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Filed pursuant to Rule 497
Registration No. 333-178516

The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement is not an offer to sell securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MARCH 14, 2012

PRELIMINARY PROSPECTUS SUPPLEMENT

(to Prospectus dated February 6, 2012)

 

$25,000,000

Horizon Technology Finance Corporation

    % Senior Notes due 2019

 

 

We are a non-diversified closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We are externally managed by Horizon Technology Finance Management LLC, a registered investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”). Our investment objective is to maximize our investment portfolio’s return by generating current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans to development-stage companies in the technology, life science, healthcare information and services and cleantech industries.

We are offering $25,000,000 in aggregate principal amount of     % senior notes due 2019, (the “Notes”). The Notes will mature on March 15, 2019. We will pay interest on the Notes on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2012. We may redeem the Notes in whole or in part at any time or from time to time on or after March 15, 2015 at the redemption prices set forth under “Specific Terms of the Notes and the Offering—Optional redemption” in this prospectus supplement. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct senior unsecured obligations and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness.

We intend to list the Notes on The New York Stock Exchange (“NYSE”) and we expect trading in the Notes on the NYSE to begin within 30 days of the original issue date. The Notes are expected to trade “flat,” which means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not reflected in the trading price. Currently, there is no public market for the Notes.

 

 

Investing in our securities is highly speculative and involves a high degree of risk, and you could lose your entire investment if any of the risks occur. For more information regarding these risks, please see “Risk Factors” beginning on page S-8 of this prospectus supplement and page 16 of the accompanying prospectus. The individual securities in which we invest will not be rated by any rating agency. If they were, they would be rated as below investment grade or “junk.” Indebtedness of below investment grade quality has predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.

 

 

This prospectus supplement and the accompanying prospectus contains important information you should know before investing in the Notes. Please read it before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission (the “SEC”). This information is available free of charge by contacting us at 312 Farmington Avenue, Farmington, Connecticut 06032, Attention: Investor Relations, or by calling us collect at (860) 676-8654. The SEC also maintains a website at http://www.sec.gov that contains such information.

 

		Per Note				Total
Public offering price				%		$
Sales load (underwriting discounts and commissions)				%		$
Proceeds to us (before expenses)				%		$

In addition, the underwriters may purchase up to an additional $3,750,000 total aggregate principal amount of the Notes at the public offering price, less the sales load payable by us to cover overallotments, if any, within 30 days from the date of this prospectus supplement. If the underwriters exercise this option in full, the total sales load paid by us will be $         and total net proceeds, before expenses, will be $        .

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters are offering the Notes as set forth in “Underwriting.” Delivery of the Notes in book-entry form through The Depository Trust Company (“DTC”) will be made on or about                     , 2012.

Sole Book-running Manager

Stifel Nicolaus Weisel

 

 

Co-Lead Managers

BB&T Capital Markets		Sterne Agee

 

 

Co-Manager

Wunderlich Securities

The date of this prospectus supplement is March     , 2012

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ABOUT THIS PROSPECTUS SUPPLEMENT

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. We are not, and the underwriters are not, making an offer to sell the Notes in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of the date on the front cover of this prospectus supplement or the accompanying prospectus. Our business, financial condition, results of operations, cash flows and prospects may have changed since that date. We will update these documents to reflect material changes only as required by law. We are offering to sell and seeking offers to buy the Notes only in jurisdictions where offers are permitted.

This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the heading, “Available Information” before investing in the Notes.

 

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TABLE OF CONTENTS

Prospectus Supplement

 

		Page
Prospectus Supplement Summary			S-1
The Offering			S-6
Risk Factors			S-8
Cautionary Note Regarding Forward-Looking Statements			S-11
Selected Condensed Consolidated Financial and Other Data			S-13
Use of Proceeds			S-14
Ratio of Earnings to Fixed Charges			S-15
Capitalization			S-16
Management’s Discussion and Analysis of Financial Condition and Results of Operations			S-17
Description of the Notes			S-28
United States Federal Income Tax Consequences			S-37
Underwriting			S-40
Legal Matters			S-43
Independent Registered Public Accounting Firm			S-43
Available Information			S-43
Consolidated Financial Statements			S-44

Prospectus

 

		Page
About this Prospectus			1
Prospectus Summary			2
Offerings			8
Fees and Expenses			13
Selected Consolidated Financial and Other Data			16
Risk Factors			18
Cautionary Note Regarding Forward-Looking Statements			40
Use of Proceeds			41
Price Range of Common Stock and Distributions			41
Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Senior Securities			58
Business			59
Portfolio Companies			69
Management			75
Certain Relationships and Related Transactions			82
Our Advisor			83
Investment Management and Administration Agreements			83
Control Persons and Principal Stockholders			90
Determination of Net Asset Value			91
Dividend Reinvestment Plan			93
Description of Securities That We May Issue			94
Description of Common Stock That We May Issue			95
Description of Preferred Stock That We May Issue			100
Description of Subscription Rights That We May Issue			101
Description of Debt Securities That We May Issue			102
Description of Warrants That We May Issue			103
Shares Eligible for Future Sale			104
Selling Stockholders			105
Regulation			106
Brokerage Allocations and Other Practices			111

 

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		Page
Plan of Distribution			111
Material U.S. Federal Income Tax Considerations			114
Custodian, Transfer Agent, Dividend Paying Agent and Registrar			122
Legal Matters			122
Independent Registered Public Accounting Firm			122
Where You Can Find More Information			123
Index to Consolidated Financial Statements			F-1

 

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RISK FACTORS

Investing in the Notes involves a number of significant risks. Before you invest in the Notes, you should be aware of various risks, including those described below and those set forth in the accompanying prospectus. You should carefully consider these risk factors, together with all of the other information included in this prospectus supplement and the accompanying prospectus, before you decide whether to make an investment in the Notes. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, you may lose all or part of your investment. The risk factors described below, together with those set forth in the accompanying prospectus, are the principal risk factors associated with an investment in the Notes as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred, including senior debt outstanding under our Credit Facilities, or may incur in the future.

The Notes will not be secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have outstanding as of the date of this prospectus supplement including senior debt outstanding under our Credit Facilities, or that they may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. As of December 31, 2011, we had $64.6 million in outstanding indebtedness. Most of this indebtedness is secured by certain of our assets and such indebtedness is therefore effectively senior to the Notes to the extent of the value of such assets.

The Notes will be subordinated structurally to the indebtedness and other liabilities of our subsidiaries including liens on the assets of our subsidiaries securing our Credit Facilities.

The Notes are obligations exclusively of Horizon Technology Finance Corporation and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Our Credit Facilities are obligations of our subsidiaries and are secured by a lien on the assets of our wholly-owned subsidiaries, Horizon Credit I LLC and Horizon Credit II LLC, which hold substantially all of our assets. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors, including trade creditors, and holders of preferred stock, if any, of our subsidiaries will have priority over our claims (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we were recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes will be subordinated structurally to all indebtedness and other liabilities, including trade payables, of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. All of the existing indebtedness of our subsidiaries would be structurally senior to the Notes. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture governing the Notes will contain limited protection for holders of the Notes.

The indenture governing the Notes offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment

 

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in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

•

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18 (a)(1)(A) of the 1940 Act or any successor provisions;

•

pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes;

•

sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

•

enter into transactions with affiliates;

•

create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

•

make investments; or

•

create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture will not require us to purchase the Notes in connection with a change of control or any other event. Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity except as required by the 1940 Act.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Certain of our current debt instruments include more protections for their holders than the indenture and the Notes. See “Risk Factors – If we are unable to comply with covenants or restrictions in our Credit Facilities or make payments when due there under our business could be materially adversely affected” in the accompanying prospectus. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

An active trading market for the Notes may not develop, which could limit the market price of the Notes or your ability to sell them. Moreover, the Notes are not expected to be rated which may subject them to greater price volatility than rated notes and particularly similar securities with an investment grade rating.

The Notes are a new issue of debt securities for which there currently is no trading market. We intend to list the Notes on the NYSE within 30 days of the original issue date. Although we expect the Notes to be listed on the NYSE, we cannot provide any assurances that we will successfully list the Notes, that an active trading market will develop for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, the time remaining to the maturity of the Notes, the outstanding principal amount of debt securities with terms identical to the Notes, the supply of debt securities

 

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trading in the secondary market, if any, the redemption or repayment features, if any, of the Notes, general economic conditions, our financial condition, performance and prospects and other factors. The Notes are not currently expected to be rated which would impact their trading and subject them to greater price volatility. To the extent they are rated and received a non-investment grade rating, their price and trading activity could be negatively impacted. Moreover, if a rating agency assigns the Notes a non-investment grade rating, the Notes may be subject to greater price volatility than securities of similar maturity without such a non-investment grade rating. The underwriters have advised us that they intend to make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion. Accordingly, we cannot assure you that a liquid trading market will develop for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

Our shares of common stock have traded at a discount from net asset value and may continue to do so, which could limit our ability to raise additional equity capital.

Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether shares of our common stock will trade at, above or below net asset value. In addition, in recent periods, the stocks of BDCs as an industry traded below net asset value. When our common stock is trading below its net asset value per share, as is currently the case, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors. We do not have stockholder approval to sell shares of our common stock at a price below our net asset value per share.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to factors previously identified elsewhere in this prospectus supplement and the accompanying prospectus, including the “Risk Factors” section of the accompanying prospectus, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

•

our future operating results, including the performance of our existing loans and warrants;

 

•

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

•

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

•

the relative and absolute investment performance and operations of our Advisor;

 

•

the impact of increased competition;

 

•

the impact of investments we intend to make and future acquisitions and divestitures;

 

•

the unfavorable resolution of legal proceedings;

 

•

our business prospects and the prospects of our portfolio companies;

 

•

the projected performance of other funds managed by our Advisor;

 

•

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

 

•

our regulatory structure and tax status;

 

•

the adequacy of our cash resources and working capital;

 

•

the timing of cash flows, if any, from the operations of our portfolio companies;

 

•

the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;

 

•

the ability of our portfolio companies to achieve their objectives;

 

•

our ability to cause a subsidiary to become a licensed Small Business Investment Company (“SBIC”);

 

•

the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our Advisor;

 

•

our contractual arrangements and relationships with third parties;

 

•

our ability to access capital and any future financings by us;

 

•

the ability of our Advisor to attract and retain highly talented professionals; and

 

•

the impact of changes to tax legislation and, generally, our tax position.

This prospectus supplement, the accompanying prospectus and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “plan,” “potential,” “project,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking statements do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) or Section 21E of the Exchange Act. Actual results could differ materially from those

 

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anticipated in forward-looking statements and future results could differ materially from historical performance. You should understand that, under Sections 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with any offering of securities pursuant to this prospectus supplement, the accompanying prospectus or in periodic reports we file under the Exchange Act.

 

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SELECTED CONDENSED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data of Horizon Technology Finance Corporation as of December 31, 2011, 2010, 2009 and 2008, and for the year ended December 31, 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010 to October 28, 2010, the year ended December 31, 2009, and the period from March 4, 2008 (Inception) to December 31, 2008 is derived from the consolidated financial statements that have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm. For the periods prior to October 29, 2010, the financial data refers to Compass Horizon Funding Company LLC. This selected financial data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

		Post-IPO as a Business Development Company								Pre-IPO Prior to becoming a Business Development Company
(In thousands, except per share data)		Year Ended December 31, 2011				October 29, 2010 to December 31, 2010				January 1, 2010 to October 28, 2010				Year Ended December 31, 2009				March 4, 2008 (Inception) Through December 31, 2008
Statement of Operations Data:
Total investment income		$	24,054			$	3,251			$	14,956			$	15,326			$	7,021
Base management fee			4,192				668				2,019				2,202				1,073
Performance based incentive fee			3,013				414				—				—				—
All other expenses			6,127				810				3,912				4,567				2,958
Net investment income before excise tax			10,722				1,359				9,025				8,557				2,990
Provision for excise tax			(211	)			—				—				—				—
Net investment income			10,511				1,359				9,025				8,557				2,990
Net realized gain on investments			6,316				611				69				138				22
Provision for excise tax			(129	)			—				—				—				—
Net unrealized (depreciation) appreciation on investments			(5,702	)			1,449				1,481				892				(73	)
Credit (provision) for loan losses			—				—				739				(274	)			(1,650	)
Net increase in net assets resulting from operations		$	10,996			$	3,419			$	11,314			$	9,313			$	1,289
Per Share Data:
Net asset value		$	17.01			$	16.75				N/A				N/A				N/A
Net investment income			1.38				0.18				N/A				N/A				N/A
Net realized gain on investments			0.81				0.08				N/A				N/A				N/A
Net change in unrealized (depreciation) appreciation on investments			(0.75	)			0.19				N/A				N/A				N/A
Net increase in net assets resulting from operations			1.44				0.45				N/A				N/A				N/A
Per share dividends declared			1.18				0.22				N/A				N/A				N/A
Dollar amount of dividends declared		$	8,983			$	1,662				N/A				N/A				N/A
Statement of Assets and Liabilities Data at Period End:
Investments, at fair value/book value		$	178,013			$	136,810				N/A			$	111,954			$	92,174
Other assets			19,798				79,395				N/A				12,914				23,041
Total assets			197,811				216,205				N/A				124,868				115,215
Total liabilities			67,927				89,010				N/A				65,375				65,430
Total net assets/members’ capital		$	129,884			$	127,195				N/A			$	59,493			$	49,785
Other data:
Weighted average annualized yield on income producing investments at fair value			14.6	%			14.6	%			N/A				13.9	%			12.7	%
Number of portfolio companies at period end			38				32				32				32				26

 

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USE OF PROCEEDS

We estimate that net proceeds we will receive from the sale of the Notes in this offering will be approximately $24,000,000 (or net proceeds of approximately $27,637,500 if the underwriters fully exercise their overallotment option), after deducting the underwriting discounts and commissions of $750,000 (or approximately $862,500 if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $250,000 (including certain expenses of the underwriters that we will reimburse the underwriters for) payable by us.

We intend to use the net proceeds from the sale of the Notes for investment in portfolio companies in accordance with our investment objective and strategies and for working capital and general corporate purposes. We estimate that it will take up to 6 months for us to substantially invest the net proceeds of any offering made pursuant to this prospectus supplement, depending on the availability of attractive opportunities and market conditions. However, we can offer no assurances that we will be able to achieve this goal. Pending such use, we will invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less from the date of investment. These temporary investments may have lower yields than our other investments and accordingly, may result in lower distributions, if any, during such period. See “Regulation—Temporary Investments” in the accompanying prospectus for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

The amount of net proceeds may be more or less than the amount described in the preliminary prospectus supplement depending on the amount of Notes we sell in the offering, which will be determined at pricing. To the extent that we receive more than the amount described in this preliminary prospectus supplement, we intend to use the net proceeds for investment in portfolio companies in accordance with our investment objective and strategies and for working capital and general corporate purposes. To the extent we receive less, the amount we have available for such purposes will be reduced.

 

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RATIO OF EARNINGS TO FIXED CHARGES

For the years ended December 31, 2011, 2010 and 2009, and the period from March 4, 2008 through December 31, 2008, our ratios of earnings to fixed charges, computed as set forth below, were as follows:

 

		For the Year Ended December 31, 2011				For the Year Ended December 31, 2010				For the Year Ended December 31, 2009				For the Period from March 4, 2008 through December 31, 2008
Earnings to Fixed Charges(1)			5.2				4.6				3.2				1.5

 

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in net assets resulting from operations plus (or minus) income tax expense (benefit) including excise tax expense plus fixed charges. Fixed charges include interest expense, which includes amortization of debt issuance costs.

 

(1)	Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

Excluding the net unrealized gains or losses, the earnings to fixed charges ratio would be 7.4 for the year ended December 31, 2011, 3.9 for the year ended December 31, 2010, 3.0 for the year ended December 31, 2009 and 1.5 for the period from March 4, 2008 through December 31, 2008.

Excluding the net realized and unrealized gains or losses, the earnings to fixed charges ratio would be 5.0 for the year ended December 31, 2011, 3.7 for the year ended December 31, 2010, 3.0 for the year ended December 31, 2009 and 1.5 for the period from March 4, 2008 through December 31, 2008.

 

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CAPITALIZATION

The following table sets forth:

 

•

our actual capitalization as of December 31, 2011; and

 

•

our pro forma capitalization to give effect to the sale of $25,000,000 aggregate principal amount of Notes in this offering based on the public offering price of $25 per Note, after deducting the underwriting discounts and commissions of $750,000 payable by us and estimated offering expenses of approximately $250,000 payable by us.

 

		As of December 31, 2011
		Actual				Pro Forma
		(dollars in thousands)
Cash and Investment in money market funds		$	14,816			$	38,816
Borrowings			64,571				64,571
Senior Notes due 2019			—				25,000
Total Borrowings		$	64,571			$	89,571
Net assets:
Preferred stock, par value $0.001 per share; 1,000,000 shares authorized, no shares issued and outstanding			—				—
Common stock, par value $0.001 per share; 100,000,000 shares authorized, 7,636,532 shares issued and outstanding			8				8
Paid-in capital in excess of par			124,512				124,512
Distributions in excess of net investment income			4,965				4,965
Net unrealized depreciation on investments			(2,659	)			(2,659	)
Net realized gains on investments			3,058				3,058
Total net assets		$	129,884			$	129,884

 

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

In this section, except where the context suggests otherwise, the terms “we,” “us,” “our” and “Horizon Technology Finance” refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this prospectus supplement. For periods prior to October 28, 2010, the consolidated financial statements and related footnotes reflect the performance of our predecessor, Compass Horizon, and its wholly owned subsidiary, Horizon Credit I LLC, both of which were formed in January 2008 and commenced operations in March 2008. Amounts are stated in thousands, except shares and per share data and where otherwise noted.

Overview

We are a specialty finance company that lends to and invests in development-stage companies in the technology, life science, healthcare information and services and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Venture Loans,” to companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Venture Lending.” We also selectively lend to publicly traded companies in our Target Industries.

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

Compass Horizon, our predecessor company, commenced operations in March 2008. We were formed in March 2010 for the purpose of acquiring Compass Horizon and continuing its business as a public entity.

Portfolio Composition and Investment Activity

The following table shows our portfolio by asset class as of December 31, 2011 and 2010:

 

		December 31, 2011												December 31, 2010
		# of Investments				Fair Value				% of Total Portfolio				# of Investments				Fair Value				% of Total Portfolio
Term loans			37			$	172,363				96.8	%			31			$	127,949				93.5	%
Equipment loans			1				923				0.5	%			1				2,285				1.6	%
Total loans			38				173,286				97.3	%			32				130,234				95.1	%
Warrants			47				4,098				2.3	%			43				6,225				4.6	%
Equity			3				629				0.4	%			2				351				0.3	%
Total						$	178,013				100.0	%						$	136,810				100.0	%

 

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Total portfolio investment activity as of and for the years ended December 31, 2011 and 2010 was as follows:

 

		December 31,
		2011				2010
Beginning portfolio		$	136,810			$	113,878
New loan funding			106,350				98,267
Less refinanced balances			(8,677	)			(13,593	)
Net new loan funding			97,673				84,674
Principal and stock payments received on investments			(34,793	)			(33,149	)
Early pay-offs			(16,649	)			(31,709	)
Accretion of loan fees			1,895				1,399
New loan fees			(1,049	)			(836	)
New equity			579				350
Proceeds from sale of investments			(6,985	)			(1,009	)
Net realized gain on investments			6,599				680
Net (depreciation) appreciation on investments			(5,974	)			2,814
Other			(93	)			(282	)
Ending portfolio		$	178,013			$	136,810

We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.

The following table shows our loan portfolio by industry sector as of December 31, 2011 and 2010:

 

		December 31, 2011								December 31, 2010
		Loans at Fair Value				Percentage of Total Portfolio				Loans at Fair Value				Percentage of Total Portfolio
Life Science
Biotechnology		$	39,854				23.0	%		$	30,470				23.4	%
Medical Device			19,281				11.1	%			19,572				15.0	%
Technology
Consumer-related Technologies			1,762				1.0	%			4,460				3.4	%
Networking			923				0.5	%			2,285				1.8	%
Software			23,354				13.5	%			8,745				6.7	%
Data Storage			3,437				2.0	%			7,912				6.1	%
Communications			5,134				3.0	%			7,591				5.9	%
Semiconductors			11,765				6.8	%			—				—
Cleantech
Energy Efficiency			23,790				13.7	%			16,570				12.7	%
Waste Recycling			4,455				2.6	%			2,363				1.8	%
Healthcare Information and Services
Diagnostics			21,347				12.3	%			20,472				15.7	%
Other Healthcare Related Services and Technologies			18,184				10.5	%			9,794				7.5	%
Total		$	173,286				100.0	%		$	130,234				100.0	%

The largest loans may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 28% and 31% of total loans outstanding as of December 31, 2011 and 2010, respectively. No single loan represented more than 10% of our total loans as of December 31, 2011 or 2010.

 

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Loan Portfolio Asset Quality

We use a credit rating system which rates each loan on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 or 1 represents a deteriorating credit quality and increased risk. See “Business” for more detailed descriptions. The following table shows the classification of our loan portfolio by credit rating as of December 31, 2011 and 2010:

 

		December 31, 2011								December 31, 2010
		Loans at Fair Value				Percentage of Loan Portfolio				Loans at Fair Value				Percentage of Loan Portfolio
Credit Rating
4		$	30,108				17.4	%		$	29,054				22.3	%
3			119,753				69.1	%			94,200				72.3	%
2			23,425				13.5	%			6,980				5.4	%
1			—				—				—				—
Total		$	173,286				100.0	%		$	130,234				100.0	%

As of December 31, 2011 and 2010 our loan portfolio had a weighted average credit rating of 3.1 and 3.2, respectively.

Consolidated Results of Operations

The consolidated results of operations set forth below include historical financial information of our predecessor, Compass Horizon, prior to our election to become a BDC and our election to be treated as a RIC. As a BDC and a RIC for U.S. federal income tax purposes, we are also subject to certain constraints on our operations, including limitations imposed by the 1940 Act and the Code. Also, the management fee that we pay to our Advisor under the Investment Management Agreement is determined by reference to a formula that differs materially from the management fee paid by Compass Horizon in prior periods. For these and other reasons, the results of operations described below may not be indicative of the results we report in future periods.

Consolidated operating results for the years ended December 31, 2011, 2010 and 2009:

 

		2011				2010				2009
Total investment income		$	24,054			$	18,207			$	15,326
Total expenses			13,332				7,823				6,769
Net investment income before excise tax			10,722				10,384				8,557
Provision for excise tax			(211	)			—				—
Net investment income			10,511				10,384				8,557
Net realized gains			6,316				680				138
Provision for excise tax			(129	)			—				—
Net unrealized (depreciation) appreciation			(5,702	)			2,930				892
Credit (provision) for loan losses			—				739				(274	)
Net income		$	10,996			$	14,733			$	9,313
Average investments, at fair value		$	164,437			$	124,027			$	109,561
Average debt outstanding		$	78,106			$	77,174			$	70,582

Net income can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net income may not be meaningful.

 

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Investment Income

Investment income increased by $5.8 million, or 32.1%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. For the year ended December 31, 2011, total investment income consisted primarily of $22.9 million in interest income from investments, which included $1.8 million in income from the amortization of discounts and origination fees on investments. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio. Fee income on investments was primarily comprised of a one-time success fee received upon the completion of an acquisition of one of our portfolio companies and from prepayment fees collected from our portfolio companies.

Investment income increased by $2.9 million, or 19.0%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. For the year ended December 31, 2010, total investment income consisted primarily of $17.4 million in interest income from investments, which included $1.4 million in income from the amortization of discounts and origination fees on investments. Interest income on investments and other investment income increased primarily due to the increased average size of the loan portfolio. Fee income was primarily comprised of loan prepayment fees collected from our portfolio companies.

For the years ended December 31, 2011, 2010 and 2009, our dollar-weighted average annualized yield on average loans was approximately 14.6%, 14.6% and 13.9%, respectively.

Investment income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 21%, 22% and 23% of investment income for the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011 and 2010, interest receivable was $3.0 million and $1.9 million, respectively, which represents one month of accrued interest income on substantially all our loans. The increase in 2011 was due to a larger loan portfolio relative to 2010.

Expenses

Total expenses increased by $5.5 million, or 70.4%, to $13.3 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Total expenses increased by $1.1 million, or 15.6%, to $7.8 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009.

Total operating expenses for each period consisted principally of management fees, incentive and administrative fees, interest expense and, to a lesser degree, professional fees and general and administrative expenses. Interest expense, which includes the amortization of debt issuance costs, decreased in 2011 from 2010 primarily due to a lower effective interest rate in 2011. Interest expense remained consistent in 2010 and 2009 primarily from a decreasing LIBOR rate offset by a higher average outstanding debt balances on the WestLB Facility.

Effective with the completion of our initial public offering in October 2010, we pay management and incentive fees under the Investment Management Agreement, which provides a higher management fee base as compared to amounts previously paid by Compass Horizon. Base management fee expense for the year ended December 31, 2011 increased by approximately $1.5 million compared to the year ended December 31, 2010 primarily due to the higher management fee base. Base management fee expense for the year ended December 31, 2010 increased by approximately $0.5 million compared to the year ended December 31, 2009 primarily due to an increase in the average loan portfolio in 2010 from 2009. Incentive fees for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 due to a full twelve months of expense in 2011 compared to only two months in 2010. The incentive fees for the year ended December 31, 2011 consisted of approximately $2.7 million and $0.3 million for part one and part two of the incentive fee, respectively. There were no incentive fees prior to the IPO.

In connection with the Administration Agreement, which commenced upon our conversion to a BDC in 2010, we incurred $1.2 million of administrative fee for the year ended December 31, 2011. The administrative fee increased compared to 2010 due to a full twelve months of expense in 2011 compared to only 2 months in 2010.

 

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Professional fees and general and administrative expenses primarily include legal and audit fees and insurance premiums. These expenses for the year ended December 31, 2011 increased by approximately $1.7 million compared to the year ended December 31, 2010 primarily due to the increased cost of being a public company. These expenses for the year ended December 31, 2010 increased by approximately $0.2 million compared to the year ended December 31, 2009 primarily due to the increased cost of being a public company.

Excise tax was incurred in 2012 as we elected 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. At December 31, 2011, we accrued an excise tax of approximately $0.3 million on approximately $8.5 million of undistributed earnings from operations and capital gains that we intend to distribute in 2012.

Net Realized Gains and Net Unrealized Appreciation and Depreciation

Realized gains or losses on investments are measured by the difference between the net proceeds from the repayment or sale and the cost basis of our investments without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. The net change in unrealized appreciation or depreciation on investments primarily reflects the change in portfolio investment fair values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the year ended December 31, 2011, we recognized realized gains totaling approximately $6.3 million primarily due to the sale of warrants of three portfolio companies. We recognized realized gains of approximately $0.7 million during the year ended December 31, 2010 primarily due to the sale of warrants of two portfolio companies. We recognized realized gains of approximately $0.1 million during the year ended December 31, 2009 primarily due to the sale of warrants of one portfolio company.

For the year ended December 31, 2011, net unrealized depreciation on investments totaled approximately $5.7 million which was primarily due to $4.0 million in reversal of unrealized appreciation on the sale of warrants and $2.7 million of unrealized depreciation on six debt investments partially offset by unrealized appreciation on investments. For the years ended December 31, 2010 and 2009, the year to year increase is primarily due to the fair value appreciation on warrants.

Credit or Provision for Loan Losses

For the period from January 1, 2010 through October 28, 2010 the credit for loan losses was $0.7 million and for the year ended December 31, 2009 the provision for loan losses was $0.3 million. The credit arose from December 31, 2009 through October 28, 2010 primarily due to improved portfolio asset quality during 2010 across all credit ratings within the loan portfolio. The loan portfolio had a weighted average credit rating of 3.1 and 2.9 as of October 28, 2010 and December 31, 2009, respectively. See “Loan Portfolio Asset Quality.” As of October 28, 2010, the date of our election to be treated as a BDC, we no longer record a credit or provision for loan losses. We record each individual loan and investment on a quarterly basis at fair value. Changes in fair value are recorded through our statement of operations.

Liquidity and Capital Resources

As of December 31, 2011 and 2010, we had cash and investments in money market funds of $14.8 million and $76.8 million, respectively. These amounts are available to fund new investments, reduce borrowings under the Credit Facilities, pay operating expenses and pay dividends. Our primary sources of capital have been from our IPO in October 2010, use of our Credit Facilities and from a private placement of $50 million of equity capital in March 2008.

The WestLB Facility had a three year initial revolving term and on March 3, 2011 the revolving term ended. The outstanding principal balance under the WestLB Facility of $46.7 million as of December 31, 2011 is amortizing based on loan investment payments received through March 3, 2015.

 

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As of December 31, 2011, we had available borrowing capacity of approximately $57.2 million under our Wells Facility, subject to existing terms and advance rates. As of December 31, 2011, the outstanding principal balance under the Wells Facility was $17.8 million.

Our operating activities used cash of $4.0 million for the year ended December 31, 2011 and our financing activities used cash of $32.4 million for the same period. Our operating activities used cash primarily for investing in portfolio companies. Such cash was provided primarily from proceeds from our IPO and draws under the Credit Facilities.

Our operating activities used cash of $38.1 million for the year ended December 31, 2010 and our financing activities provided net cash proceeds of $75.0 million for the same period. Our operating activities used cash primarily for investing in portfolio companies. Such cash was provided primarily from proceeds from our IPO and draws under the WestLB Facility.

Our operating activities used cash of $0.1 million for the year ended December 31, 2009 and our financing activities provided net cash proceeds of $0.5 million for the same period. Our operating activities used cash primarily for investing in portfolio companies that was provided primarily from our availability on our WestLB Facility.

Our primary use of available funds is making investments in portfolio companies and cash distributions to holders of our common stock. We expect to opportunistically raise additional equity and debt capital as needed, and subject to market conditions, to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act.

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders all or substantially all of our income except for certain net capital gains. In addition, as a BDC, we generally will be required to meet a coverage ratio of 200%. This requirement will limit the amount that we may borrow.

Current Borrowings

We, through our wholly owned subsidiary, Credit I, entered into the WestLB Facility. The base rate borrowings under the WestLB Facility bear interest at one-month LIBOR (0.30% as of December 31, 2011 and 0.26% as of December 31, 2010) plus 2.50%. The rates were 2.80% and 2.76% as of December 31, 2011 and 2010, respectively. We were able to request advances under the WestLB Facility through March 4, 2011. We may not request new advances and we must repay the outstanding advances under the WestLB Facility as of such date and at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the WestLB Facility, particularly the condition that the principal balance of the WestLB Facility does not exceed seventy-five percent (75%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the WestLB Facility are due and payable on March 4, 2015.

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.

We, through our wholly owned subsidiary, Credit II entered into the Wells Facility on July 14, 2011. The interest rate is based upon the one-month LIBOR plus a spread of 4.00%, with a LIBOR floor of 1.00%. The interest rate was 5.00% as of December 31, 2011.

We may request advances under the Wells Facility through July 14, 2014 (the “Revolving Period”). After the Revolving Period, we may not request new advances and we must repay the outstanding advances under the Wells Facility as of such date, at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Wells Facility. All outstanding advances under the Wells Facility are due and payable on July 14, 2017.

The Wells Facility is collateralized by loans 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

 

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Company to maintain a minimum net worth, to restrict the loans securing the Wells Facility to certain criteria for qualified loans and to comply with portfolio company concentration limits as defined in the related loan agreement.

As of December 31, 2011 and 2010, other assets were $2.0 million and $0.7 million, respectively, which is primarily made up of debt issuance cost and prepaid expenses. The increase in 2011 was due to the debt issuance cost incurred related to the Wells Facility of approximately $1.2 million.

Contractual Obligations and Off-Balance Sheet Arrangements

A summary of our significant contractual payment obligations and off-balance sheet arrangements as of December 31, 2011 are as follows:

 

		Payments due by period
		Total				Less than 1 year				1 – 3 years				3 – 5 years				After 5 years
Borrowings		$	64,571			$	34,019			$	30,552			$	—			$	—
Unfunded commitments			22,500				20,500				2,000				—				—
Total		$	87,071			$	54,519			$	32,552			$	—			$	—

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of December 31, 2011, we had unfunded commitments of approximately $22.5 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

In addition to the Wells Facility and WestLB Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with our Advisor. We have agreed to pay a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. Payments under the Investment Management Agreement are equal to (1) a base management fee equal to a percentage of the value of our average gross assets and (2) a two-part incentive fee. We have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligation under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. See Note 3 to our Consolidated Financial Statements included in this prospectus supplement for additional information regarding our Investment Management Agreement and our Administration Agreement.

Distributions

In order to qualify as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required under the Code to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute at least 98% of our ordinary income and 98.2% of our capital gain net income on an annual basis and any net ordinary income and net capital gains for preceding years that were not distributed during such years and on which we previously paid no U.S. federal income tax to avoid a U.S. federal excise tax. We intend to distribute quarterly dividends to our stockholders as determined by our Board.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a business development company under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.

 

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To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our ordinary income or gains.

We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.

Critical Accounting Policies

The discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our significant accounting policies in the notes to our consolidated financial statements.

We have identified the following items as critical accounting policies.

Valuation of Investments

Investments are recorded at fair value. Our Board determines the fair value of its portfolio investments. Prior to our election to become a BDC, loan investments were stated at current unpaid principal balances adjusted for the allowance for loan losses, unearned income and any unamortized deferred fees or costs.

We apply fair value to substantially all of our investments in accordance with relevant GAAP, which establishes a framework used to measure fair value and requires disclosures for fair value measurements. We have categorized our investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. 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, our 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. 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.

 

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Income Recognition

Interest on loan 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 we otherwise do 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.

We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment fees, non-utilization fees and prepayment fees (collectively, the “Fees”). In a limited number of cases, we 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.

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. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do not expect the borrower to be able to pay all principal and interest due.

In connection with substantially all lending arrangements, we receive 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 our 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 warrants. Gains from the disposition of the warrants or stock acquired from the exercise of warrants are recognized as realized gains on warrants.

Allowance for Loan Losses

Prior to our election to become a BDC, the allowance for loan losses represented management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The estimation of the allowance was based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that had occurred that may affect individual borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. The loan portfolio is comprised of large balance loans that are evaluated individually for impairment and are risk-rated based upon a borrower’s individual situation, current economic conditions, collateral and industry-specific information that management believes is relevant in determining the potential occurrence of a loss event and in measuring impairment. The allowance for loan losses was sensitive to the risk rating assigned to each of the loans and to corresponding qualitative loss factors that we used to estimate the allowance. Those factors were applied to the outstanding loan balances in estimating the allowance for loan losses. If necessary, based on performance factors related to specific loans, specific allowances for loan losses were established for individual impaired loans. Increases or decreases to the allowance for loan losses were charged or credited to current period earnings through the provision (credit) for loan losses. Amounts determined to be uncollectible were charged against the allowance for loan losses, while amounts recovered on previously charged-off loans increased the allowance for loan losses.

A loan was considered impaired when, based on current information and events, it was probable that we were unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis,

 

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taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment was measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan was collateral dependent.

Impaired loans also included loans modified in troubled debt restructurings where concessions had been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Income taxes

We have 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, we are required to meet certain source of income and asset diversification requirements and we must timely distribute to our stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. We, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from U.S. federal income taxes.

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 we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions, we will accrue excise tax, if any, on estimated excess taxable income as taxable income is earned.

We evaluate tax positions taken in the course of preparing our 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 our policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain tax positions at December 31, 2011 and 2010.

Prior to our election to become a BDC, we were a limited liability company treated as a partnership for U.S. federal income tax purposes and, as a result, all items of income and expense were passed through to, and are generally reportable on, the tax returns of the respective members of the limited liability company. Therefore, no federal or state income tax provision has been recorded for the period from January 1, 2010 to October 28, 2010 and the years ended December 31, 2009 and 2008.

Recently Issued Accounting Standards

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 IFRs, (ASU 2011-04). ASU 2011-04 converges the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (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 amendments are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Management is currently evaluating the effect that the provisions of ASU 2011-04 will have on the Company’s financial statements.

Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the loans within our portfolio were mostly at fixed rates and we expect that our loans in the future will also have primarily fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.

 

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Assuming that the statement of assets and liabilities as of December 31, 2011 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than 1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Statement of Assets and Liabilities and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

Our Credit Facilities have a floating interest rate provision based on a LIBOR index which resets daily, and we expect that any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations and we may use them in the future. Such instruments may include swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

Because we currently fund, and will continue to fund, our investments with borrowings, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income.

 

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DESCRIPTION OF THE NOTES

This prospectus supplement sets forth certain terms of the Notes that we are offering pursuant to this prospectus supplement. This description supplements, and to the extent inconsistent therewith, replaces the descriptions of the general terms and provisions contained in “Description of Debt Securities That We May Issue” in the accompanying prospectus.

The Notes will be issued under an indenture to be dated as of the closing date, entered into between us and U.S. Bank National Association, as trustee, as supplemented by the first supplemental indenture to be dated as of the closing date, entered into between us and U.S. Bank National Association, as trustee. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended. As used in this section, all references to “Indenture” mean the indenture as supplemented by the first supplemental indenture, and all references to “we,” “our” and “us” mean Horizon Technology Finance Corporation, a Delaware corporation, exclusive of our subsidiaries, unless we specify otherwise.

Because this section is a summary, it does not describe every aspect of the Notes and the Indenture. We urge you to read the Indenture because it, and not this description, defines your rights as a holder of Notes. For example, in this section, we use capitalized words to signify terms that are specifically defined in the Indenture. Some of the definitions are repeated in this prospectus supplement, but for the rest you will need to read the Indenture. You may obtain a copy of the Indenture from us without charge. See “Where You Can Find More Information” in the accompanying prospectus.

General

The Notes:

 

•

will be issued in an initial principal amount of $25,000,000 ($28,750,000 if the underwriters’ option to purchase Notes to cover overallotments, if any, is exercised in full);

 

•

will mature on March 15, 2019, unless redeemed prior to maturity;

 

•

will be issued in denominations of $25 and integral multiples of $25 in excess thereof;

 

•

will be redeemable in whole or in part at any time or from time to time on and after March 15, 2015, at a redemption price of $25 per Note plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption as described under “—Redemption and Repayment” below;

 

•

are expected to be listed on The New York Stock Exchange within 30 days of the original issue date.

The Notes will be our direct unsecured obligations and will rank:

 

•

pari passu with future senior unsecured indebtedness;

 

•

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; and

 

•

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles or similar facilities, including without limitation amounts outstanding under our Credit Facilities.

Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on the Notes or to make any funds available for payment on the Notes, whether by dividends, loans or other payments. In addition, the payment of dividends and the making of loans and advances to us by our subsidiaries may be subject to statutory, contractual or other restrictions, may depend on the earnings or financial condition of all of the foregoing and are subject to various business considerations. As a result, we may be unable to gain significant, if any, access to the cash flow or assets of our subsidiaries.

The Indenture does not limit the amount of debt (secured and unsecured) that we and our subsidiaries may incur or our ability to pay dividends, sell assets, enter into transactions with affiliates or make investments. In

 

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addition, the Indenture does not contain any provisions that would necessarily protect holders of Notes if we become involved in a highly leveraged transaction, reorganization, merger or other similar transaction that adversely affects us or them.

The Notes will be issued in fully registered form only, without coupons, in minimum denominations of $25 and integral multiples thereof. The Notes will be represented by one or more global notes deposited with or on behalf of The Depository Trust Company (“DTC”), or a nominee thereof. Except as otherwise provided in the Indenture, the Notes will be registered in the name of that depositary or its nominee, and you will not receive certificates for the Notes. We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants.

We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the Investment Company Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. Specifically, we may be precluded from declaring dividends or repurchasing shares of our common stock unless our asset coverage is at least 200%. 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. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Relating to Our Business and Structure—Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital, which may expose us to additional risks” in the prospectus.

Interest Provisions Related to the Notes

Interest on the Notes will accrue at the rate of     % per annum and will be payable quarterly on each March 15, June 15, September 15, and December 15 commencing on June 15, 2012. The initial interest period will be the period from and including the original issue date to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. We will pay interest to those persons who were holders of record of such Notes on the first day of the month during which each interest payment date occurs: each March 1, June 1, September 1 and December 1, commencing June 1, 2012.

Interest on the Notes will accrue from the date of original issuance and will be computed on the basis of a 360-day year comprised of twelve 30-day months. We will not provide a sinking fund for the Notes

Interest payments will be made only on a business day, defined in the Indenture as each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City are authorized or required by law or executive order to close. If any interest payment is due on a non-business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their Notes.

Redemption and Repayment

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after March 15, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of $25 per Note plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.

 

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You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes.

Any exercise of our option to redeem the Notes will be done in compliance with the Investment Company Act of 1940, as amended, and the rules, regulations and interpretations promulgated thereunder (collectively, the “Investment Company Act”), to the extent applicable.

If we redeem only some of the Notes, the Trustee will determine the method for selection of the particular Notes to be redeemed, in accordance with the Investment Company Act to the extent applicable. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

Listing

We intend to list the Notes on the New York Stock Exchange under the symbol “HTF”. We expect trading in the Notes to begin within 30 days of the original issue date.

Trading Characteristics

We expect the Notes to trade at a price that takes into account the value, if any, of accrued and unpaid interest. This means that purchasers will not pay, and sellers will not receive, accrued and unpaid interest on the Notes that is not included in their trading price. Any portion of the trading price of a note that is attributable to accrued and unpaid interest will be treated as a payment of interest for U.S. federal income tax purposes and will not be treated as part of the amount realized for purposes of determining gain or loss on the disposition of the Notes. See “United States Federal Income Tax Consequences.”

Certain Covenants

Reporting

We have agreed to provide to holders of the Notes and the trustee (if at any time when Notes are outstanding we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934 to file any periodic reports with the SEC), our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

Investment Company Act Compliance

We have also agreed that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the Investment Company Act or any successor provisions.

Events of Default

You will have rights if an Event of Default occurs in respect of the Notes and is not cured, as described later in this subsection.

The term “Event of Default” in respect of the Notes means any of the following:

 

•

We do not pay the principal of, or any premium on, the Notes when due, whether at maturity, upon redemption or otherwise.

 

•

We do not pay interest on the Notes when due, and such default is not cured within 30 days.

 

•

We remain in breach of a covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of the Notes.

 

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•

We or any of our subsidiaries do not pay, after the expiration of any applicable grace period, the principal of, or premium, or interest on, when due, indebtedness for money borrowed in the aggregate principal amount then outstanding of $10 million or more, or acceleration of our or our subsidiaries’ indebtedness for money borrowed in such aggregate principal amount or more so that it becomes due and payable before the date on which it would otherwise have become due and payable, if such default is not cured or waived, or such acceleration is not rescinded, within 30 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of the Notes.

 

•

We or any of our subsidiaries fail, within 30 days, to pay, bond or otherwise discharge any final, non-appealable judgments or orders for the payment of money the total uninsured amount of which for us or any of our subsidiaries exceeds $10 million, which are not stayed on appeal.

 

•

We or any of our subsidiaries that is a “significant subsidiary” (as defined in Regulation S-X under the Exchange Act) or any group of our subsidiaries that in the aggregate would constitute a “significant subsidiary” file for bankruptcy, or certain other events of bankruptcy, insolvency or reorganization occur.

 

•

On the last business day of each of twenty-four consecutive calendar months, we have an asset coverage of less than 100%.

The trustee may withhold notice to the holders of the Notes any default, except in the payment of principal, premium or interest, if it considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

If an Event of Default, other than an Event of Default referred to in the second to last bullet point above with respect to us (but including an Event of Default referred to in that bullet point solely with respect to a significant subsidiary, or group of subsidiaries that in the aggregate would constitute a significant subsidiary of ours), has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of Notes may declare the entire principal amount of all the Notes to be due and immediately payable. If an Event of Default referred to in the second to last bullet point above with respect to us (and not solely with respect to a significant subsidiary, or group of subsidiaries that in the aggregate would constitute a significant subsidiary of ours) has occurred, the entire principal amount of all the Notes will automatically become due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes.

The trustee is not required to take any action under the Indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an “indemnity”) (Section 315 of the Trust Indenture Act of 1939). If reasonable indemnity is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

•

You must give your trustee written notice that an Event of Default has occurred and remains uncured.

 

•

The holders of at least 25% in principal amount of all outstanding Notes must make a written request that the trustee take action because of the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of taking that action.

 

•

The trustee must not have taken action for 60 calendar days after receipt of the above notice and offer of indemnity.

 

•

The holders of a majority in principal amount of the Notes must not have given the trustee a direction inconsistent with the above notice during that 60 calendar day period.

 

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However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.

Holders of a majority in principal amount of the Notes may waive any past defaults other than:

 

•

the payment of principal, any premium or interest; or

 

•

in respect of a covenant that cannot be modified or amended without the consent of each holder.

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture, or else specifying any default.

Merger or Consolidation

Under the terms of the Indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not consolidate with or into any other corporation or convey or transfer all or substantially all of our property or assets to any person unless all the following conditions are met:

 

•

Where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for all of our obligations under the Notes and the Indenture.

 

•

Immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing.

 

•

We must deliver certain certificates and documents to the trustee.

Modification or Waiver

There are three types of changes we can make to the Indenture and the Notes.

Changes Requiring Your Approval

First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:

 

•

change the stated maturity of the principal of or interest on the Notes;

 

•

reduce any amounts due on the Notes;

 

•

reduce the amount of principal payable upon acceleration of the maturity of the Notes following a default;

 

•

adversely affect any right of repayment at the holder’s option;

 

•

change the place (except as otherwise described in the prospectus or prospectus supplement) or currency of payment on the Notes;

 

•

impair your right to sue for payment;

 

•

reduce the percentage of holders of Notes whose consent is needed to modify or amend the Indenture;

 

•

reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive certain defaults;

 

•

modify any other aspect of the provisions of the Indenture dealing with supplemental indentures, modification and waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and

 

•

change any obligation we have to pay additional amounts.

 

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Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.

Changes Requiring Majority Approval

Any other change to the Indenture and the Notes would require the following approval:

 

•

If the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes outstanding at such time.

 

•

If the change affects more than one series of debt securities issued under the indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Your Approval.”

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the Indenture or the Notes or request a waiver.

Defeasance

Covenant Defeasance

Under current United States federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the Indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your Notes. In order to achieve covenant defeasance, we must do the following:

 

•

we must irrevocably deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates. No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date of such deposit.

 

•

We must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity.

We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the Investment Company Act and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.

If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

 

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Full Defeasance

If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

•

we must deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes. No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date of such deposit.

 

•

We must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal release from the Notes would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your Notes and you would recognize gain or loss on the Notes at the time of the deposit.

 

•

We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the Investment Company Act and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent.

No service charge will be made for any registration of transfer or any exchange of Notes, but we may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith.

Satisfaction and Discharge

The Indenture will be discharged and will cease to be of further effect with respect to the Notes when either:

 

•

all the Notes that have been authenticated have been delivered to the trustee for cancellation; or

 

•

all the Notes that have not been delivered to the trustee for cancellation:

 

•

have become due and payable,

 

•

will become due and payable at their stated maturity within one year, or

 

•

are to be called for redemption within one year,

and we, in the case of the first, second and third sub-bullets above, have irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts as will be sufficient, without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness (including all principal, premium, if any, and interest) on such Notes delivered to the trustee for cancellation (in the case of notes that have become due and payable on or prior to the date of such deposit) or to the stated maturity or redemption date, as the case may be,

 

•

we have paid or caused to be paid all other sums payable by us under the Indenture with respect to the Notes; and

 

•

we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all conditions precedent provided for in the Indenture relating to the satisfaction and discharge of the Indenture and the Notes have been complied with.

 

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Additional Notes and Additional Series of Notes

We may from time to time, without notice to or the consent of the registered holders of the Notes, create and issue further notes ranking equally and ratably with the Notes in all respects, including having the same CUSIP number, so that such further notes shall be consolidated and form a single series of notes and shall have the same terms as to status or otherwise as the Notes. No additional notes may be issued if an event of default has occurred and is continuing with respect to the Notes. The indenture also allows for the issuance of additional series of debt securities from time to time.

The Trustee Under the Indenture

U.S. Bank National Association will serve as the trustee under the Indenture.

Payment, Paying Agent, Registrar and Transfer Agent

The principal amount of each Note will be payable on the stated maturity date at the office of the Paying Agent, Registrar and Transfer Agent for the Notes or at such other office in New York City as we may designate. The trustee will initially act as Paying Agent, Registrar and Transfer Agent for the Notes.

Governing Law

The Indenture and the Notes will be governed by the laws of the State of New York.

Book-Entry Debt Securities

The Depository Trust Company (“DTC”) will act as securities depository for the Notes. The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for the Notes, in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s Ratings Services’ highest rating: AAA. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can he found at www.dtcc.com and www.dtc.org.

Purchases of debt securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the debt securities on DTC’s records. The ownership interest of each actual purchaser of each security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the debt securities are to be accomplished by entries made on the

 

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books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in debt securities, except in the event that use of the book-entry system for the debt securities is discontinued.

To facilitate subsequent transfers, all debt securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of debt securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the debt securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such debt securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will he governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the debt securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and dividend payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon. DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

 

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following discussion is a general summary of the material United States federal income tax considerations (and, in the case of a non-U.S. holder (as defined below), the material United States federal estate tax consequences) applicable to an investment in the Notes. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. The discussion is based upon the Code, Treasury Regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement and all of which are subject to change, potentially with retroactive effect. You should consult your own tax advisor with respect to tax considerations that pertain to your purchase of the Notes.

This discussion deals only with Notes held as capital assets within the meaning of Section 1221 of the Code and does not purport to deal with persons in special tax situations, such as financial institutions, insurance companies, controlled foreign corporations, passive foreign investment companies and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the Notes as a hedge against currency risks or as a position in a “straddle,” “hedge,” “constructive sale transaction” or “conversion transaction” for tax purposes, entities that are tax-exempt for United States federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for United States federal income tax purposes) and beneficial owners of pass-through entities, or persons whose functional currency is not the U.S. dollar. It also does not deal with beneficial owners of the Notes other than original purchasers of the Notes who acquire the Notes in this offering for a price equal to their original issue price (i.e., the first price at which a substantial amount of the notes is sold other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). If you are considering purchasing the Notes, you should consult your own tax advisor concerning the application of the United States federal tax laws to you in light of your particular situation, as well as any consequences to you of purchasing, owning and disposing of the Notes under the laws of any other taxing jurisdiction.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for United States federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) a trust (a) subject to the control of one or more United States persons and the primary supervision of a court in the United States, or (b) that has a valid election (under applicable Treasury Regulations) to be treated as a United States person, or (iv) an estate the income of which is subject to United States federal income taxation regardless of its source. The term “non-U.S. holder” means a beneficial owner of a Note that is neither a U.S. holder nor a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes). An individual may, subject to exceptions, be deemed to be a resident alien, as opposed to a non-resident alien, by, among other ways, being present in the United States (i) on at least 31 days in the calendar year, and (ii) for an aggregate of at least 183 days during a three-year period ending in the current calendar year, counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year. Resident aliens are subject to United States federal income tax as if they were United States citizens.

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Notes, the United States federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partners of partnerships holding Notes should consult their own tax advisors.

Taxation of Note Holders

Under present law, we are of the opinion that the Notes will constitute indebtedness of us for United States federal income tax purposes, which the below discussion assumes. We intend to treat all payments made with respect to the Notes consistent with this characterization.

 

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Payments or accruals of interest on a Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

Upon the sale, exchange, redemption or retirement of a Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption or retirement (excluding amounts representing accrued and unpaid interest, which are treated as ordinary income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note generally will equal the U.S. holder’s initial investment in the Note. Capital gain or loss generally will be long-term capital gain or loss if the Note was held for more than one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders generally are eligible for reduced rates of taxation. The distinction between capital gain or loss and ordinary income or loss is also important in other contexts; for example, for purposes of the limitations on a U.S. holder’s ability to offset capital losses against ordinary income.

Newly enacted legislation may require certain noncorporate U.S. holders to pay a 3.8% Medicare tax on, among other things, interest on and capital gains from the sale, exchange, redemption or retirement of the Notes. This legislation would apply for taxable years beginning after December 31, 2012. U.S. holders should consult their own tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of the Notes.

Taxation of Non-U.S. Holders. A non-U.S. holder generally will not be subject to United States federal income or withholding taxes on payments of principal or interest on a Note provided that (i) income on the Note is not effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States, (ii) the non-U.S. holder is not a controlled foreign corporation related to the Company through stock ownership, (iii) in the case of interest income, the recipient is not a bank receiving interest described in Section 881(c)(3)(A) of the Code, (iv) the non-U.S. holder does not own (actually or constructively) 10% or more of the total combined voting power of all classes of stock of the Company, and (v) the non-U.S. holder provides a statement on an Internal Revenue Service (IRS) Form W-8BEN (or other applicable form) signed under penalties of perjury that includes its name and address and certifies that it is not a United States person in compliance with applicable requirements, or satisfies documentary evidence requirements for establishing that it is a non-U.S. holder.

A non-U.S. holder that is not exempt from tax under these rules generally will be subject to United States federal income tax withholding on payments of interest on the Notes at a rate of 30% unless (i) the income is effectively connected with the conduct of a United States trade or business, in which case the interest will be subject to United States federal income tax on a net income basis as applicable to U.S. holders generally (unless an applicable income tax treaty provides otherwise), or (ii) an applicable income tax treaty provides for a lower rate of, or exemption from, withholding tax.

In the case of a non-U.S. holder that is a corporation and that receives income that is effectively connected with the conduct of a United States trade or business, such income may also be subject to a branch profits tax (which is generally imposed on a non-U.S. corporation on the actual or deemed repatriation from the United States of earnings and profits attributable to a United States trade or business) at a 30% rate. The branch profits tax may not apply (or may apply at a reduced rate) if the non-U.S. holder is a qualified resident of a country with which the United States has an income tax treaty.

To claim the benefit of an income tax treaty or to claim exemption from withholding because income is effectively connected with a United States trade or business, the non-U.S. holder must timely provide the appropriate, properly executed IRS forms. These forms may be required to be periodically updated. Also, a non-U.S. holder who is claiming the benefits of a treaty may be required to obtain a United States taxpayer identification number and to provide certain documentary evidence issued by foreign governmental authorities to prove residence in the foreign country.

Generally, a non-U.S. holder will not be subject to United States federal income or withholding taxes on any amount that constitutes capital gain upon the sale, exchange, redemption or retirement of a Note, provided the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S.

 

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holder (and, if required by an applicable income tax treaty, is not attributable to a United States “permanent establishment” maintained by the non-U.S. holder). Certain other exceptions may be applicable, and a non-U.S. holder should consult its tax advisor in this regard.

A Note that is held by an individual who, at the time of death, is not a citizen or resident of the United States (as specially defined for United States federal estate tax purposes) generally will not be subject to the United States federal estate tax, unless, at the time of death, (i) such individual directly or indirectly, actually or constructively, owns ten percent or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder or (ii) such individual’s interest in the Notes is effectively connected with the individual’s conduct of a United States trade or business.

Information Reporting and Backup Withholding. A U.S. holder (other than an “exempt recipient,” including a corporation and certain other persons who, when required, demonstrate their exempt status) may be subject to backup withholding at a rate of 28% (which rate currently is scheduled to increase to 31% for taxable years beginning on or after January 1, 2013) on, and to information reporting requirements with respect to, payments of principal or interest on, and proceeds from the sale, exchange, redemption or retirement of, the Notes. In general, if a non-corporate U.S. holder subject to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup withholding requirements, backup withholding at the applicable rate may apply. Non-U.S. holders generally are exempt from information reporting and backup withholding, provided, if necessary, that they demonstrate their qualification for exemption.

You should consult your tax advisor regarding the qualification for an exemption from backup withholding and information reporting and the procedures for obtaining such an exemption, if applicable. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner generally would be allowed as a refund or a credit against such beneficial owner’s United States federal income tax provided the required information is timely furnished to the IRS.

You should consult your own tax advisor with respect to the particular tax consequences to you of an investment in the Notes, including the possible effect of any pending legislation or proposed regulations.

 

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UNDERWRITING

We are offering the Notes described in this prospectus supplement and the accompanying prospectus through a number of underwriters. Stifel, Nicolaus & Company, Incorporated is acting as representative of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has agreed, severally and not jointly to purchase, the aggregate principal amount of Notes listed next to its name in the following table:

 

Underwriters		Principal Amount
Stifel, Nicolaus & Company, Incorporated		$
BB&T Capital Markets, a division of Scott & Stringfellow, LLC
Sterne, Agee & Leach, Inc.
Wunderlich Securities, Inc.
Total		$	25,000,000

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the Notes sold under the underwriting agreement if any of these Notes are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

We have agreed to indemnify the underwriters and their controlling persons against certain liabilities in connection with this offering, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the Notes, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

We expect that delivery of the Notes will be made against payment therefore on or about                     , 2012, which will be the fifth business day following the date of the pricing of the Notes (such settlement being herein referred to as “T+5”). Under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Notes prior to the date of delivery hereunder will be required, by virtue of the fact that the Notes initially will settle in T+5 business days, to specify an alternate settlement arrangement at the time of any such trade to prevent a failed settlement.

Commissions and Discounts

The underwriting fee is equal to the public offering price per Note less the amount paid by the underwriters to us per Note. The underwriting fee is $ per Note. The following table shows the per Note and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional Notes.

 

Per Note

Total

Without Over- Allotment

Without Over- Allotment

With Over- Allotment

Public offering price

%

$

$

Sales load (underwriting discounts and commissions)

%

$

$

Proceeds to us before expenses

%

$

$

The underwriters propose initially to offer the notes to the public at the public offering price set forth on the cover page of this prospectus supplement and to certain dealers at such price less a concession not in excess of     % of the principal amount of the notes. After the initial offering, the public offering price, concession or any other term of the offering may be changed.

 

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We estimate that the total expenses of this offering payable by us, including registration, filing and listing fees, printing fees, legal and accounting expenses and certain expenses of the underwriters that we will reimburse the underwriters for, but excluding the underwriting discounts and commissions, will be approximately $250,000, or approximately $0.25 per Note excluding the overallotment and approximately $0.22 per Note including the overallotment.

New Listing of Notes

The Notes are a new issue of securities with no established trading market. We intend to list the Notes on The New York Stock Exchange. We expect trading in the Notes on The New York Stock Exchange to begin within 30 days after the original issue date. Currently there is no public market for the Notes.

We have been advised by the underwriters that they presently intend to make a market in the Notes after completion of the offering as permitted by applicable laws and regulations. The underwriters are not obligated, however, to make a market in the Notes and any such market-making may be discontinued at any time in the sole discretion of the underwriters without any notice. Accordingly, no assurance can be given as to the liquidity of, or development of a public trading market for, the Notes. If an active public trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected.

Overallotment Option

The underwriters have an option to buy up to an additional $3,750,000 aggregate principal amount of the Notes from us to cover sales of Notes by the underwriters which exceed the amount of Notes specified in the table above. The underwriters have 30 days from the date of this prospectus supplement to exercise this overallotment option. If any Notes are purchased with this overallotment option, the underwriters will purchase Notes in approximately the same proportion as shown in the table above. If any additional Notes are purchased, the underwriters will offer the additional Notes on the same terms as those on which all Notes are being offered.

No Sales of Similar Securities

Subject to certain exceptions, we have agreed not to directly or indirectly, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise transfer or dispose of any debt securities issued or guaranteed by the Company or any securities convertible into or exercisable or exchangeable for debt securities issued or guaranteed by the Company or file any registration statement under the Securities Act with respect to any of the foregoing for a period of 90 days after the date of this prospectus supplement without first obtaining the written consent of Stifel, Nicolaus & Company, Incorporated. This consent may be given at any time without public notice.

Price Stabilizations and Short Positions

In connection with this offering the underwriters may purchase and sell Notes in the open market. These transactions may include overallotment syndicate covering transactions and stabilizing transactions. Overallotment involves sales by the underwriters of Notes in excess of the number of securities required to be purchased by the underwriters in the offering, which creates a syndicate short position. “Covered” short sales are sales of securities made in an amount up to the number of securities represented by the underwriters’ overallotment option. Transactions to close out the covered syndicate short involve either purchases of such securities in the open market after the distribution has been completed or the exercise of the overallotment option. In determining the source of securities to close out the covered syndicate short position, the underwriters may consider the price of securities available for purchase in the open market as compared to the price at which they may purchase securities through the overallotment option. The underwriters may also make “naked” short sales, or sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing securities in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of securities in the open market while the offering is in progress for the purpose of fixing or maintaining the price of the securities.

 

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The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from an underwriter or syndicate member when the underwriters repurchase securities originally sold by that underwriter or syndicate member in order to cover syndicate short positions or make stabilizing purchases.

Any of these activities may have the effect of raising or maintaining the market price of the securities or preventing or retarding a decline in the market price of the securities. As a result, the price of the securities may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE or otherwise. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our securities. In addition, neither we nor any of the underwriters makes any representation that the underwriters will engage in these transactions. If the underwriters commence any of these transactions, they may discontinue them at any time.

In connection with this offering, the underwriters may engage in passive market making transactions in our securities on the NYSE in accordance with Rule 103 of Regulation M under the Exchange Act during a period before the commencement of offers or sales of securities and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.

Additional Underwriter Relationships

Certain of the underwriters and their respective affiliates have from time to time performed and may in the future perform various commercial banking, financial advisory and investment banking services for us and our affiliates for which they have received or will receive customary compensation.

Sales Outside the United States

No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the Notes, or the possession, circulation or distribution of this prospectus supplement or accompanying prospectus or any other material relating to us or the Notes in any jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and none of this prospectus supplement, the accompanying prospectus or any other offering material or advertisements in connection with the Notes may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.

Each of the underwriters may arrange to sell the Notes offered hereby in certain jurisdictions outside the United States, either directly or through affiliates, where it is permitted to do so.

Electronic Delivery

The underwriters may make this prospectus supplement and accompanying prospectus available in an electronic format. The prospectus supplement and accompanying prospectus in electronic format may be made available on a website maintained by any of the underwriters, and the underwriters may distribute such documents electronically. The underwriters may agree with us to allocate a limited number of Notes for sale to their online brokerage customers. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.

We estimate that our share of the total expenses of this offering, excluding underwriting discounts, will be approximately $250,000.

We and our Advisor have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

The principal business address of Stifel, Nicholaus & Company, Incorporated is 501 N. Broadway, St. Louis, Missouri 63102. The principal business address of BB&T Capital Markets, a division of Scott & Stringfellow, LLC, is 901 East Byrd Street, Suite 300, Richmond, Virginia 23219. The principal business address of Sterne, Agee & Leach, Inc. is 800 Shades Creek Parkway, Birmingham, Alabama 35209. The principal business address of Wunderlich Securities, Inc. is 6000 Poplar Ave., Ste. 150, Memphis, Tennessee 38119.

 

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LEGAL MATTERS

Certain legal matters regarding the Notes offered by this prospectus supplement will be passed upon for us by Squire Sanders (US) LLP. Certain legal matters in connection with the Notes offered hereby will be passed upon for the underwriters by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Our consolidated financial statements as of December 31, 2011 and 2010, and for the year ended December 31, 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010 to October 28, 2010, and the year ended December 31, 2009 appearing in this prospectus supplement, the accompanying prospectus and elsewhere in the registration statement have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, which report expresses an unqualified opinion, and are included in reliance upon such report and upon the authority of such firm as experts in auditing and accounting.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement, of which this prospectus supplement forms a part, on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the Notes offered by this prospectus supplement and the accompanying prospectus. The registration statement contains additional information about us and the Notes being offered by this prospectus supplement and the accompanying prospectus.

As a public company, we file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s website at http://www.sec.gov. 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, 100 F Street, N.E., Washington, D.C. 20549.

 

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Horizon Technology Finance Corporation and Subsidiaries

Index to Consolidated Financial Statements

 

		Page
Management’s Report on Internal Control over Financial Reporting			S-45
Report of Independent Registered Public Accounting Firm			S-46
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting			S-47
Consolidated Statements of Assets and Liabilities as of December 31, 2011 and 2010			S-48
Consolidated Statements of Operations for the Year Ended December  31, 2011, the Period from October 29, 2010 to December 31, 2010, the Period from January 1, 2010 to October 28, 2010, and the Year Ended December 31, 2009			S-49
Consolidated Statements of Changes in Net Assets for the Year Ended December  31, 2011, the Period from October 29, 2010 to December 31, 2010, the Period from January 1, 2010 to October 28, 2010 and the Year Ended December 31, 2009			S-50
Consolidated Statements of Cash Flows for the Year Ended December  31, 2011, the Period from October 29, 2010 to December 31, 2010, the Period from January 1, 2010 to October 28, 2010, and the Year Ended December 31, 2009			S-51
Consolidated Schedules of Investments as of December 31, 2011 and 2010			S-52
Notes to the Consolidated Financial Statements			S-60

 

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Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is a process designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions recorded necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The Company’s policies and procedures also provide reasonable assurance that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on the assessment, management believes that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm that audited the financial statements has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, which report appears herein.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Horizon Technology Finance Corporation

We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Horizon Technology Finance Corporation and Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in net assets, and cash flows for the year ended December 31, 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010 to October 28, 2010, and the year ended December 31, 2009. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments as of December 31, 2011 and 2010, by correspondence with borrower; where replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horizon Technology Finance Corporation and Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the year ended December 31, 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010 to October 28, 2010, and the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Horizon Technology Finance Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2012 expressed an unqualified opinion on the effectiveness of Horizon Technology Finance Corporation’s internal control over financial reporting.

/s/ McGladrey & Pullen, LLP

New Haven, Connecticut

March 13, 2012

 

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Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting

To the Board of Directors and Stockholders

Horizon Technology Finance Corporation

We have audited Horizon Technology Finance Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Horizon Technology Finance Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Horizon Technology Finance Corporation and Subsidiaries as of December 31, 2011 and 2010 and for the year ended December 31, 2011, the period from October 29, 2010 to December 31, 2010, the period from January 1, 2010 to October 28, 2010 and the year ended December 31, 2009, and our report dated March 13, 2012 expressed an unqualified opinion.

/s/ McGladrey & Pullen, LLP

New Haven, Connecticut

March 13, 2012

 

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Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Assets and Liabilities

(In thousands, except share data)

 

		December 31,
		2011				2010
Assets
Non-affiliate investments at fair value (cost of $180,651 and $133,494, respectively) (Note 4)		$	178,013			$	136,810
Investment in money market funds			13,518				39,104
Cash			1,298				37,689
Interest receivable			2,985				1,938
Other assets			1,997				664
Total assets		$	197,811			$	216,205
Liabilities
Borrowings (Note 6)		$	64,571			$	87,425
Base management fee payable (Note 3)			330				360
Incentive fee payable (Note 3)			1,766				414
Other accrued expenses			1,260				811
Total liabilities			67,927				89,010
Net assets
Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of December 31, 2011 and 2010			—				—
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 7,636,532 and 7,593,421 shares outstanding as of December 31, 2011 and 2010			8				8
Paid-in capital in excess of par			124,512				123,836
Accumulated undistributed (distributions in excess of) net investment income			4,965				(143	)
Net unrealized (depreciation) appreciation on investments			(2,659	)			3,043
Net realized gains on investments			3,058				451
Total net assets			129,884				127,195
Total liabilities and net assets		$	197,811			$	216,205
Net asset value per common share		$	17.01			$	16.75

 

See Notes to Consolidated Financial Statements

 

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Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

 

		Post-IPO as a Business Development Company								Pre-IPO Prior to becoming a Business Development Company
		Year Ended December 31, 2011				October 29, 2010 to December 31, 2010				January 1, 2010 to October 28, 2010				Year Ended December 31, 2009
Investment income
Interest income on non-affiliate investments		$	22,879			$	2,993			$	14,373			$	14,987
Interest income on money market funds			91				10				60				67
Fee income on non-affiliate investments			1,084				248				523				272
Total investment income			24,054				3,251				14,956				15,326
Expenses
Interest expense			2,681				508				3,622				4,246
Base management fee (Note 3)			4,192				668				2,019				2,202
Performance based incentive fee (Note 3)			3,013				414				—				—
Administrative fee (Note 3)			1,199				88				—				—
Professional fees			1,259				92				112				131
General and administrative			988				122				178				190
Total expenses			13,332				1,892				5,931				6,769
Net investment income before excise tax			10,722				1,359				9,025				8,557
Provision for excise tax (Note 7)			(211	)			—				—				—
Net investment income			10,511				1,359				9,025				8,557
Credit (provision) for loan losses			—				—				739				(274	)
Net realized and unrealized gain on investments
Net realized gain on investments			6,316				611				69				138
Provision for excise tax (Note 7)			(129	)			—				—				—
Net unrealized (depreciation) appreciation on investments			(5,702	)			1,449				1,481				892
Net realized and unrealized gain on investments			485				2,060				1,550				1,030
Net increase in net assets resulting from operations		$	10,996			$	3,419			$	11,314			$	9,313
Net investment income per common share		$	1.38			$	0.18
Change in net assets per common share		$	1.44			$	0.45
Weighted average shares outstanding			7,610,818				7,555,722

See Notes to Consolidated Financial Statements

 

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Horizon Technology Finance Corporation and Subsidiaries

Consolidated Statements of Changes in Net Assets

(In thousands, except share data)

 

		Members’ Capital				Accumulated Other Comprehensive Loss				Common Stock								Paid-In Capital in Excess of Par				Accumulated Undistributed (distributions in excess of) Net Investment Income				Net Unrealized Appreciation (Depreciation) on Investments				Net Realized Gains on Investments				Total Net Assets
										Shares				Amount
Balance at December 31, 2008		$	50,948			$	(1,163	)			—			$	—			$	—			$	—			$	—			$	—			$	49,785
Comprehensive income:
Net income			9,313				—				—				—				—				—				—				—				9,313
Unrealized gain on interest rate swaps							395				—				—				—				—				—				—				395
Total comprehensive income			—				—				—				—				—				—				—				—				9,708
Balance at December 31, 2009			60,261				(768	)			—				—				—				—				—				—				59,493
Comprehensive income:
Net income			11,314				—				—				—				—				—				—				—				11,314
Unrealized gain on interest rate swaps			—				409				—				—				—				—				—				—				409
Total comprehensive income			—				—				—				—				—				—				—				—				11,723
Cash distribution			(18,000	)			—				—				—				—				—				—				—				(18,000	)
Balance at October 28, 2010			53,575				(359	)			—				—				—				—				—				—				53,216
Election to business development company(1)			(53,575	)			359				2,645,124				3				52,456				—				1,594								837
Issuance of common stock, net of offering costs(2)			—				—				4,910,000				5				70,815				—				—				—				70,820
Net increase in net assets resulting from operations			—				—				—				—				—				1,359				1,449				611				3,419
Issuance of common stock as stock dividend			—				—				38,297				—				565				—				—				—				565
Dividends declared			—				—				—				—				—				(1,502	)			—				(160	)			(1,662	)
Balance at December 31, 2010			—				—				7,593,421				8				123,836				(143	)			3,043				451				127,195
Net increase in net assets resulting from operations			—				—				—				—				—				10,511	(3)			(5,702	)			6,187	(3)			10,996
Issuance of common stock as stock dividend			—				—				43,111				—				676				—				—				—				676
Dividends declared			—				—				—				—				—				(5,403	)			—				(3,580	)			(8,983	)
Balance at December 31, 2011		$	—			$	—				7,636,532			$	8			$	124,512			$	4,965			$	(2,659	)		$	3,058			$	129,884

 

(1)

Reclassification from members’ capital to net assets and net unrealized appreciation on investments upon election. Immediately prior to the initial public offering (“IPO”), the members of Compass Horizon Funding Company LLC (“CHF”) exchanged their membership interests for 2,645,124 shares of common stock of the Company and CHF became a wholly owned subsidiary of the Company. Concurrent with the IPO, Compass Horizon Partners, LP, one of CHF’s owners, sold 1,340,000 shares.

(2)

On October 28, 2010, the Company priced its IPO, offering 6,250,000 shares of its common stock at a public offering price of $16.00 per share. Of the 6,250,000 shares offered, 4,910,000 shares were sold by the Company and 1,340,000 shares were sold by Compass Horizon Partners, LP, one of CHF’s owners. Total offering costs were $7,740.

(3)	Net of excise tax.

 

See Notes to Consolidated Financial Statements

 

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Consolidated Statements of Cash Flows

(In thousands)

 

		Post-IPO as a Business Development Company								Pre-IPO Prior to becoming a Business Development Company
		Year Ended December 31, 2011				October 29, 2010 to December 31, 2010				January 1, 2010 to October 28, 2010				Year Ended December 31, 2009
Cash flows from operating activities:
Net increase in net assets resulting from operations		$	10,996			$	3,419			$	11,314			$	9,313
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
(Credit) provision for loan losses			—				—				(739	)			274
Amortization of debt issuance costs			277				200				962				1,123
Net realized gain on investments			(6,599	)			(611	)			(69	)			(138	)
Net unrealized depreciation (appreciation) on investments			5,717				(1,449	)			(1,481	)			(892	)
Purchase of investments			(97,673	)			(19,316	)			(65,357	)			(49,936	)
Principal payments received on investments			51,442				14,273				50,325				31,190
Proceeds from sale of investments			6,623				874				135				142
Stock received in settlement of fee income			(544	)			—				—				—
Changes in assets and liabilities:
Net decrease (increase) in investments in money market funds			25,586				(29,122	)			(895	)			10,542
(Increase) decrease in interest receivable			(1,047	)			675				(1,162	)			(949	)
Decrease in unearned loan income			(790	)			(63	)			(500	)			(618	)
(Increase) decrease in other assets			(40	)			(151	)			(246	)			19
Increase (decrease) in other accrued expenses			707				220				74				(175	)
(Decrease) increase in base management fee payable			(30	)			157				21				22
Increase in incentive fee payable			1,352				414				—				—
Net cash used in operating activities			(4,023	)			(30,480	)			(7,618	)			(83	)
Cash flows from financing activities:
Proceeds from shares sold, net of offering costs			—				70,820				—				—
Dividends and distributions paid			(8,307	)			(1,097	)			(18,000	)			—
Net (decrease) increase in revolving borrowings			(22,854	)			(3,748	)			27,007				493
Debt issuance costs			(1,207	)			—				—				—
Net cash (used in) provided by financing activities			(32,368	)			65,975				9,007				493
Net (decrease) increase in cash			(36,391	)			35,495				1,389				410
Cash:
Beginning of period			37,689				2,194				805				395
End of period		$	1,298			$	37,689			$	2,194			$	805
Supplemental disclosure of cash flow information:
Cash paid for interest		$	2,330			$	393			$	2,655			$	3,096
Supplemental non-cash investing and financing activities:
Warrant investments received & recorded as unearned loan income		$	1,316			$	304			$	1,212			$	876
Receivables resulting from sale of investments		$	361			$	—			$	—			$	—
Stock received in settlement of investments		$	—			$	209			$	—			$	198
Decrease in interest rate swap liability		$	—			$	—			$	(409	)		$	(395	)

See Notes to Consolidated Financial Statements

 

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Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2011

(In thousands)

 

Portfolio Company		Sector		Type of Investment (3)(7)		Interest Rate (4)				Maturity				Principal Amount				Cost of Investments (6)				Fair Value
Debt Investments
Debt Investments—Life Science—45.5%
ACT Biotech Corporation		Biotechnology		Term Loan (1)			13.10	%			12/1/2013			$	913			$	894			$	734
				Term Loan (1)			13.01	%			12/1/2013				913				906				906
				Term Loan (1)			13.01	%			12/1/2013				1,410				1,378				1,378
Ambit Biosciences Corporation		Biotechnology		Term Loan (1)			12.25	%			10/1/2013				4,574				4,530				4,530
Anacor Pharmaceuticals, Inc. (5)		Biotechnology		Term Loan (2)			9.41	%			4/1/2015				3,333				3,240				3,240
				Term Loan (2)			9.67	%			4/1/2015				2,667				2,608				2,608
GenturaDx, Inc.		Biotechnology		Term Loan (2)			11.25	%			4/1/2014				1,824				1,800				1,800
N30 Pharmaceuticals, LLC		Biotechnology		Term Loan (1)			11.25	%			9/1/2014				2,500				2,447				2,447
				Term Loan (2)			11.25	%			7/1/2015				2,500				2,413				2,413
Pharmasset, Inc. (5)		Biotechnology		Term Loan (1)			12.50	%			10/1/2012				1,111				1,107				1,107
Revance Therapeutics, Inc.		Biotechnology		Convertible Note (1)			8.00	%			2/10/2013				62				66				66
Sunesis Pharmaceuticals, Inc.		Biotechnology		Term Loan (2)			8.95	%			10/1/2015				2,000				1,943				1,943
Supernus Pharmaceuticals, Inc.		Biotechnology		Term Loan (2)			11.00	%			8/1/2014				3,000				2,972				2,972
				Term Loan (2)			11.00	%			7/1/2015				7,000				6,902				6,902
Tranzyme, Inc. (5)		Biotechnology		Term Loan (1)			10.75	%			1/1/2014				4,104				4,088				4,088
Xcovery Holding Company, LLC		Biotechnology		Term Loan (2)			12.00	%			10/1/2013				1,444				1,440				1,240
				Term Loan (2)			12.00	%			7/1/2014				1,500				1,480				1,480
OraMetrix, Inc.		Medical Device		Term Loan (1)			11.50	%			4/1/2014				4,340				4,282				4,282
PixelOptics, Inc.		Medical Device		Term Loan (2)			10.75	%			11/1/2014				10,000				9,921				9,921
Tengion, Inc. (5)		Medical Device		Term Loan (2)			11.75	%			1/1/2014				5,000				4,958				4,661
ViOptix, Inc.		Medical Device		Term Loan (1)			13.55	%			11/1/2011				418				417				417
Total Debt Investments—Life Science																			59,792				59,135
Debt Investments— Technology—35.7%
OpenPeak, Inc.		Communications		Term Loan (1)			11.86	%			12/1/2013				5,486				5,431				5,134
Starcite, Inc.		Consumer-related Technologies		Term Loan (1)			12.05	%			9/1/2012				1,225				1,225				1,225
Tagged, Inc.		Consumer-related Technologies		Term Loan (1)			12.78	%			5/1/2012				343				343				343
				Term Loan (1)			11.46	%			8/1/2012				195				194				194
Xtera Communications, Inc.		Semiconductors		Term Loan			11.50	%			12/1/2014				10,000				9,814				9,814
				Term Loan			11.50	%			7/1/2015				2,000				1,951				1,951
Vette Corp.		Data Storage		Term Loan (1)			11.75	%			7/1/2014				5,000				4,937				3,437
IntelePeer, Inc.		Networking		Term Loan (1)			12.43	%			4/1/2012				139				139				139
				Term Loan (1)			12.33	%			6/1/2012				214				214				214
				Term Loan (1)			12.33	%			10/1/2012				573				570				570
Construction Software Technologies, Inc.		Software		Term Loan (2)			11.75	%			12/1/2014				4,000				3,947				3,947
				Term Loan			11.75	%			6/1/2014				2,000				1,972				1,972
Courion Corporation		Software		Term Loan (1)			11.45	%			9/1/2014				7,000				6,904				6,904
Recondo Technology, Inc.		Software		Term Loan (2)			11.50	%			4/1/2015				2,000				1,927				1,927

 

See Notes to Consolidated Financial Statements

 

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Consolidated Schedule of Investments

December 31, 2011

(In thousands)

 

Portfolio Company		Sector		Type of Investment (3)(7)		Interest Rate (4)				Maturity				Principal Amount				Cost of Investments (6)				Fair Value
Seapass Solutions, Inc.		Software		Term Loan (2)			11.75	%			11/1/2014				5,000				4,933				4,933
StreamBase Systems, Inc.		Software		Term Loan (1)			12.51	%			11/1/2013				2,816				2,787				2,787
				Term Loan (1)			12.50	%			6/1/2014				896				884				884
Total Debt Investments— Technology																			48,172				46,375
Debt Investments— Cleantech—21.7%
Cereplast, Inc. (5)		Waste Recycling		Term Loan (1)			12.00	%			4/1/2014				2,356				2,313				2,004
		Waste Recycling		Term Loan (1)			12.00	%			6/1/2014				2,500				2,451				2,451
Aurora Algae, Inc.		Energy Efficiency		Term Loan (2)			10.50	%			5/1/2015				2,500				2,476				2,476
Enphase Energy, Inc.		Energy Efficiency		Term Loan (1)			12.60	%			10/1/2013				5,342				5,286				5,286
				Term Loan			10.75	%			4/1/2015				2,000				1,972				1,972
				Term Loan			10.75	%			4/1/2015				3,000				2,945				2,945
Satcon Technology Corporation (5)		Energy Efficiency		Term Loan (1)			12.58	%			1/1/2014				7,882				7,740				7,740
Tigo Energy, Inc.		Energy Efficiency		Term Loan (1)			11.00	%			8/1/2014				3,500				3,371				3,371
Total Debt Investments— Cleantech																			28,554				28,245
Debt Investments— Healthcare information and services—30.4%
BioScale, Inc.		Diagnostics		Term Loan (1)			12.00	%			8/1/2012				962				960				960
				Term Loan (1)			11.51	%			1/1/2014				5,000				4,953				4,953
Precision Therapeutics, Inc.		Diagnostics		Term Loan			10.25	%			12/1/2014				7,000				6,958				6,958
Radisphere National Radiology Group, Inc.		Diagnostics		Term Loan (1)			12.75	%			1/1/2014				8,546				8,476				8,476
Aperio Technologies, Inc.		Other Healthcare		Term Loan			9.64	%			5/1/2015				5,000				4,937				4,937
Patientkeeper, Inc.		Other Healthcare		Term Loan			10.50	%			12/1/2014				5,500				5,257				5,257
Singulex, Inc.		Other Healthcare		Term Loan (1)			11.00	%			3/1/2014				2,736				2,709				2,709
				Term Loan (1)			11.00	%			3/1/2014				1,824				1,806				1,806
Talyst, Inc.		Other Healthcare		Term Loan (1)			12.10	%			12/1/2013				1,765				1,739				1,739
				Term Loan (1)			12.05	%			12/1/2013				1,764				1,736				1,736
Total Debt Investment— Healthcare information and services																			39,531				39,531
Total Debt Investments																			176,049				173,286
Warrant Investments
Warrants—Life Science—0.9%
ACT Biotech Corporation		Biotechnology		Preferred Stock Warrants (1)			—				—				—				71				27
Ambit Biosciences, Inc.		Biotechnology		Preferred Stock Warrants (1)			—				—				—				143				131
Anacor Pharmaceuticals, Inc. (5)		Biotechnology		Common Stock Warrants (2)			—				—				—				67				42
Anesiva, Inc. (5)		Biotechnology		Common Stock Warrants (1)			—				—				—				18				—
GenturaDx, Inc.		Biotechnology		Preferred Stock Warrants (2)			—				—				—				63				49
N30 Pharmaceuticals, LLC		Biotechnology		Preferred Stock Warrants (1)(2)			—				—				—				122				249
Novalar Pharmaceuticals, Inc.		Biotechnology		Preferred Stock Warrants (1)			—				—				—				69				—

 

See Notes to Consolidated Financial Statements

 

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Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2011

(In thousands)

 

Portfolio Company		Sector		Type of Investment (3)(7)		Interest Rate (4)				Maturity				Principal Amount				Cost of Investments (6)				Fair Value
Revance Therapeutics, Inc.		Biotechnology		Preferred Stock Warrants (1)			—				—				—				224				496
Sunesis Pharmaceuticals, Inc.		Biotechnology		Common Stock Warrants (2)			—				—				—				9				9
Supernus Pharmaceuticals, Inc.		Biotechnology		Preferred Stock Warrants (2)			—				—				—				93				168
Tranzyme, Inc. (5)		Biotechnology		Common Stock Warrants (1)			—				—				—				1				—
EnteroMedics, Inc. (5)		Medical Device		Common Stock Warrants (1)			—				—				—				347				—
OraMetrix, Inc.		Medical Device		Preferred Stock Warrants (1)			—				—				—				78				1
PixelOptics, Inc.		Medical Device		Preferred Stock Warrants (2)			—				—				—				96				34
Tengion, Inc. (5)		Medical Device		Common Stock Warrants (2)			—				—				—				62				—
ViOptix, Inc.		Medical Device		Preferred Stock Warrants (1)			—				—				—				13				—
Total Warrants—Life Science																			1,476				1,206
Warrants—Technology—1.5%
OpenPeak, Inc.		Communications		Preferred Stock Warrants (1)			—				—				—				89				—
Everyday Health, Inc.		Consumer-related Technologies		Preferred Stock Warrants (1)			—				—				—				69				103
SnagAJob.com, Inc.		Consumer-related Technologies		Preferred Stock Warrants (1)			—				—				—				23				269
Tagged, Inc.		Consumer-related Technologies		Preferred Stock Warrants (1)			—				—				—				17				81
Xtera Communications, Inc.		Semiconductors		Preferred Stock Warrants			—				—				—				206				202
Vette Corp.		Data Storage		Preferred Stock Warrants (1)			—				—				—				75				—
XIOtech, Inc.		Data Storage		Preferred Stock Warrants (1)			—				—				—				22				72
Cartera Commerce, Inc.		Internet and media		Preferred Stock Warrants (1)			—				—				—				16				24
Grab Networks, Inc.		Networking		Preferred Stock Warrants (1)			—				—				—				74				—
IntelePeer, Inc.		Networking		Preferred Stock Warrants (1)			—				—				—				39				521
Motion Computing, Inc.		Networking		Preferred Stock Warrants (1)			—				—				—				7				305
Impinj, Inc.		Semi-conductor		Preferred Stock Warrants (1)			—				—				—				7				—
Clarabridge, Inc.		Software		Preferred Stock Warrants (1)			—				—				—				28				20
Construction Software Technologies, Inc.		Software		Preferred Stock Warrants (2)			—				—				—				45				35
Courion Corporation		Software		Preferred Stock Warrants (1)			—				—				—				85				81
DriveCam, Inc.		Software		Preferred Stock Warrants (1)			—				—				—				20				120
Netuitive, Inc.		Software		Preferred Stock Warrants (1)			—				—				—				27				18
Recondo Technology, Inc.		Software		Preferred Stock Warrants (2)			—				—				—				47				38
Seapass Solutions, Inc.		Software		Preferred Stock Warrants (2)			—				—				—				43				34
StreamBase Systems, Inc.		Software		Preferred Stock Warrants (1)			—				—				—				67				68
Total Warrants—Technology																			1,006				1,991
Warrants—Cleantech—0.1%
Cereplast, Inc. (5)		Waste Recycling		Common Stock Warrants (1)			—				—				—				112				—
Enphase Energy, Inc.		Energy Efficiency		Preferred Stock Warrants (1)			—				—				—				175				110
Satcon Technology Corporation (5)		Energy Efficiency		Common Stock Warrants (1)			—				—				—				285				—
Tigo Energy, Inc.		Energy Efficiency		Preferred Stock Warrants (1)			—				—				—				101				80
Total Warrants—Cleantech																			673				190
Warrants—Healthcare information and services—0.5%
BioScale, Inc.		Diagnostics		Preferred Stock Warrants (1)			—				—				—				54				51
Precision Therapeutics, Inc.		Diagnostics		Preferred Stock Warrants			—				—				—				73				158
Radisphere National Radiology Group, Inc.		Diagnostics		Preferred Stock Warrants (1)			—				—				—				167				325

 

See Notes to Consolidated Financial Statements

 

S-54

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Table of Contents

Horizon Technology Finance Corporation and Subsidiaries

Consolidated Schedule of Investments

December 31, 2011

(In thousands)

 

Portfolio Company		Sector		Type of Investment (3)(7)		Interest Rate (4)				Maturity				Principal Amount				Cost of Investments (6)				Fair Value
Aperio Technologies, Inc.		Other Healthcare		Preferred Stock Warrants			—				—				—				34				27
Patientkeeper, Inc.		Other Healthcare		Preferred Stock Warrants			—				—				—				269				44	</