilities   Term Loan (2013)   Loan     2.75     7/2/2018      $ 3,861,225        3,842,164        3,850,761   

NuSil Technology LLC.

  Chemicals/Plastics   Term Loan   Loan     5.25     4/7/2017      $ 797,986        797,986        791,004   

Ollie’s Bargain Outlet, Inc

  Retailers (Except
Food and Drugs)
  Term Loan   Loan     4.75     9/30/2019      $ 977,052        972,882        962,396   

On Assignment, Inc.

  Services: Business   Initial Term B Loan   Loan     3.50     5/15/2020      $ 1,311,364        1,303,451        1,301,528   

Onex Carestream Finance LP

  Healthcare &
Pharmaceuticals
  Term Loan (First
Lien 2013)
  Loan     5.00     6/7/2019      $ 4,074,401        4,059,378        4,078,842   

OnexYork Acquisition Co

  Healthcare &
Pharmaceuticals
  Delayed Draw Term
Loan
  Loan     4.75     10/1/2021      $ —          —          —     

OnexYork Acquisition Co

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     4.75     10/1/2021      $ 498,750        495,208        496,466   

OpenLink International LLC

  Services: Business   Term B Loan   Loan     6.25     10/28/2017      $ 970,000        970,000        957,875   

Orbitz Worldwide, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     4.50     4/15/2021      $ 1,494,994        1,492,711        1,494,755   

P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)

  Food/Drug Retailers   Term Borrowing   Loan     4.25     6/24/2019      $ 1,447,901        1,440,712        1,406,274   

P2 Upstream Acquisition Co. (P2 Upstream Canada BC ULC)

  Services: Business   Term Loan (First
Lien)
  Loan     5.00     10/30/2020      $ 990,000        985,444        947,925   

Par Pharmaceutical

  Healthcare &
Pharmaceuticals
  Term Loan B3   Loan     4.25     9/28/2019      $ 500,000        497,502        499,065   

PetCo Animal Supplies Stores, Inc.

  Retailers (Except
Food and Drugs)
  New Loans   Loan     4.00     11/24/2017      $ 1,469,388        1,468,520        1,467,066   

PetSmart

  Retail   Term Loan B   Loan     5.00     3/11/2022      $ 1,000,000        995,000        1,007,050   

PGX Holdings, Inc.

  Financial
Intermediaries
  Term Loan   Loan     6.25     9/29/2020      $ 993,750        984,482        993,750   

 

S-17


Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)

  Conglomerate   2013 Term Loan   Loan     4.00     12/5/2018      $ 1,940,400        1,918,409        1,935,898   

Phillips-Medisize Corporation

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     4.75     6/16/2021      $ 497,500        495,245        495,948   

Pinnacle Foods Finance LLC

  Food Products   New Term Loan G   Loan     3.00     4/29/2020      $ 2,581,332        2,576,466        2,565,560   

Planet Fitness Holdings LLC

  Leisure Goods/
Activities/Movies
  Term Loan   Loan     4.75     3/31/2021      $ 1,488,750        1,482,052        1,488,750   

Polymer Group, Inc.

  Chemicals/Plastics   Initial Loan   Loan     5.25     12/19/2019      $ 495,000        492,860        495,619   

Presidio

  Services: Business   Term Loan B   Loan     6.25     2/2/2022      $ 2,000,000        1,940,655        1,973,760   

Prestige Brands, Inc.

  Drugs   Term B-1 Loan   Loan     4.13     1/31/2019      $ 344,697        341,112        344,697   

Prestige Brands, Inc.

  Leisure Goods/
Activities/Movies
  Term Loan   Loan     4.50     9/3/2021      $ 1,861,111        1,858,280        1,860,534   

QoL Meds, LLC

  Healthcare &
Pharmaceuticals
  Term Loan B   Loan     5.50     7/15/2020      $ 1,995,000        1,985,909        1,990,013   

Quintiles Transnational Corp.

  Conglomerate   Term B-3 Loan   Loan     3.75     6/8/2018      $ 3,627,678        3,600,425        3,628,802   

Ranpak Holdings, Inc.

  Services: Business   Term Loan   Loan     4.75     10/1/2021      $ 997,500        995,145        996,882   

Ranpak Holdings, Inc.

  Services: Business   Term Loan (Second
Lien)
  Loan     8.25     9/30/2022      $ 500,000        497,672        496,250   

Redtop Acquisitions Limited

  Electronics/Electric   Initial Dollar Term
Loan (First Lien)
  Loan     4.50     12/3/2020      $ 495,000        491,974        494,381   

Rexnord LLC/RBS Global, Inc.

  Industrial Equipment   Term B Loan   Loan     4.00     8/21/2020      $ 1,646,799        1,648,172        1,642,172   

Reynolds Group Holdings Inc.

  Industrial Equipment   Incremental U.S.
Term Loan
  Loan     4.00     12/1/2018      $ 1,960,200        1,960,200        1,965,767   

Riverbed Technology

  Technology   Term Loan B   Loan     6.00     2/25/2022      $ 1,000,000        995,000        1,007,500   

Rocket Software, Inc.

  Services: Business   Term Loan (First
Lien)
  Loan     5.75     2/8/2018      $ 1,916,674        1,898,764        1,906,285   

Rovi Solutions Corporation / Rovi Guides, Inc.

  Electronics/Electric   Tranche B-3 Term
Loan
  Loan     3.75     7/2/2021      $ 1,492,500        1,485,607        1,479,441   

RPI Finance Trust

  Drugs   Term B-2 Term
Loan
  Loan     3.25     5/9/2018      $ 5,207,431        5,188,396        5,219,147   

SBP Holdings LP

  Industrial Equipment   Term Loan (First
Lien)
  Loan     5.00     3/27/2021      $ 992,500        988,065        863,475   

Scientific Games International, Inc.

  Electronics/Electric   Term Loan B2   Loan     6.00     10/1/2021      $ 1,000,000        990,433        998,040   

Scitor Corporation

  Services: Business   Term Loan   Loan     5.00     2/15/2017      $ 463,977        462,387        461,077   

Seadrill

  Oil & Gas   Term Loan B   Loan     4.00     2/21/2021      $ 997,481        917,590        806,294   

Sensata Technologies B.V./Sensata Technology Finance Company, LLC

  Industrial Equipment   Term Loan   Loan     3.25     5/13/2019      $ 1,509,445        1,509,445        1,511,603   

Sensus USA Inc. (fka Sensus Metering Systems)

  Utilities   Term Loan (First
Lien)
  Loan     4.50     5/9/2017      $ 1,925,067        1,920,548        1,925,067   

ServiceMaster Company, The

  Conglomerate   Tranche B Term
Loan
  Loan     4.25     7/1/2021      $ 1,995,000        1,976,650        1,994,641   

Shearers Foods LLC

  Food Services   Term Loan (First
Lien)
  Loan     4.50     6/30/2021      $ 997,500        995,166        996,253   

Sonneborn, LLC

  Chemicals/Plastics   Term Loan (First
Lien)
  Loan     5.50     12/10/2020      $ 225,000        224,471        225,000   

Sonneborn, LLC

  Chemicals/Plastics   Initial US Term
Loan
  Loan     5.50     12/10/2020      $ 1,275,000        1,272,004        1,275,000   

 

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Table of Contents

Issuer Name

  Industry   Asset Name   Asset
Type
  Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Sophia, L.P.

  Electronics/Electric   Term B Loan   Loan     4.00     7/19/2018      $ 886,138        877,732        884,756   

SourceHOV LLC

  Services: Business   Term Loan B (First
Lien)
  Loan     7.75     10/31/2019      $ 2,000,000        1,942,284        1,915,000   

Southwire Company, LLC (f.k.a Southwire Company)

  Building and
Development
  Initial Term Loan   Loan     3.25     2/10/2021      $ 496,250        495,181        485,084   

SRAM, LLC

  Industrial Equipment   Term Loan (First
Lien)
  Loan     4.00     4/10/2020      $ 2,967,681        2,957,888        2,952,842   

Steak ‘n Shake Operations, Inc.

  Food Services   Term Loan   Loan     4.75     3/19/2021      $ 992,500        983,723        975,131   

STHI Holding

  Healthcare &
Pharmaceuticals
  Term Loan   Loan     4.50     8/6/2021      $ 997,500        997,500        994,388   

SunGard Data Systems Inc. (Solar Capital Corp.)

  Conglomerate   Tranche C Term
Loan
  Loan     3.90     2/28/2017      $ 285,352        283,117        285,084   

SunGard Data Systems Inc. (Solar Capital Corp.)

  Conglomerate   Tranche E Term
Loan
  Loan     4.00     3/9/2020      $ 3,707,953        3,618,899        3,706,804   

SuperMedia Inc. (fka Idearc Inc.)

  Publishing   Loan   Loan     11.60     12/30/2016      $ 238,660        232,462        203,756   

Syniverse Holdings, Inc.

  Telecommunications   Initial Term Loan   Loan     4.00     4/23/2019      $ 479,913        476,105        473,314   

TGI Friday’s

  Food Services   Term Loan B   Loan     5.25     7/15/2020      $ 267,977        266,768        267,642   

TGI Friday’s

  Food Services   Term Loan (Second
Lien)
  Loan     9.25     7/15/2021      $ 2,000,000        2,016,250        2,000,000   

TPF II Power LLC and TPF II Covert Midco LLC

  Utilities   Term Loan B   Loan     5.50     10/2/2021      $ 500,000        496,689        504,790   

TransDigm, Inc.

  Aerospace and
Defense
  Tranche C Term
Loan
  Loan     3.75     2/28/2020      $ 4,847,054        4,856,484        4,824,661   

TransFirst

  Financial
Intermediaries
  Term Loan   Loan     5.50     11/12/2021      $ 500,000        495,182        502,815   

TransUnion

  Financial
Intermediaries
  Term Loan   Loan     4.00     4/9/2021      $ 496,250        495,138        493,977   

Tricorbraun, Inc. (fka Kranson Industries, Inc.)

  Containers/Glass
Products
  Term Loan   Loan     4.00     5/3/2018      $ 1,850,000        1,843,008        1,822,250   

Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)

  Healthcare &
Pharmaceuticals
  New Tranche B
Term Loan
  Loan     4.50     6/6/2019      $ 487,566        479,874        481,471   

Twin River Management Group, Inc.

  Lodging & Casinos   Term Loan B   Loan     5.25     7/10/2020      $ 974,167        976,455        975,998   

U.S. Security Associates Holdings, Inc.

  Services: Business   Delayed Draw Loan   Loan     6.25     7/28/2017      $ 158,518        157,610        156,734   

U.S. Security Associates Holdings, Inc.

  Services: Business   Term B Loan   Loan     6.25     7/28/2017      $ 931,046        926,144        920,572   

United Surgical Partners International, Inc.

  Healthcare &
Pharmaceuticals
  New Tranche B
Term Loan
  Loan     4.75     4/3/2019      $ 2,431,749        2,408,580        2,431,749   

Univar Inc.

  Chemicals/Plastics   Term B Loan   Loan     5.00     6/30/2017      $ 3,844,964        3,844,749        3,813,935   

Univision Communications Inc.

  Telecommunications   Replacement First-
Lien Term Loan
  Loan     4.00     3/1/2020      $ 2,947,446        2,931,982        2,940,549   

Valeant Pharmaceuticals International, Inc.

  Drugs   Series D2 Term
Loan B
  Loan     3.50     2/13/2019      $ 2,545,588        2,537,415        2,539,683   

Verint Systems Inc.

  Services: Business   Term Loan   Loan     3.50     9/6/2019      $ 1,264,058        1,259,623        1,259,634   

Vertafore, Inc.

  Services: Business   Term Loan (2013)   Loan     4.25     10/3/2019      $ 2,881,003        2,881,003        2,878,294   

Vouvray US Finance

  Industrial Equipment   Term Loan   Loan     5.00     6/28/2021      $ 497,500        495,243        499,366   

 

S-19


Table of Contents

Issuer Name

  Industry     Asset Name     Asset
Type
    Current
Rate
    Maturity
Date
    Principal/
Number

of Shares
    Cost     Fair
Value
 

Washington Inventory Service

    Services: Business       
 
U.S. Term Loan
(First Lien)
  
  
    Loan        5.75     12/20/2018      $ 1,832,876        1,851,978        1,796,218   

Waste Industries

    Environmental        Term Loan B        Loan        4.25     2/27/2020      $ 250,000        249,375        250,520   

Wendy’s International, Inc

    Food Services        Term B Loan        Loan        3.25     5/15/2019      $ 673,630        668,099        670,545   

West Corporation

    Telecommunications        Term B-10 Loan        Loan        3.25     6/30/2018      $ 2,571,560        2,605,923        2,562,998   
             

 

 

   

 

 

 
              $ 297,760,340      $ 295,239,268   
             

 

 

   

 

 

 

 

    Principal/
Number

of Shares
    Cost     Fair
Value
 

Cash and cash equivalents

     

U.S. Bank Money Market(a)

  $ 5,831,797      $ 5,831,797      $ 5,831,797   
   

 

 

   

 

 

 

Total cash and cash equivalents

  $ 5,831,797      $ 5,831,797      $ 5,831,797   
   

 

 

   

 

 

 

 

(a) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of February 28, 2015.

 

S-20


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Changes in Net Assets

 

     For the year ended
February 29, 2016
    For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

INCREASE FROM OPERATIONS:

      

Net investment income (loss)

   $ 104,587      $ 793,848      $ (2,143,630

Net realized gain (loss) from investments

     419,096        620,817        (8,815,296

Net unrealized appreciation (depreciation) on investments

     (16,277,895     (3,874,583     6,776,871   
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from operations

     (15,754,212     (2,459,918     (4,182,055
  

 

 

   

 

 

   

 

 

 

Total decrease in net assets

     (15,754,212     (2,459,918     (4,182,055

Net assets at beginning of period

     (5,803,156     (3,343,238     838,817   
  

 

 

   

 

 

   

 

 

 

Net assets at end of period

   $ (21,557,368   $ (5,803,156   $ (3,343,238
  

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

S-21


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Cash Flows

 

     For the year ended
February 29, 2016
    For the year ended
February 28, 2015
    For the year ended
February 28, 2014
 

Operating activities

      

NET DECREASE IN NET ASSETS FROM OPERATIONS

   $ (15,754,212   $ (2,459,918   $ (4,182,055

ADJUSTMENTS TO RECONCILE NET DECREASE IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES:

      

Paid-in-kind interest income

     (56,830     (167,097     (10,122

Net accretion of discount on investments

     (280,310     (454,809     (568,674

Amortization of deferred debt financing costs

     955,858        953,862        994,602   

Loss on extinguishment of debt

     —          —          3,442,442   

Net realized (gain) loss from investments

     (419,096     (620,817     8,815,296   

Net unrealized (appreciation) depreciation on investments

     16,277,895        3,874,583        (6,776,871

Proceeds from sale and redemption of investments

     142,862,138        141,358,326        128,190,654   

Purchase of investments

     (147,989,317     (138,738,379     (55,721,381

(Increase) decrease in operating assets:

      

Interest receivable

     (407,925     160,315        134,033   

Receivable from open trades

     (572,144     (318,421     3,330,272   

Other assets

     —          91,336        (91,336

Increase (decrease) in operating liabilities:

      

Interest payable

     (5,846     9,410        (43,645

Payable from open trades

     1,909,523        (4,230,669     (6,901,250

Accrued base management fee

     (949     10,904        31,882   

Accrued subordinated management fee

     (949     10,904        (97,629
  

 

 

   

 

 

   

 

 

 

NET CASH (USED BY) PROVIDED BY OPERATING ACTIVITIES

     (3,482,164     (520,470     70,546,218   
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Borrowings on debt

     —          —          277,711,620   

Paydowns on debt

     —          (1,666,666     (366,793,378

Deferred debt financing costs

     —          —          (2,250,398
  

 

 

   

 

 

   

 

 

 

NET CASH USED BY FINANCING ACTIVITIES

     —          (1,666,666     (91,332,156
  

 

 

   

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (3,482,164     (2,187,136     (20,785,938

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     5,831,797        8,018,933        28,804,871   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,349,633      $ 5,831,797      $ 8,018,933   
  

 

 

   

 

 

   

 

 

 

Supplemental Information:

      

Interest paid during the period

   $ 11,702,603      $ 9,625,726      $ 11,722,159   

Supplemental non-cash information:

      

Paid-in-kind interest income

   $ 56,830      $ 167,097      $ 10,122   

Net accretion of discount on investments

   $ 280,310      $ 454,809      $ 568,674   

Amortization of deferred debt financing costs

   $ 955,858      $ 953,862      $ 994,602   

See accompanying notes to financial statements.

 

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SARATOGA INVESTMENT CORP. CLO 2013-1, LTD.

NOTES TO FINANCIAL STATEMENTS

1. Organization and Purpose

Saratoga Investment Corp. CLO 2013-1, Ltd. (the “Issuer”, “we”, “our”, “us”, “CLO” and “Saratoga CLO”), an exempted company with limited liability incorporated under the laws of the Cayman Islands was formed on November 28, 2007 and commenced operations on January 22, 2008. The Issuer was established to acquire or participate in U.S. dollar-denominated corporate debt obligations.

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to an indenture, dated January 22, 2008 (the “Indenture”), with U.S. Bank National Association (the “Trustee”) servicing as the Trustee there under.

On October 17, 2013, in a refinancing transaction, the Issuer issued $284.9 million of notes (the “2013-1 CLO Notes”), consisting of Class X Floating Rate Senior Notes, Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 CLO Notes were used, along with existing assets held by the Trustee, to redeem all of the Secured Notes issued in 2008. As of February 29, 2016, Saratoga Investment Corp. owned 100% of the Subordinated Notes of the CLO.

Pursuant to an investment management agreement (the “Investment Management Agreement”), Saratoga Investment Corp. (the “Investment Manager”), provides investment management services to the Issuer, and makes day-to-day investment decisions concerning the assets of the Issuer. The Investment Manager also performs certain administrative services on behalf of the Issuer under the Investment Management Agreement.

2. Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are stated in U.S. dollars. The following is a summary of the significant accounting policies followed by the Issuer in the preparation of its financial statements.

The Issuer is considered to be an investment company for financial reporting purposes and has applied the guidance in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services—Investment Companies.” There has been no change to the Issuer’s status as an investment company during the year ended February 29, 2016.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires the Investment Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including the fair value of investments, and the amounts of income and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material.

Cash and Cash Equivalents

The Issuer defines cash and cash equivalents as highly liquid financial instruments with original maturities of three months or less. Cash and cash equivalents may include investments in money market mutual funds,

 

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which are carried at fair value. At February 29, 2016 and February 28, 2015, cash and cash equivalents amounted to $2.3 million and $5.8 million, respectively, and are swept on an overnight basis into a money market deposit account and invested in shares of JP Morgan Liquidity Institutional fund held at the Trustee.

Valuation of Investments

The Issuer accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Issuer to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by the Investment Manager to approve a fair value determination to reflect significant events affecting the value of these investments. The Investment Manager values investments for which market quotations are not readily available at fair value. Determinations of fair value may involve significant judgments and estimates. The types of factors that may be considered in determining the fair value of investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that are ultimately realized upon the disposal of such investments.

Investment Transactions and Income Recognition

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Issuer stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon the Investment Manager’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.

Paid-in-Kind Interest

The Issuer holds debt investments in its portfolio that contain a PIK interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity,

 

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is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

Deferred Debt Financing Costs, net

In April 2015, the FASB has issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and early adoption is allowed, and is to be applied on a retrospective basis. Management has adopted the provisions of ASU 2015-03 as of February 28, 2015, by reclassifying deferred debt financing costs from within total assets to within total liabilities as a contra-liability. The adoption of the provisions of ASU 2015-03 did not materially impact the Issuer’s financial position or results of operations. Prior period amounts were reclassified to conform to the current period presentation.

Included in deferred debt financing costs of $1.7 million as of February 29, 2016 and $1.9 million as of February 28, 2015 are structuring fees of the investment bank, rating agency fees and legal fees associated with the issuance of the 2013-1 CLO Notes on October 17, 2013. Such costs have been capitalized and amortized using an effective yield method, over the life of the related notes.

Deferred debt financing costs of $1.6 million, incurred in connection with the issuance of the Secured Notes, were expensed when the Secured Notes were extinguished on October 17, 2013.

Management Fees

The Issuer is externally managed by the Investment Manager pursuant to the Investment Management Agreement. As compensation for the performance of its obligations under the Investment Management Agreement, the Investment Manager is entitled to receive from the Issuer a base management fee (the “Base Management Fee”), a subordinated management fee (the “Subordinated Management Fee”) and an incentive management fee (the “Incentive Management Fee”). The Base Management Fee is payable in arrears quarterly (subject to availability of funds and to the satisfaction of payment obligations on the debt obligations of the Issuer (the “Priority of Payments”) in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the collection period. The Subordinated Management Fee is payable in arrears quarterly (subject to availability of funds and to the Priority of Payments) in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the Collection Period. The Incentive Management Fee equals 20% of the remaining interest proceeds and principal proceeds, if any, after the Subordinated Notes have realized the incentive management fee target return of 12.0%, in accordance with the Priority of Payments after making the prior distributions on the relevant payment date. For the years ended February 29, 2016, February 28, 2015 and 2014, no Incentive Management Fees have been paid.

Expenses

The Issuer bears its own organizational and offering expenses, all expenses related to its investment program and expenses incurred in connection with its operations including, but not limited to, external legal, administrative, trustee, accounting, tax and audit expenses, costs related to trading, acquiring, monitoring or disposing of investments of the Issuer, and interest and other borrowing expenses, expenses of preparing and distributing reports, financial statements, and litigation or other extraordinary expenses. The Issuer has retained the Trustee to provide trustee services. Additionally, the Trustee performs loan administration, debt covenant compliance calculations, and monitoring and reporting services. For the years ended February 29, 2016, February 28, 2015 and 2014, the Issuer paid $0.1 million, $0.1 million, $0.1 million, respectively, for trustee services provided and is included in other expenses in the statements of operations.

 

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Interest Expense

The Issuer has issued rated and unrated notes to finance its operations. Interest on debt is calculated by the Trustee for the Issuer. Interest is accrued and generally paid quarterly. For the years ended February 29, 2016, February 28, 2015 and 2014, $5.6 million, $3.7 million and $5.7 million of payments to the Subordinated Notes were included in interest expense on the statements of operations, respectively.

Risk Management

In the ordinary course of its business, the Issuer manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.

The Issuer is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution.

The Issuer has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.

New Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact the adoption of this standard has on the Issuer’s financial statements and disclosures.

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 updates the accounting guidance included in ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated accounting guidance provided by ASU 2015-15 was the result of the Emerging Issues Task Force meeting, held on June 18, 2015, at which the SEC staff stated that the SEC would not object to an entity deferring and presenting costs related to revolving debt arrangements as an asset. As the Issuer previously adopted the provisions of ASU 2015-03 and reclassified all deferred debt financing costs from within total assets to within total liabilities as a contra-liability effective as of February 28, 2015, it has chosen not to avail itself of the updated accounting treatment provided by ASU 2015-15 and continues to include all deferred debt financing costs as a contra-liability within total liabilities.

In February 2015, the FASB issued ASU 2015-02, Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required under GAAP and ends the deferral granted to investment companies from applying the variable interest entity guidance. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015 and early adoption is permitted. Management does not believe these changes will have a material impact on the Issuer’s financial statements and disclosures.

 

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In August 2014, the FASB issued new accounting guidance that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments provide a definition of the term “substantial doubt” and include principles for considering the mitigating effect of management’s plans. The amendments also require an evaluation every reporting period, including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued), and certain disclosures when substantial doubt is alleviated or not alleviated. The amendments in this update are effective for reporting periods ending after December 15, 2016. Management does not believe these changes will have a material impact on the Issuer’s financial statements and disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, and early application is not permitted. Management is currently evaluating the impact these changes will have on the Issuer’s financial statements and disclosures.

3. Fair Value Measurements

As noted above, the Issuer values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, 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.

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based on the observability of the inputs used in the valuation techniques, the Issuer is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

    Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Issuer has the ability to access.

 

    Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

    Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Issuer continues to employ the valuation policy that is consistent with ASC 820 and the 1940 Act.

 

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The following table presents fair value measurements of investments, by major class, as of February 29, 2016, according to the fair value hierarchy:

 

     Fair Value Measurements  
         Level 1          Level 2          Level 3          Total  

Term loans

   $ —        $ 239,255,853       $ 45,397,073       $ 284,652,926   

Equity interest

     —          190,095         1,768         191,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 239,445,948       $ 45,398,841       $ 284,844,789   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2015, according to the fair value hierarchy:

 

     Fair Value Measurements  
         Level 1          Level 2          Level 3          Total  

Term loans

   $ —         $ 294,621,817       $ —        $ 294,621,817   

Equity interest

     —          617,451         —          617,451   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 295,239,268       $           —         $ 295,239,268   
  

 

 

    

 

 

    

 

 

    

 

 

 

Transfers into or out of Level 1, 2 or 3 are recognized at the reporting date.

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 29, 2016:

 

     Term Loans      Equity Interest      Total  

Balance as of February 28, 2015

   $ —         $ —         $  —     

Net unrealized depreciation

     (2,839,083      (615,683      (3,454,766

Purchases and other adjustments to cost

     19,713,411         —           19,713,411   

Sales and redemptions

     (10,930,430      —           (10,930,430

Net realized gain from investments

     6,887         —           6,887   

Net transfers in Level 3(1)

     39,446,288         617,451         40,063,739   
  

 

 

    

 

 

    

 

 

 

Balance as of February 29, 2016

   $ 45,397,073       $ 1,768       $ 45,398,841   
  

 

 

    

 

 

    

 

 

 

 

(1) The Issuer’s investment in Level 3 investments were classified as such during the year ended February 29, 2016, as market quotes for these investments are only provided by one trading desk.

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2015:

 

     Term Loans  

Balance as of February 28, 2014

   $ 2,618,899   

Net unrealized appreciation

     18,651   

Purchases and other adjustments to cost

     3,840   

Sales and redemptions

     (2,658,626

Net realized gain from investments

     17,236   
  

 

 

 

Balance as of February 28, 2015

   $ —    
  

 

 

 

Transfers into or out of Level 3 are recognized at the reporting date.

 

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Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and redemptions represent net proceeds received from investments sold, and principal paydowns received, during the period.

The net unrealized depreciation on Level 3 investments held as of February 29, 2016 was $3.4 million, and is included in net unrealized depreciation on investments in the statements of operations. There were no Level 3 investments held as of February 28, 2015.

Significant unobservable inputs used in the fair value measurement of the Level 3 term loans and equity include market quotations available from multiple dealers. A significant increase (decrease) in the market quote, in isolation, would result in a significantly lower (higher) fair value measurement.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2016 were as follows:

 

     Fair Value     

Valuation Technique

  

Unobservable Input

  

Range

Term loans

     45,397,073       Market Comparables    Third-Party Bid    32.00% - 100.00%

Equity interest

     1,768       Market Comparables    Third-Party Bid    0.01% - 12.83%

4. Financing

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to the Indenture.

The Secured Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

On October 17, 2013, the Issuer issued $284.9 million of notes (the “2013-1 CLO Notes”), consisting of Class X Floating Rate Senior Notes, Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 CLO Notes were used along with existing assets held by the Trustee to redeem all of the Secured Notes issued in 2008. The Subordinated Notes were not included in the refinancing transaction.

The 2013-1 CLO Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

The relative order of seniority of payment of each class of securities is, as follows: first, Class X Notes, second, Class A-1 Notes, third, Class A-2 Notes, fourth, Class B Notes, fifth, Class C Notes, sixth, Class D Notes, seventh, Class E Notes, eighth, Class F Notes, and ninth, the Subordinated Notes, with (a) each class of securities (other than the Subordinated Notes) in such list being senior to each other class of securities that follows such class of securities in such list and (b) each class of securities (other than the Class X Notes) in such list being subordinate to each other class of securities that precedes such class of securities in such list. The Subordinated Notes are subordinated to the 2013-1 CLO Notes and are entitled to periodic payments from interest proceeds available in accordance with the Priority of Payments.

 

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The table below sets forth certain information for each outstanding class of notes issued, pursuant to the Indenture on October 17, 2013, at February 29, 2016:

 

Debt Security

   Interest Rate     Maturity      Principal
Amount
     Amount
Outstanding
 

Class A-1 Floating Rate Senior Notes

     LIBOR + 1.30%        October 20, 2023       $ 170,000,000       $ 170,000,000   

Class A-2 Floating Rate Senior Notes

     LIBOR + 1.50%        October 20, 2023         20,000,000         20,000,000   

Class B Floating Rate Senior Notes

     LIBOR + 2.00%        October 20, 2023         44,800,000         44,800,000   

Class C Deferrable Floating Rate Notes

     LIBOR + 2.90%        October 20, 2023         16,000,000         16,000,000   

Class D Deferrable Floating Rate Notes

     LIBOR + 3.50%        October 20, 2023         14,000,000         14,000,000   

Class E Deferrable Floating Rate Notes

     LIBOR + 4.50%        October 20, 2023         13,100,000         13,100,000   

Class F Deferrable Floating Rate Notes

     LIBOR + 5.75%        October 20, 2023         4,500,000         4,500,000   

Subordinated Notes

     N/A        October 20, 2023         30,000,000         30,000,000   
       

 

 

    

 

 

 
        $ 312,400,000       $ 312,400,000   
       

 

 

    

 

 

 

The table below sets forth certain information for each outstanding class of notes issued, pursuant to the Indenture on October 17, 2013, at February 28, 2015:

 

Debt Security

   Interest Rate     Maturity      Principal
Amount
     Amount
Outstanding
 

Class A-1 Floating Rate Senior Notes

     LIBOR + 1.30%        October 20, 2023       $ 170,000,000       $ 170,000,000   

Class A-2 Floating Rate Senior Notes

     LIBOR + 1.50%        October 20, 2023         20,000,000         20,000,000   

Class B Floating Rate Senior Notes

     LIBOR + 2.00%        October 20, 2023         44,800,000         44,800,000   

Class C Deferrable Floating Rate Notes

     LIBOR + 2.90%        October 20, 2023         16,000,000         16,000,000   

Class D Deferrable Floating Rate Notes

     LIBOR + 3.50%        October 20, 2023         14,000,000         14,000,000   

Class E Deferrable Floating Rate Notes

     LIBOR + 4.50%        October 20, 2023         13,100,000         13,100,000   

Class F Deferrable Floating Rate Notes

     LIBOR + 5.75%        October 20, 2023         4,500,000         4,500,000   

Subordinated Notes

     N/A        October 20, 2023         30,000,000         30,000,000   
       

 

 

    

 

 

 
        $ 312,400,000       $ 312,400,000   
       

 

 

    

 

 

 

 

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The following table shows each outstanding class of notes issued, pursuant to the Indenture, at fair value at February 29, 2016:

 

Debt Security

   February 29, 2016  

Class A-1 Floating Rate Senior Notes

   $ 168,738,419   

Class A-2 Floating Rate Senior Notes

     19,899,837   

Class B Floating Rate Senior Notes

     43,780,120   

Class C Deferrable Floating Rate Notes

     14,987,621   

Class D Deferrable Floating Rate Notes

     12,941,289   

Class E Deferrable Floating Rate Notes

     10,358,170   

Class F Deferrable Floating Rate Notes

     3,027,150   

Subordinated Notes

     12,827,980   
  

 

 

 
   $ 286,560,586   
  

 

 

 

The following table shows each outstanding class of notes issued, pursuant to the Indenture, at fair value at February 28, 2015:

 

Debt Security

   February 28, 2015  

Class A-1 Floating Rate Senior Notes

   $ 168,987,651   

Class A-2 Floating Rate Senior Notes

     19,973,973   

Class B Floating Rate Senior Notes

     44,569,451   

Class C Deferrable Floating Rate Notes

     15,898,369   

Class D Deferrable Floating Rate Notes

     13,737,672   

Class E Deferrable Floating Rate Notes

     12,404,616   

Class F Deferrable Floating Rate Notes

     4,234,225   

Subordinated Notes

     17,031,146   
  

 

 

 
   $ 296,837,103   
  

 

 

 

These notes are fair valued based on a discounted cash flow model, specifically using Intex cash flow models, to form the basis for the valuation and would be classified as level 3 liabilities within the fair value hierarchy.

The following table provides the weighted average interest rate for the years ended February 29, 2016, February 28, 2015 and February 28, 2014:

 

            Weighted Average Interest Rate  

Debt Security

   Interest Rate      February 29,
2016
     February 28,
2015
     February 28,
2014
 

2013-1 CLO Notes

           

Class X Floating Rate Senior Notes

     LIBOR + 1.05%         N/A         1.28%         1.29%   

Class A-1 Floating Rate Senior Notes

     LIBOR + 1.30%         1.62%         1.53%         1.54%   

Class A-2 Floating Rate Senior Notes

     LIBOR + 1.50%         1.82%         1.73%         1.74%   

Class B Floating Rate Senior Notes

     LIBOR + 2.00%         2.32%         2.23%         2.24%   

Class C Deferrable Floating Rate Notes

     LIBOR + 2.90%         3.22%         3.13%         3.14%   

Class D Deferrable Floating Rate Notes

     LIBOR + 3.50%         3.82%         3.73%         3.74%   

Class E Deferrable Floating Rate Notes

     LIBOR + 4.50%         4.82%         4.73%         4.74%   

Class F Deferrable Floating Rate Notes

     LIBOR + 5.75%         6.07%         5.98%         5.99%   

Subordinated Notes

     N/A         N/A         N/A         N/A   

 

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            Weighted Average Interest Rate  

Debt Security

   Interest Rate      February 29,
2016
     February 28,
2015
     February 28,
2014
 

Secured Notes

           

Class A Floating Rate Senior Notes

     LIBOR + 0.75%         N/A         N/A         1.03%   

Class B Floating Rate Senior Notes

     LIBOR + 2.50%         N/A         N/A         2.78%   

Class C Deferrable Floating Rate Notes

     LIBOR + 3.75%         N/A         N/A         4.03%   

Class D Deferrable Floating Rate Notes

     LIBOR + 4.70%         N/A         N/A         4.98%   

Class E Deferrable Floating Rate Notes

     LIBOR + 6.45%         N/A         N/A         6.73%   

The Indenture provides that payments on the Subordinated Notes shall rank subordinate in priority of payment to payments due on all classes of 2013-1 CLO Notes and subordinate in priority of payment to the payment of fees and expenses. Distributions on the Subordinated Notes are limited to the assets of the Issuer remaining after payment of all of the liabilities of the Issuer that rank senior in priority of payment to the Subordinated Notes. To the extent that the proceeds from the collateral are not sufficient to make distributions on the Subordinated Notes the Issuer will have no further obligation in respect of the Subordinated Notes.

Interest proceeds and, after the 2013-1 CLO Notes have been paid in full, principal proceeds, in each case will be distributed to the holders of the Subordinated Notes in accordance with the Indenture.

Distributions, if any, on the Subordinated Notes will be payable quarterly on the 20th day of each January, April, July and October of each calendar year or, if any such day is not a business day, on the next succeeding business day (each, a “Payment Date”), commencing on the first Payment Date, and on January 21, 2020 (or if any such day is not a business day, the next succeeding business day) (the “Stated Redemption Date”) (if not redeemed prior to such date) sequentially in order of seniority. At the Stated Redemption Date, the Subordinated Notes will be redeemed after payment in full of all of the 2013-1 CLO Notes and the payment of all administrative and other fees and expenses. The failure to pay interest proceeds or principal proceeds to the holders of the Subordinated Notes will not be an event of default under the Indenture.

In May of 2009, the Issuer defaulted on its Class E overcollateralization ratio of 105.10%, at which point, $4.0 million of interest proceeds were used to repay the Class E Notes through November 2009. Interest on the Class C, Class D, and Class E Notes was deferred and repaid in January of 2010 upon the Issuer’s return to compliance. Distributions to the Subordinated Notes resumed in April of 2010.

As of February 29, 2016, the remaining unamortized discount on the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class F Notes were $1.3 million, $0.1 million, $0.9 million, $0.6 million, $0.7 million, $1.4 million, and $0.5 million, respectively.

As of February 28, 2015, the remaining unamortized discount on the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, Class D Notes, Class E Notes, and Class F Notes were $1.5 million, $0.2 million, $1.0 million, $0.6 million, $0.8 million, $1.5 million, and $0.6 million, respectively.

5. Income Tax

Under the current laws, the Issuer is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

Pursuant to ASC Topic 740, Accounting for Uncertainty in Income Taxes, the Issuer adopted the provisions of the FASB relating to accounting for uncertainty in income taxes which clarifies the accounting for income

 

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taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. The Investment Manager has analyzed such tax positions for uncertain tax positions for tax years that may be open (2013—2016). The Issuer identifies its major tax jurisdictions as U.S. Federal, state and foreign jurisdictions where the Issuer makes investments. As of February 29, 2016 and February 28, 2015, there was no impact to the financial statements as a result of the Issuer’s accounting for uncertainty in income taxes. The Issuer does not have any unrecognized tax benefits or liabilities for the years ended February 29, 2016, February 28, 2015 and 2014. Also, the Issuer recognizes interest and, if applicable, penalties for any uncertain tax positions, as a component of income tax expense. No interest or penalty expense was recorded by the Issuer for the years ended February 29, 2016, February 28, 2015 and 2014.

6. Commitments and Contingencies

In the ordinary course of its business, the Issuer may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Issuer. Based on its history and experience, the Investment Manager feels that the likelihood of such an event is remote.

In the ordinary course of business, the Issuer may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Issuer. As of February 29, 2016 and February 28, 2015, the Issuer is not subject to any material legal proceedings.

The terms of Collateralized Debt Investments may require the Issuer to provide funding for any unfunded portion of a Collateralized Debt Investment at the request of the borrower. At February 29, 2016 and February 28, 2015, the Issuer had no unfunded commitments.

7. Related-Party Transactions

In the ordinary course of business and as permitted per the terms of the Indenture, the Issuer may acquire or sell investments to or from related parties at the fair value at such time. For the years ended February 29, 2016, February 28, 2015 and 2014, the Issuer bought no investments from related parties and sold investments fair valued at $0.0 million, $0.0 million, and $0.3 million, respectively, to the Investment Manager.

The Subordinated Notes are wholly owned by the Investment Manager. The Subordinated Notes do not have a stated coupon rate, but are entitled to residual cash flows from the CLO’s investments after all of the other tranches of debt and certain other fees and expenses are paid. For the years ended February 29, 2016, February 28, 2015 and 2014, $5.6 million, $3.7 million, and $5.7 million of payments to the Subordinated Notes were included in interest expense in the statements of operations, respectively.

8. Shareholders’ Capital

Capital contributions and distributions shall be made at such time and in such amounts as determined by the Investment Manager and the Indenture.

The majority holder of the Subordinated Notes has various control rights over the CLO, including the ability to call the CLO prior to its legal maturity, replace the Investment Manager under certain circumstances, and refinance any of the outstanding debt tranches. The voting structure of the Subordinated Notes may require either majority or unanimous approval depending upon the issue.

The authorized share capital of the Issuer consists of 50,000 ordinary shares, 250 of which are owned by Maples Finance Limited and are held under the terms of a declaration of trust.

 

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As of February 29, 2016 and February 28, 2015, net assets were $(21.6) million and $(5.8) million, respectively. These amounts include accumulated losses of $(5.8) million and $(3.3) million, respectively, which includes cumulative net investment income or loss, cumulative amounts of gains and losses realized from investment transactions, net unrealized appreciation or depreciation of investments, as well as the cumulative effect of accounting mismatches between investments accounted for at fair value and amortized cost or accrual-basis assets and liabilities as discussed in Significant Accounting Policies, above. The Issuer’s investments continue to generate sufficient liquidity to satisfy its obligations on periodic payment dates as well as comply with all performance criteria as of the statements of assets and liabilities date.

9. Financial Highlights

The following is a schedule of financial highlights for the years ended February 29, 2016, February 28, 2015 and 2014:

 

     February 29,
2016
    February 28,
2015
    February 28,
2014
 

Average subordinated notes’ capital balance(1)

   $ 18,382,072      $ 25,077,372      $ 28,471,910   

Ratio and supplemental data:

      

Total Return(2)

     (49.59 )%      5.34     4.65

Net investment income(3)

     0.57     3.17     (7.53 )% 

Total expenses(3)

     79.34     49.79     65.27

Base management fee(3)

     4.07     3.03     1.82

Subordinated management fee(3)

     4.07     3.03     4.42

 

(1) Subordinated notes’ capital balance is calculated based on the sum of the subordinated notes outstanding amount and total net assets, net of ordinary equity.
(2) Total return is calculated based on a time-weighted rate of return methodology. Quarterly rates of return are compounded to derive the total return reflected above. Total return is calculated for the subordinated notes’ capital taken as a whole and assumes the purchase of the subordinated notes’ capital on the first day of the period and the sale of the last day of the period.
(3) Calculated based on the average subordinated notes’ capital balance.

10. Subsequent Events

The Investment Manager has evaluated events or transactions that have occurred since February 29, 2016 through May 17, 2016, the date the financial statements were available for issuance. The Investment Manager has determined that there are no material events that would require the disclosure in the financial statements.

 

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$65,000,000

6.75% Notes due 2023

SARATOGA INVESTMENT CORP.

 

 

Prospectus

 

 

Underwriters (Joint Book-Running Managers)

 

Ladenburg Thalmann   BB&T Capital Markets   Compass Point   William Blair

December 13, 2016