10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended August 31, 2014

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-33376

 

 

SARATOGA INVESTMENT CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-8700615

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

535 Madison Avenue

New York, New York

  10022
(Address of principal executive office)   (Zip Code)

(212) 906-7800

(Registrant’s telephone number, including area code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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

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

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

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x    Smaller Reporting Company   ¨

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of October 14, 2014 was 5,379,616.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

 

         Page  

PART I

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements      3   
  Consolidated Statements of Assets and Liabilities as of August 31, 2014 (unaudited) and February 28, 2014      3   
  Consolidated Statements of Operations for the three and six months ended August 31, 2014 and August 31, 2013 (unaudited)      4   
  Consolidated Schedules of Investments as of August 31, 2014 (unaudited) and February 28, 2014      5   
  Consolidated Statements of Changes in Net Assets for the six months ended August 31, 2014 and August 31, 2013 (unaudited)      11   
  Consolidated Statements of Cash Flows for the six months ended August 31, 2014 and August 31, 2013 (unaudited)      12   
  Notes to Consolidated Financial Statements as of August 31, 2014 (unaudited)      13   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      58   

Item 4.

  Controls and Procedures      58   

PART II

  OTHER INFORMATION      59   

Item 1.

  Legal Proceedings      59   

Item 1A.

  Risk Factors      59   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      59   

Item 3.

  Defaults upon Senior Securities      59   

Item 4.

  Mine Safety Disclosures      59   

Item 5.

  Other Information      59   

Item 6.

  Exhibits      60   

Signatures

     61   

 

2


Table of Contents

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

     As of  
     August 31, 2014     February 28, 2014  
     (unaudited)        

ASSETS

    

Investments at fair value

    

Non-control/non-affiliate investments (amortized cost of $215,422,798 and $185,266,607, respectively)

   $         216,229,627      $         186,275,106   

Control investments (cost of $16,555,808 and $16,555,808, respectively)

     20,090,075        19,569,596   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $231,978,606 and $201,822,415, respectively)

     236,319,702        205,844,702   

Cash and cash equivalents

     271,378        3,293,898   

Cash and cash equivalents, reserve accounts

     3,215,671        3,293,113   

Interest receivable (net of reserve of $184,818 and $150,058, respectively)

     3,314,407        2,571,853   

Deferred debt financing costs, net

     3,879,035        4,008,704   

Management fee receivable

     167,031        150,106   

Other assets

     62,769        14,461   
  

 

 

   

 

 

 

Total assets

   $ 247,229,993      $ 219,176,837   
  

 

 

   

 

 

 

LIABILITIES

    

Revolving credit facility

   $ 8,900,000      $ —     

SBA debentures payable

     64,000,000        50,000,000   

Notes payable

     48,300,000        48,300,000   

Management and incentive fees payable

     4,221,591        3,856,962   

Accounts payable and accrued expenses

     536,355        824,568   

Interest and debt fees payable

     1,036,073        873,135   

Due to manager

     418,154        398,154   
  

 

 

   

 

 

 

Total liabilities

   $ 127,412,173      $ 104,252,819   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 7)

  

NET ASSETS

    

Common stock, par value $.001, 100,000,000 common shares authorized, 5,379,616 and 5,379,616 common shares issued and outstanding, respectively

   $ 5,380      $ 5,380   

Capital in excess of par value

     184,851,154        184,851,154   

Distribution in excess of net investment income

     (25,494,426     (29,627,578

Accumulated net realized loss from investments and derivatives

     (43,885,384     (44,327,225

Net unrealized appreciation on investments and derivatives

     4,341,096        4,022,287   
  

 

 

   

 

 

 

Total Net Assets

     119,817,820        114,924,018   
  

 

 

   

 

 

 

Total liabilities and Net Assets

   $ 247,229,993      $ 219,176,837   
  

 

 

   

 

 

 

NET ASSET VALUE PER SHARE

   $ 22.27      $ 21.36   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

     For the three months ended
August 31
    For the six months ended
August 31
 
     2014      2013     2014      2013  

INVESTMENT INCOME

          

Interest from investments

          

Non-control/Non-affiliate investments

   $ 5,047,571       $ 3,385,362      $ 9,755,465       $ 7,254,826   

Payment-in-kind interest income from Non-control/Non-affiliate investments

     329,614         296,802        582,542         472,923   

Control investments

     660,031         1,109,535        1,301,369         2,235,539   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     6,037,216         4,791,699        11,639,376         9,963,288   

Interest from cash and cash equivalents

     1,120         3,959        1,714         5,865   

Management fee income

     375,459         480,750        767,493         978,841   

Other income

     61,495         111,300        210,830         457,476   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income

     6,475,290         5,387,708        12,619,413         11,405,470   
  

 

 

    

 

 

   

 

 

    

 

 

 

EXPENSES

          

Interest and debt financing expenses

     1,809,516         1,603,581        3,597,103         2,731,436   

Base management fees

     1,037,186         811,106        2,005,665         1,547,822   

Professional fees

     275,933         235,191        711,307         566,255   

Administrator expenses

     250,000         250,000        500,000         500,000   

Incentive management fees

     789,714         (39,770     1,170,617         781,352   

Insurance

     84,127         119,234        168,614         239,229   

Directors fees and expenses

     55,586         45,000        108,761         96,000   

General & administrative

     100,568         91,425        224,194         189,786   

Other expense

     —           75        —           12,035   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

     4,402,630         3,115,842        8,486,261         6,663,915   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INVESTMENT INCOME

     2,072,660         2,271,866        4,133,152         4,741,555   
  

 

 

    

 

 

   

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

          

Net realized gain from investments

     360,161         545,642        441,841         1,074,942   

Net unrealized appreciation (depreciation) on investments

     703,506         (2,858,805     318,809         (2,057,943
  

 

 

    

 

 

   

 

 

    

 

 

 

Net gain/(loss) on investments

     1,063,667         (2,313,163     760,650         (983,001
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 3,136,327       $ (41,297   $ 4,893,802       $ 3,758,554   
  

 

 

    

 

 

   

 

 

    

 

 

 

WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE

   $ 0.58       $ (0.01   $ 0.91       $ 0.79   

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED

     5,379,616         4,730,116        5,379,616         4,730,116   

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

August 31, 2014

(unaudited)

 

Company

 

Industry

 

Investment Interest

Rate / Maturity

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

Non-control/Non-affiliated investments - 180.5% (b)

           

National Truck Protection Co.,
Inc. (d), (g)

  Automotive   Common Stock     1,116      $ 1,000,000      $ 1,473,053        1.2

National Truck Protection Co.,
Inc. (d)

  Automotive   First Lien Term Loan 15.50% Cash, 9/13/2018   $ 7,737,848        7,737,848        7,737,848        6.5

Take 5 Oil Change, L.L.C. (d), (g)

  Automotive   Common Stock     7,128        712,800        1,460,954        1.2
       

 

 

   

 

 

   

 

 

 
   

Total Automotive

      9,450,648        10,671,855        8.9
       

 

 

   

 

 

   

 

 

 

Legacy Cabinets Holdings (d), (g)

  Building Products   Common Stock Voting A-1     2,535        220,900        1,199,055        1.0

Legacy Cabinets Holdings (d), (g)

  Building Products   Common Stock Voting B-1     1,600        139,424        756,800        0.6
       

 

 

   

 

 

   

 

 

 
   

Total Building Products

      360,324        1,955,855        1.6
       

 

 

   

 

 

   

 

 

 

BMC Software, Inc. (d)

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 5,761,667        5,713,227        5,742,077        4.8

Dispensing Dynamics
International (d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 7,000,000        6,897,469        7,560,000        6.3

Easy Ice, LLC (d)

  Business Services   First Lien Term Loan 14.00% (11.00% Cash/3.00% PIK), 3/29/2018   $ 7,603,228        7,603,231        7,603,228        6.3

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 12.00% (11.00% Cash/1.00% PIK), 12/28/2017   $ 5,792,538        5,709,596        5,792,538        4.8

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

  Business Services   Warrant Membership Interests     49,318        400,000        385,174        0.3

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

  Business Services   First Lien Term Loan 5.50% Cash, 6/28/2019   $ 3,970,000        3,936,883        3,930,300        3.3

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

  Business Services   Second Lien Term Loan 9.50% Cash, 6/28/2020   $ 2,000,000        1,973,818        2,000,000        1.7

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 11.00% Cash, 11/29/2017   $ 5,259,171        5,215,608        5,259,171        4.4

Vector Controls Holding Co.,
LLC (d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 9,340,061        9,195,124        9,340,061        7.8

Vector Controls Holding Co.,
LLC (d), (g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     101        —          87,600        0.1
       

 

 

   

 

 

   

 

 

 
   

Total Business Services

      46,644,956        47,700,149        39.8
       

 

 

   

 

 

   

 

 

 

Targus Group International,
Inc. (d)

  Consumer Products   First Lien Term Loan 11.00% Cash, 5/24/2016   $ 3,661,247        3,612,910        3,503,447        2.9

Targus Holdings, Inc. (d), (g)

  Consumer Products   Common Stock     62,413        566,765        —          0.0

Targus Holdings, Inc. (d)

  Consumer Products   Unsecured Note 10.00% PIK, 6/14/2019   $ 2,054,158        2,054,158        1,499,104        1.3

Targus Holdings, Inc. (d)

  Consumer Products   Unsecured Note 16.00% Cash, 10/26/2018   $ 399,152        394,283        375,489        0.3
       

 

 

   

 

 

   

 

 

 
   

Total Consumer Products

      6,628,116        5,378,040        4.5
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC (g)

  Consumer Services   Common Stock     100,000        100,000        139,000        0.1

Avionte Holdings, LLC

  Consumer Services   First Lien Term Loan 8.25% Cash, 1/8/2019   $ 3,000,000        2,946,920        3,000,000        2.5

CFF Acquisition L.L.C. (d)

  Consumer Services   First Lien Term Loan 7.50% Cash, 7/31/2015   $ 996,679        990,974        996,679        0.9

Expedited Travel L.L.C.

  Consumer Services   First Lien Term Loan 9.00% Cash, 12/28/2017   $ 3,830,000        3,768,632        3,830,000        3.2

PrePaid Legal Services, Inc. (d)

  Consumer Services   First Lien Term Loan 6.25% Cash, 7/1/2019   $ 3,951,613        3,917,123        3,950,427        3.3

PrePaid Legal Services, Inc. (d)

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2020   $ 5,000,000        4,933,418        5,047,000        4.2
       

 

 

   

 

 

   

 

 

 
   

Total Consumer Services

      16,657,067        16,963,106        14.2
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp., L.L.C. (d), (g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

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

  Education   First Lien Term Loan 1.00% Cash, 3/13/14   $ 2,444,027        1,295,285        100,597        0.1
       

 

 

   

 

 

   

 

 

 
   

Total Education

      1,325,526        100,597        0.1
       

 

 

   

 

 

   

 

 

 

Group Dekko, Inc. (d)

  Electronics   Second Lien Term Loan 11.00% (10.00% Cash/1.00% PIK), 5/1/2016   $ 6,935,934        6,935,934        6,554,458        5.5
       

 

 

   

 

 

   

 

 

 
   

Total Electronics

      6,935,934        6,554,458        5.5
       

 

 

   

 

 

   

 

 

 

USS Parent Holding Corp. (d), (g)

  Environmental   Non Voting Common Stock     765        133,002        244,698        0.2

 

5


Table of Contents

USS Parent Holding
Corp. (d), (g)

  Environmental   Voting Common Stock     17,396        3,025,798        5,566,864        4.7
       

 

 

   

 

 

   

 

 

 
   

Total Environmental

      3,158,800        5,811,562        4.9
       

 

 

   

 

 

   

 

 

 

DS Waters of America, Inc. (d)

  Food and Beverage   First Lien Term Loan 5.25% Cash, 8/30/2020   $ 2,481,250        2,459,770        2,487,453        2.2

TB Corp. (d)

  Food and Beverage   First Lien Term Loan 5.75% Cash, 6/19/2018   $ 5,076,203        5,064,962        5,076,203        4.2

TB Corp. (d)

  Food and Beverage   Unsecured Note 13.50% (12.00% Cash/1.50% PIK), 12/20/2018   $ 2,546,121        2,517,122        2,546,121        2.1

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 7.75% Cash, 7/16/2017   $ 2,808,190        2,808,190        2,802,855        2.3
       

 

 

   

 

 

   

 

 

 
   

Total Food and Beverage

      12,850,044        12,912,632        10.8
       

 

 

   

 

 

   

 

 

 

Bristol Hospice, LLC

  Healthcare Services   Senior Secured Note 11.00%(10.00% Cash/1.00% PIK), 11/29/2018   $ 5,486,532        5,390,528        5,486,532        4.6

IDOC, LLC

  Healthcare Services   First Lien Term Loan 9.75% Cash, 8/2/2017   $ 13,831,583        13,831,583        13,831,583        11.5

Oceans Acquisition, Inc.

  Healthcare Services   First Lien Term A Loan 10.75% Cash, 12/27/2017   $ 6,246,226        6,154,475        6,121,301        5.1

Oceans Acquisition, Inc.

  Healthcare Services   First Lien Term B Loan 10.75% Cash, 12/27/2017   $ 1,000,000        991,202        980,000        0.8

Roscoe Medical, Inc. (d), (g)

  Healthcare Services   Common Stock     5,000        500,000        446,800        0.4

Roscoe Medical, Inc.

  Healthcare Services   Second Lien Term Loan 11.25% Cash, 9/26/2019   $ 4,200,000        4,123,141        4,160,100        3.5

Smile Brands Group Inc. (d)

  Healthcare Services   First Lien Term Loan 7.50% Cash, 8/16/2019   $ 4,466,250        4,390,964        4,354,594        3.6

Surgical Specialties Corporation
(US), Inc. (d)

  Healthcare Services   First Lien Term Loan 7.25% Cash, 8/22/2018   $ 2,375,000        2,355,380        2,369,063        2.0

Zest Holdings, LLC (d)

  Healthcare Services   First Lien Term Loan 6.50% Cash, 8/16/2020   $ 4,466,250        4,377,323        4,477,416        3.7
       

 

 

   

 

 

   

 

 

 
   

Total Healthcare Services

      42,114,596        42,227,389        35.2
       

 

 

   

 

 

   

 

 

 

McMillin Companies
L.L.C. (d), (g)

  Homebuilding   Senior Secured Note 0% Cash, 12/31/2013   $ 550,000        558,434        410,740        0.3
       

 

 

   

 

 

   

 

 

 
   

Total Homebuilding

      558,434        410,740        0.3
       

 

 

   

 

 

   

 

 

 

Distribution International,
Inc. (d)

  Manufacturing   First Lien Term Loan 7.50% Cash, 7/16/2019   $ 5,940,000        5,888,342        5,940,000        5.0
       

 

 

   

 

 

   

 

 

 
   

Total Manufacturing

      5,888,342        5,940,000        5.0
       

 

 

   

 

 

   

 

 

 

HMN Holdco, LLC

  Media   First Lien Term Loan 14.00% Cash, 5/16/2019   $ 9,540,696        9,360,503        9,206,771        7.7

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests (Common)     57,783        —          179,127        0.1

HMN Holdco, LLC (g)

  Media   Warrants to Purchase Limited Liability Company Interests     8,139        —          67,798        0.1
       

 

 

   

 

 

   

 

 

 
   

Total Media

      9,360,503        9,453,696        7.9
       

 

 

   

 

 

   

 

 

 

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

  Metals   Senior Secured Note 17.00% (13.00% Cash/4.00% PIK), 9/14/2014   $ 8,859,616        8,859,614        5,785,311        4.8

Elyria Foundry Company,

L.L.C. (d), (g)

  Metals   Warrants to Purchase Limited Liability Company Interests (2008)     7,000        20        —          0.0

Elyria Foundry Company,

L.L.C. (d), (g)

  Metals   Warrants to Purchase Limited Liability Company Interests (2013)     18,227        —          —          0.0
       

 

 

   

 

 

   

 

 

 
   

Total Metals

      8,859,634        5,785,311        4.8
       

 

 

   

 

 

   

 

 

 

Network Communications,
Inc. (d), (g)

  Publishing   Common Stock     380,572        —          —          0.0

Network Communications,
Inc. (d)

  Publishing   Unsecured Notes 8.60% PIK, 1/14/2020   $ 2,657,971        2,299,254        1,488,510        1.2
       

 

 

   

 

 

   

 

 

 
   

Total Publishing

      2,299,254        1,488,510        1.2
       

 

 

   

 

 

   

 

 

 

Community Investors, Inc. (g)

  Software   Common Stock     1,282        1,282        2,449        0.0

Community Investors, Inc.

  Software   First Lien Term Loan 9.75% Cash, 5/9/2018   $ 6,896,042        6,784,964        6,896,042        5.8

Community Investors, Inc.

  Software   Revolver   $ 166,667        —          —          0.0

Community Investors, Inc. (g)

  Software   Preferred Stock     63,463        149,138        121,214        0.1

Community Investors, Inc. (g)

  Software   Preferred Stock - A Shares     135,584        135,584        258,965        0.2

Identity Automation
Systems (g)

  Software   Common Stock Class A Units     232,616        232,616        232,616        0.2

Identity Automation Systems

  Software   First Lien Term Loan 10.25% Cash, 8/25/2019   $ 5,000,000        4,950,321        5,000,000        4.2

Pen-Link, Ltd. (d)

  Software   Second Lien Term Loan 12.50% Cash, 5/26/2019   $ 11,500,000        11,294,269        11,500,000        9.6
       

 

 

   

 

 

   

 

 

 
   

Total Software

      23,548,174        24,011,286        20.1
       

 

 

   

 

 

   

 

 

 

 

6


Table of Contents

Censis Technologies, Inc.

  Technology   First Lien Term Loan B 11.00% Cash, 7/24/2019   $  12,000,000        11,761,173        11,760,000        9.8

Censis Technologies,
Inc. (g), (h)

  Technology   Limited Partner Interests     999        999,000        999,000        0.8
       

 

 

   

 

 

   

 

 

 
   

Total Technology

      12,760,173        12,759,000        10.6
       

 

 

   

 

 

   

 

 

 

Advanced Air & Heat of Florida, LLC

  Utilities   First Lien Term Loan 10.00% Cash, 1/31/2019   $ 6,105,441        6,022,273        6,105,441        5.1
       

 

 

   

 

 

   

 

 

 
   

Total Utilities

      6,022,273        6,105,441        5.1
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

      215,422,798        216,229,627        180.5
       

 

 

   

 

 

   

 

 

 

Control investments – 16.8% (b)

           

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

  Structured Finance Securities   Other/Structured Finance Securities 16.01%, 10/17/2023   $ 30,000,000        16,555,808        20,090,075        16.8
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          16,555,808        20,090,075        16.8
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS – 197.3% (b)

        $ 231,978,606      $ 236,319,702        197.3
       

 

 

   

 

 

   

 

 

 

 

(a) Represents a non-qualifyng investment as defined under Section 55 (a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 8.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $119,817,820 as of August 31, 2014.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 16.01% interest rate in the table above represents the interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales (cost)      Interest
Income
     Management
fee income
     Net Realized
gains/(losses)
     Net Unrealized
gains/(losses)
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 1,301,369       $ 767,493       $ —         $ 3,534,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(g) Non-income producing at August 31, 2014.
(h) Includes securities issued by an affiliate of the company.

 

7


Table of Contents

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2014

 

Company

 

Industry

 

Investment Interest
Rate / Maturity

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

Non-control/Non-affiliated investments - 162.1% (b)

           

PATS Aircraft, LLC (d), (g)

  Aerospace   Common Stock     51,813      $ 89,636      $ 89,636        0.1

PATS Aircraft, LLC (d)

  Aerospace   First Lien Term Loan 8.50% Cash, 10/6/2016   $ 254,598        254,598        254,598        0.2
       

 

 

   

 

 

   

 

 

 
   

Total Aerospace

      344,234        344,234        0.3
       

 

 

   

 

 

   

 

 

 

National Truck Protection Co., Inc. (d), (g)

  Automotive   Common Stock     1,116        1,000,000        1,152,531        1.0

National Truck Protection Co., Inc. (d)

  Automotive   First Lien Term Loan 15.50% Cash, 9/13/2018   $ 8,250,000        8,250,000        8,250,000        7.2

Take 5 Oil Change, L.L.C. (d), (g)

  Automotive   Common Stock     7,128        712,800        1,217,747        1.1
       

 

 

   

 

 

   

 

 

 
    Total Automotive       9,962,800        10,620,278        9.3
       

 

 

   

 

 

   

 

 

 

Legacy Cabinets Holdings (d), (g)

  Building Products   Common Stock Voting A-1     2,535        220,900        552,351        0.5

Legacy Cabinets Holdings (d), (g)

  Building Products   Common Stock Voting B-1     1,600        139,424        348,624        0.3
       

 

 

   

 

 

   

 

 

 
    Total Building Products       360,324        900,975        0.8
       

 

 

   

 

 

   

 

 

 

ARSloane Acquistion, LLC (d)

  Business Services   First Lien Term Loan 7.50% Cash, 10/1/2019   $ 997,500        988,200        1,004,981        0.9

BMC Software, Inc. (d)

  Business Services   First Lien Term Loan 5.00% Cash, 9/10/2020   $ 6,000,000        5,943,801        6,013,800        5.2

Dispensing Dynamics International (d)

  Business Services   Senior Secured Note 12.50% Cash, 1/1/2018   $ 7,000,000        6,882,278        7,525,000        6.5

Easy Ice, LLC (d)

  Business Services   First Lien Term Loan 14.00% (11.00% Cash/3.00% PIK), 3/29/2018   $ 7,507,024        7,387,970        7,507,024        6.5

Emily Street Enterprises, L.L.C.

  Business Services   Senior Secured Note 12.00% (11.00% Cash/1.00% PIK), 12/28/2017   $ 5,767,983        5,680,703        5,767,983        5.0

Emily Street Enterprises, L.L.C. (g)

  Business Services   Warrant Membership Interests     49,318        400,000        601,679        0.5

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

  Business Services   First Lien Term Loan 5.50% Cash, 6/28/2019   $ 3,990,000        3,954,385        3,960,075        3.5

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

  Business Services   Second Lien Term Loan 9.50% Cash, 6/28/2020   $ 2,000,000        1,972,758        2,000,000        1.7

Knowland Technology Holdings, L.L.C.

  Business Services   First Lien Term Loan 11.00% Cash, 11/29/2017   $ 6,200,000        6,107,034        6,200,000        5.4

Trinet HR Corporation (SOI Holdings, Inc.) (d)

  Business Services   First Lien Term Loan 5.00% Cash, 8/20/2020   $ 4,987,500        4,941,335        5,018,921        4.4

Trinet HR Corporation (SOI Holdings, Inc.) (d)

  Business Services   Second Lien Term Loan 8.75% Cash, 2/20/2021   $ 2,500,000        2,453,145        2,518,750        2.2

Vector Controls Holding Co., LLC (d)

  Business Services   First Lien Term Loan, 14.00% (12.00% Cash/2.00% PIK), 3/6/2018   $ 9,261,074        9,115,415        9,075,853        7.9

Vector Controls Holding Co., LLC (d), (g)

  Business Services   Warrants to Purchase Limited Liability Company Interests     101        —          136,217        0.1
       

 

 

   

 

 

   

 

 

 
    Total Business Services       55,827,024        57,330,283        49.8
       

 

 

   

 

 

   

 

 

 

Targus Group International, Inc. (d)

  Consumer Products   First Lien Term Loan 11.00% Cash, 5/24/2016   $ 3,738,369        3,704,766        3,663,602        3.2

 

8


Table of Contents

Company

 

Industry

 

Investment Interest
Rate / Maturity

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

Targus Holdings, Inc. (d), (g)

  Consumer Products   Common Stock     62,413        566,765        730,232        0.6

Targus Holdings, Inc. (d)

  Consumer Products   Unsecured Note 10.00% PIK, 6/14/2019   $ 2,054,158        2,054,158        1,387,848        1.2

Targus Holdings, Inc. (d)

  Consumer Products   Unsecured Note 16.00% Cash, 10/26/2018   $ 384,577        379,471        336,505        0.3
       

 

 

   

 

 

   

 

 

 
    Total Consumer Products       6,705,160        6,118,187        5.3
       

 

 

   

 

 

   

 

 

 

Avionte Holdings, LLC (g)

  Consumer Services   Common Stock   $ 100,000        100,000        100,000        0.1

Avionte Holdings, LLC

  Consumer Services   First Lien Term Loan 9.75% Cash, 1/8/2019   $ 3,000,000        2,940,000        3,000,000        2.6

CFF Acquisition L.L.C. (d)

  Consumer Services   First Lien Term Loan 7.50% Cash, 7/31/2015   $ 1,319,891        1,273,596        1,319,891        1.1

Expedited Travel L.L.C.

  Consumer Services   First Lien Term Loan 9.00% Cash, 12/28/2017   $ 4,580,000        4,501,104        4,580,000        4.0

PrePaid Legal Services, Inc. (d)

  Consumer Services   First Lien Term Loan 6.25% Cash, 7/1/2019   $ 4,274,194        4,236,035        4,247,694        3.7

PrePaid Legal Services, Inc. (d)

  Consumer Services   Second Lien Term Loan 9.75% Cash, 7/1/2020   $ 5,000,000        4,931,888        5,044,000        4.4
       

 

 

   

 

 

   

 

 

 
    Total Consumer Services       17,982,623        18,291,585        15.9
       

 

 

   

 

 

   

 

 

 

M/C Acquisition Corp.,
L.L.C. (d), (g)

  Education   Class A Common Stock     544,761        30,241        —          0.0

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

  Education   First Lien Term Loan 1.00% Cash, 3/13/14   $ 2,512,184        1,358,250        90,128        0.1
       

 

 

   

 

 

   

 

 

 
    Total Education       1,388,491        90,128        0.1
       

 

 

   

 

 

   

 

 

 

Group Dekko, Inc. (d)

  Electronics   Second Lien Term Loan 11.00% (10.00% Cash/1.00% PIK), 5/1/2016   $ 6,901,547        6,901,547        6,741,431        5.9
       

 

 

   

 

 

   

 

 

 
    Total Electronics       6,901,547        6,741,431        5.9
       

 

 

   

 

 

   

 

 

 

USS Parent Holding Corp. (d), (g)

  Environmental   Non Voting Common Stock     765        133,002        220,992        0.2

USS Parent Holding Corp. (d), (g)

  Environmental   Voting Common Stock     17,396        3,025,798        5,027,574        4.4
       

 

 

   

 

 

   

 

 

 
    Total Environmental       3,158,800        5,248,566        4.6
       

 

 

   

 

 

   

 

 

 

DS Waters of America, Inc. (d)

  Food and Beverage   First Lien Term Loan 5.25% Cash, 8/30/2020   $ 2,493,750        2,470,506        2,531,156        2.2

HOA Restaurant Group, L.L.C. (d)

  Food and Beverage   Senior Secured Note 11.25% Cash, 4/1/2017   $ 4,000,000        3,918,437        4,240,000        3.7

TB Corp. (d)

  Food and Beverage   First Lien Term Loan 5.75% Cash, 6/19/2018   $ 5,101,971        5,082,013        5,127,481        4.5

TB Corp. (d)

  Food and Beverage   Unsecured Note 13.50% (12.00% Cash/1.50% PIK), 12/20/2018   $ 2,543,154        2,513,130        2,555,870        2.2

TM Restaurant Group L.L.C.

  Food and Beverage   First Lien Term Loan 7.75% Cash, 7/16/2017   $ 2,845,690        2,831,271        2,831,462        2.5
       

 

 

   

 

 

   

 

 

 
    Total Food and Beverage       16,815,357        17,285,969        15.1
       

 

 

   

 

 

   

 

 

 

Bristol Hospice, LLC

  Healthcare Services   Senior Secured Note 11.00%(10.00% Cash/1.00% PIK), 11/29/2018   $ 5,509,782        5,405,325        5,509,782        4.8

Oceans Acquisition, Inc.

  Healthcare Services   First Lien Term A Loan 10.75% Cash, 12/27/2017   $ 6,373,113        6,273,020        6,373,113        5.6

Oceans Acquisition, Inc.

  Healthcare Services   First Lien Term B Loan 10.75% Cash, 12/27/2017   $ 500,000        490,224        500,000        0.4

Smile Brands Group Inc. (d)

  Healthcare Services   First Lien Term Loan 7.50% Cash, 8/16/2019   $ 4,488,750        4,406,559        4,488,750        3.9

Surgical Specialties Corporation (US), Inc. (d)

  Healthcare Services   First Lien Term Loan 7.25% Cash, 8/22/2018   $ 2,437,500        2,415,591        2,449,688        2.1

Zest Holdings, LLC (d)

  Healthcare Services   First Lien Term Loan 6.50% Cash, 8/16/2020   $ 4,488,750        4,405,073        4,488,750        3.9
       

 

 

   

 

 

   

 

 

 
    Total Healthcare Services       23,395,792        23,810,083        20.7
       

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

Company

 

Industry

 

Investment Interest
Rate / Maturity

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

McMillin Companies L.L.C. (d), (g)

  Homebuilding   Senior Secured Note 0% Cash, 12/31/2013   $ 550,000        558,434        344,355        0.3
       

 

 

   

 

 

   

 

 

 
   

Total Homebuilding

      558,434        344,355        0.3
       

 

 

   

 

 

   

 

 

 

Distribution International, Inc. (d)

  Manufacturing   First Lien Term Loan 7.50% Cash, 7/16/2019   $ 5,970,000        5,916,094        5,970,000        5.2
       

 

 

   

 

 

   

 

 

 
   

Total Manufacturing

      5,916,094        5,970,000        5.2
       

 

 

   

 

 

   

 

 

 

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

  Metals   Senior Secured Note 17.00% (13.00% Cash/4.00% PIK), 9/14/2014   $ 8,859,614        8,859,614        6,644,711        5.8

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

  Metals   Warrants to Purchase Limited Liability Company Interests (2008)     7,000        20        —          0.0

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

  Metals   Warrants to Purchase Limited Liability Company Interests (2013)     18,227        —          —          0.0
       

 

 

   

 

 

   

 

 

 
   

Total Metals

      8,859,634        6,644,711        5.8
       

 

 

   

 

 

   

 

 

 

Network Communications, Inc. (d), (g)

  Publishing   Common Stock     380,572        —          —          0.0

Network Communications, Inc. (d)

  Publishing   Unsecured Notes 8.60% PIK, 1/14/2020   $ 2,601,736        2,202,168        1,190,888        1.0
       

 

 

   

 

 

   

 

 

 
   

Total Publishing

      2,202,168        1,190,888        1.0
       

 

 

   

 

 

   

 

 

 

Community Investors, Inc. (g)

  Software   Common Stock     1,282        1,282        1,449        0.0

Community Investors, Inc.

  Software   First Lien Term Loan 9.75% Cash, 5/9/2018   $ 6,983,333        6,863,915        6,983,333        6.1

Community Investors, Inc.

  Software   Revolver   $ 166,667        —          —          0.0

Community Investors, Inc. (g)

  Software   Preferred Stock     135,584        135,584        153,210        0.1

Pen-Link, Ltd.

  Software   Second Lien Term Loan 12.50% Cash, 5/26/2019   $ 11,500,000        11,280,887        11,500,000        10.0
       

 

 

   

 

 

   

 

 

 
   

Total Software

      18,281,668        18,637,992        16.2
       

 

 

   

 

 

   

 

 

 

Advanced Air & Heat of Florida, LLC

  Utilities   First Lien Term Loan 10.00% Cash, 1/31/2019   $ 6,705,441        6,606,457        6,705,441        5.8
       

 

 

   

 

 

   

 

 

 
   

Total Utilities

      6,606,457        6,705,441        5.8
       

 

 

   

 

 

   

 

 

 

Sub Total Non-control/
Non-affiliated investments

          185,266,607        186,275,106        162.1
       

 

 

   

 

 

   

 

 

 

Control investments -
17.0% (b)

         

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

  Structured Finance Securities   Other/Structured Finance Securities 15.16%, 10/17/2023   $ 30,000,000        16,555,808        19,569,596        17.0
       

 

 

   

 

 

   

 

 

 

Sub Total Control investments

          16,555,808        19,569,596        17.0
       

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENTS - 179.1% (b)

        $ 201,822,415      $ 205,844,702        179.1
       

 

 

   

 

 

   

 

 

 

 

(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 9.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $114,924,018 as of February 28, 2014.
(c) Because there is no readily available market value for these investments, the fair value of these investments is approved in good faith by our board of directors (see Note 3 to the consolidated financial statements).
(d) These securities are pledged as collateral under a senior secured revolving credit facility (see Note 6 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 15.16% interest rate in the table above represents the interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
(f) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company

   Purchases      Redemptions      Sales (cost)      Interest
Income
     Management
fee income
     Net Realized
gains/(losses)
     Net Unrealized
gains/(losses)
 

Saratoga Investment Corp. CLO 2013-1, Ltd.

   $ —         $ —         $ —         $ 3,410,868       $ 1,775,141       $ —         $ 3,013,788   

 

(g) Non-income producing at February 28, 2014.

 

10


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

(unaudited)

 

     For the six months ended
August 31, 2014
    For the six months ended
August 31, 2013
 

INCREASE FROM OPERATIONS:

    

Net investment income

   $ 4,133,152      $ 4,741,555   

Net realized gain from investments

     441,841        1,074,942   

Net unrealized appreciation (depreciation) on investments

     318,809        (2,057,943
  

 

 

   

 

 

 

Net increase in net assets from operations

     4,893,802        3,758,554   
  

 

 

   

 

 

 

Total increase in net assets

     4,893,802        3,758,554   

Net assets at beginning of period

     114,924,018        108,686,761   
  

 

 

   

 

 

 

Net assets at end of period

   $ 119,817,820      $ 112,445,315   
  

 

 

   

 

 

 

Net asset value per common share

   $ 22.27      $ 23.77   

Common shares outstanding at end of period

     5,379,616        4,730,116   

Distribution in excess of net investment income

   $ (25,494,426   $ (19,781,396

See accompanying notes to consolidated financial statements.

 

11


Table of Contents

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

(unaudited)

 

     For the six months ended
August 31, 2014
    For the six months ended
August 31, 2013
 

Operating activities

    

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 4,893,802      $ 3,758,554   

ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH USED BY OPERATING ACTIVITIES:

    

Paid-in-kind interest income

     (371,527     (472,923

Net accretion of discount on investments

     (382,571     (224,598

Amortization of deferred debt financing costs

     512,481        419,294   

Net realized gain from investments

     (441,841     (1,074,942

Net unrealized (appreciation) depreciation on investments

     (318,809     2,057,943   

Proceeds from sale and redemption of investments

     24,387,382        54,849,577   

Purchase of investments

     (53,347,634     (87,854,349

(Increase) decrease in operating assets:

    

Cash and cash equivalents, reserve accounts

     77,442        (4,506,556

Interest receivable

     (742,554     828,945   

Due from manager

     —          (4,929

Management fee receivable

     (16,925     17,331   

Other assets

     (48,308     (7,938

Receivable from unsettled trades

     —          316,489   

Increase (decrease) in operating liabilities:

    

Payable for unsettled trades

     —          16,270,000   

Management and incentive fees payable

     364,629        977,424   

Accounts payable and accrued expenses

     (288,213     66,602   

Interest and debt fees payable

     162,938        487,255   

Due to manager

     20,000        85,888   
  

 

 

   

 

 

 

NET CASH USED BY OPERATING ACTIVITIES

     (25,539,708     (14,010,933
  

 

 

   

 

 

 

Financing activities

    

Borrowings on debt

     27,600,000        4,000,000   

Paydowns on debt

     (4,700,000     (24,300,000

Issuance of notes

     —          48,300,000   

Debt financing cost

     (382,812     (2,579,309
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     22,517,188        25,420,691   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (3,022,520     11,409,758   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     3,293,898        149,025   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 271,378      $ 11,558,783   
  

 

 

   

 

 

 

Supplemental Information:

    

Interest paid during the period

   $ 2,921,683      $ 1,824,887   

Supplemental non-cash information:

    

Paid-in-kind interest income

   $ 371,527      $ 472,923   

Net accretion of discount on investments

   $ 382,571      $ 224,598   

Amortization of deferred debt financing costs

   $ 512,481      $ 419,294   

See accompanying notes to consolidated financial statements.

 

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SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

(unaudited)

Note 1. Organization and Basis of Presentation

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”). We commenced operations on March 23, 2007 as GSC Investment Corp. and completed our initial public offering (“IPO”) on March 28, 2007. We have elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code (the “Code”). We expect to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments.

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

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

On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in conjunction with the transaction described in “Note 13. Recapitalization Transaction” below.

We are externally managed and advised by our investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant an investment advisory and management agreement dated July 30, 2010 (the “Management Agreement”). Prior to July 30, 2010, we were managed and advised by GSCP (NJ), L.P.

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”).

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”) and include the accounts of the Company its special purpose financing subsidiary, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC) and SBIC LP. 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.

Note 2. Summary of Significant Accounting Policies

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;

 

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    we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets; or

 

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

Cash and Cash Equivalents, Reserve Accounts

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

Investment Classification

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

Investment Valuation

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

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

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

 

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

 

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

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

 

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

 

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

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

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

Investment Transactions and Income Recognition

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

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

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

Paid-in-Kind Interest

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

Deferred Debt Financing Costs

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

 

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Contingencies

In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote.

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

Income Taxes

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

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

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

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

ASC 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. During the fiscal year ended February 28, 2014, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2011, 2012 and 2013 federal tax years for the Company remain subject to examination by the IRS. As of August 31, 2014 and February 28, 2014, there were no uncertain tax positions.

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 our dividend reinvestment plan will have their cash dividends automatically reinvested in 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.

 

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

New Accounting Pronouncements

In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, (“ASU 2014-11”). ASU 2014-11 makes limited changes to the accounting for repurchase agreements, clarifies when repurchase agreements and securities lending transactions should be accounted for as secured borrowings, and requires additional disclosures regarding these types of transactions. The guidance is effective for fiscal years beginning on or after December 15, 2014, and for interim periods within those fiscal years. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statement 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.

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

 

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broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 asset, assuming no additional corroborating evidence.

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

The following table presents fair value measurements of investments, by major class, as of August 31, 2014 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Middle market loans

   $ —         $ —         $ 26,814       $ 26,814   

First lien term loans

     —           —           115,589         115,589   

Second lien term loans

     —           —           29,262         29,262   

Senior secured notes

     —           —           25,035         25,035   

Unsecured notes

     —           —           5,909         5,909   

Structured finance securities

     —           —           20,090         20,090   

Equity interest

     —           —           13,621         13,621   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 236,320       $ 236,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2014 (dollars in thousands), according to the fair value hierarchy:

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

Middle market loans

   $ —         $ —         $ 32,390       $ 32,390   

First lien term loans

     —           —           80,246         80,246   

Second lien term loans

     —           —           27,804         27,804   

Senior secured notes

     —           —           30,032         30,032   

Unsecured notes

     —           —           5,471         5,471   

Structured finance securities

     —           —           19,570         19,570   

Equity interest

     —           —           10,332         10,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 205,845       $ 205,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2014 (dollars in thousands):

 

    Middle
market
loans
    First lien
term loans
    Second lien
term loans
    Senior
secured
notes
    Unsecured
notes
    Structured
finance
securities
    Common
stock/
equities
    Total  

Balance as of February 28, 2014

  $ 32,390      $ 80,246      $ 27,804      $ 30,032      $ 5,471      $ 19,570      $ 10,332      $ 205,845   

Net unrealized gains (losses)

    (256     (395     (263     (1,108     322        520        1,499        319   

Purchases and other adjustments to cost

    28        40,446        11,175        76        116        —          2,260        54,101   

Sales and redemptions

    (5,383     (5,155     (9,500     (4,253     —          —          (96     (24,387

Net realized gains/(losses) from investments

    35        447        46        288        —          —          (374     442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2014

  $ 26,814      $ 115,589      $ 29,262      $ 25,035      $ 5,909      $ 20,090      $ 13,621      $ 236,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2013 (dollars in thousands):

 

     Middle
market
loans
     First
lien term
loans
    Second lien
term loans
    Senior
secured
notes
    Unsecured
notes
     Structured
finance
securities
    Common
stock/equities
    Total  

Balance as of February 28, 2013

   $ —         $ 83,792      $ 9,571      $ 23,305      $ 4,874       $ 25,517      $ 8,021      $ 155,080   

Net unrealized gains (losses)

     222         38        (29     (122     432         (3,635     1,037        (2,057

Purchases and other adjustments to cost

     37,013         32,924        9,400        8,938        127         —          150        88,552   

Sales and redemptions

     —           (41,650     (3,030     (7,728     —           (2,140     (301     (54,849

Net realized gains from investments

     —           403        370        —          —           —          301        1,074   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2013

   $ 37,235       $ 75,507      $ 16,282      $ 24,393      $ 5,433       $ 19,742      $ 9,208      $ 187,800   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

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

The net change in unrealized gain/(loss) for the six months ended August 31, 2014 and 2013, on investments held as of August 31, 2014 and 2013, was $734,740 and $(2,349,502), respectively, and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2014 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input   Range   Weighted
Average Yield
 
Middle market loans    $ 26,814       Market Comparables    Third-Party Bid   97.5 - 100.3     99.4%   
First lien term loans      115,589       Market Comparables    Market Yield (%)   5.5% - 15.7%     11.2%   
         EBITDA

Multiples (x)

  3.0x     3.0x   
         Third-Party Bid   83.7 - 101.0     96.1%   
Second lien term loans      29,262       Market Comparables    Market Yield (%)   8.8% - 14.8%     12.2%   
         Third-Party Bid   100.0 — 101.9     101.3%   
Senior secured notes      25,035       Market Comparables    Market Yield (%)   11.0% - 42.5%     12.6%   
         EBITDA
Multiples (x)
  5.0x     5.0x   
         Third-Party Bid   108.0     108.0%   
Unsecured notes      5,909       Market Comparables    Market Yield (%)   13.2% - 22.2%     17.0%   
Structured finance securities      20,090       Discounted Cash Flow    Discount Rate (%)   7.5%     7.5%   
Equity interests      13,621       Market Comparables    EBITDA
Multiples (x)
  6.3x — 14.0x     8.1x   

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2014 were as follows (dollars in thousands):

 

     Fair Value      Valuation Technique    Unobservable Input   Range    Weighted
Average Yield
 

Middle market loans

   $   32,390       Market Comparables    Third-Party Bid   99.5 - 100.6      100.1%   

First lien term loans

     80,246       Market Comparables    Market Yield (%)   5.1% - 15.5%      10.4%   
         EBITDA

Multiples (x)

  3.0x      3.0x   
         Third-Party Bid   83.3 - 101.5      97.0%   

Second lien term loans

     27,804       Market Comparables    Market Yield (%)   9.6% - 12.5%      11.7%   
         Third-Party Bid   100.0 — 101.8      101.1%   

Senior secured notes

     30,032       Market Comparables    Market Yield (%)   11.0% - 42.5%      12.4%   
         EBITDA
Multiples (x)
  5.0x      5.0x   
         Third-Party Bid   106.0 - 107.5      107.0%   

Unsecured notes

     5,471       Market Comparables    Market Yield (%)   12.8% - 20.3%      16.5%   

Structured finance securities

     19,570       Discounted Cash Flow    Discount Rate (%)   9.0%      9.0%   

Equity interests

     10,332       Market Comparables    EBITDA
Multiples (x)
  6.3x — 12.0x      7.8x   

 

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For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the EBITDA 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.

The composition of the Company’s investments as of August 31, 2014, at amortized cost and fair value were as follows (dollars in thousands):

 

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

Middle market loans

   $ 26,662         11.5   $ 26,814         11.3

First lien term loans

     116,473         50.2        115,589         48.9   

Second lien term loans

     29,261         12.6        29,262         12.4   

Senior secured notes

     27,416         11.8        25,035         10.6   

Unsecured notes

     7,265         3.2        5,909         2.5   

Structured finance securities

     16,556         7.1        20,090         8.5   

Equity interest

     8,346         3.6        13,621         5.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 231,979         100.0   $ 236,320         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The composition of the Company’s investments as of February 28, 2014, at amortized cost and fair value were as follows (dollars in thousands):

 

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

Middle market loans

   $ 31,983         15.8   $ 32,390         15.7

First lien term loans

     80,734         40.0        80,246         39.0   

Second lien term loans

     27,540         13.6        27,804         13.5   

Senior secured notes

     31,304         15.6        30,032         14.6   

Unsecured notes

     7,149         3.5        5,471         2.7   

Structured finance securities

     16,556         8.2        19,570         9.5   

Equity interest

     6,556         3.3        10,332         5.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 201,822         100.0   $ 205,845         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

 

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the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flows analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at August 31, 2014. The significant inputs for the valuation model include:

 

    Default rates: 2.0%

 

    Recovery rates: 35-75%

 

    Prepayment rate: 25.0%

 

    Reinvestment rate / price: L+375bps / $99.75

The Company and SBIC are both considered to be investment companies for financial reporting purposes and have applied the guidance in Topic 946, “Financial Services — Investment Companies”. There have been no changes to the Company or SBIC’s status as investment companies during the quarterly period ended August 31, 2014.

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

On January 22, 2008, we invested $30.0 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a collateralized loan obligation fund managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with GSC Investment Corp. CLO 2007, Ltd. pursuant to which we act as collateral manager to it. The Saratoga CLO was refinanced in October 2013 and its reinvestment period ends in October 2016. The Saratoga CLO remains 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.25% and a subordinated management fee of 0.25% of the Fee Basis Amount at the beginning of the Collection Period, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of the remaining interest proceeds and principal proceeds, if any, after the subordinated notes have realized the incentive management fee target return of 12.0%, in accordance with the Priority of Payments after making the prior distributions on the relevant payment date. For the three months ended August 31, 2014 and August 31, 2013, we accrued $0.4 million and $0.5 million in management fee income, respectively, and $0.7 million and $1.1 million in interest income, respectively, from Saratoga CLO. For the six months ended August 31, 2014 and August 31, 2013, we accrued $0.8 million and $1.0 million in management fee income, respectively, and $1.3 million and $2.2 million in interest income, respectively, from Saratoga CLO. We did not accrue any amounts related to the incentive management fee as the 12.0% hurdle rate has not yet been achieved.

At August 31, 2014, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $20.1 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 August 31, 2014, Saratoga CLO had investments with a principal balance of $304.4 million and a weighted average spread over LIBOR of 4.1%, and had debt with a principal balance of $282.4 million with a weighted average spread over LIBOR of 1.8%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. At August 31, 2014, the total “spread”, or projected future cash flows of the subordinated notes, over the life of Saratoga CLO was $24.3 million, which had a present value of approximately $20.9 million, using a 7.5% discount rate.

Below is certain financial information from the separate unaudited financial statements of Saratoga CLO as of August 31, 2014 and February 28, 2014, pursuant to Rule 3-09 of SEC rules Regulation S-X, and for the three and six months ended August 31, 2014 and August 31, 2013.

 

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Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

     As of  
     August 31, 2014     February 28, 2014  
     (unaudited)        

ASSETS

    

Investments

    

Fair Value Loans (amortized cost of $302,554,790 and $299,137,566, respectively)

   $         301,019,691      $         300,491,077   
  

 

 

   

 

 

 

Total investments at fair value (amortized cost of $302,554,790 and $299,137,566, respectively)

     301,019,691        300,491,077   

Cash and cash equivalents

     2,809,601        8,018,933   

Receivable from open trades

     2,223,951        1,801,266   

Interest receivable

     1,293,973        1,450,952   

Deferred debt financing costs, net

     2,054,114        2,166,633   

Other assets

     91,331        91,336   
  

 

 

   

 

 

 

Total assets

   $ 309,492,661      $ 314,020,197   
  

 

 

   

 

 

 

LIABILITIES

    

Interest payable

   $ 668,293      $ 622,476   

Payable from open trades

     7,427,661        9,445,000   

Accrued base management fee

     83,515        75,053   

Accrued subordinated management fee

     83,515        75,053   

Class X Notes—SIC CLO 2013-1, Ltd.

     —          1,666,666   

Class A-1 Notes—SIC CLO 2013-1, Ltd.

     170,000,000        170,000,000   

Discount on Class A-1 Notes—SIC CLO 2013-1, Ltd.

     (1,583,109     (1,671,864

Class A-2 Notes—SIC CLO 2013-1, Ltd.

     20,000,000        20,000,000   

Discount on Class A-2 Notes—SIC CLO 2013-1, Ltd.

     (164,100     (173,300

Class B Notes—SIC CLO 2013-1, Ltd.

     44,800,000        44,800,000   

Discount on Class B Notes—SIC CLO 2013-1, Ltd.

     (1,065,994     (1,125,757

Class C Notes—SIC CLO 2013-1, Ltd.

     16,000,000        16,000,000   

Discount on Class C Notes—SIC CLO 2013-1, Ltd.

     (663,693     (700,902

Class D Notes—SIC CLO 2013-1, Ltd.

     14,000,000        14,000,000   

Discount on Class D Notes—SIC CLO 2013-1, Ltd.

     (861,525     (909,825

Class E Notes—SIC CLO 2013-1, Ltd.

     13,100,000        13,100,000   

Discount on Class E Notes—SIC CLO 2013-1, Ltd.

     (1,624,225     (1,715,285

Class F Notes—SIC CLO 2013-1, Ltd.

     4,500,000        4,500,000   

Discount on Class F Notes—SIC CLO 2013-1, Ltd.

     (590,760     (623,880

Subordinated Notes

     30,000,000        30,000,000   
  

 

 

   

 

 

 

Total liabilities

   $ 314,109,578      $ 317,363,435   
  

 

 

   

 

 

 

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 gain (loss)

     (3,343,489     838,567   

Net loss

     (1,273,678     (4,182,055
  

 

 

   

 

 

 

Total net assets

     (4,616,917     (3,343,238
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 309,492,661      $ 314,020,197   
  

 

 

   

 

 

 

 

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Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

(unaudited)

 

     For the three months ended
August 31
    For the six months ended
August 31
 
     2014     2013     2014     2013  

INVESTMENT INCOME

        

Interest from investments

   $ 3,323,320      $ 4,201,548      $ 6,480,838      $ 8,607,828   

Interest from cash and cash equivalents

     562        1,295        838        4,451   

Other income

     42,007        325,629        140,930        677,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     3,365,889        4,528,472        6,622,606        9,289,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Interest expense

     1,997,155        1,472,007        4,124,139        3,037,996   

Professional fees

     24,142        208,576        94,360        324,928   

Miscellaneous fee expense

     3,263        8,681        26,396        160,791   

Base management fee

     187,730        96,150        383,747        195,768   

Subordinated management fee

     187,730        384,601        383,747        783,073   

Trustee expenses

     27,313        23,839        53,928        48,371   

Amortization expense

     239,963        254,427        479,926        508,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2,667,296        2,448,281        5,546,243        5,059,781   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     698,593        2,080,191        1,076,363        4,229,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

        

Net realized gain on investments

     147,951        213,058        528,570        451,600   

Net unrealized depreciation on investments

     (1,425,262     (4,139,484     (2,878,611     (3,499,811
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss on investments

     (1,277,311     (3,926,426     (2,350,041     (3,048,211
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ (578,718   $ (1,846,235   $ (1,273,678   $ 1,181,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

August 31, 2014

(unaudited)

 

Issuer Name

   Industry   Asset Name   Asset Type    Current Rate     Maturity Date      Principal      Cost      Fair Value  

24 Hour Holdings III LLC

   Leisure Goods/
Activities/Movies
  Term Loan   Loan      3.75     5/28/2021       $ 500,000       $ 495,123       $ 498,750   

Academy, LTD.

   Retailers (Except
Food and Drugs)
  Initial Term
Loan (2012)
  Loan      4.50     8/3/2018         1,950,262         1,939,947         1,944,412   

Acosta Holdco.

   Media   Term Loan
B
  Loan      5.00     8/13/2021         2,000,000         1,985,000         2,007,500   

Acosta, Inc.

   Food Products   Term B
Loan (2013)
  Loan      4.25     3/1/2018         4,141,844         4,092,120         4,133,436   

Aderant North America, Inc.

   Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.25     12/20/2018         3,260,898         3,260,898         3,264,974   

Advantage Sales

   Business Equipment
and Services
  Term Loan   Loan      4.25     7/25/2021         1,935,484         1,934,245         1,916,129   

Aegis Toxicology Science Corporation

   Healthcare   Term B
Loan
  Loan      5.50     2/24/2021         1,000,000         1,000,000         1,003,750   

Aeroflex Incorporated

   Aerospace and
Defense
  Tranche B-1
Term Loan
  Loan      4.50     1/18/2019         3,208,854         3,195,483         3,204,843   

Akorn, Inc.

   Healthcare   Term Loan
B
  Loan      4.50     4/16/2021         500,000         497,769         498,750   

Albertson’s

   Retailers (Except
Food and Drugs)
  Term Loan
B-4
  Loan      5.50     8/25/2021         1,000,000         985,000         1,002,080   

Alere Inc. (fka IM US Holdings, LLC)

   Healthcare   Incremental
B-1 Term
Loan
  Loan      4.25     6/30/2017         1,949,993         1,949,993         1,939,034   

American Tire Distributors

   Automotive   Term Loan   Loan      5.75     6/1/2018         498,988         498,988         499,612   

Anchor Glass

   Containers/Glass
Products
  Term Loan   Loan      3.25     5/16/2021         2,000,000         1,995,000         1,998,760   

Applied Systems, Inc.

   Business Equipment
and Services
  Initial Term
Loan (First
Lien)
  Loan      4.25     1/25/2021         497,500         496,392         494,545   

Aramark Corporation

   Food Products   LC-2
Facility
  Loan      3.69     7/26/2016         79,187         79,187         78,692   

Aramark Corporation

   Food Products   LC-3
Facility
  Loan      3.69     7/26/2016         43,961         43,961         43,686   

Aramark Corporation

   Food Products   U.S. Term F
Loan
  Loan      3.25     2/24/2021         3,198,521         3,198,521         3,148,944   

ARG IH Corp

   Food Services   Term Loan   Loan      4.75     11/15/2020         497,500         496,469         497,500   

Asurion, LLC (fka Asurion Corporation)

   Insurance   Incremental
Tranche B-1
Term Loan
  Loan      5.00     5/24/2019         5,480,487         5,434,635         5,481,638   

Auction.Com, LLC

   Business Equipment
and Services
  Term Loan
A-4
  Loan      4.40     2/28/2017         914,567         913,866         905,422   

Avantor Performance Materials Holdings, Inc.

   Chemicals/Plastics   Term Loan   Loan      5.25     6/26/2017         4,454,250         4,442,046         4,454,250   

Avast Software

   Electronics/Electric   Term Loan   Loan      4.00     3/20/2020         1,975,000         1,972,619         1,975,000   

AZ Chem US Inc.

   Chemicals/Plastics   Term Loan   Loan      5.25     12/22/2017         492,466         490,056         493,608   

Bass Pro Group, LLC

   Retailers (Except
Food and Drugs)
  New Term
Loan
  Loan      3.75     11/20/2019         496,174         495,632         492,041   

Bayonne Energy Center

   Oil & Gas   Term Loan
B
  Loan      4.50     8/19/2021         1,000,000         995,008         1,000,000   

Belmond Hotels

   Lodging & Casinos   Term Loan   Loan      4.00     3/19/2021         498,750         496,353         497,503   

Berry Plastics Corporation

   Chemicals/Plastics   Term E
Loan
  Loan      3.75     1/6/2021         1,496,250         1,493,014         1,479,836   

Big Heart Pet Brands (fka Del Monte Corporation)

   Food/Drug Retailers   Initial Term
Loan
  Loan      3.50     3/9/2020         2,992,500         3,013,405         2,937,648   

Biomet, Inc.

   Healthcare   Dollar Term
B-2 Loan
  Loan      3.65     7/25/2017         1,840,718         1,840,718         1,836,116   

BJ’s Wholesale Club, Inc.

   Food/Drug Retailers   New 2013
(November)
Replacement
Loan (First
Lien)
  Loan      4.50     9/26/2019         1,497,500         1,496,307         1,483,558   

Bombardier Recreational Products Inc.

   Leisure Goods/
Activities/Movies
  Term B
Loan
  Loan      4.00     1/30/2019         754,286         749,824         745,332   

Brickman Group Ltd. LLC, The

   Brokers/Dealers/
Investment Houses
  Initial Term
Loan (First
Lien)
  Loan      4.00     12/18/2020         1,498,750         1,485,345         1,470,963   

Brock Holdings III, Inc.

   Industrial
Equipment
  Term Loan
(First Lien)
  Loan      6.00     3/16/2017         1,949,171         1,966,066         1,950,399   

Burlington Coat Factory Warehouse Corporation

   Retailers (Except
Food and Drugs)
  Term B-2
Loan
  Loan      4.25     2/23/2017         2,000,000         1,990,010         1,990,000   

BWAY

   Leisure Goods/
Activities/Movies
  Term Loan
B
  Loan      5.50     8/14/2020         1,000,000         990,072         1,004,170   

Camp International Holding Company

   Aerospace and
Defense
  2013
Replacement
Term Loan
(First Lien)
  Loan      4.75     5/31/2019         1,970,023         1,976,344         1,970,023   

Capital Automotive L.P.

   Conglomerate   Tranche B-1
Term Loan
Facility
  Loan      4.00     4/10/2019         2,090,570         2,095,324         2,083,775   

Capsugel Holdings US, Inc.

   Drugs   Initial Term
Loan
  Loan      3.50     8/1/2018         3,110,785         3,104,540         3,082,259   

Catalent Pharma Solutions

   Drugs   Initial Term
B Loan
  Loan      3.50     9/15/2021         500,000         497,561         499,645   

Ceasars Entertainment Corp.

   Lodging & Casinos   Term B-7
Loan
  Loan      6.25     3/1/2017         1,000,000         993,142         973,910   

Celanese US Holdings LLC

   Chemicals/Plastics   Dollar Term
C-2
Commitment
  Loan      2.25     10/31/2016         2,165,387         2,188,463         2,165,387   

Cengage Learning

   Publishing   Term Loan   Loan      7.00     3/31/2020         2,244,375         2,275,315         2,251,669   

Charter Communications Operating, LLC

   Cable and Satellite
Television
  Term F
Loan
  Loan      3.00     12/31/2020         2,669,226         2,659,702         2,581,996   

CHS/Community Health Systems, Inc.

   Healthcare   2017 Term
E Loan
  Loan      3.48     1/25/2017         1,103,364         1,074,608         1,100,727   

CHS/Community Health Systems, Inc.

   Healthcare   2021 Term
D Loan
  Loan      4.25     1/27/2021         2,940,830         2,853,404         2,939,418   

Cinedigm Digital Funding I, LLC

   Business Equipment
and Services
  Term Loan   Loan      3.75     2/28/2018         702,747         697,657         702,747   

CITGO Petroleum

   Oil & Gas   Term Loan
B
  Loan      4.50     7/29/2021         500,000         495,047         500,625   

Covanta Energy Corporation

   Ecological Services
and Equipment
  Term Loan   Loan      3.25     3/28/2019         331,667         330,203         329,491   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

   Electronics/Electric   Term B
Loan
  Loan      4.25     4/7/2021         3,613,444         3,613,444         3,593,859   

Crosby US Acquisition Corp.

   Industrial
Equipment
  Initial Term
Loan (First
Lien)
  Loan      4.00     11/23/2020         746,250         745,404         739,720   

Crown Castle Operating Company

   Telecommunications/Cellular   Extended
Incremental
Tranche B-2
Term Loan
  Loan      3.00     1/31/2021         2,447,895         2,445,617         2,422,657   

Culligan International Company

   Conglomerate   Dollar Loan
(First Lien)
  Loan      6.25     12/19/2017         783,162         740,581         773,204   

Culligan International Company

   Conglomerate   Dollar Loan
(Second
Lien)
  Loan      9.50     6/19/2018         783,650         741,308         730,299   

Cumulus Media Holdings Inc.

   Broadcast Radio and
Television
  Term Loan   Loan      4.25     12/23/2020         492,315         487,783         489,484   

Custom Sensors

   Industrial
Equipment
  Term Loan   Loan      4.50     6/18/2021         500,000         498,800         497,500   

DaVita HealthCare Partners Inc. (fka DaVita Inc.)

   Healthcare   Tranche B
Term Loan
  Loan      4.50     10/20/2016         500,000         497,534         496,815   

DCS Business Services, Inc.

   Financial
Intermediaries
  Term B
Loan
  Loan      7.25     3/19/2018         3,477,807         3,450,350         3,390,862   

Dealertrack Technologies, Inc.

   Leisure Goods/
Activities/Movies
  Term B
Loan
  Loan      3.50     2/26/2021         477,011         475,941         474,425   

Dell International LLC

   Retailers (Except
Food and Drugs)
  Term B
Loan
  Loan      4.50     4/29/2020         1,985,000         1,974,309         1,971,363   

Delos Finance SARL

   Financial
Intermediaries
  Term Loan   Loan      3.50     3/6/2021         500,000         497,626         495,625   

Delta 2 (Lux) S.a.r.l.

   Lodging & Casinos   Term Loan
B-3
  Loan      4.75     7/30/2021         1,000,000         995,017         994,290   

Deluxe Entertainment Service Group, Inc.

   Leisure Goods/
Activities/Movies
  Term Loan
(First Lien)
  Loan      6.50     2/28/2020         1,993,750         1,995,044         1,983,781   

Devix

   Chemicals/Plastics   Term Loan   Loan      4.25     4/30/2021         250,000         247,593         250,000   

Devix

   Chemicals/Plastics   Term Loan
(Second
Lien)
  Loan      8.00     5/2/2022         500,000         497,630         498,000   

Diamond Resorts International

   Lodging & Casinos   Term Loan   Loan      5.50     5/9/2021         1,000,000         995,141         1,002,500   

Drew Marine Group Inc.

   Chemicals/Plastics   Term Loan
(First Lien)
  Loan      4.50     11/19/2020         1,497,500         1,503,089         1,503,116   

Dunkin’ Brands, Inc.

   Food Services   Term B-4
Loan
  Loan      3.25     2/7/2021         3,942,384         3,933,660         3,857,150   

Education Management LLC

   Leisure Goods/
Activities/Movies
  Tranche C-2
Term Loan
  Loan      4.25     6/1/2016         3,860,726         3,759,583         2,440,172   

EIG Investors Corp.

   Business Equipment
and Services
  Term Loan   Loan      5.00     11/8/2019         992,500         988,161         991,259   

Emerald Performance Materials, LLC

   Chemicals/Plastics   Term Loan
(First Lien)
  Loan      4.50     8/1/2021         500,000         497,515         497,500   

Emerald Performance Materials, LLC

   Chemicals/Plastics   Term Loan
(Second
Lien)
  Loan      7.75     8/1/2022         500,000         497,500         496,250   

EnergySolutions, LLC

   Oil & Gas   Term Loan
B
  Loan      6.75     5/29/2020         1,000,000         980,709         1,004,380   

Enviromental Resources Management

   Business Equipment
and Services
  Term Loan   Loan      5.00     5/16/2021         1,000,000         990,621         1,000,000   

Evergreen Acqco 1 LP

   Retailers (Except
Food and Drugs)
  New Term
Loan
  Loan      5.00     7/9/2019         980,044         976,268         979,799   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

   Industrial
Equipment
  Term Loan
(First Lien)
  Loan      4.75     1/15/2021         995,000         990,648         991,687   

Federal-Mogul Corporation

   Automotive   Tranche C
Term Loan
  Loan      4.75     4/15/2021         3,000,000         2,985,847         2,986,260   

First Data Corporation

   Financial
Intermediaries
  2017 Second
New Dollar
Term Loan
  Loan      4.15     3/24/2017         2,111,028         2,015,273         2,094,541   

First Data Corporation

   Financial
Intermediaries
  2018 Dollar
Term Loan
  Loan      4.15     3/23/2018         2,290,451         2,228,007         2,254,674   

Fitness International, LLC

   Leisure Goods/
Activities/Movies
  Term Loan
B
  Loan      5.50     7/1/2020         1,500,000         1,488,994         1,483,125   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

   Nonferrous Metals/
Minerals
  Loan   Loan      3.75     6/28/2019         1,992,500         1,992,008         1,972,954   

Four Seasons Holdings Inc.

   Lodging & Casinos   Term Loan
(First Lien)
  Loan      3.50     6/29/2020         496,250         496,250         492,776   

Garda World Security Corporation

   Business Equipment
and Services
  Term B
Delayed
Draw Loan
  Loan      4.00     11/6/2020         202,176         201,269         200,787   

Garda World Security Corporation

   Business Equipment
and Services
  Term B
Loan
  Loan      4.00     11/6/2020         790,324         786,877         784,895   

Gardner Denver, Inc.

   Oil & Gas   Initial Dollar
Term Loan
  Loan      4.25     7/30/2020         2,488,750         2,478,058         2,470,358   

Gates Global LLC

   Leisure Goods/
Activities/Movies
  Term Loan
(First Lien)
  Loan      4.25     7/2/2021         500,000         495,109         494,030   

Generac Power Systems, Inc.

   Industrial
Equipment
  Term Loan
B
  Loan      3.25     5/29/2020         857,504         842,443         842,498   

General Nutrition Centers, Inc.

   Retailers (Except
Food and Drugs)
  Amended
Tranche B
Term Loan
  Loan      3.25     3/4/2019         4,732,124         4,715,732         4,669,424   

Global Tel*Link Corporation

   Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.00     5/26/2020         2,770,614         2,761,855         2,749,834   

Goodyear Tire & Rubber Company, The

   Chemicals/Plastics   Loan
(Second
Lien)
  Loan      4.75     4/30/2019         4,000,000         3,951,481         4,006,000   

Grosvenor Capital Management Holdings, LP

   Brokers/Dealers/
Investment Houses
  Initial Term
Loan
  Loan      3.75     1/4/2021         3,482,500         3,466,019         3,449,138   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

   Publishing   Tranche B-4
Term Loan
  Loan      6.00     8/2/2019         493,750         491,629         499,922   

HCA Inc.

   Healthcare   Tranche B-4
Term Loan
  Loan      2.94     5/1/2018         5,691,680         5,400,424         5,664,132   

Hertz Corporation, The

   Automotive   Tranche B-1
Term Loan
  Loan      3.75     3/12/2018         2,955,000         2,989,719         2,938,393   

Hologic, Inc.

   Healthcare   Refinancing
Tranche A
Term Loan
  Loan      2.15     8/1/2017         2,250,000         2,245,260         2,240,865   

Hoofmaster Group, Inc.

   Containers/Glass
Products
  Term Loan   Loan      5.25     5/8/2020         2,000,000         1,980,684         1,995,000   

Huntsman International LLC

   Chemicals/Plastics   Extended
Term B
Loan
  Loan      2.69     4/19/2017         3,880,270         3,852,485         3,863,313   

Husky Injection

   Business Equipment
and Services
  Term Loan
B
  Loan      4.25     6/30/2021         500,000         497,075         497,500   

Ikaria, Inc.

   Healthcare   Initial Term
Loan (First
Lien)
  Loan      5.00     2/12/2021         471,910         469,803         471,419   

Infor (US), Inc. (fka Lawson Software Inc.)

   Business Equipment
and Services
  Tranche B-5
Term Loan
  Loan      3.75     6/30/2020         2,222,406         2,203,207         2,188,514   

 

24


Table of Contents
J. Crew Group, Inc.    Retailers (Except
Food and Drugs)
  Term B-1
Loan Retired
03/05/2014
  Loan      4.00     3/5/2021         970,069         970,068         939,269   
Jazz Acquisition    Aerospace and
Defense
  First Lien
6/14
  Loan      4.50     6/19/2021         500,000         498,754         497,500   
JFB Firth Rixson Inc.    Industrial
Equipment
  2013
Replacement
Dollar Term
Facility
Loan
  Loan      4.25     6/30/2017         2,551,360         2,541,993         2,548,170   
Kinetic Concepts, Inc.    Healthcare   Dollar Term
D-1 Loan
  Loan      4.00     5/4/2018         487,607         472,811         485,778   
Koosharem, LLC    Business Equipment
and Services
  Term Loan   Loan      7.50     4/29/2020         1,000,000         992,822         1,004,380   
La Quinta Holdings, Inc.    Lodging & Casinos   Term Loan
(First Lien)
  Loan      4.00     4/14/2021         480,952         478,688         477,648   
Mauser Holdings, Inc.    Containers/Glass
Products
  Term Loan   Loan      4.50     8/2/2021         500,000         497,526         496,250   
Michaels Stores, Inc.    Retailers (Except
Food and Drugs)
  Term B
Loan
  Loan      3.75     1/28/2020         493,750         493,750         488,284   
Michaels Stores, Inc.    Retailers (Except
Food and Drugs)
  Term Loan
B-2
  Loan      3.75     1/28/2020         500,000         497,573         495,940   
Microsemi Corporation    Electronics/Electric   Incremental
Term Loan
  Loan      3.50     2/19/2020         2,393,981         2,389,500         2,376,027   
Microsemi Corporation    Electronics/Electric   Term Loan   Loan      3.75     2/19/2020         172,170         172,170         171,524   
Millenium Laboratories    Drugs   Term Loan   Loan      5.25     4/16/2021         1,500,000         1,485,513         1,492,500   
Mitel US Holdings, Inc.    Telecommunications   Term Loan   Loan      5.25     1/31/2020         214,164         213,177         214,431   
MPH Acquisition Holdings LLC    Health Insurance   Term Loan   Loan      4.00     3/31/2021         486,364         485,222         482,628   
MSC Software Corp.    Business Equipment
and Services
  Term Loan   Loan      4.00     5/29/2020         1,000,000         990,321         1,001,250   
National CineMedia, LLC    Leisure Goods/
Activities/Movies
  Term Loan
(2013)
  Loan      2.95     11/26/2019         1,086,207         1,056,330         1,064,483   
National Veterinary Associates    Healthcare   Term Loan
B
  Loan      4.75     8/14/2021         1,000,000         995,094         1,002,500   
National Vision, Inc.    Retailers (Except
Food and Drugs)
  Term Loan
(Second
Lien)
  Loan      6.75     3/11/2022         250,000         249,690         244,063   
Newsday, LLC    Publishing   Term Loan   Loan      3.69     10/12/2016         2,215,385         2,213,965         2,215,385   
Nortek, Inc.    Electronics/Electric   Term B
Loan
  Loan      3.75     10/30/2020         1,000,000         997,657         994,170   
Novelis, Inc.    Conglomerate   Initial Term
Loan
  Loan      3.75     3/10/2017         4,832,525         4,844,857         4,820,444   
NPC International, Inc.    Food Services   Term Loan
(2013)
  Loan      4.00     12/28/2018         488,750         488,750         486,712   
NRG Energy, Inc.    Utilities   Term Loan
(2013)
  Loan      2.75     7/2/2018         3,880,875         3,858,512         3,820,062   
NuSil Technology LLC.    Chemicals/Plastics   Term Loan   Loan      5.25     4/7/2017         802,457         802,457         786,408   
OEP Pearl Dutch Acquisition B.V.    Chemicals/Plastics   Initial BV
Term Loan
  Loan      6.50     3/30/2018         136,371         135,141         136,882   
Ollie’s Bargain Outlet    Retailers (Except
Food and Drugs)
  Term Loan   Loan      6.00     9/30/2019         982,101         977,482         982,101   
On Assignment, Inc.    Business Equipment
and Services
  Initial Term
B Loan
  Loan      3.50     5/15/2020         1,311,364         1,302,764         1,305,633   
Onex Carestream Finance LP    Healthcare   Term Loan
(First Lien
2013)
  Loan      5.00     6/7/2019         4,282,361         4,263,330         4,279,021   
OpenLink International LLC    Business Equipment
and Services
  Term B
Loan
  Loan      6.25     10/27/2017         975,000         975,000         975,000   
Orbitz Worldwide, Inc.    Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      4.50     4/15/2021         500,000         498,785         498,905   
P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)    Food/Drug Retailers   Term
Borrowing
  Loan      4.25     6/24/2019         1,455,477         1,443,484         1,419,090   
P2 Upstream Acquisition Co. (P2 Upstream Canada BC ULC)    Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.00     10/30/2020         995,000         990,753         998,313   
Paragon Offshore Finance    Oil & Gas   Term Loan
B
  Loan      3.75     7/18/2021         750,000         746,314         738,750   
Patheon Inc.    Healthcare &
Pharmaceuticals
  Term Loan   Loan      4.25     3/11/2021         3,000,000         2,992,669         2,960,640   
PetCo Animal Supplies, Inc.    Retailers (Except
Food and Drugs)
  New Loans   Loan      4.00     11/24/2017         1,477,041         1,476,121         1,471,502   
Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)    Conglomerate   2013 Term
Loan
  Loan      4.00     12/5/2018         1,950,300         1,925,362         1,941,251   
Phillips-Medisize Corporation    Healthcare   Term Loan   Loan      4.75     6/16/2021         500,000         497,575         498,125   
Pinnacle Foods Finance LLC    Food Products   New Term
Loan G
  Loan      3.25     4/29/2020         2,581,332         2,575,965         2,551,337   
Planet Fitness Holdings LLC    Leisure Goods/
Activities/Movies
  Term Loan   Loan      4.75     3/31/2021         1,496,250         1,489,018         1,492,973   
Polymer Group, Inc.    Chemicals/Plastics   Initial Loan   Loan      5.25     12/19/2019         497,500         495,282         497,500   
Prestige Brands, Inc.    Drugs   Term B-1
Loan
  Loan      3.75     1/31/2019         435,606         430,604         434,081   
Prestige Brands, Inc.    Leisure Goods/
Activities/Movies
  Term Loan   Loan      4.50     9/3/2021         1,000,000         1,000,000         1,005,000   
Pro Mach, Inc.    Industrial
Equipment
  Term Loan   Loan      4.50     7/6/2017         1,891,863         1,883,473         1,895,420   
Progressive Waste Solutions Ltd.    Ecological Services
and Equipment
  Term B
Loan
  Loan      3.00     10/24/2019         496,222         496,222         496,013   
QoL Meds    Healthcare   Term Loan
B
  Loan      5.50     7/15/2020         2,000,000         1,990,049         2,005,000   
Quintiles Transnational Corp.    Conglomerate   Term B-3
Loan
  Loan      3.75     6/8/2018         3,681,541         3,649,943         3,652,383   
Redtop Acquisitions Limited    Electronics/Electric   Initial Dollar
Term Loan
(First Lien)
  Loan      4.50     12/3/2020         497,500         494,218         497,913   
Rexnord LLC/RBS Global, Inc.    Industrial
Equipment
  Term B
Loan
  Loan      4.00     8/21/2020         1,655,137         1,655,137         1,646,630   
Reynolds Group Holdings Inc.    Industrial
Equipment
  Incremental
U.S. Term
Loan
  Loan      4.00     12/1/2018         1,970,100         1,970,100         1,962,929   
Rocket Software, Inc.    Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.75     2/8/2018         1,916,674         1,896,090         1,916,080   
Rovi Solutions Corporation / Rovi Guides, Inc.    Electronics/Electric   Tranche B-3
Term Loan
  Loan      3.50     3/29/2019         1,500,000         1,492,617         1,486,245   
RPI Finance Trust    Drugs   Term B-2
Term Loan
  Loan      3.25     5/9/2018         5,233,797         5,212,118         5,219,091   
SBP Holdings LP    Industrial
Equipment
  Term Loan
(First Lien)
  Loan      5.00     3/27/2021         1,000,000         995,167         1,001,670   
Scitor Corporation    Business Equipment
and Services
  Term Loan   Loan      5.00     2/15/2017         463,977         462,503         459,337   
Sensata Technologies B.V./Sensata Technology Finance Company, LLC    Industrial
Equipment
  Term Loan   Loan      3.25     5/13/2019         1,517,088         1,517,088         1,515,540   
Sensus USA Inc. (fka Sensus Metering Systems)    Utilities   Term Loan
(First Lien)
  Loan      4.75     5/9/2017         1,935,040         1,929,701         1,934,228   
ServiceMaster Company, The    Conglomerate   Tranche B
Term Loan
  Loan      4.40     1/31/2017         2,000,000         1,980,369         1,970,000   
Shearers Foods    Food Services   Term Loan
(First Lien)
  Loan      4.50     6/30/2021         1,000,000         997,522         995,000   
Sonneborn, LLC    Chemicals/Plastics   Initial US
Term Loan
  Loan      6.50     3/30/2018         772,768         759,467         775,666   
Sophia, L.P.    Electronics/Electric   Term B
Loan
  Loan      4.00     7/19/2018         923,543         912,021         917,771   
Southwire Company, LLC (f.k.a Southwire Company)    Building and
Development
  Initial Term
Loan
  Loan      3.25     2/10/2021         498,750         497,580         493,972   
SRAM, LLC    Industrial
Equipment
  Term Loan
(First Lien)
  Loan      5.25     4/10/2020         3,138,397         3,123,509         3,067,783   
SS&C Technologies Holdings Europe S.A.R.L.    Business Equipment
and Services
  2013
Replacement
Term B-2
Loan
  Loan      3.25     6/7/2019         523,600         518,916         522,291   
SS&C Technologies, Inc., /Sunshine Acquisition II, Inc.    Business Equipment
and Services
  2013
Replacement
Term B-1
Loan
  Loan      3.25     6/7/2019         54,165         53,675         54,030   
Steak ‘n Shake Operations, Inc.    Food Services   Term Loan   Loan      4.75     3/19/2021         997,500         987,960         996,672   
STHI Holding    Healthcare   Term Loan   Loan      4.50     8/6/2021         1,000,000         995,003         995,630   
SunGard Data Systems Inc (Solar Capital Corp.)    Conglomerate   Tranche C
Term Loan
  Loan      3.90     2/28/2017         285,352         282,591         285,232   
SunGard Data Systems Inc (Solar Capital Corp.)    Conglomerate   Tranche E
Term Loan
  Loan      4.00     3/9/2020         3,707,953         3,610,543         3,689,413   
SuperMedia Inc. (fka Idearc Inc.)    Publishing   Loan   Loan      11.60     12/30/2016         252,782         244,705         218,183   
Syniverse Holdings, Inc.    Telecommunications   Initial Term
Loan
  Loan      4.00     4/23/2019         479,913         475,748         474,816   
Taminco Global Chemical Corporation    Chemicals/Plastics   Initial
Tranche B-3
Dollar Term
Loan
  Loan      3.25     2/15/2019         1,466,493         1,457,915         1,455,495   
Team Health, Inc.    Healthcare   Tranche B
Term Loan
  Loan      3.75     6/29/2018         4,365,000         4,349,553         4,343,175   
TGI Friday’s    Food Services   Term Loan
B
  Loan      5.25     7/15/2020         1,000,000         995,076         995,630   
TransDigm Inc.    Aerospace and
Defense
  Tranche C
Term Loan
  Loan      3.75     2/28/2020         4,871,784         4,881,456         4,818,341   
TransUnion    Financial
Intermediaries
  Term Loan   Loan      4.00     4/9/2021         498,750         497,586         495,508   
Tricorbraun Inc. (fka Kranson Industries, Inc.)    Containers/Glass
Products
  Term Loan   Loan      4.00     5/3/2018         1,902,083         1,893,866         1,897,328   
Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)    Healthcare   New
Tranche B
Term Loan
  Loan      4.50     6/6/2019         490,047         481,472         485,759   
Twin River Management    Lodging & Casinos   Term Loan
B
  Loan      5.25     7/10/2020         1,000,000         1,002,256         999,170   
U.S. Security Associates Holdings, Inc.    Business Equipment
and Services
  Delayed
Draw Loan
  Loan      6.00     7/28/2017         159,332         158,264         158,536   
U.S. Security Associates Holdings, Inc.    Business Equipment
and Services
  Term B
Loan
  Loan      6.00     7/28/2017         935,857         930,087         931,177   
United Surgical Partners International, Inc.    Healthcare   New
Tranche B
Term Loan
  Loan      4.75     4/3/2019         2,444,124         2,418,323         2,431,904   
Univar Inc.    Chemicals/Plastics   Term B
Loan
  Loan      5.00     6/30/2017         3,864,954         3,864,526         3,854,325   
Univision Communications Inc.    Telecommunications   Replacement
First-Lien
Term Loan
  Loan      4.00     3/1/2020         2,962,612         2,945,669         2,938,290   
Valeant Pharmaceuticals International, Inc.    Drugs   Series D2
Term Loan
B
  Loan      3.75     2/13/2019         2,545,588         2,536,761         2,532,861   
Verint Systems Inc.    Business Equipment
and Services
  Term Loan   Loan      3.50     9/6/2019         1,264,058         1,259,071         1,258,370   
Vertafore, Inc.    Business Equipment
and Services
  Term Loan
(2013)
  Loan      4.25     10/3/2019         2,881,003         2,881,003         2,873,800   
Visant Corporation (fka Jostens)    Leisure Goods/
Activities/Movies
  Tranche B
Term Loan
(2011)
  Loan      5.25     12/22/2016         3,604,551         3,604,551         3,584,726   
Vouvray    Industrial
Equipment
  Term Loan   Loan      5.00     6/28/2021         500,000         497,539         500,000   
Washington Inventory Service    Business Equipment
and Services
  U.S. Term
Loan (First
Lien)
  Loan      6.75     12/20/2018         1,896,034         1,918,563         1,888,924   
Wendy’s International, Inc    Food Services   Term B
Loan
  Loan      3.25     5/15/2019         677,050         670,886         673,184   
West Corporation    Telecommunications   Term B-10
Loan
  Loan      3.25     6/30/2018         2,571,560         2,610,717         2,535,738   
                 

 

 

    

 

 

 
                  $ 302,544,790       $ 301,019,691   
                 

 

 

    

 

 

 

 

25


Table of Contents

Saratoga Investment Corp. CLO 2013-1, Ltd.

Schedule of Investments

February 28, 2014

 

Issuer Name

   Industry   Asset Name   Asset Type    Current Rate     Maturity Date      Principal      Cost      Fair Value  

Academy, LTD.

   Retailers (Except
Food and Drugs)
  Initial Term
Loan (2012)
  Loan      4.50     8/3/2018       $ 1,960,187       $ 1,948,853       $ 1,969,969   

Acosta, Inc.

   Food Products   Term B
Loan (2013)
  Loan      4.25     3/2/2018         4,162,740         4,101,035         4,177,310   

Aderant North America, Inc.

   Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      6.25     12/20/2018         3,473,750         3,470,186         3,482,434   

Aegis Toxicology Sciences Corporation

   Healthcare   Initial Term
Loan (First
Lien)
  Loan      5.50     2/24/2021         1,000,000         990,000         990,000   

Aegis Toxicology Sciences Corporation

   Healthcare   Initial Term
Loan
(Second
Lien)
  Loan      9.50     8/24/2021         500,000         492,500         492,500   

Aeroflex Incorporated

   Aerospace and
Defense
  Tranche B-1
Term Loan
  Loan      4.50     11/9/2019         3,208,854         3,194,690         3,223,550   

Akorn, Inc.

   Healthcare   Term
Loan B
  Loan      4.50     11/13/2020         500,000         497,500         503,125   

Alere Inc. (fka IM US Holdings, LLC)

   Healthcare   Incremental
B-1 Term
Loan
  Loan      4.25     6/30/2017         1,960,000         1,930,566         1,968,173   

Applied Systems, Inc.

   Business Equipment
and Services
  Term Loan   Loan      4.25     12/8/2016         500,000         498,750         498,750   

Aramark Corporation

   Food Products   LC-2
Facility
  Loan      3.69     7/26/2016         79,187         79,187         79,206   

Aramark Corporation

   Food Products   LC-3
Facility
  Loan      3.69     7/26/2016         43,961         43,961         43,971   

Aramark Corporation

   Food Products   U.S. Term F
Loan
  Loan      3.25     2/24/2021         3,206,537         3,206,537         3,207,307   

Ardagh Holdings USA Inc. (Ardagh Packaging Finance S.A.)

   Containers/Glass
Products
  Dollar Term
Loan
  Loan      4.25     12/17/2019         1,000,000         995,109         1,002,500   

ARG IH Corporation

   Food Services   Term Loan   Loan      5.00     11/15/2020         500,000         498,797         502,500   

Asurion, LLC (fka Asurion Corporation)

   Insurance   Incremental
Tranche B-1
Term Loan
  Loan      4.50     5/24/2019         5,508,783         5,462,695         5,516,660   

Auction.Com, LLC

   Business Equipment
and Services
  Term Loan
A-4
  Loan      4.66     2/28/2017         980,651         979,812         970,845   

Autotrader.com, Inc.

   Automotive   Tranche B-1
Term Loan
  Loan      4.00     12/15/2016         3,791,778         3,791,778         3,805,997   

Avantor Performance Materials Holdings, Inc.

   Chemicals/Plastics   Term Loan   Loan      5.25     6/24/2017         4,875,000         4,861,403         4,875,000   

AZ Chem US Inc.

   Chemicals/Plastics   Term Loan   Loan      5.25     12/22/2017         1,355,941         1,329,859         1,362,720   

Bass Pro Group, LLC

   Retailers (Except
Food and Drugs)
  New Term
Loan
  Loan      3.75     11/20/2019         498,725         498,126         500,715   

Berry Plastics Corporation

   Chemicals/Plastics   Term E
Loan
  Loan      3.75     1/6/2021         1,500,000         1,496,250         1,495,500   

Big Heart Pet Brands (fka Del Monte Corporation)

   Food/Drug Retailers   Initial Term
Loan
  Loan      3.50     3/9/2020         3,000,000         3,022,866         2,999,250   

Biomet, Inc.

   Healthcare   Dollar Term
B-2 Loan
  Loan      3.65     7/25/2017         1,970,137         1,970,137         1,972,797   

BJ’s Wholesale Club, Inc.

   Food/Drug Retailers   New 2013
(November)
Replacement
Loan (First
Lien)
  Loan      4.50     9/26/2019         500,000         497,592         502,750   

Bombardier Recreational Products Inc.

   Leisure Goods/
Activities/Movies
  Term B
Loan
  Loan      4.00     1/30/2019         754,286         748,080         756,647   

Brickman Group Ltd. LLC, The

   Brokers/Dealers/
Investment Houses
  Initial Term
Loan (First
Lien)
  Loan      4.00     12/18/2020         250,000         248,750         250,937   

Brock Holdings III, Inc.

   Industrial
Equipment
  Term Loan
(First Lien)
  Loan      6.75     3/16/2017         1,959,839         1,976,826         1,967,188   

Burlington Coat Factory Warehouse Corporation

   Retailers (Except
Food and Drugs)
  Term B-2
Loan
  Loan      4.25     2/23/2017         2,660,377         2,653,889         2,675,675   

C.H.I. Overhead Doors, Inc.

   Building and
Development
  Term Loan
(First Lien)
  Loan      5.50     3/18/2019         2,739,013         2,692,934         2,745,861   

Camp International Holding Company

   Aerospace and
Defense
  2013
Replacement
Term Loan
(First Lien)
  Loan      4.75     5/31/2019         990,000         990,000         999,900   

Capital Automotive L.P.

   Conglomerate   Tranche B-1
Term Loan
Facility
  Loan      4.00     4/10/2019         2,137,369         2,141,920         2,142,712   

Capstone Logistics, LLC

   Business Equipment
and Services
  Term
Note A
  Loan      6.50     9/16/2016         2,658,626         2,637,550         2,618,899   

Capsugel Holdings US, Inc.

   Drugs   Initial Term
Loan
  Loan      3.50     8/1/2018         3,145,521         3,138,959         3,141,589   

Celanese US Holdings LLC

   Chemicals/Plastics   Dollar Term
C-2
Commitment
  Loan      2.25     10/31/2016         2,176,323         2,201,894         2,192,254   

Charter Communications Operating, LLC

   Cable and Satellite
Television
  Term F
Loan
  Loan      3.00     12/31/2020         2,682,707         2,672,727         2,666,369   

CHS/Community Health Systems, Inc.

   Healthcare   2017 Term
E Loan
  Loan      3.48     1/25/2017         1,108,908         1,082,718         1,113,987   

CHS/Community Health Systems, Inc.

   Healthcare   2021 Term
D Loan
  Loan      4.25     1/27/2021         2,955,608         2,862,024         2,980,228   

Cinedigm Digital Funding I, LLC

   Business Equipment
and Services
  Term Loan   Loan      3.75     2/28/2018         825,121         820,892         825,121   

Covanta Energy Corporation

   Ecological Services
and Equipment
  Term Loan   Loan      3.50     3/28/2019         491,250         489,468         492,788   

CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.)

   Electronics/Electric   Term B
Loan
  Loan      5.00     2/13/2017         4,622,500         4,611,092         4,622,500   

Crosby US Acquisition Corp.

   Industrial
Equipment
  Initial Term
Loan (First
Lien)
  Loan      4.00     11/23/2020         750,000         749,094         748,312   

Crown Castle Operating Company

   Telecommunications/Cellular   Extended
Incremental
Tranche B-2
Term Loan
  Loan      3.25     1/31/2019         2,460,196         2,441,025         2,460,316   

Culligan International Company

   Conglomerate   Dollar Loan
(First Lien)
  Loan      6.25     12/19/2017         787,658         738,102         734,491   

 

26


Table of Contents

Issuer Name

   Industry   Asset Name   Asset Type    Current Rate     Maturity Date      Principal      Cost      Fair Value  

Culligan International Company

   Conglomerate   Dollar Loan
(Second
Lien)
  Loan      9.50     6/19/2018         783,162         732,061         657,856   

Cumulus Media Holdings Inc.

   Broadcast
Radio and
Television
  Term Loan   Loan      4.25     12/23/2020         500,000         495,000         502,815   

DaVita HealthCare Partners Inc. (fka DaVita Inc.)

   Healthcare   Tranche B
Term Loan
  Loan      4.50     10/20/2016         3,909,320         3,909,320         3,927,655   

DCS Business Services, Inc.

   Financial
Intermediaries
  Term B
Loan
  Loan      7.25     3/19/2018         3,831,595         3,792,824         3,735,805   

DealerTrack Technologies, Inc.

   Computers &
Electronics
  Term Loan   Loan      3.50     2/28/2021         500,000         498,750         498,750   

Dell International LLC

   Retailers
(Except Food
and Drugs)
  Term B
Loan
  Loan      4.50     4/29/2020         1,995,000         1,982,818         1,988,935   

Delos Finance S.à r.l.

   Leasing   Loan   Loan      3.50     2/26/2021         500,000         497,500         497,500   

Deluxe Entertainment Services Group Inc.

   Media   Initial Term
Loan
  Loan      6.50     2/28/2020         1,000,000         1,000,000         1,000,000   

Digitalglobe, Inc.

   Ecological
Services and
Equipment
  Term Loan   Loan      3.75     1/31/2020         248,125         248,125         247,815   

Drew Marine Group Inc.

   Chemicals/
Plastics
  Term Loan
(First Lien)
  Loan      4.50     11/19/2020         500,000         499,397         502,500   

Dunkin’ Brands, Inc.

   Food Services   Term B-4
Loan
  Loan      3.25     2/7/2021         3,956,731         3,946,925         3,936,948   

DynCorp International Inc.

   Aerospace
and Defense
  Term Loan   Loan      6.25     7/7/2016         486,442         482,619         488,573   

Education Management LLC

   Leisure
Goods/
Activities/
Movies
  Tranche C-2
Term Loan
  Loan      4.31     6/1/2016         3,882,152         3,746,734         3,544,405   

EIG Investors Corp.

   Business
Equipment
and Services
  Term Loan   Loan      5.00     11/9/2019         997,500         992,713         1,003,734   

Energy Transfer Equity, L.P.

   Oil & Gas   Loan   Loan      3.25     12/2/2019         1,000,000         997,599         998,750   

Evergreen Acqco 1 LP

   Retailers
(Except Food
and Drugs)
  New Term
Loan
  Loan      5.00     7/9/2019         492,516         488,615         493,900   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)

   Industrial
Equipment
  Term Loan
(First Lien)
  Loan      4.75     1/15/2021         1,000,000         995,084         1,002,500   

Federal-Mogul Corporation

   Automotive   Tranche B
Term Loan
  Loan      2.14     12/29/2014         2,220,981         2,187,068         2,202,747   

Federal-Mogul Corporation

   Automotive   Tranche C
Term Loan
  Loan      2.14     12/28/2015         1,307,032         1,270,847         1,296,301   

First Data Corporation

   Financial
Intermediaries
  2017 Second
New Dollar
Term Loan
  Loan      4.20     3/24/2017         2,111,028         2,010,799         2,109,276   

First Data Corporation

   Financial
Intermediaries
  2018 Dollar
Term Loan
  Loan      4.20     3/23/2018         2,290,451         2,231,370         2,292,741   

FMG Resources (August 2006) Pty LTD (FMG America Finance, Inc.)

   Nonferrous
Metals/
Minerals
  Loan   Loan      4.25     6/28/2019         997,500         995,122         1,006,438   

Four Seasons Holdings Inc.

   Lodging &
Casinos
  Term Loan
(First Lien)
  Loan      3.50     6/27/2020         498,750         498,750         498,750   

Garda World Security Corporation

   Business
Equipment
and Services
  Term B
Delayed
Draw Loan
  Loan      4.00     11/6/2020         203,194         202,218         203,363   

Garda World Security Corporation

   Business
Equipment
and Services
  Term B
Loan
  Loan      4.00     11/6/2020         794,306         790,489         794,965   

Gardner Denver, Inc.

   Oil & Gas   Initial Dollar
Term Loan
  Loan      4.25     7/30/2020         1,496,250         1,485,394         1,489,337   

Generac Power Systems, Inc.

   Industrial
Equipment
  Term
Loan B
  Loan      3.50     5/31/2020         868,414         852,908         868,258   

General Nutrition Centers, Inc.

   Retailers
(Except Food
and Drugs)
  Amended
Tranche B
Term Loan
  Loan      3.25     3/4/2019         4,740,112         4,722,664         4,725,892   

Global Tel*Link Corporation

   Business
Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.00     5/23/2020         1,920,175         1,915,905         1,900,014   

Goodyear Tire & Rubber Company, The

   Chemicals/
Plastics
  Loan
(Second
Lien)
  Loan      4.75     4/30/2019         4,000,000         3,941,039         4,037,000   

Grosvenor Capital Management
Holdings, LP

   Brokers/
Dealers/
Investment
Houses
  Initial Term
Loan
  Loan      3.75     1/4/2021         3,500,000         3,482,803         3,489,080   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)

   Publishing   Tranche B-4
Term Loan
  Loan      6.00     8/4/2019         500,000         497,500         500,780   

HCA Inc.

   Healthcare   Tranche B-4
Term Loan
  Loan      2.94     5/1/2018         5,720,353         5,390,148         5,713,947   

Hertz Corporation, The

   Automotive   Tranche B-1
Term Loan
  Loan      3.75     3/11/2018         2,970,000         3,005,791         2,973,683   

Hologic, Inc.

   Healthcare   Refinancing
Tranche A
Term Loan
  Loan      2.19     8/1/2017         2,312,500         2,307,973         2,313,425   

Hunter Defense Technologies, Inc.

   Aerospace
and Defense
  Term Loan   Loan      3.45     8/22/2014         3,470,285         3,460,723         3,262,068   

Huntsman International LLC

   Chemicals/
Plastics
  Extended
Term B
Loan
  Loan      2.73     4/19/2017         3,920,000         3,892,467         3,919,020   

Ikaria, Inc.

   Healthcare   Initial Term
Loan (First
Lien)
  Loan      5.00     2/12/2021         500,000         497,515         502,815   

Infor (US), Inc. (fka Lawson Software Inc.)

   Business
Equipment
and Services
  Tranche B-5
Term Loan
  Loan      3.75     6/3/2020         1,776,183         1,758,861         1,772,488   

Inventiv Health, Inc. (fka Ventive Health, Inc)

   Conglomerate   Consolidated
Term Loan
  Loan      7.50     8/4/2016         492,090         492,090         491,105   

J. Crew Group, Inc.

   Retailers
(Except Food
and Drugs)
  Term B-1
Loan Retired
03/05/2014
  Loan      4.00     3/7/2018         972,500         972,500         972,656   

JFB Firth Rixson Inc.

   Industrial
Equipment
  2013
Replacement
Dollar Term
Facility
Loan
  Loan      4.25     6/30/2017         2,564,311         2,554,534         2,568,054   

Kinetic Concepts, Inc.

   Healthcare   Dollar Term
D-1 Loan
  Loan      4.00     5/4/2018         490,057         475,404         492,508   

La Quinta Intermediate Holdings L.L.C.

   Gaming And
Hotels
  Initial Term
Loan
  Loan      4.00     2/19/2021         500,000         500,000         500,000   

Michaels Stores, Inc.

   Retailers
(Except Food
and Drugs)
  Term B
Loan
  Loan      3.75     1/28/2020         496,250         496,250         497,302   

Microsemi Corporation

   Electronics/
Electric
  Incremental
Term Loan
  Loan      3.75     2/19/2020         498,750         498,750         499,373   

Microsemi Corporation

   Electronics/
Electric
  Term Loan   Loan      3.50     2/19/2020         2,393,981         2,389,463         2,398,482   

 

27


Table of Contents

Issuer Name

   Industry   Asset Name   Asset Type    Current Rate     Maturity Date      Principal      Cost      Fair Value  

Mitel US Holdings, Inc.

   Telecommunications   Term Loan   Loan      5.25     1/31/2020         250,000         248,753         252,083   

National CineMedia, LLC

   Leisure Goods/
Activities/Movies
  Term Loan
(2013)
  Loan      2.95     11/26/2019         1,086,207         1,054,177         1,082,134   

Newsday, LLC

   Publishing   Term Loan   Loan      3.69     10/12/2016         2,215,385         2,213,416         2,215,385   

Novelis, Inc.

   Conglomerate   Initial Term
Loan
  Loan      3.75     3/10/2017         4,857,520         4,868,347         4,873,452   

NPC International, Inc.

   Food Services   Term Loan
(2013)
  Loan      4.00     12/28/2018         490,833         490,833         493,597   

NRG Energy, Inc.

   Utilities   Term Loan
(2013)
  Loan      2.75     7/1/2018         3,900,525         3,875,534         3,872,168   

NuSil Technology LLC

   Chemicals/Plastics   Term Loan   Loan      5.25     4/7/2017         809,163         809,163         799,558   

OEP Pearl Dutch Acquisition B.V.

   Chemicals/Plastics   Initial BV
Term Loan
  Loan      6.50     3/30/2018         142,422         140,466         143,846   

On Assignment, Inc.

   Business Equipment
and Services
  Initial Term
B Loan
  Loan      3.50     5/15/2020         1,311,364         1,303,125         1,312,190   

Onex Carestream Finance LP

   Healthcare   Term Loan
(First Lien
2013)
  Loan      5.00     2/25/2017         4,531,159         4,511,264         4,582,135   

OpenLink International, Inc.

   Computers &
Electronics
  Replacement
Term Loan
  Loan      6.25     10/30/2017         980,000         980,000         980,000   

P.F. Chang’s China Bistro, Inc. (Wok Acquisition Corp.)

   Food/Drug Retailers   Term
Borrowing
  Loan      5.50     6/22/2019         1,496,212         1,488,641         1,509,675   

P2 Upstream Acquisition Co.
(P2 Upstream Canada BC ULC)

   Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.00     10/30/2020         1,000,000         995,186         1,008,750   

Patheon Inc.

   Healthcare   Term Loan   Loan      4.25     3/11/2021         3,000,000         2,992,500         2,990,640   

PetCo Animal Supplies, Inc.

   Retailers (Except
Food and Drugs)
  New Loans   Loan      4.00     11/24/2017         1,484,694         1,483,250         1,489,103   

Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)

   Conglomerate   2013 Term
Loan
  Loan      4.00     12/5/2018         1,960,200         1,936,226         1,967,845   

Pinnacle Foods Finance LLC

   Food Products   New Term
Loan G
  Loan      3.25     4/29/2020         4,962,500         4,951,514         4,942,352   

Polymer Group, Inc.

   Chemicals/Plastics   Initial Loan   Loan      5.25     12/19/2019         500,000         497,500         501,875   

Prestige Brands, Inc.

   Drugs   Term B-1
Loan
  Loan      3.75     1/31/2019         435,606         430,195         437,022   

Pro Mach, Inc.

   Industrial
Equipment
  Term Loan   Loan      4.50     7/6/2017         1,945,655         1,934,699         1,955,383   

Progressive Waste Solutions Ltd.

   Ecological Services
and Equipment
  Term B
Loan
  Loan      3.00     10/24/2019         498,741         498,741         500,486   

Quintiles Transnational Corp.

   Conglomerate   Term B-3
Loan
  Loan      3.75     6/8/2018         3,681,541         3,646,328         3,685,186   

Redtop Acquisitions Limited

   Electronics/Electric   Initial Dollar
Term Loan
(First Lien)
  Loan      4.50     12/3/2020         500,000         496,369         502,915   

Rexnord LLC/RBS Global, Inc.

   Industrial
Equipment
  Term B
Loan
  Loan      4.00     8/21/2020         1,663,476         1,663,476         1,667,035   

Reynolds Group Holdings Inc.

   Industrial
Equipment
  Incremental
U.S. Term
Loan
  Loan      4.00     12/1/2018         1,980,000         1,980,000         1,993,365   

Rocket Software, Inc.

   Business Equipment
and Services
  Term Loan
(First Lien)
  Loan      5.75     2/8/2018         1,960,025         1,934,083         1,960,515   

Rovi Solutions Corporation / Rovi Guides, Inc.

   Electronics/Electric   Tranche A-2
Loan
  Loan      2.45     3/29/2017         1,562,552         1,552,098         1,562,552   

Rovi Solutions Corporation / Rovi Guides, Inc.

   Electronics/Electric   Tranche B-3
Term Loan
  Loan      3.50     3/29/2019         1,344,450         1,339,560         1,341,088   

RPI Finance Trust

   Drugs   Term B-2
Term Loan
  Loan      3.25     5/9/2018         5,308,218         5,283,397         5,339,165   

Scitor Corporation

   Business Equipment
and Services
  Term Loan   Loan      5.00     2/15/2017         463,977         462,831         460,354   

Sensata Technologies B.V./Sensata Technology Finance Company, LLC

   Industrial
Equipment
  Term Loan   Loan      3.25     5/12/2019         1,524,730         1,524,730         1,529,106   

Sensus USA Inc. (fka Sensus Metering Systems)

   Utilities   Term Loan
(First Lien)
  Loan      5.75     5/9/2017         1,945,013         1,939,821         1,957,987   

ServiceMaster Company, The

   Conglomerate   Tranche B
Term Loan
  Loan      4.45     1/31/2017         2,822,729         2,830,165         2,825,552   

SI Organization, Inc., The

   Aerospace and
Defense
  New
Tranche B
Term Loan
  Loan      5.50     11/22/2016         3,880,675         3,863,008         3,800,655   

Sonneborn, LLC

   Chemicals/Plastics   Initial US
Term Loan
  Loan      6.50     3/30/2018         807,059         795,976         815,130   

Sophia, L.P.

   Electronics/Electric   Term B
Loan
  Loan      4.50     7/19/2018         928,389         917,174         934,191   

Southwire Company, LLC (f.k.a Southwire Company)

   Building and
Development
  Initial Term
Loan
  Loan      3.25     2/10/2021         500,000         498,758         499,730   

SRA International Inc.

   Aerospace and
Defense
  Term Loan   Loan      6.50     7/20/2018         3,268,571         3,184,532         3,276,743   

SRAM, LLC

   Industrial
Equipment
  Term Loan
(First Lien)
  Loan      4.01     4/10/2020         3,304,614         3,278,551         3,304,614   

SS&C Technologies Holdings Europe S.A.R.L.

   Business Equipment
and Services
  2013
Replacement
Term B-2
Loan
  Loan      3.25     6/7/2019         64,638         64,070         64,839   

SS&C Technologies, Inc., /Sunshine Acquisition II, Inc.

   Business Equipment
and Services
  2013
Replacement
Term B-1
Loan
  Loan      3.25     6/7/2019         624,838         619,344         626,782   

SunCoke Energy, Inc.

   Nonferrous Metals/
Minerals
  Tranche B
Term Loan
  Loan      4.00     7/26/2018         1,367,311         1,359,200         1,367,311   

SunGard Data Systems Inc (Solar Capital Corp.)

   Conglomerate   Tranche C
Term Loan
  Loan      3.95     2/28/2017         304,311         302,167         305,452   

 

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Table of Contents

Issuer Name

   Industry    Asset Name   Asset Type    Current Rate     Maturity Date      Principal      Cost     Fair Value  

SunGard Data Systems Inc (Solar Capital Corp.)

   Conglomerate    Tranche E
Term Loan
  Loan      4.00     3/8/2020         4,221,845         4,096,936        4,238,944   

SuperMedia Inc. (fka Idearc Inc.)

   Publishing    Loan   Loan      11.60     12/30/2016         264,330         257,131        196,762   

Syniverse Holdings, Inc.

   Telecommunications    Initial Term
Loan
  Loan      4.00     4/23/2019         479,913         476,371        480,911   

Taminco Global Chemical Corporation

   Chemicals/Plastics    Initial
Tranche B-3
Dollar Term
Loan
  Loan      3.25     2/15/2019         1,473,863         1,464,165        1,473,406   

Team Health, Inc.

   Healthcare    Tranche B
Term Loan
  Loan      3.75     6/29/2018         4,387,500         4,373,856        4,387,500   

TECTUM HOLDINGS INC.

   Industrial
Equipment
   Term Loan   Loan      6.50     12/3/2015         3,800,160         3,788,706        3,762,159   

Tomkins, LLC / Tomkins, Inc. (f/k/a Pinafore, LLC / Pinafore, Inc.)

   Conglomerate    Term B-2
Loan
  Loan      3.75     9/29/2016         2,356,680         2,360,795        2,361,982   

TransDigm Inc.

   Aerospace and
Defense
   Tranche C
Term Loan
  Loan      3.75     2/28/2020         4,896,514         4,904,843        4,914,876   

Tricorbraun Inc. (fka Kranson Industries, Inc.)

   Containers/Glass
Products
   Term Loan   Loan      4.00     5/3/2018         1,902,083         1,895,432        1,903,282   

Truven Health Analytics Inc. (fka Thomson Reuters (Healthcare) Inc.)

   Healthcare    New
Tranche B
Term Loan
  Loan      4.50     6/6/2019         492,528         484,755        493,513   

U.S. Security Associates Holdings, Inc.

   Business Equipment
and Services
   Delayed
Draw Loan
  Loan      6.00     7/28/2017         160,148         159,235        160,348   

U.S. Security Associates Holdings, Inc.

   Business Equipment
and Services
   Term B
Loan
  Loan      6.00     7/28/2017         122,494         122,109        122,648   

U.S. Security Associates Holdings, Inc.

   Business Equipment
and Services
   Term B
Loan
  Loan      6.00     7/28/2017         818,172         813,513        819,195   

U.S. Silica Company

   Nonferrous Metals/
Minerals
   Term Loan   Loan      4.00     7/23/2020         1,950,200         1,941,292        1,954,256   

U.S. Xpress Enterprises, Inc.

   Industrial
Equipment
   Extended
Term Loan
  Loan      9.38     11/13/2016         2,805,278         2,766,405        2,777,225   

United Surgical Partners International, Inc.

   Healthcare    New
Tranche B
Term Loan
  Loan      4.75     4/3/2019         2,456,500         2,429,626        2,470,821   

Univar Inc.

   Chemicals/Plastics    Term B
Loan
  Loan      5.00     6/30/2017         3,884,944         3,884,238        3,859,225   

Univision Communications Inc.

   Telecommunications    Replacement
First-Lien
Term Loan
  Loan      4.00     3/1/2020         2,977,500         2,959,200        2,984,467   

UPC Financing Partnership

   Broadcast Radio and
Television
   Facility AF   Loan      4.00     1/31/2021         1,000,000         974,618        1,002,500   

Valeant Pharmaceuticals International, Inc.

   Drugs    Series D2
Term
Loan B
  Loan      3.75     2/13/2019         2,947,688         2,936,432        2,955,528   

Verint Systems Inc.

   Business Equipment
and Services
   Term Loan   Loan      4.00     9/6/2019         1,900,800         1,892,737        1,904,602   

Verint Systems Inc.

   Business Equipment
and Services
   Tranche B
Incremental
Term Loan
  Loan      3.50     9/6/2019         1,000,000         997,521        1,000,000   

Vertafore, Inc.

   Business Equipment
and Services
   Term Loan
(2013)
  Loan      4.25     10/3/2019         2,899,621         2,899,621        2,909,770   

Visant Corporation (fka Jostens)

   Leisure Goods/
Activities/Movies
   Tranche B
Term Loan
(2011)
  Loan      5.25     12/22/2016         3,658,446         3,658,446        3,607,008   

W.R. Grace & Co.-CONN

   Chemicals/Plastics    Delayed
Draw Term
Loan
  Loan      0.00     2/3/2021         —           (328     —     

W.R. Grace & Co.-CONN

   Chemicals/Plastics    U.S. Term
Loan
  Loan      3.00     2/3/2021         368,421         367,502        367,828   

Washington Inventory Service

   Business Equipment
and Services
   U.S. Term
Loan (First
Lien)
  Loan      6.75     12/20/2018         1,980,000         2,004,187        1,965,150   

Wendy’s International, Inc.

   Food Services    Term B
Loan
  Loan      3.25     5/15/2019         680,470         674,563        679,197   

Wesco Aircraft Hardware Corp.

   Aerospace/Defense    Tranche B
Term Loan
  Loan      4.75     2/28/2021         500,000         498,750        498,750   

West Corporation

   Telecommunications    Term B-10
Loan
  Loan      3.25     6/30/2018         2,926,111         2,976,179        2,909,666   
                  

 

 

   

 

 

 
                   $ 299,137,566      $ 300,491,077   
                  

 

 

   

 

 

 

 

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Note 5. Agreements and Related Party Transactions

On July 30, 2010, the Company entered into the Management Agreement with our Manager. The initial term of the Management Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. On July 10, 2014, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.

The base management fee of 1.75% is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or repurchases during the applicable fiscal quarter.

The incentive fee consists of the following two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100.0% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter (9.376% annualized); and 20.0% of the amount of the our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter (9.376% annualized).

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

For the three months ended August 31, 2014 and 2013, we incurred $1.0 million and $0.8 million in base management fees, respectively. For the three months ended August 31, 2014 and 2013, we accrued $0.6 million and $0.1 million in incentive fees related to pre-incentive fee net investment income. For the three months ended August 31, 2014, we accrued $0.2 million in incentive fees related to capital gains. For the three months ended August 31, 2013, there was a reduction of $0.2 million in incentive management fees related to capital gains. For the six months ended August 31, 2014 and 2013, we incurred $2.0 million and $1.5 million in base management fees, respectively. For the six months ended August 31, 2014 and 2013, we accrued $0.9 million and $0.8 million in incentive fees related to pre-incentive fee net investment income. For the six months ended August 31, 2014, we accrued $0.3 million in incentive management fees related to capital gains. For the six months ended August 31, 2013, we did not accrue incentive management fees related to capital gains. The accrual is calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of August 31, 2014, the base management fees accrual was $1.0 million, and the incentive fees accrual was $3.2 million and is included in management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 28, 2014, the base management fees accrual was $0.9 million and the incentive fees accrual was $3.0 million and is included in management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.

On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement is two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company is capped at $1.0 million for the initial two year term of the administration agreement. On July 10, 2014, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to maintain the cap on the payment or reimbursement of expenses by the Company thereunder to $1.0 million for the additional one-year term.

 

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For the three months ended August 31, 2014 and 2013, we recognized $0.3 million and $0.3 million in administrator expenses for the periods, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses, respectively. For the six months ended August 31, 2014 and 2013, we recognized $0.5 million and $0.5 million in administrator expenses for the periods, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses, respectively. As of August 31, 2014 and February 28, 2014, $0.4 million and $0.4 million, respectively, of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities.

Note 6. Borrowings

Credit Facility

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing.

On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral was used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.

In March 2009, we amended the Revolving Facility to increase the portion of the portfolio that could be invested in “CCC” rated investments in return for an increased interest rate and expedited amortization. As a result of these transactions, we expected to have additional cushion under our borrowing base under the Revolving Facility that would allow us to better manage our capital in times of declining asset prices and market dislocation.

On July 30, 2009, we exceeded the permissible borrowing limit under the Revolving Facility for 30 consecutive days, resulting in an event of default under the Revolving Facility. As a result of this event of default, our lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral could have had a material adverse effect on our liquidity, financial condition and operations.

On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million senior secured revolving credit facility (the “Credit Facility”) with Madison Capital Funding LLC, in each case, described in “Note 13. Recapitalization Transaction” below, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets, other than those held by SBIC LP, have been pledged under the Credit Facility to secure our obligations thereunder.

On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:

 

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

 

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

 

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Table of Contents
    remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.

As of August 31, 2014 and February 28, 2014, there was $8.9 million and $0.0 million outstanding under the Credit Facility, respectively, and the Company was in compliance with all of the limitations and requirements of the Credit Facility. The carrying amount of the amount outstanding under the Credit Facility approximates its fair value. $2.3 million of financing costs related to the Credit Facility have been capitalized and are being amortized over the term of the facility. For the three months ended August 31, 2014 and 2013, we recorded $0.2 million and $0.1 million of interest expense related to the Credit Facility, respectively. For the three months ended August 31, 2014 and 2013, we recorded $0.1 million and $0.1 million of amortization of deferred financing costs related to the Credit Facility, respectively. The interest rates during the three and six months ended August 31, 2014 on the outstanding borrowings under the Credit Facility were 7.50% and 7.50%, respectively. The interest rates during the three and six months ended August 31, 2013 on the outstanding borrowings under the Credit Facility were 7.50% and 7.50%, respectively. For the six months ended August 31, 2014 and 2013, we recorded $0.4 million and $0.6 million of interest expense related to the Credit Facility, respectively. For the six months ended August 31, 2014 and 2013, we recorded $0.2 million and $0.2 million of amortization of deferred financing costs related to the Credit Facility, respectively.

The Credit Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Credit Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Credit Facility has an eight year term, consisting of a three year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Credit Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50.0% to 75.0% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company will pay the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period.

Our borrowing base under the Credit Facility was $42.2 million subject to the Credit Facility cap of $45.0 million at August 31, 2014 For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the SEC. Accordingly, the August 31, 2014 borrowing base relies upon the valuations set forth in the Annual Report on Form 10-K for the year ended February 28, 2014. The valuations presented in this Quarterly Report on Form 10-Q will not be incorporated into the borrowing base until after this Quarterly Report on Form 10-Q is filed with the SEC.

SBA Debentures

SBIC LP is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. As of August 31, 2014, we have funded SBIC LP with $45.5 million of equity capital, and have $64.0 million of SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150.0 million, which is up to twice its potential regulatory capital.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to ‘‘smaller’’ concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

SBIC LP is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC LP will receive SBA guaranteed debenture funding, which is dependent upon SBIC LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP’s assets over our stockholders and debtholders in the event we liquidate SBIC LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP upon an event of default.

 

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The Company received exemptive relief from the Securities and Exchange Commission to permit it to exclude the debt of SBIC LP guaranteed by the SBA from the definition of senior securities in the 200.0% asset coverage test under the 1940 Act. This allows the Company increased flexibility under the 200.0% asset coverage test by permitting it to borrow up to $150.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

As of August 31, 2014 and February 28, 2014, there was $64.0 million and $50.0 million outstanding of SBA debentures, respectively. The carrying amount of the amount outstanding of SBA debentures approximates its fair value. $2.1 million of financing costs related to the SBA debentures have been capitalized and are being amortized over the term of the commitment and drawdown. For the three and six months ended August 31, 2014, the Company recorded $0.4 million and $0.8 million, respectively, of interest expense related to the SBA debentures. For the three and six months ended August 31, 2013, the Company recorded $0.3 million and $0.6 million, respectively, of interest expense related to the SBA debentures. For the three and six months ended August 31, 2014, the Company recorded $0.1 million and $0.1 million, respectively, of amortization of deferred financing costs related to the SBA debentures. For the three and six months ended August 31, 2013, the Company recorded $0.05 million and $0.1 million, respectively, of amortization of deferred financing costs related to the SBA debentures. The weighted average interest rate during the six months ended August 31, 2014 and 2013 on the outstanding borrowings of the SBA debentures was 3.16% and 2.90%, respectively.

Notes

On May 10, 2013, the Company issued $42.0 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “Notes”). The Notes will mature on May 31, 2020, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 31, 2016. Interest will be payable quarterly beginning August 15, 2013.

On May 17, 2013, the Company closed an additional $6.3 million in aggregate principal amount of the Notes, pursuant to the full exercise of the underwriters’ option to purchase additional Notes.

As of August 31, 2014, the carrying amount and fair value of the Notes was $48.3 million and $49.4 million, respectively. The fair value of the Notes, which are publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a level 1 liability within the fair value hierarchy. As of August 31, 2014, $2.5 million of financing costs related to the Notes have been capitalized and are being amortized over the term of the Notes. For the three and six months ended August 31, 2014, we recorded $0.9 million and $1.8 million, respectively, of interest expense and $0.1 million and $0.2 million, respectively, of amortization of deferred financing costs related to the Notes. For the three and six months ended August 31, 2013, we recorded $0.9 million and $1.1 million, respectively, of interest expense and $0.09 million and $0.1 million, respectively, of amortization of deferred financing costs related to the Notes.

Note 7. Commitments and Contingencies

Contractual obligations

The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2014:

 

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

Long-Term Debt Obligations

   $ 121,200       $ 8,900       $ —         $ —         $ 112,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

The Company’s off-balance sheet arrangements consisted of $13.1 million and $12.2 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of August 31, 2014 and February 28, 2014, respectively. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s Consolidated Statement of Assets and Liabilities and are not reflected in the Company’s Consolidated Statements of Assets and Liabilities.

 

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Note 8. Directors Fees

The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three months ended August 31, 2014 and 2013, we accrued $0.05 million and $0.05 million for directors’ fees expense, respectively. For the six months ended August 31, 2014 and 2013, we accrued $0.1 million and $0.1 million for directors’ fees expense, respectively. As of August 31, 2014 and February 28, 2014, $0.05 million and $0.05 million in directors’ fees expense were unpaid and included in accounts payable and accrued expenses in the consolidated statements of assets and liabilities. As of August 31, 2014, we had not issued any common stock to our directors as compensation for their services.

Note 9. Stockholders’ Equity

On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of the LLC.

On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.

On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.

On November 13, 2009, we declared a dividend of $18.25 per share payable on December 31, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $2.50 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 of newly issued shares of common stock.

On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million. See “Note 13. Recapitalization Transaction.”

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

On November 12, 2010, we declared a dividend of $4.40 per share payable on December 29, 2010. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $1.2 million or $0.44 per share. Based on shareholder elections, the dividend consisted of approximately $1.2 million in cash and 596,235 shares of common stock.

On November 15, 2011, we declared a dividend of $3.00 per share payable on December 30, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 599,584 shares of common stock.

On November 9, 2012, the Company declared a dividend of $4.25 per share payable on December 31, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 853,455 shares of common stock.

 

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On October 30, 2013, the Company declared a dividend of $2.65 per share payable on December 27, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock.

Note 10. Earnings Per Share

In accordance with the provisions of FASB ASC 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and six months ended August 31, 2014 and 2013 (dollars in thousands except share and per share amounts):

 

     For the three months ended     For the six months ended  

Basic and diluted

   August 31,
2014
     August 31,
2013
    August 31,
2014
     August 31,
2013
 

Net increase (decrease) in net assets from operations

   $ 3,136       $ (41   $ 4,894       $ 3,759   

Weighted average common shares outstanding

     5,379,616         4,730,116        5,379,616         4,730,116   

Earnings (loss) per common share-basic and diluted

   $ 0.58       $ (0.01   $ 0.91       $ 0.79   

Note 11. Dividend

The Company did not declare any dividend payments during the quarters ended August 31, 2014 and August 31, 2013.

 

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Note 12. Financial Highlights

The following is a schedule of financial highlights for the six months ended August 31, 2014 and 2013:

 

     For the six months ended  
     August 31,
2014
    August 31,
2013
 

Per share data:

  

Net asset value at beginning of period

   $ 21.36      $ 22.98   

Net investment income(1)

     0.77        1.00   

Net realized and unrealized gains and (losses) on investments and derivatives

     0.14        (0.21
  

 

 

   

 

 

 

Net increase in net assets from operations

     0.91        0.79   

Net asset value at end of period

   $ 22.27      $ 23.77   

Net assets at end of period

   $ 119,817,820      $ 112,445,315   

Shares outstanding at end of period

     5,379,616        4,730,116   

Per share market value at end of period

   $ 16.06      $ 18.31   

Total return based on market value(2)

     1.31     7.58

Total return based on net asset value(3)

     4.26     3.45

Ratio/Supplemental data:

    

Ratio of net investment income to average, net assets(4)

     7.09     8.62

Ratio of operating expenses to average net assets(4)

     6.38     5.73

Ratio of incentive management fees to average net assets(4)

     2.01     1.42

Ratio of debt related expenses to average net assets(4)

     6.17     4.97

Ratio of total expenses to average net assets(4)

     14.56     12.11

Portfolio turnover rate(5)

     11.35     32.41

 

(1) Net investment income per share is calculated using the weighted average shares outstanding during the period.
(2) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.
(3) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions.
(4) Ratios are annualized.
(5) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value.

Note 13. Recapitalization Transaction

In July 2010, we consummated a recapitalization transaction that was necessitated by the fact that we had exceeded permissible borrowing limits under the Revolving Facility in July 2009, which resulted in an event of default under the Revolving Facility. As a result of the event of default under the Revolving Facility, the lender had the right to accelerate repayment of the outstanding indebtedness under the Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. We engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and consider alternatives for us in December 2008. On April 14, 2010, we entered into a stock purchase agreement with our Manager and certain of its affiliates and an assignment, assumption and novation agreement with our Manager, pursuant to which we assumed certain rights and obligations of our Manager under a debt commitment letter our Manager received from Madison Capital Funding LLC, indicating Madison Capital Funding’s willingness to provide us with the Credit Facility, subject to the satisfaction of certain terms and conditions. In addition, we and GSCP (NJ), L.P., our then external investment adviser, entered into a termination and release agreement, to be effective as of the closing of the transaction contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction contemplated by the stock purchase agreement.

 

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On July 30, 2010, the transactions contemplated by the stock purchase agreement with our Manager and certain of its affiliates was completed, and included the following actions:

 

    the private sale of shares of our common stock for $15.0 million in aggregate purchase price to our Manager and certain of its affiliates;

 

    the closing of the $40.0 million Credit Facility with Madison Capital Funding;

 

    the execution of a registration rights agreement with the investors in the private sale transaction, pursuant to which we agreed to file a registration statement with the SEC to register for resale the shares of our common stock sold in the private sale transaction;

 

    the execution of a trademark license agreement with our Manager pursuant to which our Manager granted us a non-exclusive, royalty-free license to use the “Saratoga” name, for so long as our Manager or one of its affiliates remains our investment adviser;

 

    replacing GSCP (NJ), L.P. as our investment adviser and administrator with our Manager by executing the Management Agreement, which was approved by our stockholders, and an administration agreement with our Manager;

 

    the resignations of Robert F. Cummings, Jr. and Richard M. Hayden, both of whom are affiliates of GSCP (NJ) L.P., as members of the board of directors and the election of Christian L. Oberbeck and Richard A. Petrocelli, both of whom are affiliates of our Manager, as members of the board of directors;

 

    the resignation of all of our then existing executive officers and the appointment by our board of directors of Mr. Oberbeck as our chief executive officer and Mr. Petrocelli as our chief financial officer, secretary and chief compliance officer; and

 

    our name change from “GSC Investment Corp.” to “Saratoga Investment Corp.”

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

Note 14. Subsequent Events

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no further subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the quarter ended August 31, 2014, except as disclosed below.

On September 17, 2014, the Company entered into a second amendment to the Revolving Facility with Madison Capital Funding LLC to, among other things, (1) extend the commitment termination date from February 24, 2015 to September 17, 2017; (2) extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events); (3) reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%; (4) reduce the applicable margin rate on LIBOR borrowings from 5.50% to 4.75%; (5) reduce the floor on base rate borrowings from 3.00% to 2.25%; and (6) reduce the floor on LIBOR borrowings from 2.00% to 1.25%.

On September 24, 2014, the Company announced that its Board of Directors adopted a new dividend policy to pay a regular quarterly cash dividend to shareholders. The Company will pay a quarterly dividend of $0.18 per share for the quarter ended August 31, 2014, which will be payable on November 28, 2014 to all stockholders of record at the close of business on November 3, 2014. The second dividend of $0.22 per share for the quarter ended November 30, 2014, will be payable on February 27, 2015 to all stockholders of record at the close of business on February 2, 2015.

On September 24, 2014, the Board of Directors also adopted a new dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. If the Company declares a dividend, its stockholders who have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of the Company’s common stock.

 

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On the same day, the Company also announced the approval of an open market share repurchase plan that allows it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published financial statements.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended February 28, 2014.

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 Quarterly Report on Form 10-Q 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 small business investment company and a regulated 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.

OVERVIEW

We are a Maryland corporation that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We invest primarily in leveraged loans and mezzanine debt issued by private U.S. middle market companies, which we define as companies having EBITDA of between $5 million and $50 million, both through direct lending and through participation in loan syndicates. We may also invest up to 30.0% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. We have elected and qualified to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

Corporate History

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

 

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

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

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

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

In January 2011, we registered for public resale the 982,842 shares of our common stock issued to Saratoga Investment Advisors and certain of its affiliates.

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

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

Critical Accounting Policies

Basis of Presentation

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

Investment Valuation

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820

 

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defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the statement of assets and liabilities date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

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

 

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

 

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

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

 

    The audit committee of our board of directors reviews each preliminary valuation and Saratoga Investment Advisors 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 Saratoga Investment Advisors, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

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

Revenue Recognition

Income Recognition

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

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

 

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

Paid-in-Kind Interest

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

Capital Gains Incentive Fee

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

Revenues

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

On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO, pursuant to which we act as its collateral manager. The Saratoga CLO was refinanced in October 2013 and its reinvestment period ends in October 2016. The Saratoga CLO remains 100% owned and managed by Saratoga Investment Corp. We receive a senior collateral management fee of 0.25% and a subordinate collateral management fee of 0.25% of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return equal to or greater than 12.0%.

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

Expenses

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

 

    organization;

 

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

 

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

 

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

 

    offerings of our common stock and other securities;

 

    investment advisory and management fees;

 

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

 

    transfer agent and custodial fees;

 

    federal and state registration fees;

 

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

 

    federal, state and local taxes;

 

    independent directors’ fees and expenses;

 

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

 

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

 

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

 

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

 

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

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

The incentive fee had two parts:

 

    A fee, payable quarterly in arrears, equal to 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of the net assets at the end of the immediately preceding quarter, that exceeded a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, our investment adviser received no incentive fee unless our pre-incentive fee net investment income exceeded the hurdle rate of 1.875%. Amounts received as a return of capital were not included in calculating this portion of the incentive fee. Since the hurdle rate was based on net assets, a return of less than the hurdle rate on total assets could still have resulted in an incentive fee.

 

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

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

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

 

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

 

    Under the “catch up” provision, 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income that exceeds 1.875% (7.5% annualized) but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors. This will enable Saratoga Investment Advisors to receive 20.0% of all net investment income as such amount approaches 2.344% in any quarter, and Saratoga Investment Advisors will receive 20.0% of any additional net investment income. Under the investment advisory and management agreement with our former investment adviser, GSCP (NJ), L.P. only received 20.0% of the excess net investment income over 1.875%.

 

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

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

 

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Portfolio and investment activity

Corporate Debt Portfolio Overview

 

    At August 31,
2014
    At February 28,
2014
 
    ($ in millions)  

Number of investments(1)

    64        59   

Number of portfolio companies(1)

    39        37   

Average investment size(1)

  $ 3.4      $ 3.2   

Weighted average maturity(1)

    3.9 yrs      4.3 yrs 

Number of industries(1)

    18        16   

Average investment per portfolio company(1)

  $ 5.5      $ 5.0   

Non-performing or delinquent investments(1)

  $ 0.4      $ 0.3   

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

  $ 76.6(37.8 )%    $ 70.6(40.1 )% 

Weighted average current coupon(2)

    13.0     12.5

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

  $ 126.0(62.2 )%    $ 105.4(59.9 )% 

Weighted average current spread over LIBOR(2)

    8.5     7.3

 

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

During the three months ended August 31, 2014, we made $31.8 million investments in new or existing portfolio companies and had $15.7 million in aggregate amount of exits and repayments resulting in net investments of $16.1 million for the period. During the three months ended August 31, 2013, we made $54.9 million investments in the new or existing portfolio companies and had $29.6 million in aggregate amount of exits and repayments resulting in net investments of $25.3 million for the period.

During the six months ended August 31, 2014, we made $53.3 million investments in new or existing portfolio companies and had $24.4 million in aggregate amount of exits and repayments resulting in net investments of $28.9 million for the period. During the six months ended August 31, 2013, we made $87.9 million investments in new or existing portfolio companies and had $54.9 million in aggregate amount of exits and repayments resulting in net investments of $33.0 million for the period.

Our portfolio composition based on fair value at August 31, 2014 and February 28, 2014 was as follows:

Portfolio composition

 

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

Current
Yield
 

Middle market loans

     11.3     6.5     15.7     6.2

First lien term loans

     48.9        11.0        39.0        10.7   

Second lien term loans

     12.4        11.5        13.5        11.1   

Senior secured notes

     10.6        14.7        14.6        13.8   

Unsecured notes

     2.5        14.2        2.7        15.2   

Saratoga CLO subordinated notes

     8.5        23.9        9.5        18.6   

Equity interests

     5.8        N/A        5.0        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     12.2     100.0     11.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at August 31, 2014 and February 28, 2014, was composed of $304.4 million and $301.3 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks. (See “Risk Factors—Our investment in Saratoga CLO 2013-1 Ltd. constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2014.). We do not consolidate the Saratoga CLO portfolio in our financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO portfolio investments. However, at August 31, 2014, $297.6 million or 98.9% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and no Saratoga CLO portfolio investments were in default. At February 28, 2014, $298.9 million or 99.5% of the Saratoga CLO portfolio investments in terms of market value had a CMR color rating of green or yellow and no Saratoga CLO portfolio investments were in default.

 

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

The CMR distribution of our investments at August 31, 2014 and February 28, 2014 was as follows:

Portfolio CMR distribution

 

     At August 31, 2014     At February 28, 2014  

Color

Score

   Investments
at
Fair Value
     Percentage
of

Total
Portfolio
    Investments
at
Fair Value
     Percentage
of

Total
Portfolio
 
     ($ in thousands)  

Green

   $ 179,293         75.9   $ 159,207         77.4

Yellow

     15,531         6.6        8,466         4.1   

Red

     7,785         3.3        8,270         4.0   

N/A(1)

     33,711         14.2        29,902         14.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 236,320         100.0   $ 205,845         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

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The CMR distribution of Saratoga CLO investments at August 31, 2014 and February 28, 2014 was as follows:

Portfolio CMR distribution

 

     At August 31, 2014     At February 28, 2014  

Color

Score

   Investments
at
Fair Value
     Percentage
of

Total
Portfolio
    Investments
at
Fair Value
     Percentage
of

Total
Portfolio
 
     ($ in thousands)  

Green

   $ 289,563         96.2   $ 284,796         94.8

Yellow

     8,068         2.7        14,106         4.7   

Red

     3,389         1.1        1,589         0.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 301,020         100.0   $ 300,491         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Portfolio composition by industry grouping at fair value

The following table shows the portfolio composition by industry grouping at fair value at August 31, 2014 and February 28, 2014:

 

     At August 31, 2014     At February 28, 2014  
     Investments
at
Fair Value
     Percentage
of

Total
Portfolio
    Investments
at
Fair Value
     Percentage
of

Total
Portfolio
 
     ($ in thousands)  

Business Services

   $ 47,700         20.2   $ 57,330         27.9

Healthcare Services

     42,227         17.9        23,810         11.6   

Software

     24,011         10.2        21,897         10.6   

Structured Finance Securities(1)

     20,090         8.5        19,570         9.5   

Consumer Services

     16,963         7.2        21,738         10.5   

Food and Beverage

     12,913         5.4        17,286         8.4   

Technology

     12,759         5.4        —           —     

Automotive

     10,672         4.5        10,621         5.2   

Media

     9,454         4.0        6,741         3.3   

Electronics

     6,554         2.8        6,645         3.2   

Utilities

     6,105         2.6        —           —     

Manufacturing

     5,940         2.5        5,970         2.9   

Environmental

     5,812         2.5        1,191         0.6   

Metals

     5,785         2.4        5,249         2.5   

Consumer Products

     5,378         2.3        6,118         3.0   

Building Products

     1,956         0.8        344         0.2   

Publishing

     1,489         0.6        901         0.4   

Homebuilding

     411         0.2        344         0.2   

Education

     101         0.0        —           —     

Aerospace

     —           —          90         0.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 236,320         100.0   $ 205,845         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

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The following table shows the portfolio composition by industry grouping of Saratoga CLO at fair value at August 31, 2014 and February 28, 2014:

 

     At August 31, 2014     At February 28, 2014  
     Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Healthcare

   $ 34,718         11.5   $ 37,896         12.6

Business Equipment and Services

     31,543         10.5        28,386         9.4   

Chemicals/Plastics

     27,214         9.0        26,345         8.8   

Conglomerate

     19,946         6.6        24,285         8.1   

Industrial Equipment

     19,160         6.4        24,143         8.0   

Retailers (Except Food and Drugs)

     17,670         5.9        15,314         5.1   

Leisure Goods/Activities/Movies

     16,271         5.4        8,990         3.0   

Drugs

     13,260         4.4        11,873         4.0   

Electronics/Electric

     12,013         4.0        11,861         4.0   

Aerospace and Defense

     10,491         3.5        20,465         6.8   

Food Products

     9,956         3.3        12,450         4.1   

Financial Intermediaries

     8,731         2.9        8,138         2.7   

Food Services

     8,502         2.8        5,612         1.9   

Automotive

     6,424         2.1        10,279         3.4   

Containers/Glass Products

     6,387         2.1        2,906         1.0   

Telecommunications

     6,163         2.0        6,627         2.2   

Food/Drug Retailers

     5,840         1.9        5,012         1.7   

Utilities

     5,754         1.9        5,830         1.9   

Oil and Gas

     5,714         1.9        2,488         0.8   

Insurance

     5,482         1.8        5,517         1.8   

Lodging and Casinos

     5,438         1.8        499         0.2   

Publishing

     5,185         1.7        2,913         1.0   

Brokers/Dealers/Investment Houses

     4,920         1.6        3,740         1.2   

Healthcare and Pharmaceuticals

     2,961         1.0        —           —     

Cable and Satellite Television

     2,582         0.9        2,666         0.9   

Telecommunications/Cellular

     2,423         0.8        2,460         0.8   

Media

     2,007         0.7        1,000         0.3   

Nonferrous Metals/Minerals

     1,973         0.7        4,328         1.4   

Ecological Services and Equipment

     826         0.3        1,241         0.4   

Building and Development

     494         0.2        3,246         1.1   

Broadcast Radio and Television

     489         0.2        1,505         0.5   

Health Insurance

     483         0.2        —           —     

Computers and Electronics

     —           —          1,479         0.5   

Gaming and Hotels

     —           —          500         0.2   

Leasing

     —           —          497         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 301,020         100.0   $ 300,491         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Portfolio composition by geographic location at fair value

The following table shows the portfolio composition by geographic location at fair value at August 31, 2014 and February 28, 2014. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

     At August 31, 2014     At February 28, 2014  
     Investments
at
Fair Value
     Percentage
of Total
Portfolio
    Investments
at
Fair Value
     Percentage
of Total
Portfolio
 
     ($ in thousands)  

Southeast

   $ 94,390         39.9   $ 83,161         40.4

Midwest

     45,119         19.1        41,453         20.1   

Northeast

     40,778         17.3        17,191         8.4   

West

     35,943         15.2        44,470         21.6   

Other(1)

     20,090         8.5        19,570         9.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 236,320         100.0   $ 205,845         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Results of operations

Operating results for the three and six months ended August 31, 2014 and 2013 are as follows:

 

     For the three months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Total investment income

   $ 6,475       $ 5,388   

Total expenses, net

     4,403         3,116   
  

 

 

    

 

 

 

Net investment income

     2,072         2,272   

Net realized gains

     360         546   

Net unrealized gains (losses)

     704         (2,859
  

 

 

    

 

 

 

Net increase/(decrease) in net assets resulting from operations

   $ 3,136       $ (41
  

 

 

    

 

 

 

 

     For the six months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Total investment income

   $ 12,619       $ 11,406   

Total expenses, net

     8,486         6,664   
  

 

 

    

 

 

 

Net investment income

     4,133         4,742   

Net realized gains

     442         1,074   

Net unrealized gains (losses)

     319         (2,057
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 4,894       $ 3,759   
  

 

 

    

 

 

 

Investment income

The composition of our investment income for the three and six months ended August 31, 2014 and 2013 was as follows:

 

     For the three months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Interest from investments

   $ 6,037       $ 4,792   

Management fee income from Saratoga CLO

     375         481   

Interest from cash and cash equivalents and other income

     63         115   
  

 

 

    

 

 

 

Total

   $ 6,475       $ 5,388   
  

 

 

    

 

 

 

 

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Table of Contents
     For the six months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Interest from investments

   $ 11,639       $ 9,963   

Management fee income from Saratoga CLO

     767         979   

Interest from cash and cash equivalents and other income

     213         464   
  

 

 

    

 

 

 

Total

   $ 12,619       $ 11,406   
  

 

 

    

 

 

 

For the three months ended August 31, 2014, total investment income increased $1.1 million, or 20.2% compared to the three months ended August 31, 2013. Interest income from investments increased $1.2 million, or 26.0%, to $6.0 million for the three months ended August 31, 2014, from $4.8 million for the three months ended August 31, 2013. This reflects an increase of 25.8% in total investments to $236.3 million at August 31, 2014 from $187.8 million at August 31, 2013, with the weighted average yield also decreasing to 12.2% from 13.2%.

For the six months ended August 31, 2014, total investment income increased $1.2 million, or 10.6%, compared to the six months ended August 31, 2013. Interest income from investments increased $1.6 million, or 16.8%, to $11.6 million for the six months ended August 31, 2014, from $10.0 million for the six months ended August 31, 2013. This reflects an increase of 25.8% in total investments to $236.3 million at August 31, 2014 from $187.8 million at August 31, 2013, with the weighted average yield also decreasing to 12.2% from 13.2%.

For the three and six months ended August 31, 2014 and 2013, total PIK income was $0.3 million and $0.6 million, and $0.3 million and $0.5 million, respectively.

The Saratoga CLO was refinanced in October 2013. As a result, proceeds from principal payments in the loan portfolio of Saratoga CLO must now be used to paydown its outstanding notes. Thus, the management fee income and investment income that we receive from Saratoga CLO has declined from historical periods decreasing $0.1 million, or 21.9%, to $0.4 million and $0.2 million, or 21.6%, to $0.8 million, respectively, for the three and six months ended August 31, 2014 from $0.5 million and $1.0 million for the three and six months ended August 31, 2013, respectively.

Operating expenses

The composition of our expenses for the three and six months ended August 31, 2014 and 2013 was as follows:

Operating Expenses

 

     For the three months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Interest and debt financing expenses

   $ 1,809       $ 1,604   

Base management fees

     1,037         811   

Professional fees

     276         235   

Incentive management fees

     790         (40

Administrator expenses

     250         250   

Insurance

     84         119   

Directors fees and expenses

     56         45   

General and administrative and other expenses

     101         92   
  

 

 

    

 

 

 

Total expenses

   $ 4,403       $ 3,116   
  

 

 

    

 

 

 

 

     For the six months ended  
     August 31, 2014      August 31, 2013  
     ($ in thousands)  

Interest and debt financing expenses

   $ 3,597       $ 2,731   

Base management fees

     2,006         1,548   

Professional fees

     711         566   

Incentive management fees

     1,171         781   

Administrator expenses

     500         500   

Insurance

     168         239   

Directors fees and expenses

     109         96   

General and administrative and other expenses

     224         203   
  

 

 

    

 

 

 

Total expenses

   $ 8,486       $ 6,664   
  

 

 

    

 

 

 

 

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For the three months ended August 31, 2014, total operating expenses increased $1.3 million, or 41.3% compared to the three months ended August 31, 2013. For the six months ended August 31, 2014, total operating expenses increased $1.8 million or 27.3% compared to the six months ended August 31, 2013.

For the three months ended August 31, 2014 and 2013, the increase in interest and credit facility expense is primarily attributable to an increase in the amount of outstanding debt as compared to the prior periods, with higher levels of both the SBA debentures and the revolving credit facility outstanding. For the three months ended August 31, 2014, the weighted average interest rate on our outstanding indebtedness was 5.14% compared to 5.53% for the three months ended August 31, 2013. This decrease was primarily driven by an increase in SBA debentures that carry a lower interest rate.

For the six months ended August 31, 2014 and 2013, the increase in interest and credit facility expense is primarily attributable to an increase in the amount of outstanding debt as compared to the prior periods, with higher levels of both the SBA debentures and the revolving credit facility outstanding. For the six months ended August 31, 2014, the weighted average interest rate on our outstanding indebtedness was 5.22% compared to 4.85% for the six months ended August 31, 2013. This increase was primarily driven by the interest rate on the note issuance.

For the three months ended August 31, 2014, base management fees increased $0.2 million, or 27.9% compared to the three months ended August 31, 2013. For the six months ended August 31, 2014, base management fees increased $0.5 million, or 29.6% compared to the six months ended August 31, 2013. The increase in base management fees results from the increase in the average value of our total assets, less cash and cash equivalents, from $183.9 million to $235.1 million as of August 31, 2013 and 2014, respectively.

For the three and six months ended August 31, 2014, professional fees increased $0.04 million or 17.4%, and $0.1 million, or 25.6%, respectively, compared to the three and six months ended August 31, 2013.

For the three months ended August 31, 2014, incentive management fees increased $0.8 million to $0.8 million, compared to a reduction of $0.04 million for the three months ended August 31, 2013. For the six months ended August 31, 2014, incentive management fees increased $0.4 million or 49.9% compared to the six months ended August 31, 2013. The increase in incentive management fees is primarily attributable to an increase in accrued incentive fees related to higher net investment income and incentive fee capital gains.

As discussed above, the increase in interest and credit facility expense for the three and six months ended August 31, 2014 and 2013 is primarily attributable to an increase in the amount of outstanding debt as compared to the prior periods. For the six months ended August 31, 2014, the weighted average interest rate on the outstanding borrowings under the Credit Facility and notes payable was 7.50%, however the notes were only issued and outstanding from May 10, 2013, while they were outstanding for the full six months ended August 31, 2014. For the three months ended August 31, 2014 and 2013, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.16% and 3.16%, respectively. For the six months ended August 31, 2014 and 2013, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.16% and 2.90%, respectively.

Net realized gains/losses on sales of investments

For the three months ended August 31, 2014, the Company had $15.7 million of sales, repayments, exits or restructurings resulting in $0.4 million of net realized gains.

For the six months ended August 31, 2014, the Company had $24.4 million of sales, repayments, exits or restructurings resulting in $0.4 million of net realized gains.

For the three months ended August 31, 2013, the Company had $29.6 million of sales, repayments, exits or restructurings resulting in $0.5 million of net realized gains.

For the six months ended August 31, 2013, the Company had $54.9 million of sales, repayments, exits or restructurings resulting in $1.1 million of net realized gains.

 

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Net unrealized appreciation/depreciation on investments

For the three months ended August 31, 2014, our investments had net unrealized appreciation of $0.7 million versus net unrealized depreciation of $2.9 million for the three months ended August 31, 2013. For the six months ended August 31, 2014, our investments had net unrealized appreciation of $0.3 million versus net unrealized depreciation of $2.1 million for the six months ended August 31, 2013. The most significant cumulative changes in unrealized appreciation and depreciation for the six months ended August 31, 2014, were the following:

Six Months ended August 31, 2014

 

Issuer

  

Asset Type

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

Elyria Foundry Company, LLC

   Senior Secured Note    $ 8,860       $ 5,785       $ (3,075   $ (859

Saratoga CLO

   Other/ Structured Finance Securities      16,556         20,090         3,534        520   

USS Parent Holding Corp.

   Voting Common Stock      3,026         5,567         2,541        539   

The $0.9 million of unrealized depreciation in our investment in Elyria Foundry Company, LLC was due to a decline in the company’s performance as a result of volume declines from key energy customers.

The $0.5 million of unrealized appreciation in our investment in the Saratoga CLO subordinated notes was due to a decrease in the discount rate from the previous year end.

The $0.5 million of unrealized appreciation in our investment in the common stock of USS Parent Holding Corp. was due to the sale of the company to a private equity firm.

The most significant cumulative changes in unrealized appreciation and depreciation for the six months ended August 31, 2013, were the following:

Six months ended August 31, 2013

 

Issuer

  

Asset Type

   Cost      Fair
Value
     Total
Unrealized

Appreciation/
(Depreciation)
    YTD Change
in Unrealized
Appreciation/
(Depreciation)
 
                 ($ in thousands)        

Elyria Foundry Company, LLC

   Senior Secured Note    $ 8,860       $ 7,147       $ (1,713   $ (1,713

Saratoga CLO

   Other/ Structured Finance Securities      16,805         19,742         2,937        (3,635

USS Parent Holding Corp.

   Voting Common Stock      3,026         4,023         997        1,157   

The $1.7 million of unrealized depreciation in our investment in Elyria Foundry Company, LLC was due to lower operating performance as a result of weaker oil and gas demand.

The $3.6 million of unrealized depreciation in our investment in the Saratoga CLO subordinated notes was due to lower net present value of projected future cash flows partially offset by a reduction in the investment basis of the subordinated notes.

The $1.2 million of unrealized appreciation in our investment in the common stock of USS Parent Holding Corp. was due to improved operating performance.

Changes in net assets resulting from operations

For the three months ended August 31, 2014, we recorded a net increase in net assets resulting from operations of $3.1 million versus a net decrease in net assets resulting from operations of $0.04 million for the three months ended August 31, 2013. Based on 5,379,616 and 4,730,116 weighted average common shares outstanding for the three months ended August 31, 2014 and August 31, 2013, respectively, our per share net increase in net assets resulting from operations was $0.58 for the three months ended August 31, 2014 versus a per share net decrease in net assets from operations of $(0.01) for the three months ended August 31, 2013.

 

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For the six months ended August 31, 2014, we recorded a net increase in net assets resulting from operations of $4.9 million versus a net increase in net assets resulting from operations of $3.8 million for the six months ended August 31, 2013. Based on 5,379,616 and 4,730,116 weighted average common shares outstanding for the six months ended August 31, 2014 and August 31, 2013, respectively, our per share net increase in net assets resulting from operations was $0.91 for the six months ended August 31, 2014 versus a per share net increase in net assets from operations of $0.79 for the six months ended August 31, 2013.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

Although we expect to fund the growth of our investment portfolio through the net proceeds from SBA debenture drawdowns and future equity offerings, including our dividend reinvestment plan, and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our plans to raise capital will be successful. In this regard, because our common stock has historically traded at a price below our current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital. Our stockholders approved a proposal at our annual meeting of stockholders held on September 30, 2014 that authorizes us to sell shares of our common stock at an offering price per share to investors that is not less than 85% of our then current net asset value per share in one or more offerings for a period ending on the earlier of September 30, 2015 or the date of our next annual meeting of stockholders. We would need stockholder approval of a similar proposal to issue shares below net asset value per share at any time after the earlier of September 30, 2015 or our next annual meeting of stockholders.

In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the distribution requirement applicable to RICs under Subchapter M of the Code. In satisfying this distribution requirement, we have in the past relied on IRS issued private letter rulings concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20% of the aggregate declared distribution. We may rely on these IRS private letter rulings in future periods to satisfy our RIC distribution requirement.

Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. Our asset coverage ratio, as defined in the 1940 Act, was 309.5% as of August 31, 2014 and 337.9% as of February 28, 2014. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable terms, if at all.

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

Madison revolving credit facility

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

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

 

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

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

Interest Rate and Fees. Under the Credit Facility, funds are borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 2.00%, plus an applicable margin of 5.50%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 3.00%, and the applicable margin over such alternative base rate is 4.50%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Credit Facility.

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

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

 

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

 

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

 

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

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

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

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

 

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of “eligible” pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.

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

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

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

 

    an Interest Coverage Ratio of less than 150.0%;

 

    an Overcollateralization Ratio of less than 175.0%;

 

    the filing of certain ERISA or tax liens;

 

    the occurrence of certain “Manager Events” such as:

 

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

 

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

 

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

 

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

 

    occurrence of any event constituting “cause” under the Collateral Management Agreement between the Company and Saratoga CLO (the “CLO Management Agreement”), delivery of a notice under Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.

 

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

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

On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:

 

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

 

    extend the Revolving Period from July 30, 2013 to February 24, 2015; and

 

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

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

 

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

 

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

 

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

 

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

As of August 31, 2014, we had $8.9 million outstanding under the Credit Facility and $64.0 million SBA-guaranteed debentures outstanding (which are discussed below). As of February 28, 2014 we had no outstanding balance under the Credit Facility and $50.0 million SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at August 31, 2014 and February 28, 2014 was $42.2 million, and $44.6 million, respectively.

Our asset coverage ratio, as defined in the 1940 Act, was 309.5% as of August 31, 2014 and 337.9% as of February 28, 2014.

SBA-guaranteed debentures

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

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

SBA regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of August 31, 2014, our SBIC subsidiary had $45.5 million in regulatory capital and $64.0 million SBA-guaranteed debentures outstanding.

 

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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.

Unsecured notes

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

 

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

 

    we will not violate (regardless of whether we are subject to) Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to the Company if it determines to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the BDC’s status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986. Currently these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.

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

At August 31, 2014 and February 28, 2014, the fair value of investments, cash and cash equivalents and cash and cash equivalents, securitization accounts were as follows:

 

     At August 31,
2014
    At February 28,
2014
 
     Fair Value      Percent
of
Total
    Fair Value      Percent
of
Total
 
     ($ in thousands)  

Cash and cash equivalents

   $ 271         0.1   $ 3,294         1.6

Cash and cash equivalents, securitization accounts

     3,216         1.3        3,293         1.6   

Middle market loans

     26,814         11.2        32,390         15.2   

First lien term loans

     115,589         48.2        80,246         37.8   

Second lien term loans

     29,262         12.2        27,804         13.1   

Senior secured notes

     25,035         10.4        30,032         14.1   

Unsecured notes

     5,909         2.5        5,471         2.6   

Structured finance securities

     20,090         8.4        19,570         9.2   

Equity Interest

     13,621         5.7        10,332         4.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 239,807         100.0   $ 212,432         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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

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

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

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

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

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

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

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

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

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

 

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Contractual obligations

The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2014:

 

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

Long-Term Debt Obligations

   $ 121,200       $ 8,900       $       $       $ 112,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet arrangements

The Company’s off-balance sheet arrangements consisted of $13.1 million and $12.2 million of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of August 31, 2014 and February 28, 2014, respectively. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s Consolidated Statement of Assets and Liabilities and are not reflected in the Company’s Consolidated Statements of Assets and Liabilities.

On July 10, 2014, our board of directors appointed Henri J. Steenkamp to serve as our Chief Financial Officer and Chief Compliance Officer. As previously disclosed, Mr. Steenkamp was previously appointed to serve as our Interim Chief Financial Officer and Interim Chief Compliance Officer on March 4, 2014.

On July 10, 2014, our board of directors, including a majority of the independent directors, approved the annual continuation of our investment advisory and management agreement with Saratoga Investment Advisors, LLC. Our board of directors also approved the renewal of the administration agreement with Saratoga Investment Advisors, LLC for an additional one-year term and determined to maintain the cap on the payment or reimbursement of expenses by us thereunder to $1.0 million for the additional one-year term.

Recent Developments

On September 17, 2014, we entered into a second amendment to the Revolving Facility with Madison Capital Funding LLC to, among other things, (1) extend the commitment termination date from February 24, 2015 to September 17, 2017; (2) extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events); (3) reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%; (4) reduce the applicable margin rate on LIBOR borrowings from 5.50% to 4.75%; (5) reduce the floor on base rate borrowings from 3.00% to 2.25%; and (6) reduce the floor on LIBOR borrowings from 2.00% to 1.25%.

On September 24, 2014, the Company announced that its Board of Directors adopted a new dividend policy to pay a regular quarterly cash dividend to shareholders. The Company will pay a quarterly dividend of $0.18 per share for the quarter ended August 31, 2014, which will be payable on November 28, 2014 to all stockholders of record at the close of business on November 3, 2014. The second dividend of $0.22 per share for the quarter ended November 30, 2014, will be payable on February 27, 2015 to all stockholders of record at the close of business on February 2, 2015.

On September 24, 2014, the Company also adopted a new dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. If the Company declares a dividend, its stockholders who have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of the Company’s common stock.

On the same day, the Company also announced the approval of an open market share repurchase plan that allows it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks have not changed materially from the risks reported in our Form 10-K for the year ended February 28, 2014.

 

Item 4. Controls and Procedures

 

  (a)

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of

 

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  the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our chief executive officer and our chief financial officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

 

(b) There have been no changes in our internal control over financial reporting that occurred during the quarter ended August 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On August 31, 2012, a complaint was filed in the United States Bankruptcy Court for the Southern District of New York by GSC Acquisition Holdings, LLC against us to recover, among other things, approximately $2.6 million for the benefit of the estates and the general unsecured creditors of GSC Group, Inc. and its affiliates, including the Company’s former investment adviser, GSCP (NJ), L.P. The complaint alleges that the former investment adviser made a constructively fraudulent transfer of $2.6 million in deferred incentive fees by waiving them in connection with the termination of the Management Agreement with us, and that the termination of the Management Agreement was itself a fraudulent transfer. These transfers, the complaint alleges, were made without receipt of reasonably equivalent value and while the former investment adviser was insolvent. The complaint has not yet been served, and the plaintiff’s motion for authority to prosecute the case on behalf of the estates was taken under advisement by the court on October 1, 2012. We opposed that motion. We believe that the claims in this lawsuit are without merit and, if the plaintiff is authorized to proceed, intend to vigorously defend against this action.

Except as discussed above, neither we nor our wholly-owned subsidiaries, Saratoga Investment Funding LLC and Saratoga Investment Corp. SBIC LP, are currently subject to any material legal proceedings.

 

Item 1A. Risk Factors

Other than as set forth below, there have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended February 28, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3. Defaults upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

On July 10, 2014, our board of directors appointed Henri J. Steenkamp to serve as our Chief Financial Officer and Chief Compliance Officer. As disclosed in Item 5.02 of the Current Report on Form 8-K filed by us on March 7, 2014 (which Form 8-K is incorporated herein by reference), Mr. Steenkamp was previously appointed to serve as our Interim Chief Financial Officer and Interim Chief Compliance Officer.

 

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Item 6. Exhibits

Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):

 

Exhibit

Number

 

Description of Document

31.1*   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1*   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2*   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

* Submitted herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    SARATOGA INVESTMENT CORP.
Date: October 14, 2014   By  

/s/ CHRISTIAN L. OBERBECK

    Christian L. Oberbeck
    Chief Executive Officer
  By  

/s/ HENRI J. STEENKAMP

    Henri J. Steenkamp
    Chief Financial Officer and Chief Compliance Officer

 

61

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Christian L. Oberbeck, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Saratoga Investment Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 14, 2014

 

/s/ CHRISTIAN L. OBERBECK

Christian L. Oberbeck
Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Henri J. Steenkamp, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Saratoga Investment Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 14, 2014      
     

/s/ HENRI J. STEENKAMP

      Name: Henri J. Steenkamp
      Chief Financial Officer and Chief Compliance Officer
EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the accompanying Quarterly Report of Saratoga Investment Corp. on Form 10-Q (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Christian L. Oberbeck, the Chief Executive Officer, certifies that, to the best of his knowledge:

 

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

 

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Saratoga Investment Corp.

 

Date: October 14, 2014      
     

/s/ CHRISTIAN L. OBERBECK

      Name: Christian L. Oberbeck
      Chief Executive Officer
EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the accompanying Quarterly Report of Saratoga Investment Corp. on Form 10-Q (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Henri J. Steenkamp, the Chief Financial Officer, Chief Compliance Officer and Secretary of Saratoga Investment Corp., certifies that, to the best of his knowledge:

 

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

 

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Saratoga Investment Corp.

 

Date: October 14, 2014      
     

/s/ HENRI J. STEENKAMP

      Name: Henri J. Steenkamp
      Chief Financial Officer and Chief Compliance Officer