497
Table of Contents

Filed pursuant to Rule 497

File No. 333-227116

 

PROSPECTUS SUPPLEMENT   

(to Prospectus dated October 3, 2018)

 

LOGO

Saratoga Investment Corp.

$30,000,000

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 October 16, 2018, 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 $30,000,000 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-21 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 October 15, 2018, the last reported sales price on the NYSE for our common stock was $23.42 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 August 31, 2018 was $23.16.

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


Table of Contents

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-9 of this prospectus supplement and page 22 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 October 16, 2018.


Table of Contents

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

     Page  

About this Prospectus Supplement

     S-1  

Prospectus Supplement Summary

     S-2  

The Offering

     S-13  

Fees and Expenses

     S-15  

Risk Factors

     S-18  

Note about Forward-Looking Statements

     S-19  

Use of Proceeds

     S-20  

Plan of Distribution

     S-21  

Legal Matters

     S-23  

Independent Registered Public Accounting Firm

     S-23  

Available Information

     S-23  

Index to Consolidated Financial Statements

     F-1  

PROSPECTUS

 

     Page  

Prospectus Summary

     1  

The Offering

     12  

Fees and Expenses

     17  

Selected Financial and Other Data

     20  

Risk Factors

     22  

Use of Proceeds

     52  

Ratio of Earnings to Fixed Charges

     53  

Note about Forward-Looking Statements

     54  

Price Range of Common Stock and Distributions

     55  

Dividend Reinvestment Plan

     63  

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

     65  

Senior Securities

     98  

Business

     100  

Our Portfolio Companies

     113  

Management Agreements

     120  

Management

     128  

Portfolio Management

     137  

Certain Relationships and Related Transactions

     139  

Control Persons and Principal Stockholders

     140  

Regulation

     142  

Material U.S. Federal Income Tax Considerations

     149  

Determination of Net Asset Value

     157  

Sales of Common Stock Below Net Asset Value

     160  

Description of Our Capital Stock

     166  

Description of Our Subscription Rights

     173  

Description of Our Debt Securities

     175  

Description of Our Warrants

     189  

Plan of Distribution

     191  

Brokerage Allocation and Other Practices

     193  

Custodian, Transfer and Dividend Paying Agent and Registrar

     193  

Legal Matters

     193  

Independent Registered Public Accounting Firm

     193  

Available Information

     193  

Privacy Notice

     194  

Index to Consolidated Financial Statements

     F-1  

Index to other Financial Statements of Saratoga CLO

     S-1  


Table of Contents

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 declared effective on October 3, 2018. 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 Factors” included in the accompanying prospectus, respectively, 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.

 

S-1


Table of Contents

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.

Overview

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

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Term loans are loans that do not allow the borrowers to repay all or a portion of the loans prior to maturity and then re-borrow such repaid amounts under the loan again. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt which are issued by companies with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of first or second lien security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

As of August 31, 2018, 82.5% 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. Such interest-only” loans are structured such that the borrower makes only interest payments throughout the life of the loan and makes a large, “balloon payment” at the end of the loan term. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, higher interest rates, and collateral values. If the interest-only loan borrower is unable to make or refinance a balloon payment, we may experience greater losses than if the loan were structured as amortizing.

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies (which non-investment grade debt is commonly referred to as “high yield” and “junk” debt) or, if not rated, would be rated below investment grade or “junk” if rated. In addition, 81.5% of our debt investments at August 31, 2018 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,

 

S-2


Table of Contents

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 August 31, 2018, we had total assets of $441.1 million and investments in 35 portfolio companies and additional investments in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), which investment had a fair value of $12.4 million as of August 31, 2018. Our overall portfolio composition as of August 31, 2018 consisted of no syndicated loans, 58.0% of first lien term loans, 25.5% of second lien term loans, 3.1% of unsecured term loans, 4.3% of subordinated notes of Saratoga CLO and Class F notes tranche of the Saratoga CLO and 9.1% of common equity. As of August 31, 2018, the weighted average yield on all of our debt investments, including our investment in the subordinated notes of Saratoga CLO and Class F notes tranche of the Saratoga CLO, was approximately 10.8%. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders and, among other things, is calculated before the payment of our fees and expenses. As of August 31, 2018, our total return based on net asset value per share was 5.63% and our total return based on market value was 19.04%. As of August 31, 2017, our total return based on net asset value was 6.45% and our total return based on market value was 0.92%. As of February 28, 2018, our total return based on net asset value was 14.45% and our total return based on market value was 5.28%. Total return based on NAV is the change in ending NAV per share plus dividends (distributed from net investment income) per share paid during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning NAV per share. Total return based on market value is the change in the ending market value of the Company’s common stock plus dividends (distributed from net investment income) paid during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning market value of the Company’s common stock. 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 August 31, 2018, approximately 100% of our first lien debt investments were in portfolio companies that 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 (earnings before interest, taxes, depreciation and amortization), cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. As a result, while we consider a portfolio company to be collateralized if its enterprise value exceeds the amount of our loan, we do not hold tangible assets as collateral in our portfolio companies that we would obtain in the event of a default. Even though these loans are fully collateralized as is the case with all of the liens on our debt investments, there can be no assurance that the value of collateral will be sufficient to allow the portfolio company repay our first lien debt investments in the event of its default on our investment.

Saratoga CLO is an exempted company with limited liability incorporated under the laws of the Cayman Islands, which was established to acquire or participate in U.S. dollar-denominated corporate debt obligations. Saratoga CLO has issued various tranches of senior notes, held by numerous investors, and one tranche of subordinated notes, held entirely by us. As we own 100% of the subordinated notes issued by Saratoga CLO, which is junior to all of its other outstanding indebtedness, we are deemed to hold 100% of the equity interests in Saratoga CLO for tax purposes. Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at August 31, 2018, was composed of $347.8 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

 

S-3


Table of Contents

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. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of approximately $300 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of 8.5%. The Class F tranche is the eighth tranche in the capital structure of Saratoga CLO and is subordinated to the other debt classes of Saratoga CLO. The Class F tranche is only senior to the subordinated notes, which is effectively the equity position in Saratoga CLO. As a result, the other tranches of debt in Saratoga CLO rank ahead of the $4.5 million Class F tranche and ahead of the aggregate principal amount of our position in the subordinated notes, which as of August 31, 2018 had a fair value of $12.0 million, with respect to priority of payments in the event of a default or a liquidation.

The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. because the Company owns all of the outstanding subordinated notes of Saratoga CLO, which is the equivalent of an equity position, and the Company manages the portfolio of Saratoga CLO. We receive a base management fee of 0.10% and a subordinated management fee of 0.40% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent of available proceeds. 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 Investment Company Act of 1940 (“1940 Act”). As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% immediately 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

 

S-4


Table of Contents

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 200% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200% asset coverage test by permitting us to borrow up to $150 million more than we would otherwise be able to absent the receipt of this exemptive relief.

Saratoga Investment Advisors

Our investment adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Our investment adviser is led by four principals, Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips, with 29, 27, 30 and 20 years of experience in leveraged finance, respectively. Our investment adviser is affiliated with Saratoga Partners, a middle market private equity investment firm. Saratoga Partners was established in 1984 to be the middle market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read since 1998. Saratoga Partners has a 28-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

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

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

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

Investments

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

 

S-5


Table of Contents

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. As of August 31, 2018, with the exception of our investment in the subordinated notes of Saratoga CLO and a first lien term loan to one other portfolio company, all of our equity and debt investments constituted qualifying assets under the 1940 Act. While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

Prospective portfolio company characteristics

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

 

   

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

 

   

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

 

   

reasonable debt-to-cash flow multiples;

 

   

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

 

   

capital structures that provide appropriate terms and reasonable covenants.

Investment selection

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

 

   

bottoms-up, company-specific research and analysis;

 

   

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

 

   

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

 

S-6


Table of Contents

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

 

   

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

 

   

Comprehensive analysis. A comprehensive analysis includes:

 

   

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

 

   

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

 

   

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

 

   

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

Investment structure

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

 

   

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

 

   

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

 

   

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

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

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

 

S-7


Table of Contents
   

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

Valuation process

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

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

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

 

   

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

 

   

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

 

S-8


Table of Contents

these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

Ongoing relationships with and monitoring of portfolio companies

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

Risk Factors

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

 

   

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.

 

S-9


Table of Contents
   

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 federal income tax if we fail to continue to qualify as a RIC.

 

   

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

 

   

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

 

   

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

 

   

We operate in a highly competitive market for investment opportunities.

 

   

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

 

   

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

 

   

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

 

   

We may experience fluctuations in our quarterly results.

 

   

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

 

   

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

 

   

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.

 

S-10


Table of Contents
   

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.

 

   

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 and decrease substantially.

 

S-11


Table of Contents
   

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 (“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.

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.

 

S-12


Table of Contents

THE OFFERING

 

Common stock offered by us

Shares of our common stock having an aggregate offering price of up to $30,000,000.

 

Common stock outstanding as of October 16, 2018

7,479,810 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 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”), as sales 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 $0.52 per share for the fiscal quarter ended August 31, 2018, payable on September 27, 2018, to common stockholders of record at the close of business on September 17, 2018.

 

  As disclosed in the table under “Price Range of Common Stock and Distributions,” beginning on page 49 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 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

 

S-13


Table of Contents
 

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 “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus.

 

NYSE symbol of common stock

“SAR”

 

S-14


Table of Contents

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

     3.8% (4) 

Incentive fees payable under the Management Agreement

     2.5% (5) 

Interest payments on borrowed funds

     8.0% (6) 

Other expenses

     2.8% (7) 
  

 

 

 

Total annual expenses

     17.1% (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

 

S-15


Table of Contents
  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 8.0% 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, and the 2023 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 Small Business Credit Availability Act, 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 will become effective on April 16, 2019.

(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

   $ 201      $ 633      $ 1,109      $ 2,525  

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,

 

S-16


Table of Contents

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.

 

S-17


Table of Contents

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.

 

S-18


Table of Contents

NOTE ABOUT FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in 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 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.

 

S-19


Table of Contents

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 $30,000,000, we anticipate that our net proceeds, after deducting sales agent commissions and estimated expenses payable by us, will be approximately $29.45 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 securities 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 shortterm 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.

 

S-20


Table of Contents

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 October 16, 2018. 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

 

S-21


Table of Contents

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 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. As of August 31, 2018, the Company sold 348,123 shares for gross proceeds of $7.8 million at an average price of $22.52 for aggregate net proceeds of $7.8 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, 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

 

S-22


Table of Contents

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 570 Lexington Avenue, 12th Floor, New York, NY 10022. 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, 2018, and February 28, 2017 and each of the three years ended February 28, 2018, February 28, 2017 and February 29, 2016, 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. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus forms a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov.

 

S-23


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Unaudited Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of August  31, 2018 (unaudited) and February 28, 2018

     F-2  

Consolidated Statements of Operations for the three and six months ended August 31, 2018 (unaudited) and August 31, 2017 (unaudited)

     F-3  

Consolidated Schedules of Investments as of August  31, 2018 (unaudited) and February 28, 2018

     F-4  

Consolidated Statements of Changes in Net Assets for the three months and six ended August 31, 2018 (unaudited) and August 31, 2017 (unaudited)

     F-15  

Consolidated Statements of Cash Flows for the six months ended August 31, 2018 (unaudited) and August 31, 2017 (unaudited)

     F-16  

Notes to Consolidated Financial Statements as of August  31, 2018 (unaudited)

     F-17  

 

F-1


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

     August 31, 2018     February 28, 2018  
     (unaudited)        

ASSETS

    

Investments at fair value

    

Non-control/Non-affiliate investments (amortized cost of $313,696,967 and $281,534,277, respectively)

   $ 317,441,955     $ 286,061,722  

Affiliate investments (amortized cost of $18,434,416 and $18,358,611, respectively)

     10,905,065       12,160,564  

Control investments (amortized cost of $59,263,490 and $39,797,229, respectively)

     64,540,473       44,471,767  
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $391,394,873 and $339,690,117, respectively)

     392,887,493       342,694,053  

Cash and cash equivalents

     37,409,160       3,927,579  

Cash and cash equivalents, reserve accounts

     5,842,732       9,849,912  

Interest receivable (net of reserve of $367,870 and $1,768,021, respectively)

     4,193,153       3,047,125  

Management and incentive fee receivable

     171,676       233,024  

Other assets

     559,077       584,668  

Receivable from unsettled trades

     67,164       —    
  

 

 

   

 

 

 

Total assets

   $ 441,130,455     $ 360,336,361  
  

 

 

   

 

 

 

LIABILITIES

    

Revolving credit facility

   $ —       $ —    

Deferred debt financing costs, revolving credit facility

     (650,963     (697,497

SBA debentures payable

     150,000,000       137,660,000  

Deferred debt financing costs, SBA debentures payable

     (2,642,517     (2,611,120

2023 Notes payable

     74,450,500       74,450,500  

Deferred debt financing costs, 2023 notes payable

     (2,116,365     (2,316,370

2025 Notes payable

     40,000,000       —    

Deferred debt financing costs, 2025 notes payable

     (1,448,274     —    

Base management and incentive fees payable

     5,871,083       5,776,944  

Deferred tax liability

     179,458       —    

Accounts payable and accrued expenses

     1,213,953       924,312  

Interest and debt fees payable

     3,079,968       3,004,354  

Directors fees payable

     75,500       43,500  

Due to manager

     460,085       410,371  
  

 

 

   

 

 

 

Total liabilities

   $ 268,472,428     $ 216,644,994  
  

 

 

   

 

 

 

Commitments and contingencies (See Note 7)

    

NET ASSETS

    

Common stock, par value $.001, 100,000,000 common shares authorized, 7,453,947 and 6,257,029 common shares issued and outstanding, respectively

   $ 7,454     $ 6,257  

Capital in excess of par value

     217,354,149       188,975,590  

Distribution in excess of net investment income

     (25,188,494     (27,862,543

Accumulated net realized loss

     (20,219,702     (20,431,873

Net unrealized appreciation on investments, net of deferred taxes

     704,620       3,003,936  
  

 

 

   

 

 

 

Total net assets

     172,658,027       143,691,367  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 441,130,455     $ 360,336,361  
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

   $ 23.16     $ 22.96  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-2


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

    For the three months ended     For the six months ended  
    August 31, 2018     August 31, 2017     August 31, 2018     August 31, 2017  

INVESTMENT INCOME

       

Interest from investments

       

Interest income:

       

Non-control/Non-affiliate investments

  $ 8,046,730     $ 6,961,488     $ 15,452,639     $ 12,662,366  

Affiliate investments

    241,607       222,269       480,957       441,824  

Control investments

    1,251,573       1,496,080       2,398,238       2,831,466  

Payment-in-kind interest income:

       

Non-control/Non-affiliate investments

    145,012       282,003       361,022       505,276  

Affiliate investments

    35,482       16,954       69,629       16,954  

Control investments

    594,367       207,624       1,159,224       469,733  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest from investments

    10,314,771       9,186,418       19,921,709       16,927,619  

Interest from cash and cash equivalents

    11,455       6,493       27,748       13,574  

Management fee income

    363,962       375,957       749,156       751,638  

Incentive fee income

    147,061       162,358       346,244       267,653  

Other income

    565,525       522,440       845,935       1,000,630  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    11,402,774       10,253,666       21,890,792       18,961,114  
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

       

Interest and debt financing expenses

    2,866,414       2,962,844       5,589,206       5,486,450  

Base management fees

    1,645,653       1,481,788       3,178,121       2,872,815  

Incentive management fees

    807,521       1,709,636       1,880,133       1,885,732  

Professional fees

    468,253       407,372       1,011,050       791,703  

Administrator expenses

    458,333       395,833       895,833       770,833  

Insurance

    63,860       66,165       127,719       132,330  

Directors fees and expenses

    75,000       60,000       170,500       111,000  

General & administrative

    206,295       287,201       554,145       484,444  

Income tax benefit

    (341,232     —         (608,542     —    

Excise tax credit

    —         (14,738     (270     (14,738

Other expense

    8,449       6,514       21,021       45,045  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    6,258,546       7,362,615       12,818,916       12,565,614  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

    5,144,228       2,891,051       9,071,876       6,395,500  
 

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

       

Net realized gain (loss) from investments:

       

Non-control/Non-affiliate investments

    163       (5,838,408     212,171       (5,742,819

Control investments

    —         63,554       —         63,554  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) from investments

    163       (5,774,854     212,171       (5,679,265

Net change in unrealized appreciation (depreciation) on investments:

       

Non-control/Non-affiliate investments

    (1,086,162     6,451,921       (782,457     2,347,355  

Affiliate investments

    (855,742     677,861       (1,331,304     745,194  

Control investments

    (212,617     2,623,880       602,445       4,075,162  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

    (2,154,521     9,753,662       (1,511,316     7,167,711  

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

    152,546       —         (788,000     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments

    (2,001,812     3,978,808       (2,087,145     1,488,446  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

  $ 3,142,416     $ 6,869,859     $ 6,984,731     $ 7,883,946  
 

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

  $ 0.45     $ 1.15     $ 1.06     $ 1.33  

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED

    6,915,966       5,955,251       6,597,324       5,908,453  

See accompanying notes to consolidated financial statements.

 

F-3


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

August 31, 2018

(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 - 183.9% (b)

           

Tile Redi Holdings, LLC (d)

   Building Products    First Lien Term Loan
(3M USD LIBOR+10.00%), 12.32% Cash, 6/16/2022
   6/16/2017    $ 15,000,000      $ 14,878,520      $ 14,494,500        8.4
              

 

 

    

 

 

    

 

 

 
      Total Building Products            14,878,520        14,494,500        8.4
              

 

 

    

 

 

    

 

 

 

Apex Holdings Software Technologies, LLC

   Business Services    First Lien Term Loan
(3M USD LIBOR+8.00%), 10.32% Cash, 9/21/2021
   9/21/2016    $ 18,000,000        17,893,087        18,000,000        10.4

Avionte Holdings, LLC (h)

   Business Services    Common Stock    1/8/2014      100,000        100,000        592,709        0.3

CLEO Communications Holding, LLC

   Business Services    First Lien Term Loan
(3M USD LIBOR+8.00%), 10.32% Cash/2.00% PIK, 3/31/2022
   3/31/2017    $ 13,379,220        13,287,377        13,379,220        7.7

CLEO Communications Holding, LLC

   Business Services    Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.32% Cash/2.00% PIK, 3/31/2022
   3/31/2017    $ 5,070,846        5,027,076        5,070,846        2.9

Destiny Solutions Inc. (a)

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 11/16/2023
   5/16/2018    $ 8,500,000        8,419,609        8,415,000        4.9

Destiny Solutions Inc. (a), (j)

   Business Services    Delayed Draw First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 11/16/2023
   5/16/2018    $ —          —          —          0.0

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

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

Emily Street Enterprises, L.L.C.

   Business Services    Senior Secured Note
(3M USD LIBOR+8.50%), 10.82% Cash, 1/23/2020
   12/28/2012    $ 3,300,000        3,298,669        3,301,980        1.9

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

   Business Services    Warrant Membership Interests
Expires 12/28/2022
   12/28/2012      49,318        400,000        462,109        0.3

Erwin, Inc. (d)

   Business Services    Second Lien Term Loan
(3M USD LIBOR+11.50%), 13.82% Cash/1.00% PIK, 8/28/2021
   2/29/2016    $ 15,811,685        15,705,323        15,811,685        9.2

FMG Suite Holdings, LLC

   Business Services    Second Lien Term Loan
(1M USD LIBOR+8.00%), 10.11% Cash, 11/16/2023
   5/16/2018    $ 15,000,000        14,892,308        14,887,500        8.6

FranConnect LLC (d)

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.00%), 9.32% Cash, 5/26/2022
   5/26/2017    $ 14,500,000        14,440,281        14,500,000        8.4

 

F-4


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%), 9.32% Cash, 8/23/2023
   8/23/2018    $ 7,500,000        7,425,160        7,425,000        4.3

GDS Software Holdings, LLC (h)

   Business Services    Common Stock Class A Units    8/23/2018      250,000        250,000        250,000        0.1

Identity Automation Systems (h)

   Business Services    Common Stock Class A Units    8/25/2014      232,616        232,616        819,673        0.5

Identity Automation Systems (d)

   Business Services    First Lien Term Loan
(3M USD LIBOR+9.00%), 11.32% Cash, 3/31/2021
   8/25/2014    $ 24,150,000        24,010,830        24,089,625        14.0

Knowland Technology Holdings, L.L.C.

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.75%), 10.07% Cash, 7/20/2021
   11/29/2012    $ 22,288,730        22,219,828        22,288,730        12.9

Microsystems Company

   Business Services    Second Lien Term Loan
(3M USD LIBOR+8.25%), 10.57% Cash, 7/1/2022
   7/1/2016    $ 18,000,000        17,867,620        18,000,000        10.4

National Waste Partners (d)

   Business Services    Second Lien Term Loan
10.00% Cash, 2/13/2022
   2/13/2017    $ 9,000,000        8,933,745        9,000,000        5.2

Omatic Software, LLC

   Business Services    First Lien Term Loan
(3M USD LIBOR+8.00%), 10.32% Cash, 5/29/2023
   5/29/2018    $ 5,500,000        5,446,373        5,445,000        3.2

Omatic Software, LLC (j)

   Business Services    Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.32% Cash, 5/29/2023
   5/29/2018    $ —          —          —          0.0

Passageways, Inc.

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.75%), 10.07% Cash, 7/5/2023
   7/5/2018    $ 5,000,000        4,950,000        4,950,000        2.9

Passageways, Inc. (h)

   Business Services    Series A Preferred Stock    7/5/2018      2,027,191        1,000,000        1,000,000        0.6

Vector Controls Holding Co., LLC (d)

   Business Services    First Lien Term Loan
13.75% (12.00% Cash/1.75% PIK), 3/6/2022
   3/6/2013    $ 10,409,272        10,407,718        10,409,272        6.0

Vector Controls Holding Co., LLC (h)

   Business Services    Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027    5/31/2015      343        —          1,375,005        0.8
              

 

 

    

 

 

    

 

 

 
      Total Business Services            197,206,620        200,472,354        116.1
              

 

 

    

 

 

    

 

 

 

Targus Holdings, Inc. (h)

   Consumer Products    Common Stock    12/31/2009      210,456        1,791,242        560,831        0.3
              

 

 

    

 

 

    

 

 

 
      Total Consumer Products            1,791,242        560,831        0.3
              

 

 

    

 

 

    

 

 

 

My Alarm Center, LLC (h), (k)

   Consumer Services    Preferred Equity Class A Units
8.00% PIK
   7/14/2017      2,227        2,357,880        2,256,418        1.3

My Alarm Center, LLC (h)

   Consumer Services    Preferred Equity Class B Units    7/14/2017      1,797        1,796,880        423,435        0.3

My Alarm Center, LLC (h)

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

 

 

    

 

 

    

 

 

 
      Total Consumer Services            4,154,760        2,679,853        1.6
              

 

 

    

 

 

    

 

 

 

C2 Educational Systems (d)

   Education    First Lien Term Loan
(3M USD LIBOR+8.50%), 10.82% Cash, 5/31/2020
   5/31/2017    $ 16,000,000        15,902,289        16,000,000        9.3

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

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

 

F-5


Table of Contents

Company

   Industry   

Investment
Interest Rate/
Maturity

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

M/C Acquisition Corp., L.L.C. (h), (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        819,442        0.5

Texas Teachers of Tomorrow, LLC

   Education    Second Lien Term Loan
(3M USD LIBOR+9.75%), 12.07% Cash, 6/2/2021
   12/2/2015    $ 10,000,000        9,943,220        10,000,000        5.8
              

 

 

    

 

 

    

 

 

 
      Total Education            27,814,927        26,825,702        15.6
              

 

 

    

 

 

    

 

 

 

TMAC Acquisition Co., LLC (h), (k)

   Food and Beverage    Unsecured Term Loan
8.00% PIK, 9/01/2023
   3/1/2018    $ 2,216,427        2,216,427        2,152,151        1.2
              

 

 

    

 

 

    

 

 

 
      Total Food and Beverage            2,216,427        2,152,151        1.2
              

 

 

    

 

 

    

 

 

 

Axiom Parent Holdings, LLC (h)

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

Axiom Purchaser, Inc. (d)

   Healthcare Services    First Lien Term Loan
(3M USD LIBOR+6.00%), 8.32% Cash, 6/19/2023
   6/19/2018    $ 10,000,000        9,915,177        9,912,500        5.7

Axiom Purchaser, Inc. (j)

   Healthcare Services    Delayed Draw First Lien Term Loan
(3M USD LIBOR+6.00%), 8.32% Cash, 6/19/2023
   6/19/2018    $ —          —          —          0.0

Censis Technologies, Inc.

   Healthcare Services    First Lien Term Loan B
(1M USD LIBOR+10.00%), 12.11% Cash, 7/24/2019
   7/25/2014    $ 9,900,000        9,855,881        9,900,000        5.7

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

   Healthcare Services    Limited Partner Interests    7/25/2014      999        999,000        2,083,420        1.2

ComForCare Health Care

   Healthcare Services    First Lien Term Loan
(3M USD LIBOR+8.50%), 10.82% Cash, 1/31/2022
   1/31/2017    $ 15,000,000        14,883,587        14,879,502        8.6

Ohio Medical, LLC (h)

   Healthcare Services    Common Stock    1/15/2016      5,000        500,000        131,820        0.1

Ohio Medical, LLC

   Healthcare Services    Senior Subordinated Note
12.00% Cash, 7/15/2021
   1/15/2016    $ 7,300,000        7,256,569        6,308,660        3.7

Pathway Partners Vet Management Company LLC

   Healthcare Services    Second Lien Term Loan
(1M USD LIBOR+8.00%), 10.11% Cash, 10/10/2025
   10/20/2017    $ 2,848,958        2,822,253        2,820,468        1.6

Pathway Partners Vet Management Company LLC (j)

   Healthcare Services    Delayed Draw Term Loan
(1M USD LIBOR+8.00%), 10.11% Cash, 10/10/2025
   10/20/2017    $ 781,825        781,825        774,007        0.5

Roscoe Medical, Inc. (h)

   Healthcare Services    Common Stock    3/26/2014      5,081        508,077        203,282        0.1

Roscoe Medical, Inc.

   Healthcare Services    Second Lien Term Loan
11.25% Cash, 3/28/2021
   3/26/2014    $ 4,200,000        4,180,136        3,880,800        2.3
              

 

 

    

 

 

    

 

 

 
      Total Healthcare Services            52,102,505        51,294,459        29.7
              

 

 

    

 

 

    

 

 

 

HMN Holdco, LLC

   Media    First Lien Term Loan
12.00% Cash, 7/8/2021
   5/16/2014    $ 7,791,074        7,763,827        7,946,896        4.6

HMN Holdco, LLC

   Media    Delayed Draw First Lien Term Loan
12.00% Cash, 7/8/2021
   5/16/2014    $ 5,300,000        5,268,139        5,406,000        3.1

HMN Holdco, LLC (h)

   Media    Class A Series, Expires 1/16/2025    1/16/2015      4,264        61,647        299,162        0.2

HMN Holdco, LLC (h)

   Media    Class A Warrant, Expires 1/16/2025    1/16/2015      30,320        438,353        1,754,618        1.0

 

F-6


Table of Contents

Company

   Industry   

Investment
Interest Rate/
Maturity

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

HMN Holdco, LLC (h)

   Media    Warrants to Purchase Limited Liability Company Interests (Common), Expires 5/16/2024      1/16/2015        57,872        —          3,069,531        1.8

HMN Holdco, LLC (h)

   Media    Warrants to Purchase Limited Liability Company Interests (Preferred), Expires 5/16/2024      1/16/2015        8,139        —          485,898        0.3
              

 

 

    

 

 

    

 

 

 
      Total Media            13,531,966        18,962,105        11.0
              

 

 

    

 

 

    

 

 

 

Sub Total Non-control/Non-affiliate investments

           313,696,967        317,441,955        183.9
           

 

 

    

 

 

    

 

 

 

Affiliate investments - 6.3% (b)

 

           

GreyHeller LLC (f)

   Business Services    First Lien Term Loan
(3M USD LIBOR+11.00%), 13.32% Cash, 11/16/2021
     11/17/2016      $ 7,000,000        6,950,522        7,100,100        4.1

GreyHeller LLC (f), (j)

   Business Services    Delayed Draw Term Loan B
(3M USD LIBOR+11.00%), 13.32% Cash, 11/16/2021
     11/17/2016      $ —          —          —          0.0

GreyHeller LLC (f), (h)

   Business Services    Series A Preferred Units      11/17/2016        850,000        850,000        1,079,500        0.6
              

 

 

    

 

 

    

 

 

 
      Total Business Services            7,800,522        8,179,600        4.7
              

 

 

    

 

 

    

 

 

 

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

   Metals    Common Stock      7/30/2010        60,000        9,685,029        1,776,600        1.1

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

   Metals    Second Lien Term Loan
15.00% PIK, 8/10/2022
     7/30/2010      $ 948,865        948,865        948,865        0.5
              

 

 

    

 

 

    

 

 

 
      Total Metals            10,633,894        2,725,465        1.6
              

 

 

    

 

 

    

 

 

 

Sub Total Affiliate investments

 

        18,434,416        10,905,065        6.3
              

 

 

    

 

 

    

 

 

 

Control investments - 37.4% (b)

 

           

Easy Ice, LLC (g)

   Business Services    Preferred Equity
10.00% PIK
     2/3/2017        5,080,000        9,207,018        11,714,936        6.8

Easy Ice, LLC (d), (g)

   Business Services    Second Lien Term Loan
(3M USD LIBOR+11.00%), 5.44% Cash/7.56% PIK, 2/28/2023
     3/29/2013      $ 18,018,326        17,947,266        17,870,576        10.3

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      $ 5,016,402        4,966,863        4,966,238        2.9

Netreo Holdings, LLC (g), (h)

   Business Services    Common Stock Class A Unit      7/3/2018        3,150,000        3,150,000        3,150,000        1.8
              

 

 

    

 

 

    

 

 

 
      Total Business Services            35,271,147        37,701,750        21.8
              

 

 

    

 

 

    

 

 

 

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

   Structured Finance
Securities
   Other/Structured Finance Securities
26.15%, 10/20/2025
     1/22/2008      $ 30,000,000        9,492,343        12,356,223        7.2

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

   Structured Finance
Securities
   Other/Structured Finance Securities
(3M USD LIBOR+8.50%), 10.82%, 10/20/2025
     10/17/2013      $ 4,500,000        4,500,000        4,495,500        2.6

 

F-7


Table of Contents

Company

   Industry   

Investment
Interest Rate/
Maturity

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

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

   Structured Finance
Securities
   Unsecured Loan
(3M USD LIBOR+7.50%), 9.82%, 2/7/2020
   8/7/2018    $ 10,000,000        10,000,000        9,987,000        5.8
              

 

 

    

 

 

    

 

 

 
      Total Structured Finance Securities            23,992,343        26,838,723        15.6
              

 

 

    

 

 

    

 

 

 

Sub Total Control investments

        59,263,490        64,540,473        37.4
              

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS - 227.6% (b)

      $ 391,394,873      $ 392,887,493        227.6
              

 

 

    

 

 

    

 

 

 
                    Number of
Shares
     Cost      Fair Value      % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts - 25.1% (b)

           

U.S. Bank Money Market (l)

     43,251,892      $ 43,251,892      $ 43,251,892        25.1
           

 

 

    

 

 

    

 

 

    

 

 

 

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

     43,251,892      $ 43,251,892      $ 43,251,892        25.1
           

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Represents a non-qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 9.2% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

(b)

Percentages are based on net assets of $172,658,027 as of August 31, 2018.

(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 26.15% 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 six months ended August 31, 2018 in which the issuer was an Affiliate are as follows:

 

Company

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

GreyHeller LLC

   $ —        $ —        $ 480,957      $ —        $ —        $ 325,897  

Elyria Foundry Company, L.L.C.

     —          —          69,629        —          —          (1,657,201
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 550,586      $ —        $ —        $ (1,331,304
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-8


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 six months ended August 31, 2018 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

    

Company

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

(Depreciation)
 

Easy Ice, LLC

   $ —        $ —       $ 1,657,241      $ —        $ —        $ 334,622  

Netreo Holdings, LLC

     8,100,000        —         94,905        —          —          (625

Saratoga Investment Corp. CLO 2013-1, Ltd.

     244,554        (48,083     1,523,126        1,095,400        —          285,048  

Saratoga Investment Corp. CLO 2013-1, Ltd. Class F Note

     —          —         227,106        —          —          (3,600

Saratoga Investment Corp. CLO 2013-1 Warehouse, Ltd.

     10,000,000        —         55,084        —          —          (13,000
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,344,554      $ (48,083   $ 3,557,462      $ 1,095,400      $ —        $ 602,445  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(h)

Non-income producing at August 31, 2018.

(i)

Includes securities issued by an affiliate of the Company.

(j)

All or a portion of this investment has an unfunded commitment as of August 31, 2018. (see Note 7 to the consolidated financial statements).

(k)

As of August 31, 2018, the investment was on non-accrual status. The fair value of these investments was approximately $4.4 million, which represented 1.1% 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 August 31, 2018.

LIBOR—London Interbank Offered Rate

1M USD LIBOR—The 1 month USD LIBOR rate as of August 31, 2018 was 2.11%.

3M USD LIBOR—The 3 month USD LIBOR rate as of August 31, 2018 was 2.32%.

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

See accompanying notes to consolidated financial statements.

 

F-9


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2018

 

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 - 199.1% (b)

 

       

Tile Redi Holdings, LLC (d)

   Building Products    First Lien Term Loan
(3M USD LIBOR+10.00%), 12.02% Cash, 6/16/2022
    6/16/2017     $ 15,000,000     $ 14,865,903     $ 14,850,000       10.3
           

 

 

   

 

 

   

 

 

 
      Total Building Products         14,865,903       14,850,000       10.3
           

 

 

   

 

 

   

 

 

 

Apex Holdings Software Technologies, LLC

   Business Services    First Lien Term Loan
(3M USD LIBOR+8.00%), 10.02% Cash, 9/21/2021
    9/21/2016     $ 18,000,000       17,886,188       18,000,000       12.5

Avionte Holdings, LLC (h)

   Business Services    Common Stock     1/8/2014       100,000       100,000       449,685       0.3

CLEO Communications Holding, LLC

   Business Services    First Lien Term Loan
(3M USD LIBOR+8.00%), 10.02% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 13,243,267       13,128,695       13,243,267       9.2

CLEO Communications Holding, LLC (j)

   Business Services    Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 10.02% Cash/2.00% PIK, 3/31/2022
    3/31/2017     $ 3,026,732       2,999,896       3,026,732       2.1

Emily Street Enterprises, L.L.C.

   Business Services    Senior Secured Note
(3M USD LIBOR+8.50%), 10.52% Cash, 1/23/2020
    12/28/2012     $ 3,300,000       3,298,099       3,316,500       2.3

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

   Business Services    Warrant Membership Interests
Expires 12/28/2022
    12/28/2012       49,318       400,000       468,521       0.3

Erwin, Inc.

   Business Services    Second Lien Term Loan
(3M USD LIBOR+11.50%), 13.52% Cash/1.00% PIK, 8/28/2021
    2/29/2016     $ 13,245,008       13,153,253       13,245,008       9.2

FranConnect LLC (d)

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.00%), 9.02% Cash, 5/26/2022
    5/26/2017     $ 14,500,000       14,435,057       14,574,035       10.1

Help/Systems Holdings, Inc.(Help/Systems, LLC)

   Business Services    First Lien Term Loan
(3M USD LIBOR+4.50%), 6.52% Cash, 10/8/2021
    10/26/2015     $ 5,376,934       5,294,119       5,376,934       3.8

Help/Systems Holdings, Inc.(Help/Systems, LLC)

   Business Services    Second Lien Term Loan
(3M USD LIBOR+9.50%), 11.52% Cash, 10/8/2022
    10/26/2015     $ 3,000,000       2,933,255       3,000,000       2.1

Identity Automation Systems (h)

   Business Services    Common Stock Class A Units     8/25/2014       232,616       232,616       673,377       0.5

 

F-10


Table of Contents

Company

  

Industry

  

Investment
Interest Rate/
Maturity

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

Identity Automation Systems

   Business Services    First Lien Term Loan
(3M USD LIBOR+9.50%), 11.52% Cash, 3/31/2021
    8/25/2014     $ 17,950,000       17,849,294       17,950,000       12.5

Knowland Technology Holdings, L.L.C.

   Business Services    First Lien Term Loan
(3M USD LIBOR+7.75%), 9.77% Cash, 7/20/2021
    11/29/2012     $ 22,288,730       22,214,703       22,288,731       15.5

Microsystems Company

   Business Services    Second Lien Term Loan
(3M USD LIBOR+8.25%), 10.27% Cash, 7/1/2022
    7/1/2016     $ 18,000,000       17,866,185       18,014,400       12.5

National Waste Partners (d)

   Business Services    Second Lien Term Loan
10.00% Cash, 2/13/2022
    2/13/2017     $ 9,000,000       8,925,728       9,000,000       6.3

Vector Controls Holding Co., LLC (d)

   Business Services    First Lien Term Loan
13.75% (12.00% Cash/1.75% PIK), 3/6/2022
    3/6/2013     $ 11,248,990       11,246,851       11,248,991       7.8

Vector Controls Holding Co., LLC (h)

   Business Services    Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027     5/31/2015       343       —         1,064,145       0.8
           

 

 

   

 

 

   

 

 

 
      Total Business Services         151,963,939       154,940,326       107.8
           

 

 

   

 

 

   

 

 

 

Targus Holdings, Inc. (h)

   Consumer Products    Common Stock     12/31/2009       210,456       1,791,242       433,927       0.3
           

 

 

   

 

 

   

 

 

 
      Total Consumer Products         1,791,242       433,927       0.3
           

 

 

   

 

 

   

 

 

 

My Alarm Center, LLC

   Consumer Services    Preferred Equity Class A Units
8.00% PIK
    7/14/2017       2,227       2,311,649       2,340,154       1.6

My Alarm Center, LLC (h)

   Consumer Services    Preferred Equity Class B Units     7/14/2017       1,797       1,796,880       1,481,939       1.0

My Alarm Center, LLC (h)

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

PrePaid Legal Services, Inc. (d)

   Consumer Services    First Lien Term Loan
(1M USD LIBOR+5.25%), 6.92% Cash, 7/1/2019
    7/10/2013     $ 2,377,472       2,370,104       2,377,472       1.7

PrePaid Legal Services, Inc. (d)

   Consumer Services    Second Lien Term Loan
(1M USD LIBOR+9.00%), 10.67% Cash, 7/1/2020
    7/14/2011     $ 11,000,000       10,974,817       11,000,000       7.7
           

 

 

   

 

 

   

 

 

 
      Total Consumer Services         17,453,450       17,199,565       12.0
           

 

 

   

 

 

   

 

 

 

C2 Educational Systems (d)

   Education    First Lien Term Loan
(3M USD LIBOR+8.50%), 10.52% Cash, 5/31/2020
    5/31/2017     $ 16,000,000       15,875,823       15,977,118       11.1

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. (h), (l)

   Education    First Lien Term Loan
1.00% Cash, 3/31/2018
    8/10/2004     $ 2,318,121       1,190,838       8,058       0.0

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

   Education    Common Stock     12/2/2015       750,000       750,000       792,681       0.6

Texas Teachers of Tomorrow, LLC

   Education    Second Lien Term Loan
(3M USD LIBOR+9.75%), 11.77% Cash, 6/2/2021
    12/2/2015     $ 10,000,000       9,934,492       10,000,000       7.0
           

 

 

   

 

 

   

 

 

 
      Total Education         27,781,394       26,777,857       18.7
           

 

 

   

 

 

   

 

 

 

 

F-11


Table of Contents

Company

  

Industry

  

Investment
Interest Rate/
Maturity

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

TM Restaurant Group L.L.C. (h), (l)

   Food and Beverage    First Lien Term Loan
14.50% PIK, 7/17/2017
    7/17/2012     $ 9,358,694       9,358,694       9,133,149       6.3

TM Restaurant Group L.L.C. (h), (l)

   Food and Beverage    Revolver
14.50% PIK, 7/17/2017
    5/1/2017     $ 398,645       398,644       389,037       0.3
           

 

 

   

 

 

   

 

 

 
      Total Food and Beverage         9,757,338       9,522,186       6.6
           

 

 

   

 

 

   

 

 

 

Censis Technologies, Inc.

   Healthcare Services    First Lien Term Loan B
(1M USD LIBOR+10.00%), 11.67% Cash, 7/24/2019
    7/25/2014     $ 10,350,000       10,279,781       10,350,000       7.2

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

   Healthcare Services    Limited Partner Interests     7/25/2014       999       999,000       1,578,840       1.1

ComForCare Health Care

   Healthcare Services    First Lien Term Loan
(3M USD LIBOR+8.50%), 10.52% Cash, 1/31/2022
    1/31/2017     $ 15,000,000       14,869,275       14,955,000       10.4

Ohio Medical, LLC (h)

   Healthcare Services    Common Stock     1/15/2016       5,000       500,000       238,069       0.2

Ohio Medical, LLC

   Healthcare Services    Senior Subordinated Note
12.00% Cash, 7/15/2021
    1/15/2016     $ 7,300,000       7,250,224       6,635,570       4.6

Pathway Partners Vet Management Company LLC

   Healthcare Services    Second Lien Term Loan
(1M USD LIBOR+8.00%), 9.67% Cash, 10/10/2025
    10/20/2017     $ 2,083,333       2,063,158       2,062,500       1.4

Pathway Partners Vet Management Company LLC (k)

   Healthcare Services    Delayed Draw Term Loan
(1M USD LIBOR+8.00%), 9.67% Cash, 10/10/2025
    10/20/2017     $ —         —         —         0.0

Roscoe Medical, Inc. (h)

   Healthcare Services    Common Stock     3/26/2014       5,081       508,077       352,097       0.3

Roscoe Medical, Inc.

   Healthcare Services    Second Lien Term Loan
11.25% Cash, 9/26/2019
    3/26/2014     $ 4,200,000       4,171,558       3,900,960       2.7

Zest Holdings, LLC (d)

   Healthcare Services    Syndicated Loan
(1M USD LIBOR+4.25%), 5.92% Cash, 8/16/2023
    9/10/2013     $ 4,105,884       4,033,095       4,105,884       2.9
           

 

 

   

 

 

   

 

 

 
      Total Healthcare Services         44,674,168       44,178,920       30.8
           

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

   Media    First Lien Term Loan
12.00% Cash, 7/8/2021
    5/16/2014     $ 8,028,824       7,981,971       8,249,617       5.7

HMN Holdco, LLC

   Media    Delayed Draw First Lien Term Loan
12.00% Cash, 7/8/2021
    5/16/2014     $ 4,800,000       4,764,872       4,938,000       3.4

HMN Holdco, LLC (h)

   Media    Class A Series, Expires 1/16/2025     1/16/2015       4,264       61,647       274,431       0.2

HMN Holdco, LLC (h)

   Media    Class A Warrant, Expires 1/16/2025     1/16/2015       30,320       438,353       1,565,118       1.1

HMN Holdco, LLC (h)

   Media    Warrants to Purchase Limited Liability Company Interests (Common), Expires 5/16/2024     1/16/2015       57,872       —         2,696,257       1.9

HMN Holdco, LLC (h)

   Media    Warrants to Purchase Limited Liability Company Interests (Preferred), Expires 5/16/2024     1/16/2015       8,139       —         435,518       0.3
           

 

 

   

 

 

   

 

 

 
      Total Media         13,246,843       18,158,941       12.6
           

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliate investments

 

      281,534,277       286,061,722       199.1
        

 

 

   

 

 

   

 

 

 

 

F-12


Table of Contents

Company

  

Industry

  

Investment
Interest Rate/
Maturity

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

Affiliate investments - 8.5% (b)

 

       

GreyHeller LLC (f)

   Business Services    First Lien Term Loan
(3M USD LIBOR+11.00%), 13.02% Cash, 11/16/2021
    11/17/2016     $ 7,000,000       6,944,319       7,106,501       5.0

GreyHeller LLC (f), (k)

   Business Services    Delayed Draw Term Loan B
(3M USD LIBOR+11.00%), 13.02% Cash, 11/16/2021
    11/17/2016     $ —         —         —         0.0

GreyHeller LLC (f), (h)

   Business Services    Series A Preferred Units     11/17/2016       850,000       850,000       740,999       0.5
           

 

 

   

 

 

   

 

 

 
      Total Business Services         7,794,319       7,847,500       5.5
           

 

 

   

 

 

   

 

 

 

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

   Metals    Common Stock     7/30/2010       60,000       9,685,028       3,433,800       2.4

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

   Metals    Second Lien Term Loan
15.00% PIK, 8/10/2022
    7/30/2010     $ 879,264       879,264       879,264       0.6
           

 

 

   

 

 

   

 

 

 
      Total Metals         10,564,292       4,313,064       3.0
           

 

 

   

 

 

   

 

 

 

Sub Total Affiliate investments

 

      18,358,611       12,160,564       8.5
           

 

 

   

 

 

   

 

 

 

Control investments - 30.9% (b)

               

Easy Ice, LLC (g)

   Business Services    Preferred Equity
10.00% PIK
    2/3/2017       5,080,000       8,761,000       10,760,435       7.5

Easy Ice, LLC (d), (g)

   Business Services    Second Lien Term Loan
(3M USD LIBOR+11.00%), 5.44% Cash/7.56% PIK, 2/28/2023
    3/29/2013     $ 17,337,528       17,240,357       17,337,528       12.0
           

 

 

   

 

 

   

 

 

 
      Total Business Services         26,001,357       28,097,963       19.5
           

 

 

   

 

 

   

 

 

 

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

   Structured Finance Securities    Other/Structured Finance Securities
32.21%, 10/20/2025
    1/22/2008     $ 30,000,000       9,295,872       11,874,704       8.3

Saratoga Investment Corp. Class F Note (a), (g)

   Structured Finance Securities    Other/Structured Finance Securities
(3M USD LIBOR+8.50%), 10.52%, 10/20/2025
    10/17/2013     $ 4,500,000       4,500,000       4,499,100       3.1
           

 

 

   

 

 

   

 

 

 
      Total Structured Finance Securities         13,795,872       16,373,804       11.4
           

 

 

   

 

 

   

 

 

 

Sub Total Control investments

 

      39,797,229       44,471,767       30.9
           

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS - 238.5% (b)

 

    $ 339,690,117     $ 342,694,053       238.5
           

 

 

   

 

 

   

 

 

 

 

                   Number of
Shares
     Cost      Fair Value      % of
Net Assets
 

Cash and cash equivalents and cash and cash equivalents, reserve accounts - 9.6% (b)

           

U.S. Bank Money Market (m)

     13,777,491      $ 13,777,491      $ 13,777,491        9.6
          

 

 

    

 

 

    

 

 

    

 

 

 

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

     13,777,491      $ 13,777,491      $ 13,777,491        9.6
          

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Represents a non-qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 4.8% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

 

F-13


Table of Contents
(b)

Percentages are based on net assets of $143,691,367 as of February 28, 2018.

(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 32.21% 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 year ended February 28, 2018 in which the issuer was an Affiliate are as follows:

 

Company

   Purchases      Sales      Total Interest
from
Investments
     Management and
Incentive

Fee Income
     Net Realized
Gain (Loss) from
Investments
     Net Change in
Unrealized
Appreciation
 

GreyHeller LLC

   $ —        $ —        $ 886,948      $ —        $ —        $ 56,322  

Elyria Foundry Company, L.L.C.

     800,000        —          80,460        —          —          762,001  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 800,000      $ —        $ 967,408      $ —        $ —        $ 818,323  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 year ended February 28, 2018 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 and
Incentive Fee
Income
     Net Realized
Gain from
Investments
     Net Change in
Unrealized
Appreciation
(Depreciation)
 

Easy Ice, LLC

   $ —        $ (10,180,000   $ 3,656,285      $ —        $ 166      $ 1,880,768  

Saratoga Investment Corp. CLO 2013-1, Ltd.

     —          —         2,429,680        2,100,685        —          1,947,957  

Saratoga Investment Corp. Class F Note

     —          —         423,903        —          —          (450
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ (10,180,000   $ 6,509,868      $ 2,100,685      $ 166      $ 3,828,275  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(h)

Non-income producing at February 28, 2018.

(i)

Includes securities issued by an affiliate of the company.

(j)

The investment has an unfunded commitment as of February 28, 2018 (see Note 7 to the consolidated financial statements).

(k)

The entire commitment was unfunded at February 28, 2018. As such, no interest is being earned on this investment (see Note 7 to the consolidated financial statements).

(l)

At February 28, 2018, the investment was on non-accrual status. The fair value of these investments was approximately $9.5 million, which represented 2.8% of the Company’s portfolio (see Note 2 to the consolidated financial statements).

(m)

Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of February 28, 2018.

LIBOR—London Interbank Offered Rate

1M USD LIBOR—The 1 month USD LIBOR rate as of February 28, 2018 was 1.67%.

3M USD LIBOR—The 3 month USD LIBOR rate as of February 28, 2018 was 2.02%.

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

See accompanying notes to consolidated financial statements.

 

F-14


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

(unaudited)

 

     For the six months ended  
     August 31, 2018     August 31, 2017  

INCREASE FROM OPERATIONS:

    

Net investment income

   $ 9,071,876     $ 6,395,500  

Net realized gain (loss) from investments

     212,171       (5,679,265

Net change in unrealized appreciation (depreciation) on investments

     (1,511,316     7,167,711  

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

     (788,000     —    
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     6,984,731       7,883,946  
  

 

 

   

 

 

 

DECREASE FROM SHAREHOLDER DISTRIBUTIONS:

    

Distributions of investment income—net

     (6,332,527     (5,457,810
  

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

     (6,332,527     (5,457,810
  

 

 

   

 

 

 

CAPITAL SHARE TRANSACTIONS:

    

Proceeds from issuance of common stock

     28,750,000       2,639,413  

Stock dividend distribution

     1,016,423       1,147,536  

Offering costs

     (1,386,667     (48,254
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     28,379,756       3,738,695  
  

 

 

   

 

 

 

Total increase in net assets

     29,031,960       6,164,831  

Net assets at beginning of period, as reported

     143,691,367       127,294,777  

Cumulative effect of the adoption of ASC 606 (See Note 2)

     (65,300     —    
  

 

 

   

 

 

 

Net assets at beginning of period, as adjusted

     143,626,067       127,294,777  
  

 

 

   

 

 

 

Net assets at end of period

   $ 172,658,027     $ 133,459,608  
  

 

 

   

 

 

 

Net asset value per common share

   $ 23.16     $ 22.37  
    

Common shares outstanding at end of period

     7,453,947       5,967,272  

Distribution in excess of net investment income

   $ (25,188,494   $ (26,799,657

See accompanying notes to consolidated financial statements.

 

F-15


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

(unaudited)

 

     For the six months ended  
     August 31, 2018     August 31, 2017  

Operating activities

    

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 6,984,731     $ 7,883,946  

ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

    

Payment-in-kind interest income

     (1,604,326     (606,978

Net accretion of discount on investments

     (515,149     (335,240

Amortization of deferred debt financing costs

     516,653       491,135  

Net deferred income taxes

     (608,542     —    

Net realized (gain) loss from investments

     (212,171     5,679,265  

Net change in unrealized (appreciation) depreciation on investments

     1,511,316       (7,167,711

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

     788,000       —    

Proceeds from sales and repayments of investments

     37,556,821       43,784,914  

Purchase of investments

     (86,929,931     (81,662,750

(Increase) decrease in operating assets:

    

Interest receivable

     (1,146,028     (479,210

Management and incentive fee receivable

     61,348       (84,028

Other assets

     (133,505     (136,499

Receivable from unsettled trades

     (67,164     —    

Increase (decrease) in operating liabilities:

    

Base management and incentive fees payable

     94,139       (757,698

Accounts payable and accrued expenses

     289,641       390,245  

Interest and debt fees payable

     75,614       274,291  

Directors fees payable

     32,000       9,000  

Due to manager

     49,714       (44,119
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (43,256,839     (32,761,437
  

 

 

   

 

 

 

Financing activities

    

Borrowings on debt

     26,840,000       46,500,000  

Paydowns on debt

     (14,500,000     (14,500,000

Issuance of notes

     40,000,000       —    

Payments of deferred debt financing costs

     (1,684,808     (1,204,517

Proceeds from issuance of common stock

     28,750,000       2,639,413  

Payments of offering costs

     (1,292,548     (39,614

Payments of cash dividends

     (5,316,104     (4,310,274
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     72,796,540       29,085,008  
  

 

 

   

 

 

 

Cumulative effect of the adoption of ASC 606 (See Note 2)

     (65,300     —    

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS

     29,474,401       (3,676,429

CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD

     13,777,491       22,087,968  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD

   $ 43,251,892     $ 18,411,539  
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid during the period

   $ 4,996,939     $ 4,721,025  

Cash paid for taxes

     56,562       69,345  

Supplemental non-cash information:

    

Payment-in-kind interest income

   $ 1,604,326     $ 606,978  

Net accretion of discount on investments

     515,149       335,240  

Amortization of deferred debt financing costs

     516,653       491,135  

Stock dividend distribution

     1,016,423       1,147,536  

See accompanying notes to consolidated financial statements.

 

F-16


Table of Contents

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2018

(unaudited)

Note 1. Organization

Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company commenced operations on March 23, 2007 as GSC Investment Corp. and completed the initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code”). The Company expects to continue to qualify and to elect to be treated, for tax purposes, as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments.

GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.

On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.

On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in connection with the consummation of a recapitalization transaction.

The Company is externally managed and advised by the investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant to a management agreement (the “Management Agreement”). Prior to July 30, 2010, the Company was managed and advised by GSCP (NJ), L.P.

The Company has established wholly-owned subsidiaries, SIA Avionte, Inc., SIA Bush Franklin, Inc., SIA Easy Ice, LLC, SIA GH, Inc., SIA MAC, Inc., SIA TT, Inc., and SIA Vector, Inc., which are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax blockers are consolidated for accounting purposes, but are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

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

On 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.

 

F-17


Table of Contents

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), are stated in U.S. Dollars and include the accounts of the Company and its special purpose financing subsidiaries, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC), SBIC LP, SIA Avionte, Inc., SIA Bush Franklin, Inc., SIA Easy Ice, LLC, SIA GH, Inc., SIA MAC, Inc., SIA TT, Inc., and SIA Vector, Inc. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiaries, except as stated otherwise.

The Company and SBIC LP are both considered to be investment companies for financial reporting purposes and have applied the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services—Investment Companies” (“ASC 946”). There have been no changes to the Company or SBIC LP’s status as investment companies during the six months ended August 31, 2018.

Use of Estimates in the Preparation of Financial Statements

The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as, a money market fund if such investment would cause the Company to exceed any of the following limitations:

 

   

we were to own more than 3.0% of the total outstanding voting stock of the money market fund;

 

   

we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets, except as allowed pursuant to Rule 12d1-1 of Section 12(d)(1) of the 1940 Act which is designed to permit “cash sweep” arrangements rather than investments directly in short-term instruments; or

 

   

we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10.0% of the value of our total assets.

As of August 31, 2018, the Company did not exceed any of these limitations.

Cash and Cash Equivalents, Reserve Accounts

Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts in the form of cash and short-term liquid investments in money market funds, representing payments received on secured investments or other reserved amounts associated with the Company’s $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.

 

F-18


Table of Contents

In addition, cash and cash equivalents, reserve accounts also include amounts held in designated bank accounts, in the form of cash and short-term liquid investments in money market funds, within our wholly-owned subsidiary, SBIC LP.

The statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts.

The following table provides a reconciliation of cash and cash equivalents and cash and cash equivalents, reserve accounts reported within the consolidated statements of assets and liabilities that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

 

     August 31,
2018
     August 31,
2017
 

Cash and cash equivalents

   $ 37,409,160      $ 1,595,438  

Cash and cash equivalents, reserve accounts

     5,842,732        16,816,101  
  

 

 

    

 

 

 

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

   $ 43,251,892      $ 18,411,539  
  

 

 

    

 

 

 

Investment Classification

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.

Investment Valuation

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

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

 

F-19


Table of Contents

The Company undertakes 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.

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

 

   

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

 

   

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

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

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

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.

Investment Transactions and Income Recognition

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual

 

F-20


Table of Contents

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. At August 31, 2018, certain investments in three portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $4.4 million, or 1.1% of the fair value of our portfolio. At February 28, 2018, certain investments in two portfolio companies were on non-accrual status with a fair value of approximately $9.5 million, or 2.8% of the fair value of our portfolio.

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.

Adoption of 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). In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period for annual periods beginning after December 15, 2017.

Under the new guidance, the Company recognizes revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Under this standard, revenue is based on a contract with a determinable transaction price and distinct performance obligations with probable collectability. Revenues cannot be recognized until the performance obligation(s) are satisfied and control is transferred to the customer. The Company’s adoption of ASC 606 impacted the timing and recognition of incentive fee income in the Company’s consolidated statements of operations. The adoption of ASC 606 did not have an impact on the Company’s management fee income.

The Company adopted ASC 606 to all applicable contracts under the modified retrospective approach using the practical expedient provided for within paragraph 606-10-65-1(f)(3); therefore, the presentation of prior year periods has not been adjusted. The Company recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balance of components of equity as of March 1, 2018.

Incentive Fee Income

Incentive fee income is recognized based on the performance of Saratoga CLO during the period, subject to the achievement of minimum return levels in accordance with the terms set out in the investment management agreement between the Company and Saratoga CLO. Incentive fee income is realized in cash on a quarterly basis. Once realized, such fees are no longer subject to reversal.

 

F-21


Table of Contents

Upon the adoption of ASC 606, the Company will recognize incentive fee income only when the amount is realized and no longer subject to reversal. Therefore, the Company will no longer recognize unrealized incentive fee income in the consolidated financial statements. The adoption of ASC 606 results in the delayed recognition of unrealized incentive fee income in the consolidated financial statements until they become realized at the end of the measurement period and all uncertainties are eliminated, which is typically quarterly.

The Company adopted ASC 606 for incentive fee income using the modified retrospective approach with an effective date of March 1, 2018. The cumulative effect of the adoption resulted in the reversal of $0.07 million of unrealized incentive fee income and is presented as a reduction to the opening balances of components of equity as of March 1, 2018.

The following table presents the impact of incentive fees on the consolidated statement of assets and liabilities upon the adoption of ASC 606 effective March 1, 2018:

Consolidated Statement of Assets and Liabilities

 

     February 28, 2018  
     As Reported      Adjustments (1)      As Adjusted for
Adoption of ASC
606
 

Management and incentive fee receivable

   $ 233,024      $ (65,300    $ 167,724  

Total assets

     360,336,361        (65,300      360,271,061  

Cumulative effect adjustment for Adoption of ASC 606

     —          (65,300      (65,300

Total net assets

     143,691,367        (65,300      143,626,067  

NET ASSET VALUE PER SHARE

   $ 22.96      $ (0.01    $ 22.95  

 

(1)

Unrealized incentive fees receivable balance as of February 28, 2018.

In accordance with the ASC 606 disclosure requirements, the following tables present the adjustments made by the Company to remove the effects of adopting ASC 606 on the consolidated financial statements as of and for the three and six months ended August 31, 2018:

Consolidated Statement of Assets and Liabilities

 

     August 31, 2018  
     As Reported      Adjustments      Without
Adoption of ASC
606
 

Management and incentive fee receivable

   $ 171,676      $ 70,263      $ 241,939  

Total assets

     441,130,455        70,263        441,200,718  

Total net assets

     172,658,027        70,263        172,728,290  

NET ASSET VALUE PER SHARE

   $ 23.16      $ 0.01      $ 23.17  

 

F-22


Table of Contents

Consolidated Statements of Operations

 

     For the Three Months Ended August 31, 2018  
     As Reported      Adjustments      Without
Adoption of
ASC 606
 

Incentive fee income

   $ 147,061      $ (22,689    $ 124,372  

Total investment income

     11,402,774        (22,689      11,380,085  

NET INVESTMENT INCOME

     5,144,228        (22,689      5,121,539  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

     3,142,416        (22,689      3,119,727  

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 0.45      $ —        $ 0.45  
     For the Six Months Ended August 31, 2018  
     As Reported      Adjustments      Without
Adoption of
ASC 606
 

Incentive fee income

   $ 346,244      $ 4,963      $ 351,207  

Total investment income

     21,890,792        4,963        21,895,755  

NET INVESTMENT INCOME

     9,071,876        4,963        9,076,839  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

     6,984,731        4,963        6,989,694  

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

   $ 1.06      $ —        $ 1.06  

Other Income

Other income includes dividends received, origination fees, structuring fees and advisory fees, and is recorded in the consolidated statements of operations when earned.

Payment-in-Kind Interest

The Company holds debt 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.

Deferred Debt Financing Costs

Financing costs incurred in connection with our credit facility and notes are deferred and amortized using the straight line method over the life of the respective facility and debt securities. Financing costs incurred in connection with our SBA debentures are deferred and amortized using the effective yield method over the life of the debentures.

The Company presents deferred debt financing costs on the balance sheet as a contra-liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

 

F-23


Table of Contents

Contingencies

In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.

In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.

Income Taxes

The Company has elected to be treated for tax purposes as a RIC under the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes.

In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

The Company may utilize wholly owned holding companies taxed under Subchapter C of the Code (“Taxable Blockers”) when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. Taxable Blockers are consolidated in the Company’s GAAP financial statements and may result in current and deferred federal and state income tax expense with respect to income derived from those investments. Such income, net of applicable income taxes, is not included in the Company’s tax-basis net investment income until distributed by the Taxable Blocker, which may result in timing and character differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses. Income tax expense or benefit from Taxable Blockers related to net investment income are included in total operating expenses, while any expense or benefit related to federal or state income tax originated for capital gains and losses are included together with the applicable net realized or unrealized gain or loss line item. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely than-not that some portion or all of the deferred tax assets will not be realized.

 

F-24


Table of Contents

FASB ASC Topic 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the consolidated statements of operations. During the fiscal year ended February 28, 2018, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2015, 2016 and 2017 federal tax years for the Company remain subject to examination by the IRS. As of August 31, 2018 and February 28, 2018, there were no uncertain tax positions. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

Dividends

Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.

We have adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.

Capital Gains Incentive Fee

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

Regulatory Matters

In October 2016, the SEC adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosures about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. Management has adopted the amendments to Regulation S-X and included required disclosures in the Company’s consolidated financial statements and related disclosures.

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

 

F-25


Table of Contents

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 is currently evaluating the impact these changes will have 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 does not believe they would have a material impact on the Company’s consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Amendments to the Leases (“ASU Topic 842”), which will require for all operating leases the recognition of a right-of-use asset and a lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance is effective for annual and interim periods beginning after December 15, 2018. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

Risk Management

In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount.

The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.

The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.

Note 3. Investments

As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

F-26


Table of Contents

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

   

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

   

Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

   

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by a disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

The following table presents fair value measurements of investments, by major class, as of August 31, 2018 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
         Level 1              Level 2          Level 3      Total  

First lien term loans

   $ —        $ —        $ 227,887      $ 227,887  

Second lien term loans

     —          —          100,302        100,302  

Unsecured term loans

     —          —          12,139        12,139  

Structured finance securities

     —          —          16,852        16,852  

Equity interests

     —          —          35,707        35,707  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 392,887      $ 392,887  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2018 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
         Level 1              Level 2          Level 3      Total  

Syndicated loans

   $ —        $ —        $ 4,106      $ 4,106  

First lien term loans

     —          —          197,359        197,359  

Second lien term loans

     —          —          95,075        95,075  

Structured finance securities

     —          —          16,374        16,374  

Equity interests

     —          —          29,780        29,780  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 342,694      $ 342,694  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-27


Table of Contents

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2018 (dollars in thousands):

 

    Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Unsecured
term loans
    Structured
finance
securities
    Equity
interests
    Total  

Balance as of February 28, 2018

  $ 4,106     $ 197,359     $ 95,075     $ —       $ 16,374     $ 29,780     $ 342,694  

Net change in unrealized appreciation (depreciation) on investments

    (73     (619     (659     (77     281       (364     (1,511

Purchases and other adjustments to cost

    73       50,338       19,886       12,216       245       6,291       89,049  

Sales and repayments

    (4,106     (19,403     (14,000     —         (48     —         (37,557

Net realized gain from investments

    —         212       —         —         —         —         212  

Balance as of August 31, 2018

  $ —       $ 227,887     $ 100,302     $ 12,139     $ 16,852     $ 35,707     $ 392,887  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) for the period relating to those Level 3 assets that were still held by the Company at the end of the period

  $ —       $ (765   $ (568   $ (77   $ 281     $ (364   $ (1,493
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and repayments represent net proceeds received from investments sold, and principal paydowns received during the period.

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no restructures in or out for the six months ended August 31, 2018.

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2017 (dollars in thousands):

 

     Syndicated
loans
    First lien
term loans
    Second
lien
term loans
    Structured
finance
securities
    Equity
interests
    Total  

Balance as of February 28, 2017

   $ 9,823     $ 159,097     $ 87,750     $ 15,450     $ 20,541     $ 292,661  

Net change in unrealized appreciation (depreciation) on investments

     (48     255       1,799       2,084       3,078       7,168  

Purchases and other adjustments to cost

     10       78,571       1,560       —         2,464       82,605  

Sales and repayments

     (751     (12,680     (25,954     (997     (3,403     (43,785

Net realized gain (loss) from investments

     (54     (8     (7,530     —         1,913       (5,679

Restructures in

     —         —         39,837       —         2,617       42,454  

Restructures out

     —         (42,454     —         —         —         (42,454
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2017

   $ 8,980     $ 182,781     $ 97,462     $ 16,537     $ 27,210     $ 332,970  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) for the period relating to those Level 3 assets that were still held by the Company at the end of the period

   $ (48   $ 255     $ 1,928     $ 2,084     $ 3,731     $ 7,950  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-28


Table of Contents

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

Sales and repayments represent net proceeds received from investments sold, and principal paydowns received during the period.

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. Restructures in and out for the six months ended August 31, 2017 included a restructure of Easy Ice, LLC of approximately $26.7 million from a first lien term loan to a second lien term loan; a restructure of Mercury Funding, LLC’s first lien term loan of approximately $15.8 million to a second lien term loan; and a restructure of My Alarm Center, LLC’s second lien term loan of approximately $2.6 million to an equity interest.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2018 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input    Range

First lien term loans

   $ 227,887      Market Comparables    Market Yield (%)    8.5% - 13.5%
         EBITDA Multiples (x)    3.0x

Second lien term loans

     100,302      Market Comparables    Market Yield (%)    10.0% - 18.2%
         EBITDA Multiples (x)    5.0x

Unsecured term loans

     12,139      Market Comparables    Market Yield (%)    9.7% - 11.9%
         EBITDA Multiples (x)    4.8x

Structured finance securities

     16,852      Discounted Cash Flow    Discount Rate (%)    8.5% - 13.5%

Equity interests

     35,707      Market Comparables    EBITDA Multiples (x)    4.0x - 14.0x
         Revenue Multiples (x)    0.5x - 41.9x

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2018 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input    Range

Syndicated loans

   $ 4,106      Market Comparables    Third-Party Bid (%)    100.0%

First lien term loans

     197,359      Market Comparables    Market Yield (%)    7.3% - 13.4%
         EBITDA Multiples (x)    3.0x
         Third-Party Bid (%)    97.6% - 100.1%

Second lien term loans

     95,075      Market Comparables    Market Yield (%)    10.0% - 16.5%
         EBITDA Multiples (x)    5.0x
         Third-Party Bid (%)    100.0%

Structured finance securities

     16,374      Discounted Cash Flow    Discount Rate (%)    8.5% - 15.0%

Equity interests

     29,780      Market Comparables    EBITDA Multiples (x)    4.0x - 14.0x
         Revenue Multiples (x)    0.6x - 39.6x

For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the earnings before interest, tax, depreciation and amortization (“EBITDA”) or revenue valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing a market quote in deriving a value, a significant increase (decrease) in the market quote, in isolation, would result in a significantly higher (lower) fair value measurement.

 

F-29


Table of Contents

The composition of our investments as of August 31, 2018 at amortized cost and fair value was as follows (dollars in thousands):

 

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

First lien term loans

   $ 228,400        58.3   $ 227,887        58.0

Second lien term loans

     101,279        25.9       100,302        25.5  

Unsecured term loans

     12,217        3.1       12,139        3.1  

Structured finance securities

     13,992        3.6       16,852        4.3  

Equity interests

     35,507        9.1       35,707        9.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 391,395        100.0   $ 392,887        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The composition of our investments as of February 28, 2018 at amortized cost and fair value was as follows (dollars in thousands):    

 

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

Syndicated loans

   $ 4,033        1.2   $ 4,106        1.2

First lien term loans

     197,253        58.1       197,359        57.6  

Second lien term loans

     95,392        28.1       95,075        27.7  

Structured finance securities

     13,796        4.0       16,374        4.8  

Equity interests

     29,216        8.6       29,780        8.7  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 339,690        100.0   $ 342,694        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset liquidation or expected recovery model.

For equity securities of portfolio companies and partnership interests, we determine the fair value based on the market approach with value then attributed to equity or equity like securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected

 

F-30


Table of Contents

performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. In connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on assumptions about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at August 31, 2018. The significant inputs at August 31, 2018 for the valuation model include:

 

   

Default rate: 2.0%

 

   

Recovery rate: 70%

 

   

Discount rate: 13.5%

 

   

Prepayment rate: 20.0%

 

   

Reinvestment rate / price: L+340bps / $99.75

Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”)

On January 22, 2008, the Company invested $30.0 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a collateralized loan obligation fund managed by the Company that invests primarily in senior secured loans. Additionally, the Company entered into a collateral management agreement with GSC Investment Corp. CLO 2007, Ltd. pursuant to which we act as collateral manager to it. The Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, the Company completed the second refinancing of the Saratoga CLO. The Saratoga CLO refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital structure of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the Class F notes tranche of the Saratoga CLO at par, with a coupon of LIBOR plus 8.5%.

The Saratoga CLO remains 100.0% owned and managed by Saratoga Investment Corp. Following the refinancing, the Company receives 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 Company is 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%. For the three months ended August 31, 2018 and August 31, 2017, we accrued $0.4 million and $0.4 million in management fee income, respectively, and $0.7 million and $0.6 million in interest income, respectively, from the Saratoga CLO. For the six months ended August 31, 2018 and August 31, 2017, we accrued $0.7 million and $0.8 million in management fee income, respectively, and $1.5 million and $1.0 million in interest income, respectively, from the Saratoga CLO. For the three months ended August 31, 2018 and August 31, 2017, we accrued $0.1 million and $0.2 million, respectively, related to the incentive management fee from Saratoga CLO. For the six months ended August 31, 2018 and August 31, 2017, we accrued $0.3 million and $0.3 million, respectively, related to the incentive management fee from Saratoga CLO.

As of August 31, 2018, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $12.4 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the

 

F-31


Table of Contents

subordinated notes over the life of Saratoga CLO. As of August 31, 2018, Saratoga CLO had investments with a principal balance of $347.8 million and a weighted average spread over LIBOR of 4.0%, and had debt with a principal balance outstanding of $282.4 million with a weighted average spread over LIBOR of 2.4%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At August 31, 2018, the present value of the projected future cash flows of the subordinated notes was approximately $12.3 million, using a 13.5% discount rate. Saratoga Investment Corp. invested $32.8 million into the CLO since January 2008, and to date has since received distributions of $55.3 million, management fees of $18.7 million and incentive fees of $0.9 million.

On August 7, 2018, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse, Ltd (“CLO 2013-1 Warehouse”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expires on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%.

As of February 28, 2018, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $11.9 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. At February 28, 2018, Saratoga CLO had investments with a principal balance of $310.4 million and a weighted average spread over LIBOR of 3.9%, and had debt with a principal balance outstanding of $282.4 million with a weighted average spread over LIBOR of 2.4%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At February 28, 2018, the present value of the projected future cash flows of the subordinated notes, was approximately $12.2 million, using a 15.0% discount rate.

Below is certain financial information from the separate financial statements of Saratoga CLO as of August 31, 2018 (unaudited) and February 28, 2018 and for the three and six months ended August 31, 2018 (unaudited) and August 31, 2017 (unaudited).

 

F-32


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

     August 31, 2018     February 28, 2018  
     (unaudited)        

ASSETS

    

Investments at fair value

    

Loans at fair value (amortized cost of $345,292,427 and $307,926,355, respectively)

   $ 342,639,347     $ 305,823,704  

Equities at fair value (amortized cost of $3,531,218 and $3,531,218, respectively)

     6,599       6,599  
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $348,823,645 and $311,457,573, respectively)

     342,645,946       305,830,303  

Cash and cash equivalents

     7,088,188       5,769,820  

Receivable from open trades

     2,996,250       12,395,571  

Interest receivable

     1,505,467       1,653,928  
  

 

 

   

 

 

 

Total assets

   $ 354,235,851     $ 325,649,622  
  

 

 

   

 

 

 

LIABILITIES

    

Interest payable

   $ 1,625,779     $ 1,190,428  

Payable from open trades

     21,777,656       24,471,358  

Accrued base management fee

     34,335       33,545  

Accrued subordinated management fee

     137,341       134,179  

Accrued incentive fee

     70,263       65,300  

Loan payable, related party

     10,000,000       —    

Loan payable, third party

     21,787,500       —    

Class A-1 notes—SIC CLO 2013-1, Ltd.

     170,000,000       170,000,000  

Class A-2 notes—SIC CLO 2013-1, Ltd.

     20,000,000       20,000,000  

Class B notes—SIC CLO 2013-1, Ltd.

     44,800,000       44,800,000  

Class C notes—SIC CLO 2013-1, Ltd.

     16,000,000       16,000,000  

Discount on class C notes—SIC CLO 2013-1, Ltd.

     (63,827     (68,370

Class D notes—SIC CLO 2013-1, Ltd.

     14,000,000       14,000,000  

Discount on class D notes—SIC CLO 2013-1, Ltd.

     (296,318     (317,409

Class E notes—SIC CLO 2013-1, Ltd.

     13,100,000       13,100,000  

Class F notes—SIC CLO 2013-1, Ltd.

     4,500,000       4,500,000  

Deferred debt financing costs, SIC CLO 2013-1, Ltd. notes

     (951,011     (1,014,090

Subordinated notes

     30,000,000       30,000,000  
  

 

 

   

 

 

 

Total liabilities

   $ 366,521,718     $ 336,894,941  
  

 

 

   

 

 

 

Commitments and contingencies

    

NET ASSETS

    

Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 issued and outstanding, respectively

   $ 250     $ 250  

Accumulated loss

     (11,245,569     (12,974,026

Net gain (loss)

     (1,040,548     1,728,457  
  

 

 

   

 

 

 

Total net assets

     (12,285,867     (11,245,319
  

 

 

   

 

 

 

Total liabilities and net assets

   $   354,235,851     $   325,649,622  
  

 

 

   

 

 

 

 

F-33


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

(unaudited)

 

     For the three months ended     For the six months ended  
     August 31, 2018     August 31, 2017     August 31, 2018     August 31, 2017  

INVESTMENT INCOME

        

Interest from investments

   $ 4,856,814     $ 4,150,598     $ 9,889,239     $ 8,128,469  

Interest from cash and cash equivalents

     4,074       4,343       8,089       9,426  

Other income

     30,214       84,556       173,171       245,170  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     4,891,102       4,239,497       10,070,499       8,383,065  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Interest expense

     4,062,081       3,312,058       8,011,901       6,935,616  

Professional fees

     87,558       18,556       113,446       53,107  

Miscellaneous fee expense

     2,418       19,833       29,807       29,959  

Base management fee

     72,792       75,192       149,831       150,328  

Subordinated management fee

     291,170       300,765       599,325       601,310  

Incentive fees

     124,372       162,358       351,207       267,653  

Trustee expenses

     15,228       38,547       60,696       74,715  

Amortization expense

     44,357       44,357       88,713       88,714  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     4,699,976       3,971,666       9,404,926       8,201,402  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     191,126       267,831       665,573       181,663  
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

        

Net realized gain (loss) on investments

     2,237       475,486       (1,155,692     769,344  

Net change in unrealized depreciation on investments

     (440,254     (1,311,081     (550,429     (1,358,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss on investments

     (438,017     (835,595     (1,706,121     (589,504
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (246,891   $ (567,764   $ (1,040,548   $ (407,841
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-34


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

August 31, 2018

(unaudited)

 

Issuer Name

 

Industry

 

Asset Name

 

Asset
Type

 

Reference Rate/Spread

  LIBOR
Floor
    Current
Rate
(All In)
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Cumulus Media Inc.

  Radio & Television   Common Stock—Class A   Equity   —       —         —         —         4,337     $ —       $ —    

Education Management II LLC

  Leisure Goods/Activities/Movies   A-1 Preferred Shares   Equity   —       —         —         —         18,975       1,897,538       4,364  

Education Management II LLC

  Leisure Goods/Activities/Movies   A-2 Preferred Shares   Equity   —       —         —         —         6,692       669,214       1,539  

New Millennium Holdco, Inc.

  Healthcare   Common Stock   Equity   —       —         —         —         14,813       964,466       696  

24 Hour Fitness Worldwide, Inc.

  Leisure Goods/Activities/Movies   Term Loan (5/18)   Loan   1M USD LIBOR + 3.50%     0.00     5.61     5/30/2025     $ 2,000,000       1,990,121       2,015,000  

ABB Con-Cise Optical Group LLC

  Healthcare   Term Loan B   Loan   1M USD LIBOR + 5.00%     1.00     7.11     6/15/2023       1,963,941       1,944,824       1,966,396  

Acosta, Inc.

  Business Equipment & Services   Term Loan B (1st Lien)   Loan   1M USD LIBOR + 3.25%     1.00     5.36     9/26/2021       1,925,325       1,917,958       1,487,314  

ADMI Corp.

  Healthcare   Term Loan B   Loan   1M USD LIBOR + 3.25%     0.00     5.36     4/30/2025       2,000,000       1,990,214       2,006,880  

Advantage Sales & Marketing Inc.

  Business Equipment & Services   First Lien Term Loan   Loan   1M USD LIBOR + 3.25%     1.00     5.36     7/23/2021       2,408,668       2,407,020       2,244,590  

Advantage Sales & Marketing Inc.

  Business Equipment & Services   Term Loan B Incremental   Loan   1M USD LIBOR + 3.25%     1.00     5.36     7/23/2021       497,487       488,687       469,917  

Aegis Toxicology Sciences Corporation

  Healthcare   Term Loan   Loan   3M USD LIBOR + 5.50%     1.00     7.82     5/9/2025       4,000,000       3,947,103       3,885,000  

Agrofresh, Inc.

  Ecological Services & Equipment   Term Loan   Loan   2M USD LIBOR + 4.75%     1.00     6.96     7/30/2021       2,934,872       2,929,761       2,909,192  

AI Mistral (Luxembourg) Subco Sarl

  Surface Transport   Term Loan   Loan   1M USD LIBOR + 3.00%     1.00     5.11     3/11/2024       493,750       493,750       490,254  

AIS Holdco, LLC

  Insurance   Term Loan   Loan   3M USD LIBOR + 5.00%     0.00     7.32     8/15/2025       2,500,000       2,487,513       2,500,000  

Akorn, Inc.

  Drugs   Term Loan B   Loan   1M USD LIBOR + 4.75%     1.00     6.86     4/16/2021       398,056       397,352       385,119  

Albertson’s LLC

  Food Products   Term Loan B4 (5/17)   Loan   1M USD LIBOR + 2.75%     0.75     4.86     8/25/2021       2,640,977       2,629,287       2,635,483  

Alera Group Intermediate Holdings, Inc.

  Insurance   Term Loan B   Loan   1M USD LIBOR + 4.50%     0.00     6.61     8/1/2025       500,000       498,750       503,125  

Alion Science and Technology Corporation

  Conglomerates   Term Loan B (1st Lien)   Loan   1M USD LIBOR + 4.50%     1.00     6.61     8/19/2021       3,626,521       3,619,059       3,642,405  

Allen Media, LLC

  Telecommunications   Term Loan B   Loan   3M USD LIBOR + 6.50%     1.00     8.82     9/22/2023       3,000,000       2,925,000       2,932,500  

Alpha 3 B.V.

  Chemicals & Plastics   Term Loan B1   Loan   3M USD LIBOR + 3.00%     1.00     5.32     1/31/2024       247,500       246,961       248,119  

Altisource S.a r.l.

  Financial Intermediaries   Term Loan B (03/18)   Loan   3M USD LIBOR + 4.00%     1.00     6.32     4/3/2024       1,924,554       1,908,371       1,915,740  

American Greetings Corporation

  Publishing   Term Loan   Loan   1M USD LIBOR + 4.50%     1.00     6.61     4/5/2024       997,500       978,541       998,128  

American Residential Services LLC

  Building & Development   Term Loan B   Loan   1M USD LIBOR + 4.00%     1.00     6.11     6/30/2022       2,483,055       2,473,872       2,461,329  

 

F-35


Table of Contents

Issuer Name

 

Industry

 

Asset Name

 

Asset
Type

 

Reference Rate/Spread

  LIBOR
Floor
    Current
Rate
(All In)
    Maturity
Date
    Principal/
Number
of Shares
    Cost     Fair Value  

Anastasia Parent LLC

  Retailers (Except Food & Drug)   Term Loan   Loan   1M USD LIBOR + 3.75%     0.00     5.86     8/1/2025       1,000,000       995,016       995,630  

Anchor Glass Container Corporation

  Containers & Glass Products   Term Loan (07/17)   Loan   1M USD LIBOR + 2.75%     1.00     4.86     12/7/2023       492,525       490,472       434,501  

AqGen Ascensus, Inc.

  Financial Intermediaries   Term Loan Incremental   Loan   2M USD LIBOR + 3.50%     1.00     5.71     12/5/2022       311,719       310,939       312,108  

AqGen Ascensus, Inc.

  Financial Intermediaries   Delayed Draw Term Loan Incremental   Loan   3M USD LIBOR + 3.50%     1.00     5.82     12/5/2022       72,500       72,500       72,591  

Aramark Services, Inc.

  Food Products   Term Loan B-2   Loan   3M USD LIBOR + 1.75%     0.00     4.07     3/28/2024       1,612,143       1,612,143       1,614,835  

Arctic Glacier U.S.A., Inc.

  Food Products   Term Loan (3/18)   Loan   1M USD LIBOR + 3.50%     1.00     5.61     3/20/2024       523,619       523,554       524,053  

ASG Technologies Group, Inc.

  Electronics/Electrical   Term Loan   Loan   1M USD LIBOR + 3.50%     1.00     5.61     7/31/2024       496,256       494,027       493,155  

Astoria Energy LLC

  Utilities   Term Loan   Loan   1M USD LIBOR + 4.00%     1.00     6.11     12/24/2021       1,411,843       1,401,835       1,419,791  

Asurion, LLC

  Property & Casualty Insurance   Term Loan B-4 (Replacement)   Loan   1M USD LIBOR + 3.00%     0.00     5.11     8/4/2022       2,292,802       2,283,504       2,303,784  

Asurion, LLC

  Property & Casualty Insurance   Term Loan B6   Loan   1M USD LIBOR + 3.00%     0.00     5.11     11/3/2023       500,546       496,445       502,068  

ATS Consolidated, Inc.

  Building & Development   Term Loan   Loan   1M USD LIBOR + 3.75%     0.00     5.86     3/3/2025       498,750       496,302       500,151  

Avaya, Inc.

  Telecommunications   Term Loan B   Loan   1M USD LIBOR + 4.25%     0.00     6.36     12/16/2024       995,000       985,266       1,001,099  

Avolon TLB Borrower 1 US LLC

  Equipment Leasing   Term Loan B3   Loan   1M USD LIBOR + 2.00%     0.75     4.11     1/15/2025       992,500       987,710       991,170  

Ball Metalpack Finco, LLC

  Containers & Glass Products   Term Loan   Loan   1M USD LIBOR + 4.50%     0.00     6.61