Saratoga Investment Corp.
SARATOGA INVESTMENT CORP. (Form: 10-Q, Received: 01/14/2014 17:03:07)

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 November 30, 2013

 

o

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 o

 

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 o No o

 

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 o

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer x

 

Smaller Reporting Company o

 

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

 

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

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 


 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Statements of Assets and Liabilities as of November 30, 2013 (unaudited) and February 28, 2013

3

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended November 30, 2013 and 2012 (unaudited)

4

 

 

 

 

Consolidated Schedules of Investments as of November 30, 2013 (unaudited) and February 28, 2013

5

 

 

 

 

Consolidated Statements of Changes in Net Assets for the nine months ended November 30, 2013 and 2012 (unaudited)

11

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended November 30, 2013 and 2012 (unaudited)

12

 

 

 

 

Notes to Consolidated Financial Statements as of November 30, 2013 (unaudited)

13

 

 

 

Item 2.

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

36

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

PART II

OTHER INFORMATION

53

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 1A.

Risk Factors

53

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3.

Defaults upon Senior Securities

53

 

 

 

Item 4.

Mine Safety Disclosures

54

 

 

 

Item 5.

Other Information

54

 

 

 

Item 6.

Exhibits

54

 

 

 

Signatures

 

55

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Saratoga Investment Corp.

 

Consolidated Statements of Assets and Liabilities

 

 

 

As of

 

 

 

November 30, 2013

 

February 28, 2013

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Investments at fair value

 

 

 

 

 

Non-control/non-affiliate investments (amortized cost of $180,323,606 and $130,465,086, respectively)

 

$

179,759,938

 

$

129,563,428

 

Control investments (cost of $16,555,808 and $18,944,966 respectively)

 

19,018,842

 

25,516,959

 

Total investments at fair value (amortized cost of $196,879,414 and $149,410,052 respectively)

 

198,778,780

 

155,080,387

 

Cash and cash equivalents

 

3,359,983

 

149,025

 

Cash and cash equivalents, reserve accounts

 

1,599,132

 

12,086,142

 

Interest receivable, (net of reserve of $310,146 and $53,543, respectively)

 

2,751,138

 

2,889,358

 

Due from manager

 

4,929

 

 

Deferred debt financing costs, net

 

4,008,926

 

2,090,184

 

Management fee receivable

 

166,682

 

215,853

 

Other assets

 

99,597

 

83,407

 

Receivable from unsettled trades

 

 

1,817,074

 

Total assets

 

$

210,769,167

 

$

174,411,430

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Revolving credit facility

 

$

4,000,000

 

$

24,300,000

 

SBA debentures payable

 

40,000,000

 

36,000,000

 

Notes payable

 

48,300,000

 

 

Dividend payable

 

2,507,112

 

 

Management and incentive fees payable

 

3,587,061

 

4,509,322

 

Accounts payable and accrued expenses

 

381,485

 

435,038

 

Interest and debt fees payable

 

514,333

 

257,796

 

Due to manager

 

273,083

 

222,513

 

Total liabilities

 

$

99,563,074

 

$

65,724,669

 

 

 

 

 

 

 

NET ASSETS

 

 

 

 

 

Common stock, par value $.001, 100,000,000 common shares authorized, 5,379,616 and 4,730,116 common shares issued and outstanding, respectively

 

$

5,380

 

$

4,730

 

Capital in excess of par value

 

184,851,122

 

174,824,076

 

Distribution in excess of net investment income

 

(29,418,170

)

(24,522,951

)

Accumulated net realized loss from investments and derivatives

 

(46,131,603

)

(47,289,427

)

Net unrealized appreciation on investments and derivatives

 

1,899,364

 

5,670,333

 

Total Net Assets

 

111,206,093

 

108,686,761

 

 

 

 

 

 

 

Total liabilities and Net Assets

 

$

210,769,167

 

$

174,411,430

 

 

 

 

 

 

 

NET ASSET VALUE PER SHARE

 

$

20.67

 

$

22.98

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

Saratoga Investment Corp.

 

Consolidated Statements of Operations

 

(unaudited)

 

 

 

For the three months ended
November 30

 

For the nine months ended
November 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME

 

 

 

 

 

 

 

 

 

Interest from investments

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate investments

 

$

4,279,445

 

$

2,190,350

 

$

11,534,271

 

$

6,129,508

 

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

 

161,485

 

276,245

 

634,408

 

821,830

 

Control investments

 

556,291

 

1,046,285

 

2,791,830

 

3,186,751

 

Total interest income

 

4,997,221

 

3,512,880

 

14,960,509

 

10,138,089

 

Interest from cash and cash equivalents

 

1,316

 

731

 

7,181

 

5,368

 

Management fee income

 

421,198

 

500,454

 

1,400,039

 

1,500,519

 

Other income

 

381,480

 

19,750

 

838,956

 

172,310

 

Total investment income

 

5,801,215

 

4,033,815

 

17,206,685

 

11,816,286

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Interest and debt financing expenses

 

1,611,221

 

529,858

 

4,342,657

 

1,808,586

 

Base management fees

 

876,345

 

528,735

 

2,424,167

 

1,492,345

 

Professional fees

 

312,992

 

347,459

 

879,247

 

986,781

 

Administrator expenses

 

250,000

 

250,000

 

750,000

 

750,000

 

Incentive management fees

 

(561,539

)

(412,654

)

219,813

 

887,020

 

Insurance

 

117,955

 

128,891

 

357,184

 

389,506

 

Directors fees and expenses

 

35,978

 

53,705

 

131,978

 

155,705

 

General & administrative

 

251,058

 

117,357

 

440,844

 

265,720

 

Other expense

 

9,172

 

1,311

 

21,207

 

4,434

 

Total expenses

 

2,903,182

 

1,544,662

 

9,567,097

 

6,740,097

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT INCOME

 

2,898,033

 

2,489,153

 

7,639,588

 

5,076,189

 

 

 

 

 

 

 

 

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

 

 

 

 

 

 

 

 

 

Net realized gain from investments

 

82,882

 

95,372

 

1,157,824

 

542,720

 

Net realized loss from derivatives

 

 

 

 

(131,000

)

Net unrealized appreciation (depreciation) on investments

 

(1,713,025

)

(1,838,957

)

(3,770,968

)

3,188,543

 

Net unrealized appreciation on derivatives

 

 

 

 

130,925

 

Net gain (loss) on investments

 

(1,630,143

)

(1,743,585

)

(2,613,144

)

3,731,188

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

 

$

1,267,890

 

$

745,568

 

$

5,026,444

 

$

8,807,377

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE

 

$

0.26

 

$

0.19

 

$

1.05

 

$

2.25

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED

 

4,851,451

 

3,970,447

 

4,770,267

 

3,907,696

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

Saratoga Investment Corp.

 

Consolidated Schedule of Investments

 

November 30, 2013

 

(unaudited)

 

Company (a)

 

Industry

 

Investment Interest Rate / Maturity

 

Principal/
Number of Shares

 

Cost

 

Fair Value (c)

 

% of
Net Assets

 

Non-control/Non-affiliated investments - 161.6% (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

 

1,120,330

 

1.0

%

National Truck Protection Co., Inc. (d)

 

Automotive

 

First Lien Term Loan 15.50% (13.50% Cash/2.00% PIK), 9/13/2018

 

$

 

8,250,000

 

8,250,000

 

8,250,000

 

7.4

%

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

 

Automotive

 

Common Stock

 

7,128

 

712,800

 

1,091,154

 

1.0

%

 

 

 

 

Total Automotive

 

 

 

9,962,800

 

10,461,484

 

9.4

%

Legacy Cabinets Holdings (d, g)

 

Building Products

 

Common Stock Voting A-1

 

2,535

 

220,900

 

302,020

 

0.3

%

Legacy Cabinets Holdings (d, g)

 

Building Products

 

Common Stock Voting B-1

 

1,600

 

139,424

 

190,624

 

0.2

%

Legacy Cabinets, Inc. (d)

 

Building Products

 

First Lien Term Loan 7.25% (1.00% Cash/6.25% PIK), 5/3/2014

 

$

 

260,521

 

260,521

 

260,521

 

0.2

%

 

 

 

 

Total Building Products

 

 

 

620,845

 

753,165

 

0.7

%

ARSloane Acquistion, LLC (d)

 

Business Services

 

First Lien Term Loan 7.50% Cash, 10/1/2019

 

$

 

1,000,000

 

990,265

 

1,001,300

 

0.9

%

BMC Software, Inc. (d)

 

Business Services

 

First Lien Term Loan 5.00% Cash, 9/10/2020

 

$

 

6,000,000

 

5,941,650

 

6,051,000

 

5.4

%

Dispensing Dynamics International (d)

 

Business Services

 

Senior Secured Note 12.50% Cash, 1/1/2018

 

$

 

7,000,000

 

6,877,686

 

7,385,000

 

6.7

%

Easy Ice, LLC (d)

 

Business Services

 

First Lien Term Loan 14.00% (11.00% Cash 3.00% PIK), 3/29/2018

 

$

 

7,451,002

 

7,324,751

 

7,451,002

 

6.7

%

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

 

Business Services

 

Senior Secured Note 14.00% (13.00% Cash/1.00% PIK), 12/28/2017

 

$

 

5,753,427

 

5,660,528

 

5,753,427

 

5.2

%

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

 

Business Services

 

Warrant Membership Interests

 

49,318

 

400,000

 

488,741

 

0.4

%

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

 

Business Services

 

First Lien Term Loan 5.50% Cash, 6/28/2019

 

$

 

4,000,000

 

3,962,643

 

3,990,000

 

3.6

%

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

 

Business Services

 

Second Lien Term Loan 9.50% Cash, 6/28/2020

 

$

 

2,000,000

 

1,971,697

 

2,000,000

 

1.8

%

Knowland Technology Holdings, L.L.C. (d)

 

Business Services

 

First Lien Term Loan 11.00% Cash, 11/29/2017

 

$

 

6,200,000

 

6,100,922

 

6,200,000

 

5.6

%

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

 

Business Services

 

First Lien Term Loan 5.00% Cash, 8/20/2020

 

$

 

5,000,000

 

4,951,958

 

5,000,000

 

4.5

%

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

 

Business Services

 

Second Lien Term Loan 8.75% Cash, 2/20/2021

 

$

 

2,500,000

 

2,451,490

 

2,472,000

 

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

 

$

 

9,554,517

 

9,394,118

 

9,554,517

 

8.6

%

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

 

Business Services

 

Warrants to Purchase Limited Liability Company Interests

 

101

 

 

 

0.0

%

 

 

 

 

Total Business Services

 

 

 

56,027,708

 

57,346,987

 

51.6

%

Targus Group International, Inc. (d)

 

Consumer Products

 

First Lien Term Loan 11.00% Cash, 5/24/2016

 

$

 

3,776,785

 

3,738,991

 

3,635,156

 

3.3

%

Targus Holdings, Inc. (d, g)

 

Consumer Products

 

Common Stock

 

62,413

 

566,765

 

680,302

 

0.6

%

Targus Holdings, Inc. (d)

 

Consumer Products

 

Unsecured Note 10.00% PIK, 6/14/2019

 

$

 

1,914,341

 

1,914,341

 

1,320,582

 

1.2

%

Targus Holdings, Inc. (d)

 

Consumer Products

 

Unsecured Note 16.00% Cash, 10/26/2018

 

$

 

371,073

 

366,112

 

345,148

 

0.3

%

 

 

 

 

Total Consumer Products

 

 

 

6,586,209

 

5,981,188

 

5.4

%

CFF Acquisition L.L.C. (d)

 

Consumer Services

 

First Lien Term Loan 7.50% Cash, 7/31/2015

 

$

 

1,606,766

 

1,540,599

 

1,606,766

 

1.4

%

Expedited Travel L.L.C. (d)

 

Consumer Services

 

First Lien Term Loan 12.00% Cash, 12/28/2017

 

$

 

4,642,500

 

4,557,379

 

4,642,500

 

4.2

%

PrePaid Legal Services, Inc. (d)

 

Consumer Services

 

First Lien Term Loan 6.25% Cash, 7/1/2019

 

$

 

4,596,774

 

4,553,840

 

4,596,774

 

4.1

%

PrePaid Legal Services, Inc. (d)

 

Consumer Services

 

Second Lien Term Loan 9.75% Cash, 7/1/2020

 

$

 

5,000,000

 

4,929,239

 

5,000,000

 

4.5

%

 

 

 

 

Total Consumer Services

 

 

 

15,581,057

 

15,846,040

 

14.2

%

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

 

Education

 

Class A Common Stock

 

544,761

 

30,241

 

 

0.0

%

 

5



Table of Contents

 

Company (a)

 

Industry

 

Investment Interest Rate / Maturity

 

Principal/
Number of Shares

 

Cost

 

Fair Value (c)

 

% of
Net Assets

 

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

 

Education

 

First Lien Term Loan 1.00% Cash, 3/13/14

 

$

2,519,667

 

1,365,733

 

90,426

 

0.1

%

 

 

 

 

Total Education

 

 

 

1,395,974

 

90,426

 

0.1

%

Group Dekko, Inc. (d)

 

Electronics

 

Second Lien Term Loan 11.00% (10.00% Cash/1.00% PIK), 5/1/2016

 

$

6,883,558

 

6,883,558

 

6,752,082

 

6.1

%

 

 

 

 

Total Electronics

 

 

 

6,883,558

 

6,752,082

 

6.1

%

USS Parent Holding Corp. (d, g)

 

Environmental

 

Non Voting Common Stock

 

765

 

133,002

 

192,577

 

0.2

%

USS Parent Holding Corp. (d, g)

 

Environmental

 

Voting Common Stock

 

17,396

 

3,025,798

 

4,381,122

 

3.9

%

 

 

 

 

Total Environmental

 

 

 

3,158,800

 

4,573,699

 

4.1

%

DS Waters of America, Inc. (d)

 

Food and Beverage

 

First Lien Term Loan 5.25% Cash, 8/30/2020

 

$

2,500,000

 

2,475,815

 

2,512,500

 

2.2

%

HOA Restaurant Group, L.L.C. (d)

 

Food and Beverage

 

Senior Secured Note 11.25% Cash, 4/1/2017

 

$

4,000,000

 

3,912,548

 

4,220,000

 

3.8

%

TB Corp. (d)

 

Food and Beverage

 

First Lien Term Loan 5.75% Cash, 6/19/2018

 

$

5,114,855

 

5,093,700

 

5,080,585

 

4.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TB Corp. (d)

 

Food and Beverage

 

Unsecured Note 13.50% (12.00% Cash/1.50% PIK), 12/20/2018

 

$

2,533,219

 

2,501,656

 

2,533,219

 

2.3

%

TM Restaurant Group L.L.C. (d)

 

Food and Beverage

 

First Lien Term Loan 7.75% Cash, 7/16/2017

 

$

2,864,440

 

2,848,866

 

2,850,118

 

2.6

%

 

 

 

 

Total Food and Beverage

 

 

 

16,832,585

 

17,196,422

 

15.5

%

Bristol Hospice, LLC (d)

 

Healthcare Services

 

First Lien Term Loan 11.00%(10.00% Cash/1.00% PIK), 11/29/2018

 

$

5,500,000

 

5,390,120

 

5,500,000

 

4.9

%

Oceans Acquisition, Inc. (d)

 

Healthcare Services

 

First Lien Term Loan 10.75% Cash, 12/27/2017

 

$

6,500,000

 

6,391,338

 

6,500,000

 

5.8

%

Smile Brands Group Inc. (d)

 

Healthcare Services

 

First Lien Term Loan 7.50% Cash, 8/16/2019

 

$

4,500,000

 

4,413,884

 

4,421,250

 

4.0

%

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

 

Healthcare Services

 

First Lien Term Loan 7.25% Cash, 8/22/2018

 

$

2,468,750

 

2,445,338

 

2,474,922

 

2.2

%

Zest Holdings, LLC (d)

 

Healthcare Services

 

First Lien Term Loan 6.50% Cash, 8/16/2020

 

$

4,500,000

 

4,412,915

 

4,432,500

 

4.0

%

 

 

 

 

Total Healthcare Services

 

 

 

23,053,595

 

23,328,672

 

20.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Homebuilding

 

Senior Secured Note 0% Cash, 12/31/2013

 

$

550,000

 

556,046

 

375,705

 

0.3

%

 

 

 

 

Total Homebuilding

 

 

 

556,046

 

375,705

 

0.3

%

Keystone Automotive Operations, Inc. (d)

 

Logistics

 

First Lien Term Loan 7.00% Cash, 8/15/2019

 

$

5,000,000

 

4,928,468

 

5,056,500

 

4.5

%

 

 

 

 

Total Logistics

 

 

 

4,928,468

 

5,056,500

 

4.5

%

Distribution International, Inc.  (d)

 

Manufacturing

 

First Lien Term Loan 7.50% Cash, 7/16/2019

 

$

5,985,000

 

5,928,481

 

5,955,075

 

5.4

%

 

 

 

 

Total Manufacturing

 

 

 

5,928,481

 

5,955,075

 

5.4

%

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

 

6,685,465

 

6.0

%

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

 

6,685,465

 

6.0

%

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

 

$

2,553,597

 

2,142,163

 

1,179,794

 

1.1

%

 

 

 

 

Total Publishing

 

 

 

2,142,163

 

1,179,794

 

1.1

%

Community Investors, Inc. (d, g)

 

Software

 

Common Stock

 

1,282

 

1,282

 

1,564

 

0.0

%

Community Investors, Inc. (d)

 

Software

 

First Lien Term Loan 9.75% Cash, 5/9/2018

 

$

6,150,000

 

6,040,876

 

6,150,000

 

5.5

%

Community Investors, Inc. (d)

 

Software

 

Revolver

 

$

166,667

 

 

 

0.0

%

Community Investors, Inc. (d, g)

 

Software

 

Preferred Stock

 

148,718

 

148,718

 

181,436

 

0.2

%

Pen-Link, Ltd. (d)

 

Software

 

Second Lien Term Loan 12.50% Cash, 5/26/2019

 

$

11,500,000

 

11,270,573

 

11,500,000

 

10.3

%

 

 

 

 

Total Software

 

 

 

17,461,449

 

17,833,000

 

16.0

%

Sub Total Non-control/Non-affiliated investments

 

 

 

 

 

 

 

180,323,606

 

179,759,938

 

161.6

%

Control investments - 17.1% (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Structured Finance Securities

 

Other/Structured Finance Securities 14.78%, 10/17/2023

 

$

30,000,000

 

16,555,808

 

19,018,842

 

17.1

%

Sub Total Control investments

 

 

 

 

 

 

 

16,555,808

 

19,018,842

 

17.1

%

TOTAL INVESTMENTS - 178.7% (b)

 

 

 

 

 

 

 

$

196,879,414

 

$

198,778,780

 

178.7

%

 

6



Table of Contents

 


(a)       All of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Saratoga Investment Corp. CLO 2013-1, Ltd.

(b)       Percentages are based on net assets of $111,206,093 as of November 30, 2013.

(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)       14.78% represents the modeled effective interest rate that is expected to be earned over the life of 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:

 

 

 

 

 

 

 

 

 

Interest

 

Management

 

Net Realized

 

Net Unrealized

 

Company

 

Purchases

 

Redemptions

 

Sales (cost)

 

Income

 

fee income

 

gains/(losses)

 

gains/(losses)

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

$

 

$

 

$

 

$

2,791,830

 

$

1,400,039

 

$

 

$

2,463,034

 

 


(g) Non-income producing at November 30, 2013.

 

7



Table of Contents

 

Saratoga Investment Corp.

 

Consolidated Schedule of Investments

 

February 28, 2013

 

Company (a)

 

Industry

 

Investment Interest Rate / Maturity

 

Principal/
Number of Shares

 

Cost

 

Fair Value (c)

 

% of
Net Assets

 

Non-control/Non-affiliated investments - 119.2% (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

Coast Plating, Inc. (d)

 

Aerospace

 

First Lien Term Loan 11.70% Cash, 9/13/2014

 

$

2,550,000

 

$

2,550,000

 

$

2,550,000

 

2.3

%

Coast Plating, Inc. (d)

 

Aerospace

 

First Lien Term Loan 13.20% Cash, 9/13/2014

 

$

950,000

 

950,000

 

950,000

 

0.9

%

 

 

 

 

Total Aerospace

 

 

 

3,500,000

 

3,500,000

 

3.2

%

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

 

Automotive

 

Common Stock

 

589

 

500,000

 

591,827

 

0.5

%

National Truck Protection Co., Inc. (d)

 

Automotive

 

First Lien Term Loan 15.50% Cash 8/10/2017

 

$

5,500,000

 

5,500,000

 

5,500,000

 

5.1

%

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

 

Automotive

 

First Lien Term Loan 9.00% Cash, 11/28/2016

 

$

6,000,000

 

6,000,000

 

6,000,000

 

5.5

%

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

 

Automotive

 

First Lien Term Loan 13.00% Cash, 11/28/2016

 

$

2,000,000

 

1,961,761

 

2,000,000

 

1.8

%

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

 

Automotive

 

Common Stock

 

7,128

 

712,800

 

712,800

 

0.7

%

 

 

 

 

Total Automotive

 

 

 

14,674,561

 

14,804,627

 

13.6

%

Legacy Cabinets Holdings (d), (h)

 

Building Products

 

Common Stock Voting A-1

 

2,535

 

220,900

 

 

0.0

%

Legacy Cabinets Holdings (d), (h)

 

Building Products

 

Common Stock Voting B-1

 

1,600

 

139,424

 

 

0.0

%

Legacy Cabinets, Inc. (d)

 

Building Products

 

First Lien Term Loan 7.25% (1.00% Cash/6.25% PIK), 5/3/2014

 

$

332,229

 

332,229

 

267,378

 

0.2

%

 

 

 

 

Total Building Products

 

 

 

692,553

 

267,378

 

0.2

%

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

 

Business Services

 

Senior Secured Note 14.00% (13.00% Cash/1.00% PIK), 12/28/2017

 

$

5,705,384

 

5,595,317

 

5,705,384

 

5.2

%

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

 

Business Services

 

Warrant Membership Interests

 

49,318

 

400,000

 

399,969

 

0.4

%

Dispensing Dynamics International (d)

 

Business Services

 

Senior Secured Note 12.50% Cash, 1/1/2018

 

$

7,000,000

 

6,860,186

 

7,000,000

 

6.4

%

Knowland Technology Holdings, L.L.C. (d)

 

Business Services

 

First Lien Term Loan 11.00% Cash, 11/29/2017

 

$

6,200,000

 

6,082,248

 

6,200,000

 

5.7

%

Sourcehov LLC (d)

 

Business Services

 

Second Lien Term Loan 10.50% Cash, 4/29/2018

 

$

3,000,000

 

2,648,298

 

2,850,000

 

2.6

%

 

 

 

 

Total Business Services

 

 

 

21,586,049

 

22,155,353

 

20.3

%

C.H.I. Overhead Doors, Inc. (d)

 

Consumer Products

 

First Lien Term Loan 7.25% Cash, 8/17/2017

 

$

4,974,747

 

4,930,481

 

5,024,495

 

4.7

%

Targus Group International, Inc. (d)

 

Consumer Products

 

First Lien Term Loan 11.00% Cash, 5/24/2016

 

$

3,940,003

 

3,888,460

 

3,956,551

 

3.6

%

Targus Holdings, Inc. (d)

 

Consumer Products

 

Unsecured Note 10.00% PIK, 6/14/2019

 

$

1,914,341

 

1,914,341

 

1,116,252

 

1.0

%

Targus Holdings, Inc. (d)

 

Consumer Products

 

Unsecured Note 16.00% Cash, 10/26/2018

 

$

332,500

 

326,320

 

305,334

 

0.3

%

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

 

Consumer Products

 

Common Stock

 

62,413

 

566,765

 

3,324,741

 

3.1

%

 

 

 

 

Total Consumer Products

 

 

 

11,626,367

 

13,727,373

 

12.7

%

CFF Acquisition L.L.C. (d)

 

Consumer Services

 

First Lien Term Loan 7.50% Cash, 7/31/2015

 

$

2,161,391

 

2,032,060

 

2,154,475

 

2.0

%

Expedited Travel L.L.C. (d)

 

Consumer Services

 

First Lien Term Loan 12.00% Cash, 12/28/2017

 

$

5,500,000

 

5,380,520

 

5,500,000

 

5.0

%

PrePaid Legal Services, Inc. (d)

 

Consumer Services

 

First Lien Term Loan 11.00% Cash, 12/31/2016

 

$

3,000,000

 

2,936,860

 

3,000,000

 

2.8

%

 

 

 

 

Total Consumer Services

 

 

 

10,349,440

 

10,654,475

 

9.8

%

 

8



Table of Contents

 

Company (a)

 

Industry

 

Investment Interest Rate / Maturity

 

Principal/
Number of Shares

 

Cost

 

Fair Value (c)

 

% of
Net Assets

 

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

 

Education

 

First Lien Term Loan 1.00% Cash, 12/31/2012

 

$

2,740,780

 

1,586,846

 

291,893

 

0.3

%

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

 

Education

 

Class A Common Stock

 

544,761

 

30,242

 

 

0.0

%

 

 

 

 

Total Education

 

 

 

1,617,088

 

291,893

 

0.3

%

Group Dekko, Inc. (d)

 

Electronics

 

Second Lien Term Loan 11.00% (10.00% Cash/1.00% PIK), 5/1/2016

 

$

6,824,717

 

6,824,717

 

6,720,981

 

6.2

%

 

 

 

 

Total Electronics

 

 

 

6,824,717

 

6,720,981

 

6.2

%

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

 

Environmental

 

Non Voting Common Stock

 

765

 

133,002

 

125,981

 

0.1

%

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

 

Environmental

 

Voting Common Stock

 

17,396

 

3,025,798

 

2,866,065

 

2.7

%

 

 

 

 

Total Environmental

 

 

 

3,158,800

 

2,992,046

 

2.8

%

DS Waters of America, Inc. (d)

 

Food and Beverage

 

First Lien Term Loan 10.50% Cash, 8/29/2017

 

$

3,970,000

 

3,994,704

 

4,049,400

 

3.7

%

HOA Restaurant Group, L.L.C. (d)

 

Food and Beverage

 

Senior Secured Note 11.25% Cash, 4/1/2017

 

$

4,000,000

 

3,897,940

 

3,560,000

 

3.3

%

TB Corp. (d)

 

Food and Beverage

 

First Lien Term Loan 5.81% Cash, 6/19/2018

 

$

5,153,506

 

5,128,662

 

5,140,622

 

4.7

%

TB Corp. (d)

 

Food and Beverage

 

Unsecured Note 13.50% (12.00% Cash/1.50% PIK), 2/19/2017

 

$

2,504,585

 

2,468,317

 

2,492,062

 

2.3

%

TM Restaurant Group L.L.C. (d)

 

Food and Beverage

 

First Lien Term Loan 7.75% Cash, 7/17/2017

 

$

2,962,500

 

2,943,045

 

2,956,871

 

2.7

%

 

 

 

 

Total Food and Beverage

 

 

 

18,432,668

 

18,198,955

 

16.7

%

Oceans Acquisition, Inc. (d)

 

Healthcare Services

 

First Lien Term Loan 10.75% Cash, 12/27/2017

 

$

7,500,000

 

7,351,433

 

7,500,000

 

6.9

%

Maverick Healthcare Group (d)

 

Healthcare Services

 

First Lien Term Loan 10.75% Cash, 12/31/2016

 

$

4,900,000

 

4,835,389

 

4,900,000

 

4.5

%

 

 

 

 

Total Healthcare Services

 

 

 

12,186,822

 

12,400,000

 

11.4

%

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

 

Homebuilding

 

Senior Secured Note 0% Cash, 12/31/2013

 

$

550,000

 

536,764

 

315,370

 

0.3

%

 

 

 

 

Total Homebuilding

 

 

 

536,764

 

315,370

 

0.3

%

Capstone Logistics, L.L.C. (d)

 

Logistics

 

First Lien Term Loan 7.50% Cash, 9/16/2016

 

$

899,769

 

889,798

 

908,766

 

0.8

%

Capstone Logistics, L.L.C. (d)

 

Logistics

 

First Lien Term Loan 13.50% Cash, 9/16/2016

 

$

3,693,369

 

3,652,443

 

3,767,236

 

3.5

%

Worldwide Express Operations, L.L.C. (d)

 

Logistics

 

First Lien Term Loan 7.50% Cash, 6/30/2013

 

$

6,527,979

 

6,461,295

 

6,504,478

 

6.0

%

 

 

 

 

Total Logistics

 

 

 

11,003,536

 

11,180,480

 

10.3

%

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

 

Metals

 

Senior Secured Note 17.00% (13.00% Cash/4.00% PIK), 3/1/2013

 

$

7,728,566

 

7,728,566

 

6,723,852

 

6.2

%

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

 

Metals

 

Warrants to Purchase Limited Liability Company Interests

 

3,000

 

 

 

0.0

%

 

 

 

 

Total Metals

 

 

 

7,728,566

 

6,723,852

 

6.2

%

Network Communications, Inc. (d)

 

Publishing

 

Unsecured Note 8.60% PIK, 1/14/2020

 

$

2,500,198

 

2,049,660

 

960,827

 

0.9

%

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

 

Publishing

 

Common Stock

 

211,429

 

 

 

0.0

%

Penton Media, Inc. (d)

 

Publishing

 

First Lien Term Loan 6.00% (4.00% Cash/2.00% PIK), 8/1/2014

 

$

4,839,189

 

4,497,495

 

4,669,818

 

4.3

%

 

 

 

 

Total Publishing

 

 

 

6,547,155

 

5,630,645

 

5.2

%

 

9



Table of Contents

 

Company (a)

 

Industry

 

Investment Interest Rate / Maturity

 

Principal/
Number of Shares

 

Cost

 

Fair Value (c)

 

% of
Net Assets

 

Sub Total Non-control/Non-affiliated investments

 

 

 

 

 

 

 

130,465,086

 

129,563,428

 

119.2

%

Control investments - 23.5% (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

GSC Partners CDO GP III, LP (g), (h) 

 

Financial Services

 

100% General Partnership Interest

 

 

 

 

0.0

%

GSC Investment Corp. CLO 2007 LTD. (d), (e), (g) 

 

Structured Finance Securities

 

Other/Structured Finance Securities 23.06%, 1/21/2020

 

$

30,000,000

 

18,944,966

 

25,516,959

 

23.5

%

Sub Total Control investments

 

 

 

 

 

 

 

18,944,966

 

25,516,959

 

23.5

%

Affiliate investments - 0.0% (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

GSC Partners CDO GP III, LP (f), (h) 

 

Financial Services

 

6.24% Limited Partnership Interest

 

 

 

 

0.0

%

Sub Total Affiliate investments

 

 

 

 

 

 

 

 

 

0.0

%

TOTAL INVESTMENTS - 142.7% (b)

 

 

 

 

 

 

 

$

149,410,052

 

$

155,080,387

 

142.7

%

 


(a)

 

All of our equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except GSC Investment Corp. CLO 2007 Ltd. and GSC Partners CDO GP III, LP.

(b)

 

Percentages are based on net assets of $108,686,761 as of February 28, 2013.

(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)

 

23.06% represents the modeled effective interest rate that is expected to be earned over the life of the investment.

(f)

 

As defined in the Investment Company Act, we are an “Affiliate” of this portfolio company because we own 5% or more of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was an Affiliate are as follows:

 

 

 

 

 

 

 

 

 

Interest

 

Management

 

Net Realized

 

Net Unrealized

 

Company

 

Purchases

 

Redemptions

 

Sales (cost)

 

Income

 

fee income

 

gains/(losses)

 

gains/(losses)

 

GSC Partners CDO GP III, LP

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

(g)

 

As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the period in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

 

 

 

 

 

 

 

 

Interest

 

Management

 

Net Realized

 

Net Unrealized

 

Company

 

Purchases

 

Redemptions

 

Sales (cost)

 

Income

 

fee income

 

gains/(losses)

 

gains/(losses)

 

GSC Investment Corp. CLO 2007 LTD.

 

$

 

$

 

$

 

$

4,205,509

 

$

2,000,072

 

$

 

$

6,571,992

 

GSC Partners CDO GP III, LP

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

(h)

 

Non-income producing at February 28, 2013.

 

10



Table of Contents

 

Saratoga Investment Corp.

 

Consolidated Statements of Changes in Net Assets

 

(unaudited)

 

 

 

For the nine months ended
November 30, 2013

 

For the nine months ended
November 30, 2012

 

INCREASE FROM OPERATIONS:

 

 

 

 

 

Net investment income

 

$

7,639,588

 

$

5,076,189

 

Net realized gain from investments

 

1,157,824

 

542,720

 

Net realized loss from derivatives

 

 

(131,000

)

Net unrealized appreciation (depreciation) on investments

 

(3,770,968

)

3,188,543

 

Net unrealized appreciation on derivatives

 

 

130,925

 

Net increase in net assets from operations

 

5,026,444

 

8,807,377

 

DECREASE FROM SHAREHOLDER DISTRIBUTIONS:

 

 

 

 

 

Distributions declared

 

(12,534,807

)

(16,475,809

)

Net decrease in net assets from shareholder distributions

 

(12,534,807

)

(16,475,809

)

CAPITAL SHARE TRANSACTIONS:

 

 

 

 

 

Stock dividend distribution

 

10,027,695

 

13,180,503

 

Net increase in net assets from capital share transactions

 

10,027,695

 

13,180,503

 

 

 

 

 

 

 

Total increase in net assets

 

2,519,332

 

5,512,071

 

Net assets at beginning of period

 

108,686,761

 

97,380,150

 

Net assets at end of period

 

$

111,206,093

 

$

102,892,221

 

 

 

 

 

 

 

Net asset value per common share

 

$

20.67

 

$

21.75

 

Common shares outstanding at end of period

 

5,379,616

 

4,730,116

 

 

 

 

 

 

 

Distribution in excess of net investment income

 

$

(29,418,170

)

$

(25,319,688

)

 

See accompanying notes to consolidated financial statements.

 

11



Table of Contents

 

Saratoga Investment Corp.

 

Consolidated Statements of Cash Flows

 

(unaudited)

 

 

 

For the nine months
ended November 30,
2013

 

For the nine months
ended November 30,
2012

 

Operating activities

 

 

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

 

$

5,026,444

 

$

8,807,377

 

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

 

 

 

 

 

Paid-in-kind interest income

 

(634,408

)

(821,830

)

Net accretion of discount on investments

 

(543,999

)

(710,418

)

Amortization of deferred debt financing costs

 

660,568

 

342,505

 

Net realized gain from investments

 

(1,157,824

)

(542,720

)

Net realized loss from derivatives

 

 

131,000

 

Net unrealized (appreciation) depreciation on investments

 

3,770,968

 

(3,188,543

)

Net unrealized appreciation on derivatives

 

 

(130,925

)

Proceeds from sale and redemption of investments

 

64,989,332

 

15,990,963

 

Purchase of investments

 

(110,122,464

)

(34,658,367

)

(Increase) decrease in operating assets:

 

 

 

 

 

Cash and cash equivalents, reserve accounts

 

10,487,010

 

21,747,012

 

Interest receivable

 

138,220

 

(216,782

)

Due from manager

 

(4,929

)

 

Management fee receivable

 

49,171

 

10,634

 

Other assets

 

(16,190

)

75,850

 

Receivable from unsettled trades

 

1,817,074

 

59,511

 

Increase (decrease) in operating liabilities:

 

 

 

 

 

Payable for unsettled trades

 

 

(4,072,500

)

Management and incentive fees payable

 

(922,261

)

479,049

 

Accounts payable and accrued expenses

 

(53,553

)

(196,907

)

Interest and debt fees payable

 

256,537

 

87,162

 

Due to manager

 

50,570

 

(276,217

)

NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES

 

(26,209,734

)

2,915,854

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Borrowings on debt

 

8,000,000

 

7,350,000

 

Paydowns on debt

 

(24,300,000

)

(8,500,000

)

Issuance of notes

 

48,300,000

 

 

Debt financing cost

 

(2,579,308

)

(597,000

)

NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES

 

29,420,692

 

(1,747,000

)

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

3,210,958

 

1,168,854

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

149,025

 

1,325,698

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

3,359,983

 

$

2,494,552

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

Interest paid during the period

 

$

3,425,552

 

$

1,378,919

 

 

 

 

 

 

 

Supplemental non-cash information:

 

 

 

 

 

Paid-in-kind interest income

 

$

634,408

 

$

821,830

 

Net accretion of discount on investments

 

$

543,999

 

$

710,418

 

Amortization of deferred debt financing costs

 

$

660,568

 

$

342,505

 

Stock dividend distribution

 

$

10,027,695

 

$

13,180,503

 

Cash dividend payable

 

$

2,507,112

 

$

3,295,306

 

 

See accompanying notes to consolidated financial statements.

 

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SARATOGA INVESTMENT CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

November 30, 2013

 

(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 12. Recapitalization Transaction” below.

 

We are externally managed and advised by our investment adviser, Saratoga Investment Advisors, LLC (the “Manager”), pursuant to an investment advisory and 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 (“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 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 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.

 

Derivative Financial Instruments

 

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

 

Investment Transactions and Income Recognition

 

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its