Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Note 1. Organization
Horizon Technology
Finance Corporation (the “Company”) was organized as a Delaware corporation on March 16, 2010 and is an externally
managed, non-diversified, closed end investment company. The Company has elected to be regulated as a business development company
(“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for tax purposes,
the Company has elected to be treated as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1,
under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, the Company is not subject
to federal income tax on the portion of its taxable income and capital gains the Company distributes to the stockholders. The Company
primarily makes secured loans to development-stage companies in the technology, life science, healthcare information and services
and cleantech industries.
On October 28,
2010 the Company completed an initial public offering (“IPO”) and its common stock trades on the NASDAQ Global Select
Market under the symbol “HRZN”. The Company was formed to continue and expand the business of Compass Horizon Funding
Company LLC (“CHF”), a Delaware limited liability company, which commenced operations in March 2008 and became
the Company’s wholly owned subsidiary with the completion of the IPO.
Horizon Credit I LLC
(“Credit I”) was formed as a Delaware limited liability company on January 23, 2008, with CHF as the sole equity
member. Credit I is a special purpose bankruptcy remote entity and is reported herein as a wholly owned subsidiary of the Company.
Credit I is a separate legal entity from the Company and CHF and the assets conveyed to Credit I are not available to creditors
of the Company or any other entity other than Credit I’s lenders.
Horizon Credit II
LLC (“Credit II”) was formed as a Delaware limited liability company on June 28, 2011, with the Company as the sole
equity member. Credit II is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets
conveyed to Credit II are not available to creditors of the Company or any other entity other than Credit II’s lenders.
Horizon Credit III
LLC (“Credit III”) was formed as a Delaware limited liability company on May 30, 2012, with the Company as the sole
equity member. Credit III is a special purpose bankruptcy remote entity and is a separate legal entity from the Company. Any assets
conveyed to Credit III are not available to creditors of the Company or any other entity other than Credit III’s lenders.
Longview SBIC GP LLC
and Longview SBIC LP (collectively, “Horizon SBIC”) were formed as a Delaware limited liability company and Delaware
limited partnership, respectively, on February 11, 2011. Horizon SBIC are wholly owned subsidiaries of the Company and were formed
in anticipation of obtaining a license to operate a small business investment company from the U. S. Small Business Administration.
There has been no activity in Horizon SBIC since their inception.
The Company’s
investment strategy is to maximize the investment portfolio’s return by generating current income from the loans made and
the capital appreciation from the warrants received when making such loans. The Company has entered into an investment management
agreement (the “Investment Management Agreement”) with Horizon Technology Finance Management LLC (“HTFM”
or the “Advisor”), under which the Advisor will manage the day-to-day operations of, and provide investment advisory
services to, the Company.
Note 2. Basis of Presentation and Significant Accounting
Policies
Basis of Financial Statement Presentation
The consolidated financial
statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)
and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. In the opinion of management,
the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation
of financial results as of and for the periods presented. All intercompany balances and transactions have been eliminated. Certain
prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
As permitted under
Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company will generally not consolidate
its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists
of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s subsidiaries in
its consolidated financial statements.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Use of Estimates
In preparing the consolidated
financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and
income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the valuation of investments.
Fair Value
The Company applies
fair value to substantially all of its investments in accordance with relevant GAAP, which establishes a framework used to measure
fair value and requires disclosures for fair value measurements. The Company has categorized its investments carried at fair value,
based on the priority of the valuation technique, into a three-level fair value hierarchy as more fully described in Note 5. Fair
value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather
than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions
are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement
date.
The availability of
observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example,
the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market
and the current market conditions. To the extent that the valuation is based on models or inputs that are less observable or unobservable
in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company
in determining fair value is greatest for financial instruments classified as Level 3.
In May 2011, the FASB
issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and International Financial Reporting Standards (IFRSs), (ASU 2011-04). ASU 2011-04 converges the fair value measurement
guidance in U.S. GAAP and IFRSs. Some of the amendments clarify the application of existing fair value measurement requirements,
while other amendments change a particular principle in existing guidance. In addition, ASU 2011-04 requires additional fair value
disclosures. The Company has adopted ASU 2011-04 and included the additional required disclosures in Note 5.
See Note 5 for additional
information regarding fair value.
Segments
The Company has determined
that it has a single reporting segment and operating unit structure. The Company lends to and invests in portfolio companies in
various technology, life science, healthcare information and services and cleantech industries. The Company separately evaluates
the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships
has similar business and economic characteristics, they have been aggregated into a single lending and investment segment.
Investments
Investments are recorded
at fair value. The Company’s board of directors (“Board”) determines the fair value of its portfolio investments.
The Company has the intent to hold its loans for the foreseeable future or until maturity or payoff.
Interest on debt investments
is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income is determined
using a method that results in a level rate of return on principal amounts outstanding. When a loan becomes 90 days or more
past due, or if the Company otherwise does not expect to receive interest and principal repayments, the loan is placed on non-accrual
status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status
are treated as reductions of principal until the principal is repaid. There were no loans on non-accrual status as of September
30, 2012 and December 31, 2011.
The Company receives
a variety of fees from borrowers in the ordinary course of conducting its business, including advisory fees, commitment fees, amendment
fees, non-utilization fees and prepayment fees. In a limited number of cases, the Company may also receive a non-refundable deposit
earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred and,
along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty
loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is
placed on non-accrual status, the amortization of the related fees and unearned income is discontinued until the loan is returned
to accrual status.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Certain loan agreements
also require the borrower to make an end-of-term payment that is accrued into income over the life of the loan to the extent such
amounts are expected to be collected. The Company will generally cease accruing the income if there is insufficient value to support
the accrual or the Company does not expect the borrower to be able to pay all principal and interest due.
In connection with
substantially all lending arrangements, the Company receives warrants to purchase shares of stock from the borrower. The warrants
are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered
loan fees and are also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income
over the contractual life of the related loan in accordance with the Company’s income recognition policy. Subsequent to loan
origination, the warrants are also measured at fair value using the Black-Scholes valuation model. Any adjustment to fair value
is recorded through earnings as net unrealized gain or loss on investments. Gains from the disposition of the warrants or stock
acquired from the exercise of warrants are recognized as realized gains on investments.
Debt Issuance Costs
Debt issuance costs
are fees and other direct incremental costs incurred by the Company in obtaining debt financing from its lenders and issuing debt
securities. Debt issuance costs are recognized as assets and amortized as interest expense over the term of the related borrowings.
The unamortized balance of debt issuance costs as of September 30, 2012 and December 31, 2011, included in other assets, was
$3.8 million and $1.1 million, respectively. The accumulated amortization balances as of September 30, 2012 and December 31, 2011
were $0.4 and $0.1 million, respectively. The amortization expense for the nine months ended September 30, 2012 and 2011 relating
to debt issuance costs was $0.3 million and $0.2 million, respectively.
Income Taxes
The Company elected
to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable
to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification
requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code,
for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders,
which will generally relieve the Company from U.S. federal income taxes.
Depending on the level
of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend
distributions into the next tax year and pay a 4% 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 three and nine months ended
September 30, 2012 and 2011, no amount was recorded for U.S. federal excise tax.
The Company evaluates
tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold,
or uncertain tax positions, would be recorded as a tax expense in the current year. It is the Company’s policy to recognize
accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions
at September 30, 2012 and December 31, 2011. The 2011, 2010 and 2009 tax years remain subject to examination by U.S. federal
and state tax authorities.
Dividends
Dividends and distributions
to common stockholders are recorded on the declaration date. The amount to be paid out as a dividend is determined by the Board.
Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains
for investment.
The Company has adopted
a dividend reinvestment plan that provides for reinvestment of cash distributions and other distributions on behalf of its stockholders,
unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares, a cash dividend, then
stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically
reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company may use
newly issued shares to implement the plan (especially if the Company’s shares are trading at a premium to net asset value),
or the Company may purchase shares in the open market in connection with the obligations under the plan.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Interest Rate Swaps and Hedging Activities
The Company entered
into interest rate swap agreements to manage interest rate risk. The Company does not hold or issue interest rate swap agreements
or other derivative financial instruments for speculative purposes.
The interest rate
swaps are recorded at fair value with changes in fair value reflected in net unrealized appreciation or depreciation of investments
during the reporting period. The Company records the accrual of periodic interest settlements of interest rate swap agreements
in net unrealized appreciation or depreciation of investments and subsequently records the amount as a net realized gain or loss
on investments on the interest settlement date. Cash payments received or paid for the termination of an interest rate swap agreement
would be recorded as a realized gain or loss upon termination in the consolidated statements of operations.
Transfers of Financial Assets
Transfers of financial
assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the transferor
does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates
the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return
specific assets, other than through a cleanup call.
Note 3. Related Party Transactions
Investment Management Agreement
On October 28,
2010, the Company entered into the Investment Management Agreement with the Advisor, under which the Advisor manages the day-to-day
operations of, and provides investment advisory services to, the Company. Under the terms of the Investment Management Agreement,
the Advisor determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the
investment portfolio and the manner of implementing such changes; identifies, evaluates and negotiates the structure of the investments
the Company makes (including performing due diligence on the Company’s prospective portfolio companies); and closes, monitors
and administers the investments the Company makes, including the exercise of any voting or consent rights.
The Advisor’s
services under the Investment Management Agreement are not exclusive to the Company, and the Advisor is free to furnish similar
services to other entities so long as its services to the Company are not impaired. The Advisor is a registered investment advisor
with the SEC. The Advisor receives fees for providing services, consisting of two components, a base management fee and an incentive
fee.
The base management
fee under the Investment Management Agreement is calculated at an annual rate of 2.00% of the Company’s gross assets, payable
monthly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets
acquired with the proceeds of leverage. The accrued management fee as of September 30, 2012 and December 31, 2011 was $0.4
million and $0.3 million, respectively. The base management fee expense for both the three months ended September 30, 2012 and
2011 was $1.1 million. The base management fee expense for the nine months ended September 30, 2012 and 2011 was $3.0 million and
$3.2 million, respectively.
The incentive fee
has two parts, as follows:
The first
part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the
immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend
income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment,
origination, structuring, diligence and consulting fees or other fees received from portfolio companies) accrued during the calendar
quarter, minus operating expenses for the quarter (including the base management fee, expenses payable under the administration
agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income
that we have not yet received in cash. The incentive fee with respect to the pre-incentive fee net investment income is 20.00%
of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds
a 1.75% (which is 7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar
quarter. Under this provision, in any calendar quarter, the Advisor receives no incentive fee until the net investment income equals
the hurdle rate of 1.75%, but then receives, as a “catch-up,” 100.00% of the pre-incentive fee net investment income
with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less
than 2.1875%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.1875% in any calendar
quarter, the Advisor will receive 20.00% of the pre-incentive fee net investment income as if a hurdle rate did not apply.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Pre-incentive
fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation
or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter
in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the
quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that
quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of
the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 2.00% base management
fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances
or repurchases during the current quarter.
The second
part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the
Investment Management Agreement, as of the termination date), and equals 20.00% of the Company’s aggregate realized capital
gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed
net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts
paid in respect of the capital gain incentive fee.
The performance based
incentive fee expense was approximately $0.7 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively.
The performance based incentive fee expense was approximately $2.0 million and $2.7 million for the nine months ended September
30, 2012 and 2011, respectively. The incentive fee payable as of September 30, 2012 and December 31, 2011 was $0.7 million
and $1.8 million, respectively. The incentive payable as of September 30, 2012 includes $0.7 million for part one and no accrual
for part two of the incentive fee. The incentive fee payable as of December 31, 2011 included $1.4 million for part one and $0.4
million for part two of the incentive fee.
Administration Agreement
The Company entered
into an Administration Agreement with the Advisor to provide administrative services to the Company. For providing these services,
facilities and personnel, the Company will reimburse the Advisor for the Company’s allocable portion of overhead and other
expenses incurred by the Advisor in performing its obligations under the Administration Agreement, including rent, the fees and
expenses associated with performing compliance functions and the Company’s allocable portion of the costs of compensation
and related expenses of the Company’s chief compliance officer and chief financial officer and their respective staffs. For
both the three months ended September 30, 2012 and 2011, $0.4 million was charged to operations under the Administration Agreement.
For both the nine months ended September 30, 2012 and 2011, $0.9 million was charged to operations under the Administration Agreement.
Note 4. Investments
Investments, all of
which are with portfolio companies in the United States, consisted of the following:
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Money market funds
|
|
$
|
2,366
|
|
|
$
|
2,366
|
|
|
$
|
13,518
|
|
|
$
|
13,518
|
|
|
Non-affiliate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
213,101
|
|
|
$
|
212,405
|
|
|
$
|
176,049
|
|
|
$
|
173,286
|
|
|
Warrants
|
|
|
4,936
|
|
|
|
5,827
|
|
|
|
3,891
|
|
|
|
4,098
|
|
|
Other Investments
|
|
|
4,939
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity
|
|
|
709
|
|
|
|
677
|
|
|
|
711
|
|
|
|
629
|
|
|
Total non-affiliate investments
|
|
$
|
223,685
|
|
|
$
|
220,909
|
|
|
$
|
180,651
|
|
|
$
|
178,013
|
|
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
The following table
shows the Company’s portfolio investments by industry sector:
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Life Science
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology
|
|
$
|
49,891
|
|
|
$
|
50,568
|
|
|
$
|
41,322
|
|
|
$
|
41,127
|
|
|
Medical Device
|
|
|
19,649
|
|
|
|
18,930
|
|
|
|
20,173
|
|
|
|
19,315
|
|
|
Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-Related Technologies
|
|
|
118
|
|
|
|
452
|
|
|
|
1,871
|
|
|
|
2,217
|
|
|
Networking
|
|
|
106
|
|
|
|
855
|
|
|
|
1,043
|
|
|
|
1,749
|
|
|
Software
|
|
|
26,929
|
|
|
|
27,072
|
|
|
|
23,715
|
|
|
|
23,768
|
|
|
Data Storage
|
|
|
4,962
|
|
|
|
2,012
|
|
|
|
5,051
|
|
|
|
3,533
|
|
|
Internet and Media
|
|
|
10,023
|
|
|
|
10,093
|
|
|
|
—
|
|
|
|
—
|
|
|
Communications
|
|
|
572
|
|
|
|
526
|
|
|
|
6,003
|
|
|
|
5,660
|
|
|
Semiconductors
|
|
|
20,057
|
|
|
|
20,044
|
|
|
|
11,979
|
|
|
|
11,967
|
|
|
Power Management
|
|
|
15,856
|
|
|
|
15,856
|
|
|
|
—
|
|
|
|
—
|
|
|
Healthcare Information and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostics
|
|
|
18,787
|
|
|
|
18,808
|
|
|
|
21,640
|
|
|
|
21,881
|
|
|
Other Healthcare Related Services
|
|
|
15,218
|
|
|
|
15,243
|
|
|
|
18,627
|
|
|
|
18,361
|
|
|
Cleantech
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Efficiency
|
|
|
28,584
|
|
|
|
28,121
|
|
|
|
24,351
|
|
|
|
23,980
|
|
|
Waste Recycling
|
|
|
4,281
|
|
|
|
3,662
|
|
|
|
4,876
|
|
|
|
4,455
|
|
|
Alternative Energy
|
|
|
8,652
|
|
|
|
8,667
|
|
|
|
—
|
|
|
|
—
|
|
|
Total non-affiliate investments
|
|
$
|
223,685
|
|
|
$
|
220,909
|
|
|
$
|
180,651
|
|
|
$
|
178,013
|
|
Note 5. Fair Value
The Company uses fair
value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
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. Fair value is best determined based upon quoted market prices. However, in certain
instances, there are no quoted market prices for certain assets or liabilities. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the asset or liability.
Fair value measurements
focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants
at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity
for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In
such instances, determining the price at which willing market participants would transact at the measurement date under current
market conditions depends on the facts and circumstances and requires the use of significant judgment.
The Company’s
fair value measurements are classified into a fair value hierarchy based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. The three categories within the hierarchy are as follows:
Level 1
Quoted prices
in active markets for identical assets and liabilities.
Level 2
Observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets
that are not active and model-based valuation techniques for which all significant inputs are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management
judgment or estimation.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Investments are valued
at fair value as determined in good faith by the Board, based on input of management, the audit committee and independent valuation
firms that have been engaged at the direction of the Board to assist in the valuation of each portfolio investment without a readily
available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied
valuation process. This valuation process is conducted at the end of each fiscal quarter, with approximately 25% (based on fair
value) of the Company’s valuation of portfolio companies without readily available market quotations subject to review by
an independent valuation firm.
Cash and interest receivable:
The
carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring
basis and are categorized as Level 1 within the fair value hierarchy described above.
Money Market Funds:
The carrying amounts are valued at their net asset value as of the close of business on the day of valuation. These financial
instruments are recorded at fair value on a recurring basis and are categorized as Level 2 within the fair value hierarchy described
above as these funds can be redeemed daily.
Debt Investments:
For variable rate debt investments which re-price frequently and have no significant fair value change in credit risk, carrying
values are a reasonable estimate of fair values. The fair value of fixed rate debt investments is estimated by discounting the
expected future cash flows using the year end rates at which similar debt investments would be made to borrowers with similar credit
ratings and for the same remaining maturities. At both September 30, 2012 and December 31, 2011, the discount rates used ranged
from 8% to 25%. Significant increases (decreases) in this unobservable input would result in a significantly lower (higher) fair
value measurement. These assets are recorded at fair value on a recurring basis and are categorized as Level 3 within the
fair value hierarchy described above.
Under certain circumstances
the Company may use an alternative technique to value debt investments that better reflects its fair value, such as the use of
multiple probability weighted cash flow models when the expected future cash flows contain elements of variability.
Warrant Investments
:
The Company values its warrants using the Black-Scholes valuation model incorporating the following material assumptions:
|
|
•
|
Underlying asset value of the issuer is estimated
based on information available, including any information regarding the most recent rounds of borrower funding. Significant increases
(decreases) in this unobservable input would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Volatility, or the amount of uncertainty or risk about
the size of the changes in the warrant price, is based on guideline publicly traded companies within indices similar in nature
to the underlying company issuing the warrant. A total of seven such indices were used. The weighted average volatility assumptions
used for the warrant valuation at September 30, 2012 and December 31, 2011 was 24%. Significant increases (decreases) in
this unobservable input would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
The risk-free interest rates are derived from the
U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates
that correspond closest to the expected remaining life of the warrant. The risk free rates used for the warrant valuations at
September 30, 2012 and December 31, 2011 ranged from 0.17% to 0.62%, and from 0.12% to 0.83%, respectively.
|
|
|
•
|
Other adjustments, including a marketability discount
on private company warrants, are estimated based on management’s judgment about the general industry environment. The marketability
discount used for the warrant valuations at both September 30, 2012 and December 31, 2011 was 20%. Significant increases
(decreases) in this unobservable input would result in a significantly lower (higher) fair value measurement.
|
Under certain circumstances
the Company may use an alternative technique to value warrants that better reflects the warrants fair value, such as an expected
settlement of a warrant in the near term or a model that incorporates a put feature associated with the warrant. The fair value
may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected
proceeds from the put option.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
The fair value of
the Company’s warrants held in publicly traded companies is determined based on inputs that are readily available in public
markets or can be derived from information available in public markets. Therefore, the Company has categorized these warrants as
Level 2 within the fair value hierarchy described above. The fair value of the Company’s warrants held in private companies
is determined using both observable and unobservable inputs and represents management’s best estimate of what market participants
would use in pricing the warrants at the measurement date. Therefore, the Company has categorized these warrants as Level 3 within
the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Equity Investments
:
The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company
adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing.
The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in
a portfolio company’s financial or operational performance. Significant increases (decreases) in this unobservable input
would result in a significantly higher (lower) fair value measurement. The Company has categorized these equity investments as
Level 3 within the fair value hierarchy described above. The fair value of an equity investment in a publicly traded company is
based upon the closing public share price on the date of measurement. Therefore, the Company has categorized these equity investments
as Level 1 within the fair value hierarchy described above. These assets are recorded at fair value on a recurring basis.
Other Investments:
Other investments will be valued based on the facts and circumstances of the underlying agreement. The Company currently values
one contractual agreement using a multiple probability weighted cash flow model as the contractual future cash flows contain elements
of variability. Significant changes in the estimated cash flows and probability weightings would result in a significantly
higher or lower fair value measurement. The Company has categorized this other investment as Level 3 within the fair value hierarchy
described above. These assets are recorded at fair value on a recurring basis.
Borrowings:
The carrying amount of borrowings under the revolving credit facilities and the term loan facility approximate fair value due to
the variable interest rate of these credit facilities and are categorized as Level 2 within the fair value hierarchy described
above. Additionally, the Company considers its creditworthiness in determining the fair value of such borrowings. The fair value
of our fixed rate Senior Notes (See Note 6 below) is based on the closing public share price on the date of measurement and approximates
the carrying value as of September 30, 2012. Therefore, the Company has categorized this borrowing as Level 1 within the fair value
hierarchy described above. These liabilities are not recorded at fair value on a recurring basis.
Off-Balance-Sheet
Instruments:
Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Therefore,
the Company has categorized these instruments as Level 3 within the fair value hierarchy described above. Off-balance-sheet instruments
are not recorded at fair value on a recurring basis.
The following tables
detail the assets and liabilities that are carried at fair value and measured at fair value on a recurring basis as of September
30, 2012 and December 31, 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company
to determine the fair value:
|
|
|
September 30, 2012
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Money market funds
|
|
$
|
2,366
|
|
|
$
|
—
|
|
|
$
|
2,366
|
|
|
$
|
—
|
|
|
Debt investments
|
|
$
|
212,405
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
212,405
|
|
|
Warrant investments
|
|
$
|
5,827
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
|
$
|
4,792
|
|
|
Other investments
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
Equity investments
|
|
$
|
677
|
|
|
$
|
151
|
|
|
$
|
—
|
|
|
$
|
526
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Money market funds
|
|
$
|
13,518
|
|
|
$
|
—
|
|
|
$
|
13,518
|
|
|
$
|
—
|
|
|
Debt investments
|
|
$
|
173,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173,286
|
|
|
Warrant investments
|
|
$
|
4,098
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
4,048
|
|
|
Equity investments
|
|
$
|
629
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
526
|
|
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
The following
tables show a reconciliation of the beginning and ending balances for Level 3 assets for the three months ended September 30,
2012 and 2011:
|
|
|
For the three months ended September 30, 2012
|
|
|
|
|
Debt
|
|
|
Warrant
|
|
|
Equity
|
|
|
Other
|
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Level 3 assets, beginning of period
|
|
$
|
187,932
|
|
|
$
|
4,355
|
|
|
$
|
526
|
|
|
$
|
2,000
|
|
|
$
|
194,813
|
|
|
Purchase of investments
|
|
|
36,464
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,464
|
|
|
Warrants received and classified as Level 3
|
|
|
—
|
|
|
|
397
|
|
|
|
—
|
|
|
|
—
|
|
|
|
397
|
|
|
Principal payments received on investments
|
|
|
(12,066
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,066
|
)
|
|
Unrealized (depreciation) appreciation included in earnings
|
|
|
339
|
|
|
|
40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
379
|
|
|
Other
|
|
|
(264
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(264
|
)
|
|
Level 3 assets, end of period
|
|
$
|
212,405
|
|
|
$
|
4,792
|
|
|
$
|
526
|
|
|
$
|
2,000
|
|
|
$
|
219,723
|
|
During the three months
ended September 30, 2012, there were no transfers between Levels
|
|
|
For the three months ended September 30, 2011
|
|
|
|
|
Debt
|
|
|
Warrant
|
|
|
Equity
|
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Level 3 assets, beginning of period
|
|
$
|
180,110
|
|
|
$
|
4,360
|
|
|
$
|
668
|
|
|
$
|
185,138
|
|
|
Purchase of investments
|
|
|
7,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,000
|
|
|
Warrants received and classified as Level 3
|
|
|
—
|
|
|
|
47
|
|
|
|
—
|
|
|
|
47
|
|
|
Principal payments received on investments
|
|
|
(12,874
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,874
|
)
|
|
Net realized loss on investments
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
(17
|
)
|
|
Unrealized (depreciation) appreciation on investments
|
|
|
(282
|
)
|
|
|
645
|
|
|
|
—
|
|
|
|
363
|
|
|
Other
|
|
|
448
|
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
304
|
|
|
Level 3 assets, end of period
|
|
$
|
174,402
|
|
|
$
|
5,035
|
|
|
$
|
524
|
|
|
$
|
179,961
|
|
The following tables
show a reconciliation of the beginning and ending balances for Level 3 assets for the nine months ended September 30, 2012 and
2011:
|
|
|
For the nine months ended September 30, 2012
|
|
|
|
|
Debt
|
|
|
Warrant
|
|
|
Equity
|
|
|
Other
|
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Level 3 assets, beginning of period
|
|
$
|
173,286
|
|
|
$
|
4,048
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
177,860
|
|
|
Purchase of investments
|
|
|
86,720
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
86,720
|
|
|
Warrants received and classified as Level 3
|
|
|
—
|
|
|
|
937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
937
|
|
|
Principal payments received on investments
|
|
|
(44,186
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,186
|
)
|
|
Unrealized (depreciation) appreciation included in earnings
|
|
|
(872
|
)
|
|
|
85
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(787
|
)
|
|
Transfer out of Level 3
|
|
|
—
|
|
|
|
(278
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(278
|
)
|
|
Transfer from debt to other investments
|
|
|
(2,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
Other
|
|
|
(543
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(543
|
)
|
|
Level 3 assets, end of period
|
|
$
|
212,405
|
|
|
$
|
4,792
|
|
|
$
|
526
|
|
|
$
|
2,000
|
|
|
$
|
219,723
|
|
The Company’s transfers between levels
are recognized at the end of the reporting period. During the nine months ended September 30, 2012, there were no transfers
between Level 1 and Level 2. The transfer out of Level 3 relates to warrants held in two portfolio companies, with a value
of $0.3 million, that were transferred into Level 2 due to the portfolio companies becoming public companies during the nine months
ended September 30, 2012. Because the fair value of the portfolio company warrants held are determined based on inputs that are
readily available in public markets or can be derived from information available in public markets, the Company has categorized
the warrants as Level 2 within the fair value hierarchy described above as of September 30, 2012.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
|
|
|
For the nine months ended September 30, 2011
|
|
|
|
|
Debt
|
|
|
Warrant
|
|
|
Equity
|
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Level 3 assets, beginning of period
|
|
$
|
130,234
|
|
|
$
|
4,249
|
|
|
$
|
142
|
|
|
$
|
134,625
|
|
|
Purchase of investments
|
|
|
78,156
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78,156
|
|
|
Warrants and equity received and classified as Level 3
|
|
|
—
|
|
|
|
1,040
|
|
|
|
482
|
|
|
|
1,522
|
|
|
Principal payments received on investments
|
|
|
(32,574
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,574
|
)
|
|
Proceeds from sale of investments
|
|
|
—
|
|
|
|
(3,971
|
)
|
|
|
—
|
|
|
|
(3,971
|
)
|
|
Net realized gain on investments
|
|
|
—
|
|
|
|
3,938
|
|
|
|
—
|
|
|
|
3,938
|
|
|
Unrealized (depreciation) appreciation on investments
|
|
|
(681
|
)
|
|
|
(221
|
)
|
|
|
44
|
|
|
|
(858
|
)
|
|
Other
|
|
|
(733
|
)
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
(877
|
)
|
|
Level 3 assets, end of period
|
|
$
|
174,402
|
|
|
$
|
5,035
|
|
|
$
|
524
|
|
|
$
|
179,961
|
|
The change in unrealized
appreciation (depreciation) included in the consolidated statement of operations attributable to Level 3 investments still held
at September 30, 2012 includes $0.9 million depreciation on loans and $0.1 million appreciation on warrants.
The Company discloses
fair value information about financial instruments, whether or not recognized in the statement of assets and liabilities, for which
it is practicable to estimate that value. Certain financial instruments are excluded from the disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value amounts
have been measured as of the reporting date, and have not been reevaluated or updated for purposes of these financial statements
subsequent to that date. As such, the fair values of these financial instruments subsequent to the reporting date may be different
than amounts reported.
As of September 30,
2012 and December 31, 2011, the recorded book balances approximated fair value for all of the Company’s financial instruments
that are not recognized at fair value.
Off-balance sheet instruments
The Company assumes
interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result,
the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be
either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent
believed necessary to minimize interest rate risk. Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s
overall interest rate risk.
Note 6. Borrowings
In accordance with
the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that the asset coverage, as defined
in the 1940 Act, is at least 200% after such borrowings. As of September 30, 2012, the asset coverage for borrowed amounts was
300%.
The Company entered
into a revolving credit facility (the “WestLB Facility”) with WestLB, AG, New York Branch (“WestLB”) effective
March 4, 2008. The WestLB Facility had a three year initial revolving term and on March 3, 2011, the revolving term ended.
The outstanding principal balance of the WestLB Facility is amortizing based on loan investment payments received through March 3,
2015. The interest rate is based upon the one-month LIBOR (0.21% as of September 30, 2012 and 0.30% as of December 31, 2011) plus
a spread of 2.50%. The rates at September 30, 2012 and December 31, 2011 were 2.71% and 2.80%, respectively. The average rates
for the three months ended September 30, 2012 and 2011 were 2.79%, and 2.76%, respectively. The average rates for the nine months
ended September 30, 2012 and 2011 were 2.79% and 2.78%, respectively.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
The WestLB Facility
is collateralized by all loans and warrants held by Credit I and permits an advance rate of up to 75% of eligible loans held by
Credit I. The WestLB Facility contains covenants that, among other things, require the Company to maintain a minimum net worth
and to restrict the loans securing the WestLB Facility to certain criteria for qualified loans, and includes portfolio company
concentration limits as defined in the related loan agreement. The average amounts of borrowings were approximately $12.0 million
and $69.5 million for the three months ended September 30, 2012 and 2011, respectively. The average amounts of borrowings were
approximately $23.6 million and $78.1 million for the nine months ended September 30, 2012 and 2011, respectively. At September
30, 2012 and December 31, 2011, the Company had actual borrowings outstanding of approximately $9.6 million and $46.7 million,
respectively, on the WestLB Facility.
The Company entered
into a revolving credit facility (the “Wells Facility”) with Wells Fargo Capital Finance, LLC (“Wells”)
effective July 14, 2011. The Wells Facility has an accordion feature which allows for an increase in the total loan commitment
to $150 million from the current $75 million commitment provided by Wells. The Wells Facility has a three year revolving term followed
by a three year amortization period and matures on July 14, 2017. The interest rate is based upon the one-month LIBOR plus a spread
of 4.00%, with a LIBOR floor of 1.00%. The rate at both September 30, 2012 and 2011 was 5.00%. The average rate for both the three
months ended September 30, 2012 and 2011 was 5.00%. The average rate for the nine months ended September 30, 2012 was 5.00%.
The Wells Facility
is collateralized by all loans and warrants held by Credit II and permits an advance rate of up to 50% of eligible loans held by
Credit II. The Wells Facility contains covenants that, among other things, require the Company to maintain a minimum net worth
and to restrict the loans securing the Wells Facility to certain criteria for qualified loans and includes portfolio company concentration
limits as defined in the related loan agreement. The average amount of borrowings were approximately $9.9 million and $15.1 million
for the three months ended September 30, 2012 and 2011, respectively. The average amount of borrowings were approximately $11.7
million for the nine months ended September 30, 2012. The average rate and average borrowings for the nine months ended September
30, 2011 are not meaningful because the Wells Facility was outstanding for only a short duration during that period. At September
30, 2012 and December 31, 2011, the Company had actual borrowings outstanding of approximately $23.7 million and $17.8 million
on the Wells Facility.
On March 23, 2012,
the Company issued and sold an aggregate principal amount of $30 million of 7.375% senior unsecured notes due in 2019 and on April
18, 2012, pursuant to the underwriters’ 30 day option to purchase additional notes, the Company sold an additional $3 million
of such notes (collectively, the “Senior Notes”). The Senior Notes will mature on March 15, 2019 and may be redeemed
in whole or in part at the Company’s option at any time or from time to time on or after March 15, 2015 at a redemption price
of $25 per security plus accrued and unpaid interest. The Senior Notes bear interest at a rate of 7.375% per year payable quarterly
on March 15, June 15, September 15 and December 15 of each year. The Senior Notes are the Company’s direct unsecured obligations
and rank (i) pari passu with the Company’s future senior unsecured indebtedness; (ii) senior to any of the Company’s
future indebtedness that expressly provides it is subordinated to the Senior Notes; (iii) effectively subordinated to all of the
Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently
grant security) to the extent of the value of the assets securing such indebtedness and (iv) structurally subordinated to all existing
and future indebtedness and other obligations of any of the Company’s subsidiaries. The Senior Notes are listed on the New
York Stock Exchange under the symbol “HTF.”
The Company entered
into a term loan credit facility (the “Fortress Facility”) with Fortress Credit Co LLC effective August 23, 2012. The
Fortress Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict
the loans securing the Fortress Facility to certain criteria for qualified loans and includes portfolio company concentration limits
as defined in the related loan agreement. The Fortress Facility, among other things, has a three-year term subject to two one-year
extensions with a draw period of up to four years. The Fortress Facility requires the payment of an unused line fee of 1.00% annually
beginning October 1, 2012 and has an effective advance rate of approximately 66% against eligible loans. The Fortress Facility
generally bears interest based upon the one-month LIBOR plus a spread of 6.00%, with a LIBOR floor of 1.00%. The rate at September
30, 2012 was 7.00%, and the average rate for the period within the three months ended September 30, 2012, in which the loan was
outstanding, was 7.00%. The average amount of borrowings was approximately $10.0 million for the period within the three months
ended September 30, 2012 in which the loan was outstanding. The average rate and average borrowings for the nine months ended September
30, 2012 is not meaningful because the Fortress Facility was outstanding for only a short duration during that period. At September
30, 2012, the Company had actual borrowings outstanding of approximately $10.0 million on the Fortress Facility.
Note 7. Financial Instruments with Off-Balance Sheet Risk
In the normal course
of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its borrowers.
These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated statements of assets and liabilities. The Company attempts to limit its credit risk
by conducting extensive due diligence and obtaining collateral where appropriate.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
The balance of unfunded
commitments to extend credit was approximately $29.0 million and $22.5 million as of September 30, 2012 and December 31, 2011,
respectively. Commitments to extend credit consist principally of the unused portions of commitments that obligate the Company
to extend credit, such as revolving credit arrangements or similar transactions. Commitments may also include a financial or non-financial
milestone that has to be achieved before the commitment can be drawn. Commitments generally have fixed expiration dates or other
termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Note 8. Concentrations of Credit Risk
The Company’s
loan portfolio consists primarily of loans to development-stage companies at various stages of development in the technology, life
science, healthcare information and services and cleantech industries. Many of these companies may have relatively limited operating
histories and also may experience variation in operating results. Many of these companies conduct business in regulated industries
and could be affected by changes in government regulations. Most of the Company’s borrowers will need additional capital
to satisfy their continuing working capital needs and other requirements and, in many instances, to service the interest and principal
payments on the loans.
The largest loans
may vary from year to year as new loans are recorded and repaid. The Company’s five largest loans represented approximately
25% and 28% of total loans outstanding as of September 30, 2012 and December 31, 2011, respectively. No single loan represents
more than 10% of the total loans as of September 30, 2012 and December 31, 2011. Loan income, consisting of interest and fees,
can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately
23% and 27% of total loan interest and fee income for the three months ended September 30, 2012 and 2011, respectively. Interest
income from the five largest loans accounted for approximately 23% and 25% of total loan interest and fee income for the nine months
ended September 30, 2012 and 2011, respectively.
Note 9: Interest Rate Swaps and Hedging Activities
On October 14,
2008, the Company entered into two interest rate swap agreements (collectively, the “Swap”) with WestLB, fixing the
rate of $10 million at 3.58% and $15 million at 3.20% on the first advances of a like amount of variable rate WestLB
Facility borrowings. The $15 million interest rate swap expired in October 2010 and the $10 million interest rate
swap expired in October 2011. The objective of the Swap was to hedge the risk of changes in cash flows associated with the
future interest payments on the first $25 million of the variable rate WestLB Facility debt with a combined notional amount
of $25 million.
During the nine months
ended September 30, 2011, approximately $245 of net unrealized appreciation, and approximately $255 of net realized losses, from
the Swap were recorded in the statement of operations.
Note 10: Dividends and Distributions
The Company’s
dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration
and distribution activity as of September 30, 2012:
|
Date
|
|
|
Record
|
|
|
Payment
|
|
|
Amount
|
|
|
Cash
|
|
|
Drip Shares
|
|
|
Drip Shares
|
|
|
Declared
|
|
|
Date
|
|
|
Date
|
|
|
Per Share
|
|
|
Distribution
|
|
|
Issued
|
|
|
Values
|
|
|
|
12/15/10
|
|
|
|
12/28/10
|
|
|
|
12/31/10
|
|
|
$
|
0.22
|
|
|
$
|
1,097
|
|
|
|
38,297
|
|
|
$
|
565
|
|
|
|
5/10/11
|
|
|
|
5/19/11
|
|
|
|
5/26/11
|
|
|
$
|
0.33
|
|
|
$
|
2,190
|
|
|
|
20,104
|
|
|
$
|
316
|
|
|
|
8/9/11
|
|
|
|
8/23/11
|
|
|
|
8/30/11
|
|
|
$
|
0.40
|
|
|
$
|
2,836
|
|
|
|
13,193
|
|
|
$
|
209
|
|
|
|
11/8/11
|
|
|
|
11/23/11
|
|
|
|
11/30/11
|
|
|
$
|
0.45
|
|
|
$
|
3,281
|
|
|
|
9,814
|
|
|
$
|
151
|
|
|
|
3/12/12
|
|
|
|
3/23/12
|
|
|
|
3/30/12
|
|
|
$
|
0.45
|
|
|
$
|
3,378
|
|
|
|
3,517
|
|
|
$
|
58
|
|
|
|
5/3/12
|
|
|
|
5/17/12
|
|
|
|
5/31/12
|
|
|
$
|
0.45
|
|
|
$
|
3,402
|
|
|
|
2,299
|
|
|
$
|
37
|
|
|
|
8/7/12
|
|
|
|
8/17/12
|
|
|
|
8/31/12
|
|
|
$
|
0.45
|
|
|
$
|
4,105
|
|
|
|
11,608
|
|
|
$
|
193
|
|
On November 2, 2012, the Company declared
a third quarter dividend of $0.45 per share, payable on November 30, 2012 to stockholders of record on November 16, 2012.
Horizon Technology Finance Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except shares and per
share data)
Note 11: Financial Highlights
The financial highlights
for the Company are as follows:
|
|
|
For the nine months ended
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
17.01
|
|
|
$
|
16.75
|
|
|
Net dilution from issuance of common stock
|
|
|
(0.28
|
)
|
|
|
—
|
|
|
Dividend declared and distributed
|
|
|
(1.35
|
)
|
|
|
(0.73
|
)
|
|
Net investment income
|
|
|
1.06
|
|
|
|
0.95
|
|
|
Realized (loss) gain on investments
|
|
|
(0.01
|
)
|
|
|
0.73
|
|
|
Unrealized depreciation on investments
|
|
|
(0.02
|
)
|
|
|
(0.34
|
)
|
|
Net asset value at end of period
|
|
$
|
16.41
|
|
|
$
|
17.36
|
|
|
Per share market value, end of period
|
|
$
|
16.16
|
|
|
$
|
14.66
|
|
|
Total return based on market value
|
|
|
7.3
|
%
|
|
|
6.6
|
%
|
|
Shares outstanding at end of period
|
|
|
9,562,956
|
|
|
|
7,626,718
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Expenses without incentive fees
|
|
|
8.0
|
%(1)
|
|
|
8.2
|
%(1)
|
|
Incentive fees
|
|
|
2.0
|
%(1)
|
|
|
2.8
|
%(1)
|
|
Total expenses
|
|
|
10.0
|
%(1)
|
|
|
11.0
|
%(1)
|
|
Net investment income with incentive fees
|
|
|
8.4
|
%(1)
|
|
|
10.2
|
%(1)
|
|
Average net assets
|
|
$
|
135,934
|
|
|
$
|
129,786
|
|
|
Portfolio turnover ratio
|
|
|
48.33
|
%
|
|
|
48.06
|
%
|