497 1 d773620d497.htm 497 497
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Filed pursuant to Rule 497

File No. 333-227116

 

PROSPECTUS SUPPLEMENT   

(to Prospectus dated June 28, 2019)

 

LOGO

Saratoga Investment Corp.

$70,000,000

Common Stock

 

 

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 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 have entered into an amended equity distribution agreement, dated July 11, 2019, as amended from time to time, with Ladenburg Thalmann & Co. Inc. relating to the shares of common stock offered by this prospectus supplement and the accompanying prospectus.

The equity distribution agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $70,000,000 from time to time through Ladenburg Thalmann & Co. Inc., as our sales agent. Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the New York Stock Exchange (“NYSE”) or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.

Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC and B. Riley FBR, Inc., which we collectively refer to as the “Agents,” will receive a commission from us up to 1.5% of the gross sales price of any shares of our common stock sold through the Agents under the equity distribution agreement. The Agents are not required to sell any specific number or dollar amount of common stock, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the shares of our common stock offered by this prospectus supplement and the accompanying prospectus. See “Plan of Distribution” beginning on page S-57 of this prospectus supplement. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less the Agents’ commission, will not be less than the net asset value per share of our common stock at the time of such sale.

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “SAR.” On July 10, 2019, the last reported sales price on the NYSE for our common stock was $24.03 per share. We are required to determine the net asset value per share of our common stock on a quarterly basis. Our net asset value per share of our common stock as of May 31, 2019 was $24.06.

Please read this prospectus supplement and the accompanying prospectus before investing in our securities and keep each for future reference. This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in our securities. We file annual, semi-annual and quarterly reports, proxy statements and other information about us with the Securities and Exchange Commission, or the “SEC.” This information is available free of charge by contacting us by mail at 535 Madison Avenue, New York, New York 10022, by telephone at (212) 906-7800, or on our website at http://www.saratogainvestmentcorp.com. The SEC also maintains a website at http://www.sec.gov that contains such information. Information contained on our website is not incorporated by reference into this prospectus


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supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus.

 

 

Investing in our common stock involves a high degree of risk and should be considered speculative. For example, our investment in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd., represents a first loss position in a portfolio that is composed predominantly of 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 collateralized loan obligation fund or losses are otherwise incurred by the collateralized loan obligation fund, including its incurrence of operating expenses in excess of its operating income. For more information regarding the risks you should consider, including the risk of leverage, please see “Summary—Risk Factors” beginning on page S-22 of this prospectus supplement and page 23 of the accompanying prospectus.

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

 

Ladenburg Thalmann   BB&T Capital Markets   B. Riley FBR

Prospectus Supplement dated July 11, 2019.


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TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

     Page  

About this Prospectus Supplement

     S-1  

Prospectus Supplement Summary

     S-2  

The Offering

     S-14  

Fees and Expenses

     S-16  

Selected Financial and Other Data

     S-19  

Risk Factors

     S-22  

Note about Forward-Looking Statements

     S-23  

Use of Proceeds

     S-24  

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

     S-25  

Plan of Distribution

     S-57  

Legal Matters

     S-59  

Independent Registered Public Accounting Firm

     S-59  

Available Information

     S-59  

Index to Consolidated Financial Statements

     SF-1  

PROSPECTUS

 

     Page  

Prospectus Summary

     1  

The Offering

     13  

Fees and Expenses

     18  

Selected Financial and Other Data

     21  

Risk Factors

     23  

Use of Proceeds

     53  

Note about Forward-Looking Statements

     54  

Price Range of Common Stock and Distributions

     56  

Dividend Reinvestment Plan

     66  

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

     68  

Senior Securities

     102  

Business

     104  

Our Portfolio Companies

     118  

Management Agreements

     132  

Management

     140  

Portfolio Management

     149  

Certain Relationships and Related Transactions

     151  

Control Persons and Principal Stockholders

     152  

Regulation

     154  

Certain U.S. Federal Income Tax Considerations

     161  

Determination of Net Asset Value

     169  

Sales of Common Stock Below Net Asset Value

     172  

Description of Our Capital Stock

     178  

Description of Our Subscription Rights

     185  

Description of Our Debt Securities

     187  

Description of Our Warrants

     201  

Plan of Distribution

     203  

Brokerage Allocation and Other Practices

     205  

Custodian, Transfer and Dividend Paying Agent and Registrar

     205  

Legal Matters

     205  

Independent Registered Public Accounting Firm

     205  

Available Information

     205  

Privacy Notice

     206  

Incorporation by Reference

     206  

Index to Consolidated Financial Statements

     F-1  

Index to other Financial Statements of Saratoga CLO

     S-1  


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ABOUT THIS PROSPECTUS SUPPLEMENT

We have filed with the SEC a registration statement on Form N-2 File No. 333-227116 utilizing a shelf registration process relating to the securities described in this prospectus supplement, which registration statement was most recently declared effective on June 28, 2019. This document is in two parts. The first part is the prospectus supplement, which describes the terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from or is additional to the information contained in the accompanying prospectus, you should rely only on the information contained in this prospectus supplement. Please carefully read this prospectus supplement and the accompanying prospectus together with the additional information described under the headings “Available Information” and “Risk Factor” in this Prospectus Supplement and “Available Information,” “Risk Factors” and “Incorporation by Reference” included in the accompanying prospectus before investing in our common stock.

Neither we nor the Agents have authorized any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction or to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and the accompanying prospectus is accurate as of the dates on their respective covers. Our financial condition, results of operations and prospects may have changed since those dates. To the extent required by law, we will amend or supplement the information contained in this prospectus supplement and the accompanying prospectus to reflect any material changes subsequent to the date of this prospectus supplement and the accompanying prospectus and prior to the completion of any offering pursuant to this prospectus supplement and the accompanying prospectus.

 

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PROSPECTUS SUPPLEMENT SUMMARY

The following summary contains basic information about the offering of shares of our common stock pursuant to this prospectus supplement and the accompanying 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 the accompanying 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.

In accordance with the Small Business Credit Availability Act (“SBCA”), we are now allowed to “incorporate by reference” information that we had previously included in this prospectus supplement or the accompanying prospectus. This means that we can disclose information to you by referring to other reports that we have filed with the SEC that contain that information. The information incorporated by reference is considered to comprise part of this prospectus supplement or the accompanying prospectus from the date we file that other report with the SEC. Any other reports filed by us with the SEC subsequent to the date of this filing and before the date that any offering of any securities by means of this prospectus supplement or the accompanying prospectus is terminated will update or supersede any information contained in this prospectus supplement or the accompanying prospectus. See “Incorporation by Reference,” on page 206 of the accompanying prospectus.

Overview

We are a specialty finance company that provides customized financing solutions to U.S middle-market businesses. We primarily invest in senior and unitranche leveraged loans and mezzanine debt and, to a lesser extent, equity issued by private U.S. middle-market companies, which we define as companies having annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. Our investment objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. Our investments generally provide financing for change of ownership transactions, strategic acquisitions, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors. 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. 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 May 31, 2019, 80.0% 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)

 

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or, if not rated, would be rated below investment grade or “junk” if rated. In addition, 83.3% of our debt investments at May 31, 2019 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 the Investment Company Act of 1940 (“1940 Act”), which includes private equity funds, to no more than 15% of its net assets.

As of May 31, 2019, we had total assets of $476.3 million and investments in 33 portfolio companies, 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 $28.0 million as of May 31, 2019 and also investments in the Class F-R-2 Notes and Class G-R-2 Notes tranches of the Saratoga CLO, which as of May 31, 2019 had fair values of $2.5 million and $7.5 million, respectively. The overall portfolio composition as of May 31, 2019 consisted of 53.6% of first lien term loans, 26.7% of second lien term loans, 0.5% of unsecured term loans, 9.3% of structured finance securities and 9.9% of equity interests. As of May 31, 2019, the weighted average yield on all of our investments, including our investment in the subordinated notes of Saratoga CLO and Class F-R-2 Notes and Class G-R-2 Notes tranches of the Saratoga CLO, was approximately 10.6%. The weighted average yield of our 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 May 31, 2019, our total return based on market value was 9.69% and our total return based on net asset value per share was 4.42%. As of May 31, 2018, our total return based on market value was 12.51% and our total return based on net asset value was 2.96%. Total return based on market value is the change in the ending market value of the Company’s common stock plus dividends distributed during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning market value of the Company’s common stock. Total return based on NAV is the change in ending NAV per share plus dividends distributed per share paid during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning NAV per share. While total return based on NAV and total return based on market value reflect fund expenses, they do not reflect any sales load that may be paid by investors. As of May 31, 2019, 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. 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, 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 May 31, 2019, was composed of $513.4 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.

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,

 

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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 position in a portfolio that, at May 31, 2019, was composed of $513.4 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 subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.” in the accompanying prospectus 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 $278 million aggregate principal amount of debt, as of August 31, 2018, issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate” in the accompanying prospectus.

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. On December 14, 2018, we completed a third refinancing and upsize of the Saratoga CLO (the “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the non-call period and reinvestment period to January 20, 2020 and January 20, 2021, respectively, and extended its legal final date to January 20, 2030. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. As part of the refinancing of its liabilities, we also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million aggregate principal amount of the Class G-R-2 notes tranches of the Saratoga CLO at par, with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. We also redeemed our existing $4.5 million aggregate principal amount of the Class F Notes tranche of the Saratoga CLO at par. The Class F-R-2 Notes and Class G-R-2 Notes tranches are the seventh and eighth tranches in the capital structure of Saratoga CLO and are subordinated to the other debt classes of Saratoga CLO, respectively. The Class F-R-2 and Class G-R-2 tranches are 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 $2.5 million Class F-R-2 tranche and $7.5 million Class G-R-2 tranche and ahead of the aggregate principal amount of our position in the subordinated notes, with respect to priority of payments in the event of a default or a liquidation. We also purchased an aggregate principal amount of $39.5 million of subordinated notes, which is in addition to the $30.0 million of subordinated notes issued in 2013 that were reset with an extended legal final date to January 20, 2030. Following the refinancing, Saratoga Investment Corp. owns 100% of the Class F-R-2, Class G-R-2 and the subordinated notes of the Saratoga CLO. After the reinvestment period ends in January 2021, 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 which extends the investment period of the CLO on terms that are acceptable to

 

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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 January 2021, then Saratoga CLO will be required to use investment repayments by portfolio companies received thereafter to repay its outstanding indebtedness. At May 31, 2019, the aggregate fair value of our investments in the Class F-R-2, Class G-R-2 Notes and subordinated notes of the Saratoga CLO was $2.5 million, $7.5 million and $28.0 million, respectively.

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. The fee basis is calculated using i) the aggregate principal balance of all collateral debt securities and eligible investments purchased with principal proceeds or unused proceeds and ii) cash representing principal proceeds or unused 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 150% after such borrowing.

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” in the accompanying prospectus. 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 150% asset coverage test under the 1940 Act. This allows us increased flexibility under the 150% 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.

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 31, 29, 32 and 22 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.

 

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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 (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 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” in the accompanying prospectus.

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 the accompanying prospectus.

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. 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;

 

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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;

 

   

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.

 

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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.

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 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.

 

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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 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 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 23 of the accompanying prospectus.

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.

 

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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 cause it to increase our leverage 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, 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.

 

   

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.

 

   

Recent 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 U.S. 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.

 

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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.

 

   

A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans.

 

   

We may be exposed to higher risks with respect to our investments that include PIK interest, particularly our investments in interest-only loans.

 

   

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.

 

   

Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.

 

   

Our investments in Saratoga CLO have a different risk profile than would direct investments made by us, including less information available and fewer rights regarding repayment compared to companies we invest in directly as well as complicated accounting and tax implications.

 

   

Failure by Saratoga CLO to satisfy certain financial covenants may entitle senior debtholders to additional payments, which may harm our operating results by reducing payments we would otherwise be entitled to receive from Saratoga CLO.

 

   

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.

 

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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.

Risks Related to Our Common Stock

 

   

Investing in our common stock may involve an above average degree of risk.

 

   

We may continue to choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

 

   

The market price of our common stock may fluctuate significantly.

 

   

There is a risk that you may not receive distributions or that our distributions may not grow over time.

 

   

Provisions of our governing documents and the Maryland General Corporation Law could deter future takeover attempts and have an adverse impact on the price of our common stock.

 

   

Our common stock may trade at a discount to our net asset value per share.

 

   

Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.

 

   

The issuance of subscription rights, warrants or convertible debt that are exchangeable for our common stock will cause your economic interest and voting power in us to be diluted as a result of our offering of any such securities.

 

   

Our common stock is subject to the risk of subordination relative to holders of our debt instruments.

 

   

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.

Corporate History and Information

We commenced operations on March 23, 2007 as GSC Investment Corp. and completed an initial public offering 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 entry into a senior secured revolving credit facility (“the Credit Facility”) with Madison Capital Funding LLC

 

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(“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 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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THE OFFERING

 

Common stock offered by us

Shares of our common stock having an aggregate offering price of up to $70,000,000.

 

Common stock outstanding as of July 10, 2019

8,018,188 shares

 

Use of proceeds

We intend to use substantially all of the net proceeds from this offering to make investments in middle-market companies in accordance with our investment objective and strategies described in this prospectus supplement, and for general corporate purposes. We may also use a portion of the net proceeds to reduce any of our outstanding borrowings. 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 “Use of Proceeds.”

 

Manner of offering

“At the market” offering that may be made from time to time through the Agents using commercially reasonable efforts. See “Plan of Distribution.”

 

 

Distribution

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Prior to January 2009, we paid quarterly distributions to our stockholders. However, in January 2009, we suspended the practice of paying quarterly distributions to our stockholders and only paid five dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders through December 2013, which distributions were made with a combination of cash and the issuance of shares of our common stock. 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 distribution to our shareholders. In this regard, most recently our board of directors declared a distribution in the amount of $0.54 per share for the fiscal quarter ended February 28, 2019. The distribution for the fiscal quarter ended February 28, 2019 had a payment date of March 28, 2019 to all stockholders of record at the close of business on March 14, 2019. In each case, all of our distributions have been paid from our earnings and there has not been any return of capital to investors.

 

  As disclosed in the table under “Price Range of Common Stock and Distributions,” beginning on page 56 of the accompanying prospectus, our board of directors has continued to declare regular quarterly cash distributions to our shareholders since adopting our new dividend policy.

 

Taxation

We elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. Accordingly, we generally will not pay corporate-level federal income taxes on any net ordinary income or realized net capital gains that we distribute to our stockholders as

 

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dividends. To maintain our RIC tax treatment, we must meet specified source-of- income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. 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 a 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. See “Certain U.S. Federal Income Tax Considerations” in the accompanying prospectus.

 

NYSE symbol of common stock

“SAR”

 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by “you,” “us” or “Saratoga Investment Corp.,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Saratoga Investment Corp.

 

Stockholder transaction expenses (as a percentage of offering price):

  

Sales load paid

     1.5% (1) 

Offering expenses borne by us

     0.3% (2) 

Dividend reinvestment plan expenses

     None (3)
  

 

 

 

Total stockholder transaction expenses paid

     1.8

Annual estimated expenses (as a percentage of average net assets attributable to common stock):

  

Management fees

     4.2% (4) 

Incentive fees payable under the Management Agreement

     2.9% (5) 

Interest payments on borrowed funds

     8.1% (6) 

Other expenses

     3.4% (7) 
  

 

 

 

Total annual expenses

     18.6% (8) 

 

(1)

Represents the commission with respect to the shares of our common stock being sold in this offering, which we will pay to the Agents in connection with sales of shares of our common stock effected by the Agents under the equity distribution agreement. There is no guaranty that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus.

(2)

The offering expenses of this offering are estimated to be approximately $100,000.

(3)

The expenses associated with the administration of our dividend reinvestment plan are included in “Other expenses.” The participants in the dividend reinvestment plan will pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see “Dividend Reinvestment Plan.”

(4)

Our base management fee under the Management Agreement with Saratoga Investment Advisors is based on our gross assets, which is defined as our total assets, including those acquired using borrowings for investment purposes, but excluding cash and cash equivalents. See “Investment Advisory and Management Agreement.” The fact that our base management fee is payable based upon our gross assets, rather than our net assets (i.e., total assets after deduction of any liabilities, including borrowings) means that our base management fee as a percentage of net assets attributable to common stock will increase when we utilize leverage.

(5)

The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued by us during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).

    

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% 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

 

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  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% of 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. We estimate this as zero for purposes of this table as these fees are hard to predict, as they are based on capital gains and losses. See “Investment Advisory and Management Agreement” in the accompanying prospectus.
(6)

We may borrow funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so. The 8.1% figure in the table includes all expected borrowing costs that we expect to incur over the next twelve months in connection with the secured revolving credit facility we have with Madison Capital Funding LLC. The costs associated with our outstanding borrowings are indirectly borne by our stockholders. We do not expect to issue any preferred stock during the next twelve months and, therefore, have not included the cost of issuing and servicing preferred stock in the table. In addition, all of the commitment fees, interest expense, amortized financing costs of our Credit Facility, SBA debentures, the 2023 Notes and the 2025 Notes, and the fees and expenses of issuing and servicing any other borrowings or leverage that we expect to incur during the next twelve months are included in the table and expense example presentation below. On April 16, 2018, as permitted by the SBCA, which was signed into law on March 23, 2018, our non-interested board of directors approved of the Company becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019. See “Regulation” and “Risk Factors—Risks Related to Our Business and Structure—Recent legislation may allow us to incur additional leverage” in the accompanying prospectus.

(7)

“Other expenses” are based on estimated amounts for the current fiscal year and include our overhead expenses, including payments under our administration agreement based on our allocable portion of overhead and other expenses incurred by Saratoga Investment Advisors in performing its obligations under the administration agreement. See “Administration Agreement” in the accompanying prospectus.

(8)

This figure includes all of the fees and expenses of our wholly-owned subsidiaries, Saratoga Investment Corp SBIC, LP and Saratoga Investment Funding LLC. Furthermore, this table reflects all of the fees and expenses borne by us with respect to our investment in Saratoga CLO.

Example

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that we would have no additional leverage and our annual operating expenses would remain at the levels set forth in the table above, and that we pay the transaction expenses set forth in the table above, including a sales load of 1.5% paid by you (the commission to be paid by us with respect to common stock sold by us in this offering).

 

     1 Year      3 Years      5 Years      10 Years  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return on portfolio

   $ 200      $ 632      $ 1,109      $ 2,524  

This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The example assumes that the 5% annual return is generated entirely through the realization of capital gains on our assets and, as a result,

 

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triggers the payment of an incentive fee on such capital gains under the Management Agreement. The “pre-incentive fee net investment income” under the Management Agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher.

While the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by either (i) the greater of (x) the net asset value of our common stock or (y) 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our board of directors in the event that we use newly issued shares to satisfy the share requirements of the dividend reinvestment plan or (ii) the average purchase price, including any brokerage charges or other charges, of all shares of common stock purchased by the administrator of the dividend reinvestment plan in the event that shares are purchased in the open market to satisfy the share requirements of the dividend reinvestment plan, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” in the accompanying prospectus for additional information regarding our dividend reinvestment plan.

 

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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 28, 2019, February 28, 2018, February 28, 2017, February 29, 2016, and February 28, 2015. 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 three months ended May 31, 2019 and May 31, 2018 were 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 supplement and the accompanying prospectus. The historical data is not necessarily indicative of results to be expected for any future period.

 

    As of and for the
Three Months Ended
May 31,
    As of and for
the Year Ended
February 28,
2019
    As of and for
the Year Ended
February 28,
2018
    As of and for
the Year Ended
February 28,
2017
    As of and
for the Year
Ended
February 29,
2016
    As of and for
the Year Ended
February 28,
2015
 
    2019     2018  
                (dollar amounts in thousands, except share and per share numbers)  

Consolidated Statements of Operations Data:

             

Investment income:

             

Interest from investments

  $ 11,603     $ 9,607     $ 43,297     $ 35,110     $ 29,348     $ 26,871     $ 24,684  

Management fee, incentive fee and other income

    1,148       881       4,411       3,505       3,809       3,179       2,691  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    12,751       10,488       47,708       38,615       33,157       30,050       27,375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Interest and debt financing expenses

    3,864       2,723       13,126       10,939       9,888       8,456       7,375  

Base management and incentive management fees(1)

    3,925       2,605       11,770       10,180       7,846       6,761       6,704  

Administrator expenses

    500       437       1,896       1,646       1,367       1,175       1,000  

General and administrative and other expenses

    779       1,063       3,641       3,133       2,896       2,866       2,328  

Income/excise tax expense (benefit)

    2       (267     (1,027     (15     45       114       294  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,070       6,561       29,406       25,883       22,042       19,372       17,701  

Loss on extinguishment of debt

    —         —         —         —         1,455       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    3,681       3,927       18,302       12,732       9,660       10,678       9,674  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain (loss) on investments:

             

Net realized gain (loss) from investments

    —         212       4,874       (5,878     12,368       226       3,276  

Net change in unrealized appreciation (depreciation) on investments

    3,989       643       (2,900     10,825       (10,641     741       (1,943

Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments

    (21     (940     (1,767     —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net gain on investments

    3,968       (85     207       4,947       1,727       967       1,333  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

  $ 7,649     $ 3,842     $ 18,509     $ 17,679     $ 11,387     $ 11,645     $ 11,007  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    As of and for the
Three Months Ended
May 31,
    As of and for
the Year Ended
February 28,
2019
    As of and for
the Year Ended
February 28,
2018
    As of and for
the Year Ended
February 28,
2017
    As of and
for the Year
Ended
February 29,
2016
    As of and for
the Year Ended
February 28,
2015
 
    2019     2018  
                (dollar amounts in thousands, except share and per share numbers)  

Per Share:

             

Adoption of ASC 606(2)

  $ —       $ (0.01   $ (0.01   $ —       $ —       $ —       $ —    

Earnings per common share—basic and diluted(3)

    0.99       0.61       2.63       2.93       1.98       2.09       2.04  

Net investment income per share—basic and diluted(3)

    0.48       0.63       2.60       2.11       1.68       1.91       1.80  

Net realized and unrealized gain (loss) per share—basic and diluted(3)

    0.51       (0.02     0.03       0.82       0.30       0.18       0.24  

Dividends declared per common share(4)

    0.54       0.50       2.06       1.90       1.93       2.36       0.40  

Issuance of common stock above net asset value(5)

    —         —         0.15       —         —         —         —    

Dilutive impact of dividends paid in stock on net asset value per share(6)

    (0.01       (0.05     (0.04     (0.14     (0.37     (0.02

Net asset value per share

  $ 24.06     $ 23.06     $ 23.62     $ 22.96     $ 21.97     $ 22.06     $ 22.70  

Total return based on market value(7)

    9.69     12.51     16.11     5.28     80.83     4.27     1.63

Total return based on net asset value(8)

    4.42     2.96     13.33     14.45     12.62     11.10     10.09

Consolidated Statements of Assets and Liabilities Data:

             

Investment assets at fair value

  $ 409,451     $ 343,351     $ 402,020     $ 342,694     $ 292,661     $ 283,996     $ 240,538  

Total assets

    476,336       362,018       470,672       360,336       318,651       295,047       263,560  

Total debt outstanding, net of discount and/or deferred financing costs

    277,453       206,740       277,151       206,486       181,476       160,749       132,117  

Total net assets

    186,784       144,845       180,875       143,691       127,295       125,150       122,599  

Net asset value per common share

  $ 24.06     $ 23.06     $ 23.62     $ 22.96     $ 21.97     $ 22.06     $ 22.70  

Common shares outstanding at end of year

    7,764,844       6,282,384       7,657,156       6,257,029       5,794,600       5,672,227       5,401,899  

Other Data:

             

Investments funded

  $ 27,369     $ 35,204     $ 187,708     $ 107,697     $ 126,935     $ 109,191     $ 104,872  

Principal collections related to investment repayments or sales

  $ 26,917     $ 36,541     $ 135,728     $ 66,312     $ 121,159     $ 68,174     $ 73,257  

Number of investments at year end

    66       55       58       56       53       59       64  

Weighted average yield of income producing debt investments—Non-control/Non-affiliate(9)

    10.72     11.29     10.93     11.11     10.66     10.82     10.63

Weighted average yield on income producing debt investments—Affiliate(9)

    13.46     13.26     13.56     13.06     12.17     —         —    

Weighted average yield on income producing debt investments—Control(9)

    14.47     17.92     13.67     16.97     11.64     16.40     25.22

 

(1)

See Note 6 to the consolidated financial statements contained elsewhere herein.

(2)

See Note 2 to the consolidated financial statements contained elsewhere herein.

(3)

For the quarter ended May 31, 2019 and May 31, 2018, amount is calculated using weighted average common shares outstanding of 7,746,187 and 6,275,494, respectively. For the years ended February 28, 2019, February 28, 2018, February 28, 2017, February 29, 2016 and February 28, 2015, amounts are calculated using weighted average common shares outstanding of 7,046,686, 6,024,040, 5,740,450, 5,582,453 and 5,385,049, respectively.

(4)

Calculated using the shares outstanding at the ex-dividend date.

(5)

The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date multiplied by (B) the differences between the net



 

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  proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding during the period.
(6)

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—Dividend Policy.”

(7)

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.

(8)

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.

(9)

The weighted average yield on income producing investments is higher than what investors in the Company will realize because it does not reflect the Company’s expenses and any sales load paid by investors.



 

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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 supplement and the accompanying prospectus, before making an investment in our securities. The risks set forth below and in the accompanying prospectus 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.

Our common stock is subject to a risk of subordination relative to holders of our debt instruments and holders of our preferred stock.

Rights of holders of our common stock are subordinated to the rights of holders of our indebtedness and to the rights of holders of our preferred stock. Therefore, dividends, distributions and other payments to holders of our common stock in liquidation or otherwise may be subject to prior payments due to the holders of our indebtedness or our preferred stock. In addition, under some circumstances the 1940 Act may provide debt holders with voting rights that are superior to the voting rights of holders of our equity securities.

 

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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 supplement and the accompanying prospectus. In addition to historical information, the following discussion and other parts of this prospectus supplement and the accompanying 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 of the accompanying prospectus 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 supplement involve risks and uncertainties, including statements as to:

 

   

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 supplement and the accompanying 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 supplement and the accompanying 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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USE OF PROCEEDS

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than the amount set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. However, the sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less the Agents’ commission, will not be less than the net asset value per share of our common stock at the time of such sale. If we sell shares of our common stock with an aggregate offering price of $70,000,000, we anticipate that our net proceeds, after deducting sales agent commissions and estimated expenses payable by us, will be approximately $68.85 million.

We intend to use substantially all of the net proceeds from the sale of our securities to make investments in middle-market companies in accordance with our investment objective and strategies described in the accompanying prospectus, and for general corporate purposes. We may also use a portion of the net proceeds to reduce any of our outstanding borrowings.

We anticipate that substantially all of the net proceeds from any offering of our common stock will be used as described above within six to twelve 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” in the accompanying prospectus. 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” in the accompanying prospectus for additional information regarding this matter.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

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 supplement and the accompanying prospectus. In addition to historical information, the following discussion and other parts of this prospectus supplement and the accompanying 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 “Note about Forward-Looking Statements” and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

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 supplement and the accompanying prospectus Report on Form 10-Q involve risks and uncertainties, including statements as to:

 

   

our future operating results;

 

   

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

   

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

   

the relative and absolute investment performance and operations of our Investment Adviser;

 

   

the impact of increased competition;

 

   

our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

 

   

the unfavorable resolution of any future legal proceedings;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of investments that we expect to make and future acquisitions and divestitures;

 

   

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 status, including our ability to operate as a business development company (“BDC”), or to operate our small business investment company (“SBIC”) subsidiary, and to continue to qualify to be taxed as a regulated investment company (“RIC”);

 

   

the adequacy of our cash resources and working capital;

 

   

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

 

   

the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;

 

   

the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser;

 

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the impact of changes to tax legislation and, generally, our tax position;

 

   

our ability to access capital and any future financings by us;

 

   

the ability of our Investment Adviser to attract and retain highly talented professionals; and

 

   

the ability of our Investment Adviser to locate suitable investments for us and to monitor and effectively administer our investments.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

We have based the forward-looking statements included in this prospectus supplement and the accompanying prospectus on information available to us on the date of this prospectus supplement and the accompanying prospectus, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this prospectus supplement and the accompanying prospectus.

OVERVIEW

We are a Maryland corporation that has elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. We invest primarily in senior and unitranche leveraged loans and mezzanine debt issued by private U.S.    middle market companies, which we define as companies having earnings before interest, tax, depreciation and amortization (“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. 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 15.0% of its net assets. 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 &

 

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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 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% fixed-rate unsecured notes due 2020 (the “2020 Notes”) 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. The 2020 Notes were listed on the NYSE under the trading symbol “SAQ” with a par value of $25.00 per share. The 2020 Notes were redeemed in full on January 13, 2017.

On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. 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. Prior to the 2020 Notes being redeemed in full, the Company had sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million (net of transaction costs).

On December 21, 2016, we issued $74.5 million in aggregate principal amount of our 6.75% fixed-rate unsecured notes due 2023 (the “2023 Notes”) for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance

 

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included the exercise of substantially all of the underwriters’ option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. Interest on the 2023 Notes is paid quarterly in arrears on March 15, June 15, September 15 and December 15, at a rate of 6.75% per year, beginning March 30, 2017. The 2023 Notes mature on December 20, 2023, and commencing December 21, 2019, may be redeemed in whole or in part at any time or from time to time at our option. The 2023 Notes are listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share.

On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were also added to the agreement. On July 9, 2019, the amount of the common stock to be offered through this offering was increased to $70.0 million. As of May 31, 2019, the Company sold 571,120 shares for gross proceeds of $13.0 million at an average price of $22.78 for aggregate net proceeds of $12.9 million (net of transaction costs).

On July 13, 2018, the Company issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.

On August 28, 2018, the Company issued $40.0 million in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 2025 Notes within 30 days. Interest on the 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 2025 Notes have been capitalized and are being amortized over the term of the 2025 Notes.

On December 14, 2018, the Company completed the third refinancing of the Saratoga CLO (the “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the Saratoga CLO reinvestment period to January 2021, and extended its legal maturity to January 2030. A non-call period of January 2020 was also added. In addition to and as part of the refinancing, the Saratoga CLO has also been upsized from $300 million in assets to approximately $500 million. As part of this refinancing and upsizing, the Company invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $2.5 million in aggregate principal amount of the Class F-R-2 Notes tranche and $7.5 million in aggregate principal amount of the Class G-R-2 Notes tranche at par. Concurrently, the existing $4.5 million of Class F notes were repaid.

On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. Offering costs incurred were approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million aggregate principal amount of 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 2025 Notes issued in August 2018. The net proceeds from this offering were used for general corporate purposes in accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 2025 Notes have been capitalized and are being amortized over the term of the 2025 Notes.

At May 31, 2019, the total 2025 Notes outstanding was $60.0 million. The 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.

 

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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 Measurement 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 or its liabilities are to be transferred 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 Advisors, 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 independently 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. We use a party independent valuation firm to value our investment in the subordinated notes of Saratoga CLO and the Class F-R-2 Notes and Class G-R-2 Notes tranches of the Saratoga CLOs every quarter.

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 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

 

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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 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.

Payment-in-Kind Interest

The Company holds debt and preferred equity 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.

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 or preferred equity investments may provide for a portion or all of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of

 

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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 or common 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 with its reinvestment period extended to October 2016. On November 15, 2016, we completed a second refinancing of the Saratoga CLO with its reinvestment period extended to October 2018.

On December 14, 2018, we completed a third refinancing and upsize of the Saratoga CLO. The third Saratoga CLO refinancing, among other things, extended its reinvestment period to January 2021, and extended its legal maturity date to January 2030. A non-call period of January 2020 was also added. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO and also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million in aggregate principal amount of the Class G-R-2 notes tranches at par, with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. As part of this refinancing, we also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par.

The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.10% per annum and a subordinated management fee of 0.40% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, we received a base management fee of 0.25% per annum and a subordinated management fee of 0.25% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds.

Following the third refinancing and the issuance of the 2013-1 Reset CLO Notes on December 14, 2018, we are no longer 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%.

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.

ASC 606

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which supersedes the revenue recognition requirements in Revenue Recognition (ASC 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 for annual periods beginning after December 15, 2017. Management has concluded that the majority of its revenues associated with financial instruments are scoped out of ASC 606, and has concluded that the only significant impact relates to the timing of the recognition of the CLO incentive fee income. We adopted ASC 606 under the modified

 

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retrospective approach using the practical expedient provided for, therefore the presentation of prior periods has not been adjusted.

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;

 

   

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;

 

   

expenses incurred by our Investment Adviser payable for travel and 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 U.S. 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 investment advisory and 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

 

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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.

 

   

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 on each investment in the Company’s portfolio, 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 investment advisory and 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 prospectus supplement and the accompanying prospectus.

The terms of the investment advisory and management agreement with Saratoga Investment Advisors, our current investment adviser, are substantially similar to the terms of the investment advisory and 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 investment advisory and 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

 

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approaches 2.344% in any quarter, and Saratoga Investment Advisors will receive 20.0% of any additional net investment income. Under the investment advisory and 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.

Capital Gains Incentive Fee

The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its Manager 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 Manager if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s Manager 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.

Regulatory Matters

In August 2018, the SEC issued Final Rule Release No.33-10532, Disclosure Update and Simplification, which in part amends certain disclosure requirements of Regulation S-X that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP or changes in the information environment. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The effective date for these disclosures was November 5, 2018, effective for the first quarter that begins after the effective date. Management has adopted these amendments as currently required and these are reflected in the Company’s consolidated financial statements and related disclosures. The presentation of certain prior year information has been adjusted to conform with these amendments.

New Accounting Pronouncements

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has assessed these changes and does not believe they would have a material impact on the Company’s consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU 2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management has assessed these changes and concluded these changes do not have a material impact on the Company’s consolidated financial statements and disclosures.

 

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Portfolio and Investment Activity

Investment Portfolio Overview

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
     May 31, 2019     February 28, 2019  
   ($ in millions)  

Number of investments(1)

     66       58  

Number of portfolio companies(2)

     33       31  

Average investment per portfolio company(2)

   $ 11.3     $ 11.8  

Average investment size(1)

   $ 5.8     $ 6.5  

Weighted average maturity(3)

     3.5yrs       3.6yrs  

Number of industries

     8       8  

Non-performing or delinquent investments (fair value)

   $ 4.8     $ 5.7  

Fixed rate debt (% of interest earning portfolio)(3)

   $ 56.8(16.7%)     $ 55.7(16.3%)  

Fixed rate debt (weighted average current coupon)(3)

     10.4     10.4

Floating rate debt (% of interest earning portfolio)(3)

   $ 284.0(83.3%)     $ 285.0(83.7%)  

Floating rate debt (weighted average current spread over LIBOR)(3)(4)

     8.5     8.6

 

(1)

Excludes our investment in the subordinated notes of Saratoga CLO.

 

(2)

Excludes our investment in the subordinated notes of Saratoga CLO, Class F-R-2 Notes and Class G-R-2 Notes tranches of Saratoga CLO.

 

(3)

Excludes our investment in the subordinated notes of Saratoga CLO and equity interests.

 

(4)

Calculation uses either 1-month or 3-month LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors.

During the three months ended May 31, 2019, we invested $27.4 million in new or existing portfolio companies and had $26.9 million in aggregate amount of exits and repayments resulting in net investments of $0.5 million for the period.

During the three months ended May 31, 2018, we invested $35.2 million in new or existing portfolio companies and had $36.5 million in aggregate amount of exits and repayments resulting in net exits and repayments of $1.3 million for the period.

Portfolio Composition

Our portfolio composition at May 31, 2019 and February 28, 2019 at fair value was as follows:

 

     May 31, 2019     February 28, 2019  
     Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
    Percentage
of Total
Portfolio
    Weighted
Average
Current
Yield
 

First lien term loans

     53.6     10.7     50.5     10.9

Second lien term loans

     26.7       11.8       31.3       11.7  

Unsecured term loans

     0.5       0.0       0.5       0.0  

Structured finance securities

     9.3       16.0       8.8       14.6  

Equity interests

     9.9       2.8       8.9       3.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     10.6     100.0     10.7
  

 

 

   

 

 

   

 

 

   

 

 

 

At May 31, 2019, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $28.0 million and constituted 6.8% of our portfolio.

 

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This investment constitutes a first loss position in a portfolio that, as of May 31, 2019 and February 28, 2019, was composed of $513.4 million and $510.3 million, respectively, in aggregate principal amount of primarily senior secured first lien term loans. In addition, as of May 31, 2019, we also own $2.5 million of the F-R-2 Notes and $7.5 million of the G-R-2 Notes in the Saratoga CLO, that only rank senior to the subordinated notes.

This investment is subject to unique risks. (See “Part 1. 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” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019).

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 May 31, 2019, $491.0 million or 98.6% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and three Saratoga CLO portfolio investments were in default with a fair value of $1.3 million. At February 28, 2019, $491.0 million or 98.5% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and two Saratoga CLO portfolio investments were in default with a fair value of $0.01 million. For more information relating to the Saratoga CLO, see the audited financial statements for Saratoga in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

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)—performing credit; (Yellow)—underperforming credit; (Red)—in principal payment default and/or expected loss of principal.

Portfolio CMR distribution

The CMR distribution for our investments at May 31, 2019 and February 28, 2019 was as follows:

Saratoga Investment Corp.

 

     May 31, 2019     February 28, 2019  

Color Score

   Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Green

   $ 336,314        82.1   $ 336,061        83.6

Yellow

     2,058        0.5       4,600        1.1  

Red

     2,411        0.6       6        0.0  

N/A(1)

     68,668        16.8       61,353        15.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 409,451        100.0   $ 402,020        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

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

The change in reserve from $0.6 million as of February 28, 2019 to $0.9 million as of May 31, 2019 was primarily related to the additional quarterly interest accruals reserved on Roscoe Medical, Inc. and TMAC Acquisition Co., LLC.

 

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The CMR distribution of Saratoga CLO investments at May 31, 2019 and February 28, 2019 was as follows:

Saratoga CLO

 

     May 31, 2019     February 28, 2019  

Color Score

   Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Green

   $ 458,082        92.0   $ 462,171        92.7

Yellow

     32,902        6.6       28,839        5.8  

Red

     6,751        1.4       7,379        1.5  

N/A(1)

     0        0.0       16        0.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 497,735        100.0   $ 498,405        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 May 31, 2019 and February 28, 2019:

Saratoga Investment Corp.

 

     May 31, 2019     February 28, 2019  
     Investments
At
Fair Value
     Percentage
of Total
Portfolio
    Investments
At
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Business Services

   $ 249,061        60.8   $ 252,676        62.8

Healthcare Services

     66,518        16.3       57,342        14.3  

Education

     48,070        11.7       48,076        12.0  

Structured Finance Securities(1)

     37,965        9.3       35,328        8.8  

Metals

     2,906        0.7       2,827        0.7  

Consumer Services

     2,372        0.6       3,166        0.8  

Food and Beverage

     2,058        0.5       2,100        0.5  

Consumer Products

     501        0.1       505        0.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 409,451        100.0   $ 402,020        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO.

 

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The following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at May 31, 2019 and February 28, 2019:

Saratoga CLO

 

     May 31, 2019     February 28, 2019  
     Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Banking Finance Insurance & Real Estate

   $ 75,212        15.1   $ 74,638        15.0

Healthcare & Pharmaceuticals

     43,983        8.8       39,242        7.9  

Services: Business

     35,698        7.2       36,575        7.3  

High Tech Industries

     35,433        7.1       38,886        7.8  

Telecommunications

     27,159        5.5       28,156        5.6  

Media: Advertising Printing & Publishing

     25,975        5.2       31,799        6.4  

Services: Consumer

     23,882        4.8       24,712        5.0  

Retail

     21,470        4.3       23,018        4.6  

Aerospace & Defense

     21,302        4.3       16,836        3.4  

Beverage Food & Tobacco

     21,129        4.2       23,436        4.7  

Chemicals Plastics & Rubber

     18,869        3.8       15,841        3.2  

Hotel Gaming & Leisure

     18,106        3.6       15,373        3.1  

Consumer goods: Non-durable

     15,435        3.1       15,528        3.1  

Automotive

     14,686        3.0       13,373        2.7  

Media: Diversified & Production

     13,088        2.6       13,086        2.6  

Containers Packaging & Glass

     13,005        2.6       10,033        2.0  

Construction & Building

     11,272        2.3       13,293        2.7  

Transportation: Cargo

     10,779        2.2       11,137        2.2  

Capital Equipment

     9,698        2.0       9,638        1.9  

Media: Broadcasting & Subscription

     8,990        1.8       10,410        2.1  

Consumer goods: Durable

     6,145        1.2       6,324        1.3  

Metals & Mining

     5,010        1.0       5,048        1.0  

Transportation: Consumer

     4,766        1.0       4,773        1.0  

Forest Products & Paper

     4,548        0.9       4,555        0.9  

Utilities: Oil & Gas

     4,440        0.9       2,953        0.6  

Energy: Electricity

     3,034        0.6       5,059        1.0  

Utilities: Electric

     2,939        0.6       2,941        0.6  

Environmental Industries

     985        0.2       979        0.2  

Energy: Oil & Gas

     697        0.1       763        0.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 497,735      $ 100.0   $ 498,405        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 May 31, 2019 and February 28, 2019. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

     May 31, 2019     February 28, 2019  
     Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Southeast

   $ 142,489        34.8   $ 130,604        32.5

Midwest

     108,534        26.5       116,388        29.0  

Southwest

     51,358        12.5       50,236        12.5  

Northeast

     18,306        4.5       19,061        4.7  

West

     11,043        2.7       10,777        2.7  

Northwest

     8,770        2.1       8,636        2.1  

Other(1)

     68,951        16.9       66,318        16.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 409,451        100.0   $ 402,020        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO.

Results of operations

Operating results for the three months ended May 31, 2019 and May 31, 2018 was as follows:

 

     For the three months ended  
     May 31, 2019     May 31, 2018  
     ($ in thousands)  

Total investment income

   $ 12,751     $ 10,488  

Total operating expenses

     9,070       6,561  
  

 

 

   

 

 

 

Net investment income

     3,681       3,927  

Net realized gains (losses) from investments

     —         212  

Net change in unrealized appreciation (depreciation) on investments

     3,989       643  

Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments

     (21     (940
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 7,649     $ 3,842  
  

 

 

   

 

 

 

Investment income

The composition of our investment income for three months ended May 31, 2019 and May 31, 2018 was as follows:

 

     For the three months ended  
     May 31, 2019      May 31, 2018  
     ($ in thousands)  

Interest from investments

   $ 11,603      $ 9,607  

Management fee income

     630        385  

Incentive fee income

     —          199  

Interest from cash and cash equivalents and other income

     518        297  
  

 

 

    

 

 

 

Total investment income

   $ 12,751      $ 10,488  
  

 

 

    

 

 

 

 

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For the three months ended May 31, 2019, total investment income increased $2.3 million, or 21.6% to $12.8 million from $10.5 million for the three months ended May 31, 2018. Interest income from investments increased $2.0 million, or 20.8%, to $11.6 million for the three months ended May 31, 2019 from $9.6 million for the three months ended May 31, 2018. This reflects an increase of $66.1 million, or 19.3% in total investments at May 31, 2019 from $343.4 million at May 31, 2018. At May 31, 2019, the weighted average current yield on investments was 10.6% compared to 11.3% at May 31, 2018, which offset some of the increase.

For the three months ended May 31, 2019 and May 31, 2018, total PIK income was $1.2 million and $0.8 million, respectively. This increase was primarily due to the increase in investment in Easy Ice, LLC, which primarily generates PIK income.

Management fee income reflects the fee income received for managing the Saratoga CLO. For the three months ended May 31, 2019, total management fee income increased $0.2 million, or 63.4% to $0.6 million from $0.4 million for the three months ended May 31, 2018. This reflects the increase in Saratoga CLO assets being managed by the Company following the third refinancing of the Saratoga CLO.

Following the third refinancing of the Saratoga CLO on December 14, 2018, the Company is no longer entitled to receive the incentive fee. For the three months ended May 31, 2018, incentive fee income of $0.2 million was recognized related to the Saratoga CLO, reflecting the 12.0% hurdle rate that has been achieved.

Operating expenses

The composition of our operating expenses for the three months ended May 31, 2019 and May 31, 2018 was as follows:

 

     For the three months ended  
     May 31, 2019      May 31, 2018  
     ($ in thousands)  

Interest and debt financing expenses

   $ 3,864      $ 2,723  

Base management fees

     1,812        1,532  

Incentive management fees

     2,113        1,073  

Professional fees

     395        543  

Administrator expenses

     500        437  

Insurance

     65        64  

Directors fees and expenses

     60        96  

General and administrative and other expenses

     259        360  

Income tax benefit

     2        (267

Excise tax credit

     —          0  
  

 

 

    

 

 

 

Total operating expenses

   $ 9,070      $ 6,561  
  

 

 

    

 

 

 

For the three months ended May 31, 2019, total operating expenses increased $2.5 million, or 38.3% compared to the three months ended May 31, 2018.

For the three months ended May 31, 2019 and May 31, 2018, the increase in interest and debt financing expenses is primarily attributable to an increase in average outstanding debt from $212.1 million for the three months ended May 31, 2018 to $284.5 million for the three months ended May 31, 2019. For the three months ended May 31, 2019, the weighted average interest rate on our outstanding indebtedness was 4.80% compared to 4.44% for the three months ended May 31, 2018. The increase in weighted average interest rate was primarily driven by the issuance of the 2025 Notes which carry a fixed rate of 6.25%, versus the SBA debentures that carry a lower interest rate. For both May 31, 2019 and February 28, 2019, the SBA debentures represented 52.7% of overall debt.

 

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For the three months ended May 31, 2019, base management fees increased $0.3 million, or 18.3% compared to the three months ended May 31, 2018. The increase in base management fees results from the 18.6% increase in the average value of our total assets, less cash and cash equivalents, from $347.4 million as of May 31, 2018 to $412.0 million as of May 31, 2019.

For the three months ended May 31, 2019, incentive management fees increased $1.0 million, or 97.0%, compared to the three months ended May 31, 2018. The first part of the incentive management fees increased from $1.0 million for the three months ended May 31, 2018 to $1.2 million for the three months ended May 31, 2019, as higher average total assets led to increased net investment income above the hurdle rate pursuant to the investment advisory and management agreement. The incentive management fees related to capital gains increased from $0.1 million for the three months ended May 31, 2018 to $1.0 million for the three months ended May 31, 2019, reflecting net realized gains on investments this period, including the impact of the deferred taxes on unrealized appreciation.

For the three months ended May 31, 2019, professional fees decreased $0.1 million, or 27.2% compared to the three months ended May 31, 2018. This decrease primarily relates to decreased legal and accounting fees this year following the Sarbanes-Oxley implementation costs last year.

For the three months ended May 31, 2019, administrator expenses increased $0.06 million, or 14.3%, compared to the three months ended May 31, 2018, which reflects an increase to the cap on the payment or reimbursement of expenses by the Company from $1.75 million to $2.0 million, effective August 1, 2018.

As discussed above, the increase in interest and debt financing expenses for the three months ended May 31, 2019 compared to the three months ended May 31, 2018 is primarily attributable to an increase in the amount of outstanding debt. During the three months ended May 31, 2019 and May 31, 2018, there were no borrowings outstanding under the Credit Facility. For the three months ended May 31, 2019 and May 31, 2018, the average borrowings outstanding of SBA debentures was $150.0 million and $137.7 million, respectively. For the three months ended May 31, 2019 and May 31, 2018, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.25% and 3.17%, respectively. During the three months ended May 31, 2019, the average dollar amount of our 6.25% fixed-rate 2025 Notes outstanding was $60.0 million. There were no outstanding borrowings of our fixed-rate 2025 Notes during the three months ended May 31, 2018. During the three months ended May 31, 2019 and May 31, 2018, the average dollar amount of our 6.75% fixed-rate 2023 Notes outstanding was $74.5 million and $74.5 million, respectively.

For the three months ended May 31, 2019 and May 31, 2018, there were income tax benefits of $0.0 million and $0.3 million, respectively. This relates to net deferred federal and state income tax benefits with respect to operating losses and income derived from equity investments held in taxable blockers.

Net realized gains (losses) on sales of investments

For the three months ended May 31, 2019, the Company had $26.9 million of sales, repayments, exits or restructurings. For the three months ended May 31, 2018, the Company had $36.5 million of sales, repayments, exits or restructurings resulting in $0.2 million of net realized gains. There were no realized gains and losses during the three months ended May 31, 2019.

The most significant realized gains and losses during the three months ended May 31, 2018 were as follows (dollars in thousands):

Three Months ended May 31, 2018

 

Issuer

  

Asset Type

   Gross Proceeds      Cost      Net
Realized
Gain (Loss)
 

Take 5 Oil Change, L.L.C.

   Equity Interests    $ 319      $ —        $ 319  

TM Restaurant Group L.L.C.

   First Lien Term Loan      9,256        9,359        (103

 

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Net change in unrealized appreciation (depreciation) on investments

For the three months ended May 31, 2019, our investments had a net change in unrealized appreciation of $4.0 million versus a net change in unrealized appreciation of $0.6 million for the three months ended May 31, 2018. The most significant cumulative net change in unrealized appreciation (depreciation) for the three months ended May 31, 2019 were the following (dollars in thousands):

Three Months ended May 31, 2019

 

Issuer

  

Asset Type

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

Censis Technologies, Inc.

   Equity Interests    $ 999      $ 4,018      $ 3,019     $ 1,631  

My Alarm Center, LLC

   Equity Interests      4,811        2,372        (2,439     (794

Saratoga Investment Corp. CLO 2013-1, Ltd.

   Structured Finance Securities      24,899        28,024        3,125       1,248  

The $1.6 million net change in unrealized appreciation in our investment in Censis Technologies, Inc. was driven by continued outperformance of the business as well as the completion of a strategic acquisition.

The $0.8 million net change in unrealized depreciation in our investment in My Alarm Center, LLC was driven by the issuance of new securities senior to existing investments.

The $1.2 million net change in unrealized appreciation in our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. was driven by continued outperformance of the Saratoga CLO.

The most significant cumulative net change in unrealized appreciation (depreciation) for the three months ended May 31, 2018 were the following (dollars in thousands):

Three Months ended May 31, 2018

 

Issuer

  

Asset Type

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

Elyria Foundry Company, L.L.C

   Common Stock    $ 9,685      $ 2,672      $ (7,013   $ (761

Easy Ice, LLC

   Preferred Equity      8,980        11,676        2,696       697  

HMN Holdco, LLC

   Warrant      —          3,166        3,166       469  

The $0.8 million of net change in unrealized depreciation in our investment in Elyria Foundry, L.L.C. was driven by a decline in oil and gas end markets since year-end, negatively impacting the Company’s performance.

The $0.7 million of net change in unrealized appreciation in our investment in Easy Ice, LLC was driven by a continued increase in the scale and earnings of the business.

The $0.5 million of net change in unrealized appreciation in our investment in HMN Holdco, LLC was driven by a continued increase in the earnings of the business.

Changes in net assets resulting from operations

For the three months ended May 31, 2019 and May 31, 2018, we recorded a net increase in net assets resulting from operations of $7.6 million and $3.8 million, respectively. Based on 7,746,187 weighted average

 

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common shares outstanding as of May 31, 2019, our per share net increase in net assets resulting from operations was $0.99 for the three months ended May 31, 2019. This compares to a per share net increase in net assets resulting from operations of $0.61 for the three months ended May 31, 2018 based on 6,275,494 weighted average common shares outstanding as of May 31, 2018.

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 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 the Code. In satisfying this distribution requirement, we have in the past relied on Internal Revenue Service (“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 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. 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 200.0%, reduced to 150.0% effective April 16, 2019 following the approval received from the non-interested board of directors on April 16, 2018. This requirement limits the amount that we may borrow. Our asset coverage ratio, as defined in the 1940 Act, was 238.9% as of May 31, 2019 and 234.5% as of February 28, 2019. 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 LLC (the “Credit Facility”) on June 30, 2010, which was most recently amended on May 18, 2017.

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

 

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“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 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 1.00%, plus an applicable margin of 4.75%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such alternative base rate is 3.75%. 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

 

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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 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

 

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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 $5.0 million 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 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 LLC 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 LLC 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 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

 

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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 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%.

On May 18, 2017, we entered into a third amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:

 

   

extend the commitment termination date from September 17, 2017 to September 17, 2020;

 

   

extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025;

 

   

reduce the floor on base rate borrowings from 2.25% to 2.00%;

 

   

reduce the floor on LIBOR borrowings from 1.25% to 1.00%; and

 

   

reduce the commitment fee rate from 0.75% to 0.50% for any period during which the ratio of advances outstanding to aggregate commitments, expressed as a percentage, is greater than or equal to 50%.

As of May 31, 2019, we had $0.0 million of outstanding borrowings under the Credit Facility and $150.0 million of SBA-guaranteed debentures outstanding (which are discussed below). As of February 28, 2019, we had no outstanding borrowings under the Credit Facility and $150.0 million of SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at May 31, 2019 and February 28, 2019 was $27.3 million and $30.6 million, respectively.

Our asset coverage ratio, as defined in the 1940 Act, was 238.9% as of May 31, 2019 and 234.5% as of February 28, 2019.

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 ten-year maturities.

 

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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 May 31, 2019, our SBIC subsidiary had $75.0 million in regulatory capital and $150.0 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 asset coverage test under the 1940 Act. This allows us increased flexibility under the 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 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non- interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% from 200% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150.0% asset coverage ratio became effective on April 16, 2019.

On September 27, 2018, the SBA issued a “green light” letter inviting us to file a formal license application for a second SBIC license. If approved, the additional SBIC license would provide the Company with an incremental source of long-term capital by permitting us to issue, subject to SBA approval, up to $175.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the Company’s 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 additional SBIC license, or of the timeframe in which it would receive an additional license, should one ultimately be granted.

Unsecured notes

In May 2013, we issued $48.3 million in aggregate principal amount of our 2020 Notes 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 200.0% 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 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 the Code. 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 200.0% 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 were redeemed in full on January 13, 2017 and are no longer listed on the NYSE.

 

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On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. 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. Prior to the 2020 Notes being redeemed in full, the Company had sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million (net of transaction costs).

On December 21, 2016, we issued $74.5 million in aggregate principal amount of our 2023 Notes for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included the exercise of substantially all of the underwriters’ option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. Interest on the 2023 Notes is paid quarterly in arrears on March 15, June 15, September 15 and December 15, at a rate of 6.75% per year, beginning March 30, 2017. The 2023 Notes mature on December 30, 2023, and commencing December 21, 2019, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used to repay all of the outstanding indebtedness under the 2020 Notes on January 13, 2017, which amounted to $61.8 million, and for general corporate purposes in accordance with our investment objective and strategies. The 2023 Notes are listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share.

On August 28, 2018, the Company issued $40.0 million in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 2025 Notes within 30 days. Interest on the 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 2025 Notes have been capitalized and are being amortized over the term of the 2025 Notes. The 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.

On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. Offering costs incurred were approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million aggregate principal amount of 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 2025 Notes issued in August 2018. The net proceeds from this offering were used for general corporate purposes in accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 2025 Notes have been capitalized and are being amortized over the term of the 2025 Notes.

At May 31, 2019 the total 2023 Notes and 2025 Notes outstanding was $74.5 million and $60.0 million, respectively.

In connection with the issuance of the 2023 Notes and 2025 Notes, we agreed to the following covenants for the period of time during which the 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. 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, or, if we obtain the required approvals from our independent directors and/or stockholders, 150% (after deducting the amount of such dividend, distribution or purchase price, as the case may be).

 

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we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the 1940 Act) of at least 150.0%, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to (i) any exemptive relief granted to us by the SEC, and (ii) any SEC no-action relief granted by the SEC to another BDC (or to us if we determine 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 such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a regulated investment company under Subchapter M of the Code.

 

   

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 2025 Notes and the Trustee, for the period of time during which the 2023 Notes and/or the 2025 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.

At May 31, 2019 and February 28, 2019, the fair value of investments, cash and cash equivalents and cash and cash equivalents, reserve accounts were as follows:

 

     May 31, 2019     February 28, 2019  
     Fair Value      Percentage of
Total
    Fair Value      Percentage of
Total
 
     ($ in thousands)  

Cash and cash equivalents

   $ 37,184        7.9   $ 30,799        6.6

Cash and cash equivalents, reserve accounts

     23,813        5.1       31,295        6.7  

First lien term loans

     219,479        46.7       202,846        43.7  

Second lien term loans

     109,305        23.2       125,786        27.1  

Unsecured term loans

     2,058        0.4       2,100        0.5  

Structured finance securities

     37,965        8.1       35,328        7.6  

Equity interests

     40,644        8.6       35,960        7.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 470,448        100.0   $ 464,114        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

On July 13, 2018, the Company issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.

On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were also added to the agreement. On July 9, 2019, the amount of common stock to be offered through this offering was increased to $70.0 million. As of May 31, 2019, the Company sold 571,120 shares for gross proceeds of $13.0 million at an average price of $22.78 for aggregate net proceeds of $12.9 million (net of transaction costs).

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

 

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common stock. 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 10, 2017 and January 8, 2019, the Company’s board of directors extended the open market share repurchase plan for another year to October 15, 2018 and January 15, 2020, respectively, each time leaving the number of shares unchanged at 600,000 shares of its common stock. As of May 31, 2019, we purchased 218,491 shares of common stock, at the average price of $16.87 for approximately $3.7 million pursuant to this repurchase plan.

On May 28, 2019, our board of directors declared a dividend of $0.55 per share, which was paid on June 27, 2019, to common stockholders of record as of June 13, 2019. 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 $3.6 million in cash and 31,545 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 $22.65 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2019.

On February 26, 2019, our board of directors declared a dividend of $0.54 per share, which was paid on March 28, 2019, to common stockholders of record as of March 14, 2019. 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 $3.5 million in cash and 31,240 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 $21.36 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 18, 19, 20, 21, 22, 25, 26, 27 and 28, 2019.

On November 27, 2018, our board of directors declared a dividend of $0.53 per share, which was paid on January 2, 2019, to common stockholders of record on December 17, 2018. 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 $3.4 million in cash and 30,796 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 $18.88 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 18, 19, 20, 21, 24, 26, 27, 28, 31, 2018 and January 2, 2019.

On August 28, 2018, our board of directors declared a dividend of $0.52 per share, which was paid on September 27, 2018, to common stockholders of record as of September 17, 2018. 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 $3.3 million in cash and 25,862 newly issued shares of common stock, or 0.3% 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 $22.35 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2018.

On May 30, 2018, our board of directors declared a dividend of $0.51 per share, which was paid on June 27, 2018, to common stockholders of record as of June 15, 2018. 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 $2.7 million in cash and 21,562 newly issued shares of common stock, or 0.3% 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 $23.72 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2018.

 

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On February 26, 2018, our board of directors declared a dividend of $0.50 per share, which was paid on March 26, 2018, to common stockholders of record as of March 14, 2018. 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 $2.6 million in cash and 25,354 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 $19.91 per share, which equaled the volume weighted average trading price per share of the common stock on March 13, 14, 15, 16, 19, 20, 21, 22, 23 and 26, 2018.

On November 29, 2017, our board of directors declared a dividend of $0.49 per share, which was paid on December 27, 2017, to common stockholders of record on December 15, 2017. 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 $2.5 million in cash and 25,435 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 $21.14 per share, which equaled the volume weighted average trading price per share of the common stock on December 13, 14, 15, 18, 19, 20, 21, 22, 26 and 27, 2017.

On August 28, 2017, our board of directors declared a dividend of $0.48 per share, which was paid on September 26, 2017, to common stockholders of record on September 15, 2017. 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 $2.2 million in cash and 33,551 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 $20.19 per share, which equaled the volume weighted average trading price per share of the common stock on September 13, 14, 15, 18, 19, 20, 21, 22, 25 and 26, 2017.

On May 30, 2017, our board of directors declared a dividend of $0.47 per share, which was paid on June 27, 2017, to common stockholders of record on June 15, 2017. 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 $2.3 million in cash and 26,222 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 $20.04 per share, which equaled the volume weighted average trading price per share of the common stock on June 14, 15, 16, 19, 20, 21, 22, 23, 26 and 27, 2017.

On February 28, 2017, our board of directors declared a dividend of $0.46 per share, which was paid on March 28, 2017, to common stockholders of record as of March 15, 2017. 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 $2.0 million in cash and 29,096 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 $21.38 per share, which equaled the volume weighted average trading price per share of the common stock on March 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2017.

On January 12, 2017, our board of directors declared a dividend of $0.45 per share, which was paid on February 9, 2017, to common stockholders of record as of January 31, 2017. 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 $1.6 million in cash and 50,453 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 $20.25 per share, which equaled the volume weighted average trading price per share of the common stock on January 27, 30, 31 and February 1, 2, 3, 6, 7, 8 and 9, 2017.

 

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On October 5, 2016, our board of directors declared a dividend of $0.44 per share, which was paid 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 to our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 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 $17.12 per share, which equaled the volume weighted average trading price per share of the common stock on October 27, 28, 31 and November 1, 2, 3, 4, 7, 8 and 9, 2016.

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 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, 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 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.

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 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.

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 to 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, 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 to 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.

 

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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 to 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.

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 on as of May 26, 2015. 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 $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 to 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, 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, our board of directors declared a dividend of $0.22 per share, which was paid on February 27, 2015, to common stockholders of record on February 2, 2015. Shareholders have 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 $0.8 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, our board of directors declared a dividend of $0.18 per share, which was paid on November 28, 2014, to common stockholders of record on November 3, 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 was 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

 

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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.

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 864,872.5 shares of common stock, or 104.0% of our outstanding common stock prior to the dividend payment. The amount of cash

 

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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 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 as of May 31, 2019:

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
            Payment Due by Period  

Long-Term Debt Obligations

   Total      Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
 
     ($ in thousands)  

Revolving credit facility

   $ —        $ —        $ —        $ —        $ —    

SBA debentures

     150,000        —          —          50,000        100,000  

2023 Notes

     74,451        —          —          74,451        —    

2025 Notes

     60,000        —          —          —          60,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Long-Term Debt Obligations

   $ 284,451      $ —        $ —        $ 124,451      $ 160,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

As of May 31, 2019 and February 28, 2019, the Company’s off-balance sheet arrangements consisted of $24.5 million and $4.5 million, respectively, of unfunded commitments outstanding to provide debt financing to its portfolio companies or to fund limited partnership interests. 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 unfunded commitments outstanding as of May 31, 2019 and February 28, 2019 is shown in the table below (dollars in thousands):

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
     May 31, 2019      February 28, 2019  

Axiom Purchaser, Inc.

   $ 1,000      $ 1,000  

Destiny Solutions, Inc.

     1,500        1,500  

Fancy Chap, Inc.

     14,000        —    

GDS Holdings US, Inc.

     —          1,000  

HemaTerra Holding Company, LLC

     2,000        —    

inMotionNow, Inc.

     5,000        —    

Omatic Software, LLC

     1,000        1,000  
  

 

 

    

 

 

 

Total

   $ 24,500      $ 4,500  
  

 

 

    

 

 

 

 

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PLAN OF DISTRIBUTION

Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC and B. Riley FBR, Inc. (which we collectively refer to as the “Agents”) are acting as our sales agents in connection with the offer and sale of shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Upon written instructions from us, each Agent will use its commercially reasonable efforts consistent with its sales and trading practices to sell, as our sales agents, our common stock under the terms and subject to the conditions set forth in our amended equity distribution agreement with the Agents dated July 11, 2019. We will instruct the Agents as to the amount of common stock to be sold by it. We may instruct the Agents not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less the Agents’ commission, will not be less than the net asset value per share of our common stock at the time of such sale. We or Ladenburg Thalmann & Co. Inc. on behalf of the Agents may suspend the offering of shares of common stock upon proper notice and subject to other conditions.

Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange at prices related to the prevailing market prices or at negotiated prices.

The Agents will provide written confirmation of a sale to us no later than the opening of the trading day on the NYSE following each trading day in which shares of our common stock are sold under the equity distribution agreement. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to the Agents in connection with the sales.

The Agents will receive a commission from us equal to the lesser of (i) 1.5% of the gross sales price per share from such sale and (ii) the difference between the gross sale price per share from such sale and our most recently determined net asset value per share, with respect to any shares of our common stock sold through the Agents under the equity distribution agreement. We estimate that the total expenses for the offering, excluding compensation payable to the Agents under the terms of the equity distribution agreement, will be approximately $100,000. In addition to the commission payable to the Agents, we have agreed to reimburse the Agents for their reasonable out-of-pocket expenses, including fees and disbursements of counsel, incurred by the Agents in connection with this offering; provided that such reimbursements shall not exceed $25,000.

Settlement for sales of shares of common stock will occur on the third trading day following the end of the month in which such sales are made, or on some other date that is agreed upon by us and the Agents in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

We will report at least quarterly the number of shares of our common stock sold through the Agents under the equity distribution agreement and the net proceeds to us.

In connection with the sale of the common stock on our behalf, the Agents may be deemed to be “underwriters” within the meaning of the Securities Act, and the compensation of the Agents may be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to the Agents against certain civil liabilities, including liabilities under the Securities Act.

The offering of our shares of common stock pursuant to the equity distribution agreement will terminate upon the earlier of (i) the sale of the dollar amount of common stock subject to the equity distribution agreement or (ii) the termination of the equity distribution agreement. The equity distribution agreement may be terminated by us in our sole discretion under the circumstances specified in the equity distribution agreement by giving

 

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notice to the Agents. In addition, Ladenburg Thalmann & Co. Inc., on behalf of the Agents, may terminate the equity distribution agreement under the circumstances specified in the equity distribution agreement by giving notice to us.

Potential Conflicts of Interest

The Agents and their affiliates have provided, or 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.

On February 5, 2019, pursuant to an underwriting agreement with Ladenburg Thalmann & Co. Inc. as representative of the several underwriters, including Compass Point Research & Trading, LLC and BB&T Capital Markets, a division of BB&T Securities, LLC, we issued $20.0 million in principal amount of our 6.25% fixed-rate notes due 2025 for net proceeds of $19.0 million after deducting underwriting commissions and discounts of approximately $0.8 million and offering costs of approximately $0.2 million.

On August 28, 2018, pursuant to an underwriting agreement with Ladenburg Thalmann & Co. Inc. as representative of the several underwriters, including, BB&T Capital Markets, a division of BB&T Securities, LLC, Janney Montgomery Scott LLC, B. Riley FBR, Inc., Compass Point Research & Trading, LLC, National Securities Corporation, a wholly owned subsidiary of National Holding Corporation, William Blair & Company L.L.C. and Maxim Group LLC, we issued $40 million in principal amount of our 6.25% fixed-rate notes due 2025 for net proceeds of $38.6 million after deducting underwriting commissions of approximately $1.25 million and offering costs of approximately $0.2 million.

On July 13, 2018, pursuant to an underwriting agreement with Ladenburg Thalmann & Co. Inc. as representative of the several underwriters, including BB&T Capital Markets, a division of BB&T Securities, LLC, B. Riley FBR, Inc., Compass Point Research & Trading, LLC, Janney Montgomery Scott LLC, National Securities Corporation, a wholly owned subsidiary of National Holding Corporation, and Maxim Group LLC, we issued $1,150,000 shares of our common stock for net proceeds of $27.2 million after deducting underwriting commissions of approximately $1.15 million and offering costs of approximately $0.2 million.

On March 16, 2017, we entered into an equity distribution agreement, as amended, with Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and B. Riley FBR, Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an at-the-market (“ATM”) offering. On July 11, 2019, the amount of common stock to be offered through this offering was increased to $70.0 million. As of May 31, 2019, the Company sold 571,120 shares for gross proceeds of $13.0 million at an average price of $22.78 for aggregate net proceeds of $12.9 million (net of transaction costs).

On December 21, 2016, pursuant to an underwriting agreement with Ladenburg Thalmann & Co. Inc. as representative of the several underwriters, including BB&T Capital Markets, a division of BB&T Securities, LLC, Compass Point Research & Trading LLC and William Blair & Company, L.L.C., we issued $74.5 million in aggregate principal amount of our 6.75% fixed-rate notes due 2023 for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million.

On May 29, 2015, we entered into a Debt Distribution Agreement, as amended with Ladenburg Thalmann & Co. Inc., as sales agent, through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the our 7.5% fixed-rate notes due 2020, initially issued by us in May 2013 (the “2020 Notes”) through an ATM offering. As of February 29, 2016, and at the close of the ATM offering, we 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 $273,436 in connection with the sales. We have not sold any additional 2020 Notes under this ATM offering and are no longer actively selling on this ATM offering.

Pursuant to an underwriting agreement dated May 2, 2013, for which Ladenburg Thalmann & Co. Inc. acted as representative of the underwriters, including BB&T Capital Markets, a division of BB&T Securities, LLC,

 

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William Blair and Company, LLC, Maxim Group LLC, National Securities Corporation, C&Co/PrinceRidge LLC, Dominick & Dominick LLC and Gilford Securities Incorporated, on May 10, 2013, we issued $42.0 million in aggregate principal amount of our 2020 Notes. In addition, on May 17, 2013, we closed an additional $6.3 million in aggregate principal amount of 2020 Notes, initially issued by us in May 2013, 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 approximately $1.9 million to the underwriters.

The Agents and their affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In the ordinary course of their various business activities, the Agents and their 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 Agents and their 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.

The principal business address of Ladenburg Thalmann & Co. Inc. is 277 Park Avenue, 26th Floor, New York, NY 10172. The principal business address of BB&T Capital Markets is 901 East Byrd Street, Suite 300, Richmond, VA 23219. The principal business address of B. Riley FBR, Inc. is 299 Park Avenue, 7th  Floor, New York, New York 10171.

LEGAL MATTERS

Certain legal matters regarding the securities offered by this prospectus supplement will be passed upon for us by Eversheds Sutherland (US) LLP, Washington, D.C. Certain legal matters in connection with this offering will be passed upon for the Agents 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 28, 2019, and February 28, 2018 and each of the three years ended February 28, 2019, February 28, 2018 and February 29, 2017, 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 the accompanying 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

We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act. The registration statement contains additional information about us and the securities being offered by this prospectus supplement and the accompanying prospectus.

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. 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. 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 May 31, 2019 (unaudited) and February 28, 2019

     SF-2  

Consolidated Statements of Operations for the three months ended May 31, 2019 (unaudited) and May 31, 2018 (unaudited)

     SF-3  

Consolidated Schedules of Investments as of May 31, 2019 (unaudited) and February 28, 2019

     SF-4  

Consolidated Statements of Changes in Net Assets for the three months ended May 31, 2019 (unaudited) and May 31, 2018 (unaudited)

     SF-17  

Consolidated Statements of Cash Flows for the three months ended May 31, 2019 (unaudited) and May 31, 2018 (unaudited)

     SF-18  

Notes to Consolidated Financial Statements as of May 31, 2019 (unaudited)

     SF-19  

 

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Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

    May 31, 2019     February 28, 2019  
    (unaudited)        

ASSETS

   

Investments at fair value

   

Non-control/Non-affiliate investments (amortized cost of $308,061,752 and $307,136,188, respectively)

  $ 309,830,182     $ 306,511,427  

Affiliate investments (amortized cost of $18,557,809 and $18,514,716, respectively)

    11,676,118       11,463,081  

Control investments (amortized cost of $78,739,023 and $76,265,189, respectively)

    87,945,041       84,045,212  
 

 

 

   

 

 

 

Total investments at fair value (amortized cost of $405,358,584 and $401,916,093, respectively)

    409,451,341       402,019,720  

Cash and cash equivalents

    37,183,604       30,799,068  

Cash and cash equivalents, reserve accounts

    23,812,643       31,295,326  

Interest receivable (net of reserve of $873,414 and $647,210, respectively)

    3,815,502       3,746,604  

Due from affiliate (See Note 6)

    1,243,197       1,673,747  

Management and incentive fee receivable

    279,828       542,094  

Other assets

    550,093       595,543  
 

 

 

   

 

 

 

Total assets

  $ 476,336,208     $ 470,672,102  
 

 

 

   

 

 

 

LIABILITIES

   

Revolving credit facility

  $ —       $ —    

Deferred debt financing costs, revolving credit facility

    (581,922     (605,189

SBA debentures payable

    150,000,000       150,000,000  

Deferred debt financing costs, SBA debentures payable

    (2,274,866     (2,396,931

2023 Notes payable

    74,450,500       74,450,500  

Deferred debt financing costs, 2023 notes payable

    (1,819,617     (1,919,620

2025 Notes payable

    60,000,000       60,000,000  

Deferred debt financing costs, 2025 notes payable

    (2,320,888     (2,377,551

Base management and incentive fees payable

    7,522,070       6,684,785  

Deferred tax liability

    762,783       739,716  

Accounts payable and accrued expenses

    1,430,701       1,615,443  

Interest and debt fees payable

    1,978,494       3,224,671  

Directors fees payable

    63,500       62,000  

Due to manager

    341,752       319,091  
 

 

 

   

 

 

 

Total liabilities

  $ 289,552,507     $ 289,796,915  
 

 

 

   

 

 

 

Commitments and contingencies (See Note 8)

   

NET ASSETS

   

Common stock, par value $.001, 100,000,000 common shares authorized, 7,764,844 and 7,657,156 common shares issued and outstanding, respectively

  $ 7,765     $ 7,657  

Capital in excess of par value

    205,988,350       203,552,800  

Total distributable earnings (loss)

    (19,212,414     (22,685,270
 

 

 

   

 

 

 

Total net assets

    186,783,701       180,875,187  
 

 

 

   

 

 

 

Total liabilities and net assets

  $ 476,336,208     $ 470,672,102  
 

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

  $ 24.06     $ 23.62  
 

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

     For the three months ended  
     May 31, 2019     May 31, 2018  

INVESTMENT INCOME

    

Interest from investments

    

Interest income:

    

Non-control/Non-affiliate investments

   $ 8,527,740     $ 7,405,909  

Affiliate investments

     249,325       239,350  

Control investments

     1,648,146       1,146,665  

Payment-in-kind interest income:

    

Non-control/Non-affiliate investments

     151,897       216,010  

Affiliate investments

     40,150       34,147  

Control investments

     985,869       564,857  
  

 

 

   

 

 

 

Total interest from investments

     11,603,127       9,606,938  

Interest from cash and cash equivalents

     51,359       16,293  

Management fee income

     629,516       385,194  

Incentive fee income

     —         199,183  

Other income

     467,182       280,410  
  

 

 

   

 

 

 

Total investment income

     12,751,184       10,488,018  
  

 

 

   

 

 

 

OPERATING EXPENSES

    

Interest and debt financing expenses

     3,864,576       2,722,792  

Base management fees

     1,812,169       1,532,468  

Incentive management fees

     2,113,169       1,072,612  

Professional fees

     395,126       542,797  

Administrator expenses

     500,000       437,500  

Insurance

     64,619       63,859  

Directors fees and expenses

     60,000       95,500  

General & administrative

     258,601       347,850  

Income tax expense (benefit)

     2,136       (267,310

Excise tax expense (credit)

     —         (270

Other expense

     —         12,572  
  

 

 

   

 

 

 

Total operating expenses

     9,070,396       6,560,370  
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     3,680,788       3,927,648  
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

    

Net realized gain (loss) from investments:

    

Non-control/Non-affiliate investments

     —         212,008  
  

 

 

   

 

 

 

Net realized gain (loss) from investments

     —         212,008  

Net change in unrealized appreciation (depreciation) on investments:

    

Non-control/Non-affiliate investments

     2,393,191       303,705  

Affiliate investments

     169,944       (475,562

Control investments

     1,425,995       815,062  
  

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     3,989,130       643,205  

Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments

     (20,930     (940,546
  

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments

     3,968,200       (85,333
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 7,648,988     $ 3,842,315  
  

 

 

   

 

 

 

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 0.99     $ 0.61  

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED

     7,746,187       6,275,494  

See accompanying notes to consolidated financial statements.

 

SF-3


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

May 31, 2019

(unaudited)

 

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Non-control/Non-affiliate investments—165.9% (b)

             

Apex Holdings Software Technologies, LLC

  Business Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash, 9/21/2021
    9/21/2016     $ 18,000,000     $ 17,932,070     $ 18,000,000       9.7

Apex Holdings Software Technologies, LLC

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash, 9/21/2021
    10/1/2018     $ 1,500,000       1,488,728       1,500,000       0.8

Avionte Holdings, LLC (h)

  Business Services   Class A Units     1/8/2014       100,000       100,000       707,472       0.4

CLEO Communications Holding, LLC

  Business Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 13,583,511       13,517,395       13,583,512       7.3

CLEO Communications Holding, LLC

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 12,204,179       12,105,751       12,204,179       6.5

Destiny Solutions Inc. (a)

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 5/16/2023
    5/16/2018     $ 8,500,000       8,429,988       8,513,600       4.6

Destiny Solutions Inc. (a), (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 5/16/2023
    5/16/2018     $ —         —         —         0.0

Destiny Solutions Inc. (a), (h), (i)

  Business Services   Limited Partner Interests     5/16/2018       999,000       999,000       1,083,543       0.6

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note
(3M USD LIBOR+8.50%), 11.00% Cash, 1/23/2020
    12/28/2012     $ 3,300,000       3,299,665       3,307,657       1.8

Emily Street Enterprises, L.L.C. (h)

  Business Services   Warrant Membership Interests
Expires 12/28/2022
    12/28/2012       49,318       400,000       414,271       0.2

Erwin, Inc. (d)

  Business Services   Second Lien Term Loan
(3M USD LIBOR+11.50%), 14.00% Cash/1.00% PIK, 8/28/2021
    2/29/2016     $ 15,928,264       15,845,224       15,928,264       8.5

 

See accompanying notes to consolidated financial statements.

 

SF-4


Table of Contents

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Fancy Chap, Inc.

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.50%), 10.00% Cash, 4/8/2024
    4/8/2019     $ 6,000,000       5,940,434       5,991,000       3.2

Fancy Chap, Inc. (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 10.00% Cash, 4/8/2024
    4/8/2019     $ —         —         —         0.0

Fancy Chap, Inc. (h)

  Business Services   Series C Preferred Stock     4/8/2019       38,398       925,123       2,076,658       1.1

FMG Suite Holdings, LLC (d)

  Business Services   Second Lien Term Loan
(1M USD LIBOR+8.00%), 10.43% Cash, 11/16/2023
    5/16/2018     $ 23,000,000       22,849,679       22,958,600       12.3

GDS Holdings US, Inc. (d)

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/23/2023
    8/23/2018     $ 7,500,000       7,435,464       7,492,500       4.0

GDS Holdings US, Inc.

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/23/2023
    3/29/2019     $ 1,000,000       990,143       999,000       0.5

GDS Software Holdings, LLC (h)

  Business Services   Common Stock Class A Units     8/23/2018       250,000       250,000       299,892       0.2

Identity Automation Systems (h)

  Business Services   Common Stock Class A Units     8/25/2014       232,616       232,616       640,811       0.3

Identity Automation Systems (d)

  Business Services   First Lien Term Loan
(3M USD LIBOR+9.24%), 11.74% Cash, 3/31/2021
    8/25/2014     $ 15,500,000       15,437,640       15,500,000       8.3

inMotionNow, Inc.

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.25), 9.75% Cash, 5/15/2024
    5/15/2019     $ 12,200,000       12,078,703       12,078,000       6.5

inMotionNow, Inc. (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+7.25) 9.75% Cash, 5/15/2024
    5/15/2019     $ —         —         —         0.0

Knowland Group, LLC

  Business Services   Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash, 5/9/2024
    11/9/2018     $ 15,000,000       15,000,000       14,953,500       8.0

National Waste Partners (d)

  Business Services   Second Lien Term Loan
10.00% Cash, 2/13/2022
    2/13/2017     $ 9,000,000       8,946,185       8,853,300       4.7

Omatic Software, LLC

  Business Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash, 5/29/2023
    5/29/2018     $ 5,500,000       5,453,319       5,527,500       3.0

 

See accompanying notes to consolidated financial statements.

 

SF-5


Table of Contents

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Omatic Software, LLC (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.50% Cash, 5/29/2023
    5/29/2018     $ —         —         —         0.0

Passageways, Inc.

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.75%), 10.25% Cash, 7/5/2023
    7/5/2018     $ 5,000,000       4,956,214       5,059,500       2.7

Passageways, Inc. (h)

  Business Services   Series A Preferred Stock     7/5/2018       2,027,205       1,000,000       1,395,128       0.7

Vector Controls Holding Co.,
LLC (d)

  Business Services   First Lien Term Loan
11.50% (9.75% Cash/1.75% PIK), 3/6/2022
    3/6/2013     $ 9,098,356       9,097,625       9,166,594       4.9

Vector Controls Holding Co.,
LLC (h)

  Business Services   Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027     5/31/2015       343       —         2,076,854       1.1
         

 

 

   

 

 

   

 

 

 
    Total Business Services         184,710,966       190,311,335       101.9
         

 

 

   

 

 

   

 

 

 

Targus Holdings, Inc. (h)

  Consumer Products   Common Stock     12/31/2009       210,456       1,713,605       501,112       0.3
         

 

 

   

 

 

   

 

 

 
    Total Consumer Products         1,713,605       501,112       0.3
         

 

 

   

 

 

   

 

 

 

My Alarm Center, LLC (k)

  Consumer Services   Preferred Equity Class A Units
8.00% PIK
    7/14/2017       2,227       2,357,879       374,662       0.2

My Alarm Center, LLC (h)

  Consumer Services   Preferred Equity Class B Units     7/14/2017       1,797       1,796,880       —         0.0

My Alarm Center, LLC (h)

  Consumer Services   Preferred Equity Class Z Units     9/12/2018       676       655,987       1,997,158       1.0

My Alarm Center, LLC (h)

  Consumer Services   Common Stock     7/14/2017       96,224       —         —         0.0
         

 

 

   

 

 

   

 

 

 
    Total Consumer Services         4,810,746       2,371,820       1.2
         

 

 

   

 

 

   

 

 

 

C2 Educational Systems (d)

  Education   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 5/31/2020
    5/31/2017     $ 16,000,000       15,943,708       15,920,139       8.5

Kev Software Inc. (a)

  Education   First Lien Term Loan
(1M USD LIBOR+8.63%), 11.06% Cash, 9/13/2023
    9/13/2018     $ 21,393,178       21,226,465       21,388,899       11.5

M/C Acquisition Corp., L.L.C. (h)

  Education   Class A Common Stock     6/22/2009       544,761       30,241       —         0.0

M/C Acquisition Corp., L.L.C. (k)

  Education   First Lien Term Loan
1.00% Cash, 3/31/2020
    8/10/2004     $ 2,315,090       1,189,177       6,260       0.0

Texas Teachers of Tomorrow,
LLC (h), (i)

  Education   Common Stock     12/2/2015       750,000       750,000       801,908       0.4

 

See accompanying notes to consolidated financial statements.

 

SF-6


Table of Contents

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Texas Teachers of Tomorrow, LLC

  Education   Second Lien Term Loan
(3M USD LIBOR+9.75%), 12.25% Cash, 6/2/2021
    12/2/2015     $ 10,000,000       9,956,443       9,953,204       5.3
         

 

 

   

 

 

   

 

 

 
    Total Education         49,096,034       48,070,410       25.7
         

 

 

   

 

 

   

 

 

 

TMAC Acquisition Co., LLC (k)

  Food and Beverage   Unsecured Term Loan
8.00% PIK, 9/01/2023
    3/1/2018     $ 2,216,427       2,216,427       2,057,888       1.1
         

 

 

   

 

 

   

 

 

 
    Total Food and Beverage         2,216,427       2,057,888       1.1
         

 

 

   

 

 

   

 

 

 

Axiom Parent Holdings, LLC (h)

  Healthcare Services   Common Stock Class A Units     6/19/2018       400,000       400,000       424,155       0.2

Axiom Purchaser, Inc. (d)

  Healthcare Services   First Lien Term Loan
(3M USD LIBOR+6.00%), 8.50% Cash, 6/19/2023
    6/19/2018     $ 10,000,000       9,926,809       9,999,000       5.4

Axiom Purchaser, Inc. (j)

  Healthcare Services   Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 8.50% Cash, 6/19/2023
    6/19/2018     $ —         —         —         0.0

Censis Technologies, Inc.

  Healthcare Services   First Lien Term Loan B
(1M USD LIBOR+8.30%), 10.73% Cash, 9/27/2023
    7/25/2014     $ 19,900,000       19,873,291       19,963,680       10.7

Censis Technologies, Inc. (h), (i)

  Healthcare Services   Limited Partner Interests     7/25/2014       999       999,000       4,018,452       2.1

ComForCare Health Care

  Healthcare Services   First Lien Term Loan
(3M USD LIBOR+7.50%), 10.00% Cash, 1/31/2022
    1/31/2017     $ 15,000,000       14,905,794       15,063,000       8.1

HemaTerra Holding Company, LLC

  Healthcare Services   First Lien Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
    4/15/2019     $ 6,000,000       5,941,146       5,940,000       3.2

HemaTerra Holding Company,
LLC (j)

  Healthcare Services   Delayed Draw Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
    4/15/2019     $ —         —         —         0.0

TRC HemaTerra, LLC (h)

  Healthcare Services   Class D Membership Interests     4/15/2019       1,000,000       1,000,000       1,000,000       0.5

Ohio Medical, LLC (h)

  Healthcare Services   Common Stock     1/15/2016       5,000       500,000       441,950       0.2

Ohio Medical, LLC

  Healthcare Services   Senior Subordinated Note
12.00% Cash, 7/15/2021
    1/15/2016     $ 7,300,000       7,266,535       7,262,040       4.0

Roscoe Medical, Inc. (h)

  Healthcare Services   Common Stock     3/26/2014       5,081       508,077       —         0.0

Roscoe Medical, Inc. (k)

  Healthcare Services   Second Lien Term Loan
11.25% Cash, 3/28/2021
    3/26/2014     $ 4,200,000       4,193,322       2,405,340       1.3
         

 

 

   

 

 

   

 

 

 
    Total Healthcare Services         65,513,974       66,517,617       35.7
         

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

SF-7


Table of Contents

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Sub Total Non-control/Non-affiliate investments

            308,061,752       309,830,182       165.9
       

 

 

   

 

 

   

 

 

 

Affiliate investments—6.3% (b)

             

GreyHeller LLC (f)

  Business Services   First Lien Term Loan
(3M USD LIBOR+11.00%), 13.50% Cash, 11/16/2021
    11/17/2016     $ 7,000,000       6,960,362       7,140,000       3.8

GreyHeller LLC (f), (h)

  Business Services   Series A Preferred Units     11/17/2016       850,000       850,000       1,629,899       0.9
         

 

 

   

 

 

   

 

 

 
    Total Business Services         7,810,362       8,769,899       4.7
         

 

 

   

 

 

   

 

 

 

Elyria Foundry Company, L.L.C. (f), (h)

  Metals   Common Stock     7/30/2010       60,000       9,685,028       1,843,800       1.0

Elyria Foundry Company, L.L.C. (d), (f)

  Metals   Second Lien Term Loan
15.00% PIK, 8/10/2022
    7/30/2010     $ 1,062,419       1,062,419       1,062,419       0.6
    Total Metals         10,747,447       2,906,219       1.6
         

 

 

   

 

 

   

 

 

 

Sub Total Affiliate investments

            18,557,809       11,676,118       6.3
         

 

 

   

 

 

   

 

 

 

Control investments—47.0% (b)

             

Easy Ice, LLC (g)

  Business Services   Preferred Equity
10.00% PIK
    2/3/2017       5,080,000       9,925,702       13,510,126       7.2

Easy Ice, LLC (d), (g)

  Business Services   Second Lien Term Loan
7.03% Cash/5.97% PIK, 2/28/2023
    3/29/2013     $ 21,867,482       21,820,919       21,976,819       11.8

Easy Ice Masters, LLC (d), (g)

  Business Services   Second Lien Term Loan
7.03% Cash/5.97% PIK, 2/28/2023
    10/31/2018     $ 3,931,585       3,895,045       3,951,243       2.1

Netreo Holdings, LLC (g)

  Business Services   First Lien Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.00% PIK,
7/3/2023
    7/3/2018     $ 5,092,999       5,048,142       5,135,271       2.7

Netreo Holdings, LLC (g), (h)

  Business Services   Common Stock Class A Unit     7/3/2018       3,150,000       3,150,000       5,406,229       2.9
         

 

 

   

 

 

   

 

 

 
    Total Business Services         43,839,808       49,979,688       26.7
         

 

 

   

 

 

   

 

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)

  Structured Finance Securities   Other/Structured Finance Securities
19.50%, 1/20/2030
    1/22/2008     $ 69,500,000       24,899,215       28,024,105       15.0

Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2
Note (a), (g)

  Structured Finance Securities   Other/Structured Finance Securities
(3M USD LIBOR+8.75%), 11.25%, 1/20/2030
    12/14/2018     $ 2,500,000       2,500,000       2,485,183       1.3

Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2
Note (a), (g)

  Structured Finance Securities   Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 12.50%, 1/20/2030
    12/14/2018     $ 7,500,000       7,500,000       7,456,065       4.0
         

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

SF-8


Table of Contents

Company

 

Industry

 

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 
    Total Structured Finance Securities         34,899,215       37,965,353       20.3
         

 

 

   

 

 

   

 

 

 

Sub Total Control investments

            78,739,023       87,945,041       47.0
         

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS—219.2% (b)

          $ 405,358,584     $ 409,451,341       219.2
         

 

 

   

 

 

   

 

 

 
                  Number of
Shares
    Cost     Fair Value     % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts—32.7% (b)

 

       

U.S. Bank Money Market (l)

 

    60,996,247     $ 60,996,247     $ 60,996,247       32.7
       

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and cash and cash equivalents, reserve accounts

 

    60,996,247     $ 60,996,247     $ 60,996,247       32.7
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Represents a non-qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of May 31, 2019, non-qualifying assets represent 16.5% 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 $186,783,701 as of May 31, 2019.

(c)

Because there is no readily available market value for these investments, the fair values of these investments were determined using significant unobservable inputs and approved in good faith by our board of directors. These investments have been included as Level 3 in the Fair Value Hierarchy (see Note 3 to the consolidated financial statements).

(d)

These securities are either fully or partially 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 19.50% 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, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the quarter ended May 31, 2019 in which the issuer was an Affiliate are as follows:

 

Company

   Purchases      Sales      Total Interest
from
Investments
     Management Fee
Income
     Net Realized
Gain (Loss) from
Investments
     Net Change in
Unrealized
Appreciation
 

GreyHeller LLC

   $ —        $ —        $ 249,325      $ —        $ —        $ 130,344  

Elyria Foundry Company, L.L.C.

     —          —          40,150        —          —          39,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 289,475      $ —        $ —        $ 169,944  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents
(g)

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 quarter ended May 31, 2019 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Sales      Total Interest
from
Investments
     Management
Fee Income
     Net Realized
Gain (Loss) from
Investments
     Net Change in
Unrealized
Appreciation
(Depreciation)
 

Easy Ice, LLC

   $ —        $ —        $ 961,894      $ —        $ —        $ (76,286

Easy Ice Masters, LLC

     —          —          130,808        —          —          4,762  

Netreo Holdings, LLC

     —          —          143,991        —          —          242,491  

Saratoga Investment Corp. CLO 2013-1, Ltd.

     —          —          1,081,435        629,516        —          1,247,780  

Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Notes

     —          —          72,982        —          —          1,683  

Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Notes

        —          242,905        —          —          5,565  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 2,634,015      $ 629,516      $ —        $ 1,425,995  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(h)

Non-income producing at May 31, 2019.

(i)

Includes securities issued by an affiliate of the Company.

(j)

All or a portion of this investment has an unfunded commitment as of May 31, 2019. (see Note 7 to the consolidated financial statements).

(k)

As of May 31, 2019, the investment was on non-accrual status. The fair value of these investments was approximately $4.9 million, which represented 1.2% of the Company’s portfolio (see Note 2 to the consolidated financial statements).

(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 May 31, 2019.

LIBOR—London Interbank Offered Rate

1M USD LIBOR - The 1 month USD LIBOR rate as of May 31, 2019 was 2.43%.

3M USD LIBOR - The 3 month USD LIBOR rate as of May 31, 2019 was 2.50%.

PIK - Payment-in-Kind (see Note 2 to the consolidated financial statements).

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2019

 

Company

  Industry    

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

Non-control/Non-affiliate investments—169.5% (b)

             

Apex Holdings Software Technologies, LLC

    Business Services     First Lien Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash, 9/21/2021
    9/21/2016     $ 18,000,000     $ 17,922,851     $ 18,000,000       10.0

Apex Holdings Software Technologies, LLC

    Business Services     Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash, 9/21/2021
    10/1/2018     $ 1,000,000       992,183       1,000,000       0.6

Avionte Holdings, LLC (h)

    Business Services     Class A Units     1/8/2014       100,000       100,000       635,781       0.4

CLEO Communications Holding, LLC

    Business Services     First Lien Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 13,514,320       13,437,153       13,514,320       7.5

CLEO Communications Holding, LLC

    Business Services     Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 12,142,015       12,040,280       12,142,015       6.7

Destiny Solutions Inc. (a)

    Business Services     First Lien Term Loan
(3M USD LIBOR+7.00%), 9.62% Cash, 5/16/2023
    5/16/2018     $ 8,500,000       8,426,441       8,489,800       4.7

Destiny Solutions Inc. (a), (j)

    Business Services     Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.62% Cash, 5/16/2023
    5/16/2018     $ —         —         —         0.0

Destiny Solutions Inc. (a), (h), (i)

    Business Services     Limited Partner Interests     5/16/2018       999,000       999,000       1,062,440       0.6

Emily Street Enterprises, L.L.C.

    Business Services     Senior Secured Note
(3M USD LIBOR+8.50%), 11.12% Cash, 1/23/2020
    12/28/2012     $ 3,300,000       3,299,122       3,314,520       1.8

Emily Street Enterprises,
L.L.C. (h)

    Business Services     Warrant Membership Interests
Expires 12/28/2022
    12/28/2012       49,318       400,000       505,509       0.3

Erwin, Inc. (d)

    Business Services     Second Lien Term Loan
(3M USD LIBOR+11.50%), 14.12% Cash/1.00% PIK, 8/28/2021
    2/29/2016     $ 15,888,102       15,796,316       15,888,102       8.8

FMG Suite Holdings, LLC (d)

    Business Services     Second Lien Term Loan
(1M USD LIBOR+8.00%), 10.49% Cash, 11/16/2023
    5/16/2018     $ 23,000,000       22,844,123       23,000,000       12.7

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Company

  Industry  

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

GDS Holdings US, LLC (d)

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.62% Cash, 8/23/2023
    8/23/2018     $ 7,500,000       7,430,649       7,495,500       4.0

GDS Holdings US, LLC (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.62% Cash, 8/23/2023
    8/23/2018     $ —         —         —         0.0

GDS Software Holdings, LLC (h)

  Business Services   Common Stock Class A Units     8/23/2018       250,000       250,000       277,139       0.2

Identity Automation Systems (h)

  Business Services   Common Stock Class A Units     8/25/2014       232,616       232,616       629,555       0.3

Identity Automation Systems (d)

  Business Services   First Lien Term Loan
(3M USD LIBOR+9.00%), 11.62% Cash, 3/31/2021
    8/25/2014     $ 24,100,000       23,991,294       24,100,000       13.3

Knowland Group, LLC

  Business Services   Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash, 5/9/2024
    11/9/2018     $ 15,000,000       15,000,000       15,000,000       8.3

Microsystems Company

  Business Services   Second Lien Term Loan
(3M USD LIBOR+8.25%), 10.87% Cash, 7/1/2022
    7/1/2016     $ 18,000,000       17,889,554       17,881,200       9.9

National Waste Partners (d)

  Business Services   Second Lien Term Loan
10.00% Cash, 2/13/2022
    2/13/2017     $ 9,000,000       8,942,155       8,864,100       4.9

Omatic Software, LLC

  Business Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash, 5/29/2023
    5/29/2018     $ 5,500,000       5,451,758       5,537,400       3.1

Omatic Software, LLC (j)

  Business Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.62% Cash, 5/29/2023
    5/29/2018     $ —         —         —         0.0

Passageways, Inc.

  Business Services   First Lien Term Loan
(3M USD LIBOR+7.75%), 10.37% Cash, 7/5/2023
    7/5/2018     $ 5,000,000       4,955,204       5,063,500       2.8

Passageways, Inc. (h)

  Business Services   Series A Preferred Stock     7/5/2018       2,027,205       1,000,000       1,339,705       0.7

Vector Controls Holding Co.,
LLC (d)

  Business Services   First Lien Term Loan
11.50% (9.75% Cash/1.75% PIK), 3/6/2022
    3/6/2013     $ 9,311,956       9,310,703       9,371,929       5.2

Vector Controls Holding Co.,
LLC (h)

  Business Services   Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027     5/31/2015       343       —         2,210,149       1.2
         

 

 

   

 

 

   

 

 

 
    Total Business Services         190,711,402       195,322,664       108.0
         

 

 

   

 

 

   

 

 

 

Targus Holdings, Inc. (h)

  Consumer Products   Common Stock     12/31/2009       210,456       1,713,605       505,094       0.3
         

 

 

   

 

 

   

 

 

 
    Total Consumer Products         1,713,605       505,094       0.3
         

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

SF-12


Table of Contents

Company

  Industry  

Investment Interest Rate/
Maturity

  Original
Acquisition
Date
    Principal/
Number of
Shares
    Cost     Fair Value (c)     % of
Net Assets
 

My Alarm Center, LLC (k)

  Consumer Services   Preferred Equity Class A Units
8.00% PIK
    7/14/2017       2,227       2,357,879       1,112,543       0.6

My Alarm Center, LLC (h)

  Consumer Services   Preferred Equity Class B Units     7/14/2017       1,797       1,796,880       —         0.0

My Alarm Center, LLC

  Consumer Services   Preferred Equity Class Z Units
25.00% PIK
    9/12/2018       676       655,987       2,053,514       1.1

My Alarm Center, LLC (h)

  Consumer Services   Common Stock     7/14/2017       96,224       —         —         0.0