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As filed with the Securities and Exchange Commission on September 22, 2010

Registration No. 333-169135

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ý Pre-Effective Amendment No. 1

o Post-Effective Amendment No.

Saratoga Investment Corp.
(Exact Name of Registrant as Specified in its Charter)

535 Madison Avenue
New York, New York 10022
(Address of Principal Executive Offices)

(212) 906-7800
(Registrant's Telephone Number, Including Area Code)

Christian L. Oberbeck
Chief Executive Officer
and President
Saratoga Investment Corp.
535 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)

Copies to:
Steven B. Boehm, Esq.
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
Tel: (202) 383-0100
Fax: (202) 637-3593



Approximate Date of Proposed Public Offering:
From time to time after the effective date of this Registration Statement.

         If any of the securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend reinvestment plans, please check the following box. ý

         It is proposed that this filing will become effective (check appropriate box):



CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

           
 
Title of Each Class of Securities
to be Registered

  Amount Being
Registered

  Proposed Maximum
Aggregate Offering
Price

  Amount of
Registration Fee

 

Common Stock, $0.001 par value per share

  989,924   $18,165,105(1)   $1,295(2)
 

Common Stock, $0.001 par value per share

  178,094(3)   $3,385,567(4)   $243

 

(1)
This amount has been estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(c) of the Securities Act of 1933 and is based upon the average high and low sales price for a share of the registrant's common stock on August 26, 2010, as reported on the New York Stock Exchange.

(2)
Previously paid.

(3)
In addition to the registration of 989,924 shares of the registrant's common stock in connection with the initial filing of this Registration Statement on Form N-2, the registrant is hereby registering an additional 178,094 shares of its common stock in connection with the filing of this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2.

(4)
This amount has been estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(c) of the Securities Act of 1933 and is based upon the average high and low sales price for a share of the registrant's common stock on September 15, 2010, as reported on the New York Stock Exchange.

         THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.


The information in this prospectus is not complete and may be changed. The selling stockholders named in this prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated September 21, 2010

PROSPECTUS

        1,168,018 Shares

Saratoga Investment Corp.

Common Stock



        We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We have elected to be regulated as a business development company under the Investment Company Act of 1940 and are managed by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a leading middle-market private equity investment firm.

        This prospectus covers 1,168,018 shares of our common stock that may be offered for resale by the selling stockholders named in this prospectus. The 986,837 shares of common stock offered by the selling stockholders in this prospectus were originally issued by us on July 30, 2010 to the selling stockholders in connection with the private sale of $15 million in aggregate purchase price of our common stock pursuant to a stock purchase agreement, dated April 14, 2010. As part of the private sale transaction, we agreed to register for resale by the selling stockholders the shares of common stock that we issued in the private sale transaction as well as 181,181 shares of our common stock held by an entity affiliated with GSCP (NJ), L.P., our former external investment adviser. No securities are being offered or sold by us pursuant to this prospectus. We will not receive any of the proceeds from the sale of these shares by the selling stockholders.

        Subject to the lock-up agreement described in this prospectus, the selling stockholders named in this prospectus may offer, from time to time, up to 1,168,018 shares of our common stock in market transactions through any market on which our common stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through a broker, who may act as agent or as principal, or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled "Plan of Distribution." The selling stockholders may sell the shares held for their own account or the shares may be sold by donees, transferees, pledgees or other successors in interest that receive such shares from the selling stockholders as a gift or other non-sale related transfer.

        Our common stock is listed on the New York Stock Exchange under the symbol "SAR." On September 17, 2010, the last reported sales price on the New York Stock Exchange for our common stock was $19.20 per share.

        Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 13 to read about factors you should consider, including the risk of leverage, before investing in our common stock.



        This prospectus contains important information about us that you should know before investing in our common stock. Please read it before making an investment decision and keep it for future reference. We are required to file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information is available free of charge by writing to us at 535 Madison Avenue, New York, New York 10022, by telephone at (212) 906-7800 or on our website at www.saratogainvestmentcorp.com. You may also obtain information about us from the Securities and Exchange Commission's website at www.sec.gov. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

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

The date of this prospectus is                  , 2010.


        You should rely only on the information contained in this prospectus and any accompanying prospectus supplement. You must not rely on any unauthorized information or representations not contained in this prospectus or any accompanying prospectus supplement as if we had authorized it. This prospectus and any accompanying prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus and any accompanying prospectus supplement is accurate as of the dates on their covers.



TABLE OF CONTENTS

 
  Page

Forward-Looking Statements

  iii

Prospectus Summary

  1

The Offering

  6

Fees and Expenses

  8

Selected Financial Data

  11

Risk Factors

  13

Use of Proceeds

  32

Price Range of Common Stock and Dividends

  32

Dividend Reinvestment Plan

  35

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

  37

Senior Securities

  62

Business

  63

Portfolio Companies

  74

Management

  77

Investment Advisory and Management Agreement

  84

Administration Agreement

  90

License Agreement

  92

Portfolio Management

  93

Certain Relationships

  95

Control Persons and Principal Stockholders

  96

Determination of Net Asset Value

  98

Material U.S. Federal Income Tax Considerations

  99

Description of Our Common Stock

  107

Regulation

  114

Custodian, Transfer and Dividend Paying Agent and Registrar

  119

Brokerage Allocation and Other Practices

  119

Selling Stockholders

  120

Plan of Distribution

  122

Legal Matters

  124

Independent Registered Public Accountants

  124

Available Information

  124

Privacy Notice

  124

Index to Consolidated Financial Statements

  F-1



i



ABOUT THIS PROSPECTUS

        This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, or SEC, using the "shelf" registration process. Under the shelf registration process, the selling stockholders named herein may offer, from time to time, up to an aggregate of 1,168,018 shares of our common stock on the terms to be determined at the time of the offering. Shares of our common stock may be offered by the selling stockholders at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the shares of our common stock that the selling stockholders may offer. Each time a selling stockholder uses this prospectus to offer shares of our common stock, we will provide a prospectus supplement that will contain specific information about the terms of that offering. A prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any such supplements together with the additional information described under "Available Information" and "Risk Factors" before you make an investment decision.

ii



FORWARD-LOOKING STATEMENTS

        Some of the statements in this prospectus and any accompanying prospectus supplement constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology. Any forward-looking statements contained in this prospectus and any accompanying prospectus supplement do not have the benefit of the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act of 1933.

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

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

        We have based the forward-looking statements included in this prospectus and will base the forward-looking statements included in any accompanying prospectus supplement on information available to us on the date of this prospectus and any accompanying prospectus supplement, as appropriate, and we assume no obligation to update any such forward-looking statements, except as required by law.

iii



PROSPECTUS SUMMARY

        This summary highlights some of the information in this prospectus. It is not complete and does not contain all of the information that you should consider. You should read carefully the more detailed information in this prospectus, especially information set forth under "Risk Factors." Except where the context suggests otherwise, the terms the "Company," "we," "us" and "our" refer to Saratoga Investment Corp. and its wholly-owned subsidiary, Saratoga Investment Funding LLC.

Saratoga Investment Corp.

        We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We are externally managed and advised by Saratoga Investment Advisors LLC, a New York-based investment firm affiliated with Saratoga Partners, a leading middle-market private equity investment firm.

        As of May 31, 2010, we had investments in 28 portfolio companies and one collateralized loan obligation fund with an aggregate fair value of $89.9 million. The weighted average yield on all of our debt investments as of May 31, 2010 was approximately 10.5%. As of May 31, 2010, we held equity investments consisting of common stock, limited partnership interests and warrants to purchase common stock or other equity interests in our portfolio companies with an aggregate fair value of $3.4 million.

        Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

        While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

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

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

1


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

        The recapitalization transaction consisted of (i) the private sale of 986,837 shares of our common stock for $15 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and (ii) the entry into a $40 million senior secured revolving credit facility with Madison Capital Funding LLC. We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the secured revolving credit facility with Madison Capital Funding LLC to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

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

Saratoga Investment Advisors

        Our investment adviser is led by four principals who collectively have over 60 years of experience in leveraged finance. Our investment adviser is affiliated with Saratoga Partners, a leading middle-market private equity investment firm. Saratoga Partners was established in 1984 to be the middle-market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read since 1998. Saratoga Partners has a 25-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

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

        We have entered into an investment advisory and management agreement with Saratoga Investment Advisors. The initial term of the investment advisory and management agreement is for two years, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom are not "interested" directors as defined in the 1940 Act. Pursuant to the investment advisory and management agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day

2



functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.

        Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $3 million made by us. In addition, all sales of our investments must be approved by three out of four investment committee members.

        We pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% of our gross assets which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.

        In addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

        Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter.

        The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory and management agreement) and equals 20% of our "incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the 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

3



incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the "incentive fee capital gains" calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

        We have also entered into a separate administration agreement with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services. The administration agreement has an initial term of two years. Under the administration agreement, Saratoga Investment Advisors also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. Payments under the administration agreement will be equal to an amount based upon the allocable portion of Saratoga Investment Advisors' overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs relating to the performance of services under the administration agreement. Notwithstanding the foregoing, the fees to be paid to Saratoga Investment Advisors for the first year of the term of the administration agreement will be capped at $1 million and the existence of a cap, and the determination of a proper cap amount, in the second year of the term will be determined by the mutual agreement of our independent directors and Saratoga Investment Advisors.

Market Opportunity

        We believe the environment for investing in private middle market companies is attractive for the following reasons:

Investment Selection

        In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify

4



portfolio companies with superior fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga Investment Advisors' investment process emphasizes the following:

Risk Factors

        Investing in this offering involves risks. The following is a summary of certain risks that you should carefully consider before investing in our common stock. In addition, see "Risk Factors" beginning on page 13 for a more detailed discussion of these risk factors.

5



THE OFFERING

        The selling stockholders named in this prospectus may offer, from time to time, up to 1,168,018 shares of our common stock in market transactions through any market on which our common stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through a broker, who may act as agent or as principal, or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled "Plan of Distribution."

        The prospectus supplement relating to the offering will disclose the terms of the offering, including the name or names of any agents or underwriters involved in the sale of our common stock by the selling stockholders named in this prospectus, the purchase price, and any fee, commission or discount arrangement between the selling stockholders named in this prospectus and their agents or underwriters or among their underwriters or the basis upon which such amount may be calculated.

        The selling stockholders named in this prospectus may not sell any of our common stock through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of our common stock.

        Set forth below is additional information regarding the offering of our common stock by the selling stockholders named in this prospectus:

Use of Proceeds

  We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus.

Stock Exchange Listing

 

Our common stock is listed on the New York Stock Exchange under the symbol "SAR".

Trading at a Discount

 

Common stock of closed-end investment companies, including business development companies, frequently trade at discounts to net asset value and our common stock may also be discounted in the market. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade above, at or below our net asset value.

Taxation

 

We have elected and qualified to be treated as a RIC for U.S. federal income tax purposes. As a RIC, we generally will not be subject to U.S. federal income tax on our net taxable income that is distributed to stockholders. To maintain our qualification as a RIC we must derive at least 90% of our annual gross income from certain sources, meet certain asset diversification requirements and distribute to stockholders at least 90% of our net taxable income (which includes, among other items, interest, dividends, the excess of any net short-term capital gains over net long-term capital losses and other taxable income other than net capital gains). See "Material U.S. Federal Income Tax Considerations."

Dividends

 

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. In order to maintain our qualification as a RIC, we must distribute at least 90% of our net taxable income each year. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and have only made one dividend distribution (in November 2009) to our stockholders since such time.

6


Leverage

 

We expect to continue to use leverage to make investments. As a result, we may continue to be exposed to the risks of leverage, which include that leverage may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our shares of common stock. As a business development company, under the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage (calculated on a consolidated basis), as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on Saratoga Investment Advisors' and our board of directors' assessment of market conditions and other factors at the time of any proposed borrowing.

Management arrangements

 

Saratoga Investment Advisors serves as our investment adviser and our administrator. For a description of Saratoga Investment Advisors and our contractual arrangements with Saratoga Investment Advisors, see "Investment Advisory and Management Agreement," "Administration Agreement" and "License Agreement."

Dividend Reinvestment Plan

 

We have adopted a dividend reinvestment plan through which cash dividends are automatically reinvested in additional shares of our common stock, unless a stockholder opts out of the plan and elects to receive cash. Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash; however, since their cash dividends will be reinvested, such stockholders will not receive cash with which to pay any applicable taxes on reinvested dividends. See "Dividend Reinvestment Plan."

Additional Information

 

Our common stock is registered under the Exchange Act, and we are required to file reports, proxy statements and other information with the SEC. This information is available at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC's public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, at http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, that file documents electronically with the SEC. This information is also available free of charge by writing to us at 535 Madison Avenue, New York, New York 10022, by telephone at (212) 906-7800 or on our website at www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

7



FEES AND EXPENSES

        The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors will incur in connection with each offering of shares of our common stock pursuant to this prospectus. As a result, investors are urged to read the "Fees and Expenses" table contained in any corresponding prospectus supplement to fully understanding the actual transaction costs and expenses they will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by "you," "us" or "Saratoga Investment Corp.," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Saratoga Investment Corp.

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

       

Sales load paid

    %(1)

Offering expenses borne by us

    %(2)

Dividend reinvestment plan expenses

    None     (3)
       

Total stockholder transaction expenses paid

    %

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

       

Management fees

    2.15 %(4)

Incentive fees payable under the investment advisory and management agreement

    1.08 %(5)

Interest payments on borrowed funds

    2.28 %(6)

Other expenses

    3.48 %(7)
       

Total annual expenses

    8.99 %

Example

        The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that we would have no additional leverage and our annual operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load and offering expenses.

 
  1 Year   3 Years   5 Years   10 Years  

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

  $ 90   $ 191   $ 208   $ 256  

(1)
In the event that the shares of common stock to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

(2)
The prospectus supplement corresponding to each offering will disclose the applicable offering expenses and total stockholder transaction expenses.

(3)
The expenses associated with the administration of our dividend reinvestment plan are included in "Other expenses." The participants in the dividend reinvestment plan will pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see "Dividend Reinvestment Plan."

8


(4)
Our base management fee under the investment advisory and management agreement with Saratoga Investment Advisors is based on our gross assets, which is defined as all of our assets, including those acquired using borrowings for investment purposes, but excluding cash and cash equivalents. See "Investment Advisory and Management Agreement."

(5)
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our "pre-incentive fee net investment income" for the immediately preceding quarter, subject to a preferred return, or "hurdle," and a "catch up" feature. For this purpose, "pre-incentive fee net investment income" means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued by us during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).

    The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory and management agreement) and equals 20% of our "incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Under the investment advisory and management agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of incentive fee capital gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

    See "Investment Advisory and Management Agreement."

(6)
We may borrow funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so. The costs associated with our outstanding borrowings are indirectly borne by our stockholders.

(7)
"Other expenses" are based on estimated amounts for the current fiscal year and include our overhead expenses, including payments under our administration agreement based on our allocable portion of overhead and other expenses incurred by Saratoga Investment Advisors in performing its obligations under the administration agreement. See "Administration Agreement."

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

        The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher.

9


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

10



SELECTED FINANCIAL DATA

        The following selected financial and other data for the years ended February 28, 2010 and 2009 and February 29, 2008 are derived from the consolidated financial statements of GSC Investment Corp. (now known as Saratoga Investment Corp.), which have been audited by Ernst & Young LLP, an independent registered public accounting firm whose report thereon is included within this prospectus. The financial information at May 31, 2010 and for the three months ended May 31, 2010 and 2009 was derived from our unaudited financial statements and related notes included elsewhere in this prospectus. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The historical financial information below may not be indicative of our future performance. Our results for the interim period may not be indicative of our results for the full year. The data should be read in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this prospectus.

 
  Three
Months Ended
May 31,
2010
(unaudited)
  Three
Months Ended
May 31,
2009
(unaudited)
  Year Ended
February 28,
2010
  Year Ended
February 28,
2009
  Year Ended
February 29,
2008
 
 
  (dollar amounts in thousands, except share and per share numbers)
 

Income Statement Data:

                               

Interest and related portfolio income:

                               

Interest

  $ 2,270   $ 4,187   $ 13,324   $ 21,142   $ 20,744  

Management fee and other income

    540     564     2,293     2,245     642  
                       
 

Total interest and related portfolio income

    2,810     4,751     15,617     23,387     21,386  
                       

Expenses:

                               

Interest and credit facility financing expenses

    831     642     4,096     2,605     5,031  

Base management and incentive management fees (1)

    411     870     2,278     4,432     3,650  

Administrator expenses

    155     172     671     961     892  

Administrative and other

    1,566     688     3,502     2,433     2,766  

Expense reimbursement

    (155 )   (172 )   (671 )   (1,010 )   (1,789 )
                       
 

Total operating expenses

    2,808     2,200     9,876     9,421     10,550  
                       

Net investment income before income taxes

    2     3     5,741     13,966     10,836  

Income tax expenses, including excise tax

    0     0     (27 )   (140 )   (89 )
                       

Net investment income

    2     3     5,714     13,826     10,747  
                       

Realized and unrealized gain (loss) on investments and derivatives

                               

Net realized gain (loss)

    (2,551 )   (5 )   (6,654 )   (7,143 )   3,908  

Net change in unrealized loss

    5,204     2,805     (9,523 )   (27,998 )   (20,106 )
                       

Total net gain (loss)

    2,653     2,800     (16,177 )   (35,141 )   (16,198 )
                       
 

Net increase (decrease) in net assets resulting from operations

  $ 2,655   $ 5,364   $ (10,463 ) $ (21,315 ) $ (5,451 )
                       

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  Three
Months Ended
May 31,
2010
(unaudited)
  Year Ended
February 28,
2010
  Year Ended
February 28,
2009
  Year Ended
February 29,
2008
 

Per Share:

                         

Earnings (loss) per common share—basic and diluted (2)(3)

  $ 0.16   $ (0.99 ) $ (2.57 ) $ (0.70 )

Net investment income per share—basic and diluted (2)(3)

  $ 0.00   $ 0.54   $ 1.67   $ 1.38  

Net realized and unrealized gain (loss) per share—basic and diluted (2)(3)

  $ 0.16   $ (1.52 ) $ (4.24 ) $ (2.08 )

Dividends declared per common share

  $ 0.00   $ 1.83   $ 1.03   $ 1.55  

Statement of Assets and Liabilities Data:

                         

Investment assets at fair value

  $ 89,928   $ 89,373   $ 118,912   $ 172,837  

Total assets

    96,480     96,935     130,662     192,842  

Total debt outstanding

    33,807 (4)   36,992     58,995     78,450  

Stockholders' equity

    58,133     55,478     68,014     97,869  

Net asset value per common share

  $ 3.43   $ 3.27   $ 8.20   $ 11.80  

Common shares outstanding at end of period (3)

    16,940,109     16,940,109     8,291,384     8,291,384  

Other Data:

                         

Investments funded

  $   $   $ 28,260   $ 314,003  

Principal collections related to investment repayments or sales

  $ 2,700   $ 15,185   $ 49,195   $ 141,772  

Number of portfolio investments at period end

    36     41     45     46  

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

    9.0 %   9.6 %   9.7 %   10.7 %

Weighted average yield on income producing debt investments—Control

    15.0 %   8.3 %   12.2 %   8.2 %

(1)
See note 7 to our audited consolidated financial statements contained elsewhere in this prospectus.

(2)
For the three months ended May 31, 2010 and the years ended February 28, 2010 and 2009 and February 29, 2008, amounts are calculated using weighted average common shares outstanding of 16,940,109, 16,940,109, 8,291,384 and 8,291,384, respectively.

(3)
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. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding. The share and per share information set forth in the table above does not take into account the impact of the reverse stock split.

(4)
As described elsewhere in this prospectus, we used the net proceeds from the private sale of $15 million of shares of our common stock and a portion of the funds available to us under the secured revolving credit facility with Madison Capital Funding LLC to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch on July 30, 2010, which revolving securitized credit facility was then terminated. As of September 15, 2010, we had $20 million outstanding under the secured revolving credit facility with Madison Capital Funding LLC.

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RISK FACTORS

        Before you invest in our common stock, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in our common stock. The known material risks of an investment in us are set out below. Additional risks and uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the value of our common stock could decline, and you may lose all or part of your investment.

Saratoga Investment Advisors has no prior experience managing a business development company or a RIC.

        The 1940 Act and the Code impose numerous constraints on the operations of business development companies and RICs that do not apply to the other investment vehicles previously managed by the principals of Saratoga Investment Advisors. For example, under the 1940 Act, business development companies are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly-traded companies. Moreover, qualification for taxation as a RIC under subchapter M of the Code requires satisfaction of source-of-income and diversification requirements and our ability to avoid corporate-level taxes on our income and gains depends on our satisfaction of distribution requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a business development company or RIC or could force us to pay unexpected taxes and penalties, which could be material.

        Saratoga Investment Advisors is a newly-formed entity and is newly-registered with the SEC as an investment adviser pursuant to the Investment Advisers Act of 1940, or the "Advisers Act." As a new entity, Saratoga Investment Advisors does not have any prior experience managing a business development company or RIC and its lack of experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Saratoga Investment Advisors also does not have a proven track-record in managing corporate debt investments and collateralized loan obligation funds. Despite the 25-year history of Saratoga Partners, an affiliate of Saratoga Investment Advisors, with a track record in private investments in middle market companies, there is no guarantee that Saratoga Partners' past performance record will translate into future success for us with respect to the investment services provided by Saratoga Investment Advisors to us.

        Moreover, although Saratoga Investment Advisors intends to supplement its capabilities in the management of our investments by recruiting and hiring additional professionals with experience in the management of debt investments and collateralized loan obligations and to dedicate such individuals to our management, there is no guarantee that Saratoga Investment Advisors will hire or will have hired a sufficient number of professionals with adequate experience in our line of business.

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

        The U.S. capital markets experienced extreme volatility and disruption over the past 18 months, leading to recessionary conditions and depressed levels of consumer and commercial spending. Disruptions in the capital markets increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. While recent indicators suggest modest improvement in the capital markets, we cannot provide any assurance that these conditions will not worsen. If these conditions continue or worsen, the prolonged period of market illiquidity may have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital

13



markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.

        In addition, to the extent that recessionary conditions continue or worsen, the financial results of middle market companies, like those in which we invest, will continue to experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies' products and services have experienced, and continue to experience, negative economic trends. The performances of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments.

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

        Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

The independent registered public accounting firm of GSC Investment Corp. (now known as Saratoga Investment Corp.) included in its audit report dated May 27, 2010 that there was substantial doubt about GSC Investment Corp.'s ability to continue as a going concern.

        The consolidated financial statements as of February 28, 2009 and 2010 and for the three years ended February 28, 2010 of GSC Investment Corp. (now known as Saratoga Investment Corp.) were prepared on a "going concern" basis; however, Ernst & Young LLP, the independent registered public accounting firm, concluded in its report dated May 27, 2010 regarding those consolidated financial statements, that there was substantial doubt about GSC Investment Corp.'s ability to continue as a going concern as a result of the then existing default under the revolving securitized credit facility with Deutsche Bank AG, New York Branch, which gave Deutsche Bank the right to accelerate repayment of our outstanding indebtedness and foreclose and liquidate the collateral pledged thereunder. Subsequent to the date of the auditor's report, we consummated a recapitalization transaction pursuant to which we issued 986,837 shares of our common stock for $15 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and entered into a $40 million senior secured revolving credit facility with Madison Capital Funding LLC. We used the net proceeds from the sale of shares of our common stock and a portion of the funds available to us under secured revolving credit facility with Madison Capital Funding LLC to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

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

        Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases,

14



then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique and involves risks and special considerations for stockholders, including:

        As of September 15, 2010, we had outstanding indebtedness of $20 million.

        Illustration.    The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $90.0 million in total assets, (ii) a weighted average cost of funds of 7.5%, (iii) $20.0 million in debt outstanding; and (iv) $70.0 million in stockholders' equity.


Assumed Return on Our Portfolio
(net of expenses)

 
  -10.0%   -5.0%   0.0%   5.0%   10.0%  

Corresponding net return to common stockholder

    -12.9 %   -6.4 %   0 %   6.4 %   12.9 %

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

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

15



materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

The independent registered public accounting firm of GSC Investment Corp. (now known as Saratoga Investment Corp.) identified a material weakness in its internal control over financial reporting. Our business and stock price may be adversely affected if we have not adequately addressed such weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.

        The independent registered public accounting firm of GSC Investment Corp. (now known as Saratoga Investment Corp.) identified a material weakness in its internal control over financial reporting. The material weakness related to an error in the valuation reconciliation for certain investments. This error occurred as a result of an inadequate internal review and reconciliation of the inputs used in preparing the complex investment valuations.

        These control deficiencies resulted in adjustments to the consolidated financial statements for the year ended February 28, 2010. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed. In addition, we face the risk that, notwithstanding our efforts to identify and remedy all material errors in our financial statements, we may discover other errors in the future. We also face the risk that the cost of identifying and remedying the errors and remediating our material weakness in internal control over financial reporting will be high and could have a material adverse effect on our financial condition and results of operations.

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, regardless of the market value of our common stock.

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

The incentive fees we pay to Saratoga Investment Advisors may cause it to pursue a high risk investment strategy.

        The incentive fee payable by us to our investment adviser may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The way in which the incentive fee payable to our investment adviser is determined, which is calculated separately in two components as a percentage of the income (subject to a hurdle rate) and as a percentage of the realized gain on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in offerings of common stock pursuant to this prospectus.

16


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

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

        Given the subjective nature of the investment decisions made by our investment adviser on our behalf, we will be unable to monitor these potential conflicts of interest between us and our investment adviser.

The base management fee we pay to Saratoga Investment Advisors may cause it to increase our leverage contrary to our interest.

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

We operate in a highly competitive market for investment opportunities.

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

17


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

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

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

        We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market's assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

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

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

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

We are exposed to risks associated with changes in interest rates.

        General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed-rate securities that have longer maturities.

18



Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to ten years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities. A decline in the prices of the debt we own could adversely affect the trading price of our common stock.

We may experience fluctuations in our quarterly results.

        We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

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

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

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

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

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

        Common stock of business development companies, as closed-end investment companies, frequently trade at a discount to net asset value. Our common stock has traded at a discount to our net asset value since shortly after our initial public offering. The risk that our common stock may continue to trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline.

Regulations governing our operation as a business development company will affect our ability to raise additional capital.

        We have indebtedness outstanding under the senior secured revolving credit facility we have with Madison Capital Funding and we may issue debt securities or preferred stock, which we refer to collectively as "senior securities," up to the maximum amount permitted by the 1940 Act. Under the

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provisions of the 1940 Act, we are permitted, as a business development company, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which could prohibit us from paying dividends and prevent us from qualifying as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

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

        To generate cash for funding new investments, we pledged a substantial portion of our portfolio investments under the senior secured revolving credit facility we have with Madison Capital Funding. Such assets are not available to secure other sources of funding. Our ability to obtain additional secured or unsecured financing on attractive terms in the future is uncertain. An inability to obtain additional leverage through secured or unsecured financing of our loan portfolio could limit our ability to grow our business, fully execute our business strategy and decrease our earnings, if any.

Substantially all of our assets are subject to security interests under our senior secured revolving credit facility with Madison Capital Funding and if we default on our obligations under the facility, we may suffer adverse consequences, including Madison Capital Funding foreclosing on our assets.

        Substantially all of our assets are pledged as collateral under our senior secured revolving credit facility with Madison Capital Funding. If we default on our obligations under this facility, Madison Capital Funding may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to its security interests. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated.

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

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

        As a business development company for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we intend to make distributions out of assets legally available for distribution to our stockholders once such distributions are authorized by our board of directors and declared by us. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test that is applicable to us as a business development company, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

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

        If we fail to qualify as a business development company, we might be regulated as a registered closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility.

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

        We seek to maintain our qualification as a RIC under the Code, which requires us to qualify continuously as a BDC and meet certain source of income, distribution and asset diversification requirements.

        The source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in "qualified publicly traded partnerships," as defined in the Code.

        The annual distribution requirement is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We are subject to certain asset coverage ratio requirements under the 1940 Act and covenants under the senior secured revolving credit facility we have with Madison that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. In such case, if we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.

        The diversification requirements will be satisfied if we diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other regulated investment companies, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in certain publicly traded partnerships

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

        If we fail to qualify as a RIC for any reason, all of our taxable income will be subject to U.S. federal income tax at regular corporate rates. The resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

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

        In order to qualify for the tax benefits available to RICs and to minimize corporate-level taxes, we intend to distribute to our stockholders between 90% and 100% of our annual taxable income, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we must pay income taxes at the corporate rate on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise capital from other sources to grow our business. As a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 200%. These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.

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

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

        For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. In addition, we may be required to accrue for federal income tax purposes amounts attributable to our investment in GSC Investment Corp. CLO 2007 LTD., a collateralized loan obligation fund, that may differ from the distributions paid in respect of our investment in the subordinated notes of such collateralized loan obligation fund because of the factors set forth above or because distributions on the subordinated notes are contractually required to be diverted for reinvestment or to pay down outstanding indebtedness.

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

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Changes in interest rates may affect our cost of capital and net investment income.

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

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

        We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of the members of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain "joint" transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we are prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person's affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, directors or investment adviser or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our investment adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

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

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

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investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and investment adviser, and the members of our investment adviser.

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

        We may distribute taxable dividends that are payable in part in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

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

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

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

        We are authorized to invest in the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income for our stockholders may be diminished.

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

        Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with

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respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities.

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

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

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

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

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

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

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

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

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

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

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

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

Our investment in GSC Investment Corp. CLO 2007 LTD. constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility.

        At May 31, 2010, our investment in the subordinated notes of GSC Investment Corp. CLO 2007 LTD., a collateralized loan obligation fund, had a fair value of $18.2 million and constituted 31.3% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of May 31, 2010, was composed of $142.2 million in aggregate principal amount of primarily senior secured first lien term loans and $2.9 million in uninvested cash. Interest payments generated from this portfolio will be used to pay the administrative expenses of GSC Investment Corp. CLO 2007 LTD. and interest on the debt issued by GSC Investment Corp. CLO 2007 LTD. before paying a return on the subordinated notes. Principal payments will be similarly applied to pay administrative expenses of GSC Investment

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Corp. CLO 2007 LTD. and for reinvestment or repayment of GSC Investment Corp. CLO 2007 LTD. debt before paying a return on, or repayment of, the subordinated notes. In addition, 80% of our fixed management fee and 100% our incentive management fee for acting as the collateral manager of GSC Investment Corp. CLO 2007 LTD. is subordinated to the payment of interest and principal on GSC Investment Corp. CLO 2007 LTD. debt. Any losses on the portfolio will accordingly reduce the cash flow available to pay these management fees and provide a return on, or repayment of, our investment. Depending on the amount and timing of such losses, we may experience smaller than expected returns and, potentially, the loss of our entire investment.

        As the manager of the portfolio of GSC Investment Corp. CLO 2007 LTD., we will have some ability to direct the composition of the portfolio, but our discretion is limited by the terms of the debt issued by GSC Investment Corp. CLO 2007 LTD., which may limit our ability to make investments that we feel are in the best interests of the subordinated notes, and the availability of suitable investments. The performance of the portfolio is also subject to many of the same risks sets forth in this prospectus with respect to portfolio investments in leveraged loans.

Available information about privately held companies is limited.

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

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

        We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

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

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

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

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

Investments in equity securities involve a substantial degree of risk.

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

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

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

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

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

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

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

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

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

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

        The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in

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portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.

The market price of our common stock may fluctuate significantly.

        The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

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

        We are governed by our charter and bylaws, which we refer to as our "governing documents."

        Our governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a future transaction or change in control of us that might involve a premium price for our stockholders or otherwise be in their best interest.

        Our charter provides for the classification of our board of directors into three classes of directors, serving staggered three-year terms, which may render a change of control of us or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our board of directors will be filled generally only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a successor is elected and qualifies.

        Our board of directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of stock that we have authority to issue, which could have the effect of diluting a stockholder's ownership interest. Prior to the issuance of shares of stock of each class or series, including any reclassified series, our board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock.

        Our governing documents also provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General

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Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:

        The provisions of the Maryland Business Combination Act will not apply, however, if our board of directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Although our board of directors has adopted such a resolution, there can be no assurance that this resolution will not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to acquire control of us.

        As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our board of directors at any time in the future.

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USE OF PROCEEDS

        We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus.


PRICE RANGE OF COMMON STOCK AND DIVIDENDS

        Our common stock is traded on the New York Stock Exchange under the symbol "SAR." Prior to July 30, 2010, our common stock traded on the New York Stock Exchange under the symbol "GNV." The following table sets forth, for the two most recent fiscal years and the current fiscal year, the range of high and low sales prices of our common stock as reported on the New York Stock Exchange, the sales price as a percentage of our net asset value (NAV) and the dividends declared by us for each fiscal quarter. The high and low sales prices listed below, other than for the third quarter of the fiscal year ending February 28, 2011, do not reflect the 1:10 reverse stock split that occurred on August 12, 2010.

 
   
  Price Range    
   
   
 
 
   
  Percentage of
High Sales
Price to NAV(2)
  Percentage of
Low Sales
Price to NAV(2)
  Cash
Dividend
per Share(3)(4)
 
 
  NAV(1)   High   Low  

Year ending February 28, 2011

                                     

First Quarter

  $ 3.43   $ 2.55   $ 1.70     74.3 %   49.6 % $ —    

Second Quarter

    *   $ 2.12   $ 1.44     *     *   $ —    

Third Quarter (through September 15, 2010)

    *   $ 19.54   $ 18.18     *     *   $ —    

Year ended February 28, 2010

                                     

First Quarter

  $ 8.85   $ 4.05   $ 1.40     45.8 %   15.8 % $ —    

Second Quarter

  $ 6.91   $ 3.59   $ 2.03     52.0 %   29.4 % $ —    

Third Quarter

  $ 3.80   $ 3.80   $ 1.69     100.0 %   44.5 % $ 1.825 (4)

Fourth Quarter

  $ 3.27   $ 2.27   $ 1.35     69.4 %   41.3 % $ —    

Year ended February 28, 2009

                                     

First Quarter

  $ 11.75   $ 11.48   $ 9.25     97.7 %   78.7 % $ 0.39    

Second Quarter

  $ 11.05   $ 11.37   $ 8.89     102.9 %   80.5 % $ 0.39    

Third Quarter

  $ 10.14   $ 11.12   $ 0.89     109.7 %   8.8 % $ —    

Fourth Quarter

  $ 8.20   $ 3.20   $ 1.42     39.0 %   17.3 % $ 0.25    

*
Net asset value has not yet been calculated for this period.

(1)
Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.

(2)
Calculated as the respective high or low sales price divided by net asset value.

(3)
Represents the dividend declared in the specified quarter. We have adopted an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. See "Dividend Reinvestment Plan."

(4)
On November 13, 2009, we declared a dividend of $1.825 per share payable on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share. Based on stockholder

32


        The last reported price for our common stock on September 17, 2010 was $19.20 per share. As noted elsewhere in this prospectus, we effected a one-for-ten reverse stock split of our outstanding common stock on August 12, 2010. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding. As of September 15, 2010, we had 27 stockholders of record, which did not include stockholders for whom shares are held in nominee or street name.

        Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. Since our initial public offering in March 2007, our shares of common stock have at times traded at prices significantly less than our net asset value.

Dividends

        Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to a dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and have only made one dividend distribution (in November 2009) to our stockholders since such time. We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or that violate our debt covenants.

        In order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. For the 2009 calendar year the Company made distributions sufficient such that we did not incur any federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2010 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending October 31, 2010, if any, and, if we do so, we would expect to incur federal excise taxes as a result.

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

        Pursuant to a recent revenue procedure (Revenue Procedure 2010-12), or the Revenue Procedure, issued by the Internal Revenue Service, or IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including business development companies) that are paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements and

33



qualify for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure requires that at least 10% of the total distribution be payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This Revenue Procedure applies to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011. We may pay dividends in shares of our stock pursuant to the Revenue Procedure in the future.

        In this regard, on November 13, 2009, we declared a dividend of $1.825 per share payable on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share. Based on stockholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to stockholders who elected to receive cash.

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DIVIDEND REINVESTMENT PLAN

        We have adopted a dividend reinvestment plan (the "Plan") that provides that, unless you elect to receive your dividends or other distributions in cash, they will be automatically reinvested by the Plan Administrator, American Stock Transfer & Trust Company LLC, in additional shares of our common stock. If you elect to receive your dividends or other distributions in cash, you will receive them in cash paid by check mailed directly to you by the Plan Administrator. The reinvestment of our distributions does not relieve stockholders of any tax that may be payable on such distributions. For U.S. federal income tax purposes, stockholders will be treated as receiving the amount of the distributions made by us, which amount generally will be either equal to the amount of the cash distribution the stockholder would have received if the stockholder had elected to receive cash or, for shares issued by us, the fair market value of the shares issued to the stockholder.

        No action is required on the part of a registered stockholder to have their cash dividend reinvested in shares of our common stock. Unless you or your brokerage firm decides to opt out of the Plan, the number of shares of common stock you will receive will be determined as follows:

        You may withdraw from the Plan at any time by giving written notice to the Plan Administrator, or by telephone in accordance with such reasonable requirements as we and the Plan Administrator may agree upon. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Administrator will sell your shares and send you the proceeds, minus brokerage commissions. The Plan Administrator is authorized to deduct a $15.00 transaction fee plus a $0.10 per share brokerage commission from the proceeds.

        The Plan Administrator maintains all common stockholders' accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common stock in your account will be held by the Plan Administrator in non-certificated form. The Plan Administrator will forward to each participant any proxy solicitation material and will vote any shares so held only in accordance with proxies returned to us. Any proxy you receive will include all common stock you have received under the Plan.

        There is no brokerage charge for reinvestment of your dividends or distributions in common stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Administrator when it makes open market purchases.

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        Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. See "Material U.S. Federal Income Tax Considerations".

        If you hold your common stock with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial advisory for more information.

        Neither us nor the Plan Administrator nor its nominee or nominees shall be liable for any act done in good faith, or for any good faith omission to act, including without limitation, any claims of liability arising out of failure to terminate a participant's account upon the participant's death prior to receipt of notice in writing of such death, and with respect to the price at which shares are purchased or sold for the participant's account.

        The Plan Administrator's fees under the Plan will be borne by us. There is no direct service charge to participants in the Plan; however, we reserve the right to amend or terminate the Plan, including amending the Plan to include a service charge payable by the participants, if in the judgment of the board of directors the change is warranted. Any amendment to the Plan, except amendments necessary or appropriate to comply with applicable law or the rules and policies of the SEC or any other regulatory authority, require us to provide at least 30 days written notice to each participant. Additional information about the Plan may be obtained from American Stock Transfer & Trust Company LLC, 59 Maiden Lane, New York, New York 10038.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

        We are a Maryland corporation that has elected to be treated as a business development company. 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, both through direct lending and through participation in loan syndicates. We may also invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. We have elected and qualified to be treated as a RIC under subchapter M of the Code.

Corporate History and Recent Developments

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

        The recapitalization transaction was necessitated by the fact that we had exceeded permissible borrowing limits under our revolving securitized credit facility with Deutsche Bank AG, New York Branch in July 2009, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default under the revolving securitized credit facility, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged thereunder. In light of the event of default under the revolving securitized credit facility, 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 Saratoga Investment Advisors and certain of its affiliates and an assignment, assumption and novation agreement with Saratoga Investment Advisors, pursuant to which we assumed certain rights and obligations of Saratoga Investment Advisors under a debt commitment letter Saratoga Investment Advisors received from Madison Capital Funding LLC, indicating Madison Capital Funding's willingness to provide us with a $40 million senior secured revolving credit facility, subject to the satisfaction of certain terms and conditions. In addition, we 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.

37


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

        We used the net proceeds from the private sale transaction and a portion of the funds available to us under the $40 million senior secured revolving credit facility with Madison Capital Funding to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. 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. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

        In light of the fact that these events occurred subsequent to May 31, 2010, the financial statements and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus do not reflect the changes, including in our financial condition, resulting therefrom.

        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

38


either quarterly or semi-annually. In some cases, our debt investments may provide for a portion of the interest to be paid-in-kind ("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.

        Pursuant to an agreement with our former investment adviser, GSCP (NJ), L.P., entered into on October 17, 2006, prior to becoming a business development company, we acquired the right to act as investment adviser to GSC Partners CDO Fund III Limited, a collateralized loan obligation fund which we refer to as "CDO Fund III," and collect the management fees related thereto from March 20, 2007 until the liquidation of the CDO Fund III assets. We paid GSCP (NJ), L.P. a fair market price of $0.1 million for the right to act as investment adviser to CDO Fund III.

        On January 22, 2008, we entered into a collateral management agreement with GSC Investment Corp. CLO 2007 LTD., a collateralized loan obligation fund which we refer to as "GSCIC CLO," pursuant to which we act as its collateral manager and receive a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%.

        We recognize interest income on our investment in the subordinated notes of GSCIC 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.

        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 allocable portion is based on the ratio of our total assets to the total assets administered by our administrator. 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:

39


        The amount payable to GSCP (NJ), L.P., our former investment adviser and administrator, as administrator was capped to the effect that such amount, together with our other operating expenses, could not exceed an amount equal to 1.5% per annum of our net assets attributable to common stock. In addition, for the one-year term of the administration agreement expiring on March 21, 2011, GSCP (NJ), L.P. had agreed to waive our reimbursement obligation under the administration agreement until our total assets exceeded $500 million.

        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:

40


        We deferred cash payment of any incentive fee otherwise earned by our former investment adviser if, during the then most recent four full fiscal quarter period 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 $273,000 of this amount is due in October 2010. GSCP (NJ), L.P. agreed to waive payment by us of the remaining $2.6 million in connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this prospectus.

        The terms of the investment advisory and management agreement with Saratoga Investment Advisors, our current investment adviser, is 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:

        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.

        From the commencement of operations until March 23, 2008, GSCP (NJ), L.P., our former investment adviser and administrator, was reimbursed by us for operating expenses to the extent that our total annual operating expenses (other than investment advisory and management fees and interest

41



and credit facility expenses) exceeded an amount equal to 1.55% of our net assets attributable to common stock.

Portfolio and Investment Activity

Corporate Debt Portfolio Overview(1)

 
  At
May 31,
2010
  At
February 28,
2010
  At
February 28,
2009
  At
February 29,
2008
 
 
  ($ in millions)
 

Number of investments

    36     38     42     43  

Number of portfolio companies

    28     27     35     36  

Average investment size

  $ 2.0   $ 1.9   $ 2.3   $ 3.3  

Weighted average maturity

    2.3 years     2.5 years     3.3 years     3.8 years  

Number of industries

    18     19     22     23  

Average investment per portfolio company

  $ 2.9   $ 2.7   $ 2.8   $ 4.0  

Non-performing or delinquent investments

  $ 14.3   $ 18.5   $ 0.4   $  

Fixed rate debt (% of interest bearing portfolio)

  $ 33.2 (48.6 %) $ 33.0 (46.9 %) $ 40.3 (41.8 %) $ 57.0 (39.6 %)

Weighted average current coupon

    11.6 %   11.6 %   11.7 %   11.6 %

Floating rate debt (% of interest bearing portfolio)

  $ 35.1 (51.4 %) $ 37.4 (53.1 %) $ 56.2 (58.2 %) $ 86.8 (60.4 %)

Weighted average current spread over LIBOR

    7.8 %   7.6 %   5.9 %   5.6 %

(1)
Excludes our investment in the subordinated notes of GSCIC CLO and investments in common stocks and limited partnership interests.

        During the three months ended May 31, 2010, we made no investments in new or existing portfolio companies and had $2.7 million in aggregate amount of exits and repayments resulting in net repayments of $2.7 million for the period. During the fiscal year ended February 28, 2010, we made no investments in new or existing portfolio companies and had $15.2 million in aggregate amount of exits and repayments resulting in net repayments of $15.2 million for the year.

        During the fiscal year ended February 28, 2009, we made 17 investments in an aggregate amount of $23.1 million in new portfolio companies and $5.2 million in investments in existing portfolio companies. Also during the fiscal year ended February 28, 2009, we had $49.2 million in aggregate amount of exits and repayments resulting in net repayments of $20.9 million for the year.

        During the fiscal year ended February 29, 2008, we made 144 investments in an aggregate amount of $314.0 million. Also during the fiscal year ended February 29, 2008, we had $141.8 million in aggregate amount of exits and repayments, resulting in net investments of $172.2 million in aggregate amount for the year.

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        Our portfolio composition at May 31, 2010, February 28, 2010 and February 29, 2009 was as follows:


Portfolio Composition

 
  At May 31, 2010   At February 28, 2010   At February 28, 2009  
 
  Percentage of
Total Portfolio
  Weighted Average
Current Yield
  Percentage of
Total Portfolio
  Weighted Average
Current Yield
  Percentage of
Total Portfolio
  Weighted Average
Current Yield
 

First lien term loans

    15.4 %   9.7 %   18.6 %   8.6 %   14.4 %   6.8 %

Second lien term loans

    23.1     8.1     22.7     8.1     34.5     9.0  

Senior secured notes

    32.7     11.6     31.0     11.6     21.7     11.6  

Unsecured notes

    4.8     12.2     6.4     12.2     10.4     12.3  

GSCIC CLO subordinated notes

    20.2     9.7     18.7     8.3     18.8     12.2  

Equity interests

    3.8     N/A     2.6     N/A     0.1     N/A  

Limited partnership interests

        N/A         N/A     0.1     N/A  
                           

Total

    100.0 %   9.8 %   100.0 %   9.3 %   100.0 %   10.2 %
                           

        Our investment in the subordinated notes of GSCIC CLO represents a first loss position in a portfolio that, at May 31, 2010, February 28, 2010 and 2009, was composed of $406.0, $387.1 and $416.0 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique risks. ("Risk Factors—Our investment in GSC Investment Corp. CLO 2007 LTD. constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility") We do not consolidate the GSCIC CLO portfolio in our financial statements. Accordingly, the metrics below do not include the underlying GSCIC CLO portfolio investments. However, at May 31, 2010 and February 28, 2010, three and five GSCIC CLO portfolio investments were in default and over 91.8% and over 92.3%, respectively, of the GSCIC CLO portfolio investments had a CMR (as defined below) color rating of green or yellow.

        We have historically graded all of our investments using an internally developed credit and monitoring rating system ("CMR"). Prior to November 30, 2009 the CMR rating consists of two components: (i) a numerical debt score and (ii) a corporate letter rating. The numerical debt score is based on the objective evaluation of six risk categories: (i) leverage, (ii) seniority in the capital structure, (iii) fixed charge coverage ratio, (iv) debt service coverage/liquidity, (v) operating performance, and (vi) business/industry risk. The numerical debt score ranges from 1.00 to 5.00, which can generally be characterized as follows:

        The numerical debt score is designed to produce higher scores for debt positions that are more subordinate in the capital structure. Therefore, second lien term loans, high-yield bonds and mezzanine debt will generally be assigned scores of 2.25 or higher.

43


        The CMR also consists of a corporate letter rating whereby each credit is assigned a letter rating based on several subjective criteria, including perceived financial and operating strength and covenant compliance. The corporate letter ratings range from (A) through (F) and are characterized as follows: (A) equals strong credit, (B) equals satisfactory credit, (C) equals special attention credit, (D) equals payment default risk, (E) equals payment default, (F) equals restructured equity security.

        Effective November 30, 2009, the CMR consisted 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 May 31, 2010 and February 28, 2010 was as follows:


Portfolio CMR distribution

 
  At May 31, 2010   At February 28, 2010  
 
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
 
  ($ in thousands)
 

Green

  $ 9,650     10.7 % $ 9,479     10.6 %

Yellow

    23,714     26.4     27,763     31.1  

Red

    34,941     38.9     33,222     37.2  

N/A(1)

    21,623     24.0     18,909     21.1  
                   

Total

  $ 89,928     100.0 % $ 89,373     100.0 %
                   

(1)
Comprised of our investments in the subordinated notes of GSCIC CLO, equity interests, and limited partnership interests.

        The CMR distribution of our investments, using the legacy rating components, at February 28, 2009 was as follows:


Portfolio CMR Distribution

 
  At February 28, 2009  
Numerical Debt Score
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
 
  ($ in thousands)
 

1.00 - 1.99

  $ 8,941     7.5 %

2.00 - 2.99

    33,831     28.5  

3.00 - 3.99

    49,076     41.2  

4.00 - 4.99

    4,614     3.9  

5.00

         

N/A(1)

    22,450     18.9  
           

Total

  $ 118,912     100.0 %
           

44



 
  At February 28, 2009  
Corporate Letter Rating
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
 
  ($ in thousands)
 

A

  $ 4,602     3.9 %

B

    36,818     30.9  

C

    42,700     35.9  

D

    11,668     9.8  

E

    674     0.6  

F

         

N/A(1)

    22,450     18.9  
           

Total

  $ 118,912     100.0 %
           

(1)
Predominantly comprised of our investment in the subordinated notes of GSCIC CLO.

        The following table shows the portfolio composition by industry grouping at fair value at May 31, 2010 and February 28, 2010.


Portfolio composition by industry grouping at fair value

 
  At May 31, 2010   At February 28, 2010  
 
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
 
  ($ in thousands)
 

Structured Finance Securities(1)

  $ 18,209     20.2 % $ 16,698     18.7 %

Packaging

    9,550     10.6     9,791     11.0  

Consumer Products

    7,360     8.2     7,508     8.4  

Healthcare Services

    7,347     8.2     7,190     8.0  

Apparel

    7,082     7.9     6,910     7.7  

Electronics

    6,728     7.5     6,617     7.4  

Manufacturing

    5,996     6.7     6,399     7.2  

Publishing

    5,876     6.5     6,710     7.5  

Metals

    4,550     5.1     3,794     4.3  

Homebuilding

    4,466     5.0     3,634     4.1  

Natural Resources

    3,421     3.8     2,989     3.3  

Environmental

    2,354     2.6     2,060     2.3  

Logistics

    2,070     2.3     2,230     2.5  

Food and Beverage

    1,717     1.9     1,697     1.9  

Financial Services

    1,206     1.3     984     1.1  

Oil and Gas

    610     0.7     1,129     1.2  

Education

    568     0.6     634     0.7  

Building Products

    553     0.6     530     0.6  

Consumer Services

    265     0.3     255     0.3  

Printing

            1,614     1.8  
                   

Total

  $ 89,928     100.0 % $ 89,373     100.0 %
                   

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

45


        The following table shows the portfolio composition by geographic location at fair value at May 31, 2010 and February 28, 2010. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.


Portfolio Composition by Geographic Location at Fair Value

 
  At May 31, 2010   At February 28, 2010  
 
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
 
  ($ in thousands)
 

Midwest

  $ 22,591     25.1 % $ 23,637     26.5 %

Other(1)

    18,209     20.2     16,698     18.7  

West

    15,618     17.4     14,695     16.4  

International

    12,971     14.4     12,781     14.3  

Northeast

    11,271     12.6     11,631     13.0  

Southeast

    9,268     10.3     9,931     11.1  
                   

Total

  $ 89,928     100.0 % $ 89,373     100.0 %
                   

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

Results of Operations

        Operating results for the three months ended May 31, 2010 and 2009 are as follows;

 
  For the Three
Months Ended
 
 
  May 31,
2010
  May 31,
2009
 
 
  ($ in thousands)
 

Total investment income

  $ 2,811   $ 4,764  

Total expenses before waiver and reimbursement

    2,964     2,372  

Total expense waiver and reimbursement

    (155 )   (172 )

Total expenses net of expense waiver and reimbursement

    2,808     2,200  
           

Net investment income

    2     2,564  

Net realized losses

    (2,551 )   (5 )

Net unrealized gains

    5,204     2,805  
           

Net increase in net assets resulting from operations

  $ 2,655   $ 5,364  
           

46


        The composition of our investment income for the three months ended May 31, 2010 and 2009 was as follows:


Investment Income

 
  For the Three
Months Ended
 
 
  May 31,
2010
  May 31,
2009
 
 
  ($ in thousands)
 

Interest from investments

  $ 2,270   $ 4,187  

Management of GSCIC CLO

    507     521  

Interest from cash and cash equivalents and other income

    34     56  
           

Total

  $ 2,811   $ 4,764  
           

        For the three months ended May 31, 2010, total investment income decreased $2.0 million, or 41.0% compared to the three months ended May 31, 2009. The decrease is predominantly attributable to an increase in the allowance for impaired loans and bonds, a decrease in the effective interest rate earned on our investment in the subordinated notes of GSCIC CLO, and a smaller total average portfolio. The allowance for impaired loans and bonds increased to $1.1 million, for the three months ended May 31, 2010 from $0.3 million for the three months ended May 31, 2009. Interest income from our investment in the subordinated notes of GSCIC CLO decreased $0.2 million, or 24.8%, to $0.7 million for the three months ended May 31, 2010 from $0.9 million for the three months ended May 31, 2009.

        For the three months ended May 31, 2010 and 2009, total PIK income was $0.4 million, and $0.2 million, respectively.

        The composition of our operating expenses for the three months ended May 31, 2010 and 2009 was as follows:


Operating Expenses

 
  For the Three
Months Ended
 
 
  May 31,
2010
  May 31,
2009
 
 
  ($ in thousand)
 

Interest and credit facility expense

  $ 831   $ 643  

Base management fees

    411     548  

Professional fees

    1,143     340  

Incentive management fees

        322  

Administrator expenses

    155     172  

Insurance expenses

    195     206  

Directors fees

    165     82  

General and administrative expenses

    64     59  
           

Total operating expenses before manager waiver and reimbursement

  $ 2,964   $ 2,372  
           

47


        For the three months ended May 31, 2010, total operating expenses before manager expense waiver and reimbursement increased $0.6 million, or 24.9% compared to the three months ended May 31, 2009.

        For the three months ended May 31, 2010, the increase in interest and credit facility expense is primarily attributable to an increase in the interest rate on our revolving securitized credit facility with Deutsche Bank AG, New York Branch from the commercial paper rate plus 70 basis points to the greater of the commercial paper rate and Deutsche Bank's prime rate plus 4.00% plus a default rate of 2.00%, as a result of our July 30, 2009 event of default (please see "—Financial Condition, Liquidity and Capital Resources" below for more information). For the three months ended May 31, 2010, the weighted average interest rate on the revolving securitized credit facility with Deutsche Bank AG, New York Branch was 9.25% compared to 3.85% for the three months ended May 31, 2009.

        For the three months ended May 31, 2010, base management fees decreased $0.1 million, or 24.9% compared to the three months ended May 31, 2009. The reduction in base management fees results from the decrease in the average value of our total net assets and the continued reduction in the total portfolio size.

        For the three months ended May 31, 2010, professional fees increased $0.8 million, or 236.3% compared to the three months ended May 31, 2009. The increase in professional fees is attributable to additional legal and professional fees associated with the evaluation of strategic transaction opportunities including the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this prospectus.

        For the three months ended May 31, 2010, incentive management fees decreased $0.3 million, or 100.0% compared to the three months ended May 31, 2009. The decrease in incentive management fees is primarily attributable to the decrease in investment income and the increase in operating expenses which resulted in a failure to meet the quarterly hurdle rate of 1.875% for the quarter ended May 31, 2010 resulting in no incentive management fees for the quarter.

        For the three months ended May 31, 2010, the Company had $2.7 million of sales, repayments, exits or restructurings resulting in $2.6 million of net realized losses. The most significant realized gains and losses during the three months ended May 31, 2010 were as follows:


Three months ended May 31, 2010

Issuer
  Asset Type   Gross
Proceeds
  Cost   Net Realized
Gain/(Loss)
 
 
   
  ($ in thousands)
 

Custom Direct, Inc. 

  First Lien Term Loan   $ 1,832   $ (1,535 ) $ 297  

Legacy Cabinets, Inc. 

  Second Lien Term Loan     139     (2,002 )   (1,863 )

Legacy Cabinets, Inc. 

  First Lien Term Loan     502     (1,496 )   (994 )

        For the three months ended May 31, 2009, the Company had $0.3 million of sales, repayments or exits resulting in $5,152 of net realized losses. The most significant realized gains and losses during the three months ended May 31, 2009 were as follows:


Three months ended May 31, 2009

Issuer
  Asset Type   Gross
Proceeds
  Cost   Net Realized
Loss
 
 
   
  ($ in thousands)
 

IPC Systems, Inc. 

  First Lien Term Loan   $ 14   $ (19 ) $ (5 )

48


        For the three months ended May 31, 2010, the Company had net unrealized appreciation of $5.2 million, which was comprised of $5.3 million in unrealized appreciation, $3.2 million in unrealized depreciation and $3.1 million related to the reversal of prior period net unrealized depreciation recorded upon the exit of an investment. The most significant changes in net unrealized appreciation and depreciation for the three months ended May 31, 2010 are as follows:


Three months ended May 31, 2010

Issuer
  Asset Type   Cost   Fair Value   Total
Unrealized
Depreciation
  Quarterly
Change in
Unrealized
Appreciation/
(Depreciation)
 
 
   
  ($ in thousands)
 

GSCIC CLO

 

Other/Structured Finance Securities

  $ 29,233   $ 18,209   $ (11,024 ) $ 1,510  

McMillin Companies, LLC

 

Senior Secured Notes

    7,356     4,466     (2,890 )   809  

Elyria Foundry Company, LLC

 

Senior Secured Notes

    4,889     4,550     (339 )   751  

Grant U.S. Holdings, LLP

 

Second Lien Term Loan

    6,349     592     (5,757 )   434  

USS Mergerco, Inc. 

 

Common Stock

    3,159     2,355     (804 )   294  

Jason Incorporated

 

Unsecured Notes

    13,700     1,096     (12,604 )   (592 )

Energy Alloys, LLC

 

Second Lien Term Loan

    6,285     610     (5,675 )   (565 )

Penton Media, Inc. 

 

First Lien Term Loan

    3,952     3,449     (503 )   (503 )

        The $1.5 million decrease in net unrealized depreciation in our investment in the GSCIC subordinated notes was due to changes in various assumptions, such as portfolio default rate, recovery rate on defaults and portfolio prepayment rate, used in our discounted cash flow model. These changes were made in accordance with current market practice for collateralized loan obligation fund equity investments and not as a result of any change in the underlying GSCIC portfolio. The decrease in unrealized depreciation in our investments in McMillin Companies, LLC and Elyria Foundry Company, LLC, were due to an improvement in the outlook for these companies. The increase in unrealized depreciation in our investments in Jason Incorporated and Energy Alloy were due to declining prospects for each of the companies. The change in the fair values of our investments in Grant U.S. Holdings and Penton Media, Inc were due to fluctuations in the market quotations obtained for these investments compared to the prior period.

        For the three months ended May 31, 2009, the Company had net unrealized appreciation of $2.8 million, which was comprised of $8.0 million in unrealized appreciation and $5.2 million in unrealized depreciation The most significant changes in net unrealized appreciation and depreciation for the three months ended May 31, 2009 are as follows:


Three months ended May 31, 2009

Issuer
  Asset Type   Cost   Fair Value   Total
Unrealized
Depreciation
  Quarterly
Change in
Unrealized
Appreciation/
(Depreciation)
 
 
   
  ($ in thousands)
 

Terphane Holdings Corp. 

 

Senior Secured Notes

  $ 10,435   $ 8,568   $ (1,867 ) $ 870  

Penton Media, Inc. 

 

First Lien Term Loan

    3,770     2,915     (855 )   861  

IDI Acquisition Corp. 

 

Senior Secured Notes

    3,638     3,207     (431 )   764  

USS Mergerco, Inc. 

 

Second Lien Term Loan

    5,852     4,328     (1,524 )   731  

GSCIC CLO

 

Other/Structured Finance Securities

    29,233     19,208     (10,025 )   (2,461 )

Grant U.S. Holdings LLP

 

Second Lien Term Loan

    6,189     795     (5,394 )   (1,643 )

Targus Holdings Corp

 

Second Lien Term Loan

    4,786     2,573     (2,213 )   (563 )

49


        For the three months ended May 31, 2010, changes in the value of the interest rate caps resulted in an unrealized depreciation of $19,869 versus an unrealized appreciation of $35,687 for the three months ended May 31, 2009. For a more detailed discussion of the interest rate caps, see "Note 9. Interest Rate Cap Agreements" to our audited financial statements included elsewhere in this prospectus.

        For the three months ended May 31, 2010 and 2009, we recorded a net increase in net assets resulting from operations of $2.7 million and $5.4 million, respectively. Based on 16,940,109 weighted average common shares outstanding as of May 31, 2010, our per share net increase in net assets resulting from operations was $0.16 for the three months ended May 31, 2010. This compares to a per share increase in net assets resulting from operations of $0.65 for the three months ended May 31, 2009 based on 8,291,384 weighted average common shares outstanding as of May 31, 2009.

        Operating results for the years ended February 28, 2010 and 2009 and February 29, 2008 are as follows:

 
  For The Year Ended  
 
  February 28,
2010
  February 28,
2009
  February 29,
2008
 
 
  ($ in thousands)
 

Total investment income

  $ 15,617   $ 23,387   $ 21,386  

Total expenses before waiver and reimbursement

    10,547     10,431     12,339  

Total expense waiver and reimbursement

    (671 )   (1,010 )   (1,789 )

Total expenses net of expense waiver and reimbursement

    9,876     9,421     10,550  
               

Net investment income before income taxes

    5,741     13,966     10,836  

Income tax expense, including excise tax

    (27 )   (140 )   (89 )
               

Net investment income

    5,714     13,826     10,747  

Net realized gains (losses)

    (6,654 )   (7,143 )   3,908  

Net unrealized losses

    (9,523 )   (27,998 )   (20,106 )
               

Net decrease in net assets resulting from operations

  $ (10,463 ) $ (21,315 ) $ (5,451 )
               

        The composition of our investment income in each period was as follows:


Investment Income

 
  February 28,
2010
  February 28,
2009
  February 29,
2008
 
 
  ($ in thousands)
 

Interest from investments

  $ 13,300   $ 20,967   $ 20,378  

Management of GSCIC CLO

    2,057     2,050     599  

Interest from cash and cash equivalents and other income

    260     370     409  
               

Total

  $ 15,617   $ 23,387   $ 21,386  
               

50


        For the year ended February 28, 2010, total investment income decreased $7.8 million, or 33% compared to the fiscal year ended February 28, 2009. The decrease is predominantly attributable to a decrease in the effective interest rate earned on our investment in the subordinated notes of GSCIC CLO, an increase in the allowance for impaired loans and bonds, and a smaller total average portfolio. Interest income from our investment in the subordinated notes of GSCIC CLO decreased $2.0 million, or 45%, to $2.4 million for the year ended February 28, 2010 from $4.4 million for the fiscal year ended February 28, 2009. The allowance for impaired loans and bonds increased $2.1 million, for the year ended February 28, 2010 from no allowance for the fiscal year ended February 28, 2009.

        For the year ended February 28, 2009, total investment income increased $2.0 million, or 9.3% compared to the fiscal year ended February 29, 2008. The increase is predominantly attributable to the management fee earned from GSCIC CLO during the fiscal year ended February 28, 2009 and our being operational for only eleven months during the fiscal year ended February 29, 2008.

        For the fiscal years ended February 28, 2010 and 2009 and February 29, 2008, total PIK income was $0.9 million, $0.8 million and $0.4 million, respectively.

        The composition of our operating expenses in each period was as follows:


Operating Expenses

 
  February 28,
2010
  February 28,
2009
  February 29,
2008
 
 
  ($ in thousands)
 

Interest and credit facility expense

  $ 4,096   $ 2,605   $ 5,031  

Base management fees

    1,951     2,680     2,939  

Professional fees

    2,071     1,166     1,410  

Incentive management fees

    328     1,752     711  

Administrator expenses

    671     961     892  

Insurance expenses

    870     682     587  

Directors fees

    295     295     314  

General and administrative expenses

    265     290     262  

Other

            193  
               

Total operating expenses before manager waiver and reimbursement

  $ 10,547   $ 10,431   $ 12,339  
               

        For the year ended February 28, 2010, total operating expenses before manager expense waiver and reimbursement increased $0.1 million, or 1.1% compared to the fiscal year ended February 28, 2009. For the year ended February 28, 2009, total operating expenses before manager expense waiver and reimbursement decreased $1.9 million, or 15.4% compared to the fiscal year ended February 29, 2008.

        For the year ended February 28, 2010, the increase in interest and credit facility expense is primarily attributable to an increase in the interest rate on our revolving securitized credit facility with Deutsche Bank AG, New York Branch from the commercial paper rate plus 70 basis points to the greater of the commercial paper rate and Deutsche Bank's prime rate plus 4.00% plus a default rate of 2.00%, and a one time non-cash charge of $0.5 million as a result of the write-off of deferred financing costs on such credit facility, in each case, as a result of our July 30, 2009 event of default (please see "—Financial Condition, Liquidity and Capital Resources" below for more information). For the year ended February 28, 2010, the weighted average interest rate on the revolving securitized credit facility with Deutsche Bank AG, New York Branch was 6.80% compared to 3.59% for the fiscal year ended February 28, 2009.

51


        For the year ended February 28, 2009, the decrease in interest and credit facility expense is primarily attributable to decreased borrowing under the revolving securitized credit facility with Deutsche Bank AG, New York Branch (please see "—Financial Condition, Liquidity and Capital Resources" below for more information).

        For the year ended February 28, 2010, base management fees decreased $0.7 million, or 27.2% compared to the fiscal year ended February 28, 2009. For the year ended February 28, 2009, base management fees decreased $0.3 million, or 8.8% compared to the fiscal year ended February 29, 2008. The reduction in base management fees results from the decrease in the average value of our total net assets and the continued reduction in the total portfolio size.

        For the year ended February 28, 2010, professional fees increased $0.9 million, or 77.6% compared to the fiscal year ended February 28, 2009. The increase in professional fees is attributable to additional legal and professional fees associated with the evaluation of strategic transaction opportunities including the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this prospectus. For the year ended February 28, 2009, professional fees decreased $0.2 million, or 17.3% compared to the fiscal year ended February 29, 2008.

        For the year ended February 28, 2010, incentive management fees decreased $1.4 million, or 81.3% compared to the fiscal year ended February 28, 2009. The decrease in incentive management fees is primarily attributable to the decrease in investment income and the increase in operating expenses which resulted in a failure to meet the quarterly hurdle rate of 1.875% for the quarters ended August 31, 2009 and November 30, 2009 resulting in no incentive management fees for these quarters. In connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this prospectus, the outstanding incentive fees owed to our former external investment adviser were waived. See "—Overview" above for more information.

        For the year ended February 28, 2009, incentive management fees increased $1.0 million, or 146.3%, compared to the fiscal year ended February 29, 2008. The increase in incentive management fees resulted from the combination of higher net investment income and lower operating expenses between the two periods, and was partially offset by a decrease in base management fees resulting from a decrease in the average value of our total net assets, and decreased professional fees.

        For the year ended February 28, 2010, manager expense waiver and reimbursement decreased $0.3 million, or 33.6% compared to the fiscal year ended February 28, 2009. The decrease is primarily attributable to lower total compensation expense incurred by our former administrator relating to the allocation of those persons providing administrative support and services to the Company.

        For the year ended February 28, 2009, manager expense waiver and reimbursement decreased $0.8 million, or 43.5% compared to the fiscal year ended February 28, 2009. The decrease was due to the termination of the expense reimbursement agreement as of March 23, 2008, pursuant to which our former external investment adviser had reimbursed the Company for operating expenses (other than investment advisory and management fees and interest and credit facility expenses) in excess of 1.55% of net assets attributable to common stock.

52



Net Realized Gains/Losses on Sales of Investments

        For the fiscal year ended February 28, 2010, the Company had $15.2 million of sales, repayments, exits or restructurings resulting in $6.7 million of net realized losses. Net realized losses were comprised of $1.1 million of gross realized gains and $7.8 million of gross realized losses. The most significant realized gains and losses during the year ended February 28, 2010 were as follows:


Fiscal Year Ended February 28, 2010

Issuer
  Asset Type   Gross
Proceeds
  Cost   Net Realized
Gain/(Loss)
 
 
   
  ($ in thousands)
 

Atlantis Plastics Films, Inc. 

  First Lien Term Loan   $ 521   $   $ 482  

Asurion Corporation

  First Lien Term Loan     1,930     (1,725 )   205  

Edgen Murray II, L.P. 

  Second Lien Term Loan     3,000     (2,832 )   168  

USS Mergerco, Inc. 

  Second Lien Term Loan     3,159     (5,847 )   (2,688 )

Targus Group International, Inc. 

  Second Lien Term Loan     2,121     (4,793 )   (2,672 )

Blaze Recycling & Metals, LLC

  Senior Secured Notes     1,538     (2,495 )   (957 )

        For the fiscal year ended February 28, 2009, the Company had $49.2 million of sales, repayments or exits resulting in $7.2 million of net realized losses. Net realized losses were comprised of $0.6 million of gross realized gains and $7.8 million of gross realized losses. The most significant realized gains and losses during the year ended February 28, 2009 were as follows:


Fiscal Year Ended February 28, 2009

Issuer
  Asset Type   Gross
Proceeds
  Cost   Net Realized
Gain/(Loss)
 
 
   
  ($ in thousands)
 

Key Safety Systems

  First Lien Term Loan   $ 2,063   $ 1,857   $ 206  

SILLC Holdings, LLC

  Second Lien Term Loan     23,049     22,878     171  

EuroFresh, Inc. 

  Unsecured Notes     2,880     6,900     (4,020 )

Atlantis Plastics Films, Inc. 

  First Lien Term Loan     3,073     6,053     (2,980 )

Claire's Stores, Inc. 

  First Lien Term Loan     2,103     2,584     (481 )

Jason Incorporated

  Unsecured Notes     1,581     1,700     (119 )

        For the fiscal year ended February 29, 2008, the Company had $141.8 million of sales, repayments or exits resulting in $3.2 million of net realized gains. Net realized gains were comprised of $4.1 million of gross realized gains and $0.9 million of gross realized losses. The most significant realized gains and losses during the year ended February 29, 2008 were as follows:


Fiscal Year Ended February 29, 2008

Issuer
  Asset Type   Gross
Proceeds
  Cost   Net Realized
Gain/(Loss)
 
 
   
  ($ in thousands)
 

Sportcraft, LTD

  Second Lien Term Loan   $ 9,000   $ 7,302   $ 1,698  

SILLC Holdings, LLC

  Senior Secured Notes     22,821     21,838     983  

McMillin Companies, LLC

  Senior Secured Notes     3,300     3,066     234  

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        For the year ended February 28, 2010, the Company had net unrealized losses of $9.5 million, which was comprised of $7.4 million in unrealized appreciation, $25.5 million in unrealized depreciation and $8.6 million related to the reversal of prior period net unrealized depreciation recorded upon the exit of an investment. The most significant changes in net unrealized appreciation and depreciation for the year ended February 28, 2010 are as follows:


Fiscal Year Ended February 28, 2010

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

Terphane Holdings Corp. 

 

Senior Secured Notes

  $ 10,437   $ 9,791   $ (646 ) $ 2,091  

Penton Media, Inc. 

 

First Lien Term Loan

    3,908     3,478     (430 )   1,286  

IDI Acquisition Corp. 

 

Senior Secured Notes

    3,679     3,621     (58 )   1,136  

Jason Incorporated

 

Unsecured Notes

    13,700     1,688     (12,012 )   (8,190 )

GSCIC CLO

 

Other/Structured Finance Securities

    29,233     16,698     (12,535 )   (4,970 )

Energy Alloys, LLC

 

Second Lien Term Loan

    6,239     1,129     (5,110 )   (4,197 )

        For the year ended February 28, 2009, the Company had net unrealized losses of $28.0 million, which was comprised of $0.1 million in unrealized appreciation, $36.1 million in unrealized depreciation and $8.0 million related to the reversal of prior period net unrealized depreciation recorded upon the exit of an investment. The most significant changes in net unrealized appreciation and depreciation for the year ended February 28, 2009 are as follows:


Fiscal Year Ended February 28, 2009

Issuer
  Asset Type   Cost   Fair Value   Total Unrealized
Depreciation
  YTD Change in
Unrealized
Depreciation
 
 
   
  ($ in thousands)
 

GSCIC CLO

 

Other/Structured Finance Securities

  $ 29,905   $ 22,341   $ (7,564 ) $ (6,480 )

Jason Incorporated

 

Unsecured Notes

    13,700     9,878     (3,822 )   (3,453 )

Grant U.S. Holdings LLP

 

Second Lien Term Loan

    6,140     2,388     (3,752 )   (2,553 )

McMillin Companies, LLC

 

Unsecured Notes

    7,295     3,490     (3,805 )   (2,522 )

Penton Media, Inc. 

 

First Lien Term Loan

    3,724     2,008     (1,716 )   (1,906 )

Network Communications

 

Unsecured Notes

    5,082     2,503     (2,579 )   (1,884 )

Terphane Holdings Corp.

 

Senior Secured Notes

    10,431     7,694     (2,737 )   (1,863 )

        The $6.5 million net unrealized depreciation in our investment in the GSCIC CLO subordinated notes was due to an increase in the assumed portfolio default rate and present value discount rate in our discounted cash flow model. These changes were made to reflect the current market environment for collateralized loan obligation fund equity investments and not as a result of any change in the underlying GSCIC CLO portfolio.

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        For the year ended February 29, 2008, the Company had net unrealized losses of $20.1 million, which was comprised of $0.5 million in unrealized appreciation and $20.6 million in unrealized depreciation. The most significant changes in net unrealized appreciation and depreciation for the year ended February 29, 2008 are as follows:


Fiscal Year Ended February 29, 2008

Issuer
  Asset Type   Cost   Fair Value   Total Unrealized
Depreciation
  YTD Change in
Unrealized
Depreciation
 
 
   
  ($ in thousands)
 

Eurofresh, Inc. 

  Unsecured Notes   $ 6,891   $ 3,850   $ (3,041 ) $ (3,041 )

SILLC Holdings, LLC

  Second Lien Term Loan     22,865     20,283     (2,582 )   (2,582 )

Atlantis Plastics Films, Inc.

  First Lien Term Loan     6,492     4,298     (2,194 )   (2,194 )

Bankruptcy Management

  Second Lien Term Loan     4,902     3,555     (1,347 )   (1,347 )

McMillin Companies LLC

  Unsecured Notes     7,195     5,912     (1,283 )   (1,283 )

Grant U.S. Holdings LLP

  Second Lien Term Loan     5,365     4,167     (1,198 )   (1,198 )

        For the fiscal year ended February 28, 2009, the Company recorded a net realized gain on derivatives of $30,454 relating to our investment in the GSCIC CLO warehouse facility. For the fiscal year ended February 29, 2008, the Company recorded a net realized gain on derivatives of $0.7 million from the same warehouse facility (see "—Off-balance sheet arrangements" below).

        For the fiscal year ended February 28, 2010, changes in the value of the interest rate caps purchased pursuant to the credit facilities resulted in an unrealized appreciation of $2,634 versus an unrealized depreciation of $37,221 and $54,266 for the fiscal years ended February 28, 2009 and February 29, 2008. For a more detailed discussion of the interest rate caps, see "Note 9. Interest Rate Cap Agreements" to our audited financial statements included elsewhere in this prospectus.

        For the fiscal years ended February 28, 2010 and 2009 and February 29, 2008, we recorded a net decrease in net assets resulting from operations of $10.5 million, $21.3 million and $5.5 million, respectively. Based on 10,613,507 weighted average common shares outstanding as of February 28, 2010, our per share net decrease in net assets resulting from operations was $0.99 for the fiscal year ended February 28, 2010. This compares to a per share decrease in net assets resulting from operations of $2.57 for the fiscal year ended February 28, 2009 (based on 8,291,384 weighted average common shares outstanding as of February 28, 2009) and a per share decrease in net assets resulting from operations of $0.70 for the fiscal year ended February 29, 2008 (based on 7,761,965 weighted average common shares outstanding for the fiscal year ended February 29, 2008).

Financial Condition, Liquidity and Capital Resources

        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

55



which all principal proceeds from the collateral was used to repay outstanding borrowings. In March 2009, we amended the Revolving Facility to decrease the minimum required collateralization and increase the portion of the portfolio that can be invested in "CCC" rated investments in return for an increased interest rate and expedited amortization.

        On July 30, 2009, an event of default under the Revolving Facility occurred. As a result of this event of default, the lender under the Revolving Facility had the right to accelerate repayment of the outstanding indebtedness and to foreclose and liquidate the collateral pledged thereunder. Due to the event of default, the interest rate on the Revolving Facility increased from the commercial paper rate plus 4.00% to an interest rate at February 28, 2010 and May 31, 2010 of 9.25%.

        At May 31, 2010 and February 28, 2010, we had $33.8 million and $37.0 million, respectively, in borrowings under the Revolving Facility versus $59.9 million in borrowings at February 28, 2009.

        On July 30, 2010, we used the net proceeds from the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates and a portion of the funds available to us under the senior secured revolving credit facility with Madison Capital Funding to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. Below is a summary of the terms of the $40 million senior secured revolving credit facility we have with Madison Capital Funding (the "Replacement Facility").

        Availability.    The Company can draw up to the lesser of (i) $40 million (the "Facility Amount") and (ii) the product of the applicable advance rate (which varies from 50% to 75% depending on the type of loan asset) and the value, determined in accordance with the Replacement 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 Replacement Facility is closed will be valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of the loan asset, and certain modifications to the terms of the loan asset.

        The Replacement 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.

        At any time prior to the second anniversary of the closing of the Replacement Facility and subject to certain conditions, the Company may request an increase in the Facility Amount of up to $60 million for a combined aggregate Facility Amount of $100 million.

        Collateral.    The Replacement Facility is secured by substantially all of the assets of the Company and includes the subordinated notes ("CLO Notes") issued by GSCIC CLO and the Company's rights under the CLO Management Agreement (as defined below).

        Interest Rate and Fees.    Under the Replacement 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

56



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 Replacement Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company is also obligated to pay certain other fees to the lenders in connection with the closing of the Replacement Facility.

        Revolving Period and Maturity Date.    The Company may make and repay borrowings under the Replacement Facility for a period of three years following the closing of the Replacement 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 Replacement 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 Replacement Facility that the principal amount outstanding under the Replacement 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"):

        The Replacement 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 Replacement 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.

57


        Reserve Account.    The Replacement 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% of the aggregate Adjusted Borrowing Value of "eligible" pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.

        Unfunded Exposure Account.    With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated account (the "Unfunded Exposure Account") 100% 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 Replacement 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 Replacement 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% 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 Replacement 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 Replacement Facility contains certain negative covenants, customary representations and warranties and affirmative covenants and events of default. The Replacement 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 Replacement Facility include, among other things, the following:

58


        Conditions to Acquisitions and Pledges of Loan Assets.    The Replacement 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 Replacement 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 $1,613,314.

        As of September 15, 2010, we had $20 million outstanding under the Replacement Facility.

        Our asset coverage ratio, as defined in the 1940 Act, was 250%, 215% and 225% for the years ended February 28, 2010 and 2009 and February 29, 2008, respectively, and 272% as of May 31, 2010.

59


        At May 31, 2010, February 28, 2010 and 2009 and February 29, 2008, the fair value of investments, cash and cash equivalents and cash and cash equivalents, securitization accounts were as follows:

 
  At May 31, 2010   At February 28, 2010   At February 28, 2009   February 29, 2008  
 
  Fair
Value
  Percent
of Total
  Fair
Value
  Percent
of Total
  Fair
Value
  Percent
of Total
  Fair
Value
  Percent
of Total
 
 
  ($ in thousands)
 

Cash and cash equivalents

  $ 2,928     3.2 % $ 3,352     3.6 % $ 6,356     5.0 % $ 1,073     0.6 %

Cash and cash equivalents, securitization accounts

    379     0.4     226     0.2     1,178     0.9     14,581     7.7  

First lien term loans

    13,830     14.8     16,653     17.9     17,118     13.5     26,362     14.0  

Second lien term loans

    20,794     22.3     20,267     21.8     41,043     32.5     62,446     33.1  

Senior secured notes

    29,372     31.5     27,742     29.9     25,832     20.4     31,657     16.8  

Unsecured notes

    4,308     4.6     5,690     6.1     12,381     9.8     23,280     12.4  

Structured finance securities

    18,209     19.5     16,698     18.0     22,341     17.7     28,915     15.3  

Common stock

    3,415     3.7     2,323     2.5     89     0.1          

Other/limited partnership interests

                    109     0.1     176     0.1  
                                   

Total

  $ 93,235     100.0 % $ 92,951     100.0 % $ 126,447     100.0 % $ 188,490     100.0 %
                                   

        On November 13, 2009, our board of directors declared a dividend of $1.825 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% 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.

        On December 8, 2008, our board of directors declared a cash dividend of $0.25 per share payable on December 29, 2008, to common stockholders of record on December 18, 2008.

        During the quarter ended May 31, 2010, we did not make any dividend declarations.

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        The following table shows our payment obligations for repayment of debt and other contractual obligations at May 31, 2010:

 
   
  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

  $ 33,807 (1) $ 33,807   $   $   $  
                       

(4)
As described elsewhere in this prospectus, we used the net proceeds from the private sale of $15 million of shares of our common stock and a portion of the funds available to us under the secured revolving credit facility with Madison Capital Funding LLC to pay the full amount of principal and accrued interest, including default interest, outstanding under over revolving credit facility with Deutsche Bank AG, New York Branch, which was then terminated. As of September 15, 2010, we had $20 million outstanding under the secured revolving credit facility with Madison Capital Funding LLC.

Off-Balance Sheet Arrangements

        At May 31, 2010, February 28, 2010 and 2009, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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SENIOR SECURITIES

        Information about our senior securities is shown in the following tables as of February 28, 2010, 2009 and 2008. The report of Ernst & Young LLP, the independent registered public accounting firm of GSC Investment Corp. (now known as Saratoga Investment Corp.) on the senior securities table as of February 28, 2010 is attached as an exhibit to the registration statement of which this prospectus is a part.

Year
  Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
  Asset Coverage
Per Unit(2)
  Involuntary
Liquidation
Preference
Per Unit(3)
  Average Market
Value
Per Unit(4)

Revolving Facility

                     

2010

  $ 36,992   $ 2.50       N/A

2009

    58,995     2.15       N/A

2008

    78,450     2.25       N/A

(1)
Total amount of each class of senior securities outstanding at the end of the period presented.

(2)
Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.

(3)
The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. The "—" in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of senior securities.

(4)
Not applicable because senior securities are not registered for public trading.

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BUSINESS

Saratoga Investment Corp.

        We are a specialty finance company that invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies, both through direct lending and through participation in loan syndicates. Our investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We are externally managed and advised by Saratoga Investment Advisors LLC, a New York-based investment firm affiliated with Saratoga Partners, a leading middle-market private equity investment firm.

        As of May 31, 2010, we had investments in 28 portfolio companies and one collateralized loan obligation fund with an aggregate fair value of $89.9 million. The weighted average yield on all of our debt investments as of May 31, 2010 was approximately 10.5%. As of May 31, 2010, we held equity investments consisting of common stock, limited partnership interests and warrants to purchase common stock or other equity interests in our portfolio companies with an aggregate fair value of $3.4 million.

        Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. We also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

        While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

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

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

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

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        The recapitalization transaction consisted of (i) the private sale of 986,837 shares of our common stock for $15 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and (ii) the entry into a $40 million senior secured revolving credit facility with Madison Capital Funding LLC. We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the secured revolving credit facility with Madison Capital Funding LLC to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

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

Saratoga Investment Advisors

        Our investment adviser is led by four principals who collectively have over 60 years of experience in leveraged finance. Our investment adviser is affiliated with Saratoga Partners, a leading middle-market private equity investment firm. Saratoga Partners was established in 1984 to be the middle-market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read since 1998. Saratoga Partners has a 25-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

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

        We have entered into an investment advisory and management agreement with Saratoga Investment Advisors. The initial term of the investment advisory and management agreement is for two years, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom are not "interested" directors as defined in the 1940 Act. Pursuant to the investment advisory and management agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.

        Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $3 million made by us. In addition, all sales of our investments must be approved by three out of four investment committee members.

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        We pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% of our gross assets which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.

        In addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

        Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter.

        The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory and management agreement) and equals 20% of our "incentive fee capital gains," which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the "incentive fee capital gains" calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

        We have also entered into a separate administration agreement with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services. The administration agreement has an initial term of two years. Under the administration agreement, Saratoga Investment Advisors also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our

65



stockholders and reports required to be filed with the SEC. Payments under the administration agreement will be equal to an amount based upon the allocable portion of Saratoga Investment Advisors' overhead in performing its obligations under the administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs relating to the performance of services under the administration agreement. Notwithstanding the foregoing, the fees to be paid to Saratoga Investment Advisors for the first year of the term of the administration agreement will be capped at $1 million and the existence of a cap, and the determination of a proper cap amount, in the second year of the term will be determined by the mutual agreement of our independent directors and Saratoga Investment Advisors.

Market Opportunity

        We believe the environment for investing in private middle market companies is attractive for the following reasons:

Investments

        Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans that we purchase are generally used to finance buyouts, acquisitions, growth, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by Moody's Investors Service ("Moody's") and/or Standard & Poor's or, if not rated, would be rated below investment grade if rated. As part of our long-term strategy, we also purchase mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. For purposes of this prospectus, we generally use the term "middle market" to refer to companies with annual EBITDA of between $5 million and $50 million. EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization.

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Investments in middle market companies are generally less liquid than equivalent investments in companies with larger capitalizations.

        As a business development company, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in "qualifying assets," including securities of U.S. operating companies whose securities are not listed on a national securities exchange (i.e., New York Stock Exchange, NYSE Amex and The NASDAQ Stock Market), U.S. operating companies with listed securities that have market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

        While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds.

        Our leveraged loan portfolio is comprised primarily of first lien and second lien term loans. First lien term loans are secured by a first priority perfected security interest on all or substantially all of the assets of the borrower and typically include a first priority pledge of the capital stock of the borrower. First lien term loans hold a first priority with regard to right of payment. Generally, first lien term loans offer floating rate interest payments, have a stated maturity of five to seven years, and have a fixed amortization schedule. First lien term loans generally have restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on all or substantially all of the assets of the borrower and typically include a second priority pledge of the capital stock of the borrower. Second lien term loans hold a second priority with regard to right of payment. Second lien term loans offer either floating rate or fixed rate interest payments, generally have a stated maturity of five to eight years, and may or may not have a fixed amortization schedule. Second lien term loans that do not have fixed amortization schedules require payment of the principal amount of the loan upon the maturity date of the loan. Second lien term loans have less restrictive financial and negative covenants than those that govern first lien term loans.

        Mezzanine debt usually ranks subordinate in priority of payment to senior debt and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers' capital structure. Mezzanine debt typically has fixed rate interest payments and a stated maturity of six to eight years and does not have fixed amortization schedules.

        In some cases, our debt investments may provide for a portion of the interest payable to be paid-in-kind interest. 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.

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        Equity investments may consist of preferred equity that is expected to pay dividends on a current basis or preferred equity that does not pay current dividends. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In some cases, we may acquire common equity. In general, our equity investments are not control-oriented investments and we expect that in many cases we will acquire equity securities as part of a group of private equity investors in which we are not the lead investor.

        Opportunistic investments may include investments in distressed debt, debt and equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as collateralized loan obligation funds and debt of middle market companies located outside the United States. In January 2008, we purchased for $30 million all of the outstanding subordinated notes of GSCIC CLO, a $400 million collateralized loan obligation fund managed by us that invests primarily in leveraged loans. As of August 20, 2010, the GSCIC CLO portfolio consisted of $398.1 million in aggregate principal amount of primarily senior secured first lien term loans in 143 obligors with an average obligor exposure of $2.8 million and $8.7 million in uninvested cash. The weighted average maturity of the portfolio is 3.7 years. We do not expect to manage and purchase all of the equity in another collateralized loan obligation fund transaction in the near future. We may, however, invest in collateralized loan obligation fund securities issued by other investment managers.

Prospective Portfolio Company Characteristics

        Saratoga Investment Advisors generally selects portfolio company investments with one or more of the following characteristics:

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

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        Saratoga Investment Advisors' investment process generally includes the following steps:

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

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

        Saratoga Investment Advisors seeks, where appropriate, to limit the downside potential of our investments by:

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        We carry our investments at fair value, as determined in good faith by our board of directors. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations subject to any decision by our board of directors to make 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 determined in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and, if our board or audit committee so request, 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 a fair value pricing include the nature and realizable value of any collateral, the portfolio company's ability to make payments, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors.

        Our investment in the subordinated notes of GSCIC CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available.

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

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

        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 by our board of directors may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

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

Leverage

        In addition to funds available from the issuance of our common stock, we use borrowed funds, known as "leverage," to make investments and to attempt to increase returns to our shareholders by reducing our overall cost of capital. As a business development company, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. As of May 31, 2010, our asset coverage ratio, as defined in the 1940 Act, was 272.0%.

        In connection with the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this prospectus, we entered into a $40 million senior secured revolving credit facility with Madison Capital Funding. As of September 15, 2010, we had borrowed an aggregate of $20.0 million under the facility with Madison Capital Funding.

Dividends

        Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to a dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and have only made one dividend distribution (in November 2009) to our stockholders since such time. We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or that violate our debt covenants.

        In order to maintain our qualification as a RIC, we must for each fiscal year distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. For the 2009 calendar year, we made distributions sufficient such that we did not incur any federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2010 calendar year and/or portion of the capital gains in excess of capital losses realized during the one year period ending October 31, 2010, if any, and, if we do so, we would expect to incur federal excise taxes as a result.

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

        Pursuant to a recent revenue procedure (Revenue Procedure 2010-12), or the Revenue Procedure, issued by the Internal Revenue Service, or IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including business development companies) that are paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements and

71



qualify for the dividends paid deduction for federal income tax purposes. In order to qualify for such treatment, the Revenue Procedure requires that at least 10% of the total distribution be payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This Revenue Procedure applies to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011. We may pay dividends in shares of our stock pursuant to the Revenue Procedure in the future.

        In this regard, on November 13, 2009, we declared a dividend of $1.825 per share payable on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share. Based on stockholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 shares of common stock, or 104% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to stockholders who elected to receive cash.

Competition

        Our primary competitors in providing financing to private middle market companies include public and private investment funds, commercial and investment banks and commercial financing companies. Many of our competitors are substantially larger and have considerably greater financial and marketing resources than us. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. For additional information concerning the competitive risks we face, please see "Risk Factors—We operate in a highly competitive market for investment opportunities."

Staffing

        We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the investment advisory and management agreement and the administration agreement. We reimburse Saratoga Investment Advisors for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs, subject to certain limitations. Under the administration agreement, the payments required to be made to the administrator with respect to any fiscal quarter during the first year of the initial term of the agreement will be capped such that the amounts payable to the administrator, together with all of our other operating expenses, will not exceed $1.0 million. The existence of a cap, and the determination of a proper cap amount, in the second year of the term will be determined by the mutual agreement of the independent directors, on our behalf, and the administrator.

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Properties

        We do not own any real estate or other physical properties important to our operations, however, an affiliate of our investment adviser leases office space for our executive offices at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800.

Legal proceedings

        Neither we nor Saratoga Investment Advisors are currently subject to any material legal proceedings.

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PORTFOLIO COMPANIES

        The following table sets forth certain information as of May 31, 2010 for each portfolio company in which we had a debt or equity investment. Other than these investments, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments, and the board observer or participation rights we may receive.

Name and Address of Portfolio Company Industry
   
  Title of Securities
Held by Us
  Percentage of
Class Held
  Cost of
Investment
  Fair Value of
Investment
 

Abitibi-Consolidated of Canada
1155 Metcalfe St, Ste. 800
Montreal, QC H3B 5H2
Canada

 

Natural Resources

 

First Lien Term Loan 11.00% (3/30/2009)

     
$

2,948,640
 
$

2,828,925
 

Advanced Lighting Technologies, Inc.
32000 Aurora Rd
Solon, OH 44139

 

Electronics

 

Second Lien Term Loan, 6.28% (6/1/2014)

     
$

1,825,912
 
$

1,630,000
 

Bankruptcy Management Solutions, Inc.
8 Corporate Park, Suite 230
Irvine, CA 92606

 

Financial Services

 

Second Lien Term Loan 6.60% (7/31/2013)

     
$

4,803,746
 
$

1,206,250
 

Big Train, Inc.
25392 Commercentre Drive
Lake Forest, CA 92630

 

Food and Beverage

 

First Lien Term Loan 7.75% (3/31/2012)

     
$

1,442,978
 
$

1,717,339
 

Brown Publishing Company
10222 Alliance Road
Cincinnati, OH 45242

 

Publishing

 

Second Lien Term Loan 8.76% (9/19/2014)

     
$

1,198,390
 
$

15,040
 

CFF Acquisition LLC
8680 Greenback Lane, Suite 220
Orangevale, CA 95662

 

Consumer Services

 

First Lien Term Loan 7.50% (7/31/2013)

     
$

305,973
 
$

264,667
 

Elyria Foundry Company, LLC
120 Filbert Street
Elyria, OH 44035-5357

 

Metals

 

Senior Secured Notes 13.00% (3/1/2013)
Warrants

 


<1%
 
$


4,888,653

 
$


4,550,000

 

Energy Alloys, LLC
350 Glenborough, Suite 300
Houston, Texas 77067

 

Oil and Gas

 

Second Lien Term Loan 3.00% (6/30/2015)
Warrants

 


8.0%
 
$


6,285,070

 
$


609,652

 

GFSI Inc
3350 Scott Blvd., Bldg 42
Santa Clara, CA 95054

 

Apparel

 

Senior Secured Notes 10.50% (6/1/2011)

     
$

7,082,000
 
$

7,082,000
 

Grant U.S. Holdings LLP
133 Peachtree Street, 14th Floor
Atlanta, GA 30303

 

Natural Resources

 

Second Lien Term Loan 10.75% (9/20/2013)

     
$

6,349,348
 
$

592,409
 

Group Dekko
2505 Dekko Drive
Garrett, IN 46738

 

Electronics

 

Second Lien Term Loan 10.50% (1/20/2012)

     
$

6,983,429
 
$

5,097,903
 

GSC Investment Corp. CLO 2007 LTD.
535 Madison Avenue
New York, NY 10022

 

Structured Finance Securities

 

Other/Structured
Finance Securities
9.73% (1/21/2020)

 
100.0%
 
$

29,233,097
 
$

18,208,657
 

GSC Partners CDO GP III, LP
535 Madison Avenue
New York, NY 10022

 

Financial Services

 

General Partnership
Interest
Limited
Partnership Interest

 
100.0%

6.24%
   


   


 

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Name and Address of Portfolio Company Industry
   
  Title of Securities
Held by Us
  Percentage of
Class Held
  Cost of
Investment
  Fair Value of
Investment
 

Hopkins Manufacturing Corporation
428 Peyton Street, P.O. Box 1157
Emporia, Kansas 66801-1157

 

Consumer Products

 

Second Lien Term Loan 7.61% (1/26/2012)

      $ 3,248,218   $ 3,120,000  

IDI Acquisition Corp.
222 North Sepulveda Blvd., Suite 740
El Segundo, CA 90245

 

Healthcare Services

 

Senior Secured Notes 10.75% (12/15/2011)

     
$

3,695,657
 
$

3,724,000
 

Jason Incorporated
411 East Wisconsin Avenue
Milwaukee, WI 53202-4467

 

Manufacturing

 

Unsecured Notes
13.00% (11/1/2010)
Unsecured Notes
13.00% (11/1/2010)

     
$

$

12,000,000

1,700,000
 
$

$

960,000

136,000
 

Legacy Cabinets Holdings
100 Legacy Blvd., P.O. Box 730
Eastaboga, AL 36260

 

Building Products

 

Common Voting A-1
Common Voting B-1

 
2.5%
1.6%
 
$
$

220,900
139,424
 
$
$

220,900
139,424
 

Legacy Cabinets, Inc.
100 Legacy Blvd., P.O. Box 730
Eastaboga, AL 36260

 

Building Products

 

First Lien Term Loan 7.25% (5/3/2014)

     
$

281,644
 
$

192,926
 

M/C Communications, LLC
101 Huntington Avenue
Boston, MA 02199

 

Education

 

First Lien Term Loan 6.755% (12/31/2012)
Class A Common Stock

 


<1%
 
$

$

834,131

30,241
 
$

$

554,697

13,306
 

McMillin Companies LLC
2750 Womble Road
San Diego, CA 92106-6111

 

Homebuilding

 

Senior Secured Notes 9.53% (10/31/2013)

     
$

7,356,428
 
$

4,466,000
 

Network Communications, Inc.
2305 Newpoint Parkway
Lawrenceville, GA 30043

 

Publishing

 

Unsecured Notes
10.75% (12/1/2013)

     
$

5,065,452
 
$

2,412,500
 

Penton Media, Inc.
249 W. 17th Street
New York, NY 10011

 

Publishing

 

First Lien Term Loan 5.00% (8/1/2014)

     
$

3,951,945
 
$

3,448,776
 

PRACS Institute, LTD
4801 Amber Valley Parkway
Fargo, ND 58104

 

Healthcare Services

 

Second Lien Term Loan 10.00% (4/17/2013)

     
$

4,061,460
 
$

3,622,969
 

Specialized Technology Resources, Inc.
10 Water Street
Enfield, CT 06082

 

Manufacturing

 

Second Lien Term Loan 7.35% (12/15/2014)

     
$

4,807,843
 
$

4,900,000
 

Targus Group Holdings, Inc.
1211 North Miller Street
Anaheim, CA 92806

 

Consumer Products

 

Unsecured Notes
10.00% (12/14/2015)
Common

     
$

$

1,538,235

566,765
 
$

$

799,882

686,543
 

Targus Group International, Inc.
1211 North Miller Street
Anaheim, CA 92806

 

Consumer Products

 

First Lien Term Loan 10.25% (11/22/2012)

     
$

2,969,724
 
$

2,753,356
 

Terphane Holdings Corp.
2754 West Park Drive
Bloomfield, NY 14469

 

Packaging

 

Senior Secured Notes 12.50% (6/15/2010)
Senior Secured Notes
12.50% (6/15/2010)
Senior Secured Notes
11.92% (6/15/2010)

     
$

$

$

4,850,000

5,087,250

500,000
 
$

$

$

4,437,750

4,654,834

457,500
 

USS Parent Holding Corp.
2711 Centerville Road, Suite 400
Wilmington, New Castle, DE 19808

 

Environmental

 

Non Voting Common Stock
Voting Common Stock

 
<1%
2.0%
 
$
$

133,002
3,025,798
 
$
$

99,141
2,255,450
 

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Name and Address of Portfolio Company Industry
   
  Title of Securities
Held by Us
  Percentage of
Class Held
  Cost of
Investment
  Fair Value of
Investment
 

Worldwide Express Operations, LLC
2828 Routh Street, Suite 400
Dallas, TX 75201

 

Logistics

 

First Lien Term Loan 10.00% (6/30/2013)

      $ 2,831,452   $ 2,069,603  

        Set forth below is a brief description of each portfolio company in which we have made an investment that represents greater than 5% of our total assets as of May 31, 2010.

        Elyria Foundry Company, LLC—Producer of complex, highly engineered gray and ductile iron castings.

        GFSI Inc—Maker of custom decorated sportswear.

        Group Dekko—Manufacturer of subcomponents for office furniture and transportation end markets.

        GSC Investment Corp. CLO 2007 LTD.—Collateralized loan obligation fund.

        Specialized Technology Resources, Inc.—Provider of quality assurance testing, product development, and supply chain support services for major consumer product retailers.

        Terphane Holdings Corp.—Manufacturer of polyester packaging film.

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MANAGEMENT

        Our business and affairs are managed under the direction of our board of directors. The board of directors currently consists of 5 members, of whom 3 are not "interested persons" of Saratoga Investment Corp. as defined in Section 2(a)(19) of the 1940 Act. Our board of directors elects our officers, who will serve at the discretion of the board of directors.

Executive officers and board of directors

        Under our charter, our directors are divided into three classes. Each class of directors will hold office for a three-year term. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualified.

        Information regarding the board of directors is as follows:

Name
  Age   Position   Director
Since
  Expiration
of Term
  Principal Occupation(s)
During Last Five Years
  Other Directorships/
Trusteeships Held by
Board Member

Independent Directors

                             

Steven M. Looney

   
60
 

Director

   
2007
   
2013
 

Managing Director of Peale Davies & Co. Inc.

 

Sun Healthcare and WH Industries

Charles S. Whitman III

   
68
 

Director

   
2007
   
2013
 

Senior counsel (retired) at the law firm of Davis Polk & Wardwell LLP since 2006. Prior to 2006, Mr. Whitman was a Partner in Davis Polk's Corporate Department.

 

none

G. Cabell Williams

   
56
 

Director

   
2007
   
2011
 

Managing General Partner of Williams and Gallagher, a private equity partnership, since 2004.

 

none

Interested Directors

                             

Christian L. Oberbeck

   
50
 

Chief Executive Officer and President and Director

   
2010
   
2012
 

Managing Partner of Saratoga Partners and Managing Member of Saratoga Investment Advisors.

 

none

Richard A. Petrocelli

   
42
 

Chief Financial Officer, and Vice President, Secretary and Chief Compliance Officer and Director

   
2010
   
2011
 

Managing Director and Chief Financial Officer for Saratoga Partners and Managing Director of Saratoga Investment Advisors.

 

none

        The address for each director is c/o Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

        We do not currently have any executive officers who are not also directors.

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Biographical information

        Our directors have been divided into two groups—independent directors and interested directors. Interested directors are interested persons as defined in the 1940 Act.

        Steven M. Looney—Mr. Looney is a Managing Director of Peale Davies & Co. Inc., a consulting firm with particular expertise in financial process and IT outsourcing, and is a CPA and an attorney. Mr. Looney also serves as a consultant and director to numerous companies in the healthcare, manufacturing and technology services industries, including Sun Healthcare and WH Industries Inc. Between 2000 and 2005, he served as Senior Vice President and Chief Financial Officer of PCCI, Inc., a private IT staffing and outsourcing firm. Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and Administrative Officer. Mr. Looney graduated summa cum laude from the University of Washington with a B.A. degree in Accounting and received a J.D. from the University of Washington School of Law where he was a member of the law review. Mr. Looney's qualifications as director include his experience as a Managing Director of Peale Davies & Co. Inc. and as Chief Financial and Administrative Officer of WH Industries, as well as his financial, accounting and legal expertise.

        Charles S. Whitman III—Mr. Whitman is senior counsel (retired) at Davis Polk & Wardwell LLP. Mr. Whitman was a partner in Davis Polk's Corporate Department for 28 years, representing clients in a broad range of corporate finance matters, including shelf registrations, securities compliance for financial institutions, foreign asset privatizations, and mergers and acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant to three successive Chairmen of the SEC. Mr. Whitman serves on the Legal Advisory Board of the National Association of Securities Dealers. Mr. Whitman graduated from Harvard College and graduated magna cum laude from Harvard Law School with a LL.B. Mr. Whitman also received an LL.M. from Cambridge University in England. Mr. Whitman's qualifications as director include his 28 years of experience representing clients, including AT&T, Exxon Mobil, General Motors and BP, in securities matters as a partner in Davis Polk's corporate department.

        G. Cabell Williams—Mr. Williams is currently the Managing General Partner of Williams and Gallagher, a private equity partnership located in Chevy Chase, Maryland. In 2004, Mr. Williams concluded a 23 year career at Allied Capital Corporation, a $4 billion business development corporation based in Washington, DC. While at Allied, Mr. Williams held a variety of positions, including President, COO and finally Managing Director following Allied's merger with its affiliates in 1998. From 1991 to 2004, Mr. Williams either led or co-managed the firm's Private Equity Group. For the nine years prior to 1999, Mr. Williams led Allied's Mezzanine investment activities. For 15 years, Mr. Williams served on Allied's Investment Committee where he was responsible for reviewing and approving all of the firm's investments. Prior to 1991, Mr. Williams ran Allied's Minority Small Business Investment Company. He also founded Allied Capital Commercial Corporation, a real estate investment vehicle. Mr. Williams has served on the Board of various public and private companies. Mr. Williams attended The Landon School, and graduated from Mercersburg Academy and Rollins College, receiving a B.S. in Business Administration from the latter. Mr. Williams' qualifications as director include his 28 years of experience managing investment activities at Allied Capital, where he served in a variety of positions, including President, COO and Managing Director.

        Christian L. Oberbeck—Mr. Oberbeck has over 23 years of experience in leveraged finance, from distressed debt to private equity, and has been involved in originating, structuring, negotiating, consummating, managing and monitoring investments in these businesses. Mr. Oberbeck is the Managing Partner of Saratoga Partners and has served on its investment committee since 1995. Mr. Oberbeck is also the Managing Member of Saratoga Investment Advisors and the Chief Executive

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Officer and President of the Company. He also serves as a member of the Company's board of directors.

        Prior to assuming management responsibility for Saratoga Partners in 2008, Mr. Oberbeck has co-managed Saratoga Partners since 1995, when he joined Dillon Read and Saratoga Partners from Castle Harlan, Inc., a corporate buyout firm. Mr. Oberbeck had joined Castle Harlan at its founding in 1987 and was a Managing Director, leading successful investments in manufacturing and financial services companies. Prior to joining Castle Harlan, he worked in the Corporate Development Group of Arthur Young and in corporate finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a director of numerous middle market companies while at Saratoga Partners and Castle Harlan.

        Mr. Oberbeck graduated from Brown University in 1982 with a BS in Physics and a BA in Mathematics. In 1985, he earned an MBA from Columbia University.

        Richard A. Petrocelli—Mr. Petrocelli has over 20 years of experience including investment management, private equity and corporate reorganizations. Mr. Petrocelli is a Managing Director and Chief Financial Officer at Saratoga Partners and has been involved in originating, structuring, negotiating, consummating, managing and monitoring middle market investments. Mr. Petrocelli is the Managing Director of Saratoga Investment Advisors and the Chief Financial Officer, Secretary and Chief Compliance Officer of the Company. He also serves as a member of the Company's board of directors.

        Mr. Petrocelli began his career as an accountant before transitioning to alternative assets at Gabelli Asset Management Company in 1993. Mr. Petrocelli's background brings financial expertise to the diligence and oversight processes, which is critically important when dealing in complex transactions. In addition to his involvement in originating, structuring, negotiating, consummating, managing and monitoring investments at Saratoga Partners, Mr. Petrocelli is currently the Chief Financial Officer of Saratoga Partners and is responsible for reporting and compliance. Mr. Petrocelli joined Saratoga Partners in 1998 from Gabelli Asset Management. At Gabelli Asset Management, Mr. Petrocelli was a Vice President in the corporate finance department with a primary focus on the Company's alternative investment business. Prior to that, he was a senior accountant at BDO Siedman. Mr. Petrocelli has served as a director of a number of Saratoga Partners' portfolio companies.

        Mr. Petrocelli graduated with a BSBA from Georgetown University in 1990 and earned an MBA from New York University's Stern School of Business in 1999. He is a Certified Public Accountant.

Board Leadership

        Our board of directors monitors and performs an oversight role with respect to the business and affairs of the Company, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to the Company. Among other things, our board of directors approves the appointment of our investment adviser, administrator and officers; reviews and monitors the services and activities performed by our investment adviser, administrator and officers; and approves the engagement, and reviews the performance of, our independent public accounting firm.

        Under our bylaws, our board of directors may designate a chairman to preside over the meetings of the board of directors and meetings of the stockholders and to perform such other duties as may be assigned to him by the board of directors. The Company does not have a fixed policy as to whether the chairman of the board of directors should be an independent director and believes that its flexibility to select its chairman and reorganize its leadership structure from time to time is in the best interests of the Company and its stockholders.

        Mr. Oberbeck, who is an "interested person" of the Company as defined in Section 2(a)(19) of the 1940 Act, serves as both the chief executive officer and president and chairman of the board of directors. The board of directors feels that Mr. Oberbeck, as chief executive officer and president of the Company and as a principal of Saratoga Investment Advisors, is the director with the most

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knowledge of our business strategy and is best situated to serve as chairman of the board of directors. Our charter, as well as regulations governing business development companies generally, requires that a majority of the board of directors be independent directors. The board of directors does not currently have a lead independent director. We believe that our board leadership structure must be evaluated on a case-by-case basis and that our existing board leadership structure is appropriate. However, we continually re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet our needs.

        The board of directors, directly and through the audit committee and other committees of the board of directors, takes an active role in the oversight of the Company's policies with respect to the assessment and management of enterprise risk. Among other things, the board of directors has policies in place for identifying the senior executive responsible for key risks as well as the board committees with oversight responsibility for particular key risks. In a number of cases, oversight is conducted by the full board of directors. Our board of directors also performs its risk oversight responsibilities with the assistance of the chief compliance officer. The chief compliance officer is designated to oversee compliance with the federal securities laws.

        We believe that our board of directors' (and its committees') role in risk oversight complements our board of directors' leadership structure because it allows our independent directors, through three fully independent board committees, auditor and independent valuation providers, our chief compliance officer, and otherwise, to exercise oversight of risk without any conflict that might discourage critical review. We believe that our board leadership structure and the board of directors' approach to risk oversight must be evaluated on a case-by-case basis and that the board of directors' role in risk oversight is appropriate. However, we continually re-examine the manner in which the board of directors administers its oversight function on an ongoing basis to ensure that it continues to meet our needs.

Committees of the Board of Directors

        The current members of the audit committee are Steven M. Looney (Chairman), Charles S. Whitman III and G. Cabell Williams. The board of directors has determined that Mr. Looney is an "audit committee financial expert" as defined under Item 407 of Regulation S-K of the Securities Exchange Act of 1934 and that each of Messrs. Whitman and Williams are "financially literate" as required by NYSE corporate governance standards. All of these members are independent directors. The audit committee is responsible for approving our independent accountants, reviewing with our independent accountants the plans and results of the audit engagement, approving professional services provided by our independent accountants, reviewing the independence of our independent accountants and reviewing the adequacy of our internal accounting controls. The audit committee is also responsible for aiding our board of directors in determining the fair value of debt and equity investments that are not publicly traded or for which current market values are not readily available; where appropriate, the board of directors and audit committee may utilize the services of an independent valuation firm to assist them in determining the fair value of these investments. Finally, the audit committee also reviews our financial statements and the disclosure thereof and the adequacy of our disclosure controls.

        The audit committee is authorized (without seeking board approval) to retain special legal, accounting or other advisors and may request any officer or employee of the Company or the Company's outside counsel or independent auditor to meet with any members of, or advisors to, the Audit Committee. The audit committee has available appropriate funding from the Company as determined by the audit committee for payment of: (i) compensation to any accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, (ii) compensation to any advisers employed by the audit committee, and (iii) ordinary administrative expenses of the audit committee that are necessary or appropriate in

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carrying out its duties. The audit committee may delegate its authority to subcommittees or the chairman of the audit committee when it deems appropriate and in the best interests of the Company.

        The audit committee meets as often as it determines is appropriate to carry out its responsibilities under its charter, but not less frequently than quarterly. The chairman of the audit committee, in consultation with the other committee members, determines the frequency and length of the committee meetings and sets meeting agendas consistent with its charter. The audit committee meets separately, periodically, with management, with internal auditors or other personnel responsible for the internal audit function and with the independent auditor.

        A charter of the audit committee is available in print to any stockholder who requests it and it is also available on the Company's website at www.saratogainvestmentcorp.com.

        The current members of the nominating and corporate governance committee are Charles S. Whitman III (Chairman), G. Cabell Williams and Steven M. Looney. All of these members are independent directors. The nominating and corporate governance committee is responsible for identifying individuals qualified to become board members, and recommending to the board director nominees for election at the next annual or special meeting of shareholders at which directors are to be elected or to fill any vacancies or newly created directorships that may occur between such meetings, recommending directors for appointment to board committees, making recommendations to the board of directors as to determinations of director independence, overseeing the evaluation of the board of directors, overseeing and setting compensation for the Company's directors.

        In making its recommendations for board and committee membership, the Nominating and Corporate Governance Committee reviews candidates' qualifications for membership on the board of directors or a committee of the board of directors (including making a specific determination as to the independence of each candidate) based on the criteria approved by the board of directors (and taking into account the enhanced independence, financial literacy and financial expertise standards that maybe required under law or the New York Stock Exchange rules for audit committee membership purposes). In evaluating current directors for re-nomination to the board of directors or re-appointment to any board committees, the nominating and corporate governance committee assesses the performance of such directors, periodically reviews the composition of the board of directors and its committees in light of the current challenges and needs of the board of directors, the Company and each committee, and determines whether it may be appropriate to add or remove individuals after considering issues of judgment, diversity, age, skills, background and experience, considers rotation of committee members and committee chairmen and considers any other factors that are set forth in the Company's corporate governance guidelines or are deemed appropriate by the nominating and corporate governance committee or the board of directors. The nominating and corporate governance committee considers issues of judgment, diversity, age, skills, background and experience in evaluating candidates for membership on the board of directors.

        The nominating and corporate governance committee does not have a formal policy on the consideration of director candidates recommended by stockholders. The board of directors believes that it is more appropriate to give the nominating and corporate governance committee flexibility in evaluating stockholder recommendations. In the event that a director nominee is recommended by a stockholder, the nominating and corporate governance committee will give due consideration to the director nominee and will use the same criteria used for evaluating board director nominees, in addition to considering the information relating to the director nominee provided by the stockholder.

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        The nominating and corporate governance committee has the sole authority to retain and terminate any search firm assisting the nominating and corporate governance committee in identifying director candidates, including sole authority to approve all such search firm's fees and other retention terms. In addition, the nominating and corporate governance committee has the sole authority to retain and terminate any compensation consultant assisting the nominating and corporate governance committee in the evaluation of director compensation, including sole authority to approve all such compensation consultant's fees and other retention terms. The nominating and corporate governance committee may delegate its authority to subcommittees or the chair of the nominating and corporate governance committee when it deems appropriate and in the best interests of the Company.

        The nominating and corporate governance committee meets as often as it determines is appropriate to carry out its responsibilities under its charter. The chair of the committee, in consultation with the other committee members, determines the frequency and length of the committee meetings and shall set meeting agendas consistent with its charter.

        A charter of the nominating and corporate governance committee is available in print to any stockholder who requests it, and it is also available on the Company's website at www.saratogainvestmentcorp.com.

        The current members of the compensation committee are G. Cabell Williams (Chairman), Steven M. Looney and Charles S. Whitman III. All of these members are independent directors. The compensation committee is responsible for overseeing the Company's compensation policies generally and making recommendations to the board of directors with respect to incentive compensation and equity-based plans of the Company that are subject to board approval, evaluating executive officer performance and reviewing the Company's management succession plan, overseeing and setting compensation for the Company's directors and, as applicable, its executive officers and, as applicable, preparing the report on executive officer compensation that SEC rules require to be included in the Company's annual proxy statement. Currently, none of our executive officers are compensated by the Company and as such the compensation committee is not required to produce a report on executive officer compensation for inclusion in our annual proxy statement.

        The compensation committee has the sole authority to retain and terminate any compensation consultant assisting the compensation committee, including sole authority to approve all such compensation consultant's fees and other retention terms. The compensation committee may delegate its authority to subcommittees or the chairman of the compensation committee when it deems appropriate and in the best interests of the Company.

        The compensation committee shall meet as often as it determines is appropriate to carry out its responsibilities under its charter. The chairman of the compensation committee, in consultation with the other committee members, shall determine the frequency and length of the committee meetings and shall set meeting agendas consistent with its charter. No executive officer should attend that portion of any meeting where such executive's performance (or, as applicable, compensation) is discussed, unless specifically invited by the compensation committee.

        A charter of the compensation committee is available in print to any stockholder who requests it and is also available on the Company's website at www.saratogainvestmentcorp.com.

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        During fiscal year 2010, none of the Company's executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the compensation committee or on the board of directors. No current or past executive officers or employees of the Company or its affiliates serve on the compensation committee.

Executive Compensation

        Currently, none of our executive officers are compensated by us. We currently have no employees, and each of our executive officers is also an employee of Saratoga Investment Advisors. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the investment advisory and management agreement and the administration agreement.

Director Compensation

        Our independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $5,000 and the chairman of each other committee receives an annual fee of $2,000 for their additional services in these capacities. In addition, we have purchased directors' and officers' liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors' fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are "interested persons."

        The following table sets forth information concerning total compensation earned by or paid to each of our directors during the fiscal year ended February 28, 2010:

Name of Director
  Total Compensation from the
Company Paid in FY 2010
 

Robert F. Cummings, Jr.(1)

  $  

Richard M. Hayden(1)

  $  

Steven M. Looney

  $ 67,000  

Charles S. Whitman III

  $ 65,000  

G. Cabell Williams

  $ 65,000  

(1)
Messrs. Cummings and Hayden resigned from the board of directors in connection with the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates.

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INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT

        Saratoga Investment Advisors serves as our investment adviser. Subject to the overall supervision of our board of directors, Saratoga Investment Advisors manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of an investment advisory and management agreement, Saratoga Investment Advisors:

        Saratoga Investment Advisors services under the investment advisory and management agreement are not exclusive, and it is free to furnish similar services to other entities.

Management Fee and Incentive Fee

        Pursuant to the investment advisory and management agreement with Saratoga Investment Advisors, we pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee.

        The base management fee is paid quarterly in arrears, and equals 1.75% per annum of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and calculated at the end of each fiscal quarter based on the average value of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) as of the end of such fiscal quarter and the end of the immediate prior fiscal quarter. Base management fees for any partial month or quarter are appropriately pro-rated.

        The incentive fee has the following two parts:

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Quarterly Incentive Fee Based on "Pre-Incentive Fee Net Investment Income"
Pre-Incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)

GRAPHIC

Percentage of Pre-Incentive Fee Net Investment
Income allocated to income-related portion of incentive fee

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Examples of Quarterly Incentive Fee Calculation

        Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.

        Pre-incentive fee net investment income exceeds hurdle rate, but does not fully satisfy the "catch-up" provision, therefore the income related portion of the incentive fee is 0.3575%.

Incentive Fee

  =   (100% × (pre-incentive fee net investment income - 1.875%)

  =   100% (2.2325% - 1.875%)

  =   100% (0.3575%)

  =   0.3575%

(1)
The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.

(2)
Represents 7.5% annualized hurdle rate.

(3)
Represents 1.75% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we maintain no cash or cash equivalents.

(4)
The "catch-up" provision is intended to provide our investment adviser with an incentive fee of 20% on all pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.344% in any fiscal quarter.

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        Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the "catch-up" provision, therefore the income related portion of the incentive fee is 0.5467%.

Incentive fee

  =   100% × pre-incentive fee net investment income (subject to "catch-up")(4)

Incentive fee

  =   100% × "catch-up" + (20% × (Pre-incentive fee net investment income - 2.344%))

Catch up

  =   2.344% - 1.875%

  =   0.469%

Incentive fee

  =   (100% × 0.469%) + (20% × (2.7325% - 2.344%))

  =   0.469% + (20% × 0.3885%)

  =   0.469% + 0.0777%

  =   0.5467%

Example 2: Capital Gains Portion of Incentive Fee:

        The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

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        The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:


(1)
The examples assume that Investment A and Investment B were acquired by us subsequent to May 31, 2010. If Investment A and B were acquired by us prior to May 31, 2010, then the cost basis for computing our realized gains and losses on such investments would equal the fair value of such investments as of May 31, 2010.

        The investment advisory and management agreement with Saratoga Investment Advisors was approved by our board of directors at an in-person meeting of the directors, including a majority of our independent directors, and was approved by our stockholders at the special meeting of stockholders held on July 30, 2010.

        In approving this agreement, the directors considered, among other things, (i) the nature, extent and quality of the advisory and other services to be provided to us by Saratoga Investment Advisors; (ii) our investment performance and the investment performance of Saratoga Investment Advisors; (iii) the expected costs of the services to be provided by Saratoga Investment Advisors (including management fees, advisory fees and expense ratios) and the profits expected to be realized by Saratoga Investment Advisors; (iv) the limited potential for economies of scale in investment management associated with managing us; and (v) Saratoga Investment Advisors estimated pro forma profitability with respect to managing us.

        The investment advisory and management agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated, will continue in effect for a successive period of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (i) the vote of a majority of the board members or the vote of a majority of our outstanding voting securities (as such term is defined in the 1940 Act) and (ii) the vote of a majority of the board members who are not parties to the investment advisory and management agreement or interested persons (as such term is defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The investment advisory and management agreement may be terminated as a whole at any time by us, without the payment of any penalty, upon the vote of a majority of the board members or a majority of our outstanding voting securities or by Saratoga Investment Advisors, on 60 days' written notice by either party to the other, which notice may be waived by the non-terminating party.

        The investment advisory and management agreement provides that all investment professionals of Saratoga Investment Advisors and its staff, when and to the extent engaged in providing investment advisory services required to be provided by Saratoga Investment Advisors, and the compensation and

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routine overhead expenses of such personnel allocable to such services, will be provided and paid for by Saratoga Investment Advisors and not by us.

        We will bear all costs and expenses of our operations and transactions, including those relating to:

        The investment advisory and management agreement will remain in effect continuously, unless terminated under the termination provisions of the agreement. The investment advisory and management agreement provides that it may be terminated at any time, without the payment of any penalty, upon 60 days' written notice, by the vote of stockholders holding a majority of our outstanding voting securities, or by the vote of our directors or by Saratoga Investment Advisors.

        The investment advisory and management agreement will, unless terminated as described above, continue until the second anniversary of its effective date and will continue in effect from year to year thereafter so long as it is approved at least annually by (i) the vote of the board of directors, or by the

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vote of stockholders holding a majority of our outstanding voting securities, and (ii) the vote of a majority of our directors who are not parties to the investment advisory and management agreement or "interested persons" (as such term is defined in Section 2(a)(19) of the 1940 Act) of any party to such agreement, in accordance with the requirements of the 1940 Act.

        Under the investment advisory and management agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services and except to the extent such action or omission constitutes gross negligence, willful misfeasance, bad faith or reckless disregard of its duties and obligations under the agreement.

        We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us. However, we would not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person's duties or by reason of the reckless disregard of its duties and obligations under the agreement.

        Saratoga Investment Advisors is registered as an investment adviser under the Advisers Act. The principal executive offices of Saratoga Investment Advisors are located at 535 Madison Avenue, New York, New York 10022.


ADMINISTRATION AGREEMENT

        Pursuant to a separate administration agreement, Saratoga Investment Advisors, who also serves as our administrator, furnishes us with office facilities, equipment and clerical, book-keeping and record keeping services. The administration agreement has an initial two year term commencing on July 30, 2010. Under the administration agreement, our administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the administration agreement equal to an amount based upon our allocable portion of our administrator's overhead in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion is based on the proportion that our total assets bears to the total assets administered or managed by our administrator. Under the administration agreement, our administrator also provides managerial assistance, on our behalf, to those portfolio companies who accept our offer of assistance. Under the administration agreement, the payments required to be made to the administrator with respect to any fiscal quarter during the first year of the initial term of the agreement will be capped such that the amounts payable to the administrator, together with all of our other operating expenses,

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will not exceed $1.0 million. The existence of a cap, and the determination of a proper cap amount, in the second year of the term will be determined by the mutual agreement of the independent directors, on our behalf, and the administrator. The administration agreement may be terminated by either party without penalty upon 60 days' written notice to the other party.

        Under the administration agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement.

        We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an administrator to us. However, we do not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person's duties or by reason of the reckless disregard of its duties and obligations under the agreement.

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LICENSE AGREEMENT

        We entered into a trademark license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors grants us a non-exclusive, royalty-free license to use the name "Saratoga." Under this agreement, we have a right to use the "Saratoga" name, for so long as Saratoga Investment Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the "Saratoga" name. Saratoga Investment Advisors has the right to terminate the license agreement if it is no longer acting as our investment adviser. In the event the investment advisory and management agreement is terminated, we would be required to change our name to eliminate the use of the name "Saratoga."

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PORTFOLIO MANAGEMENT

        The day-to-day management of our portfolio is the responsibility of Saratoga Investment Advisors and overseen by its investment committee.

Investment Committee

        The members of Saratoga Investment Advisors' investment committee include Christian L. Oberbeck, Richard A. Petrocelli, Thomas V. Inglesby and Charles G. Phillips. See the section of the prospectus entitled "Management" for biographies of Messrs. Oberbeck and Petrocelli. For biographical information for Messrs. Inglesby and Phillips, see "Investment Professionals" below.

Investment Professionals

        Our investment adviser's investment personnel, in addition to our investment adviser's investment committee, are primarily responsible for the day-to-day management of our portfolio.

        The members of our investment adviser's investment committee and its investment personnel are not be employed by us, and receive no compensation from us in connection with their activities. However, they receive compensation from our investment adviser that includes an annual base salary, an annual individual performance bonus, contributions to 401(k) plans, and, in certain circumstances, a portion of the incentive fee or carried interest earned in connection with their services.

        Below are the biographies for the members of our investment adviser's investment committee whose biographies are not included elsewhere in this prospectus and the other investment professionals of our investment adviser.

        Thomas V. Inglesby—Mr. Inglesby has over 25 years of investment experience including private equity and leveraged finance. Mr. Inglesby is a managing director at Saratoga Investment Advisors and is responsible for originating, structuring, negotiating, consummating, managing and monitoring middle market investments.

        Prior to joining Saratoga Investment Advisors, Mr. Inglesby was a senior managing director at GSC Group, Inc. From September 2008 through July 2010, Mr. Inglesby was a senior managing director in the Recovery Investment Group at GSC Group, serving on the investment committee as an internal advisor on matters relating to GSC Group's ongoing restructuring. From 2002 to 2008, Mr. Inglesby served as the Head of the U.S. Corporate Debt Group of GSC Group. During this period, GSC Group raised and managed $5.6 billion in capital across 12 corporate credit investment funds. From 1997 to 2002, he served as a managing director at GSC Group focused on middle market buyouts. Prior to joining GSC Group in 1997, Mr. Inglesby served as a managing director with Harbour Group from 1994 to 1997, where he focused on acquisitions of manufacturing companies in fragmented industries. From 1992 to 1994, Mr. Inglesby served as a managing director at the South Street Funds, a startup distressed debt investment fund founded by former partners at Goldman Sachs. From 1986 to 1990, Mr. Inglesby served as a vice president in the Merchant Banking Department at PaineWebber.

        In September 2010, GSC Group filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.

        Mr. Inglesby received a J.D. from the University of Virginia School of Law, an M.B.A. from the Darden Graduate School of Business Administration, and a B.S. in Accounting with General Honors from the University of Maryland.

        Charles G. Phillips IV—Mr. Phillips has over 13 years of investment experience including private equity and leveraged finance. Mr. Phillips is a managing director at Saratoga Investment Advisors and Saratoga Partners and has been involved in originating, structuring, negotiating, consummating, managing and monitoring middle market investments.

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        Mr. Phillips has extensive experience investing in middle-market manufacturing and service companies. He also has extensive experience in dealing with public financings and sales through his work with several portfolio companies of Saratoga Partners. Prior corporate finance experience includes mergers and acquisitions and capital markets experience in a variety of industries, including packaged foods, consumer products, cable television, energy and education. Mr. Phillips joined Saratoga Partners in 1997 after graduating from Harvard Business School. Prior to that, from 1993 to 1995, Mr. Phillips worked in Dillon Read's corporate finance department, where he was involved in mergers and acquisitions and advisory assignments in a variety of industries. Prior experience includes McCown De Leeuw & Co., a corporate buyout firm. Mr. Phillips has served as a director of a number of Saratoga Partners' portfolio companies.

        Mr. Phillips graduated with an A.B. from Harvard College in 1993 and earned an M.B.A. from Harvard Business School in 1997.

        John F. MacMurray—Mr. MacMurray has over 8 years of investment experience including private equity and investment banking. Mr. MacMurray has been involved in all phases of the investment process, including sourcing, structuring, negotiating and managing investments in middle market companies, and has deep experience in executing add-on investments.

        Prior to joining Saratoga Partners in 2006, Mr. MacMurray was at EuroConsult, Inc., an independent investment banking firm, where he was involved in mergers and acquisitions and advisory assignments throughout North America and Europe in a wide variety of industries. Mr. MacMurray joined Saratoga Partners after graduating from Columbia Business School in 2006.

        Mr. MacMurray graduated with an A.B. from Princeton University in 1998 and earned an M.B.A. from Columbia Business School in 2006.

        The following table sets forth the dollar range of our equity securities beneficially owned by each member of our investment adviser's investment committee and of our investment adviser's investment professionals as of September 15, 2010.

Name
  Dollar Range of Equity
Securities in Saratoga
Investment Corp.(1)(2)

Christian L. Oberbeck

  Over $1,000,000

Richard A. Petrocelli

  $500,001 - $1,000,000

Thomas V. Inglesby

  Over $1,000,000

Charles G. Phillips IV

  $500,001 - $1,000,000

John F. MacMurray

  $50,001 - $100,000

(1)
Dollar ranges are as follows: None, $1 – $10,000, $10,001 - $50,000, $50,001 - $100,000, $100,001 - $500,000, $500,001 - $1,000,000, or over $1,000,000.

(2)
Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

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CERTAIN RELATIONSHIPS

        We have entered into an investment advisory and management agreement with Saratoga Investment Advisors. We have also entered into a license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name "Saratoga." In addition, pursuant to the terms of the administration agreement, Saratoga Investment Advisors provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Oberbeck, our chief executive officer and president, is the primary investor in and controls Saratoga Investment Advisors. For more information about these agreements, see "Investment Advisory and Management Agreement," "Administration Agreement" and "License Agreement" elsewhere in this prospectus.

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CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

        The following table sets forth certain ownership information with respect to our common stock for (i) those persons who directly or indirectly own, control or hold with the power to vote, 5% or more of our outstanding shares of common stock, (ii) each of our executive officers and directors and (iii) all of our executive officers and directors as a group.

        The percentage ownership is based on 2,680,842 shares of common stock outstanding as of September 15, 2010. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. To our knowledge, unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated by footnote, the address for each director, executive officer and owner of 5% or more of our common stock is Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

Name of Beneficial Owner
  Number of Shares
Owned Beneficially
  Percent of Class  

Interested Directors and Executive Officers

             

Christian L. Oberbeck

    865,128 (1)   32.3 %

Richard A. Petrocelli

    865,128 (2)   32.3 %

Independent Directors

             

Steven M. Looney

    287     *  

Charles S. Whitman III

    641     *  

G. Cabell Williams

    4,491     *  

All Directors and Executive Officers as a Group (5 members)

   
870,547
   
32.5

%

Owners of 5% or More of Our Common Stock

             

GSC CDO III, LLC(3)

    192,800     7.2 %

*
Less than 1%

(1)
Includes 552,302 shares of common stock directly held by Mr. Oberbeck, 78,947 shares of common stock held by Saratoga Investment Advisors, which Mr. Oberbeck controls, and 78,947 shares of common stock held by CLO Partners LLC, an entity wholly owned by Mr. Oberbeck. All other shares of common stock attributed to Mr. Oberbeck are owned directly by Richard A. Petrocelli (32,894 shares of common stock), our chief financial officer, secretary and chief compliance officer and a managing director of our investment adviser, Charles G. Phillips (32,894 shares of common stock), a managing director of our investment adviser, John F. MacMurray (3,618 shares of common stock), an investment professional of our investment adviser, Charles P. Durkin, Jr. (19,736 shares of common stock), a senior advisor at Saratoga Management Company, an affiliate of Saratoga Partners, and John P. Birkelund (65,789 shares of common stock), a senior advisor at Saratoga Management Company, with whom Mr. Oberbeck may be deemed to be a member of a "group" under Section 13d-3 of the Exchange Act and, as a result, may be deemed to share voting and/or investment power with respect to the shares owned by these individuals.

(2)
Includes 32,894 shares of common stock directly held by Mr. Petrocelli. All other shares of common stock attributed to Mr. Petrocelli are owned directly and indirectly by Christian L. Oberbeck (710,196 shares), our chief executive office and president and the managing member of our investment adviser, Charles G. Phillips (32,894 shares of common stock), a managing director of our investment adviser, John F. MacMurray (3,618 shares of common stock), an investment professional of our investment adviser, Charles P. Durkin, Jr. (19,736 shares of common stock), a senior advisor at Saratoga Management Company, an affiliate of Saratoga Partners, and John P.

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(3)
Includes 13 shares of common stock held by GSC Secondary Interest Fund, LLC and 11,606 shares of common stock held by Greenwich Street Capital Partners II, L.P., both of which are affiliates of GSC CDO III, L.L.C.. The address of GSC CDO III, LLC is 500 Campus Drive, Suite 220, Florham Park, New Jersey 07932.

        The following table sets forth the dollar range of our equity securities beneficially owned by each of our directors as of September 15, 2010.

Name of Director
  Dollar Range of Equity
Securities in Saratoga
Investment Corp.(1)(2)

Independent Directors

   

Steven M. Looney

  $1 – $10,000

Charles S. Whitman III

  $1 – $10,000

G. Cabell Williams

  $50,001 – $100,000

Interested Directors

   

Christian L. Oberbeck

  over $100,000

Richard A. Petrocelli

  over $100,000

(1)
Dollar ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, or over $100,000.

(2)
Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

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DETERMINATION OF NET ASSET VALUE

        The net asset value per share of our outstanding common stock is determined quarterly by dividing the value of total assets minus liabilities by the total number of shares of our common stock outstanding.

        We carry our investments at fair value, as determined in good faith by our board of directors. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations subject to any decision by our board of directors to make 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 determined in good faith by our board of directors based on input from Saratoga Investment Advisors, our audit committee and, if our board or audit committee so request, 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 a fair value pricing include the nature and realizable value of any collateral, the portfolio company's ability to make payments, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors.

        Our investment in the subordinated notes of GSCIC CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar subordinated notes or equity of collateralized loan obligation funds, when available.

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

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

        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 by our board of directors may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

        The following discussion is a general summary of the material United States federal income tax considerations applicable to us and to an investment in our shares. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under United States federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as in effect as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service regarding the offering. This summary does not discuss any aspects of United States estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under United States federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets in which we do not currently intend to invest.

        A "U.S. stockholder" generally is a beneficial owner of shares of our common stock who is for United States federal income tax purposes:

        A "Non-U.S. stockholder" is a beneficial owner of shares of our common stock that is not a U.S. stockholder.

        If a partnership (including an entity treated as a partnership for United States federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder who is a partner of a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership and disposition of shares of our common stock.

        Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

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Election to be taxed as a Regulated Investment Company.

        We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level federal income taxes on any income that we distribute to our stockholders from our tax earnings and profits. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our "investment company taxable income," which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses (the "Annual Distribution Requirement").

Taxation as a Regulated Investment Company

        If we:

then we will not be subject to federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.

        In order to maintain our qualification as a RIC for federal income tax purposes, we must, among other things:

        We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax (the "Excise Tax Avoidance Requirement"). We may choose to retain a portion of our ordinary income and/or capital gain net income in year and pay the 4% U.S. federal excise tax on the retained amounts.

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

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

        Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are generally not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. See "Regulation—Indebtedness and Senior Securities." Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

        Certain of our investment practices may be subject to special and complex federal income tax provisions that may, among other things, (1) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (2) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (3) convert lower-taxed long-term capital gain into higher-taxed short-term capital gain or ordinary income, (4) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (5) cause us to recognize income or gain without receipt of a corresponding distribution of cash, (6) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (7) adversely alter the characterization of certain complex financial transactions and (8) produce income that will not be qualifying income for purposes of the 90% Income Test. We intend to monitor our transactions and may make certain tax elections to mitigate the potential adverse effect of these provisions, but there can be no assurance that any adverse effects of these provisions will be mitigated.

        If we purchase shares in a "passive foreign investment company" (a "PFIC"), we may be subject to federal income tax on its allocable share of a portion of any "excess distribution" received on, or any gain from the disposition of, such shares even if our allocable share of such income is distributed as a taxable dividend to its stockholders. Additional charges in the nature of interest generally will be

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imposed on us in respect of deferred taxes arising from any such excess distribution or gain. If we invest in a PFIC and elect to treat the PFIC as a "qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed by the QEF. Alternatively, we may be able to elect to mark-to-market at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the value of such shares, and as ordinary loss our allocable share of any decrease in such value to the extent that any such decrease does not exceed prior increases included in our income. Under either election, we may be required to recognize in a year income in excess of distributions from PFICs and proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.

        Currently, GSCIC CLO is treated as a disregarded entity for U.S. federal tax purposes and we are required to include all of its income in our investment company taxable income and net capital gain as if we earned such income directly. We may make an election to treat GSCIC CLO as a separate corporation for U.S. federal tax purposes. If such an election were made, GSCIC CLO would be a controlled foreign corporation for U.S. federal income tax purposes and we would be required to include in income each year any subpart F income, which would generally include its net investment income, regardless of whether we received any distributions with respect to such income. Although the Code generally provides that subpart F income will be "good income" for purposes of the 90% Income Test to the extent it is distributed to a RIC in the year it is included in the RIC's income, the Code does not specifically provide whether subpart F income for which no distribution is received during the RIC's taxable year would be "good income" for the 90% Income Test. The Internal Revenue Service has issued a series of private rulings in which it has concluded that any subpart F income included in a RIC's income would constitute "good income" for purposes of the 90% Income Test. Such rulings are not binding on the Internal Revenue Service except with respect to the taxpayer to whom such rulings were issued. Accordingly, if we do elect to treat GSCIC CLO as a separate corporation, although we believe that any subpart F income of GSCIC CLO that we are required to include in our taxable income would be "good income" for purposes of the 90% Income Test, no guaranty can be made that the Internal Revenue Service would not assert that such income would not be "good income" for purposes of the 90% Income Test. If such income were not considered "good income" for purposes of the 90% Income Test, we may fail to qualify as a RIC.

        Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt obligations denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

        The remainder of this discussion assumes that we maintain our qualification as a RIC and have satisfied the Annual Distribution Requirement.

Taxation of U.S. Stockholders

        Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our "investment company taxable income" (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to

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dividends from U.S. corporations and certain qualified foreign corporations, such distributions, or Qualifying Dividends, may be eligible for a current maximum tax rate of 15%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the current 15% maximum rate applicable to Qualifying Dividends. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as "capital gain dividends" will be taxable to a U.S. stockholder as long-term capital gains that are currently taxable at a maximum rate of 15% in the case of individuals, trusts or estates, regardless of the U.S. stockholder's holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder's adjusted tax basis in such stockholder's common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.

        For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.

        If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.

        Pursuant to a recent revenue procedure issued by the Internal Revenue Service, or the IRS, the IRS has indicated that it will treat distributions from certain publicly traded RICs (including business development companies) that are paid part in cash and part in stock as dividends that would satisfy the RIC's annual distribution requirements. In order to qualify for such treatment, the revenue procedure requires that at least 10% of the total distribution be paid in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder's distribution in cash). This revenue procedure applies to distributions made with respect to taxable years ending prior to January 1, 2012.

        A stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference between such stockholder's adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.

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        In general, individual U.S. stockholders currently are subject to a maximum federal income tax rate of 15% on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses), including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. The maximum rate on long-term capital gains for non-corporate taxpayers is scheduled to return to 20% for tax years beginning after December 31, 2010. In addition, for taxable years beginning after December 31, 2012, individuals with income in excess of $200,000 ($250,000 in the case of married individuals filing jointly) and certain estates and trusts are subject to an additional 3.8% tax on their "net investment income," which generally includes net income from interest, dividends, annuities, royalties, and rents, and net capital gains (other than certain amounts earned from trades or businesses). Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carry back such losses for three years or carry forward such losses for five years.

        We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year's distributions generally will be reported to the Internal Revenue Service (including the amount of dividends, if any, eligible for the 15% maximum rate). Dividends paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to Qualifying Dividends because our income generally will not consist of dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder's particular situation.

        We may be required to withhold federal income tax, or backup withholding, currently at a rate of 28%, from all distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual's taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder's federal income tax liability, provided that proper information is provided to the IRS.

Taxation of Non-U.S. Stockholders

        Whether an investment in our shares is appropriate for a Non-U.S. stockholder will depend upon that person's particular circumstances. An investment in our shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.

        Distributions of our investment company taxable income to Non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to Non-U.S. stockholders directly) will be subject to withholding of federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if an income tax treaty applies, attributable to a permanent establishment in the United States, we will not be required to withhold federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to federal income

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tax at the rates applicable to U.S. persons. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers.)

        In addition, with respect to certain distributions made to Non-U.S. stockholders in our taxable years beginning before January 1, 2010, no withholding was required and the distributions generally were not be subject to federal income tax if (i) the distributions were properly designated in a notice timely delivered to our stockholders as "interest-related dividends" or "short-term capital gain dividends," (ii) the distributions were derived from sources specified in the Code for such dividends and (iii) certain other requirements were satisfied. Although both Houses of Congress have passed versions of a bill that would extend this exemption to tax years beginning prior to January 1, 2011, no assurance can be given that such legislation will be passed, or that it would be extended for future years. In addition, no assurance can be given that any of our distributions would be eligible for this exemption even it is extended.

        Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to federal withholding tax and generally will not be subject to federal income tax unless (i) the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States, or (ii) the Non-U.S. stockholder is an individual that is present in the United States for more than 183 days during the taxable year.

        If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a federal income tax credit or tax refund equal to the stockholder's allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.

        Recently enacted legislation that becomes effective after December 31, 2012, generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions that fail to enter into an agreement with the United States Treasury to report certain required information with respect to accounts held by United States persons (or held by foreign entities that have United States persons as substantial owners). The types of income subject to the tax include U.S. source interest and dividends and the gross proceeds from the sale of any property that could produce U.S.-source interest or dividends. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder's account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a 10% or greater U.S. owner or provides the withholding agent with identifying information on each 10% or greater U.S. owner. When these provisions become effective, depending on the status of a Non-U.S. Holder and the status of the intermediaries through which they hold their units, Non-U.S. Holders could be subject to this 30% withholding tax with respect to distributions on their units and proceeds from the sale of their units. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes.

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        A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of federal tax, may be subject to information reporting and backup withholding of federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

        Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.

Failure to Maintain Our Qualification as a RIC

        If we were unable to maintain our qualification for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income that prior to January 1, 2011, would be eligible for the current 15% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and any remaining distributions would be treated as a capital gain.

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DESCRIPTION OF OUR COMMON STOCK

        The following description is based on relevant portions of the Maryland General Corporation Law and our charter and bylaws, which we collectively refer to as our "governing documents."

        As of the date of this prospectus, our authorized stock consists of 100,000,000 shares of capital stock, $0.001 par value per share, all of which are designated as shares of common stock. Our common stock trades under the symbol "SAR" on the New York Stock Exchange. There are no outstanding options or warrants to purchase our common stock. No shares of common stock have been authorized for issuance under any equity compensation plans. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

        Under our governing documents, our board of directors is authorized to create new classes or series of shares of stock and to authorize the issuance of shares of stock without obtaining stockholder approval. Our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

Common Stock

        Each share of our common stock has equal rights as to earnings, assets, dividends and voting and all of our outstanding shares of common stock are duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights.

        In the event of a liquidation, dissolution or winding up of us, each share of common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of shares of our preferred stock, if any are outstanding at such time. Each share of our common stock entitles its holder to cast one vote on all matters submitted to a vote of stockholders, including the election and removal of directors.

        The following table sets forth information regarding our authorized shares of stock under our charter and bylaws and shares of stock outstanding as of the date of this prospectus.

Title of Class
  Shares Authorized   Amount Held by Us
or for Our Account
  Amount Outstanding
Exclusive of Amount Held by Us
or for Our Account
 

Common Stock

    100,000,000         2,680,842  

Preferred Stock

        Our governing documents authorize our board of directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to the issuance of shares of stock of each class or series, the board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock. Thus, the board of directors could authorize the issuance of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. In addition, as a business development company, any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, the aggregate

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dividend or distribution on, or purchase price of, such shares of preferred stock together with all other indebtedness and senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock is in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding shares of preferred stock. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

        The Maryland General Corporation Law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our governing documents contain a provision which eliminates directors' and officers' liability to the maximum extent permitted by the Maryland General Corporation Law, subject to the requirements of the 1940 Act.

        Maryland law requires a corporation (unless its charter provides otherwise, which, our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received unless, in either case, a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

        Our charter authorizes us to obligate ourselves, and our bylaws do obligate us, to the maximum extent permitted by Maryland law and subject to any applicable requirements of the 1940 Act, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (1) any present or former director or officer or (2) any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, manager, member or trustee, from and against any claim or liability to which that person may become subject for which that person may incur by reason of his or her service in such capacity. Our charter and bylaws also permit indemnification and the advancement of expenses to any person who served a predecessor to Saratoga Investment Corp. in any of the capacities described above and any of our employees or agents or any employees or agents of such predecessor.

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        As a business development company, and in accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

        In addition to the indemnification provided for in our bylaws, we have entered into indemnification agreements with each of our current directors and officers and we intend to enter into indemnification agreements with each of our future directors and officers. The indemnification agreements attempt to provide these directors and officers the maximum indemnification permitted under Maryland law and the 1940 Act. The agreements provide, among other things, for the advancement of expenses and indemnification for liabilities incurred which such person may incur by reason of his or her status as a present or former director or officer in any action or proceeding arising out of the performance of such person's services as a present or former director or officer.

Provisions of Our Governing Documents and the Maryland General Corporation Law

        Our governing documents and the Maryland General Corporation Law contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

        Our board of directors is divided into three classes of directors serving staggered three-year terms. Directors of each class are elected to serve for three-year terms and until their successors are duly elected and qualify, and each year one class of directors is elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.

        Our governing documents provide that the number of directors will be set only by our board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than three nor more than eleven. Our charter provides that, except as may be provided by the board of directors in setting the terms of any class or series of shares of stock, so long as we have a class of securities registered under the Exchange Act and at least three independent directors, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act. If there are no directors then in office, vacancies may be filled by stockholders at a special meeting called for such purpose. Our charter provides that a director may be removed only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

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        Our charter and bylaws provide that the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of directors will be required to elect each director. Pursuant to our charter and bylaws, our board of directors may amend the bylaws to alter the vote required to elect directors.

        All of our outstanding shares of common stock will generally be able to vote on any matter that is a proper subject for action by the stockholders of a Maryland corporation, including in respect of the election or removal of directors as well as other extraordinary matters. Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or by written or electronically-transmitted unanimous consent in lieu of a meeting. These provisions, combined with the requirements of our governing documents regarding the calling of a stockholder-requested special meeting of stockholder discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

        Our bylaws provide that, with respect to an annual meeting of our stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) by any stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the annual meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors, (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is a stockholder of record both at the time of giving notice by the stockholder and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of our bylaws or (4) by a stockholder who is entitled to vote at the meeting in circumstances in which a special meeting of stockholders is called for the purpose of electing directors when no directors remain in office.

        The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

        Our bylaws provide that special meetings of our stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of

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certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of our stockholders will be called by our secretary upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting, except that, if no directors remain in office, a special meeting of our stockholders shall be called to elect directors by the secretary upon the written request of holders entitled to cast at least 10% of the votes entitled to be cast generally in the election of directors.

        Under Maryland law, a Maryland corporation generally cannot dissolve or amend its charter unless the corporation's board of directors declares the dissolution or amendment to be advisable and the dissolution or amendment is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of amendments to our charter by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. However, our charter also provides that certain charter amendments and proposals for our liquidation, dissolution or conversion, whether by merger or otherwise, from a closed-end company to an open-end company require the approval of the stockholders entitled to cast at least two- thirds percent of the votes entitled to be cast on such matter. If such amendment or proposal is approved by at least two-thirds of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The "continuing directors" are, as defined in our charter, our current directors as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the board of directors.

        Our governing documents provide that the board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

        Under Maryland law, a Maryland corporation generally cannot amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless the corporation's board of directors declares action or transaction to be advisable and the action or transaction is approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. A Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter.

        Except for a merger that would result in our conversion to an open-end company, which requires the approval described above, our charter provides that we may merge, sell all or substantially all of our assets, engage in a consolidation or share exchange or engage in similar transactions, if such transaction is declared advisable by our board of directors and approved by a majority of all of the votes entitled to be cast on the matter.

        Except with respect to appraisal rights arising in connection with the Maryland Control Share Acquisition Act discussed below, as permitted by the Maryland General Corporation Law, our governing documents provide that our stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines that such rights will apply with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such

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determination in connection with which holders of such shares would otherwise be entitled to exercise appraisal rights.

        The Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

        The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

        A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholder meeting.

        If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations, including, as provided in our bylaws, compliance with the 1940 Act, which will prohibit any such repurchase other than in limited circumstances. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholder meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

        The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

        Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our common stock. Such provision could also be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Acquisition Act only if the board of directors determines that it would be in our best interests and that our being subject to the Control Share Acquisition Act does not conflict with the 1940 Act.

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        Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

        A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

        After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

        These super-majority vote requirements do not apply if the corporation's stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

        The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution exempting from the provisions of the Maryland Business Combination Act any business combination between us and any other person. If our board of directors adopts resolutions causing us to be subject to the provisions of the Business Combination Act, these provisions may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

        Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Acquisition Act or the Business Combination Act (if we amend our bylaws to be subject to such Acts), or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.

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REGULATION

        We have elected to be treated as a business development company under the 1940 Act. As with other companies regulated by the 1940 Act, a business development company must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than "interested persons," as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as a business development company unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company's stock present at a meeting if more than 50% of the outstanding stock of such company are present and represented by proxy or (ii) more than 50% of the outstanding stock of such company.

Qualifying Assets

        Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. The principal categories of qualifying assets relevant to our business are the following:

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Managerial Assistance to Portfolio Companies

        As a business development company we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Pursuant to a separate administration agreement, Saratoga Investment Advisors will provide such managerial assistance on our behalf to portfolio companies that request this assistance, recognizing that our involvement with each investment will vary based on factors including the size of the company, the nature of our investment, the company's overall stage of development and our relative position in the capital structure. We may receive fees for these services.

        In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above under "—Qualifying assets." However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the business development company must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the business development company purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Temporary Investments

        As a business development company, pending investment in other types of "qualifying assets," as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no

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percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the asset diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Indebtedness and Senior Securities

        As a business development company, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of shares of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must generally make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or stock unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.

Common Stock

        We are generally not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.

Code of Ethics

        As a business development company, we and Saratoga Investment Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code's requirements.

Proxy Voting Policies and Procedures

        SEC registered investment advisers that have the authority to vote (client) proxies (which authority may be implied from a general grant of investment discretion) are required to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered investment advisers also must maintain certain records on proxy voting. In most cases, we will invest in securities that do not generally entitle us to voting rights in our portfolio companies. When we do have voting rights, we will delegate the exercise of such rights to our investment adviser.

        Saratoga Investment Advisors has particular proxy voting policies and procedures in place. In determining how to vote, officers of Saratoga Investment Advisors will consult with each other, taking into account our interests and the interests of our investors, as well as any potential conflicts of interest. Saratoga Investment Advisors will consult with legal counsel to identify potential conflicts of interest. Where a potential conflict of interest exists, Saratoga Investment Advisors may, if it so elects,

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resolve it by following the recommendation of a disinterested third party, by seeking the direction of our independent directors or, in extreme cases, by abstaining from voting. While Saratoga Investment Advisors may retain an outside service to provide voting recommendations and to assist in analyzing votes, it will not delegate its voting authority to any third party.

        An officer of Saratoga Investment Advisors will keep a written record of how all such proxies are voted. It will retain records of (1) proxy voting policies and procedures, (2) all proxy statements received (or it may rely on proxy statements filed on the SEC's EDGAR system in lieu thereof), (3) all votes cast, (4) investor requests for voting information, and (5) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, Saratoga Investment Advisors may rely on such service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

        Saratoga Investment Advisors' proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, Saratoga Investment Advisors will vote our proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) it finds it necessary to vote contrary to its general guidelines to maximize stockholder value or our best interests.

        In reviewing proxy issues, Saratoga Investment Advisors generally will use the following guidelines:

        Elections of Directors:    In general, Saratoga Investment Advisors will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company's board of directors, or Saratoga Investment Advisors determines that there are other compelling reasons for withholding our vote, it will determine the appropriate vote on the matter. It may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a majority vote requirement, (3) submit a rights plan to a stockholder vote or (4) act on tender offers where a majority of stockholders have tendered their shares. Finally, Saratoga Investment Advisors may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

        Appointment of Auditors:    We believe that a portfolio company remains in the best position to choose its independent auditors and Saratoga Investment Advisors will generally support management's recommendation in this regard.

        Changes in Capital Structure:    Changes in a portfolio company's organizational documents may be required by state or federal regulation. In general, Saratoga Investment Advisors will cast our votes in accordance with the management on such proposals. However, Saratoga Investment Advisors will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

        Corporate Restructurings, Mergers and Acquisitions:    We believe proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, Saratoga Investment Advisors will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

        Proposals Affecting Stockholder Rights:    We will generally vote in favor of proposals that give stockholders a greater voice in the affairs of a portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, Saratoga Investment Advisors will balance the financial impact of the proposal against any impairment of stockholder rights as well as of our investment in the portfolio company.

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        Corporate Governance:    We recognize the importance of good corporate governance. Accordingly, Saratoga Investment Advisors will generally favor proposals that promote transparency and accountability within a portfolio company.

        Anti-Takeover Measures:    Saratoga Investment Advisors will evaluate, on a case-by-case basis, any proposals regarding anti-takeover measures to determine the measure's likely effect on stockholder value dilution.

        Share Splits:    Saratoga Investment Advisors will generally vote with management on share split matters.

        Limited Liability of Directors:    Saratoga Investment Advisors will generally vote with management on matters that could adversely affect the limited liability of directors.

        Social and Corporate Responsibility:    Saratoga Investment Advisors will review proposals related to social, political and environmental issues to determine whether they may adversely affect stockholder value. It may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.

Compliance with Applicable Laws

        As a business development company, we will be periodically examined by the SEC for compliance with the 1940 Act.

        We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office.

        We and Saratoga Investment Advisors are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.

Co-Investment

        We may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. Thus, based on current SEC interpretations, co-investment transactions involving a business development company like us and an entity that is advised by Saratoga Investment Advisors or an affiliated adviser generally could not be effected without SEC relief. The staff of the SEC has, however, granted no-action relief permitting for purchases of a single class of privately-placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, currently we only expect to co-invest on a concurrent basis with affiliates of Saratoga Investment Advisors when each of us will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures.

        We may in the future submit an exemptive application to the SEC to permit greater flexibility to negotiate the terms of co-investments because we believe that it will be advantageous for us to co-invest with affiliates of Saratoga Investment Advisors where such investment is consistent with the investment objective, investment positions, investment policies, investment strategies, investment restrictions, regulatory requirements and other pertinent factors applicable to us. However, there is no assurance that any application for exemptive relief, if made, would be granted by the SEC.

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Compliance with the Sarbanes-Oxley Act and the New York Stock Exchange Corporate Governance Regulations

        We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. For example:

        The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We intend to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

        The New York Stock Exchange has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance listing standards applicable to business development companies.


CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

        Our portfolio securities are held under a custody agreement by U.S. Bank National Association. The address of the custodian is 214 N. Tryon Street, 12th Floor, Charlotte, North Carolina 28202. American Stock Transfer & Trust Company acts as our transfer agent, dividend paying agent and registrar. The principal business address of American Stock Transfer & Trust Company is 59 Maiden Lane, Plaza Level, New York, New York 10038, telephone number: (212) 936-5100.


BROKERAGE ALLOCATION AND OTHER PRACTICES

        Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of our business. Subject to policies established by our board of directors, Saratoga Investment Advisors is primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions. Saratoga Investment Advisors does not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm's risk and skill in positioning blocks of securities. While Saratoga Investment Advisors generally seeks reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, Saratoga Investment Advisors may select a broker based partly upon brokerage or research services provided to Saratoga Investment Advisors, to us and any other clients. In return for such services, we may pay a higher commission than other brokers would charge if the investment adviser determines in good faith that such commission is reasonable in relation to the services provided.

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SELLING STOCKHOLDERS

        This prospectus covers 1,168,018 shares of our common stock that may be offered for resale by the selling stockholders named in this prospectus. The 986,837 shares of common stock offered by the selling stockholders in this prospectus were originally issued by us on July 30, 2010 to the selling stockholders in connection with the private sale of $15 million in aggregate purchase price of our common stock pursuant to a stock purchase agreement, dated April 14, 2010. As part of the private sale transaction, we agreed to register for resale by the selling stockholders the shares of common stock that we issued in the private sale transaction as well as 181,181 shares of our common stock held by an entity affiliated with GSCP (NJ), L.P., our former external investment adviser.

        The table below sets forth, as of September 15, 2010, the following information for each selling stockholder:

        The information included in the table under "Shares Beneficially Owned After Offering" assumes that each stockholder below will elect to sell all of the shares set forth under "Number of Shares That May Be Offered." The selling stockholders may sell all, some or none of their shares in this offering. See "Plan of Distribution." The information regarding the identity of the selling stockholders and their affiliations, including their beneficial ownership of shares of our common stock, is based solely on information provided by or on behalf of the selling stockholders.

 
  Shares
Beneficially Owned
Prior to Offering(1)
   
  Shares
Beneficially Owned
After Offering(2)(3)
 
 
  Number of
Shares that
May Be Offered
 
Name
  Number   Percent   Number   Percent  

Christian L. Oberbeck

    865,128 (4)   32.3 %   865,128     0     0 %

Richard A. Petrocelli

    865,128 (4)   32.3 %   865,128     0     0 %

Charles G. Phillips IV

    865,128 (4)   32.3 %   865,128     0     0 %

John F. MacMurray

    865,128 (4)   32.3 %   865,128     0     0 %

Charles P. Durkin, Jr. 

    865,128 (4)   32.3 %   865,128     0     0 %

John P. Birkelund

    865,128 (4)   32.3 %   865,128     0     0 %

Maria F. Constanzo

    6,578     *     6,578     0     0 %

Robert Cizik

    16,447     *     16,447     0     0 %

Thomas V. Inglesby

    117,255     4.4 %   98,684     0     0 %

GSC CDO III, L.L.C

    192,800     7.2 %   181,181     11,619     *  

*
Less than 1%.

(1)
Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act.

(2)
Assumes the sale of all shares eligible for sale in this prospectus and no other purchases or sales of our common stock. This assumption has been made under the rules and regulations of the SEC

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(3)
Applicable percentage of ownership is based on 2,680,842 shares of our common stock outstanding on September 15, 2010.

(4)
Includes shares of common stock attributed to the selling stockholder that are owned by other selling stockholders as a result of the fact that these selling stockholders may be deemed to have formed a "group" within the meaning of Section 13d-3 of the Exchange Act. See "Control Persons and Principal Stockholders."

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PLAN OF DISTRIBUTION

        The selling stockholders named in this prospectus may offer, from time to time, up to 1,168,018 shares of our common stock. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock.

        The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions:

        If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short

122


sales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

        The selling stockholders may pledge or grant a security interest in some or all of the common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment or supplement to this prospectus amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

        The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.

        Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

        There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement of which this prospectus forms a part.

        The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

        We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, including, without limitation, SEC filing fees and expenses of compliance with state securities or "blue sky" laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreement, or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the registration rights agreement, or we may be entitled to contribution.

        Pursuant to the terms of the registration rights agreement described above, each of the selling stockholders other than GSC CDO III, L.L.C. has agreed not to sell, dispose of, pledge or otherwise transfer 33.33% of the shares of our common stock purchased by them in connection with the stock purchase transaction described elsewhere in this prospectus until July 30, 2011.

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LEGAL MATTERS

        Certain legal matters regarding the securities offered by this prospectus will be passed upon for Saratoga Investment Corp. by Sutherland Asbill & Brennan, Washington, D.C.


INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

        The financial statements as of February 28, 2010 and February 28, 2009 included in this prospectus have been audited by Ernst & Young LLP, an independent registered public accounting firm, and have been so included in reliance on the report of such firm given upon their authority as experts in auditing and accounting.


AVAILABLE INFORMATION

        We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our shares of our common stock offered by this prospectus. The registration statement contains additional information about us and our shares of our common stock being offered by this prospectus.

        We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov. Our Internet address is www.saratogainvestmentcorp.com. We make available free of charge on our Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.


PRIVACY NOTICE

        We are committed to protecting your privacy. This privacy notice explains the privacy policies of Saratoga Investment Corp., Saratoga Investment Advisors and their affiliated companies. This notice supersedes any other privacy notice you may have received from us.

        We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. The only information we collect from you is your name, address, number of shares you hold and your social security number. This information is used only so that we can send you annual reports and other information about us, and send you proxy statements or other information required by law.

        We do not share this information with any non-affiliated third party except as described below.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page

Unaudited Consolidated Financial Statements:

   

Consolidated Statement of Assets and Liabilities as of May 31, 2010 (unaudited) and February 28, 2010

  F-2

Consolidated Statements of Operations for the three months ended May 31, 2010 and 2009 (unaudited)

  F-3

Consolidated Schedules of Investments as of May 31, 2010 (unaudited) and February 28, 2010

  F-4

Consolidated Statements of Changes in Net Assets for the three months ended May 31, 2010 and 2009 (unaudited)

  F-10

Consolidated Statements of Cash Flows for the three months ended May 31, 2010 and 2009 (unaudited)

  F-11

Notes to Consolidated Financial Statements as of May 31, 2010 (unaudited)

  F-12

Audited Consolidated Financial Statements:

   

Report of Independent Registered Public Accounting Firm

  F-30

Consolidated Statement of Assets and Liabilities as of February 28, 2010 and 2009

  F-31

Consolidated Statements of Operations for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-32

Consolidated Schedule of Investments as of February 28, 2010 and 2009

  F-33

Consolidated Statements of Changes in Net Assets for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-40

Consolidated Statements of Cash Flows for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-41

Notes to Consolidated Financial Statements

  F-42

F-1



GSC Investment Corp.

Consolidated Statement of Assets and Liabilities

 
  As of  
 
  May 31,
2010
  February 28,
2010
 
 
  (unaudited)
 

ASSETS

 

Investments at fair value

             

Non-control/non-affiliate investments (amortized cost of $113,009,708 and $117,678,275, respectively)

  $ 71,719,742   $ 72,674,847  

Control investments (cost of $29,233,097 and $29,233,097, respectively)

    18,208,657     16,698,303  
           

Total investments at fair value (amortized cost of $142,242,805 and $146,911,372, respectively)

    89,928,399     89,373,150  

Cash and cash equivalents

    2,928,017     3,352,434  

Cash and cash equivalents, securitization accounts

    378,728     225,424  

Outstanding interest rate cap at fair value (cost of $131,000 and $131,000, respectively)

    22,278     42,147  

Interest receivable, net of reserve of $3,269,723 and $2,120,309, respectively

    2,589,212     3,473,961  

Management fee receivable

    231,300     327,928  

Other assets

    401,636     140,272  
           

Total assets

  $ 96,479,570   $ 96,935,316  
           


LIABILITIES


 

Revolving credit facility

 
$

33,807,431
 
$

36,992,222
 

Management and incentive fees payable

    3,482,482     3,071,093  

Accounts payable and accrued expenses

    779,972     1,111,081  

Interest and credit facility fees payable

    270,246     267,166  

Due to manager

    6,549     15,602  
           

Total liabilities

  $ 38,346,680   $ 41,457,164  
           

NET ASSETS

             

Common stock, par value $.0001 per share, 100,000,000 common shares authorized, 16,940,109 common shares issued and outstanding

  $ 1,694   $ 1,694  

Capital in excess of par value

    128,339,497     128,339,497  

Accumulated undistributed net investment loss

    (2,843,933 )   (2,846,135 )

Accumulated net realized loss from investments and derivatives

    (14,941,240 )   (12,389,830 )

Net unrealized depreciation on investments and derivatives

    (52,423,128 )   (57,627,074 )
           

Total Net Assets

    58,132,890     55,478,152  
           

Total liabilities and Net Assets

  $ 96,479,570   $ 96,935,316  
           

NET ASSET VALUE PER SHARE

  $ 3.43   $ 3.27  
           

See accompanying notes to consolidated financial statements.

F-2



GSC Investment Corp.

Consolidated Statements of Operations

 
  For the
Three Months Ended
May 31, 2010
  For the
Three Months Ended
May 31, 2009
 
 
  (unaudited)
  (unaudited)
 

INVESTMENT INCOME

             

Interest from investments

             

Non-control/Non-affiliate investments

  $ 1,617,267   $ 3,318,840  

Control investments

    652,720     868,229  
           
 

Total interest income

    2,269,987     4,187,069  

Interest from cash and cash equivalents

    319     13,191  

Management fee income

    506,785     520,992  

Other income

    33,559     43,134  
           

Total investment income

    2,810,650     4,764,386  
           

EXPENSES

             

Interest and credit facility financing expenses

    831,121     642,893  

Base management fees

    411,389     547,744  

Professional fees

    1,142,537     339,780  

Administrator expenses

    155,137     171,861  

Incentive management fees

        322,183  

Insurance

    194,654     206,017  

Directors fees and expenses

    164,611     82,000  

General & administrative

    64,136     59,780  
           

Expenses before expense waiver and reimbursement

    2,963,585     2,372,258  
           

Expense reimbursement

    (155,137 )   (171,861 )
           

Total expenses net of expense waiver and reimbursement

    2,808,448     2,200,397  
           

NET INVESTMENT INCOME

    2,202     2,563,989  
           

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

             

Net realized loss from investments

    (2,551,410 )   (5,152 )

Net unrealized appreciation on investments

    5,223,815     2,769,292  

Net unrealized appreciation/(depreciation) on derivatives

    (19,869 )   35,687  
           

Net gain on investments

    2,652,536     2,799,827  
           

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

  $ 2,654,738   $ 5,363,816  
           

WEIGHTED AVERAGE—BASIC AND DILUTED EARNINGS PER COMMON SHARE

  $ 0.16   $ 0.65  

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING—BASIC AND DILUTED

    16,940,109     8,291,384  

See accompanying notes to consolidated financial statements.

F-3



GSC Investment Corp.

Consolidated Schedule of Investments

May 31, 2010

(Unaudited)

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of Net
Assets
 

Non-control/Non-affiliated investments—123.4%(b)

                                 

GFSI Inc(d)

 

Apparel

 

Senior Secured Notes 10.50%, 6/1/2011

  $ 7,082,000   $ 7,082,000   $ 7,082,000     12.2 %

Legacy Cabinets Holdings(d)(i)

 

Building Products

 

Common Voting A-1

    2,535     220,900     220,900     0.4 %

Legacy Cabinets Holdings(d)(i)

 

Building Products

 

Common Voting B-1

    1,600     139,424     139,424     0.2 %

Legacy Cabinets, Inc.(d)(i)

 

Building Products

 

First Lien Term Loan 7.25%, 5/3/2014

    281,644     281,644     192,926     0.3 %
                           

     

Total Building Products

    285,779     641,968     553,250     0.9 %
                           

Hopkins Manufacturing Corporation(d)

 

Consumer Products

 

Second Lien Term Loan 7.61%, 1/26/2012

    3,250,000     3,248,218     3,120,000     5.4 %

Targus Group International, Inc.(d)

 

Consumer Products

 

First Lien Term Loan 10.25%, 11/22/2012

    3,128,814     2,969,724     2,753,356     4.7 %

Targus Holdings, Inc.(d)

 

Consumer Products

 

Unsecured Notes 10.00%, 12/14/2015

    1,538,235     1,538,235     799,882     1.4 %

Targus Holdings, Inc.(d)(i)

 

Consumer Products

 

Common

    62,413     566,765     686,543     1.2 %
                           

     

Total Consumer Products

    7,979,462     8,322,942     7,359,781     12.7 %
                           

CFF Acquisition LLC(d)

 

Consumer Services

 

First Lien Term Loan 7.50%, 7/31/2013

    305,973     305,973     264,667     0.5 %

M/C Communications, LLC(d)

 

Education

 

First Lien Term Loan 6.75%, 12/31/2012

    834,131     834,131     554,697     1.0 %

M/C Communications, LLC(d)(i)

 

Education

 

Class A Common Stock

    166,327     30,241     13,306     0.0 %
                           

     

Total Education

    1,000,458     864,372     568,003     1.0 %
                           

Advanced Lighting Technologies, Inc.(d)

 

Electronics

 

Second Lien Term Loan 6.28%, 6/1/2014

    2,000,000     1,825,912     1,630,000     2.8 %

Group Dekko(d)

 

Electronics

 

Second Lien Term Loan 10.50%, 1/20/2012

    6,983,429     6,983,429     5,097,903     8.8 %
                           

     

Total Electronics

    8,983,429     8,809,341     6,727,903     11.6 %
                           

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Non Voting Common Stock

    765     133,002     99,141     0.2 %

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Voting Common Stock

    17,396     3,025,798     2,255,450     3.9 %
                           

     

Total Environmental

    18,161     3,158,800     2,354,591     4.1 %
                           

Bankruptcy Management Solutions, Inc.(d)

 

Financial Services

 

Second Lien Term Loan 6.60%, 7/31/2013

    4,825,000     4,803,746     1,206,250     2.1 %

Big Train, Inc.(d)

 

Food and Beverage

 

First Lien Term Loan 7.75%, 3/31/2012

    1,876,873     1,442,978     1,717,339     3.0 %

IDI Acquisition Corp.(d)

 

Healthcare Services

 

Senior Secured Notes 10.75%, 12/15/2011

    3,800,000     3,695,657     3,724,000     6.4 %

PRACS Institute, LTD(d)

 

Healthcare Services

 

Second Lien Term Loan 10.00%, 4/17/2013

    4,093,750     4,061,460     3,622,969     6.2 %
                           

     

Total Healthcare Services

    7,893,750     7,757,117     7,346,969     12.6 %
                           

McMillin Companies LLC(d)

 

Homebuilding

 

Senior Secured Notes 9.53%, 10/31/2013

    7,700,000     7,356,428     4,466,000     7.7 %

Worldwide Express Operations, LLC(d)

 

Logistics

 

First Lien Term Loan 10.00%, 6/30/2013

    2,835,072     2,831,452     2,069,603     3.6 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    12,000,000     12,000,000     960,000     1.7 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    1,700,000     1,700,000     136,000     0.2 %

Specialized Technology Resources, Inc.(d)

 

Manufacturing

 

Second Lien Term Loan 7.35%, 12/15/2014

    5,000,000     4,807,843     4,900,000     8.4 %
                           

     

Total Manufacturing

    18,700,000     18,507,843     5,996,000     10.3 %
                           

F-4



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

May 31, 2010

(Unaudited)

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of Net
Assets
 

Elyria Foundry Company, LLC(d)

 

Metals

 

Senior Secured Notes 13.00%, 3/1/2013

    5,000,000     4,888,653     4,550,000     7.8 %

Elyria Foundry Company, LLC(d)(i)

 

Metals

 

Warrants

    3,000             0.0 %
                           

     

Total Metals

    5,003,000     4,888,653     4,550,000     7.8 %
                           

Abitibi-Consolidated Company of Canada(d)(e)

 

Natural Resources

 

First Lien Term Loan 11.00%, 3/30/2009

    2,948,640     2,948,640     2,828,925     4.9 %

Grant U.S. Holdings LLP(d)(e)(i)

 

Natural Resources

 

Second Lien Term Loan 10.75%, 9/20/2013

    6,349,512     6,349,348     592,409     1.0 %
                           

     

Total Natural Resources

    9,298,152     9,297,988     3,421,334     5.9 %
                           

Energy Alloys, LLC(d)

 

Oil and Gas

 

Second Lien Term Loan 3.00%, 6/30/2015

    6,285,070     6,285,070     609,652     1.0 %

Energy Alloys, LLC(d)(i)

 

Oil and Gas

 

Warrants

    3             0.0 %
                           

     

Total Oil and Gas

    6,285,073     6,285,070     609,652     1.0 %
                           

Terphane Holdings Corp.(d)(e)(i)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2010

    4,850,000     4,850,000     4,437,750     7.6 %

Terphane Holdings Corp.(d)(e)(i)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2010

    5,087,250     5,087,250     4,654,834     8.0 %

Terphane Holdings Corp.(d)(e)(i)

 

Packaging

 

Senior Secured Notes 11.92%, 6/15/2010

    500,000     500,000     457,500     0.8 %
                           

     

Total Packaging

    10,437,250     10,437,250     9,550,084     16.4 %
                           

Brown Publishing Company(d)(i)

 

Publishing

 

Second Lien Term Loan 8.76%, 9/19/2014

    1,203,226     1,198,390     15,040     0.0 %

Network Communications, Inc.(d)(i)

 

Publishing

 

Unsecured Notes 10.75%, 12/1/2013

    5,000,000     5,065,452     2,412,500     4.1 %

Penton Media, Inc.(d)

 

Publishing

 

First Lien Term Loan 5.00%, 8/1/2014

    4,840,388     3,951,945     3,448,776     5.9 %
                           

     

Total Publishing

    11,043,614     10,215,787     5,876,316     10.0 %
                           

Sub Total Non-control/Non-affiliated investments

                  113,009,708     71,719,742     123.4 %
                             

Control investments—31.3%(b)

                                 

GSC Partners CDO GP III, LP(h)(i)

 

Financial Services

 

100% General Partnership Interest

                0.0 %

GSC Investment Corp. CLO 2007 LTD.(f)(h)

 

Structured Finance Securities

 

Other/Structured Finance Securities 9.73%, 1/21/2020

    30,000,000     29,233,097     18,208,657     31.3 %
                             

Sub Total Control investments

                  29,233,097     18,208,657     31.3 %
                             

Affiliate investments—0.0%(b)

                                 

GSC Partners CDO GP III, LP(g)(i)

 

Financial Services

 

6.24% Limited Partnership Interest

                0.0 %
                             

Sub Total Affiliate investments

                          0.0 %
                             

TOTAL INVESTMENT ASSETS—154.7%(b)

                $ 142,242,805   $ 89,928,399     154.7 %
                             

 

Outstanding interest rate cap
  Interest
rate
  Maturity   Notional   Cost   Fair
Value
  % of Net
Assets
 

Interest rate cap

    8.0 %   2/9/2014   $ 36,734,694   $ 87,000   $ 15,812     0.0 %

Interest rate cap

    8.0 %   11/30/2013     26,433,408     44,000     6,466     0.0 %
                                 

Sub Total Outstanding interest rate cap

                    $ 131,000   $ 22,278     0.0 %
                                 

(a)
All of the Fund's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Abitibi-Consolidated Company of Canada, Grant U.S. Holdings LLP, GSC Investment Corp. CLO 2007 Ltd., Terphane Holdings Corp., and GSC Partners CDO GP III, LP.

F-5



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

May 31, 2010

(Unaudited)

(b)
Percentages are based on net assets of $58,132,890 as of May 31, 2010.

(c)
Fair valued investment (see Note 4 to the consolidated financial statements).

(d)
All or a portion of the securities are pledged as collateral under a revolving securitized credit facility (see Note 7 to the consolidated financial statements).

(e)
Non-U.S. company. The principal place of business for Terphane Holdings Corp is Brazil, and for Abitibi-Consolidated Company of Canada and Grant U.S. Holdings LLP is Canada.

(f)
9.73% represents the modeled effective interest rate that is expected to be earned over the life of the investment.

(g)
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:

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

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $  
                               
(h)
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. In addition, 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)
 

GSC Investment Corp. CLO 2007 LTD. 

  $   $   $   $ 652,720   $ 506,785   $   $ 1,510,354  
                               

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $  
                               
(i)
Non-income producing at May 31, 2010.

F-6



GSC Investment Corp.

Consolidated Schedule of Investments

February 28, 2010

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of Net
Assets
 

Non-control/Non-affiliated investments—131.0%(b)

                                 

GFSI Inc(d)

 

Apparel

 

Senior Secured Notes 10.50%, 6/1/2011

  $ 7,082,000   $ 7,082,000   $ 6,909,907     11.9 %

Legacy Cabinets, Inc.(d)(i)

 

Building Products

 

First Lien Term Loan 6.58%, 8/18/2012

    1,479,842     1,463,159     444,841     0.8 %

Legacy Cabinets, Inc.(d)(i)

 

Building Products

 

Second Lien Term Loan 12.50%, 8/18/2013

    1,862,420     1,828,197     85,113     0.1 %
                           

     

Total Building Products

    3,342,262     3,291,356     529,954     0.9 %
                           

Hopkins Manufacturing Corporation(d)

 

Consumer Products

 

Second Lien Term Loan 7.50%, 1/26/2012

    3,250,000     3,247,947     3,003,650     5.2 %

Targus Group International, Inc.(d)

 

Consumer Products

 

First Lien Term Loan 10.25%, 11/22/2012

    3,109,712     2,936,092     2,738,101     4.7 %

Targus Holdings, Inc.(d)

 

Consumer Products

 

Unsecured Notes 10.00%, 12/14/2015

    1,538,235     1,538,235     1,529,467     2.6 %

Targus Holdings, Inc.(d)(i)

 

Consumer Products

 

Common

    62,413     566,765     237,169     0.4 %
                           

     

Total Consumer Products

    7,960,360     8,289,039     7,508,387     12.9 %
                           

CFF Acquisition LLC(d)

 

Consumer Services

 

First Lien Term Loan 7.50%, 7/31/2013

    306,855     306,855     255,242     0.4 %

M/C Communications, LLC(d)

 

Education

 

First Lien Term Loan 6.75%, 12/31/2012

    831,174     831,174     616,897     1.1 %

M/C Communications, LLC(d)(i)

 

Education

 

Class A Common Stock

    166,327     30,241     16,633     0.0 %
                           

     

Total Education

    997,501     861,415     633,530     1.1 %
                           

Advanced Lighting Technologies, Inc.(d)

 

Electronics

 

Second Lien Term Loan 6.23%, 6/1/2014

    2,000,000     1,814,950     1,764,600     3.0 %

Group Dekko(d)

 

Electronics

 

Second Lien Term Loan 10.50%, 1/20/2012

    6,913,293     6,913,293     4,852,440     8.3 %
                           

     

Total Electronics

    8,913,293     8,728,243     6,617,040     11.4 %
                           

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Non Voting Common Stock

    765     133,002     86,745     0.1 %

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Voting Common Stock

    17,396     3,025,798     1,973,453     3.3 %
                           

     

Total Environmental

    18,161     3,158,800     2,060,198     3.5 %
                           

Bankruptcy Management Solutions, Inc.(d)

 

Financial Services

 

Second Lien Term Loan 6.48%, 7/31/2013

    4,837,500     4,814,623     983,464     1.7 %

Big Train, Inc.(d)

 

Food and Beverage

 

First Lien Term Loan 7.75%, 3/31/2012

    1,931,121     1,451,316     1,696,876     2.9 %

IDI Acquisition Corp.(d)

 

Healthcare Services

 

Senior Secured Notes 10.75%, 12/15/2011

    3,800,000     3,679,489     3,620,640     6.2 %

PRACS Institute, LTD(d)

 

Healthcare Services

 

Second Lien Term Loan 8.26%, 4/17/2013

    4,093,750     4,058,633     3,568,931     6.2 %
                           

     

Total Healthcare Services

    7,893,750     7,738,122     7,189,571     12.4 %
                           

McMillin Companies LLC(d)

 

Homebuilding

 

Senior Secured Notes 9.53%, 10/31/2013

    7,700,000     7,334,121     3,634,400     6.3 %

Worldwide Express Operations, LLC(d)

 

Logistics

 

First Lien Term Loan 10.00%, 6/30/2013

    2,820,467     2,816,547     2,230,143     3.9 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    12,000,000     12,000,000     1,478,400     2.5 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    1,700,000     1,700,000     209,440     0.4 %

Specialized Technology Resources, Inc.(d)

 

Manufacturing

 

Second Lien Term Loan 7.23%, 12/15/2014

    5,000,000     4,799,666     4,711,000     8.0 %
                           

     

Total Manufacturing

    18,700,000     18,499,666     6,398,840     11.0 %
                           

F-7



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2010

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of Net
Assets
 

Elyria Foundry Company, LLC(d)

 

Metals

 

Senior Secured Notes 13.00%, 3/1/2013

    5,000,000     4,883,382     3,785,500     6.5 %

Elyria Foundry Company, LLC(d)(i)

 

Metals

 

Warrants

    3,000         8,610     0.0 %
                           

     

Total Metals

    5,003,000     4,883,382     3,794,110     6.5 %
                           

Abitibi-Consolidated Company of Canada(d)(e)

 

Natural Resources

 

First Lien Term Loan 11.00%, 3/30/2009

    2,948,639     2,948,639     2,830,694     4.9 %

Grant U.S. Holdings LLP(d)(e)(i)

 

Natural Resources

 

Second Lien Term Loan 10.75%, 9/20/2013

    6,349,512     6,349,348     158,738     0.3 %
                           

     

Total Natural Resources

    9,298,151     9,297,987     2,989,432     5.1 %
                           

Energy Alloys, LLC(d)

 

Oil and Gas

 

Second Lien Term Loan 3.00%, 6/30/2015

    6,239,318     6,239,318     1,128,693     1.9 %

Energy Alloys, LLC(d)(i)

 

Oil and Gas

 

Warrants

    3             0.0 %
                           

     

Total Oil and Gas

    6,239,321     6,239,318     1,128,693     1.9 %
                           

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2010

    4,850,000     4,850,000     4,549,785     7.8 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes

                         

     

12.50%, 6/15/2010

    5,087,250     5,087,250     4,772,349     8.2 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 10.92%, 6/15/2010

    500,000     500,000     469,050     0.8 %
                           

     

Total Packaging

    10,437,250     10,437,250     9,791,184     16.8 %
                           

Custom Direct, Inc.(d)

 

Printing

 

First Lien Term Loan 3.06%, 12/31/2013

    1,832,053     1,527,103     1,614,222     2.7 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 12.75%, 3/31/2010

    361,020     360,554     361,020     0.6 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 12.75%, 3/31/2010

    386,625     386,129     386,626     0.7 %

Brown Publishing Company(d)(i)

 

Publishing

 

Second Lien Term Loan 8.76%, 9/19/2014

    1,203,226     1,198,390     10,709     0.0 %

Network Communications, Inc.(d)

 

Publishing

 

Unsecured Notes 10.75%, 12/1/2013

    5,000,000     5,067,619     2,473,000     4.3 %

Penton Media, Inc.(d)

 

Publishing

 

First Lien Term Loan 2.50%, 2/1/2013

    4,847,802     3,908,440     3,478,299     5.9 %
                           

     

Total Publishing

    11,798,673     10,921,132     6,709,654     11.5 %
                           

Sub Total Non-control/Non-affiliated investments

                  117,678,275     72,674,847     125.0 %
                             

Control investments—30.1%(b)

                                 

GSC Partners CDO GP III, LP(h)(i)

 

Financial Services

 

100% General Partnership Interest

                0.0 %

GSC Investment Corp. CLO 2007 LTD.(f)(h)

 

Structured Finance Securities

 

Other/Structured Finance Securities 8.27%, 1/21/2020

    30,000,000     29,233,097     16,698,303     28.7 %
                             

Sub Total Control investments

                  29,233,097     16,698,303     28.7 %
                             

Affiliate investments—0.0%(b)

                                 

GSC Partners CDO GP III, LP(g)(i)

 

Financial Services

 

6.24% Limited Partnership Interest

                  0.0 %
                             

Sub Total Affiliate investments

                          0.0 %
                             

TOTAL INVESTMENT ASSETS—161.1%(b)

                $ 146,911,372   $ 89,373,150     153.7 %
                             

F-8



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2010


Outstanding interest rate cap
  Interest
rate
  Maturity   Notional   Cost   Fair
Value
  % of Net
Assets
 

Interest rate cap

    8.0 %   2/9/2014   $ 39,183,673   $ 87,000   $ 30,097     0.1 %

Interest rate cap

    8.0 %   11/30/2013     26,433,408     44,000     12,050     0.0 %
                                 

Sub Total Outstanding interest rate cap

                    $ 131,000   $ 42,147     0.1 %
                                 

(a)
All of the Fund's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Abitibi-Consolidated Company of Canada, Grant U.S. Holdings LLP, GSC Investment Corp. CLO 2007 Ltd., Terphane Holdings Corp., and GSC Partners CDO GP III, LP.

(b)
Percentages are based on net assets of $55,478,152 as of February 28, 2010.

(c)
Fair valued investment (see Note 4 to the consolidated financial statements).

(d)
All or a portion of the securities are pledged as collateral under a revolving securitized credit facility (see Note 7 to the consolidated financial statements).

(e)
Non-U.S. company. The principal place of business for Terphane Holdings Corp is Brazil, and for Abitibi-Consolidated Company of Canada and Grant U.S. Holdings LLP is Canada.

(f)
8.27% represents the modeled effective interest rate that is expected to be earned over the life of the investment.

(g)
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:

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

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $ (10,527 )
                               
(h)
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. In addition, 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)
 

GSC Investment Corp. CLO 2007 LTD. 

  $   $   $   $ 2,397,514   $ 2,057,397   $   $ (4,970,217 )
                               

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $ (98,412 )
                               
(i)
Non-income producing at February 28, 2010.

F-9



GSC Investment Corp.

Consolidated Statements of Changes in Net Assets

 
  For the Three Months Ended
May 31, 2010
  For the Three Months Ended
May 31, 2009
 
 
  (unaudited)
  (unaudited)
 

INCREASE FROM OPERATIONS:

             

Net investment income

  $ 2,202   $ 2,563,989  

Net realized loss from investments

    (2,551,410 )   (5,152 )

Net unrealized appreciation on investments

    5,223,815     2,769,292  

Net unrealized appreciation/(depreciation) on derivatives

    (19,869 )   35,687  
           
 

Net increase in net assets from operations

    2,654,738     5,363,816  
           
 

Total increase in net assets

    2,654,738     5,363,816  

Net assets at beginning of period

    55,478,152     68,013,777  
           

Net assets at end of period

  $ 58,132,890   $ 73,377,593  
           

Net asset value per common share

  $ 3.43   $ 8.85  

Common shares outstanding at end of period

    16,940,109     8,291,384  

Accumulated undistributed net investment income (loss)

  $ (2,843,933 ) $ 8,686,481  

See accompanying notes to consolidated financial statements.

F-10



GSC Investment Corp.

Consolidated Statements of Cash Flows

 
  For the Three
Months Ended
May 31, 2010
  For the Three
Months Ended
May 31, 2009
 
 
  (unaudited)
  (unaudited)
 

Operating activities

             

NET INCREASE IN NET ASSETS FROM OPERATIONS

  $ 2,654,738   $ 5,363,816  

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

             
 

Paid-in-kind interest income

    (377,030 )   (193,771 )
 

Net accretion of discount on investments

    (182,648 )   (274,406 )
 

Amortization of deferred credit facility financing costs

        71,320  
 

Net realized loss from investments

    2,551,410     5,152  
 

Net unrealized appreciation on investments

    (5,223,815 )   (2,769,292 )
 

Unrealized (appreciation) depreciation on derivatives

    19,869     (35,687 )
 

Proceeds from sale and redemption of investments

    2,676,834     921,553  
   

(Increase) decrease in operating assets:

             
   

Cash and cash equivalents, securitization accounts

    (153,304 )   (850,750 )
   

Interest receivable

    884,749     19,713  
   

Management fee receivable

    96,628     64  
   

Other assets

    (261,364 )   180,268  
 

Increase (decrease) in operating liabilities:

             
   

Management and incentive fees payable

    411,389     869,927  
   

Accounts payable and accrued expenses

    (331,109 )   (9,891 )
   

Interest and credit facility fees payable

    3,080     154,175  
   

Due to manager

    (9,053 )    
           

NET CASH PROVIDED BY OPERATING ACTIVITIES

    2,760,374     3,452,191  
           

Financing activities

             

Paydowns on debt

    (3,184,791 )   (1,239,416 )

Credit facility financing cost

        (25,000 )
           

NET CASH USED BY FINANCING ACTIVITIES

    (3,184,791 )   (1,264,416 )
           

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (424,417 )   2,187,775  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    3,352,434     6,356,225  
           

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 2,928,017   $ 8,544,000  
           

Supplemental Information:

             
 

Interest paid during the period

  $ 828,040   $ 417,398  

Supplemental non-cash information

             
 

Paid-in-kind interest income

  $ 377,030   $ 193,771  
 

Net accretion of discount on investments

  $ 182,648   $ 274,406  
 

Amortization of deferred credit facility financing costs

  $   $ 71,320  

See accompanying notes to consolidated financial statements.

F-11



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2010

(unaudited)

Note 1. Organization and Basis of Presentation

        GSC Investment Corp. (the "Company", "we" 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 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 objectives are to generate both current income and capital appreciation through debt and equity investments by primarily investing in private middle market companies and select high yield bonds.

        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, the LLC was merged with and into the Company 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 common share of the LLC was converted into an equivalent number of shares of common stock of the Company and the Company is the surviving entity.

        We are externally managed and advised by our investment adviser, GSCP (NJ), L.P. (individually and collectively with its affiliates, "GSC Group" or the "Manager"), pursuant to an investment advisory and management agreement.

        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 and its special purpose financing subsidiary, GSC Investment Funding, LLC. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the "Company," "we," and "us" in the financial statements encompassing of these 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 revenues and expenses during the period reported. Actual results could differ 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.

F-12



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 2. Summary of Significant Accounting Policies (Continued)

Cash and cash equivalents, Securitization Accounts

        Cash and cash equivalents, securitization 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 securitized investments or other reserved amounts associated with the Company's securitization facilities. The Company is required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements. Cash held in such accounts may not be available for the general use of the Company.

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% of the voting securities or maintain greater than 50% 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% and 25% of the voting securities. Under the 1940 Act, "Non-affiliated Investments" are defined as investments that are neither Control Investments or Affiliated Investments.

Investment Valuation

        The fair value of the Company's assets and liabilities which qualify as financial instruments under ASC 825 approximates the carrying amounts presented in the consolidated statements of assets and liabilities.

        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 make 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 determined, in good faith, by our board of directors based on input from our Manager, our audit committee and, if our board or audit committee so request, 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 a fair value pricing 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:

F-13



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 2. Summary of Significant Accounting Policies (Continued)

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

        Our equity investment in GSC Investment Corp. CLO 2007, Ltd. ("GSCIC CLO") is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar CLO equity, when available, as determined by our investment advisor and recommended to our board of directors.

        Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value by our board of directors 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.

        We account for derivative financial instruments in accordance with ASC 815. ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statement 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 statement of operations.

Investment Transactions and Income Recognition

        Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. If any cash is received after it is determined that interest is no longer collectible, we treat the cash as payment on the principal balance until the entire principal balance has been repaid, before any interest income is recognized. 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.

F-14



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 2. Summary of Significant Accounting Policies (Continued)

        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. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection.

        Interest income on our investment in GSCIC CLO is recorded using the effective interest method in accordance with the provision of ASC 325, 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 includes in income certain amounts that it has not yet received in cash, such as contractual paid-in-kind interest ("PIK"), which represents contractually deferred interest added to the investment balance that is generally due at maturity. We stop accruing PIK if we do not expect the issuer to be able to pay all principal and interest when due.

Deferred Credit Facility Financing Costs

        Financing costs incurred in connection with each respective credit facility have been deferred and are being amortized using the straight line method over the life of each respective facility.

Indemnifications

        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.

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% 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

F-15



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 2. Summary of Significant Accounting Policies (Continued)


of 4% on undistributed income if we do not distribute at least 98% of our ordinary income in any calendar year and 98% of our 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, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.

        We adopted ASC Topic 740, Income Taxes ("ASC 740") on February 28, 2008. ASC 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an uncertain tax position is required to meet before tax benefits associated with such uncertain tax position are recognized in the consolidated financial statements. Our adoption of ASC 740 did not require a cumulative effect adjustment to the February 28, 2008 undistributed net realized earnings. We classify interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income taxes.

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.

        The Company has adopted a dividend reinvestment plan 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. If the Company's common stock is trading below net asset value at the time of valuation, the plan administrator will receive the dividend or distribution in cash and will purchase common stock in the open market, on the New York Stock Exchange or elsewhere, for the account of each Participant.

New Accounting Pronouncements

        In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140", ("SFAS No. 166") which amends the derecognition guidance in SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", eliminates the concept of a "qualifying special-purpose entity" ("QSPE") and requires more information about transfers of financial assets, including securitization transactions as well as a company's continuing exposure to the risks related to transferred financial assets. SFAS No. 166 is now codified in ASC 860. The amended requirements are effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The adoption of ASC 860 by the Company did not have material effect on our consolidated financial statements.

F-16



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 2. Summary of Significant Accounting Policies (Continued)

        In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures ("ASU 2010-06"), which amends ASC 820 and requires additional disclosure related to recurring and non-recurring fair value measurement in respect of transfers in and out of Level 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies existing disclosure about inputs and valuation techniques. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures related to activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within that fiscal year. The adoption of ASU 2010—06 by the Company did not have a material effect on our consolidated financial statements.

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 securitization accounts at a major financial institution and credit risk related to the derivative counterparty.

        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. Going Concern

        As of May 31, 2010, the Company remained in default on its Revolving Facility (see Note 7) and as a result of the default, our lender has the right to accelerate repayment of the outstanding indebtedness and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral would have a material adverse effect on our liquidity, financial condition and operations. The deleveraging of the Company may significantly impair the Company's ability to effectively operate. There is no assurance that we will have sufficient funds available to pay in full the total amount of obligations that would become due as a result of such acceleration or that we will be able to obtain additional or alternative financing to pay or refinance any such accelerated obligations. However, we continue to believe that we will have adequate liquidity to continue to fund our operations and the interest payments on our outstanding debt, including any default interest.

F-17



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 3. Going Concern (Continued)

        On April 14, 2010, the Company entered into a definitive agreement with Saratoga Investment Advisors, LLC ("Saratoga") and CLO Partners LLC ("CLO Partners") and announced a $55 million recapitalization plan to cure the debt default. The recapitalization plan includes Saratoga and CLO Partners purchasing approximately 9.8 million shares of common stock of GSC Investment Corp. for $1.52 per share pursuant to a definitive stock purchase agreement and a commitment from Madison Capital Funding LLC to provide the Company with a $40 million senior secured revolving credit facility. Upon the closing of the transaction, the Company will immediately borrow funds under the new credit facility that, when added to the $15 million equity investment, will be sufficient to repay the full amount of the Company's existing debt and to provide the Company with working capital thereafter. The plan is subject to shareholder approval.

        A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. Our consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty or our debt restructuring activities.

Note 4. Investments

        The Company values all investments in accordance with ASC 820 "Fair Value Measurements and Disclosures" ("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 provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability, and identifying transactions that are not orderly. In those circumstances, further analysis and/or significant adjustment to the transaction or quoted prices may be required at the measurement date under current market conditions.

        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 the following information according to the fair value hierarchy. The fair value hierarchy

F-18



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 4. Investments (Continued)


ranks the quality and reliability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

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

        The following table presents fair value measurements of investments as of May 31, 2010 (dollars in thousands):

 
  Fair Value Measurements Using  
 
  Level 1   Level 2   Level 3   Total  

First lien term loans

  $   $   $ 13,830   $ 13,830  

Second lien term loans

            20,794     20,794  

Senior secured notes

            29,372     29,372  

Unsecured notes

            4,308     4,308  

Structured finance securities

            18,209     18,209  

Common stock/equities

            3,415     3,415  

Limited partnership interest

                 
                   

Total

  $   $   $ 89,928   $ 89,928  
                   

F-19



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 4. Investments (Continued)

        The following table presents fair value measurements of investments as of February 28, 2010 (dollars in thousands):

 
  Fair Value Measurements Using  
 
  Level 1   Level 2   Level 3   Total  

First lien term loans

  $   $   $ 16,653   $ 16,653  

Second lien term loans

            20,267     20,267  

Senior secured notes

            27,742     27,742  

Unsecured notes

            5,690     5,690  

Structured finance securities

            16,698     16,698  

Common stock/equities

            2,323     2,323  

Limited partnership interest

                 
                   

Total

  $   $   $ 89,373   $ 89,373  
                   

        The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the quarter ended May 31, 2010 (dollars in thousands):

 
  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, 2010

  $ 16,653   $ 20,267   $ 27,742   $ 5,690   $ 16,698   $ 2,323   $ 89,373  

Net unrealized gains (losses)

    547     2,228     1,586     (1,380 )   1,511     732     5,224  

Purchases and other adjustments to cost

    308     210     44     (2 )           560  

Sales and redemptions

    (2,664 )   (13 )                   (2,677 )

Net realized loss from investments

    (689 )   (1,863 )                   (2,552 )

Transfers in/out

    (325 )   (35 )               360      
                               

Balance as of May 31, 2010

  $ 13,830   $ 20,794   $ 29,372   $ 4,308   $ 18,209   $ 3,415   $ 89,928  
                               

        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.

        Sale and redemptions represent net proceeds received from investments sold during the period.

F-20



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 4. Investments (Continued)

        Net transfers in and/or out represent existing investments that were either previously categorized as another level and the inputs to the model became unobservable or investments that were previously classified as the lowest significant input became observable during the period. These investments transfers are recorded at their end of period fair values.

        The composition of our investments as of May 31, 2010, at amortized cost and fair value were as follows (dollars in thousands):

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

First lien term loans

  $ 15,567   $ 13,830     15.4 %

Second lien term loans

    39,563     20,794     23.1  

Senior secured notes

    33,460     29,372     32.7  

Unsecured notes

    20,304     4,308     4.8  

Structured finance securities

    29,233     18,209     20.2  

Common stock/equities

    4,116     3,415     3.8  

Limited partnership interest

             
               

Total

  $ 142,243   $ 89,928     100.0 %
               

        The composition of our investments as of February 28, 2010, at amortized cost and fair value were as follows (dollars in thousands):

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

First lien term loans

  $ 18,936   $ 16,653     18.6 %

Second lien term loans

    41,264     20,267     22.7  

Senior secured notes

    33,416     27,742     31.0  

Unsecured notes

    20,306     5,690     6.4  

Structured finance securities

    29,233     16,698     18.7  

Common stock/equities

    3,756     2,323     2.6  

Limited partnership interest

             
               

Total

  $ 146,911   $ 89,373     100.0 %
               

Note 5. Investment in GSC Investment Corp. CLO 2007, Ltd.

        On January 22, 2008, we invested $30 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a $400 million CLO managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with GSCIC CLO pursuant to which we will act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, to be paid

F-21



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 5. Investment in GSC Investment Corp. CLO 2007, Ltd. (Continued)


quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%. For the three months ended May 31, 2010 and May 31, 2009 we accrued $0.5 and $0.5 million in management fee income, respectively and $0.7 and $0.9 million in interest income, respectively, from GSCIC CLO. We did not accrue any amounts related to the incentive management fee as the 12% hurdle rate has not yet been achieved.

Note 6. Agreements

        On March 21, 2007, the Company entered into an investment advisory and management agreement (the "Management Agreement") with GSC Group, our investment advisor. 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. Pursuant to the Management Agreement, our investment adviser 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 investment adviser 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 investment adviser 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 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.

        The incentive fee consists of the following two parts:

        We will defer cash payment of any incentive fee otherwise earned by our investment adviser if, during the most recent four full fiscal quarter period ending on or prior to the date such payment is to

F-22



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 6. Agreements (Continued)

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) is less than 7.5% of our net assets at the beginning of such period. These calculations will be 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 will become payable on the next date on which such test has been satisfied for the most recent four full fiscal quarters or upon certain terminations of the investment advisory and management agreement.

        For the three months ended May 31, 2010 and May 31, 2009 we incurred $0.4 and $0.5 million in base management fees. For the three months May 31, 2009 we incurred $0.3 million in incentive fees related to pre-incentive fee net investment income. For the three months ended May 31, 2010 and May 31, 2009, we incurred no incentive management fees related to net realized capital gains. As of May 31, 2010 $0.9 million of base management fees and $2.6 million of incentive fees were unpaid and included in management and incentive fees payable in the accompanying consolidated statement of assets and liabilities.

        As of May 31, 2010, the end of the first quarter of fiscal year 2011, the sum of our aggregate distributions to our stockholders and 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 the first fiscal quarter of fiscal year 2010. Accordingly, the payment of the incentive fee for the quarter ended May 31, 2010 has been deferred along with all previously deferred incentive fees. The total deferred incentive fee payable at May 31, 2010 was $2.6 million.

        On March 21, 2007, the Company entered into a separate administration agreement (the "Administration Agreement") with GSC Group, pursuant to which GSC Group, 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. Our allocable portion is based on the proportion that our total assets bears to the total assets or a subset of total assets administered by our administrator.

        For the three months ended May 31, 2010 and May 31, 2009 we expensed $0.2 and $0.2 million of administrator expenses, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to the Company in addition to our allocable portion of rent and other overhead related expenses. GSC Group has agreed not to be reimbursed by the Company for any expenses incurred in performing its obligations under the Administration Agreement until the Company's total assets exceeds $500 million. Additionally, the Company's requirement to reimburse GSC Group is capped such that the amounts payable, together with the Company's other operating expenses, will not exceed an amount equal to 1.5% per annum of the Company's net assets attributable to the Company's common stock. Accordingly, for the three months ended May 31, 2010 and May 31, 2009, we have recorded $0.2 and $0.2 million in expense waiver and reimbursement, respectively, under the Administration Agreement in the accompanying consolidated statement of operations.

        On March 23, 2007, the Manager provided the Company with a Notification of Fee Reimbursement (the "Expense Reimbursement Agreement"). The Expense Reimbursement Agreement provides for the Manager to reimburse the Company for operating expenses to the extent that our total

F-23



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 6. Agreements (Continued)


annual operating expenses (other than investment advisory and management fees, interest and credit facility expenses, and organizational expense) exceed an amount equal to 1.55% of our net assets attributable to common stock. The Manager is not entitled to recover any reimbursements under this agreement in future periods. The term of the Expense Reimbursement Agreement is for a period of 12 months beginning March 23, 2007 and for each twelve months period thereafter unless otherwise agreed by the Manager and the Company. On April 15, 2008, the Manager and the Company agreed not to extend the agreement for an additional twelve month period and terminated the Expense Reimbursement Agreement as of March 23, 2008. For the three months ended May 31, 2010 and May 31, 2009, we recorded $0.2 and $0.2 million in expense waiver and reimbursement, respectively under the Expense Reimbursement Agreement in the accompanying consolidated statement of operations.

Note 7. Borrowings

        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% 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 formed GSC Investment Funding LLC ("GSC Funding"), a wholly owned consolidated subsidiary of the Company, through which we entered into a revolving securitized credit facility (the "Revolving Facility") with Deutsche Bank AG, as administrative agent, under which we may borrow up to $100 million. A significant percentage of our total assets have 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 is 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 is 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 Credit Facility to increase the portion of the portfolio that can 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 (as defined below) that would allow us to better manage our capital in times of declining asset prices and market dislocation. If we are not able to obtain new sources of financing, however, we expect our portfolio will gradually de-lever as principal payments are received, which may negatively impact our net investment income and ability to pay dividends.

        On July 30, 2009 we exceeded the permissible borrowing limit for 30 consecutive days, resulting in an event of default under our Revolving Facility that is continuing. As a result of this event of default, our lender has the right to accelerate repayment of the outstanding indebtedness under and Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral would have a material adverse effect on our liquidity, financial condition and operations. As a result of the continuing default, the Company may be forced to sell its investments to raise funds to repay outstanding amounts. Such forced sales

F-24



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 7. Borrowings (Continued)


may result in values that could be less than carrying values reported in these financial statements. The deleveraging of the Company may significantly impair the Company's ability to effectively operate. Please see Part I, Item 1A. "Risk Factors—An event of default under the Revolving Facility may lead to a forced liquidation of the pledged assets that may yield less than the fair value of the assets" in our Annual Report on form 10-K for the year ended February 28, 2010 for more information. Our lender has elected not to accelerate the obligation to date, but has reserved the right to do so.

        At May 31, 2010 and February 28, 2010 we had $33.8 million and $37.0 million in borrowings under the Revolving Facility, respectively. The actual amount that may be outstanding at any given time (the "Borrowing Base") is dependent upon the amount and quality of the collateral securing the Revolving Facility. Our Borrowing Base was $6.1 million at May 31, 2010 versus $1.7 million at February 28, 2010. The increase in our Borrowing Base during the quarter is mainly attributable to the change in classification of certain defaulted assets that resulted in a higher collateral value per the Borrowing Base calculation.

        For purposes of determining the Borrowing Base, most assets are assigned the values set forth in our most recent quarterly report filed with the SEC. Accordingly, the May 31, 2010 Borrowing Base relies upon the valuations set forth in the annual report for the year ended February 28, 2010. The valuations presented in this quarterly report will not be incorporated into the Borrowing Base until after this report is filed with the SEC.

        During the continuance of an event of default, the interest rate on the Revolving Facility is increased from the commercial paper rate plus 4.00% to 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 is unavailable, the greater of the prevailing LIBOR rates and our lender's prime rate plus 6.00% plus a default rate of 3.00%. For the three months ended May 31, 2010 and May 31, 2009, we recorded $0.8 and $0.6 million of interest expense. For the three months ended May 31, 2009, we recorded $71,320 of amortization of deferred financing costs related to the Revolving Facility. For the three months ended May 31, 2010 and May 31, 2009, the interest rates on the outstanding borrowings were 9.25% and a range of 4.52% to 4.73%, respectively.

Note 8. Interest Rate Cap Agreements

        In April and May 2007, pursuant to the requirements of the Facilities, GSC Funding and GSC Funding II entered into interest rate cap agreements with Deutsche Bank AG with notional amounts of $34 million and $60.9 million at costs of $75,000, and $44,000, respectively. In May 2007 GSC Funding increased the notional under its agreement from $34 million to $40 million for an additional cost of $12,000. The agreements expire in February 2014 and November 2013 respectively. These interest rate caps are treated as free-standing derivatives under ASC 815 and are presented at their fair value on the consolidated statement of assets and liabilities and the changes in their fair value are included on the consolidated statement of operations.

        The agreements provide for a payment to the Company in the event LIBOR exceeds 8%, mitigating our exposure to increases in LIBOR. With respect to calculating the payments under these agreements, the notional amount is determined based on a pre-determined schedule set forth in the

F-25



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 8. Interest Rate Cap Agreements (Continued)

respective agreements which provides for a reduction in the notional at specified dates until the maturity of the agreements. As of May 31, 2010 we did not receive any such payments as the LIBOR has not exceeded 8%. At May 31, 2010, the total notional outstanding for the interest rate caps was $63.2 million with an aggregate fair value of $22,278, which is recorded in outstanding interest cap at fair value on the Company's consolidated statement of assets and liabilities. For the three months ended May 31, 2010 and May 31, 2009, the Company recorded $19,869 of unrealized depreciation and $35,687 of unrealized appreciation respectively, on derivatives in the consolidated statement of operations related to the change in the fair value of the interest rate cap agreements.

        The table below summarizes our interest rate cap agreements as of May 31, 2010 (dollars in thousands):

Instrument
  Type   Notional   Interest
Rate
  Maturity   Fair Value  

Interest Rate Cap

  Free Standing Derivative   $ 36,735     8.0 %   Feb 2014   $ 16  

Interest Rate Cap

  Free Standing Derivative     26,433     8.0     Nov 2013     6  
                             

  Net fair value                     $ 22  
                             

        The table below summarizes our interest rate cap agreements as of February 28, 2010 (dollars in thousands):

Instrument
  Type   Notional   Interest
Rate
  Maturity   Fair Value  

Interest Rate Cap

  Free Standing Derivative   $ 39,184     8.0 %   Feb 2014   $ 30  

Interest Rate Cap

  Free Standing Derivative     26,433     8.0     Nov 2013     12  
                             

  Net fair value                     $ 42  
                             

Note 9. Directors Fees

        The independent directors receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $5,000 and the 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." For the three months ended May 31, 2010 and May 31, 2009, we accrued $0.1 and $0.1 million for directors' fees expense, respectively. As of May 31, 2010 and February 28, 2009, $110,500 and $54,000 in directors' fees expense were unpaid and included in accounts payable and accrued expenses in the consolidated statements of assets and liabilities. As of May 31, 2010, we had not issued any common stock to our directors as compensation for their services.

F-26



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 10. Stockholders' Equity

        On May 16, 2006, GSC Group 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 959,955 and 81,362 shares of common stock, priced at $15.00 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 67 shares owned by GSC Group in the LLC were exchanged for 67 shares of GSC Investment Corp.

        On March 28, 2007, the Company completed its IPO of 7,250,000 shares of common stock, priced at $15.00 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 $1.825 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 $0.25 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 of newly issued shares of common stock.

Note 11. Earnings Per Share

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

        The following information sets forth the computation of the weighted average basic and diluted net decrease in net assets per share from operations for the quarters ended May 31, 2010 and May 31, 2009 (dollars in thousands except per share amounts):

Basic and diluted
  May 31, 2010   May 31, 2009  

Net increase in net assets from operations

  $ 2,655   $ 5,364  

Weighted average common shares outstanding

    16,940,109     8,291,384  

Earnings per common share-basic and diluted

  $ 0.16   $ 0.65  

Note 12. Dividend

        The Company did not declare any dividend payments during the quarters ended May 31, 2010 and May 31, 2009.

F-27



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 13. Financial Highlights

        The following is a schedule of financial highlights for the three months ended May 31, 2010 and May 31, 2009:

 
  May 31, 2010   May 31, 2009  

Per share data:

             

Net asset value at beginning of period

  $ 3.27   $ 8.20  

Net investment income(1)(5)

    0.00     0.31  

Net realized losses on investments and derivatives

    (0.15 )    

Net unrealized appreciation on investments and derivatives

    0.31     0.34  
           

Net increase in stockholders' equity

    0.16     0.65  

Net asset value at end of period

  $ 3.43   $ 8.85  
           

Net assets at end of period

  $ 58,132,890   $ 73,377,593  

Shares outstanding at end of period

    16,940,109     8,291,384  

Per share market value at end of period

  $ 1.71   $ 2.90  

Total return based on market value(2)

    (10.94 )%   45.73 %

Total return based on net asset value(3)

    4.79 %   7.93 %

Ratio/Supplemental data:(6)

             

Ratio of net investment income net of expense waiver and reimbursement to average net assets(4)

    0.01 %   12.83 %

Ratio of operating expenses net of expense waiver and reimbursement to average net assets(4)

    13.34 %   6.18 %

Ratio of incentive management fees to average net assets

    0.00 %   1.61 %

Ratio of credit facility related expenses to average net assets

    5.61 %   3.22 %

Ratio of total expenses net of expense waiver and reimbursement to average net assets(4)

    18.95 %   11.01 %

(1)
Net investment (loss) income excluding expense waiver and reimbursement equals ($0.01) and $0.29 per share for the quarters ended May 31, 2010 and May 31, 2009, respectively.

(2)
Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales change for the year.

(3)
Total annual return is historical and assumes changes in net assets value, reinvestments of all dividends and distributions, and no sales change for the year.

(4)
For the quarter ended May 31, 2010, excluding the expense waiver and reimbursement arrangement, the ratio of net investment income, operating expenses, total expenses to average net assets is (1.03%), 14.39% and 19.99%, respectively. For the quarter ended May 31, 2009, excluding the expense waiver and reimbursement arrangement, the ratio of

F-28



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

May 31, 2010

(unaudited)

Note 13. Financial Highlights (Continued)

(5)
Amount is less than $0.005 for the quarter end May 31, 2010.

(6)
Ratios are annualized.

Note 14. Related Party Transaction

        On March 20, 2007, the Company issued 959,955 and 81,362 shares of common stock, priced at $15.00 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. As of May 31, 2010, the fair value of the general partnership interest and limited partnership interest was zero.

        On January 10, 2008, GSC Group notified our Dividend Reinvestment Plan Administrator that it was electing to receive dividends and other distributions in cash (rather than in additional shares of common stock) with respect to all shares of stock held by it and the investment funds under its control. For the quarter ended February 29, 2008, GSC Group received 35,911 of additional shares under the dividend reinvestment plan. As of May 31, 2010, GSC Group and its affiliates own approximately 11.4% of the outstanding common shares of the Company.

        On January 22, 2008, we entered into a collateral management agreement with GSCIC CLO pursuant to which we will act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, to be paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%. We do not expect to enter into additional collateral management agreements in the near future.

        In April 2009, our investment adviser withheld a scheduled principal amortization payment under its credit facility, resulting in a default thereunder. Since then, our investment adviser and its secured lenders have been in negotiations regarding a consensual restructuring of its obligations under such credit facility. While we are not directly affected by our investment adviser's default, if it is unable to restructure its credit facility, or an acceleration of the outstanding principal balance by the lenders occurs, the ability of the investment adviser to retain key individuals and perform its investment advisory duties for us could be significantly impaired.

Note 15. Subsequent Events

        On June 7, 2010, the Company repaid $0.1 million of the outstanding borrowings related to the credit facility.

        On June 25, 2010, the Company filed a definitive Proxy Statement on Schedule 14A related to the proposed Saratoga transaction.

        On July 9, 2010, the Company repaid $0.8 million of the outstanding borrowings related to the credit facility.

F-29



Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of GSC Investment Corp.

        We have audited the accompanying consolidated statement of assets and liabilities of GSC Investment Corp. (the "Company"), including the consolidated schedule of investments as of February 28, 2010 and February 28, 2009 , and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended February 28, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GSC Investment Corp. at February 28, 2010 and February 28, 2009, and the consolidated results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended February 28, 2010 in conformity with U.S. generally accepted accounting principles.

        The accompanying consolidated financial statements have been prepared assuming that GSC Investment Corp. will continue as a going-concern. As more fully described in Note 3, the Company remained in default of its Revolving Facility. As a result of the default, the Company's lender has the right to accelerate repayment of the outstanding indebtedness and foreclose and liquidate the collateral pledged. This would have a material adverse effect on the Company's liquidity, financial condition and operations. This condition raises substantial doubt about the Company's ability to continue as a going-concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 
   

 

/s/ Ernst & Young LLP

New York, NY
May 27, 2010

F-30



GSC Investment Corp.

Consolidated Statement of Assets and Liabilities

 
  As of  
 
  February 28,
2010
  February 28,
2009
 

ASSETS

 

Investments at fair value

             

Non-control/non-affiliate investments (amortized cost of $117,678,275 and $137,020,449, respectively)

  $ 72,674,847   $ 96,462,919  

Control investments (cost of $29,233,097 and $29,905,194, respectively)

    16,698,303     22,439,029  

Affiliate investments (cost of $0 and $0, respectively)

        10,527  
           

Total investments at fair value (amortized cost of $146,911,372 and $166,925,643, respectively)

    89,373,150     118,912,475  

Cash and cash equivalents

    3,352,434     6,356,225  

Cash and cash equivalents, securitization accounts

    225,424     1,178,201  

Outstanding interest rate cap at fair value (cost of $131,000 and $131,000, respectively)

    42,147     39,513  

Interest receivable, net of reserve

    3,473,961     3,087,668  

Deferred credit facility financing costs, net

        529,767  

Management fee receivable

    327,928     237,370  

Other assets

    140,272     321,260  
           

Total assets

  $ 96,935,316   $ 130,662,479  
           


LIABILITIES


 

Revolving credit facility

 
$

36,992,222
 
$

58,994,673
 

Management and incentive fees payable

    3,071,093     2,880,667  

Accounts payable and accrued expenses

    1,111,081     700,537  

Interest and credit facility fees payable

    267,166     72,825  

Due to manager

    15,602      
           

Total liabilities

  $ 41,457,164   $ 62,648,702  
           

NET ASSETS

             

Common stock, par value $.0001 per share, 100,000,000 common shares authorized, 16,940,109 and 8,291,384 common shares issued and outstanding, respectively

  $ 1,694   $ 829  

Capital in excess of par value

    128,339,497     116,943,738  

(Distributions in excess of accumulated net investment income)/Accumulated undistributed net investment income

    (2,846,135 )   6,122,492  

Accumulated net realized loss from investments and derivatives

    (12,389,830 )   (6,948,628 )

Net unrealized depreciation on investments and derivatives

    (57,627,074 )   (48,104,654 )
           

Total Net Assets

    55,478,152     68,013,777  
           

Total liabilities and Net Assets

  $ 96,935,316   $ 130,662,479  
           

NET ASSET VALUE PER SHARE

  $ 3.27   $ 8.20  
           

See accompanying notes to consolidated financial statements.

F-31



GSC Investment Corp.

Consolidated Statements of Operations

 
  For The
Year Ended
February 28, 2010
  For The
Year Ended
February 28, 2009
  For The
Year Ended
February 29, 2008
 

INVESTMENT INCOME

                   

Interest from investments

                   

Non-control/Non-affiliate investments

  $ 10,902,482   $ 16,572,973   $ 20,115,301  

Control investments

    2,397,514     4,393,818     262,442  
               
 

Total interest income

    13,299,996     20,966,791     20,377,743  

Interest from cash and cash equivalents

    23,624     175,567     366,312  

Management fee income

    2,057,397     2,049,717     599,476  

Other income

    236,259     195,135     42,548  
               

Total investment income

    15,617,276     23,387,210     21,386,079  
               

EXPENSES

                   

Interest and credit facility financing expenses

    4,096,041     2,605,367     5,031,233  

Base management fees

    1,950,760     2,680,231     2,938,659  

Professional fees

    2,071,027     1,166,111     1,409,806  

Administrator expenses

    670,720     960,701     892,112  

Incentive management fees

    327,684     1,752,254     711,363  

Insurance

    869,969     682,154     586,784  

Directors fees and expenses

    294,932     295,017     313,726  

General & administrative

    265,575     289,477     261,653  

Cost of acquiring management contract

            144,000  

Organizational expense

            49,542  
               

Expenses before expense waiver and reimbursement

    10,546,708     10,431,312     12,338,878  
               

Expense waiver and reimbursement

    (670,720 )   (1,010,416 )   (1,789,028 )
               

Total expenses net of expense waiver and reimbursement

    9,875,988     9,420,896     10,549,850  
               

NET INVESTMENT INCOME BEFORE INCOME TAXES

    5,741,288     13,966,314     10,836,229  

Income tax expense, including excise tax

    (27,445 )   (140,322 )   (88,951 )
               

NET INVESTMENT INCOME

    5,713,843     13,825,992     10,747,278  
               

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

                   

Net realized gain/(loss) from investments

                   

Non-Control/Non-Affiliate investments

    (6,653,983 )   (7,173,118 )   2,707,402  

Control investments

            428,673  

Affiliate investments

            39,147  

Net realized gain from derivatives

        30,454     732,526  

Net unrealized depreciation on investments

    (9,525,054 )   (27,961,244 )   (20,051,923 )

Net unrealized appreciation/(depreciation) on derivatives

    2,634     (37,221 )   (54,266 )
               

Net loss on investments

    (16,176,403 )   (35,141,129 )   (16,198,441 )
               

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

  $ (10,462,560 ) $ (21,315,137 ) $ (5,451,163 )
               

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

  $ (0.99 ) $ (2.57 ) $ (0.70 )

WEIGHTED AVERAGE COMMON STOCK OUTSTANDING—BASIC AND DILUTED

    10,613,507     8,291,384     7,761,965  

See accompanying notes to consolidated financial statements.

F-32



GSC Investment Corp.

Consolidated Schedule of Investments

February 28, 2010

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of
Stockholders'
Equity
 

Non-control/Non-affiliated investments—131.0%(b)

                                 

GFSI Inc(d)

 

Apparel

 

Senior Secured Notes 10.50%, 6/1/2011

  $ 7,082,000   $ 7,082,000   $ 6,909,907     12.5 %

Legacy Cabinets, Inc.(d)(i)

 

Building Products

 

First Lien Term Loan 6.58%, 8/18/2012

    1,479,842     1,463,159     444,841     0.8 %

Legacy Cabinets, Inc.(d)(i)

 

Building Products

 

Second Lien Term Loan 12.50%, 8/18/2013

    1,862,420     1,828,197     85,113     0.2 %
                           

     

Total Building Products

    3,342,262     3,291,356     529,954     1.0 %
                           

Hopkins Manufacturing Corporation(d)

 

Consumer Products

 

Second Lien Term Loan 7.50%, 1/26/2012

    3,250,000     3,247,947     3,003,650     5.4 %

Targus Group International, Inc.(d)

 

Consumer Products

 

First Lien Term Loan 10.25%, 11/22/2012

    3,109,712     2,936,092     2,738,101     4.9 %

Targus Holdings, Inc.(d)

 

Consumer Products

 

Unsecured Notes 10.00%, 12/14/2015

    1,538,235     1,538,235     1,529,467     2.8 %

Targus Holdings, Inc.(d)(i)

 

Consumer Products

 

Common

    62,413     566,765     237,169     0.4 %
                           

     

Total Consumer Products

    7,960,360     8,289,039     7,508,387     13.5 %
                           

CFF Acquisition LLC(d)

 

Consumer Services

 

First Lien Term Loan 7.50%, 7/31/2013

    306,855     306,855     255,242     0.5 %

M/C Communications, LLC(d)

 

Education

 

First Lien Term Loan 6.75%, 12/31/2012

    831,174     831,174     616,897     1.1 %

M/C Communications, LLC(d)(i)

 

Education

 

Class A Common Stock

    166,327     30,241     16,633     0.0 %
                           

     

Total Education

    997,501     861,415     633,530     1.1 %
                           

Advanced Lighting Technologies, Inc.(d)

 

Electronics

 

Second Lien Term Loan 6.23%, 6/1/2014

    2,000,000     1,814,950     1,764,600     3.2 %

Group Dekko(d)

 

Electronics

 

Second Lien Term Loan 10.50%, 1/20/2012

    6,913,293     6,913,293     4,852,440     8.7 %
                           

     

Total Electronics

    8,913,293     8,728,243     6,617,040     11.9 %
                           

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Non Voting Common Stock

    765     133,002     86,745     0.2 %

USS Parent Holding Corp.(d)(i)

 

Environmental

 

Voting Common Stock

    17,396     3,025,798     1,973,453     3.5 %
                           

     

Total Environmental

    18,161     3,158,800     2,060,198     3.7 %
                           

Bankruptcy Management Solutions, Inc.(d)

 

Financial Services

 

Second Lien Term Loan 6.48%, 7/31/2013

    4,837,500     4,814,623     983,464     1.8 %

Big Train, Inc.(d)

 

Food and Beverage

 

First Lien Term Loan 7.75%, 3/31/2012

    1,931,121     1,451,316     1,696,876     3.1 %

IDI Acquisition Corp.(d)

 

Healthcare Services

 

Senior Secured Notes 10.75%, 12/15/2011

    3,800,000     3,679,489     3,620,640     6.5 %

PRACS Institute, LTD(d)

 

Healthcare Services

 

Second Lien Term Loan 8.26%, 4/17/2013

    4,093,750     4,058,633     3,568,931     6.5 %
                           

     

Total Healthcare Services

    7,893,750     7,738,122     7,189,571     13.0 %
                           

McMillin Companies LLC(d)

 

Homebuilding

 

Senior Secured Notes 9.53%, 10/31/2013

    7,700,000     7,334,121     3,634,400     6.6 %

Worldwide Express Operations, LLC(d)

 

Logistics

 

First Lien Term Loan 10.00%, 6/30/2013

    2,820,467     2,816,547     2,230,143     4.1 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    12,000,000     12,000,000     1,478,400     2.7 %

Jason Incorporated(d)(i)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    1,700,000     1,700,000     209,440     0.4 %

Specialized Technology Resources, Inc.(d)

 

Manufacturing

 

Second Lien Term Loan 7.23%, 12/15/2014

    5,000,000     4,799,666     4,711,000     8.4 %
                           

     

Total Manufacturing

    18,700,000     18,499,666     6,398,840     11.5 %
                           

F-33



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2010

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal/
Number of
Shares
  Cost   Fair
Value
  % of
Stockholders'
Equity
 

Elyria Foundry Company, LLC(d)

 

Metals

 

Senior Secured Notes 13.00%, 3/1/2013

    5,000,000     4,883,382     3,785,500     6.8 %

Elyria Foundry Company, LLC(d)(i)

 

Metals

 

Warrants

    3,000         8,610     0.0 %
                           

     

Total Metals

    5,003,000     4,883,382     3,794,110     6.8 %
                           

Abitibi-Consolidated Company of Canada(d)(e)

 

Natural Resources

 

First Lien Term Loan 11.00%, 3/30/2009

    2,948,639     2,948,639     2,830,694     5.1 %

Grant U.S. Holdings LLP(d)(e)(i)

 

Natural Resources

 

Second Lien Term Loan 10.75%, 9/20/2013

    6,349,512     6,349,348     158,738     0.3 %
                           

     

Total Natural Resources

    9,298,151     9,297,987     2,989,432     5.4 %
                           

Energy Alloys, LLC(d)

 

Oil and Gas

 

Second Lien Term Loan 3.00%, 6/30/2015

    6,239,318     6,239,318     1,128,693     2.0 %

Energy Alloys, LLC(d)(i)

 

Oil and Gas

 

Warrants

    3             0.0 %
                           

     

Total Oil and Gas

    6,239,321     6,239,318     1,128,693     2.0 %
                           

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2010

    4,850,000     4,850,000     4,549,785     8.2 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2010

    5,087,250     5,087,250     4,772,349     8.6 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 10.92%, 6/15/2010

    500,000     500,000     469,050     0.8 %
                           

     

Total Packaging

    10,437,250     10,437,250     9,791,184     17.6 %
                           

Custom Direct, Inc.(d)

 

Printing

 

First Lien Term Loan 3.06%, 12/31/2013

    1,832,053     1,527,103     1,614,222     2.8 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 12.75%, 3/31/2010

    361,020     360,554     361,020     0.7 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 12.75%, 3/31/2010

    386,625     386,129     386,626     0.7 %

Brown Publishing Company(d)(i)

 

Publishing

 

Second Lien Term Loan 8.76%, 9/19/2014

    1,203,226     1,198,390     10,709     0.0 %

Network Communications, Inc.(d)

 

Publishing

 

Unsecured Notes 10.75%, 12/1/2013

    5,000,000     5,067,619     2,473,000     4.5 %

Penton Media, Inc.(d)

 

Publishing

 

First Lien Term Loan 2.50%, 2/1/2013

    4,847,802     3,908,440     3,478,299     6.2 %
                           

     

Total Publishing

    11,798,673     10,921,132     6,709,654     12.1 %
                           

Sub Total Non-control/Non-affiliated investments

                  117,678,275     72,674,847     131.0 %
                             

Control investments—30.1%(b)

                                 

GSC Partners CDO GP III, LP(h)(i)

 

Financial Services

 

100% General Partnership Interest

                0.0 %

GSC Investment Corp. CLO 2007 LTD.(f)(h)

 

Structured Finance Securities

 

Other/Structured Finance Securities 8.27%, 1/21/2020

    30,000,000     29,233,097     16,698,303     30.1 %
                             

Sub Total Control investments

                  29,233,097     16,698,303     30.1 %
                             

Affiliate investments—0.0%(b)

                                 

GSC Partners CDO GP III, LP(g)(i)

 

Financial Services

 

6.24% Limited Partnership Interest

                0.0 %
                             

Sub Total Affiliate investments

                          0.0 %
                             

TOTAL INVESTMENT ASSETS—161.1%(b)

                $ 146,911,372   $ 89,373,150     161.1 %
                             

F-34



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2010


Outstanding interest rate cap
  Interest
rate
  Maturity   Notional   Cost   Fair
Value
  % of
Stockholders'
Equity
 

Interest rate cap

    8.0 %   2/9/2014   $ 39,183,673   $ 87,000   $ 30,097     0.1 %

Interest rate cap

    8.0 %   11/30/2013     26,433,408     44,000     12,050     0.0 %
                                 

Sub Total Outstanding interest rate cap

                    $ 131,000   $ 42,147     0.1 %
                                 

(a)
All of the Fund's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Abitibi-Consolidated Company of Canada, Grant U.S. Holdings LLP, GSC Investment Corp. CLO 2007 Ltd., Terphane Holdings Corp., and GSC Partners CDO GP III, LP.

(b)
Percentages are based on net assets of $55,478,152 as of February 28, 2010.

(c)
Fair valued investment (see Note 4 to the consolidated financial statements).

(d)
All or a portion of the securities are pledged as collateral under a revolving securitized credit facility (see Note 8 to the consolidated financial statements).

(e)
Non-U.S. company. The principal place of business for Terphane Holdings Corp is Brazil, and for Abitibi-Consolidated Company of Canada and Grant U.S. Holdings LLP is Canada.

(f)
8.27% represents the modeled effective interest rate that is expected to be earned over the life of the investment.

(g)
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:

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

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $ (10,527 )
(h)
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. In addition, 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)
 

GSC Investment Corp. CLO 2007 LTD. 

  $   $   $   $ 2,397,514   $ 2,057,397   $   $ (4,970,217 )

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $ (98,412 )
(i)
Non-income producing at February 28, 2010.

F-35



GSC Investment Corp.

Consolidated Schedule of Investments

February 28, 2009

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal   Cost   Fair
Value
  % of
Stockholders'
Equity
 

Non-control/Non-affiliated investments—141.8%(b)

                                 

GFSI Inc(d)

 

Apparel

 

Senior Secured Notes 10.50%, 6/1/2011

  $ 7,082,000   $ 7,082,000   $ 6,616,004     9.7 %

Legacy Cabinets, Inc.(d)

 

Building Products

 

First Lien Term Loan 5.75%, 8/18/2012

    1,437,555     1,420,872     975,956     1.4 %

Legacy Cabinets, Inc.(d)

 

Building Products

 

Second Lien Term Loan 9.75%, 8/18/2013

    1,862,420     1,828,197     450,519     0.7 %
                           

     

Total Building Products

    3,299,975     3,249,069     1,426,475     2.1 %
                           

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.75%, 12/20/2013

    32,381     27,281     6,152     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.47%, 12/20/2013

    77,141     64,991     14,657     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.16%, 12/20/2014

    92,962     78,320     17,663     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.16%, 12/20/2014

    92,962     78,320     17,663     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.16%, 12/20/2014

    92,962     78,320     17,663     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.75%, 12/20/2013

    121,428     102,303     23,071     0.0 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 5.75%, 12/20/2013

    231,354     194,916     43,957     0.1 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 7.00%, 12/20/2014

    403,388     339,854     76,644     0.1 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 7.00%, 12/20/2014

    403,388     339,854     76,644     0.1 %

Lyondell Chemical Company(d)

 

Chemicals

 

First Lien Term Loan 7.00%, 12/20/2014

    403,388     339,854     76,644     0.1 %
                           

     

Total Chemicals

    1,951,354     1,644,013     370,758     0.4 %
                           

Hopkins Manufacturing Corporation(d)

 

Consumer Products

 

Second Lien Term Loan 7.70%, 1/26/2012

    3,250,000     3,246,870     2,627,950     3.9 %

Targus Group International, Inc.(d)

 

Consumer Products

 

First Lien Term Loan 4.67%, 11/22/2012

    3,122,943     2,895,723     2,089,561     3.1 %

Targus Group International, Inc.(d)

 

Consumer Products

 

Second Lien Term Loan 9.75%, 5/22/2013

    5,000,000     4,777,205     3,126,000     4.6 %
                           

     

Total Consumer Products

    11,372,943     10,919,798     7,843,511     11.6 %
                           

CFF Acquisition LLC(d)

 

Consumer Services

 

First Lien Term Loan 8.57%, 7/31/2013

    308,912     308,912     243,793     0.4 %

M/C Communications, LLC(d)

 

Education

 

First Lien Term Loan 13.12%, 12/31/2010

    1,697,164     1,590,350     674,283     1.0 %

Advanced Lighting Technologies, Inc.(d)

 

Electronics

 

Second Lien Term Loan 8.53%, 6/1/2014

    2,000,000     1,771,457     1,503,200     2.2 %

Group Dekko(d)

 

Electronics

 

Second Lien Term Loan 6.45%, 1/20/2012

    6,670,000     6,670,000     5,321,326     7.8 %

IPC Systems, Inc.(d)

 

Electronics

 

First Lien Term Loan 3.71%, 3/31/2014

    46,332     42,367     24,621     0.0 %
                           

     

Total Electronics

    8,716,332     8,483,824     6,849,147     10.0 %
                           

USS Mergerco, Inc.(d)

 

Environmental

 

Second Lien Term Loan 4.73%, 6/29/2013

    5,960,000     5,846,833     3,592,092     5.3 %

Bankruptcy Management Solutions, Inc.(d)

 

Financial Services

 

Second Lien Term Loan 6.70%, 7/31/2013

    4,887,500     4,858,282     3,053,221     4.5 %

F-36



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2009

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal   Cost   Fair
Value
  % of
Stockholders'
Equity
 

Big Train, Inc.(d)

 

Food and Beverage

 

First Lien Term Loan 4.98%, 3/31/2012

    2,478,660     1,671,647     1,706,557     2.5 %

IDI Acquisition Corp.(d)

 

Healthcare Services

 

Senior Secured Notes 10.75%, 12/15/2011

    3,800,000     3,623,605     2,428,580     3.6 %

PRACS Institute, LTD(d)

 

Healthcare Services

 

Second Lien Term Loan 11.13%, 4/17/2013

    4,093,750     4,047,419     3,581,213     5.3 %
                           

     

Total Healthcare Services

    7,893,750     7,671,024     6,009,793     8.9 %
                           

McMillin Companies LLC(d)

 

Homebuilding

 

Senior Secured Notes 9.53%, 4/30/2012

    7,700,000     7,294,643     3,489,640     5.1 %

Asurion Corporation(d)

 

Insurance

 

First Lien Term Loan 3.76%, 7/3/2014

    2,000,000     1,704,665     1,493,400     2.2 %

Worldwide Express Operations, LLC(d)

 

Logistics

 

First Lien Term Loan 6.95%, 6/30/2013

    2,820,779     2,815,612     2,133,637     3.1 %

Jason Incorporated(d)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    12,000,000     12,000,000     8,652,000     12.7 %

Jason Incorporated(d)

 

Manufacturing

 

Unsecured Notes 13.00%, 11/1/2010

    1,700,000     1,700,000     1,225,700     1.8 %

Specialized Technology Resources, Inc.(d)

 

Manufacturing

 

Second Lien Term Loan 7.48%, 12/15/2014

    5,000,000     4,769,304     4,602,000     6.8 %
                           

     

Total Manufacturing

    18,700,000     18,469,304     14,479,700     21.3 %
                           

Blaze Recycling & Metals, LLC(d)

 

Metals

 

Senior Secured Notes 10.88%, 7/15/2012

    2,500,000     2,494,342     1,850,500     2.7 %

Elyria Foundry Company, LLC(d)

 

Metals

 

Senior Secured Notes 13.00%, 3/1/2013

    5,000,000     4,853,894     3,753,000     5.5 %

Elyria Foundry Company, LLC

 

Metals

 

Warrants

            89,610     0.1 %
                           

     

Total Metals

    7,500,000     7,348,236     5,693,110     8.3 %
                           

Abitibi-Consolidated Company of Canada(d)(e)

 

Natural Resources

 

First Lien Term Loan 11.50%, 3/30/2009

    2,948,640     2,940,073     2,081,740     3.1 %

Grant U.S. Holdings LLP(d)(e)

 

Natural Resources

 

Second Lien Term Loan 9.81%, 9/20/2013

    6,139,928     6,139,764     2,388,432     3.5 %
                           

     

Total Natural Resources

    9,088,568     9,079,837     4,470,172     6.6 %
                           

Edgen Murray II, L.P.(d)

 

Oil and Gas

 

Second Lien Term Loan 7.24%, 5/11/2015

    3,000,000     2,815,938     2,072,700     3.0 %

Energy Alloys, LLC(d)

 

Oil and Gas

 

Second Lien Term Loan 11.75%, 10/5/2012

    6,200,000     6,200,000     5,286,740     7.8 %
                           

     

Total Oil and Gas

    9,200,000     9,015,938     7,359,440     10.8 %
                           

Stronghaven, Inc.(d)

 

Packaging

 

Second Lien Term Loan 13.00%, 10/31/2010

    2,500,000     2,500,000     2,375,500     3.5 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2009

    4,850,000     4,846,976     3,575,420     5.3 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.50%, 6/15/2009

    5,087,250     5,084,820     3,750,321     5.5 %

Terphane Holdings Corp.(d)(e)

 

Packaging

 

Senior Secured Notes 12.02%, 6/15/2009

    500,000     499,670     368,600     0.5 %
                           

     

Total Packaging

    12,937,250     12,931,466     10,069,841     14.8 %
                           

Custom Direct, Inc.(d)

 

Printing

 

First Lien Term Loan 4.21%, 12/31/2013

    2,049,694     1,618,148     1,638,526     2.4 %

Advanstar Communications Inc.(d)

 

Publishing

 

First Lien Term Loan 3.71%, 5/31/2014

    1,970,000     1,553,133     807,700     1.2 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 3.01%, 6/24/2009

    476,261     468,285     418,872     0.6 %

Affinity Group, Inc.(d)

 

Publishing

 

First Lien Term Loan 2.98%, 6/24/2009

    511,811     503,239     450,137     0.7 %

F-37



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2009

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal   Cost   Fair
Value
  % of
Stockholders'
Equity
 

Brown Publishing Company(d)

 

Publishing

 

Second Lien Term Loan 8.76%, 9/19/2014

    1,203,226     1,198,390     288,774     0.4 %

Network Communications, Inc.(d)

 

Publishing

 

Unsecured Notes 10.75%, 12/1/2013

    5,000,000     5,082,100     2,503,000     3.7 %

Penton Media, Inc.(d)

 

Publishing

 

First Lien Term Loan 3.35%, 2/1/2013

    4,897,651     3,723,761     2,008,037     3.0 %
                           

     

Total Publishing

    14,058,949     12,528,908     6,476,520     9.6 %
                           

GXS Worldwide, Inc.(d)

 

Software

 

Second Lien Term Loan 8.63%, 9/30/2013

    1,000,000     887,940     773,299     1.2 %
                             

Sub Total Non-control/Non-affiliated investments

                  137,020,449     96,462,919     141.8 %
                             

Control investments—33.0%(b)

                                 

GSC Partners CDO GP III, LP(h)

 

Financial Services

 

100% General Partnership interest

            98,412     0.1 %

GSC Investment Corp. CLO 2007 LTD.(f)(h)

 

Structured Finance Securities

 

Other/Structured Finance Securities 12.15%, 1/21/2020

    30,000,000     29,905,194     22,340,617     32.9 %
                             

Sub Total Control investments

                  29,905,194     22,439,029     33.0 %
                             

Affiliate investments—0.0%(b)

                                 

GSC Partners CDO GP III, LP(g)

 

Financial Services

 

6.24% Limited Partnership Interest

            10,527     0.0 %
                             

Sub Total Affiliate investments

                      10,527     0.0 %
                             

TOTAL INVESTMENT ASSETS—174.8%(b)

                $ 166,925,643   $ 118,912,475     174.8 %
                             

 

Outstanding interest rate cap
  Interest
rate
  Maturity   Notional   Cost   Fair
Value
  % of
Stockholders'
Equity
 

Interest rate cap

    8.0 %   2/9/2014   $ 40,000,000   $ 87,000   $ 27,682     0.1 %

 

Company(a)(c)
  Industry   Investment Interest
Rate/Maturity
  Principal   Cost   Fair
Value
  Stockholders'
% of
Equity
 

Interest rate cap

    8.0 %   11/30/2013     26,433,408     44,000     11,831     0.0 %
                                 

Sub Total Outstanding interest rate cap

                    $ 131,000   $ 39,513     0.1 %
                                 

(a)
All of the Fund's equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Abitibi-Consolidated Company of Canada, Grant U.S. Holdings LLP, GSC Investment Corp. CLO 2007, Terphane Holdings Corp., and GSC Partners CDO GP III, LP.

(b)
Percentages are based on net assets of $68,013,777 as of February 28, 2009.

(c)
Fair valued investment (see Note 4 to the consolidated financial statements).

(d)
All or a portion of the securities are pledged as collateral under a revolving securitized credit facility (see Note 7 to the consolidated financial statements).

(e)
Non-U.S. company. The principal place of business for Terphane Holdings Corp is Brazil, and for Abitibi-Consolidated Company of Canada and Grant U.S. Holdings LLP is Canada.

(f)
12.15% represents the modeled effective interest rate that is expected to be earned over the life of the investment.

F-38



GSC Investment Corp.

Consolidated Schedule of Investments (Continued)

February 28, 2009

(g)
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:

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

GSC Partners CDO GP III, LP

  $   $   $   $   $   $   $ (5,706 )
(h)
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. In addition, 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)
 

GSC Investment Corp. CLO 2007 LTD. 

  $   $   $   $ 4,393,818   $ 2,049,717   $   $ (6,479,722 )

GSC Partners CDO GP III, LP

  $   $   $   $   $   $     (61,741 )

F-39



GSC Investment Corp.

Consolidated Statements of Changes in Net Assets

 
  For The Year Ended
February 28, 2010
  For The Year Ended
February 28, 2009
  For The Year Ended
February 29, 2008
 

INCREASE/(DECREASE) FROM OPERATIONS:

                   
 

Net investment income

  $ 5,713,843   $ 13,825,992   $ 10,747,278  
 

Net realized gain/(loss) from investments

    (6,653,983 )   (7,173,118 )   3,175,222  
 

Net realized gain from derivatives

        30,454     732,526  
 

Net unrealized depreciation on investments

    (9,525,054 )   (27,961,244 )   (20,051,923 )
 

Net unrealized appreciation/(depreciation) on derivatives

    2,634     (37,221 )   (54,266 )
               
   

Net decrease in net assets from operations

    (10,462,560 )   (21,315,137 )   (5,451,163 )
               

DECREASE FROM SHAREHOLDER DISTRIBUTIONS:

                   
 

Distributions declared

    (15,131,775 )   (8,540,126 )   (12,851,645 )
               
   

Net decrease in net assets from shareholder distributions

    (15,131,775 )   (8,540,126 )   (12,851,645 )
               

CAPITAL SHARE TRANSACTIONS:

                   
 

Stock dividend distribution

    13,058,710          
 

Issuance of common stock, net

            116,301,011  
               
   

Net increase in net assets from capital share transactions

    13,058,710         116,301,011  
               
   

Total increase/(decrease) in net assets

    (12,535,625 )   (29,855,263 )   97,998,203  

Net assets at beginning of year

    68,013,777     97,869,040     (129,163 )
               

Net assets at end of year

  $ 55,478,152   $ 68,013,777   $ 97,869,040  
               

Net asset value per common share

  $ 3.27   $ 8.20   $ 11.80  

Common shares outstanding at end of year

    16,940,109     8,291,384     8,291,384  

(Distributions in excess of accumulated net investment income)/Accumulated undistributed net investment income

  $ (2,846,135 ) $ 6,122,492   $ 455,576  

See accompanying notes to consolidated financial statements.

F-40



GSC Investment Corp.

Consolidated Statements of Cash Flows

 
  For The
Year Ended
February 28,
2010
  For The
Year Ended
February 28,
2009
  For The
Year Ended
February 29,
2008
 

Operating activities

                   

NET DECREASE IN NET ASSETS FROM OPERATIONS

  $ (10,462,560 ) $ (21,315,137 ) $ (5,451,163 )

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

                   
 

Paid-in-kind interest income

    (858,730 )   (819,905 )   (365,592 )
 

Net accretion of discount on investments

    (966,191 )   (1,323,644 )   (765,255 )
 

Amortization of deferred credit facility financing costs

    633,349     193,464     502,468  
 

Net realized loss from investments

    6,653,983     7,173,118     (3,175,222 )
 

Net realized (gain) loss from derivatives

            (732,526 )
 

Net unrealized depreciation on investments

    9,525,054     27,961,244     20,051,923  
 

Unrealized (appreciation) depreciation on derivatives

    (2,634 )   37,221     54,266  
 

Proceeds from sale and redemption of investments

    15,185,210     49,193,508     141,772,158  
 

Purchase of investments

        (28,259,995 )   (314,002,526 )
 

(Increase) decrease in operating assets:

                   
 

Cash and cash equivalents, securitization accounts

    952,777     13,402,772     (14,580,973 )
 

Interest receivable

    (386,293 )   (732,546 )   (2,355,122 )
 

Due from manager

        940,903     (940,903 )
 

Management fee receivable

    (90,558 )   (21,456 )   (215,914 )
 

Other assets

    180,988     (281,911 )   (39,349 )
 

Deferred offering costs

            808,617  
 

Increase (decrease) in operating liabilities:

                   
 

Payable for unsettled trades

        (11,329,150 )   11,329,150  
 

Management and incentive fees payable

    190,426     1,937,606     943,061  
 

Accounts payable and accrued expenses

    410,544     (12,885 )   608,422  
 

Interest and credit facility fees payable

    194,341     (219,482 )   292,307  
 

Due to manager

    15,602     (11,048 )   (62,762 )
 

Accrued offering costs

            (760,000 )
               

NET CASH PROVIDED BY OPERATING ACTIVITIES

    21,175,308     36,512,677     (167,084,935 )
               

Financing activities

                   

Issuance of shares of common stock

            108,750,000  

Offering costs and sales load

            (8,068,750 )

Borrowings on debt

        7,800,000     167,958,119  

Paydowns on debt

    (22,002,451 )   (27,255,327 )   (89,508,119 )

Credit facility financing cost

    (103,582 )       (1,225,699 )

Cost of interest rate cap

            (131,000 )

Payments of cash dividends

    (2,073,066 )   (11,773,766 )   (9,618,005 )
               

NET CASH USED BY FINANCING ACTIVITIES

    (24,179,099 )   (31,229,093 )   168,156,546  
               

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (3,003,791 )   5,283,584     1,071,611  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

    6,356,225     1,072,641     1,030  
               

CASH AND CASH EQUIVALENTS, END OF YEAR

  $ 3,352,434   $ 6,356,225   $ 1,072,641  
               

Supplemental Information:

                   

Interest paid during the year

  $ 3,268,351   $ 2,631,385   $ 4,236,458  

Federal excise tax paid during the year

  $ 140,322   $ 88,951   $  

Supplemental non-cash information

                   

Issuance of common stock for acquisition of investments in GSC CDO III, LLC and GSC Partners CDO GP III, L.P. 

  $   $   $ 15,619,761  

Paid-in-kind interest income

  $ 858,730   $ 819,905   $ 365,592  

Net accretion of discount on investments

  $ 966,191   $ 1,323,644   $ 765,255  

Amortization of deferred credit facility financing costs

  $ 633,349   $ 193,464   $ 502,468  

Stock dividend distribution

  $ 13,058,710   $   $  

See accompanying notes to consolidated financial statements.

F-41



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

        GSC Investment Corp. (the "Company", "we" 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 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 objectives are to generate both current income and capital appreciation through debt and equity investments by primarily investing in private middle market companies and select high yield bonds.

        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, the LLC was merged with and into the Company 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 common share of the LLC was converted into an equivalent number of shares of common stock of the Company and the Company is the surviving entity.

        We are externally managed and advised by our investment adviser, GSCP (NJ), L.P. (individually and collectively with its affiliates, "GSC Group" or the "Manager"), pursuant to an investment advisory and management agreement.

        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 and its special purpose financing subsidiaries, GSC Investment Funding, LLC and GSC Investment Funding II, LLC. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the "Company," "we," and "us" in the financial statements encompassing of these consolidated subsidiaries, except as stated otherwise.

Note 2. Summary of Significant Accounting Policies

        In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 established the Accounting Standards Codification ("ASC" or the "Codification") as the source of authoritative GAAP in the United States (the "GAAP hierarchy") to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Once the Codification is in effect, all of its content will carry the same level of authority and the GAAP hierarchy will be modified to include only two levels of GAAP, authoritative and non-authoritative. SFAS 168, now codified as ASC 105, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This adoption by the Company has changed the Company's references to GAAP accounting standards but did not impact any of the Company's significant accounting policies or its results of operations or financial position.

F-42



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

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 revenues and expenses during the period reported. Actual results could differ 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.

Cash and cash equivalents, Securitization Accounts

        Cash and cash equivalents, securitization 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 securitized investments or other reserved amounts associated with the Company's securitization facilities. The Company is required to use a portion of these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the related securitization agreements. Cash held in such accounts may not be available for the general use of the Company.

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% of the voting securities or maintain greater than 50% 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% and 25% of the voting securities. Under the 1940 Act, "Non-affiliated Investments" are defined as investments that are neither Control Investments or Affiliated Investments.

Investment Valuation

        The fair value of the Company's assets and liabilities which qualify as financial instruments under ASC 825 (previously, SFAS No. 107, "Disclosure About Fair Value of Financial Instruments"), approximates the carrying amounts presented in the consolidated statements of assets and liabilities.

        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 make 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 determined, in good faith, by our board of directors based on input from our Manager, our audit committee and, if our board or audit committee so request, 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 a fair value pricing include the nature and realizable value of any collateral, the portfolio company's ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

F-43



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

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

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

        Our equity investment in GSC Investment Corp. CLO 2007, Ltd. ("GSCIC CLO") is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar CLO equity, when available, as determined by our investment advisor and recommended to our board of directors.

        Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value by our board of directors 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.

        We account for derivative financial instruments in accordance with ASC 815 (previously, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statement 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 statement of operations.

Investment Transactions and Income Recognition

        Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. If any cash is received after it is determined that interest is no longer collectible, we treat the cash as payment on the principal balance until the entire principal balance has been repaid, before any interest income is recognized. Discounts and premiums on investments purchased are accreted/amortized over the

F-44



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


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 reversed 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. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection.

        Interest income on our investment in GSCIC CLO is recorded using the effective interest method in accordance with the provision of ASC 325 (previously, EITF 99-20), 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 includes in income certain amounts that it has not yet received in cash, such as contractual paid-in-kind interest ("PIK"), which represents contractually deferred interest added to the investment balance that is generally due at maturity. We stop accruing PIK if we do not expect the issuer to be able to pay all principal and interest when due.

Organizational Expenses

        Organizational expenses consist principally of professional fees incurred in connection with the organization of the Company and have been expensed as incurred.

Deferred Credit Facility Financing Costs

        Financing costs incurred in connection with each respective credit facility have been deferred and are being amortized using the straight line method over the life of each respective facility.

Indemnifications

        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.

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

F-45



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


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% 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% on undistributed income if we do not distribute at least 98% of our ordinary income in any calendar year and 98% of our 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, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the years ended February 28, 2010 and 2009, provisions of $27,445 and $140,322, respectively were recorded for federal excise taxes and as of each respective year end date the amounts remained unpaid and included in accounts payable on the accompanying consolidated statement of assets and liabilities. The $27,445 payable remains unpaid and the $140,322 payable has been subsequently paid.

        We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 , which is codified in FASB ASC Topic 740, Income Taxes ("ASC 740") on February 28, 2008. ASC 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an uncertain tax position is required to meet before tax benefits associated with such uncertain tax position are recognized in the consolidated financial statements. Our adoption of ASC 740 did not require a cumulative effect adjustment to the February 28, 2008 undistributed net realized earnings. We classify interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income taxes.

        Based on our analysis of our tax position, we concluded that we did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. We did not have any unrecognized tax benefits as of both February 28, 2010 and February 28, 2009.

        The Company files federal and state tax returns. The federal and state tax returns for fiscal years 2008 through 2010 remain subject to examination by the IRS and state and local tax authorities.

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.

        The Company has adopted a dividend reinvestment plan 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. If the Company's common stock is trading below net asset value at the time of valuation, the plan

F-46



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


administrator will receive the dividend or distribution in cash and will purchase common stock in the open market, on the New York Stock Exchange or elsewhere, for the account of each Participant.

New Accounting Pronouncements

        In May 2009, the FASB issued ASC 855 (previously, SFAS No. 165, "Subsequent Events"), which addresses accounting and disclosure requirements related to subsequent events. ASC 855 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. The adoption of ASC 855 did not have a material effect on our financial condition or results of operations.

        In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140", ("SFAS No. 166") which amends the derecognition guidance in SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", eliminates the concept of a "qualifying special-purpose entity" ("QSPE") and requires more information about transfers of financial assets, including securitization transactions as well as a company's continuing exposure to the risks related to transferred financial assets. SFAS No. 166 is now codified in ASC 860. The amended requirements are effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The Company is currently evaluating the impact on our interim consolidated financial statements of adopting ASC 860.

        In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures ("ASU 2010-06"), which amends ASC 820 and requires additional disclosure related to recurring and non-recurring fair value measurement in respect of transfers in and out of Level 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies existing disclosure about inputs and valuation techniques. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures related to activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal year. Management is currently evaluating the impact on our consolidated financial statements of adopting ASU 2010-06.

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 securitization accounts at a major financial institution and credit risk related to the derivative counterparty.

        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.

F-47



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)


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. Going Concern

        As of February 28, 2010, the Company remained in default on its Revolving Facility (see Note 8) and as a result of the default, our lender has the right to accelerate repayment of the outstanding indebtedness and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral would have a material adverse effect on our liquidity, financial condition and operations. The deleveraging of the Company may significantly impair the Company's ability to effectively operate. There is no assurance that we will have sufficient funds available to pay in full the total amount of obligations that would become due as a result of such acceleration or that we will be able to obtain additional or alternative financing to pay or refinance any such accelerated obligations. However, we continue to believe that we will have adequate liquidity to continue to fund our operations and the interest payments on our outstanding debt, including any default interest.

        On April 14, 2010 the Company entered into a definitive agreement with Saratoga Investment Advisors, LLC ("Saratoga") and CLO Partners LLC ("CLO Partners") and announced a $55 million recapitalization plan to cure the debt default. The recapitalization plan includes Saratoga and CLO Partners purchasing approximately 9.8 million shares of common stock of GSC Investment Corp. for $1.52 per share pursuant to a definitive stock purchase agreement and a commitment from Madison Capital Funding LLC to provide the Company with a $40 million senior secured revolving credit facility. Upon the closing of the transaction, the Company will immediately borrow funds under the new credit facility that, when added to the $15 million equity investment, will be sufficient to repay the full amount of the Company's existing debt and to provide the Company with working capital thereafter. The plan is subject to shareholder approval.

        A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. Our consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty or our debt restructuring activities.

Note 4. Investments

        The Company values all investments in accordance with ASC 820 "Fair Value Measurements and Disclosures" ("ASC 820") (previously, SFAS No. 157, "Fair Value Measurements"). 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.

F-48



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4. Investments (Continued)

        ASC 820 provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability, and identifying transactions that are not orderly. In those circumstances, further analysis and/or significant adjustment to the transaction or quoted prices may be required at the measurement date under current market conditions.

        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 the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

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

        The following table presents fair value measurements of investments as of February 28, 2010 (dollars in thousands):

 
  Fair Value Measurements Using  
 
  Level 1   Level 2   Level 3   Total  

Non-control/non-affiliate investments

  $   $   $ 72,675   $ 72,675  

Control investments

            16,698     16,698  

Affiliate investments

                 
                   

Total investments at fair value

  $   $   $ 89,373   $ 89,373  
                   

F-49



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4. Investments (Continued)

        The following table presents fair value measurements of investments as of February 28, 2009 (dollars in thousands):

 
  Fair Value Measurements Using  
 
  Level 1   Level 2   Level 3   Total  

Non-control/non-affiliate investments

  $   $   $ 96,463   $ 96,463  

Control investments

            22,439     22,439  

Affiliate investments

            10     10  
                   

Total investments at fair value

  $   $   $ 118,912   $ 118,912  
                   

        The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2010 (dollars in thousands):

 
  Non-control/
non-affiliate
  Investments
Control
  Affiliate
Investments
  Total  

Balance as of February 28, 2009

  $ 96,464   $ 22,438   $ 10   $ 118,912  

Net unrealized losses

    (4,447 )   (5,068 )   (10 )   (9,525 )

Purchases and other adjustments to cost

    1,825             1,825  

Sales and redemptions

    (14,513 )   (672 )       (15,185 )

Net realized loss from investments

    (6,654 )           (6,654 )
                   

Balance as of February 28, 2010

  $ 72,675   $ 16,698   $   $ 89,373  
                   

        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.

        Sale and redemptions represent net proceeds received from investments sold during the year.

        Net transfers in and/or out represent existing investments that were either previously categorized as another level and the inputs to the model became unobservable or investments that were previously classified as the lowest significant input became observable during the period. These investments transfers are recorded at their end of period fair values.

F-50



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4. Investments (Continued)

        The composition of our investments as of February 28, 2010, at amortized cost and fair value were as follows (dollars in thousands):

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

First lien term loans

  $ 18,936   $ 16,653     18.6 %

Second lien term loans

    41,264     20,267     22.7  

Senior secured notes

    33,416     27,742     31.0  

Unsecured notes

    20,306     5,690     6.4  

Structured Finance Securities

    29,233     16,698     18.7  

Common stock/equities

    3,756     2,323     2.6  

Limited partnership interest

             
               

Total

  $ 146,911   $ 89,373     100.0 %
               

        The composition of our investments as of February 28, 2009, at amortized cost and fair value were as follows (dollars in thousands):

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

First lien term loans

  $ 24,901   $ 17,117     14.4 %

Second lien term loans

    57,558     41,043     34.5  

Senior secured notes

    35,780     25,832     21.7  

Unsecured notes

    18,782     12,381     10.4  

Structured Finance Securities

    29,905     22,341     18.8  

Common stock/equities

             

Limited partnership interest

        198     0.2  
               

Total

  $ 166,926   $ 118,912     100.0 %
               

Note 5. Investment in GSC Investment Corp. CLO 2007, Ltd.

        On January 22, 2008, we invested $30 million in all of the outstanding subordinated notes of GSC Investment Corp. CLO 2007, Ltd., a $400 million CLO managed by us that invests primarily in senior secured loans. Additionally, we entered into a collateral management agreement with GSCIC CLO pursuant to which we will act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, to be paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%. For the years ended February 28, 2010 and 2009 and February 29, 2008 we accrued $2.1, $2.0 and $0.6 million in management fee income, respectively and $2.4, $4.4 and $0.3 million in interest income, respectively, from GSCIC CLO. We did not accrue any amounts related to the incentive management fee as the 12% hurdle rate has not yet been achieved.

F-51



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Income Taxes

        The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.

        The Company owns 100% of GSCIC CLO, an Exempted Company incorporated in the Cayman Islands. For financial reporting purposes, the GSCIC CLO is not included as part of the consolidated financial statements. For federal income tax purposes, the Company has requested and received approval from the Internal Revenue Service to treat the GSCIC CLO as a disregarded entity. As such, for federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the GSCIC CLO are included with those of the Company.

        To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as defined by the Code. Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. As of February 28, 2010 and 2009, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible excise tax, meals & entertainment, market discount, interest income with respect to the GSCIC CLO which is consolidated for tax purposes, and the tax character of distributions as follows (dollars in thousands):

 
  February 28,
2010
  February 28,
2009
 

Accumulated net investment income/(loss)

  $ 449   $ 381  

Accumulated net realized gains (losses) on investments

    1,213     (1,106 )

Additional paid-in-capital

    (1,662 )   725  

        For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended December 31, 2009 was as follows (dollars in thousands):

 
  December 31,
2009
  December 31,
2008
 

Ordinary Income

  $ 15,132   $ 8,540  

Capital gains

         

Return of capital

         
           

Total

  $ 15,132   $ 8,540  
           

        For federal income tax purposes, as of February 28, 2010, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost is $17.3 million and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value is $78.8 million. The aggregate cost of securities for federal income tax purposes is $481.3 million.

        At February 28, 2010 and 2009, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company's consolidated statements of assets and

F-52



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Income Taxes (Continued)


liabilities by temporary book/tax differences primarily arising from the consolidation of the GSCIC CLO for tax purposes, market discount and original issue discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures (dollars in thousands).

 
  February 28,
2010
  February 28,
2009
 

Post October loss deferred

  $ (4,560 ) $  

Accumulated capital losses

    (17,306 )   (3,195 )

Other temporary differences

    (2,208 )   (119 )

Undistributed ordinary income

    3,950     6,312  

Unrealized depreciation

    (61,539 )   (146,540 )
           

Components of accumulated losses

  $ (81,663 ) $ (143,542 )
           

        Post-October losses represent losses realized on investments from November 1, 2009 to February 28, 2010, in accordance with federal income tax regulations, the Company has elected to defer and treat as having arisen in the following fiscal year.

        The Company has incurred capital losses of $14.1 and $3.2 million for the years ended February 28, 2010 and 2009. Such capital losses will be available to offset future capital gains if any and if unused, will expire on February 28, 2018 and 2017.

        Management has analyzed the Company's tax positions taken on federal income tax returns for all open years (fiscal years 2008-2010), and has concluded that no provision for uncertain income tax positions is required in the Company's financial statements.

Note 7. Agreements

        On March 21, 2007, the Company entered into an investment advisory and management agreement (the "Management Agreement") with GSC Group, our investment advisor. 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. Pursuant to the Management Agreement, our investment adviser 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 investment adviser 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 investment adviser 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 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.

F-53



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Agreements (Continued)

        The incentive fee consists of the following two parts:

        We will defer cash payment of any incentive fee otherwise earned by our investment adviser if, during the most recent four full fiscal quarter period ending on or prior to the date such payment is 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) is less than 7.5% of our net assets at the beginning of such period. These calculations will be 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 will become payable on the next date on which such test has been satisfied for the most recent four full fiscal quarters or upon certain terminations of the investment advisory and management agreement.

        For the years ended February 28, 2010 and 2009 and February 29, 2008 we incurred $2.0, $2.7 and $2.9 million in base management fees and $0.3, $1.8 and $0.7 million in incentive fees related to pre-incentive fee net investment income, respectively. For the years ended February 28, 2010 and 2009 and February 29, 2008, we incurred no incentive management fees related to net realized capital gains. As of February 28, 2010 and 2009, $0.5 million and $0.6 million of base management fees and $2.6 million and $2.3 million of incentive fees, respectively, were unpaid and included in management and incentive fees payable in the accompanying consolidated statement of assets and liabilities.

        As of February 28, 2010, the end of the fourth quarter of fiscal year 2010, the sum of our aggregate distributions to our stockholders and 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 the first fiscal quarter of fiscal year 2010. Accordingly, the payment of the incentive fee for the quarter ended February 28, 2010 has been deferred along with all previously deferred incentive fees. The total deferred incentive fee payable at February 28, 2010 and 2009 were $2.6 million and $2.3 million, respectively.

        On March 21, 2007, the Company entered into a separate administration agreement (the "Administration Agreement") with GSC Group, pursuant to which GSC Group, 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

F-54



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Agreements (Continued)


which we are required to provide such assistance. Our allocable portion is based on the proportion that our total assets bears to the total assets or a subset of total assets administered by our administrator.

        For the years ended February 28, 2010 and 2009 and February 29, 2008 we expensed $0.7, $1.0 and $0.9 million of administrator expenses, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to the Company in addition to our allocable portion of rent and other overhead related expenses. GSC Group has agreed not to be reimbursed by the Company for any expenses incurred in performing its obligations under the Administration Agreement until the Company's total assets exceeds $500 million. Additionally, the Company's requirement to reimburse GSC Group is capped such that the amounts payable, together with the Company's other operating expenses, will not exceed an amount equal to 1.5% per annum of the Company's net assets attributable to the Company's common stock. Accordingly, for the years ended February 28, 2010 and 2009 and February 29, 2008, we have recorded $0.7, $1.0 and $1.8 million in expense waiver and reimbursement, respectively, under the Administration Agreement in the accompanying consolidated statement of operations.

        On March 23, 2007, the Manager provided the Company with a Notification of Fee Reimbursement (the "Expense Reimbursement Agreement"). The Expense Reimbursement Agreement provides for the Manager to reimburse the Company for operating expenses to the extent that our total annual operating expenses (other than investment advisory and management fees, interest and credit facility expenses, and organizational expense) exceed an amount equal to 1.55% of our net assets attributable to common stock. The Manager is not entitled to recover any reimbursements under this agreement in future periods. The term of the Expense Reimbursement Agreement is for a period of 12 months beginning March 23, 2007 and for each twelve months period thereafter unless otherwise agreed by the Manager and the Company. On April 15, 2008, the Manager and the Company agreed not to extend the agreement for an additional twelve month period and terminated the Expense Reimbursement Agreement as of March 23, 2008. For the years ended February 28, 2009 and February 29, 2008, we recorded $49,715 and $0.9 million in expense waiver and reimbursement, respectively under the Expense Reimbursement Agreement in the accompanying consolidated statement of operations.

Note 8. Borrowings

        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% 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 formed GSC Investment Funding LLC ("GSC Funding"), a wholly owned consolidated subsidiary of the Company, through which we entered into a revolving securitized credit facility (the "Revolving Facility") with Deutsche Bank AG, as administrative agent, under which we may borrow up to $100 million. A significant percentage of our total assets have been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds are borrowed from or through certain lenders at prevailing commercial paper rates or, if the commercial paper market is at any time unavailable, at prevailing LIBOR rates, plus 0.70% payable monthly. As of February 28, 2010 and 2009, there was $37.0 million and $59.0 million outstanding under the Revolving Facility, respectively. For the years ended February 28, 2010 and 2009 and February 29, 2008, we

F-55



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Borrowings (Continued)


recorded $3.5, $2.4 and $4.0 million of interest expense and $0.6, $0.2 and $0.2 million of amortization of deferred financing costs related to the Revolving Facility, respectively. For the years ended February 28, 2010 and 2009 and February 29, 2008 the interest rates on the outstanding borrowings ranged from 1.37% to 9.25%, 1.50% to 5.22% and 4.45% to 6.62%, respectively.

        On May 1, 2007, we formed GSC Investment Funding II LLC ("GSC Funding II"), a wholly owned consolidated subsidiary of the Company, through which we entered into a $25.7 million term securitized credit facility (the "Term Facility" and, together with the Revolving Facility, the "Facilities") with Deutsche Bank AG, as administrative agent, which was fully drawn at closing. A significant percentage of our total assets were pledged under the Term Facility to secure our obligations thereunder. The Term Facility bears interest at prevailing commercial paper rates or, if the commercial paper market is at any time unavailable, at prevailing LIBOR rates, plus 0.70%, payable quarterly. For the year ended February 29, 2008, we recorded $0.6 million of interest expense and $0.3 of amortization of deferred financing costs related to the Term Facility.

        Each of the Facilities contain limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, payment frequency and status, average life, collateral interests and investment ratings. The Facilities also include certain requirements relating to portfolio performance the violation of which could result in the early amortization of the Facilities, limit further advances (in the case of the Revolving Facility) and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder.

        On December 12, 2007, the Company consolidated its Facilities by using the proceeds of a draw under the Revolving Facility to repay and terminate the Term Facility and transferring all assets in GSC Funding II to GSC Funding. The Company's aggregate indebtedness and cost of funding were unchanged as a result of this consolidation.

        In March 2009 we amended the Revolving Credit Facility to increase the portion of the portfolio that can 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 (as defined below) that would allow us to better manage our capital in times of declining asset prices and market dislocation. If we are not able to obtain new sources of financing, however, we expect our portfolio will gradually de-lever as principal payments are received, which may negatively impact our net investment income and ability to pay dividends.

        At February 28, 2010 and 2009 we had $37.0 million and $59.0 million in borrowings under the Revolving Facility, respectively. The actual amount that may be outstanding at any given time (the "Borrowing Base") is dependent upon the amount and quality of the collateral securing the Revolving Facility. Our Borrowing Base was $1.7 million at February 28, 2010 versus $59.9 million at February 28, 2009. The decline in our Borrowing Base in fiscal year 2010 is mainly attributable to the decline in the value of the pledged collateral and the downgrade of certain public ratings or private credit estimates of the pledged collateral.

        For purposes of determining the Borrowing Base, most assets are assigned the values set forth in our most recent quarterly report filed with the SEC. Accordingly, the February 28, 2010 Borrowing Base relies upon the valuations set forth in the quarterly report for the quarter ended November 30, 2009. The valuations presented in this annual report will not be incorporated into the Borrowing Base until after this report is filed with the SEC.

F-56



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Borrowings (Continued)

        On July 30, 2009 we exceeded the permissible borrowing limit for 30 consecutive days, resulting in an event of default under our Revolving Facility that is continuing. As a result of this event of default, our lender has the right to accelerate repayment of the outstanding indebtedness under and Revolving Facility and to foreclose and liquidate the collateral pledged thereunder. Acceleration of the outstanding indebtedness and/or liquidation of the collateral would have a material adverse effect on our liquidity, financial condition and operations. As a result of the continuing default, the Company may be forced to sell its investments to raise funds to repay outstanding amounts. Such forced sales may result in values that could be less than carrying values reported in these financial statements. The deleveraging of the Company may significantly impair the Company's ability to effectively operate. Please see Part I, Item 1A. "Risk Factors—An event of default under the Revolving Facility may lead to a forced liquidation of the pledged assets that may yield less than the fair value of the assets" for more information. Our lender has elected not to accelerate the obligation to date, but has reserved the right to do so.

        During the continuance of an event of default, the interest rate on the Revolving Facility is increased from the commercial paper rate plus 4.00% to 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 is unavailable, the greater of the prevailing LIBOR rates and our lender's prime rate plus 6.00% plus a default rate of 3.00%.

Note 9. Interest Rate Cap Agreements

        In April and May 2007, pursuant to the requirements of the Facilities, GSC Funding and GSC Funding II entered into interest rate cap agreements with Deutsche Bank AG with notional amounts of $34 million and $60.9 million at costs of $75,000, and $44,000, respectively. In May 2007 GSC Funding increased the notional under its agreement from $34 million to $40 million for an additional cost of $12,000. The agreements expire in February 2014 and November 2013 respectively. These interest rate caps are treated as free-standing derivatives under ASC 815 and are presented at their fair value on the consolidated statement of assets and liabilities in their fair value are included on the consolidated statement of operations.

        The agreements provide for a payment to the Company in the event LIBOR exceeds 8%, mitigating our exposure to increases in LIBOR. With respect to calculating the payments under these agreements, the notional amount is determined based on a pre-determined schedule set forth in the respective agreements which provides for a reduction in the notional at specified dates until the maturity of the agreements. As of February 28, 2010 we did not receive any such payments as the LIBOR has not exceeded 8%. At February 28, 2010, the total notional outstanding for the interest rate caps was $65.6 million with an aggregate fair value of $0.04 million, which is recorded in outstanding interest cap at fair value on the Company's consolidated statement of assets and liabilities. For the years ended February, 28, 2010 and 2009, and February 29, 2008, the Company recorded $2,634 of unrealized appreciation, $37,221 of unrealized depreciation and $54,226 of unrealized depreciation, respectively, on derivatives in the consolidated statement of operations related to the change in the fair value of the interest rate cap agreements.

F-57



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9. Interest Rate Cap Agreements (Continued)

        The table below summarizes our interest rate cap agreements as of February 28, 2010 (dollars in thousands):

Instrument
  Type   Notional   Interest
Rate
  Maturity   Fair
Value
 

Interest Rate Cap

  Free Standing Derivative   $ 39,184     8.0 %   Feb 2014   $ 30  

Interest Rate Cap

  Free Standing Derivative     26,433     8.0     Nov 2013     12  
                             

  Net fair value                     $ 42  
                             

        The table below summarizes our interest rate cap agreements as of February 28, 2009 (dollars in thousands):

Instrument
  Type   Notional   Interest
Rate
  Maturity   Fair
Value
 

Interest Rate Cap

  Free Standing Derivative   $ 40,000     8.0 %   Feb 2014   $ 28  

Interest Rate Cap

  Free Standing Derivative     26,433     8.0     Nov 2013     12  
                             

  Net fair value                     $ 40  
                             

Note 10. 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." For the years ended February 28, 2010 and 2009 and February 29, 2008 we accrued $0.3, $0.3 and $0.3 million for directors fees expense, respectively and $25,432, $18,017 and $13,226 for reimbursement of out-of-pocket expenses, respectively. As of February 28, 2010 and 2009, $54,000 and $5,250 in directors fees expense were unpaid and included in accounts payable and accrued expenses in the consolidated statements of assets and liabilities. As of February 28, 2010, we had not issued any common stock to our directors as compensation for their services.

Note 11. Stockholders' Equity

        On May 16, 2006, GSC Group 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 959,955 and 81,362 shares of common stock, priced at $15.00 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

F-58



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11. Stockholders' Equity (Continued)


III GP, LP, collectively valued at $15.6 million. At this time, the 67 shares owned by GSC Group in the LLC were exchanged for 67 shares of GSC Investment Corp.

        On March 28, 2007, the Company completed its IPO of 7,250,000 shares of common stock, priced at $15.00 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 $1.825 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 $0.25 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 8,648,725 of newly issued shares of common stock.

Note 12. 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.

        On November 13, 2009, we declared a dividend of $1.825 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 $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% 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. The financial statements for the period ended November 30, 2009 were retroactively adjusted to reflect the increase in common stock as a result of the dividend in accordance with the provisions of ASC 505-20-550 regarding disclosure of a capital structure change after the interim balance sheet but before the release of the financial statements.

        The following information sets forth the computation of the weighted average basic and diluted net decrease in net assets per share from operations for the years ended February 28, 2010 and 2009 and February 29, 2008 (dollars in thousands except per share amounts):

Basic and diluted
  February 28,
2010
  February 28,
2009
  February 29,
2008
 

Net decrease in net assets from operations

  $ (10,463 ) $ (21,315 ) $ (5,451 )

Weighted average common shares outstanding

    10,613,507     8,291,384     7,761,965  

Loss per common share-basic and diluted

  $ (0.99 ) $ (2.57 ) $ (0.70 )

F-59



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13. Dividend

        The following table summarizes dividends declared during the years ended February 28, 2010 and 2009 and February 29, 2008 (dollars in thousands except per share amounts):

Date Declared
  Record Date   Payment Date   Amount Per
Share*
  Total
Amount
 

November 13, 2009

  November 25, 2009   December 31, 2009   $ 1.825   $ 15,132  
                   

Total dividends declared

          $ 1.825   $ 15,132  
                   

 

Date Declared
  Record Date   Payment Date   Amount Per
Share*
  Total
Amount
 

May 22, 2008

  May 30, 2008   June 13, 2008   $ 0.39   $ 3,234  

August 19, 2008

  August 29, 2008   September 15, 2008     0.39     3,234  

December 8, 2008

  December 18, 2008   December 29, 2008     0.25     2,072  
                   

Total dividends declared

          $ 1.03   $ 8,540  
                   

 

Date Declared
  Record Date   Payment Date   Amount Per
Share*
  Total
Amount
 

May 21, 2007

  May 29, 2007   June 6, 2007   $ 0.24   $ 1,990  

August 14, 2007

  August 24, 2007   August 31, 2007     0.36     2,985  

November 15, 2007

  November 30, 2007   December 3, 2007     0.38     3,151  

December 28, 2007

  January 18, 2008   January 28, 2008     0.18     1,492  

February 20, 2008

  February 29, 2008   March 10, 2008     0.39     3,234  
                   

Total dividends declared

          $ 1.55   $ 12,852  
                   

*
Amount per share is calculated based on the number of shares outstanding at the date of declaration.

F-60



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14. Financial Highlights

        The following is a schedule of financial highlights for the years ended February 28, 2010 and 2009 and February 29, 2008:

Per share data:
  February 28,
2010
  February 28,
2009
  February 29,
2008
 

Public offering cost at IPO, March 23, 2007

  $   $   $ 15.00  

Sales load

            (0.85 )

Offering cost

            (0.12 )
               

Net asset value at beginning of period/IPO

    8.20     11.80     14.03  

Net investment income(1)

    0.54     1.67     1.30  

Net realized gains (losses) on investments and derivatives

    (0.63 )   (0.86 )   0.47  

Net unrealized depreciation on investments and derivatives

    (0.90 )   (3.38 )   (2.45 )*
               

Net decrease in stockholders' equity

    (0.99 )   (2.57 )   (0.68 )

Distributions declared from net investment income

    (1.83 )   (1.03 )   (1.37 )

Distributions declared from net realized capital gains

            (0.18 )

Other(5)

    (2.11 )        
               

Total distributions to stockholders

    (3.94 )   (1.03 )   (1.55 )
               

Net asset value at end of period

  $ 3.27   $ 8.20   $ 11.80  
               

Net assets at end of period

  $ 55,478,152   $ 68,013,777   $ 97,869,040  

Shares outstanding at end of period

    16,940,109     8,291,384     8,291,384  

Per share market value at end of period

  $ 1.92   $ 1.99   $ 11.04  

Total return based on market value(2)

    113.10 %   (70.33 )%   0.45 %

Total return based on net asset value(3)

    (11.92 )%   14.40 %   10.96 %

*
Net unrealized depreciation on investments and derivatives per share amount includes the net loss incurred prior to the IPO.

Ratio/Supplemental data:
   
   
   
 

Ratio of net investment income net of expense waiver and reimbursement to average net assets(4)

    9.12 %   16.21 %   9.63 %

Ratio of operating expenses net of expense waiver and reimbursement to average net assets(4)

    8.71 %   5.94 %   4.31 %

Ratio of incentive management fees to average net assets

    0.52 %   2.05 %   0.64 %

Ratio of credit facility related expenses to average net assets

    6.54 %   3.05 %   4.51 %

Ratio of total expenses net of expense waiver and reimbursement to average net assets(4)

    15.77 %   11.04 %   9.45 %

(1)
Net investment income excluding expense waiver and reimbursement equals $0.48, $1.55 and $1.08 per share for the years ended February 28, 2010 and 2009 and February 29, 2008, respectively.

(2)
Total annual return historical and resumes changes in share price, reinvestments of all dividends and distributions, and no sales change for the year.

(3)
Total annual return is historical and assumes changes in net assets value, reinvestments of all dividends and distributions, and no sales change for the year.

(4)
For the year ended February 28, 2010, excluding the expense waiver and reimbursement arrangement, the ratio of net investment income, operating expenses, total expenses to average net

F-61



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14. Financial Highlights (Continued)

(5)
Represents the impact of the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of period end.

Note 15. Related Party Transaction

        On March 20, 2007, the Company issued 959,955 and 81,362 shares of common stock, priced at $15.00 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. Additionally, GSC Group assigned its rights to act as collateral manager for GSC Partners CDO Fund III, Limited ("CDO III") to the Company. The Company paid GSC Group $0.1 million to acquire the rights to act as collateral manager and expected to receive collateral management fees of $0.2 million. For the year ended February 29, 2008 we received $0.4 million of management fee income from CDO III and received distributions of $16.1 million from our partnership interests resulting in a realized gain of $0.5 million. As of February 28, 2010, the fair value of the general partnership interest and limited partnership interest was zero.

        On January 10, 2008, GSC Group notified our Dividend Reinvestment Plan Administrator that it was electing to receive dividends and other distributions in cash (rather than in additional shares of common stock) with respect to all shares of stock held by it and the investment funds under its control. For the year ended February 29, 2008, GSC Group received 35,911 of additional shares under the dividend reinvestment plan. As of February 28, 2010, GSC Group and its affiliates own approximately 11.4% of the outstanding common shares of the Company.

        On January 22, 2008, we entered into a collateral management agreement with GSCIC CLO pursuant to which we will act as collateral manager to it. In return for our collateral management services, we are entitled to a senior collateral management fee of 0.10% and a subordinate collateral management fee of 0.40% of the outstanding principal amount of GSCIC CLO's assets, to be paid quarterly to the extent of available proceeds. We are also entitled to an incentive management fee equal to 20% of excess cash flow to the extent the GSCIC CLO subordinated notes receive an internal rate of return equal to or greater than 12%. We do not expect to enter into additional collateral management agreements in the near future.

        In April 2009, our investment adviser withheld a scheduled principal amortization payment under its credit facility, resulting in a default thereunder. Since then, our investment adviser and its secured lenders have been in negotiations regarding a consensual restructuring of its obligations under such credit facility. While we are not directly affected by our investment adviser's default, if it is unable to restructure its credit facility, or an acceleration of the outstanding principal balance by the lenders occurs, the ability of the investment adviser to retain key individuals and perform its investment advisory duties for us could be significantly impaired.

F-62



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 16. Selected Quarterly Data (Unaudited)

 
  2010  
($ in thousands, except per share numbers)
  Qtr 4   Qtr 3   Qtr 2   Qtr 1  

Interest and related portfolio income

  $ 3,637   $ 3,530   $ 3,685   $ 4,764  

Net investment income

    1,201     869     1,080     2,564  

Net realized and unrealized gain (loss)

    (10,067 )   8,258     (17,168 )   2,800  

Net increase (decrease) in net assets resulting from operations

    (8,866 )   9,128     (16,088 )   5,364  

Net investment income per common share at end of each quarter

  $ 0.07   $ 0.10   $ 0.13   $ 0.31  

Net realized and unrealized gain (loss) per common share at end of each quarter

  $ (0.59 ) $ 0.91   $ (2.07 ) $ 0.34  

Dividends declared per common share

  $   $ 1.825   $   $  

Net asset value per common share

  $ 3.27   $ 3.80   $ 6.91   $ 8.85  

 

 
  2009  
($ in thousands, except per share numbers)
  Qtr 4   Qtr 3   Qtr 2   Qtr 1  

Interest and related portfolio income

  $ 5,476   $ 6,361   $ 5,835   $ 5,715  

Net investment income

    3,289     3,887     3,455     3,195  

Net realized and unrealized loss

    (17,296 )   (11,438 )   (6,023 )   (384 )

Net increase (decrease) in net assets resulting from operations

    (14,008 )   (7,551 )   (2,567 )   2,811  

Net investment income per common share at end of each quarter

  $ 0.40   $ 0.47   $ 0.42   $ 0.39  

Net realized and unrealized loss per common share at end of each quarter

  $ (2.09 ) $ (1.38 ) $ (0.73 ) $ (0.05 )

Dividends declared per common share

  $   $ 0.25   $ 0.39   $ 0.39  

Net asset value per common share

  $ 8.20   $ 10.14   $ 11.05   $ 11.75  

 

 
  2008  
($ in thousands, except per share numbers)
  Qtr 4   Qtr 3   Qtr 2   Qtr 1  

Interest and related portfolio income

  $ 5,520   $ 5,882   $ 5,882   $ 4,102  

Net investment income

    2,562     3,070     3,157     1,958  

Net realized and unrealized gain (loss)

    (11,972 )   (2,009 )   (3,939 )   1,722  

Net increase (decrease) in net assets resulting from operations

    (9,410 )   1,061     (782 )   3,680  

Net investment income per common share at end of each quarter

  $ 0.32   $ 0.37   $ 0.38   $ 0.23  

Net realized and unrealized gain (loss) per common share at end of each quarter

  $ (1.46 ) $ (0.24 ) $ (0.47 ) $ 0.21  

Dividends declared per common share

  $ 0.57   $ 0.38   $ 0.36   $ 0.24  

Net asset value per common share

  $ 11.80   $ 13.51   $ 13.76   $ 14.21  

Note 17. Subsequent Events

        There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the years then ended, except as disclosed below.

F-63



GSC INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 17. Subsequent Events (Continued)

        On March 2, 2010 the Company received a full par redemption of $0.7 million related to Affinity Group, Inc. On March 11, 2010, a portion of the proceeds from this redemption were used to make a repayment of $0.7 million of outstanding borrowings.

        On April 9, 2010 the Company received a full par redemption of $1.8 million related to Custom Direct, Inc. On April 13, 2010, the proceeds from this redemption plus a portion of interest collections related to Elyria Foundry Company were used to make a repayment of $1.9 million of outstanding borrowings.

        On April 14, 2010 the Company entered into a definitive agreement with Saratoga Investment Advisors, LLC ("Saratoga") and CLO Partners LLC ("CLO Partners") and announced a $55 million recapitalization plan to cure the debt default. The recapitalization plan includes Saratoga and CLO Partners purchasing approximately 9.8 million shares of common stock of GSC Investment Corp. for $1.52 per share pursuant to a definitive stock purchase agreement and a commitment from Madison Capital Funding LLC to provide the Company with a $40 million senior secured revolving credit facility. Upon the closing of the transaction, the Company will immediately borrow funds under the new credit facility that, when added to the $15 million equity investment, will be sufficient to repay the full amount of the Company's existing debt and to provide the Company with working capital thereafter. The plan is subject to shareholder approval.

        On May 4, 2010 the Company received an interest payment of $0.4 million related to McMillin Companies, LLC. On May 14, 2010, a portion of the proceeds were used to make a repayment of $0.3 million of outstanding borrowings.

        On May 13, 2010 the Company filed a Preliminary Proxy Statement on Schedule 14A related to the proposed Saratoga transaction.

F-64


1,168,018 Shares

Saratoga Investment Corp.

Common Stock




PROSPECTUS





PART C—OTHER INFORMATION

Item 25.    Financial Statements and Exhibits

        The following financial statements of the Company are filed herewith:

 
  Page

Consolidated Statement of Assets and Liabilities as of May 31, 2010 (unaudited) and February 28, 2010

  F-2

Consolidated Statements of Operations for the three months ended May 31, 2010 and 2009 (unaudited)

  F-3

Consolidated Schedules of Investments as of May 31, 2010 (unaudited) and February 28, 2010

  F-4

Consolidated Statements of Changes in Net Assets for the three months ended May 31, 2010 and 2009 (unaudited)

  F-10

Consolidated Statements of Cash Flows for the three months ended May 31, 2010 and 2009 (unaudited)

  F-11

Notes to Consolidated Financial Statements as of May 31, 2010 (unaudited)

  F-12

Report of Independent Registered Public Accounting Firm

  F-30

Consolidated Statement of Assets and Liabilities as of February 28, 2010 and 2009

  F-31

Consolidated Statements of Operations for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-32

Consolidated Schedule of Investments as of February 28, 2010 and 2009

  F-33

Consolidated Statements of Changes in Net Assets for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-40

Consolidated Statements of Cash Flows for the years ended February 28, 2010 and 2009 and February 29, 2008

  F-41

Notes to Consolidated Financial Statements

  F-42

Exhibit
Number
  Description
  a.1   Articles of Incorporation of the registrant (incorporated by reference to the registrant's Form 10-Q for the quarterly period ended May 31, 2007, File No. 001-33376).

 

a.2

 

Articles of Amendment of the registrant (incorporated by reference to the registrant's Current Report on Form 8-K filed August 2, 2010).

 

a.3

 

Articles of Amendment of the registrant (incorporated by reference to the registrant's Current Report on Form 8-K filed August 13, 2010).

 

b

 

Amended and Restated Bylaws of the registrant (incorporated by reference to the registrant's Current Report on Form 8-K, File No. 001-33376, filed on March 5, 2008).

 

d.1

 

Specimen certificate of Saratoga Investment Corp.'s common stock, par value $0.001 per share.**

 

d.2

 

Registration Rights Agreement dated July 30, 2010 between GSC Investment Corp., GSC CDO III L.L.C., and the investors party thereto (incorporated by reference to the registrant's Current Report on Form 8-K filed on August 2, 2010).

 

e

 

Form of Dividend Reinvestment Plan (incorporated by reference to Amendment No. 2 to the registrant's Registration Statement on Form N-2, File No. 333-138051, filed on January 12, 2007).

Exhibit
Number
  Description
  g   Investment Advisory and Management Agreement dated July 30, 2010 between GSC Investment Corp and Saratoga Investment Advisors, LLC (incorporated by reference to the registrant's Current Report on Form 8-K filed on August 2, 2010).

 

h

 

Not Applicable.

 

i.

 

Not Applicable.

 

j.

 

Custodian Agreement dated March 21, 2007 between GSC Investment LLC (the registrant's predecessor entity) and U.S. Bank National Association (incorporated by reference to the registrant's Form 10-Q for the quarterly period ended May 31, 2007, File No. 001-33376).

 

k.1

 

Credit, Security and Management Agreement, dated July 30, 2010, by and among GSC Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to the registrant's Current Report on Form 8-K filed on August 2, 2010).

 

k.2

 

Administration Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors LLC (incorporated by reference to the registrant's Current Report on Form 8-K filed on August 2, 2010).

 

k.3

 

Trademark License Agreement dated July 30, 2010 between Saratoga Investment Advisors LLC and GSC Investment Corp. (incorporated by reference to the registrant's Current Report on Form 8-K filed on August 2, 2010).

 

k.4

 

Form of Indemnification Agreement between Saratoga Investment Corp. and each officer and director of Saratoga Investment Corp. (incorporated by reference to Amendment No. 2 to registrant's Registration Statement on Form N-2, File No. 333-138051, filed on January 12, 2007.

 

l

 

Opinion of Sutherland Asbill & Brennan LLP, counsel to the Registrant.***

 

m.

 

Not applicable.

 

n.1

 

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.*

 

n.2

 

Opinion of Ernst & Young LLP, Independent Registered Public Accounting Firm, regarding "Senior Securities" table contained herein.**

 

n.3

 

Consent of Sutherland Asbill & Brennan LLP, counsel to the Registrant (included in Exhibit l).*

 

o

 

Not applicable.

 

p

 

Not applicable.

 

q

 

Not applicable.

 

r

 

Code of Ethics of the Company adopted under Rule 17j-1 (incorporated by reference to Amendment No. 7 to the registrant's Registration Statement on Form N-2, File No. 333-138051, filed on March 22, 2007).

*
Filed herewith.

**
Previously filed as an exhibit to this registration statement.

***
To be filed with a subsequent pre-effective amendment.

Item 26.    Marketing Arrangements

        The information contained under the heading "Plan of Distribution" in this Registration Statements is incorporated herein by reference.



Item 27.    Other Expenses of Issuance and Distribution

        The following table sets forth the estimated expenses payable by us in connection with the offering (excluding underwriting discounts and commissions):

 
  Amount  

SEC registration fee

  $ 1,538  

Accounting fees and expenses

  $ 55,000  

Legal fees and expenses

  $ 100,000  

Printing expenses

  $ 70,000  

Total

  $ 226,538  

        The amounts set forth above, except for the Securities and Exchange Commission fee, are in each case estimated. All of the expenses set forth above shall be borne by the Registrant.

Item 28.    Persons Controlled by or Under Common Control

        The Registrant has one subsidiary, Saratoga Investment Funding LLC, a Delaware limited liability company. The Registrant owns 100% of the outstanding equity interests of Saratoga Investment Funding LLC.

        In addition, the Registrant may be deemed to control GSC Investment Corp. CLO 2007 Ltd, one of the Registrant's portfolio companies.

Item 29.    Number of Holders of Securities

        The following table sets forth the number of record holders of the Registrant's common equity at September 15, 2010.

Title of Class
  Number of
Record Holders

Common stock, par value $0.001 per share

  27

Item 30.    Indemnification

        Reference is made to Section 2-418 of the Maryland General Corporation Law, Article VII of the Registrant's charter and Article XI of the Registrant's Amended and Restated Bylaws.

        Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Registrant's charter contains such a provision which eliminates directors' and officers' liability to the maximum extent permitted by Maryland law, subject to the requirements of the Investment Company Act of 1940, as amended (the "1940 Act").


        The Registrant's charter authorizes the Registrant, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while serving as the Registrant's director or officer and at the Registrant's request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. The Registrant's bylaws obligate the Registrant, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while serving as the Registrant's director or officer and at the Registrant's request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit the Registrant to indemnify and advance expenses to any person who served a predecessor of the Registrant in any of the capacities described above and any of the Registrant's employees or agents or any employees or agents of the Registrant's predecessor. In accordance with the 1940 Act, the Registrant will not indemnify any person for any liability to which such person would be subject by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

        Maryland law requires a corporation (unless its charter provides otherwise, which the Registrant's charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received unless, in either case, a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer in advance of final disposition of a proceeding upon the corporation's receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

        Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by



controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The Registrant has obtained an insurance policy insuring its directors and officers against certain liabilities they may incur in their capacity as directors and officers.

Item 31.    Business and Other Connections of Investment Adviser

        A description of any other business, profession, vocation, or employment of a substantial nature in which Saratoga Investment Advisors, and each executive officer of Saratoga Investment Advisors, is or has been during the past two fiscal years, engaged in for his or her own account or in the capacity of director, officer, employee, partner or trustee, is set forth in Part A of this Registration Statement in the sections entitled "Management—Board of Directors," "Investment Advisory and Management Agreement" and "Portfolio Management—Investment Personnel." Additional information regarding Saratoga Investment Advisors and its officers and directors is set forth in its Form ADV, as filed with the Securities and Exchange Commission (SEC File No. 801-71176), under the Investment Advisers Act of 1940, as amended, and is incorporated herein by reference.

Item 32.    Location of Accounts and Records

        The Registrant maintains physical possession of each account, book or other document required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder at the offices of:

Item 33.    Management Services

        Not applicable.

Item 34.    Undertakings




SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 21th day of September 2010.

    SARATOGA INVESTMENT CORP.

 

 

/s/ CHRISTIAN L. OBERBECK

    Name: Christian L. Oberbeck
    Title: Chief Executive Officer and President

        Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 
/s/ CHRISTIAN L. OBERBECK

Christian L. Oberbeck
  Chief Executive Officer and President
(Principal Executive Officer)
  September 21, 2010

/s/ RICHARD A. PETROCELLI

Richard A. Petrocelli

 

Chief Financial Officer, Chief Compliance Officer and Secretary (Principal Financial and Accounting Officer)

 

September 21, 2010

*

Steven M. Looney

 

Director

 

September 21, 2010

*

Charles S. Whitman III

 

Director

 

September 21, 2010

*

G. Cabell Williams

 

Director

 

September 21, 2010

* Signed by Richard A. Petrocelli pursuant to a power of attorney signed by each individual on August 26, 2010.




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TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
FORWARD-LOOKING STATEMENTS
PROSPECTUS SUMMARY
THE OFFERING
FEES AND EXPENSES
SELECTED FINANCIAL DATA
RISK FACTORS
Assumed Return on Our Portfolio (net of expenses)
USE OF PROCEEDS
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
DIVIDEND REINVESTMENT PLAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate Debt Portfolio Overview(1)
Portfolio Composition
Portfolio CMR distribution
Portfolio CMR Distribution
Portfolio composition by industry grouping at fair value
Portfolio Composition by Geographic Location at Fair Value
Investment Income
Operating Expenses
Three months ended May 31, 2010
Three months ended May 31, 2009
Three months ended May 31, 2010
Three months ended May 31, 2009
Investment Income
Operating Expenses
Fiscal Year Ended February 28, 2010
Fiscal Year Ended February 28, 2009
Fiscal Year Ended February 29, 2008
Fiscal Year Ended February 28, 2010
Fiscal Year Ended February 28, 2009
Fiscal Year Ended February 29, 2008
SENIOR SECURITIES
BUSINESS
PORTFOLIO COMPANIES
MANAGEMENT
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Quarterly Incentive Fee Based on "Pre-Incentive Fee Net Investment Income" Pre-Incentive Fee Net Investment Income (expressed as a percentage of the value of net assets)
Percentage of Pre-Incentive Fee Net Investment Income allocated to income-related portion of incentive fee
ADMINISTRATION AGREEMENT
LICENSE AGREEMENT
PORTFOLIO MANAGEMENT
CERTAIN RELATIONSHIPS
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
DETERMINATION OF NET ASSET VALUE
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
DESCRIPTION OF OUR COMMON STOCK
REGULATION
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELLING STOCKHOLDERS
PLAN OF DISTRIBUTION
LEGAL MATTERS
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
AVAILABLE INFORMATION
PRIVACY NOTICE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GSC Investment Corp. Consolidated Statement of Assets and Liabilities
GSC Investment Corp. Consolidated Statements of Operations
GSC Investment Corp. Consolidated Schedule of Investments May 31, 2010 (Unaudited)
GSC Investment Corp. Consolidated Schedule of Investments February 28, 2010
GSC Investment Corp. Consolidated Statements of Changes in Net Assets
GSC Investment Corp. Consolidated Statements of Cash Flows
GSC INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2010 (unaudited)
Report of Independent Registered Public Accounting Firm
GSC Investment Corp. Consolidated Statement of Assets and Liabilities
GSC Investment Corp. Consolidated Statements of Operations
GSC Investment Corp. Consolidated Schedule of Investments February 28, 2010
GSC Investment Corp. Consolidated Schedule of Investments February 28, 2009
GSC Investment Corp. Consolidated Statements of Changes in Net Assets
GSC Investment Corp. Consolidated Statements of Cash Flows
GSC INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART C—OTHER INFORMATION
SIGNATURES

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Exhibit N.1


Consent of Independent Registered Public Accounting Firm

        We consent to the references to our firm under the captions "Selected Financial Data," "Risk Factors," "Senior Securities," and "Independent Registered Public Accounting Firm" and to the use of our reports dated (i) May 27, 2010, with respect to the consolidated financial statements of GSC Investment Corp. (now known as Saratoga Investment Corp.) as of February 28, 2010 and 2009 and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended February 28, 2010, and (ii) August 30, 2010, with respect to the senior securities table as of February 28, 2010, included in the Pre-Effective Amendment No. 1 to the Registration Statement (Form N-2 No. 333-169135) and related Prospectus of Saratoga Investment Corp. for the registration of 1,168,018 shares of common stock for resale.

    /s/ Ernst & Young LLP

New York, NY
September 21, 2010




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Consent of Independent Registered Public Accounting Firm