nv2
As filed with
the Securities and Exchange Commission on December 15,
2011
Securities Act
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form N-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Pre-Effective
Amendment
o
Post-Effective Amendment
No.
o
Horizon Technology Finance
Corporation
(Exact name of Registrant as
specified in its charter)
312 Farmington Avenue
Farmington, Connecticut
06032
(Address of Principal Executive
Offices)
(860) 676-8654
(Registrants Telephone
Number, Including Area Code)
Robert D. Pomeroy, Jr.
Chief Executive
Officer
Horizon Technology Finance
Corporation
312 Farmington Avenue
Farmington, Connecticut
06032
(Name and Address of Agent for
Service)
Copies to:
Stephen C.
Mahon, Esq.
Toby D.
Merchant, Esq.
Squire, Sanders &
Dempsey (US) LLP
221 East Fourth Street,
Suite 2900
Cincinnati, Ohio 45202
(513) 361-1200
(513) 361-1201
Facsimile
APPROXIMATE DATE OF PROPOSED
PUBLIC OFFERING:
From time to time after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered
in connection with a dividend reinvestment plan, check the
following
box. þ
It is proposed that this filing will become effective (check the
appropriate box)
o
When declared effective pursuant to section 8(c)
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum
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Proposed Maximum
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Amount Being
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Offering Price Per
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Aggregate Offering
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Amount of
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Title of Securities Being Registered
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Registered
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Unit
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Price(1)
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Registration Fee(7)
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Primary Offering:
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Common Stock, $0.001 par value per share(2)
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Preferred Stock(2)
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Subscription Rights(3)
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Debt Securities(4)
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Warrants(5)
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Units(6)
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Primary Offering Total
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$250,000,000
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$28,650
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Secondary Offering:
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Common Stock, $0.001 par value per share(2)
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1,322,669
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$16.00(8)
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$21,162,704
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$2,426
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Secondary Offering Total
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$2,426
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Total
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$31,076
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(1)
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Estimated pursuant to Rule 457
solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(o) of the rules and regulations under
the Securities Act of 1933, which permits the registration fee
to be calculated on the basis of the maximum offering price of
all the securities listed, the table does not specify by each
class information as to the amount to be registered, proposed
maximum offering price per unit or proposed maximum aggregate
offering price.
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(2)
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Subject to Note 7 below, there
is being registered hereunder an indeterminate amount of common
stock or preferred stock as may be sold, from time to time. This
includes such indeterminate number of shares of common stock as
may, from time to time, be issued upon conversion or exchange of
other securities registered hereunder, to the extent any such
securities are, by their terms, convertible or exchangeable for
common stock.
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(3)
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Subject to Note 7 below, there
is being registered hereunder an indeterminate number of
subscription rights as may be sold from time to time,
representing rights to purchase common stock.
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(4)
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Subject to Note 7 below, there
is being registered hereunder an indeterminate principal amount
of debt securities as may be sold, from time to time. If any
debt securities are issued at an original issue discount, then
the offering price shall be in such greater principal amount as
shall result in an aggregate price to investors not to exceed
$250,000,000.
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(5)
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Subject to Note 7 below, there
is being registered hereunder an indeterminate number of
warrants as may be sold, from time to time, representing rights
to purchase common stock, preferred stock or debt securities.
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(6)
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Subject to Note 7 below, there
is being registered hereunder an indeterminate principal amount
of units. Each unit may consist of a combination of any one or
more of the securities being registered hereunder and may also
include securities issued by the U.S. Treasury.
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(7)
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In no event will the aggregate
offering price of all securities issued from time to time
pursuant to this registration statement exceed $271,162,704.
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(8)
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Pursuant to Rule 457(c) of the
Securities Act of 1933, as amended, the proposed maximum
aggregate offering price and the amount of the registration fee
have been determined on the basis of the high and low market
prices of the Companys common stock reported on the NASDAQ
Global Market on December 12, 2011.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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PRELIMINARY
PROSPECTUS |
Subject to Completion,
dated ,
2011 |
$250,000,000
Horizon Technology Finance
Corporation
Common Stock
Preferred Stock
Subscription Rights
Debt Securities
Warrants
Units
and
1,322,669 Shares of Common
Stock Offered by the Selling Stockholders
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 portfolios 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 may offer, from time to time, in one or more offerings or
series, together or separately, up to $250,000,000 of our common
stock, preferred stock, subscription rights, debt securities,
warrants representing rights to purchase shares of our common
stock, preferred stock or debt securities, or units, which we
refer to, collectively, as the securities. In
addition, certain of our stockholders may offer for resale, from
time to time, up to an aggregate of 1,322,669 shares of
common stock under this prospectus. We will not receive any of
the proceeds from the sale of shares of our common stock by any
selling stockholders.
We and/or
the selling stockholders may sell our securities through
underwriters or dealers,
at-the-market
to or through a market maker into an existing trading market or
otherwise directly to one or more purchasers or through agents
or through a combination of methods of sale. The identities of
such underwriters, dealers, market makers or agents, as the case
may be, will be described in one or more supplements to this
prospectus. The securities may be offered at prices and on terms
to be described in one or more supplements to this prospectus.
In the event we offer common stock or warrants or rights to
acquire such common stock hereunder, the offering price per
share of our common stock less any underwriting commissions or
discounts will not be less than the net asset value per share of
our common stock at the time we make the offering except
(1) in connection with the exercise of certain warrants,
options or rights whose issuance has been approved by our
stockholders at an exercise or conversion price not less than
the market value of our common stock at the date of issuance
(or, if no such market value exists, the net asset value per
share of our common stock as of such date); (2) to the
extent such an offer or sale is approved by a majority of our
stockholders and by our board of directors (our
Board); or (3) under such other circumstances
as may be permitted under the 1940 Act or by the Securities and
Exchange Commission (the SEC).
The shares of our common stock which are offered for resale by
this prospectus are offered for the accounts of one or more of
the selling stockholders named herein, who acquired such shares
as described under Selling Stockholders. We have
agreed to bear specific expenses in connection with the
registration and sale of the common stock being offered by the
selling stockholders.
Our common stock is listed on The NASDAQ Global Market
(NASDAQ) under the symbol HRZN. On
December 13, 2011, the last reported sale price of a share
of our common stock on NASDAQ was $15.89. The net asset value
per share of our common stock at September 30, 2011 (the
last date prior to the date of this prospectus on which we
determined net asset value) was $17.36.
Shares of closed-end investment companies, including BDCs,
frequently trade at a discount to their net asset value. If our
shares trade at a discount to net asset value, it may increase
the risk of loss for purchasers in this public offering. See
Risk Factors Risks Related to Offerings Under This
Prospectus Shares of closed-end investment companies,
including BDCs, frequently trade at a discount to their net
asset value, and we cannot assure you that the market price of
our common stock will not decline following an offering on
page 31 for more information.
This prospectus and any accompanying prospectus supplement
contain important information you should know before investing
in our securities and should be retained for future reference.
We file annual, quarterly and current reports, proxy statements
and other information about us with the SEC. We maintain a
website at www.horizontechnologyfinancecorp.com and
intend to make all of the foregoing information available, free
of charge, on or through our website. You may also obtain such
information by contacting us at 312 Farmington Avenue,
Farmington, Connecticut 06032, or by calling us at
(860) 676-8654.
The SEC maintains a website at www.sec.gov where such
information is available without charge. Information contained
on our website is not incorporated by reference into this
prospectus, and you should not consider information contained on
our website to be part of this prospectus.
Investing in our securities is speculative and involves
numerous risks, 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 14.
Neither the SEC nor any state securities commission has
approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
This prospectus may not be used to consummate sales of
securities unless accompanied by a prospectus supplement.
The date of this prospectus
is ,
2011
You should rely only on the information contained in this
prospectus or any accompanying supplement to this prospectus. We
have not, and the selling stockholders have not, authorized any
other person to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
This prospectus and any accompanying prospectus supplement do
not constitute an offer to sell or a solicitation of any offer
to buy any security other than the registered securities to
which they relate. You should assume that the information in
this prospectus is accurate only as of the date of this
prospectus. Our business, financial condition and prospects may
have changed since that date. We will update this prospectus to
reflect material changes to the information contained herein.
TABLE OF
CONTENTS
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Page
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About this Prospectus
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1
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Prospectus Summary
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2
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Offerings
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7
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Fees and Expenses
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10
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Selected Consolidated Financial and Other Data
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12
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Risk Factors
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14
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Cautionary Note Regarding Forward-Looking Statements
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35
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Use of Proceeds
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36
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Price Range of Common Stock and Distributions
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37
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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39
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Senior Securities
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53
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Business
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54
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Portfolio Companies
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64
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Management
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70
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Certain Relationships and Related Transactions
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78
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Our Advisor
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79
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Investment Management and Administration Agreements
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80
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Control Persons and Principal Stockholders
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87
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Determination of Net Asset Value
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89
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Dividend Reinvestment Plan
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91
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Description of Securities That We May Issue
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93
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Description of Common Stock That We May Issue
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94
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Description of Preferred Stock That We May Issue
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99
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Description of Subscription Rights That We May Issue
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100
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Description of Debt Securities That We May Issue
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101
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Description of Warrants That We May Issue
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102
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Description of Units That We May Issue
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104
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Shares Eligible for Future Sale
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105
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Selling Stockholders
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106
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Regulation
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108
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Brokerage Allocations and Other Practices
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113
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Plan of Distribution
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114
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Material U.S. Federal Income Tax Considerations
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117
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Custodian, Transfer Agent, Dividend Paying Agent and Registrar
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125
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Legal Matters
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125
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Independent Registered Public Accounting Firm
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125
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Where You Can Find More Information
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125
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Index to Consolidated Financial Statements
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F-1
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ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the SEC using the shelf registration
process. Under the shelf registration process, we may offer,
from time to time, up to $250,000,000 of our common stock,
preferred stock, subscription rights, debt securities, warrants
representing rights to purchase shares of our common stock,
preferred stock or debt securities, or units, on terms to be
determined at the time of the offering, and the selling
stockholders may offer for resale up to 1,322,669 shares of
our common stock. This prospectus provides you with a general
description of the securities that we
and/or one
or more of the selling stockholders may offer. Each time we
and/or one
or more of the selling stockholders use this prospectus to offer
securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering.
The prospectus supplement may also add, update or change
information contained in this prospectus. Please carefully read
this prospectus and any accompanying prospectus supplement
together with the additional information described under
Where You Can Find More Information and Risk
Factors before you make an investment decision. During an
offering, we will disclose material amendments to this
prospectus through a post-effective amendment or prospectus
supplement.
1
PROSPECTUS
SUMMARY
This summary highlights some of the information in this
prospectus. It is not complete and may not contain all of the
information that you may want to consider before investing in
our common stock. You should read the entire prospectus and any
prospectus supplement carefully, including Risk
Factors, Selected Consolidated Financial and Other
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements contained elsewhere in this prospectus.
Horizon Technology Finance Corporation, a Delaware
corporation, was formed on March 16, 2010 for the purpose
of acquiring, continuing and expanding the business of its
wholly-owned subsidiary, Compass Horizon Funding Company LLC, a
Delaware limited liability company, which we refer to as
Compass Horizon, raising capital in its initial
public offering, or IPO, and operating as an externally managed
BDC under the 1940 Act. Except where the context suggests
otherwise, the terms we, us,
our and Company refer to Compass Horizon
and its consolidated subsidiary prior to our IPO and to Horizon
Technology Finance Corporation and its consolidated subsidiaries
after the IPO. In addition, we refer to Horizon Technology
Finance Management LLC, a Delaware limited liability company, as
HTFM, our Advisor or our
Administrator.
Our
Company
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
(collectively, 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
(Venture Loans) to companies backed by established
venture capital and private equity firms in our Target
Industries (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. The amount of leverage that we employ will
depend on our assessment of market conditions and other factors
at the time of any proposed borrowing.
We have elected to be treated for federal income tax purposes as
a regulated investment company (RIC), under
Subchapter M of the Internal Revenue Code (the
Code). As a RIC, we generally will not have to pay
corporate-level federal income taxes on any net ordinary income
or capital gains that we distribute to our stockholders if we
meet certain
source-of-income,
distribution, asset diversification and other requirements.
We are externally managed and advised by our Advisor. Our
Advisor manages our
day-to-day
operations and also provides all administrative services
necessary for us to operate.
Our
Advisor
Our investment activities are managed by our Advisor and we
expect to continue to benefit from our Advisors ability to
identify attractive investment opportunities, conduct diligence
on and value prospective investments, negotiate investments and
manage our diversified portfolio of investments. In addition to
the experience gained from the years that they have worked
together both at our Advisor and prior to the formation by our
Advisor of the Company, the members of our investment team have
broad lending backgrounds, with substantial experience at a
variety of commercial finance companies, technology banks and
private debt funds, and have developed a broad network of
contacts within the venture capital and private equity
community. This network of contacts provides a principal source
of investment opportunities.
Our Advisor is led by five senior managers, including its two
co-founders, Robert D. Pomeroy, Jr., our Chief Executive
Officer, and Gerald A. Michaud, our President. The other senior
managers include Christopher M. Mathieu, our Senior Vice
President and Chief Financial Officer, John C. Bombara, our
Senior Vice President, General Counsel and Chief Compliance
Officer, and Daniel S. Devorsetz, our Senior Vice President and
Chief Credit Officer.
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Our
Strategy
Our investment objective is to maximize our investment
portfolios total return by generating current income from
the loans we make and capital appreciation from the warrants we
receive when making such loans. To further implement our
business strategy, our Advisor will continue to employ the
following core strategies:
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Structured Investments in the Venture Capital and Private
Equity Markets. We make loans to
development-stage companies within our Target Industries
typically in the form of secured amortizing loans. The secured
amortizing debt structure provides a lower risk strategy, as
compared to equity investments, to participate in the emerging
technology markets because the debt structures we typically
utilize provide collateral against the downside risk of loss,
provide return of capital in a much shorter timeframe through
current pay interest and amortization of loan principal and have
a senior position in the capital structure to equity in the case
of insolvency, wind down or bankruptcy. Unlike venture capital
and private equity investments, our investment returns and
return of our capital do not require equity investment exits
such as mergers and acquisitions or initial public offerings.
Instead, we receive returns on our loans primarily through
regularly scheduled payments of principal and interest and, if
necessary, liquidation of the collateral supporting the loan.
Only the potential gains from warrants are dependent upon exits.
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Enterprise Value Lending. We and
our Advisor take an enterprise value approach to the loan
structuring and underwriting process. We secure a senior or
subordinated lien position against the enterprise value of a
portfolio company.
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Creative Products with Attractive Risk-Adjusted
Pricing. Each of our existing and prospective
portfolio companies has its own unique funding needs for the
capital provided from the proceeds of our Venture Loans. These
funding needs include, but are not limited to, funds for
additional development runways, funds to hire or retain sales
staff or funds to invest in research and development in order to
reach important technical milestones in advance of raising
additional equity. Our loans include current pay interest,
commitment fees, final payments, pre-payment fees and
non-utilization fees. We believe we have developed pricing
tools, structuring techniques and valuation metrics that satisfy
our portfolio companies requirements while mitigating risk
and maximizing returns on our investments.
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Opportunity for Enhanced Returns. To enhance
our loan portfolio returns, in addition to interest and fees, we
obtain warrants to purchase the equity of our portfolio
companies as additional consideration for making loans. The
warrants we obtain generally include a cashless
exercise provision to allow us to exercise these rights
without requiring us to make any additional cash investment.
Obtaining warrants in our portfolio companies has allowed us to
participate in the equity appreciation of our portfolio
companies, which we expect will enable us to generate higher
returns for our investors.
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Direct Origination. We originate transactions
directly with technology, life science, healthcare information
and services and cleantech companies. These transactions are
referred to our Advisor from a number of sources, including
referrals from, or direct solicitation of, venture capital and
private equity firms, portfolio company management teams, legal
firms, accounting firms, investment banks and other lenders that
represent companies within our Target Industries. Our Advisor
has been the sole or lead originator in substantially all
transactions in which the funds it manages have invested.
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Disciplined and Balanced Underwriting and Portfolio
Management. We use a disciplined underwriting
process that includes obtaining information validation from
multiple sources, extensive knowledge of our Target Industries,
comparable industry valuation metrics and sophisticated
financial analysis related to development-stage companies. Our
Advisors due diligence on investment prospects includes
obtaining and evaluating information on the prospective
portfolio companys technology, market opportunity,
management team, fund raising history, investor support,
valuation considerations, financial condition and projections.
We seek to balance our investment portfolio to reduce the risk
of down market cycles associated with any particular industry or
sector, development-stage or geographic area. Our Advisor
employs a hands on approach to portfolio management
requiring private portfolio companies to provide monthly
financial information and to participate in regular updates on
performance and future plans.
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Use of Leverage. We use leverage to increase
returns on equity through revolving credit facilities provided
by WestLB AG (the WestLB Facility) and Wells Fargo
Capital Finance, LLC (the Wells Facility and
collectively with the WestLB Facility, the Credit
Facilities). See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
additional information about the Credit Facilities.
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Market
Opportunity
We focus our investments primarily in four key industries of the
emerging technology market: technology, life science, healthcare
information and services and cleantech. The technology sectors
we focus on include communications, networking, wireless
communications, data storage, software, cloud computing,
semiconductor, internet and media and consumer-related
technologies. The life science sectors we focus on include
biotechnology, drug delivery, bioinformatics and medical
devices. The healthcare information and services sectors we
focus on include diagnostics, medical record services and
software and other healthcare related services and technologies
that improve efficiency and quality of administered healthcare.
The cleantech sectors we focus on include alternative energy,
water purification, energy efficiency, green building materials
and waste recycling.
We believe that Venture Lending has the potential to achieve
enhanced returns that are attractive notwithstanding the
increased level of risk associated with lending to
development-stage companies. Potential benefits include:
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interest rates that typically exceed rates that would be
available to portfolio companies if they could borrow in
traditional commercial financing transactions;
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the loan support provided by cash proceeds from equity capital
invested by venture capital and private equity firms;
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relatively rapid amortization of loans;
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senior ranking to equity and collateralization of loans to
minimize potential loss of capital; and
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potential equity appreciation through warrants.
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We believe that Venture Lending also provides an attractive
financing source for portfolio companies, their management teams
and their equity capital investors, as it:
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is typically less dilutive to the equity holders than additional
equity financing;
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extends the time period during which a portfolio company can
operate before seeking additional equity capital or pursuing a
sale transaction or other liquidity event; and
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allows portfolio companies to better match cash sources with
uses.
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Competitive
Strengths
We believe that we, together with our Advisor, possess
significant competitive strengths, which include the following:
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Consistently Execute Commitments and Close
Transactions. Our Advisor and its senior
management and investment professionals have an extensive track
record of originating, underwriting and closing Venture Loans.
Our Advisor has directly originated, underwritten and managed
more than 130 Venture Loans with an aggregate original principal
amount over $800 million since it commenced operations in
2004. In our experience, prospective portfolio companies prefer
lenders that have demonstrated their ability to deliver on their
commitments.
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Robust Direct Origination Capabilities. Our
Advisors managing directors each have significant
experience originating Venture Loans in our Target Industries.
This experience has given each managing director a deep
knowledge of our Target Industries and an extensive base of
transaction sources and references. Our Advisors brand
name recognition in our market has resulted in a steady flow of
high quality investment opportunities that are consistent with
the strategic vision and expectations of our Advisors
senior management.
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4
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Highly Experienced and Cohesive Management
Team. Our Advisor has had the same senior
management team of experienced professionals since its
inception. This consistency allows companies, their management
teams and their investors to rely on consistent and predictable
service, loan products and terms and underwriting standards.
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Relationships with Venture Capital and Private Equity
Investors. Our Advisor has developed strong relationships
with venture capital and private equity firms and their
partners. The strength and breadth of our Advisors venture
capital and private equity relationships would take considerable
time and expense to develop.
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Well-Known Brand Name. Our Advisor has
originated Venture Loans to more than 130 companies in our
Target Industries under the Horizon Technology
Finance brand. Each of these companies is backed by one or
more venture capital or private equity firms. We believe that
the Horizon Technology Finance brand, as a
competent, knowledgeable and active participant in the Venture
Lending marketplace, will continue to result in a significant
number of referrals and prospective investment opportunities in
our Target Industries.
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Our
Portfolio
Since our inception and through September 30, 2011, we have
funded 65 portfolio companies and have invested
$337.9 million in loans (including 28 loans that have been
repaid). As of September 30, 2011, our total investment
portfolio consisted of 37 loans which totaled
$174.4 million and our net assets were $132.4 million.
Our existing loans are secured by all or a portion of the
tangible and intangible assets of the applicable portfolio
company. The loans in our loan portfolio generally are not rated
by any rating agency. For the nine months ended
September 30, 2011, our loan portfolio had a
dollar-weighted average annualized yield of approximately 14.6%
(excluding any yield from warrants). As of September 30,
2011, our loan portfolio had a dollar-weighted average term of
approximately 38 months from inception and a
dollar-weighted average remaining term of approximately
28 months. In addition, we held warrants to purchase either
common stock or preferred stock in 48 portfolio companies. As of
September 30, 2011, our loans had an original committed
principal amount of between $1 million and
$12 million, repayment terms of between 30 and
48 months and bore current pay interest at annual interest
rates of between 10% and 14%.
Risk
Factors
The values of our assets, as well as the market price of our
shares, fluctuate. Our investments may be risky, and you may
lose all or part of your investment in us. Investing in us
involves other risks, including the following:
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We have a limited operating history and may not be able to
achieve our investment objective or generate sufficient revenue
to make or sustain distributions to our stockholders and your
investment in us could decline substantially;
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We may not replicate the historical results achieved by us or
other entities managed or sponsored by members of our Advisor or
its affiliates;
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We and our Advisor have limited experience operating under the
constraints imposed on a BDC or managing an investment company,
which may affect our ability to manage our business and impair
your ability to assess our prospects;
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We are dependent upon key personnel of our Advisor and our
Advisors ability to hire and retain qualified personnel;
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We operate in a highly competitive market for investment
opportunities, and if we are not able to compete effectively,
our business, results of operations and financial condition may
be adversely affected and the value of your investment in us
could decline;
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If we are unable to satisfy the requirements under the Code for
qualification as a RIC, we will be subject to corporate-level
federal income tax;
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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;
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5
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We have not yet identified many of the potential investment
opportunities for our portfolio that we will invest in with the
proceeds of an offering under this registration statement;
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If our investments do not meet our performance expectations, you
may not receive distributions;
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Most of our portfolio companies will need additional capital,
which may not be readily available;
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Economic recessions or downturns could adversely affect our
business and that of our portfolio companies which may have an
adverse effect on our business, results of operations and
financial condition;
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Our investment strategy focuses on investments in
development-stage companies in our Target Industries, which are
subject to many risks, including volatility, intense
competition, shortened product life cycles and periodic
downturns, and would be typically rated below investment
grade;
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We cannot assure you that the market price of shares of our
common stock will not decline following an offering;
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Subsequent sales in the public market of substantial amounts of
our common stock may have an adverse effect on the market price
of our common stock;
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Our common stock price may be volatile and may decrease
substantially;
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We may allocate the net proceeds from an offering in ways with
which you may not agree;
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Your interest in us may be diluted if you do not fully exercise
subscription rights in any rights offering. In addition, if the
subscription price is less than our net asset value per share,
then you will experience an immediate dilution of the aggregate
net asset value of your shares;
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Investors in offerings of our common stock may incur immediate
dilution upon the closing of such offering;
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If we sell common stock at a discount to our net asset value per
share, stockholders who do not participate in such sale will
experience immediate dilution in an amount that may be material;
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There is a risk that investors in our equity securities may not
receive dividends or that our dividends may not grow over time
and that investors in debt securities that we may issue may not
receive all of the interest income to which they are entitled;
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Shares of closed-end investment companies, including BDCs,
frequently trade at a discount to their net asset value, and we
cannot assure you that the market price of our common stock will
not decline following an offering;
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Stockholders will experience dilution in their ownership
percentage if they do not participate in our dividend
reinvestment plan;
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The trading market or market value of publicly issued debt
securities that we may issue may fluctuate;
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Terms relating to redemption may materially adversely affect
return on any debt securities that we may issue; and
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Our credit ratings may not reflect all risks of an investment in
any debt securities that we may issue.
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See Risk Factors beginning on page 14 and the
other information included in this prospectus for a more
detailed discussion of the material risks you should carefully
consider before deciding to invest in our securities.
Company
Information
Our administrative and executive offices and those of our
Advisor are located at 312 Farmington Avenue, Farmington,
Connecticut 06032, and our telephone number is
(860) 676-8654.
Our corporate website is located at
www.horizontechnologyfinancecorp.com. Information
contained on our website is not incorporated by reference into
this prospectus, and you should not consider information
contained on our website to be part of this prospectus.
6
OFFERINGS
We may offer, from time to time, up to $250,000,000 of our
common stock, preferred stock, subscription rights, debt
securities
and/or
warrants representing rights to purchase shares of our common
stock, preferred stock or debt securities, separately or as
units comprising any combination of the foregoing, on terms to
be determined at the time of the offering. Any debt securities,
preferred stock, warrants and subscription rights offered by
means of this prospectus may be convertible or exchangeable into
shares of our common stock, on terms to be determined at the
time of the offering. We will offer our securities at prices and
on terms to be set forth in one or more supplements to this
prospectus. The selling stockholders may offer, from time to
time, up to 1,322,669 shares of our common stock for resale
at prices and on terms to be set forth in one or more
supplements to this prospectus.
We and/or
one or more of the selling stockholders may offer our securities
directly to one or more purchasers, including existing
stockholders in a rights offering, through agents that we
designate from time to time or to or through underwriters or
dealers. The prospectus supplement relating to each offering
will identify any agents or underwriters involved in the sale of
our securities and will set forth any applicable purchase price,
fee, commission or discount arrangement between us and our
agents or underwriters or among our underwriters or the basis
upon which such amount may be calculated. See Plan of
Distribution. We
and/or the
selling stockholders may not sell any of our securities through
agents, underwriters or dealers without delivery of a prospectus
supplement describing the method and terms of the offering of
our securities.
Set forth below is additional information regarding offerings of
our securities:
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Use of proceeds |
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We intend to use the net proceeds from selling our securities to
make new investments in portfolio companies in accordance with
our investment objective and strategies as described in this
prospectus and for working capital and general corporate
purposes. We will not receive any proceeds from the sale of our
common stock by the selling stockholders. |
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Listing |
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Our common stock is traded on NASDAQ under the symbol
HRZN. |
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Dividends and Distributions |
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We pay quarterly dividends to our stockholders out of assets
legally available for distribution. Our dividends, if any, will
be determined by our Board. Our ability to declare dividends
depends on our earnings, our overall financial condition
(including our liquidity position), maintenance of RIC status
and such other factors as our Board may deem relevant from time
to time. |
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Taxation |
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We have elected to be treated as a RIC. Accordingly, we
generally will not pay corporate-level federal income taxes on
any net ordinary income or capital gains that we distribute to
our stockholders as dividends. To maintain RIC tax treatment, we
must meet specified
source-of-income
and asset diversification requirements and distribute annually
at least 90% of our net ordinary income and realized net
short-term capital gains in excess of realized net long-term
capital losses, if any. |
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Leverage |
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We borrow funds to make additional investments. We use this
practice, which is known as leverage, to attempt to
increase returns to our stockholders, but it involves
significant risks. See Risk Factors. With certain
limited exceptions, we are only allowed to borrow amounts such
that our asset coverage, as defined in the 1940 Act, equals at
least 200% after such borrowing. |
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Trading at a Discount |
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Shares of closed-end investment companies frequently trade at a
discount to their net asset value. This risk is separate and
distinct from the risk that our net asset value per share may
decline. We cannot predict whether our common stock will trade
above, at or below net asset value. |
7
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Dividend Reinvestment Plan |
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We have a dividend reinvestment plan for our stockholders. The
dividend reinvestment plan is an opt out dividend
reinvestment plan. As a result, if we declare a dividend, then
stockholders cash dividends will be automatically
reinvested in additional shares of our common stock, unless they
specifically opt out of the dividend reinvestment plan so as to
receive cash dividends. Stockholders who receive distributions
in the form of stock will be subject to the same federal, state
and local tax consequences as stockholders who elect to receive
their distributions in cash. See Dividend Reinvestment
Plan. |
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Sales of Common Stock Below Net Asset Value |
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In the event we offer common stock or warrants or rights to
acquire such common stock, the offering price per share of our
common stock less any underwriting commissions or discounts will
not be less than the net asset value per share of our common
stock at the time we make the offering except (1) in
connection with the exercise of certain warrants, options or
rights whose issuance has been approved by our stockholders at
an exercise or conversion price not less than the market value
of our common stock at the date of issuance (or, if no such
market value exists, the net asset value per share of our common
stock as of such date); (2) to the extent such an offer or
sale is approved by a majority of our stockholders and our
Board; or (3) under such other circumstances as may be
permitted under the 1940 Act or by the SEC. For purposes of
(2) above, a majority of outstanding securities
is defined in the 1940 Act as (i) 67% or more of the voting
securities present at a stockholders meeting if the
holders of more than 50% of the outstanding voting securities of
the Company are present or represented by proxy; or
(ii) 50% of the outstanding voting securities of the
Company, whichever is less. |
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Certain Anti-Takeover Provisions |
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Our certificate of incorporation and bylaws, as well as certain
statutory and regulatory requirements, contain certain
provisions that may have the effect of discouraging a third
party from making an acquisition proposal for us. These
anti-takeover provisions may inhibit a change in control in
circumstances that could give the holders of our common stock
the opportunity to realize a premium over the market price for
our common stock. See Description of Common Stock That We
May Issue. |
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Investment Management Agreement |
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We have entered into an investment management agreement (the
Investment Management Agreement) with our Advisor,
under which our Advisor, subject to the overall supervision of
our Board, manages our
day-to-day
operations and provides investment advisory services to us. For
providing these services, our Advisor receives a base management
fee from us, paid monthly in arrears, at an annual rate of 2% of
our gross assets, including any assets acquired with the
proceeds of leverage. The Investment Management Agreement also
provides that our Advisor or its affiliates may be entitled to
an incentive fee under certain circumstances. The incentive fee
has two parts, which are independent of each other, with the
result that one part may be payable even if the other is not.
Under the first part, we will pay our Advisor each quarter 20%
of the amount by which our accrued net income for the quarter
after expenses and excluding the effect of any realized capital
gains and losses and any unrealized |
8
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appreciation and depreciation for the quarter exceeds 1.75%
(which is 7% annualized) of our average net assets at the end of
the immediately preceding calendar quarter, subject to a
catch-up
feature. Under the second part of the incentive fee, we will pay
our Advisor at the end of each calendar year 20% of our realized
capital gains from inception through the end of that year,
computed net of all realized capital losses and all unrealized
depreciation on a cumulative basis, less the aggregate amount of
any previously paid capital gain incentive fees. The second part
of the incentive fee is not subject to any minimum return to
stockholders. The Investment Management Agreement may be
terminated by either party without penalty by delivering written
notice to the other party upon not more than 60 days
written notice. See Investment Management and
Administration Agreements Investment Management
Agreement. |
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Administration Agreement |
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We reimburse our Administrator for the allocable portion of
overhead and other expenses incurred by our Administrator in
performing its obligations under an administration agreement
(the Administration Agreement), including furnishing
rent, the fees and expenses associated with performing
compliance functions and our allocable portion of the costs of
compensation and related expenses of our chief compliance
officer and chief financial officer and their respective staffs.
See Investment Management and Administration
Agreements Administration Agreement. |
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Available Information |
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We are required to file periodic reports, current reports, proxy
statements and other information with the SEC. This information
is available on the SECs website at www.sec.gov.
You can also inspect any materials we file with the SEC, without
charge, at the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room. You may
also obtain such information by contacting us at 312 Farmington
Avenue, Farmington, Connecticut 06032 or by calling us at
(860) 676-8654.
We intend to provide much of the same information on our website
at www.horizontechnologyfinancecorp.com. Information
contained on our website is not part of this prospectus or any
prospectus supplement and should not be relied upon as such. |
9
FEES AND
EXPENSES
The following table is intended to assist you in understanding
the costs and expenses that an investor will bear directly or
indirectly. However, we caution you that some of the percentages
indicated in the table below are estimates and may vary. The
following table and example should not be considered a
representation of our future expenses. Actual expenses may be
greater or less than shown. Except where the context suggests
otherwise, whenever this prospectus contains a reference to fees
or expenses paid by you or us or that
we will pay fees or expenses, stockholders will
indirectly bear such fees or expenses as investors in the
Company.
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Stockholder Transaction Expenses
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Sales Load (as a percentage of offering price)
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%(1)
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Offering Expenses (as a percentage of offering price)
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%(2)
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Dividend Reinvestment Plan Fees
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None
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(3)
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Total Stockholder Transaction Expenses (as a percentage of
offering price)
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%
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Annual Expenses (as a Percentage of Net Assets Attributable
to Common Stock)
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Base Management Fee
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3.30
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%(4)
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Incentive Fees Payable Under the Investment Management Agreement
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2.15
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%(5)
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Interest Payments on Borrowed Funds
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2.12
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%(6)
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Other Expenses (estimated)
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1.81
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%(7)
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Total Annual Expenses (estimated)
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9.38
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%(4)(8)
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(1)
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In the event that securities to
which this prospectus relates are sold to or through
underwriters or agents, a corresponding prospectus supplement
will disclose the applicable sales load.
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(2)
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In the event that we conduct an
offering of any of our securities, a corresponding prospectus
supplement will disclose the estimated offering expenses because
they will be ultimately borne by us.
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(3)
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The expenses of the dividend
reinvestment plan are included in Other Expenses in
the table. See Dividend Reinvestment Plan.
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(4)
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Our base management fee under the
Investment Management Agreement is based on our gross assets,
which includes assets acquired using leverage, and is payable
monthly in arrears. The management fee referenced in the table
above assumes the base management fee remains consistent with
fees incurred for the three months ended September 30,
2011. See Investment Management and Administration
Agreements Investment Management Agreement.
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(5)
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Our incentive fee payable under the
Investment Management Agreement consists of two parts:
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The first part, which is payable
quarterly in arrears, equals 20% of the excess, if any, of our
Pre-Incentive Fee Net Investment Income over a 1.75%
quarterly (7% annualized) hurdle rate and a
catch-up
provision measured as of the end of each calendar quarter. Under
this provision, in any calendar quarter, our Advisor receives no
incentive fee until our net investment income equals the hurdle
rate of 1.75% but then receives, as a
catch-up,
100% of our Pre-Incentive Fee Net Investment Income with respect
to that portion of such Pre-Incentive Fee Net Investment Income,
if any, that exceeds the hurdle rate but is less than 2.1875%.
The effect of this provision is that, if Pre-Incentive Fee Net
Investment Income exceeds 2.1875% in any calendar quarter, our
Advisor will receive 20% of our Pre-Incentive Fee Net Investment
Income as if a hurdle rate did not apply. The first part of the
incentive fee is computed and paid on income that may include
interest that is accrued but not yet received in cash.
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The second part of the incentive
fee equals 20% of our Incentive Fee Capital Gains,
if any, which will equal our realized capital gains on a
cumulative basis from inception through the end of each calendar
year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, less the aggregate
amount of any previously paid capital gain incentive fees. The
second part of the incentive fee is payable, in arrears, at the
end of each calendar year (or upon termination of the Investment
Management Agreement, as of the termination date). For a more
detailed discussion of the calculation of this fee, see
Investment Management and Administration
Agreements Investment Management Agreement.
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The incentive fee payable to our
Advisor is based on the actual amount incurred under the first
part of the Investment Management Agreement during the three
months ended September 30, 2011, annualized for a full
year. As we cannot predict the occurrence of any capital gains
from the portfolio, we have assumed no Incentive Fee Capital
Gains.
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(6)
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We will continue to borrow funds
from time to time to make investments to the extent we determine
that the economic situation is conducive to doing so. The costs
associated with our outstanding borrowings are indirectly borne
by our investors. For purposes of this section, we have computed
the interest expense using the balance outstanding at
September 30, 2011. We used the LIBOR rate on
September 30, 2011 and the interest rates on the Credit
Facilities. We have also included the estimated amortization of
fees incurred in establishing the Credit Facilities. At
September 30, 2011, we had approximately $66 million
outstanding under the WestLB Facility and approximately
$16 million
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outstanding under the Wells
Facility. We may also issue preferred stock, subject to our
compliance with applicable requirements under the 1940 Act.
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(7)
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Includes our overhead expenses,
including payments under the Administration Agreement, based on
our allocable portion of overhead and other expenses incurred by
the Administrator in performing its obligations under the
Administration Agreement. See Investment Management and
Administration Agreements Administration
Agreement. Other Expenses are based on
estimated amounts to be incurred on an annual basis.
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(8)
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Total Annual Expenses
as a percentage of consolidated net assets attributable to
common stock are higher than the total annual expenses
percentage would be for a company that is not leveraged. We
borrow money to leverage our net assets and increase our total
assets. The SEC requires that the Total Annual
Expenses percentage be calculated as a percentage of net
assets (defined as total assets less indebtedness and after
taking into account any incentive fees payable during the
period), rather than the total assets, including assets that
have been funded with borrowed monies.
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Example
The following example demonstrates the projected dollar amount
of total cumulative expenses that would be incurred over various
periods with respect to a hypothetical investment in our common
stock. This example and the expenses in the table above should
not be considered a representation of our future expenses, and
actual expenses (including the cost of debt, if any, and other
expenses) may be greater or less than those shown. In
calculating the following expense amounts, we have assumed that
our annual operating expenses remain at the levels set forth in
the table above. In the event that shares to which this
prospectus relates are sold to or through underwriters or
agents, a corresponding prospectus supplement will restate this
example to reflect the applicable sales load.
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1 Year
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3 Years
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5 Years
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10 Years
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You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return
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$
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179
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$
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337
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$
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480
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$
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780
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The example and the expenses in the tables above should not
be considered a representation of our future expenses, and
actual expenses may be greater or lesser than those shown.
While the example assumes, as required by the applicable rules
of the SEC, a 5% annual return, our performance will vary and
may result in a return greater or less than 5%. The incentive
fee under the Investment Management Agreement is unlikely to be
significant assuming a 5% annual return and is not included in
the example. If we achieve sufficient returns on our
investments, including through the realization of capital gains,
to trigger an incentive fee of a material amount, our
distributions to our common stockholders and our expenses would
likely be higher. See Investment Management and
Administration Agreements Examples of Incentive Fee
Calculation for additional information regarding the
calculation of incentive fees. In addition, while the example
assumes reinvestment of all dividends and other distributions at
net asset value, participants in our dividend reinvestment plan
receive a number of shares of our common stock determined by
dividing the total dollar amount of the distribution payable to
a participant by the market price per share of our common stock
at the close of trading on the valuation date for the
distribution. This price may be at, above or below net asset
value. See Dividend Reinvestment Plan for additional
information regarding our dividend reinvestment plan.
11
SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA
The selected historical financial and other data below reflects
our consolidated operations. The selected financial data for 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 to December 31, 2008 have been derived
from our consolidated financial statements that have been
audited by McGladrey & Pullen, LLP, an independent
registered public accounting firm. Interim financial information
for the nine months ended September 30, 2011 and 2010 is
derived from our unaudited consolidated financial statements,
and in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) that are
necessary to present fairly the results of such interim period.
Results for the year ended December 31, 2010 and the nine
months ended September 30, 2011 are not necessarily
indicative of the results that may be expected for the current
year. You should read this selected consolidated financial and
other data in conjunction with our Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-IPO Prior
|
|
|
|
|
|
|
|
|
|
|
Post-IPO as a
|
|
to becoming a
|
|
Post-IPO as a
|
|
|
|
|
|
|
|
|
Business
|
|
Business
|
|
Business
|
|
|
|
|
|
|
|
|
Development
|
|
Development
|
|
Development
|
|
|
|
|
|
March 4,
|
|
|
Company
|
|
Company
|
|
Company
|
|
|
|
|
|
2008
|
|
|
Nine Months
|
|
Nine Months
|
|
October 29,
|
|
January 1,
|
|
|
|
(Inception)
|
|
|
Ended
|
|
Ended
|
|
2010 to
|
|
2010 to
|
|
Year Ended
|
|
through
|
|
|
September 30,
|
|
September 30,
|
|
December 31,
|
|
October 28,
|
|
December 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2010
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
Total investment income
|
|
$
|
17,871
|
|
|
$
|
13,250
|
|
|
$
|
3,251
|
|
|
$
|
14,956
|
|
|
$
|
15,326
|
|
|
$
|
7,021
|
|
Total expenses
|
|
|
10,670
|
|
|
|
5,372
|
|
|
|
1,892
|
|
|
|
5,931
|
|
|
|
6,769
|
|
|
|
4,031
|
|
Net investment income
|
|
|
7,201
|
|
|
|
7,878
|
|
|
|
1,359
|
|
|
|
9,025
|
|
|
|
8,557
|
|
|
|
2,990
|
|
Credit (provision) for loan losses
|
|
|
|
|
|
|
739
|
|
|
|
|
|
|
|
739
|
|
|
|
(274
|
)
|
|
|
(1,650
|
)
|
Net realized gain (loss) on investments
|
|
|
5,544
|
|
|
|
(2
|
)
|
|
|
611
|
|
|
|
69
|
|
|
|
138
|
|
|
|
22
|
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(2,535
|
)
|
|
|
1,549
|
|
|
|
1,449
|
|
|
|
1,481
|
|
|
|
892
|
|
|
|
(73
|
)
|
Net increase in net assets resulting from operations
|
|
$
|
10,210
|
|
|
$
|
10,164
|
|
|
$
|
3,419
|
|
|
$
|
11,314
|
|
|
$
|
9,313
|
|
|
$
|
1,289
|
|
Net investment income per common share
|
|
$
|
0.95
|
|
|
|
N/A
|
|
|
$
|
0.18
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net increase in net assets per common share
|
|
$
|
1.34
|
|
|
|
N/A
|
|
|
$
|
0.45
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Per share dividend declared
|
|
$
|
0.73
|
|
|
|
N/A
|
|
|
$
|
0.22
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Dollar amount of dividends declared
|
|
$
|
5,551
|
|
|
|
N/A
|
|
|
$
|
1,662
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted average common shares
|
|
|
7,604,345
|
|
|
|
N/A
|
|
|
|
7,555,722
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
Balance sheet data at period end:
|
Investments
|
|
$
|
180,186
|
|
|
$
|
137,818
|
|
|
$
|
136,810
|
|
|
$
|
111,954
|
|
|
$
|
92,174
|
|
Cash and cash equivalents
|
|
|
32,598
|
|
|
|
19,219
|
|
|
|
76,793
|
|
|
|
9,892
|
|
|
|
20,024
|
|
Other assets
|
|
|
4,087
|
|
|
|
2,899
|
|
|
|
2,602
|
|
|
|
3,022
|
|
|
|
3,017
|
|
Total assets
|
|
|
216,871
|
|
|
|
159,936
|
|
|
|
216,205
|
|
|
|
124,868
|
|
|
|
115,215
|
|
Total liabilities
|
|
|
84,492
|
|
|
|
89,870
|
|
|
|
89,010
|
|
|
|
65,375
|
|
|
|
65,430
|
|
Total net assets
|
|
|
132,379
|
|
|
|
70,065
|
|
|
|
127,195
|
|
|
|
59,493
|
|
|
|
49,785
|
|
12
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
The following tables set forth certain quarterly financial
information for each of the eleven quarters ending with the
quarter ended September 30, 2011. This information was
derived from our unaudited consolidated financial statements.
Results for any quarter are not necessarily indicative of
results for the past fiscal year or for any future quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
Q3
|
|
Q2
|
|
Q1
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
Total investment income
|
|
$
|
6,441
|
|
|
$
|
5,970
|
|
|
$
|
5,460
|
|
Net investment income
|
|
$
|
2,993
|
|
|
$
|
1,980
|
|
|
$
|
2,228
|
|
Net realized and unrealized (loss) gain
|
|
$
|
(234
|
)
|
|
$
|
1,843
|
|
|
$
|
1,400
|
|
Net increase in net assets resulting from operations
|
|
$
|
2,759
|
|
|
$
|
3,823
|
|
|
$
|
3,628
|
|
Earnings per
share(1)
|
|
$
|
0.39
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
Net asset value per share at the end of the
quarter(2)
|
|
$
|
17.36
|
|
|
$
|
17.40
|
|
|
$
|
17.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
Total investment income
|
|
$
|
4,956
|
|
|
$
|
5,189
|
|
|
$
|
4,270
|
|
|
$
|
3,793
|
|
Net investment income
|
|
$
|
2,507
|
|
|
$
|
3,257
|
|
|
$
|
2,509
|
|
|
$
|
2,113
|
|
Net realized and unrealized gain (loss)
|
|
$
|
2,063
|
|
|
$
|
1,711
|
|
|
$
|
(366
|
)
|
|
$
|
202
|
|
Net increase in net assets resulting from operations
|
|
$
|
4,570
|
|
|
$
|
5,288
|
|
|
$
|
2,259
|
|
|
$
|
2,618
|
|
Earnings per
share(3)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Net asset value per share at the end of the
quarter(2)(3)
|
|
$
|
16.75
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
|
(Dollar amounts in thousands, except per share data)
|
|
Total investment income
|
|
$
|
4,155
|
|
|
$
|
4,169
|
|
|
$
|
3,746
|
|
|
$
|
3,256
|
|
Net investment income
|
|
$
|
2,492
|
|
|
$
|
2,393
|
|
|
$
|
1,998
|
|
|
$
|
1,673
|
|
Net realized and unrealized gain (loss)
|
|
$
|
498
|
|
|
$
|
(55
|
)
|
|
$
|
143
|
|
|
$
|
445
|
|
Net increase in net assets resulting from operations
|
|
$
|
3,343
|
|
|
$
|
2,004
|
|
|
$
|
1,884
|
|
|
$
|
2,083
|
|
Earnings per
share(3)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Net asset value per share at the end of the
quarter(3)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
|
|
(1)
|
|
Based on the weighted average
shares outstanding for the respective period.
|
(2)
|
|
Based on shares outstanding at the
end of the respective period.
|
|
|
|
(3)
|
|
For periods prior to
October 29, 2010, the Company did not have common shares
outstanding or an equivalent and, therefore, cannot calculate
earnings per share and net asset value per share.
|
13
RISK
FACTORS
Investing in our securities involves a high degree of risk.
Before you invest in our securities, you should be aware of
various risks, including those described below. You should
carefully consider these risk factors, together with all of the
other information included in this prospectus and any
accompanying prospectus supplement, before you decide whether to
make an investment in our securities. The risks set forth below
are not the only risks we face. If any of the following events
occur, our business, financial condition and results of
operations could be materially adversely affected. In such case,
our net asset value and the trading price of our securities
could decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business and Structure
We
have a limited operating history and may not be able to achieve
our investment objective or generate sufficient revenue to make
or sustain distributions to our stockholders and your investment
in us could decline substantially.
We commenced operations in March 2008 and became a public
company on October 28, 2010. As a result of our limited
operating history, we are subject to certain business risks and
uncertainties associated with any recently formed business
enterprise, including the risk that we will not achieve our
investment objective and that the value of your investment in us
could decline substantially. As a public company, we are subject
to the regulatory requirements of the SEC, in addition to the
specific regulatory requirements applicable to BDCs under the
1940 Act and RICs under the Code. Our management and our Advisor
have limited experience operating under this regulatory
framework, and we may incur substantial additional costs, and
expend significant time or other resources, to do so. From time
to time our Advisor may pursue investment opportunities, like
equity investments, in which our Advisor has more limited
experience. In addition, we may be unable to generate sufficient
revenue from our operations to make or sustain distributions to
our stockholders.
We and
our Advisor have limited experience operating under the
constraints imposed on a BDC or managing an investment company,
which may affect our ability to manage our business and impair
your ability to assess our prospects.
Prior to becoming a public company in October 2010, we did not
operate as a BDC or manage an investment company under the 1940
Act. As a result, we have limited operating results under this
regulatory framework that can demonstrate to you either its
effect on our business or our ability to manage our business
within this framework. The 1940 Act imposes numerous constraints
on the operations of BDCs. For example, BDCs are required to
invest at least 70% of their total assets in specified types of
securities, primarily securities of eligible portfolio
companies (as defined in the 1940 Act), cash, cash
equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less. See
Regulation. Our Advisors lack of experience in
managing a portfolio of assets under these constraints may
hinder our ability to take advantage of attractive investment
opportunities and, as a result, could impair our ability to
achieve our investment objective. Furthermore, if we are unable
to comply with the requirements imposed on BDCs by the 1940 Act,
the SEC could bring an enforcement action against us
and/or we
could be exposed to claims of private litigants. In addition, we
could be regulated as a closed-end management investment company
under the 1940 Act, which could further decrease our operating
flexibility and may prevent us from operating our business,
either of which could have a material adverse effect on our
business, results of operations or financial condition.
We are
dependent upon key personnel of our Advisor and our
Advisors ability to hire and retain qualified
personnel.
We depend on the members of our Advisors senior
management, particularly Mr. Pomeroy, our Chairman and
Chief Executive Officer, and Mr. Michaud, our President, as
well as other key personnel for the identification, evaluation,
final selection, structuring, closing and monitoring of our
investments. These employees have critical industry experience
and relationships that we rely on to implement our business plan
to originate Venture Loans in our Target Industries. Our future
success depends on the continued service of Mr. Pomeroy and
Mr. Michaud as well as the other senior members of our
Advisors management team. If our Advisor were to lose the
services of either
14
Mr. Pomeroy or Mr. Michaud or any of the other senior
members of our Advisors management team, we may not be
able to operate our business as we expect, and our ability to
compete could be harmed, either of which could cause our
business, results of operations or financial condition to
suffer. In addition, if either of Mr. Pomeroy or
Mr. Michaud cease to be employed by us, WestLB AG
(WestLB) could, absent a waiver or cure, demand
repayment of any outstanding obligations under the WestLB
Facility and, if more than one of Mr. Pomeroy,
Mr. Michaud or Mr. Mathieu, our Chief Financial
Officer, shall cease to be actively involved in the Company or
our Advisor, and are not replaced by individuals satisfactory to
Wells Fargo Capital Finance, LLC (Wells) within
ninety days, Wells could, absent a waiver or cure, demand
repayment of any outstanding obligations under the Wells
Facility. Our future success also depends, in part, on our
Advisors ability to identify, attract and retain
sufficient numbers of highly skilled employees. Absent exemptive
or other relief granted by the SEC and for so long as we remain
externally managed, the 1940 Act prevents us from granting
options to our employees and adopting a profit sharing plan,
which may make it more difficult for us to attract and retain
highly skilled employees. If we are not successful in
identifying, attracting and retaining these employees, we may
not be able to operate our business as we expect. Moreover, we
cannot assure you that our Advisor will remain our investment
advisor or that we will continue to have access to our
Advisors investment professionals or its relationships.
For example, our Advisor may in the future manage investment
funds with investment objectives similar to ours thereby
diverting the time and attention of its investment professionals
that we rely on to implement our business plan.
We
operate in a highly competitive market for investment
opportunities, and if we are not able to compete effectively,
our business, results of operations and financial condition may
be adversely affected and the value of your investment in us
could decline.
We compete for investments with a number of investment funds and
other BDCs, as well as traditional financial services companies
such as commercial banks and other financing sources. Some of
our competitors are larger and have greater financial,
technical, marketing and other resources than we have. For
example, some competitors may have a lower cost of funds and
access to funding sources that are not available to us. This may
enable these competitors to make commercial loans with interest
rates that are comparable to, or lower than, the rates we
typically offer. We may lose prospective portfolio companies if
we do not match our competitors pricing, terms and
structure. If we do match our competitors pricing, terms
or structure, we may experience decreased net interest income
and increased risk of credit losses. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety
of investments, establish more relationships than us and build
their market shares. Furthermore, many of our competitors are
not subject to the regulatory restrictions that the 1940 Act
imposes on us as a BDC or that the Code imposes on us as a RIC.
If we are not able to compete effectively, we may not be able to
take advantage of attractive investment opportunities that we
identify and may not be able to fully invest our available
capital. If this occurs, our business, financial condition and
results of operations could be materially adversely affected.
We
borrow money, which magnifies the potential for gain or loss on
amounts invested and may increase the risk of investing in
us.
Leverage is generally considered a speculative investment
technique, and we intend to continue to borrow money as part of
our business plan. The use of leverage magnifies the potential
for gain or loss on amounts invested and, therefore, increases
the risks associated with investing in us. We borrow from and
issue senior debt securities to banks and other lenders. Such
senior debt securities include those under the Credit
Facilities. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources. Lenders of senior debt
securities have fixed dollar claims on our assets that are
superior to the claims of our common stockholders. If the value
of our assets increases, then leveraging would cause the net
asset value attributable to our common stock to increase more
sharply than it would have had we not leveraged. However, any
decrease in our income would cause net income to decline more
sharply than it would have had we not leveraged. This decline
could adversely affect our ability to make common stock dividend
payments. In addition, because our investments may be illiquid,
we may be unable to dispose of them, or unable to do so at a
favorable price in the event we need to do so, if we are unable
to refinance any indebtedness upon maturity, and, as a result,
we may suffer losses.
15
Our ability to service any debt that we incur depends largely on
our financial performance and is subject to prevailing economic
conditions and competitive pressures. Moreover, as our
Advisors management fee is payable to our Advisor based on
our gross assets, including those assets acquired through the
use of leverage, our Advisor may have a financial incentive to
incur leverage which may not be consistent with our
stockholders interests. In addition, holders of our common
stock bear the burden of any increase in our expenses as a
result of leverage, including any increase in the management fee
payable to our Advisor.
Illustration: The following table illustrates the effect
of leverage on returns from an investment in our common stock
assuming various annual returns, net of expenses. The
calculations are hypothetical and actual returns may be higher
or lower than those appearing in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Return on Our Portfolio
|
|
|
(Net of Expenses)
|
|
|
−10%
|
|
−5%
|
|
0%
|
|
5%
|
|
10%
|
|
Corresponding return to
stockholder(1)
|
|
−18.50%
|
|
−10.28%
|
|
−2.06%
|
|
6.16%
|
|
14.38%
|
|
|
|
(1)
|
|
Assumes $217 million in total
assets, $82 million in debt outstanding, $132 million
in stockholders equity, and an average cost of funds of
3.32%. Assumptions are based on our financial condition and our
average costs of funds at September 30, 2011. Actual
interest payments may be different.
|
Based on our outstanding indebtedness of $82 million as of
September 30, 2011 and the effective annual interest rate
of 3.32% as of that date, our investment portfolio would have
been required to experience an annual return of at least 1.52%
to cover annual interest payments on the outstanding debt.
If we
are unable to comply with the covenants or restrictions in our
Credit Facilities, our business could be materially adversely
affected.
Horizon Credit I LLC (Credit I) is wholly owned by
us through our wholly-owned subsidiary, Compass Horizon, and is
party to our WestLB Facility. Our wholly-owned subsidiary,
Horizon Credit II LLC (Credit II) is party to
our Wells Facility. The Credit Facilities include covenants
that, among other things, restrict the ability of Credit I and
Credit II to make loans to, or investments in, third
parties (other than Venture Loans and warrants or other equity
participation rights), pay dividends and distributions, incur
additional indebtedness and engage in mergers or consolidations.
The Credit Facilities also restrict the ability of Credit I and
Credit II to create liens on the collateral securing the
Credit Facilities, permit additional negative pledges on such
collateral and change the business currently conducted by them.
The Credit Facilities also include provisions that restrict a
change of control of Credit I or Credit II, and the Wells
Facility makes the acquisition of 20% or more of the beneficial
ownership of the Company by any person or group of persons (as
defined in the Securities Exchange Act of 1934 as amended) an
event of default. For this purpose a change of control generally
means a merger or other consolidation, a liquidation, a sale of
all or substantially all of our assets, or a transaction in
which any person or group acquires more than 50% of our shares.
In addition, the Credit Facilities also require Credit I,
Credit II and our Advisor to comply with various financial
covenants, including, among other covenants, maintenance by our
Advisor of a minimum tangible net worth and limitations on the
value of, and modifications to, the loan collateral that secures
the Credit Facilities. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Complying with these restrictions may prevent us from taking
actions that we believe would help us to grow our business or
are otherwise consistent with our investment objective. These
restrictions could also limit our ability to plan for or react
to market conditions or meet extraordinary capital needs or
otherwise restrict corporate activities or could result in our
failing to qualify as a RIC and thus become subject to
corporate-level income tax. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
additional information regarding our credit arrangements.
The breach of certain of the covenants or restrictions unless
cured within the applicable grace period would result in a
default under the Credit Facilities that would permit the
applicable lender to declare all amounts outstanding to be due
and payable. In such an event, we may not have sufficient assets
to repay such indebtedness and the lender may exercise rights
available to it under the security interest granted in the
assets of Credit I or Credit II, as applicable, including, to
the extent permitted under applicable law, the seizure of such
assets without adjudication. As a result, any default could have
serious consequences to our financial condition. An event of
16
default or acceleration under the Credit Facilities could also
cause a cross-default or cross-acceleration of another debt
instrument or contractual obligation, which would adversely
impact our liquidity. We may not be granted waivers or
amendments to the Credit Facilities if for any reason we are
unable to comply with it, and we may not be able to refinance
the Credit Facilities on terms acceptable to us, or at all.
The
impact of recent financial reform legislation on us is
uncertain.
In light of current conditions in the U.S. and global
financial markets and the U.S. and global economy,
legislators, the presidential administration and regulators have
increased their focus on the regulation of the financial
services industry. The Dodd-Frank Wall Street Reform and
Consumer Protection Act institutes a wide range of reforms that
will have an impact on all financial institutions. Many of these
provisions are subject to rule making procedures and studies
that will be conducted in the future. Accordingly, we cannot
predict the effect it or its implementing regulations will have
on our business, results of operations or financial condition.
Because
we distribute all or substantially all of our income and any
realized net short-term capital gains over realized net
long-term capital losses to our stockholders, we will need
additional capital to finance our growth, if any. If additional
funds are unavailable or not available on favorable terms, our
ability to grow will be impaired.
To satisfy the requirements applicable to a RIC, to avoid
payment of excise taxes and to minimize or avoid payment of
corporate-level federal income taxes, we intend to distribute to
our stockholders all or substantially all of our net ordinary
income and realized net short-term capital gains over realized
net long-term capital losses except that we may retain certain
net long-term capital gains, pay applicable income taxes with
respect thereto, and elect to treat such retained capital gains
as deemed distributions to our stockholders. As a BDC, we
generally are required to meet a coverage ratio of total assets
to total senior securities, which includes all of our borrowings
and any preferred stock we may issue in the future, of at least
200%. This requirement limits the amount that we may borrow.
Because we continue to need capital to grow our loan and
investment portfolio, this limitation may prevent us from
incurring debt and require us to raise additional equity at a
time when it may be disadvantageous to do so. We cannot assure
you that debt and equity financing will be available to us on
favorable terms, or at all, and debt financings may be
restricted by the terms of any of our outstanding borrowings. In
addition, as a BDC, we are limited in our ability to issue
equity securities priced below net asset value. If additional
funds are not available to us, we could be forced to curtail or
cease new lending and investment activities, and our net asset
value could decline.
If we
are unable to obtain additional debt financing, our business
could be materially adversely affected.
We may want to obtain additional debt financing, or need to do
so upon maturity of the Credit Facilities, in order to obtain
funds which may be made available for investments. We currently
may not request new advances under the WestLB Facility and we
must repay the outstanding advances under the WestLB Facility 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 not exceed 75% of the aggregate principal
balance of Credit Is eligible loans to its portfolio
companies. We may request new advances under the Wells Facility
until July 14, 2014, and, after such date, 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, particularly the condition that the principal balance
of the Wells Facility not exceed 50% of the aggregate principal
balance of Credit IIs eligible loans to its portfolio
companies. All outstanding advances under the WestLB Facility
are due and payable on March 4, 2015, unless such date is
extended upon Credit Is request and upon mutual agreement
of WestLB and Credit I. All outstanding advances under the Wells
Facility are due and payable on July 14, 2017, unless such
date is extended upon Credit IIs request and upon mutual
agreement of Wells and Credit II. If we are unable to increase,
renew or replace any such facility and enter into a new debt
financing facility on commercially reasonable terms, our
liquidity may be reduced significantly. In addition, if we are
unable to repay amounts outstanding under any such facilities
and are declared in default or are unable to renew or refinance
these facilities, we may not be able to make new investments or
operate our business in the normal course. These situations may
arise due to circumstances that we may be unable to control,
such as lack of access to the credit markets, a severe decline
in the value of the U.S. dollar, a further economic
downturn or an
17
operational problem that affects third parties or us, and could
materially damage our business. Moreover, we have withdrawn our
application to the Small Business Administration
(SBA) for a license to operate as a small business
investment company (SBIC), which was originally
filed on December 6, 2010, and, though we may in the future
submit a new application, we have no present intention to do so
and, therefore, do not expect to be able to access liquidity by
issuing SBA-guaranteed debentures.
Changes
in interest rates may affect our cost of capital and net
investment income.
Because we currently incur indebtedness to fund our investments,
a portion of our income depends upon the difference between the
interest rate at which we borrow funds and the interest rate at
which we invest these funds. Most of our investments have fixed
interest rates, while our borrowings have floating interest
rates. As a result, a significant change in interest rates could
have a material adverse effect on our net investment income. In
periods of rising interest rates, our cost of funds could
increase, which would reduce our net investment income. We may
hedge against interest rate fluctuations by using hedging
instruments such as swaps, futures, options and forward
contracts, subject to applicable legal requirements, including,
without limitation, all necessary registrations (or exemptions
from registration) with the Commodity Futures Trading
Commission. These activities may limit our ability to benefit
from lower interest rates with respect to the hedged portfolio.
Adverse developments resulting from changes in interest rates or
hedging transactions or any adverse developments from our use of
hedging instruments could have a material adverse effect on our
business, financial condition and results of operations. In
addition, we may be unable to enter into appropriate hedging
transactions when desired and any hedging transactions we enter
into may not be effective.
Because
many of our investments typically are not and will not be in
publicly traded securities, the value of our investments may not
be readily determinable, which could adversely affect the
determination of our net asset value.
Our investments consist, and we expect our future investments to
consist, primarily of loans or securities issued by privately
held companies. The fair value of these investments that are not
publicly traded may not be readily determinable. In addition, we
are not permitted to maintain a general reserve for anticipated
loan losses. Instead, we are required by the 1940 Act to
specifically value each investment and record an unrealized gain
or loss for any asset that we believe has increased or decreased
in value. We value these investments on a quarterly basis, or
more frequently as circumstances require, in accordance with our
valuation policy consistent with generally accepted accounting
principles. Our Board employs an independent third-party
valuation firm to assist them in arriving at the fair value of
our investments. Our Board discusses valuations and determines
the fair value in good faith based on the input of our Advisor
and the third-party valuation firm. The factors that may be
considered in fair value pricing our investments include the
nature and realizable value of any collateral, the portfolio
companys earnings and its ability to make payments on its
indebtedness, the markets in which the portfolio company does
business, comparisons to publicly traded companies, discounted
cash flow and other relevant factors. Because such valuations
are inherently uncertain and may be based on estimates, our
determinations of fair value may differ materially from the
values that would be assessed if a ready market for these
securities existed. Our net asset value could be adversely
affected if our determinations regarding the fair value of our
investments are materially higher than the values that we
ultimately realize upon the disposal of these investments.
Disruption
in the capital markets and the credit markets could adversely
affect our business.
Without sufficient access to the capital markets or credit
markets, we may be forced to curtail our business operations or
we may not be able to pursue new investment opportunities. The
global capital markets are in a period of disruption and extreme
volatility and, accordingly, there has been and will continue to
be uncertainty in the financial markets in general. Ongoing
disruptive conditions in the financial industry could restrict
our business operations and could adversely impact our results
of operations and financial condition. We are unable to predict
when economic and market conditions may become more favorable.
Even if these conditions improve significantly over the long
term, adverse conditions in particular sectors of the financial
markets could adversely impact our business.
18
We may
not realize gains from our equity investments.
We may make non-control, equity co-investments in companies in
conjunction with private equity sponsors. The equity interests
we receive may not appreciate in value and, in fact, may decline
in value. Accordingly, we may not be able to realize gains from
our equity interests, and any gains we do realize on the
disposition of any equity interests may not be sufficient to
offset any other losses we experience. We also may be unable to
realize any value if a portfolio company does not have a
liquidity event, such as a sale of the business, refinancing or
public offering, which would allow us to sell the underlying
equity interests. In addition, our Advisors significant
experience in Venture Lending may not result in returns on our
equity investments.
From time to time we may also acquire equity participation
rights in connection with an investment which will allow us, at
our option, to participate in future rounds of equity financing
through direct capital investments in our portfolio companies.
Our Advisor determines whether to exercise any of these rights.
Accordingly, you will have no control over whether or to what
extent these rights are exercised, if at all. If we exercise
these rights, we will be making an additional investment
completely in the form of equity which will subject us to
significantly more risk than our Venture Loans and we may not
receive the returns that are anticipated with respect to these
investments.
We may
not realize expected returns on warrants received in connection
with our debt investments.
As discussed above, we generally receive warrants in connection
with our debt investments. If we do not receive the returns that
are anticipated on the warrants, our investment returns on our
portfolio companies, and the value of your investment in us, may
be lower than expected.
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.
Our business plan contemplates a need for a substantial amount
of capital in addition to our current amount of capital. We may
obtain additional capital through the issuance of debt
securities, other indebtedness or preferred stock, and we may
borrow money from banks or other financial institutions, which
we refer to collectively as senior securities, up to
the maximum amount permitted by the 1940 Act. If we issue senior
securities, we would be exposed to typical risks associated with
leverage, including an increased risk of loss. In addition, if
we issue preferred stock, it would rank senior to common stock
in our capital structure and preferred stockholders would have
separate voting rights and may have rights, preferences or
privileges more favorable than those of holders of our common
stock.
The 1940 Act permits us to issue senior securities in amounts
such that our asset coverage ratio, as defined in the 1940 Act,
equals at least 200% after each issuance of senior securities.
If our asset coverage ratio is not at least 200%, we are not
permitted to pay dividends or issue additional senior
securities. If the value of our assets declines, we may be
unable to satisfy this asset coverage test. If that happens, we
may be required to liquidate a portion of our investments and
repay a portion of our indebtedness at a time when we may be
unable to do so or unable to do so on favorable terms. See
Note 6 to Consolidated Financial Statements for additional
information regarding borrowings.
As a BDC, we generally are not able to issue our common stock at
a price below net asset value without first obtaining the
approval of our stockholders and our independent directors. This
requirement does not apply to stock issued upon the exercise of
options, warrants or rights that we may issue from time to time.
If we raise additional funds by issuing more common stock or
senior securities convertible into, or exchangeable for, our
common stock, the percentage ownership of our stockholders at
that time would decrease, and you may experience dilution.
If we
are unable to satisfy the requirements under the Code for
qualification as a RIC, we will be subject to corporate-level
federal income tax.
To qualify as a RIC under the Code, we must meet certain
source-of-income,
diversification and other requirements contained in Subchapter M
of the Code and maintain our election to be regulated as a BDC
under the 1940 Act. We must also meet the Annual Distribution
Requirement, as defined in Material U.S. Federal Income
Tax Considerations to avoid corporate-level federal income
tax in that year on all of our taxable income, regardless of
whether we make any distributions to our stockholders.
19
The
source-of-income
requirement is satisfied if we derive in each taxable year at
least 90% of our gross income from dividends, interest
(including tax-exempt interest), payments with respect to
certain securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, other
income (including but not limited to gain from options, futures
or forward contracts) derived with respect to our business of
investing in stock, securities or currencies, or net income
derived from an interest in a qualified publicly traded
partnership. The status of certain forms of income we
receive could be subject to different interpretations under the
Code and might be characterized as non-qualifying income that
could cause us to fail to qualify as a RIC, assuming we do not
qualify for or take advantage of certain remedial provisions,
and, thus, may cause us to be subject to corporate-level federal
income taxes.
The Annual Distribution Requirement for a RIC is satisfied if we
distribute to our stockholders on an annual basis an amount
equal to at least 90% of our net ordinary income and realized
net short-term capital gains in excess of realized net long-term
capital losses, if any. If we borrow money, we may be subject to
certain asset coverage ratio requirements under the 1940 Act and
loan covenants that could, under certain circumstances, restrict
us from making distributions necessary to qualify as a RIC. If
we are unable to obtain cash from other sources, we may fail to
qualify as a RIC, assuming we do not qualify for or take
advantage of certain remedial provisions, and, thus, may be
subject to corporate-level income tax.
To qualify as a RIC, we must also meet certain asset
diversification requirements at the end of each calendar
quarter. Failure to meet these tests may result in our having to
(i) dispose of certain investments quickly; (ii) raise
additional capital to prevent the loss of RIC status; or
(iii) engage in certain remedial actions that may entail
the disposition of certain investments at disadvantageous prices
that could result in substantial losses, and the payment of
penalties, if we qualify to take such actions. Because most of
our investments are and will be in development-stage companies
within our Target Industries, any such dispositions could be
made at disadvantageous prices and may result in substantial
losses. If we raise additional capital to satisfy the asset
diversification requirements, it could take a longer time to
invest such capital. During this period, we will invest in
temporary investments, such as cash and cash equivalents, which
we expect will earn yields substantially lower than the interest
income that we anticipate receiving in respect of our
investments in secured and amortizing loans.
If we were to fail to qualify for the federal income tax
benefits allowable to RICs for any reason and become subject to
a corporate-level federal income tax, the resulting taxes could
substantially reduce our net assets, the amount of income
available for distribution to our stockholders and the actual
amount of our distributions. Such a failure would have a
material adverse effect on us, the net asset value of our common
stock and the total return, if any, obtainable from your
investment in our common stock. In addition, we could be
required to recognize unrealized gains, pay substantial taxes
and interest and make substantial distributions before
requalifying as a RIC. See Regulation.
We may
have difficulty paying our required distributions if we
recognize taxable income before or without receiving
cash.
We may be required to recognize taxable income in circumstances
in which we do not receive cash. For example, if we hold debt
instruments that are treated under applicable tax rules as
having original issue discount (such as debt instruments with
payment-in-kind
interest or, in certain cases, increasing interest rates or
issued with warrants), we must include in taxable income each
year a portion of the original issue discount that accrues over
the life of the debt instrument, regardless of whether cash
representing such income is received by us in the same taxable
year. Because in certain cases we may recognize taxable income
before or without receiving cash representing such income, we
may have difficulty meeting the requirement that we distribute
an amount equal to at least 90% of our net ordinary income and
realized net short-term capital gains in excess of realized
long-term capital losses, if any.
Accordingly, we may need to sell some of our assets at times
that we would not consider advantageous, raise additional debt
or equity capital or forego new investment opportunities or
otherwise take actions that are disadvantageous to our business
(or be unable to take actions that we believe are necessary or
advantageous to our business) in order to satisfy the Annual
Distribution Requirement. If we are unable to obtain cash from
other
20
sources to satisfy the Annual Distribution Requirement, we may
fail to qualify for the federal income tax benefits allowable to
RICs and, thus, become subject to a corporate-level federal
income tax on all our income.
If we
do not invest a sufficient portion of our assets in qualifying
assets, we could fail to qualify as a BDC or be precluded from
investing according to our current business
strategy.
As a BDC, we are prohibited from acquiring any assets other than
qualifying assets unless, at the time of and after
giving effect to such acquisition, at least 70% of our total
assets are qualifying assets. Substantially all of our assets
are qualifying assets and we expect that substantially all
assets that we may acquire in the future will be qualifying
assets, although we may decide to make other investments that
are not qualifying assets to the extent permitted by the 1940
Act. If we acquire debt or equity securities from an issuer that
has outstanding marginable securities at the time we make an
investment, these acquired assets may not be treated as
qualifying assets. This result is dictated by the definition of
eligible portfolio company under the 1940 Act, which
in part looks to whether a company has outstanding marginable
securities. See Regulation Qualifying
Assets. If we do not invest a sufficient portion of our
assets in qualifying assets, we could lose our status as a BDC,
which would have a material adverse effect on our business,
financial condition and results of operations.
Changes
in laws or regulations governing our business could adversely
affect our business, results of operations and financial
condition.
Changes in the laws or regulations or the interpretations of the
laws and regulations that govern BDCs, RICs or non-depository
commercial lenders could significantly affect our operations,
our cost of doing business and our investment strategy. We are
subject to federal, state and local laws and regulations and
judicial and administrative decisions that affect our
operations, including our loan originations, maximum interest
rates, fees and other charges, disclosures to portfolio
companies, the terms of secured transactions, collection and
foreclosure procedures, portfolio composition and other trade
practices. If these laws, regulations or decisions change, or if
we expand our business into jurisdictions that have adopted more
stringent requirements, we may incur significant expenses to
comply with these laws, regulations or decisions or we might
have to restrict our operations or alter our investment
strategy. In addition, if we do not comply with applicable laws,
regulations and decisions, we may lose licenses needed for the
conduct of our business and be subject to civil fines and
criminal penalties, any of which could have a material adverse
effect upon our business, results of operations or financial
condition.
Our
Advisor has significant potential conflicts of interest with us
and our stockholders.
As a result of our arrangements with our Advisor, there may be
times when our Advisor has interests that differ from those of
our stockholders, giving rise to a potential conflict of
interest. Our executive officers and directors, as well as the
current and future executives and employees of our Advisor,
serve or may serve as officers, directors or principals of
entities that operate in the same or a related line of business
as we do. Accordingly, they may have obligations to investors in
those entities, the fulfillment of which might not be in the
best interests of our stockholders. In addition, our Advisor may
manage other funds in the future that may have investment
objectives that are similar, in whole or in part, to ours. Our
Advisor may determine that an investment is appropriate for us
and for one or more of those other funds. In such an event,
depending on the availability of the investment and other
appropriate factors, our Advisor will endeavor to allocate
investment opportunities in a fair and equitable manner. It is
also possible that we may not be given the opportunity to
participate in these other investment opportunities.
We pay management and incentive fees to our Advisor and
reimburse our Advisor for certain expenses it incurs. As a
result, investors in our common stock invest on a
gross basis and receive distributions on a
net basis after expenses, resulting in a lower rate
of return than an investor might achieve through direct
investments. Also, the incentive fee payable by us to our
Advisor may create an incentive for our Advisor to pursue
investments on our behalf that are riskier or more speculative
than would be the case in the absence of such compensation
arrangements.
We have entered into a license agreement with Horizon Technology
Finance, LLC, pursuant to which it has agreed to grant us a
non-exclusive, royalty-free right and license to use the service
mark Horizon Technology Finance. Under this
agreement, we have a right to use the Horizon Technology
Finance service mark for so long as the Investment
Management Agreement is in effect between us and our Advisor. In
addition, we pay our Advisor
21
our allocable portion of overhead and other expenses incurred by
our Advisor in performing its obligations under the
Administration Agreement, including rent, the fees and expenses
associated with performing compliance functions, and our
allocable portion of the compensation of our chief financial
officer and any administrative support staff. Any potential
conflict of interest arising as a result of our arrangements
with our Advisor could have a material adverse effect on our
business, results of operations and financial condition.
Our
incentive fee may impact our Advisors structuring of our
investments, including by causing our Advisor to pursue
speculative investments.
The incentive fee payable by us to our Advisor may create an
incentive for our Advisor to pursue investments on our behalf
that are riskier or more speculative than would be the case in
the absence of such compensation arrangement. The incentive fee
payable to our Advisor is calculated based on a percentage of
our return on invested capital. This may encourage our Advisor
to use leverage to increase the return on our investments. Under
certain circumstances, the use of leverage may increase the
likelihood of default, which would impair the value of our
common stock. In addition, our Advisor receives the incentive
fee based, in part, upon net capital gains realized on our
investments. Unlike that portion of the incentive fee based on
income, there is no hurdle rate applicable to the portion of the
incentive fee based on net capital gains. As a result, our
Advisor may have a tendency to invest more capital in
investments that are likely to result in capital gains as
compared to income-producing securities. Such a practice could
result in our investing in more speculative investments than
would otherwise be the case, which could result in higher
investment losses, particularly during economic downturns. In
addition, the incentive fee may encourage our Advisor to pursue
different types of investments or structure investments in ways
that are more likely to result in warrant gains or gains on
equity investments, including upon exercise of equity
participation rights, which are inconsistent with our investment
strategy and disciplined underwriting process.
The incentive fee payable by us to our Advisor may also induce
our Advisor to pursue investments on our behalf that have a
deferred interest feature, even if such deferred payments would
not provide cash necessary to enable us to pay current
distributions to our stockholders. Under these investments, we
would accrue interest over the life of the investment but would
not receive the cash income from the investment until the end of
the term. Our net investment income used to calculate the income
portion of our investment fee, however, includes accrued
interest. Thus, a portion of this incentive fee would be based
on income that we have not yet received in cash. In addition,
the
catch-up
portion of the incentive fee may encourage our Advisor to
accelerate or defer interest payable by portfolio companies from
one calendar quarter to another, potentially resulting in
fluctuations in the timing and amounts of dividends. Our
governing documents do not limit the number of loans we may make
with deferred interest features or the proportion of our income
we derive from such loans.
Our
Advisors liability is limited, and we have agreed to
indemnify our Advisor against certain liabilities, which may
lead our Advisor to act in a riskier manner on our behalf than
it would when acting for its own account.
Under the Investment Management Agreement, our Advisor does not
assume any responsibility to us other than to render the
services called for under that agreement, and it is not
responsible for any action of our Board in following or
declining to follow our Advisors advice or
recommendations. Under the terms of the Investment Management
Agreement, our Advisor, its officers, members, personnel and any
person controlling or controlled by our Advisor is not liable to
us, any subsidiary of ours, our directors, our stockholders or
any subsidiarys stockholders or partners for acts or
omissions performed in accordance with and pursuant to the
Investment Management Agreement, except those resulting from
acts constituting gross negligence, willful misconduct, bad
faith or reckless disregard of our Advisors duties under
the Investment Management Agreement. In addition, we have agreed
to indemnify our Advisor and each of its officers, directors,
members, managers and employees from and against any claims or
liabilities, including reasonable legal fees and other expenses
reasonably incurred, arising out of or in connection with our
business and operations or any action taken or omitted on our
behalf pursuant to authority granted by the Investment
Management Agreement, except where attributable to gross
negligence, willful misconduct, bad faith or reckless disregard
of such persons duties under the Investment Management
Agreement. These protections may lead our Advisor to act in a
riskier manner when acting on our behalf than it would when
acting for its own account.
22
If we
are unable to manage our future growth effectively, we may be
unable to achieve our investment objective, which could
adversely affect our business, results of operations and
financial condition and cause the value of your investment in us
to decline.
Our ability to achieve our investment objective depends on our
ability to achieve and sustain growth, which depends, in turn,
on our Advisors direct origination capabilities and
disciplined underwriting process in identifying, evaluating,
financing, investing in and monitoring suitable companies that
meet our investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of our Advisors
marketing capabilities, management of the investment process,
ability to provide efficient services and access to financing
sources on acceptable terms. In addition to monitoring the
performance of our existing investments, our Advisor may also be
called upon to provide managerial assistance to our portfolio
companies. These demands on their time may distract them or slow
the rate of investment. If we fail to manage our future growth
effectively, our business, results of operations and financial
condition could be materially adversely affected and the value
of your investment in us could decrease.
Our
Board may change our operating policies and strategies,
including our investment objective, without prior notice or
stockholder approval, the effects of which may adversely affect
our business.
Our Board may modify or waive our current operating policies and
strategies, including our investment objective, without prior
notice and without stockholder approval (provided that no such
modification or waiver may change the nature of our business so
as to cease to be, or withdraw our election as, a BDC as
provided by the 1940 Act without stockholder approval at a
special meeting called upon written notice of not less than ten
or more than sixty days before the date of such meeting). We
cannot predict the effect any changes to our current operating
policies and strategies would have on our business, results of
operations or financial condition or on the value of our stock.
However, the effects of any changes might adversely affect our
business, any or all of which could negatively impact our
ability to pay dividends or cause you to lose all or part of
your investment in us.
Our
quarterly and annual operating results may fluctuate due to the
nature of our business.
We could experience fluctuations in our quarterly and annual
operating results due to a number of factors, some of which are
beyond our control, including: our ability to make investments
in companies that meet our investment criteria; the interest
rate payable on our loans; the default rate on these
investments; the level of our expenses, variations in, and the
timing of, the recognition of realized and unrealized gains or
losses; and the degree to which we encounter competition in our
markets and general economic conditions. For example, we have
historically experienced greater investment activity during the
second and fourth quarters relative to other periods. As a
result of these factors, you should not rely on the results for
any prior period as being indicative of our performance in
future periods.
Our
business plan and growth strategy depends to a significant
extent upon our Advisors referral relationships. If our
Advisor is unable to develop new or maintain existing
relationships, or if these relationships fail to generate
investment opportunities, our business could be materially
adversely affected.
We have historically depended on our Advisors referral
relationships to generate investment opportunities. For us to
achieve our future business objectives, members of our Advisor
need to maintain these relationships with venture capital and
private equity firms and management teams and legal firms,
accounting firms, investment banks and other lenders, and we
rely to a significant extent upon these relationships to provide
us with investment opportunities. If they fail to maintain their
existing relationships or develop new relationships with other
firms or sources of investment opportunities, we may not be able
to grow our investment portfolio. In addition, persons with whom
our Advisor has relationships are not obligated to provide us
with investment opportunities, and, therefore, there is no
assurance that such relationships will lead to the origination
of debt or other investments.
Our
Advisor can resign on 60 days notice and we may not
be able to find a suitable replacement within that time,
resulting in a disruption in our operations that could adversely
affect our business, results of operations or financial
condition.
Under the Investment Management Agreement, our Advisor has the
right to resign at any time, including during the first two
years following the Investment Management Agreements
effective date, upon not more than 60 days written
notice, whether we have found a replacement or not. If our
Advisor resigns, we may not be able to
23
find a new investment advisor or hire internal management with
similar expertise and ability to provide the same or equivalent
services on acceptable terms within 60 days, or at all. If
we are unable to do so, our operations are likely to be
disrupted, our business, results of operations and financial
condition and our ability to pay distributions may be adversely
affected and the market price of our shares may decline. In
addition, the coordination of our internal management and
investment activities is likely to suffer if we are unable to
identify and reach an agreement with a single institution or
group of executives having the expertise possessed by our
Advisor and its affiliates. Even if we are able to retain
comparable management, whether internal or external, the
integration of new management and their lack of familiarity with
our investment objective may result in additional costs and time
delays that may adversely affect our business, results of
operations or financial condition.
Our
ability to enter into transactions with our affiliates is
restricted.
As a BDC, we are prohibited under the 1940 Act from
participating in certain transactions with our affiliates
without the prior approval of our independent directors and, in
some cases, the SEC. Any person that owns, directly or
indirectly, 5% or more of our outstanding voting securities is
considered our affiliate for purposes of the 1940 Act. We are
generally prohibited from buying or selling any security from or
to an affiliate, absent the prior approval of our independent
directors. The 1940 Act also prohibits certain joint
transactions with an affiliate, which could include investments
in the same portfolio company (whether at the same or different
times), without prior approval of our independent directors. If
a person acquires more than 25% of our voting securities, we are
prohibited from buying or selling any security from or to that
person or certain of that persons affiliates, or entering
into prohibited joint transactions with those persons, absent
the prior approval of the SEC. Similar restrictions limit our
ability to transact business with our officers or directors or
their affiliates.
We
incur significant costs as a result of being a publicly traded
company.
As a publicly traded company, we incur legal, accounting and
other expenses, including costs associated with the periodic
reporting requirements applicable to a company whose securities
are registered under the Securities Exchange Act of 1934, as
amended (the Exchange Act), as well as additional
corporate governance requirements, including requirements under
the Sarbanes-Oxley Act of 2002 (the Sarbanes Oxley
Act), and other rules implemented by the SEC.
Efforts
to comply with Section 404 of the Sarbanes-Oxley Act may
involve significant expenditures, and non-compliance with
Section 404 of the Sarbanes-Oxley Act may adversely affect
us and the market price of our common stock.
Under current SEC rules, we are required to report on our
internal control over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act and related rules and
regulations of the SEC. As a result, we incur additional
expenses that may negatively impact our financial performance
and our ability to make distributions. This process also results
in a diversion of managements time and attention. We
cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the
same on our operations, and we may not be able to ensure that
the process is effective or that our internal control over
financial reporting is or will be effective in a timely manner.
In the event that we are unable to maintain or achieve
compliance with Section 404 of the Sarbanes-Oxley Act and
related rules, we and the market price of our securities may be
adversely affected.
Terrorist
attacks and other catastrophic events may disrupt the businesses
in which we invest and harm our operations and our
profitability.
Terrorist attacks and threats, escalation of military activity
or acts of war may significantly harm our results of operations
and your investment. We cannot assure you that there will not be
further terrorist attacks against the United States or United
States businesses. Such attacks or armed conflicts in the United
States or elsewhere may impact the businesses in which we invest
directly or indirectly, by undermining economic conditions in
the United States or elsewhere. In addition, because many of our
portfolio companies operate and rely on network infrastructure
and enterprise applications and internal technology systems for
development, marketing, operational, support and other business
activities, a disruption or failure of any or all of these
systems in the event of a major telecommunications failure,
cyber-attack, fire, earthquake, severe weather conditions or
other catastrophic event
24
could cause system interruptions, delays in product development
and loss of critical data and could otherwise disrupt their
business operations. Losses resulting from terrorist attacks are
generally uninsurable.
Risks
Related to our Investments
We
have not yet identified many of the potential investment
opportunities for our portfolio.
We have not yet identified many of the potential investment
opportunities for our portfolio. Our future investments will be
selected by our Advisor, subject to the approval of its
investment committee. Our stockholders do not have input into
our Advisors investment decisions. As a result, our
stockholders are unable to evaluate any of our future portfolio
company investments. These factors increase the uncertainty, and
thus the risk, of investing in our securities.
We are
a non-diversified investment company within the meaning of the
1940 Act, and therefore we generally are not limited with
respect to the proportion of our assets that may be invested in
securities of a single issuer.
We are classified as a non-diversified investment company within
the meaning of the 1940 Act, which means that we are not limited
by the 1940 Act with respect to the proportion of our assets
that we may invest in securities of a single issuer, excluding
limitations on stake holdings in investment companies. To the
extent that we assume large positions in the securities of a
small number of issuers, our net asset value may fluctuate to a
greater extent than that of a diversified investment company as
a result of changes in the financial condition or the
markets assessment of the issuer. We may also be more
susceptible to any single economic or regulatory occurrence than
a diversified investment company. Beyond our income tax
diversification requirements, we do not have fixed guidelines
for diversification, and our investments could be concentrated
in relatively few portfolio companies.
If our
investments do not meet our performance expectations, you may
not receive distributions.
We intend to make distributions of income on a quarterly basis
to our stockholders. We may not be able to achieve operating
results that will allow us to make distributions at a specific
level or increase the amount of these distributions from time to
time. In addition, due to the asset coverage test applicable to
us as a BDC, we may be limited in our ability to make
distributions. See Regulation. Also, restrictions
and provisions in any existing or future credit facilities may
limit our ability to make distributions. If we do not distribute
a certain percentage of our income annually, we will suffer
adverse tax consequences, including failure to obtain, or
possible loss of, the federal income tax benefits allowable to
RICs.
Most
of our portfolio companies will need additional capital, which
may not be readily available.
Our portfolio companies typically require substantial additional
financing to satisfy their continuing working capital and other
capital requirements and service the interest and principal
payments on our investments. We cannot predict the circumstances
or market conditions under which our portfolio companies will
seek additional capital. Each round of institutional equity
financing is typically intended to provide a company with only
enough capital to reach the next stage of development. It is
possible that one or more of our portfolio companies will not be
able to raise additional financing or may be able to do so only
at a price or on terms that are unfavorable to the portfolio
company, either of which would negatively impact our investment
returns. Some of these companies may be unable to obtain
sufficient financing from private investors, public capital
markets or lenders, thereby requiring these companies to cease
or curtail business operations. Accordingly, investing in these
types of companies generally entails a higher risk of loss than
investing in companies that do not have significant incremental
capital raising requirements.
Economic
recessions or downturns could adversely affect our business and
that of our portfolio companies which may have an adverse effect
on our business, results of operations and financial
condition.
General economic conditions may affect our activities and the
operation and value of our portfolio companies. Economic
slowdowns or recessions may result in a decrease of
institutional equity investment, which would limit our lending
opportunities. Furthermore, many of our portfolio companies may
be susceptible to economic
25
slowdowns or recessions and may be unable to repay our loans
during these periods. Therefore, our non-performing assets are
likely to increase and the value of our portfolio is likely to
decrease during these periods. Adverse economic conditions may
also decrease the value of collateral securing some of our loans
and the value of our equity investments. Economic slowdowns or
recessions could lead to financial losses in our portfolio and a
decrease in revenues, net income and assets. Unfavorable
economic conditions could also increase our funding costs, limit
our access to the capital markets or result in a decision by
lenders not to extend credit to us.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize the
portfolio companys ability to meet its obligations under
the loans that we hold. We may incur expenses to the extent
necessary to recover our investment upon default or to negotiate
new terms with a defaulting portfolio company. These events
could harm our financial condition and operating results.
Our
investment strategy focuses on investments in development-stage
companies in our Target Industries, which are subject to many
risks, including volatility, intense competition, shortened
product life cycles and periodic downturns, and are typically
rated below investment grade.
We intend to invest, under normal circumstances, most of the
value of our total assets (including the amount of any
borrowings for investment purposes) in development-stage
companies, which may have relatively limited operating
histories, in our Target Industries. Many of these companies may
have narrow product lines and small market shares, compared to
larger established publicly-owned firms, which tend to render
them more vulnerable to competitors actions and market
conditions, as well as general economic downturns. The revenues,
income (or losses) and valuations of development-stage companies
in our Target Industries can and often do fluctuate suddenly and
dramatically. For these reasons, investments in our portfolio
companies, if rated by one or more ratings agency, would
typically be rated below investment grade, which
refers to securities rated by ratings agencies below the four
highest rating categories. These companies may also have more
limited access to capital and higher funding costs. In addition,
development-stage technology markets are generally characterized
by abrupt business cycles and intense competition, and the
competitive environment can change abruptly due to rapidly
evolving technology. Therefore, our portfolio companies may face
considerably more risk than companies in other industry sectors.
Accordingly, these factors could impair their cash flow or
result in other events, such as bankruptcy, which could limit
their ability to repay their obligations to us and may
materially adversely affect the return on, or the recovery of,
our investments in these businesses.
Because of rapid technological change, the average selling
prices of products and some services provided by
development-stage companies in our Target Industries have
historically decreased over their productive lives. These
decreases could adversely affect their operating results and
cash flow, their ability to meet obligations under their debt
securities and the value of their equity securities. This could,
in turn, materially adversely affect our business, financial
condition and results of operations.
Any
unrealized depreciation we experience on our loan portfolio may
be an indication of future realized losses, which could reduce
our income available for distribution.
As a BDC, we are required to carry our investments at fair value
which shall be the market value of our investments or, if no
market value is ascertainable, at the fair value as determined
in good faith pursuant to procedures approved by our Board in
accordance with our valuation policy. We are not permitted to
maintain a reserve for loan losses. Decreases in the fair values
of our investments are recorded as unrealized depreciation. Any
unrealized depreciation in our loan portfolio could be an
indication of a portfolio companys inability to meet its
repayment obligations to us with respect to the affected loans.
This could result in realized losses in the future and
ultimately reduces our income available for distribution in
future periods.
If the
assets securing the loans we make decrease in value, we may not
have sufficient collateral to cover losses and may experience
losses upon foreclosure.
We believe our portfolio companies generally are and will be
able to repay our loans from their available capital, from
future capital-raising transactions or from cash flow from
operations. However, to mitigate our credit
26
risks, we typically take a security interest in all or a portion
of the assets of our portfolio companies, including the equity
interests of their subsidiaries. There is a risk that the
collateral securing our loans may decrease in value over time,
may be difficult to appraise or sell in a timely manner and may
fluctuate in value based upon the business and market
conditions, including as a result of the inability of a
portfolio company to raise additional capital, and, in some
circumstances, our lien could be subordinated to claims of other
creditors. In addition, deterioration of a portfolio
companys financial condition and prospects, including its
inability to raise additional capital, may be accompanied by
deterioration of the value of the collateral for the loan.
Consequently, although such loan is secured, we may not receive
principal and interest payments according to the loans
terms and the value of the collateral may not be sufficient to
recover our investment should we be forced to enforce our
remedies.
In addition, because we invest in development-stage companies in
our Target Industries, a substantial portion of the assets
securing our investment may be in the form of intellectual
property, if any, inventory, equipment, cash and accounts
receivables. Intellectual property, if any, which secures a
loan, could lose value if the companys rights to the
intellectual property are challenged or if the companys
license to the intellectual property is revoked or expires. In
addition, in lieu of a security interest in a portfolio
companys intellectual property, we may sometimes obtain a
security interest in all assets of the portfolio company other
than intellectual property and also obtain a commitment by the
portfolio company not to grant liens to any other creditor on
the companys intellectual property. In these cases, we may
have additional difficulty recovering our principal in the event
of a foreclosure. Similarly, any equipment securing our loan may
not provide us with the anticipated security if there are
changes in technology or advances in new equipment that render
the particular equipment obsolete or of limited value or if the
company fails to adequately maintain or repair the equipment.
Any one or more of the preceding factors could materially impair
our ability to recover principal in a foreclosure.
We may
choose to waive or defer enforcement of covenants in the debt
securities held in our portfolio, which may cause us to lose all
or part of our investment in these companies.
We structure the debt investments in our portfolio companies to
include business and financial covenants placing affirmative and
negative obligations on the operation of the companys
business and its financial condition. However, from time to time
we may elect to waive breaches of these covenants, including our
right to payment, or waive or defer enforcement of remedies,
such as acceleration of obligations or foreclosure on
collateral, depending upon the financial condition and prospects
of the particular portfolio company. These actions may reduce
the likelihood of our receiving the full amount of future
payments of interest or principal and be accompanied by a
deterioration in the value of the underlying collateral as many
of these companies may have limited financial resources, may be
unable to meet future obligations and may go bankrupt. These
events could harm our financial condition and operating results.
The
lack of liquidity in our investments may adversely affect our
business, and if we need to sell any of our investments, we may
not be able to do so at a favorable price. As a result, we may
suffer losses.
We plan to generally invest in loans with terms of up to four
years and hold such investments until maturity, unless earlier
prepaid, and we do not expect that our related holdings of
equity securities will provide us with liquidity opportunities
in the near-term. We expect to primarily invest in companies
whose securities are not publicly-traded, and whose securities
are subject to legal and other restrictions on resale or are
otherwise less liquid than publicly-traded securities. The
illiquidity of these investments may make it difficult for us to
sell these investments when desired. We may also face other
restrictions on our ability to liquidate an investment in a
public portfolio company to the extent that we possess material
non-public information regarding the portfolio company. In
addition, if we are required to liquidate all or a portion of
our portfolio quickly, we may realize significantly less than
the value at which we had previously recorded these investments.
As a result, we do not expect to dispose of our investments in
the near term. However, we may be required to do so in order to
maintain our qualification as a BDC and as a RIC if we do not
satisfy one or more of the applicable criteria under the
respective regulatory frameworks. Because most of our
investments are illiquid, we may be unable to dispose of them,
in which case we could fail to qualify as a RIC
and/or BDC,
or we may not be able to dispose of them at favorable prices,
and as a result, we may suffer losses.
27
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
We plan to invest primarily in loans issued by our portfolio
companies. Some of our portfolio companies are permitted to have
other debt that ranks equally with, or senior to, our loans in
the portfolio company. By their terms, these debt instruments
may provide that the holders thereof are entitled to receive
payment of interest or principal on or before the dates on which
we are entitled to receive payments in respect of our loans.
These debt instruments may prohibit the portfolio companies from
paying interest on or repaying our investments in the event of,
and during, the continuance of a default under the debt
instruments. In addition, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of a
portfolio company, holders of debt instruments ranking senior to
our investment in that portfolio company would typically be
entitled to receive payment in full before we receive any
payment in respect of our investment. After repaying senior
creditors, a portfolio company may not have any remaining assets
to use for repaying its obligation to us. In the case of debt
ranking equally with our loans, we would have to share on an
equal basis any distributions with other creditors holding such
debt in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy.
There
may be circumstances where our loans could be subordinated to
claims of other creditors or we could be subject to lender
liability claims.
Even though certain of our investments are structured as senior
loans, if one of our portfolio companies were to go bankrupt,
depending on the facts and circumstances, including the extent
to which we actually provided managerial assistance to that
portfolio company, a bankruptcy court might recharacterize our
debt investment and subordinate all or a portion of our claim to
that of other creditors. We may also be subject to lender
liability claims for actions taken by us with respect to a
portfolio companys business, including in rendering
significant managerial assistance, or instances where we
exercise control over the portfolio company.
An
investment strategy focused primarily on privately held
companies presents certain challenges, including the lack of
available information about these companies, a dependence on the
talents and efforts of only a few key portfolio company
personnel and a greater vulnerability to economic
downturns.
We currently invest, and plan to invest, primarily in privately
held companies. Generally, very little public information exists
about these companies, and we are required to rely on the
ability of our Advisor to obtain adequate information to
evaluate the potential returns from investing in these
companies. If we are unable to uncover all material information
about these companies, we may not make a fully informed
investment decision, and we may lose money on our investments.
Also, privately held companies frequently have less diverse
product lines and a smaller market presence than larger
competitors. Thus, they are generally more vulnerable to
economic downturns and may experience substantial variations in
operating results. These factors could affect our investment
returns.
In addition, our success depends, in large part, upon the
abilities of the key management personnel of our portfolio
companies, who are responsible for the
day-to-day
operations of our portfolio companies. Competition for qualified
personnel is intense at any stage of a companys
development. The loss of one or more key managers can hinder or
delay a companys implementation of its business plan and
harm its financial condition. Our portfolio companies may not be
able to attract and retain qualified managers and personnel. Any
inability to do so may negatively affect our investment returns.
Prepayments
of our debt investments by our portfolio companies could
adversely impact our results of operations and reduce our return
on equity.
We are subject to the risk that the investments we make in our
portfolio companies may be repaid prior to maturity. For
example, most of our debt investments have historically been
repaid prior to maturity by our portfolio companies. At the time
of a liquidity event, such as a sale of the business,
refinancing or public offering, many of our portfolio companies
have availed themselves of the opportunity to repay our loans
prior to maturity. Our investments generally allow for repayment
at any time subject to certain penalties. When this occurs, we
generally reinvest these proceeds in temporary investments,
pending their future investment in new portfolio companies.
These temporary investments have substantially lower yields than
the debt being prepaid, and we could experience significant
delays in
28
reinvesting these amounts. Any future investment in a new
portfolio company may also be at lower yields than the debt that
was repaid. As a result, our results of operations could be
materially adversely affected if one or more of our portfolio
companies elects to prepay amounts owed to us. Additionally,
prepayments could negatively impact our return on equity, which
could result in a decline in the market price of our common
stock.
Our
business and growth strategy could be adversely affected if
government regulations, priorities and resources impacting the
industries in which our portfolio companies operate
change.
Some of our portfolio companies operate in industries that are
highly regulated by federal, state
and/or local
agencies. Changes in existing laws, rules or regulations, or
judicial or administrative interpretations thereof, or new laws,
rules or regulations could have an adverse impact on the
business and industries of our portfolio companies. In addition,
changes in government priorities or limitations on government
resources could also adversely impact our portfolio companies.
We are unable to predict whether any such changes in laws, rules
or regulations will occur and, if they do occur, the impact of
these changes on our portfolio companies and our investment
returns.
Our
portfolio companies operating in the life science industry are
subject to extensive government regulation and certain other
risks particular to that industry.
As part of our investment strategy, we have invested, and plan
to invest in the future, in companies in the life science
industry that are subject to extensive regulation by the Food
and Drug Administration and to a lesser extent, other federal
and state agencies. If any of these portfolio companies fail to
comply with applicable regulations, they could be subject to
significant penalties and claims that could materially and
adversely affect their operations. Portfolio companies that
produce medical devices or drugs are subject to the expense,
delay and uncertainty of the regulatory approval process for
their products and, even if approved, these products may not be
accepted in the marketplace. In addition, new laws, regulations
or judicial interpretations of existing laws and regulations
might adversely affect a portfolio company in this industry.
Portfolio companies in the life science industry may also have a
limited number of suppliers of necessary components or a limited
number of manufacturers for their products, and therefore face a
risk of disruption to their manufacturing process if they are
unable to find alternative suppliers when needed. Any of these
factors could materially and adversely affect the operations of
a portfolio company in this industry and, in turn, impair our
ability to timely collect principal and interest payments owed
to us.
If our
portfolio companies are unable to commercialize their
technologies, products, business concepts or services, the
returns on our investments could be adversely
affected.
The value of our investments in our portfolio companies may
decline if our portfolio companies are not able to commercialize
their technology, products, business concepts or services.
Additionally, although some of our portfolio companies may
already have a commercially successful product or product line
at the time of our investment, technology-related products and
services often have a more limited market or life span than
products in other industries. Thus, the ultimate success of
these companies often depends on their ability to continually
innovate in increasingly competitive markets. If they are unable
to do so, our investment returns could be adversely affected and
their ability to service their debt obligations to us over the
life of the loan could be impaired. Our portfolio companies may
be unable to successfully acquire or develop any new
technologies and the intellectual property they currently hold
may not remain viable. Even if our portfolio companies are able
to develop commercially viable products, the market for new
products and services is highly competitive and rapidly
changing. Neither our portfolio companies nor we have any
control over the pace of technology development. Commercial
success is difficult to predict, and the marketing efforts of
our portfolio companies may not be successful.
If our
portfolio companies are unable to protect their intellectual
property rights, our business and prospects could be harmed, and
if portfolio companies are required to devote significant
resources to protecting their intellectual property rights, the
value of our investment could be reduced.
Our future success and competitive position depends in part upon
the ability of our portfolio companies to obtain, maintain and
protect proprietary technology used in their products and
services. The intellectual property held by our portfolio
companies often represents a substantial portion of the
collateral securing our investments
and/or
constitutes a significant portion of the portfolio
companies value that may be available in a downside
29
scenario to repay our loans. Our portfolio companies rely, in
part, on patent, trade secret and trademark law to protect that
technology, but competitors may misappropriate their
intellectual property, and disputes as to ownership of
intellectual property may arise. Portfolio companies may, from
time to time, be required to institute litigation to enforce
their patents, copyrights or other intellectual property rights,
protect their trade secrets, determine the validity and scope of
the proprietary rights of others or defend against claims of
infringement. Such litigation could result in substantial costs
and diversion of resources. Similarly, if a portfolio company is
found to infringe or misappropriate a third partys patent
or other proprietary rights, it could be required to pay damages
to the third party, alter its products or processes, obtain a
license from the third party
and/or cease
activities utilizing the proprietary rights, including making or
selling products utilizing the proprietary rights. Any of the
foregoing events could negatively affect both the portfolio
companys ability to service our debt investment and the
value of any related debt and equity securities that we own, as
well as the value of any collateral securing our investment.
We do
not expect to control any of our portfolio
companies.
We do not control, or expect to control in the future, any of
our portfolio companies, even though our debt agreements may
contain certain restrictive covenants that limit the business
and operations of our portfolio companies. We also do not
maintain, or intend to maintain in the future, a control
position to the extent we own equity interests in any portfolio
company. As a result, we are subject to the risk that a
portfolio company in which we invest may make business decisions
with which we disagree and the management of such company, as
representatives of the holders of their common equity, may take
risks or otherwise act in ways that do not serve our interests
as debt investors. Due to the lack of liquidity of the
investments that we typically hold in our portfolio companies,
we may not be able to dispose of our investments in the event we
disagree with the actions of a portfolio company and we may
therefore, suffer a decrease in the value of our investments.
Risks
Related to Offerings Under This Prospectus
There
is a risk that investors in our equity securities may not
receive dividends or that our dividends may not grow over time
and that investors in our debt securities may not receive all of
the interest income to which they are entitled.
We intend to make distributions on a quarterly basis to our
stockholders out of assets legally available for distribution.
We cannot assure you that we will achieve investment results
that will allow us to make a specified level of cash
distributions or
year-to-year
increases in cash distributions. In addition, due to the asset
coverage test applicable to us as a BDC, we may be limited in
our ability to make distributions. Further, if we invest a
greater amount of assets in equity securities that do not pay
current dividends, it could reduce the amount available for
distribution. See Price Range of Common Stock and
Distributions.
We
cannot assure you that the market price of shares of our common
stock will not decline.
Prior to our IPO, there was no public trading market for our
common stock. We cannot predict the prices at which our common
stock will trade. Shares of closed-end management investment
companies have in the past frequently traded at discounts to
their net asset values and our common stock has been and may
continue to be discounted in the market. This characteristic of
closed-end management investment companies is separate and
distinct from the risk that our net asset value per share may
decline. We cannot predict whether shares of our common stock
will trade above, at or below our net asset value. If our common
stock trades below its net asset value, we will generally not be
able to sell additional shares of our common stock to the public
at its market price without first obtaining the approval of our
stockholders (including our unaffiliated stockholders) and our
independent directors.
Our
common stock price may be volatile and may decrease
substantially.
The trading price of our common stock may fluctuate
substantially and the liquidity of our common stock may be
limited, in each case depending on many factors, some of which
are beyond our control and may not be directly related to our
operating performance. These factors include the following:
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price and volume fluctuations in the overall stock market or in
the market for BDCs from time to time;
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investor demand for our shares of common stock;
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significant volatility in the market price and trading volume of
securities of registered closed-end management investment
companies, BDCs or other financial services companies;
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our inability to raise capital, borrow money or deploy or invest
our capital;
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fluctuations in interest rates;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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operating performance of companies comparable to us;
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changes in regulatory policies or tax guidelines with respect to
RICs or BDCs;
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losing RIC status;
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actual or anticipated changes in our earnings or fluctuations in
our operating results;
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changes in the value of our portfolio of investments;
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general economic conditions, trends and other external factors;
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departures of key personnel; or
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loss of a major source of funding.
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In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Due to
the potential volatility of our stock price, we may therefore be
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources from our business.
Shares
of closed-end investment companies, including BDCs, frequently
trade at a discount to their net asset value, and we cannot
assure you that the market price of our common stock will not
decline following an offering.
We cannot predict the price at which our common stock will
trade. Shares of closed-end investment companies frequently
trade at a discount to their net asset value and our stock may
also be discounted in the market. This characteristic of
closed-end investment companies is separate and distinct from
the risk that our net asset value per share may decline. We
cannot predict whether shares of our common stock will trade
above, at or below our net asset value. In addition, if our
common stock trades below its net asset value, we will generally
not be able to issue additional shares of our common stock at
its market price without first obtaining the approval of our
stockholders and our independent directors.
We
currently invest a portion of our capital in high-quality
short-term investments, which generate lower rates of return
than those expected from investments made in accordance with our
investment objective.
We currently invest a portion of the net proceeds of our capital
in cash, cash equivalents, U.S. government securities and
other high-quality short-term investments. These securities may
earn yields substantially lower than the income that we
anticipate receiving once these proceeds are fully invested in
accordance with our investment objective.
Investing
in shares of our common stock may involve an above average
degree of risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk, volatility or
loss of principal than alternative investment options. Our
investments in portfolio companies may be highly speculative and
aggressive, and therefore, an investment in our common stock may
not be suitable for investors with lower risk tolerance.
31
We may
allocate the net proceeds from an offering in ways with which
you may not agree.
We have significant flexibility in investing the net proceeds of
an offering and may use the net proceeds from an offering in
ways with which you may not agree or for purposes other than
those contemplated at the time of the offering.
Anti-takeover
provisions in our charter documents and other agreements and
certain provisions of the DGCL could deter takeover attempts and
have an adverse impact on the price of our common
stock.
The Delaware General Corporation Law (the DGCL), our
certificate of incorporation and our bylaws contain provisions
that may have the effect of discouraging a third party from
making an acquisition proposal for us. Among other things, our
certificate of incorporation and bylaws:
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provide for a classified board of directors, which may delay the
ability of our stockholders to change the membership of a
majority of our Board;
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authorize the issuance of blank check preferred
stock that could be issued by our Board to thwart a takeover
attempt;
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do not provide for cumulative voting;
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provide that vacancies on our Board, including newly created
directorships, may be filled only by a majority vote of
directors then in office;
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limit the calling of special meetings of stockholders;
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provide that our directors may be removed only for cause;
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require supermajority voting to effect certain amendments to our
certificate of incorporation and our bylaws; and
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require stockholders to provide advance notice of new business
proposals and director nominations under specific procedures.
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These anti-takeover provisions may inhibit a change in control
in circumstances that could give the holders of our common stock
the opportunity to realize a premium over the market price of
our common stock. Our WestLB Facility also contains a covenant
that prohibits us from merging or consolidating with any other
person or selling all or substantially all of our assets without
the prior written consent of WestLB. If we were to engage in
such a transaction without such consent, WestLB could accelerate
our repayment obligations under,
and/or
terminate, our WestLB Facility. In addition, it is a default
under our Wells Facility if (i) a person or group of
persons (within the meaning of the Exchange Act) acquires
beneficial ownership of 20% or more of our issued and
outstanding stock or (ii) during any twelve month period
individuals who at the beginning of such period constituted our
Board cease for any reason, other than death or disability, to
constitute a majority of the directors in office. If either
event were to occur, Wells could accelerate our repayment
obligations under,
and/or
terminate, our Wells Facility.
If we
elect to issue preferred stock, holders of any such preferred
stock will have the right to elect members of our Board and have
class voting rights on certain matters.
The 1940 Act requires that holders of shares of preferred stock
must be entitled as a class to elect two directors at all times
and to elect a majority of the directors if dividends on such
preferred stock are in arrears by two years or more, until such
arrearage is eliminated. In addition, certain matters under the
1940 Act require the separate vote of the holders of any issued
and outstanding preferred stock, including changes in
fundamental investment restrictions and conversion to open-end
status and, accordingly, preferred stockholders could veto any
such changes. Restrictions imposed on the declarations and
payment of dividends or other distributions to the holders of
our common stock and preferred stock, both by the 1940 Act and
by requirements imposed by rating agencies, might impair our
ability to maintain our qualification as a RIC for
U.S. federal income tax purposes.
32
Your
interest in us may be diluted if you do not fully exercise your
subscription rights in any rights offering. In addition, if the
subscription price is less than our net asset value per share,
then you will experience an immediate dilution of the aggregate
net asset value of your shares.
In the event we issue subscription rights, stockholders who do
not fully exercise their rights should expect that they will, at
the completion of a rights offering pursuant to this prospectus,
own a smaller proportional interest in us than would otherwise
be the case if they fully exercised their rights. Such dilution
is not currently determinable because it is not known what
proportion of the shares will be purchased as a result of such
rights offering. Any such dilution will disproportionately
affect nonexercising stockholders. If the subscription price per
share is substantially less than the current net asset value per
share, this dilution could be substantial.
In addition, if the subscription price is less than our net
asset value per share, our stockholders would experience an
immediate dilution of the aggregate net asset value of their
shares as a result of such rights offering. The amount of any
decrease in net asset value is not predictable because it is not
known at this time what the subscription price and net asset
value per share will be on the expiration date of the rights
offering or what proportion of the shares will be purchased as a
result of such rights offering. Such dilution could be
substantial.
Investors
in offerings of our common stock may incur immediate dilution
upon the closing of such offering.
If the public offering price for any offering of shares of our
common stock is higher than the book value per share of our
outstanding common stock, investors purchasing shares of common
stock in any such offering pursuant to this prospectus will pay
a price per share that exceeds the tangible book value per share
after such offering.
If we
sell common stock at a discount to our net asset value per
share, stockholders who do not participate in such sale will
experience immediate dilution in an amount that may be
material.
The issuance or sale by us of shares of our common stock at a
discount to net asset value poses a risk of dilution to our
stockholders. In particular, stockholders who do not purchase
additional shares at or below the discounted price in proportion
to their current ownership will experience an immediate decrease
in net asset value per share (as well as in the aggregate net
asset value of their shares if they do not participate at all).
These stockholders will also experience a disproportionately
greater decrease in their participation in our earnings and
assets and their voting power than the increase we experience in
our assets, potential earning power and voting interests from
such issuance or sale. In addition, such sales may adversely
affect the price at which our common stock trades. See
Sales of Common Stock Below Net Asset Value.
Stockholders
will experience dilution in their ownership percentage if they
do not participate in our dividend reinvestment
plan.
All dividends payable to stockholders that are participants in
our dividend reinvestment plan are automatically reinvested in
shares of our common stock. As a result, stockholders that do
not participate in the dividend reinvestment plan will
experience dilution over time.
The
trading market or market value of our publicly issued debt
securities that we may issue may fluctuate.
Upon issuance, any publicly issued debt securities that we may
issue will not have an established trading market. We cannot
assure you that a trading market for our publicly issued debt
securities will ever develop or, if developed, will be
maintained. In addition to our creditworthiness, many factors
may materially adversely affect the trading market for, and
market value of, our publicly issued debt securities. These
factors include:
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the time remaining to the maturity of these debt securities;
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the outstanding principal amount of debt securities with terms
identical to these debt securities;
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the supply of debt securities trading in the secondary market,
if any;
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the redemption or repayment features, if any, of these debt
securities;
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33
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the level, direction and volatility of market interest rates
generally; and
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market rates of interest higher or lower than rates borne by the
debt securities.
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You should also be aware that there may be a limited number of
buyers when you decide to sell your debt securities. This too
may materially adversely affect the market value of the debt
securities or the trading market for the debt securities.
Terms
relating to redemption may materially adversely affect your
return on the debt securities that we may issue.
If we issue debt securities that are redeemable at our option,
we may choose to redeem the debt securities at times when
prevailing interest rates are lower than the interest rate paid
on the debt securities. In addition, if such debt securities are
subject to mandatory redemption, we may be required to redeem
the debt securities at times when prevailing interest rates are
lower than the interest rate paid on the debt securities. In
this circumstance, you may not be able to reinvest the
redemption proceeds in a comparable security at an effective
interest rate as high as your debt securities being redeemed.
Our
credit ratings may not reflect all risks of an investment in
debt securities that we may issue.
Our credit ratings are an assessment by third parties of our
ability to pay our obligations. Consequently, real or
anticipated changes in our credit ratings will generally affect
the market value of debt securities that we may issue. Our
credit ratings, however, may not reflect the potential impact of
risks related to market conditions generally or other factors
discussed above on the market value of or trading market for any
publicly issued debt securities that we may issue.
Subsequent
sales in the public market of substantial amounts of our common
stock may have an adverse effect on the market price of our
common stock.
Sales of substantial amounts of our common stock, or the
availability of shares for sale, including those registered
pursuant to this Registration Statement, could adversely affect
the prevailing market price of our common stock. If this occurs
and continues, it could impair our ability to raise additional
capital through the sale of equity securities should we desire
to do so.
34
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to factors previously identified elsewhere in this
prospectus, including the Risk Factors section of
this prospectus, the following factors, among others, could
cause actual results to differ materially from forward-looking
statements or historical performance:
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our future operating results, including the performance of our
existing loans and warrants;
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the introduction, withdrawal, success and timing of business
initiatives and strategies;
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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;
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the relative and absolute investment performance and operations
of our Advisor;
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the impact of increased competition;
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the impact of investments we intend to make and future
acquisitions and divestitures;
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the unfavorable resolution of legal proceedings;
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our business prospects and the prospects of our portfolio
companies;
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the projected performance of other funds managed by our Advisor;
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the impact, extent and timing of technological changes and the
adequacy of intellectual property protection;
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our regulatory structure and tax status;
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the adequacy of our cash resources and working capital;
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the timing of cash flows, if any, from the operations of our
portfolio companies;
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the impact of interest rate volatility on our results,
particularly because we use leverage as part of our investment
strategy;
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the ability of our portfolio companies to achieve their
objectives;
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our ability to cause a subsidiary to become a licensed SBIC;
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the impact of legislative and regulatory actions and reforms and
regulatory, supervisory or enforcement actions of government
agencies relating to us or our Advisor;
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our contractual arrangements and relationships with third
parties;
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our ability to access capital and any future financings by us;
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the ability of our Advisor to attract and retain highly talented
professionals; and
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the impact of changes to tax legislation and, generally, our tax
position.
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This 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
anticipated in forward-looking statements and future results
could differ materially from historical performance.
35
USE OF
PROCEEDS
Unless otherwise specified in any prospectus supplement
accompanying this prospectus, we intend to use the net proceeds
from the sale of our securities for investment in portfolio
companies in accordance with our investment objective and
strategies as described in this prospectus and for working
capital and general corporate purposes. The supplement to this
prospectus relating to an offering will more fully identify the
use of proceeds from such offering. 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,
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 for
additional information about temporary investments we may make
while waiting to make longer-term investments in pursuit of our
investment objective. We will not receive any proceeds from the
resale of our common stock by the selling stockholders.
36
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on NASDAQ, under the symbol
HRZN. The following table sets forth, for each
fiscal quarter since our IPO, the range of high and low sales
prices of our common stock as reported on NASDAQ, the sales
price as a percentage of our net asset value and the
distributions declared by us for each fiscal quarter.
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Premium/
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Premium/
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discount of
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Discount of
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High Sales
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Low Sales
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Price to
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Price to
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Cash
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Net Asset
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Net Asset
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Net Asset
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Distributions
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Value(1)
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Closing Sales Price
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Value(2)
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Value(2)
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per
Share(3)
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High
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Low
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Year ended December 31, 2011
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Fourth
Quarter(4)
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$
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*
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$
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16.27
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$
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14.40
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*
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%
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*
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%
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$
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*
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Third Quarter
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$
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17.36
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$
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16.25
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$
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13.88
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94
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%
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80
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%
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$
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0.45
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Second Quarter
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$
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17.40
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$
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16.17
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$
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15.21
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93
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%
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87
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%
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$
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0.40
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First Quarter
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$
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17.23
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$
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16.25
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$
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14.90
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94
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%
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86
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%
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$
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0.33
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Year ended December 31, 2010
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Fourth
Quarter(5)
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$
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16.75
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$
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15.59
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$
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13.83
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93
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%
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83
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%
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$
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0.22
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(1)
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Net asset value per share is
determined as of the last day in the relevant quarter and
therefore may not reflect the net asset value per share on the
date of the high and low sales prices. The net asset values
shown are based on outstanding shares at the end of each period.
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(2)
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Calculated as the respective high
or low sales price divided by net asset value.
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(3)
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Represents the distribution
declared for the specified quarter. 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 are automatically
reinvested in additional shares of our common stock, unless they
specifically opt out of the dividend reinvestment plan so as to
receive cash distributions. See Dividend Reinvestment
Plan.
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(4)
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From October 1, 2011 to
December 13, 2011.
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(5)
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From October 29, 2010 (initial
public offering) to December 31, 2010.
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*
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Not yet determined at the time of
filing.
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The last reported price for our common stock on
December 13, 2011 was $15.89 per share. As of
December 13, 2011, we had four stockholders of record,
which does not include stockholders for whom shares are held in
nominee or street name.
Shares of BDCs may trade at a market price that is less than the
net asset value that is attributable to those shares. The
possibility that our shares of common stock will trade at a
discount from net asset value or at a premium that is
unsustainable over the long term is separate and distinct from
the risk that our net asset value will decrease. It is not
possible to predict whether our shares will trade at, above or
below net asset value in the future.
We intend to continue making quarterly distributions to our
stockholders. The timing and amount of our quarterly
distributions, if any, is determined by our Board. Any
distributions to our stockholders are declared out of assets
legally available for distribution. We monitor available net
investment income to determine if a tax return of capital may
occur for the fiscal year. To the extent our taxable earnings
fall below the total amount of our distributions for any given
fiscal year, a portion of those distributions may be deemed to
be a return of capital to our common 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.
To maintain RIC status, we must, among other things, meet the
Annual Distribution Requirement. 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 distributions
into the next tax year and pay a 4% excise tax on such income.
Distributions of any such carryover taxable income must be made
through a dividend declared prior to filing the final tax return
related to the year in which such taxable income was generated
in order to count towards the satisfaction of the Annual
37
Distribution Requirement in the year in which such income was
generated. We may, in the future, make actual distributions to
our stockholders of our net capital gains. We can offer no
assurance that we will achieve results that will permit the
payment of any cash distributions and, if we issue senior
securities, we may be prohibited from making distributions if
doing so causes us to fail to maintain the asset coverage ratios
stipulated by the 1940 Act or if distributions are limited by
the terms of any of our borrowings. See Material U.S.
Federal Income Tax Considerations.
In January 2010, the Internal Revenue Service (the
IRS) extended a revenue procedure that temporarily
allows a RIC to distribute its own stock as a dividend for the
purpose of fulfilling its distribution requirements. Pursuant to
this revenue procedure, a RIC may treat a distribution of its
own stock as a dividend if (1) the stock is publicly traded
on an established securities market, (2) the distribution
is declared on or before December 31, 2012 with respect to
a taxable year ending on or before December 31, 2011 and
(3) each stockholder may elect to receive his or her entire
distribution in either cash or stock of the RIC subject to a
limitation on the aggregate amount of cash to be distributed to
all stockholders, which must be at least 10% of the aggregate
declared distribution. If too many stockholders elect to receive
cash, each stockholder electing to receive cash will receive a
pro rata amount of cash (with the balance of the distribution
paid in stock). In no event will any stockholder electing to
receive cash receive less than 10% of his or her entire
distribution in cash. We have not elected to distribute stock as
a dividend but reserve the right to do so.
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% (or, for our taxable years beginning
in 2011, 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. 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.
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 are
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
receives cash distributions. Although distributions paid in the
form of additional shares of our common stock are generally
subject to U.S. federal, state and local taxes in the same
manner as cash distributions, stockholders participating in our
dividend reinvestment plan do not receive any corresponding cash
distributions with which to pay any such applicable taxes.
38
MANAGEMENTS
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
registration statement on
Form N-2.
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. Our actual results could
differ materially from those anticipated by forward-looking
information due to factors discussed under Risk
Factors and Cautionary Note Regarding
Forward-Looking Statements appearing elsewhere herein.
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.
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 Venture Loans to
companies backed by established venture capital and private
equity firms in our Target Industries. 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 operation 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
September 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
# of
|
|
|
Fair
|
|
|
Total
|
|
|
# of
|
|
|
Fair
|
|
|
Total
|
|
|
|
Investments
|
|
|
Value
|
|
|
Portfolio
|
|
|
Investments
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
($ in thousands)
|
|
|
Term loans
|
|
|
35
|
|
|
$
|
170,187
|
|
|
|
94.5
|
%
|
|
|
31
|
|
|
$
|
127,949
|
|
|
|
93.5
|
%
|
Revolving loans
|
|
|
1
|
|
|
|
2,933
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment loans
|
|
|
1
|
|
|
|
1,282
|
|
|
|
0.7
|
%
|
|
|
1
|
|
|
|
2,285
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
37
|
|
|
|
174,402
|
|
|
|
96.8
|
%
|
|
|
32
|
|
|
|
130,234
|
|
|
|
95.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
48
|
|
|
|
5,091
|
|
|
|
2.8
|
%
|
|
|
43
|
|
|
|
6,225
|
|
|
|
4.6
|
%
|
Equity
|
|
|
2
|
|
|
|
693
|
|
|
|
0.4
|
%
|
|
|
2
|
|
|
|
351
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
180,186
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
136,810
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Total portfolio investment activity for the three and nine month
periods ended September 30, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Beginning portfolio
|
|
$
|
186,029
|
|
|
$
|
143,008
|
|
|
$
|
136,810
|
|
|
$
|
113,878
|
|
New loan funding
|
|
|
7,000
|
|
|
|
15,000
|
|
|
|
86,833
|
|
|
|
75,517
|
|
Less refinanced balances
|
|
|
|
|
|
|
|
|
|
|
(8,677
|
)
|
|
|
(10,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new loan funding
|
|
|
7,000
|
|
|
|
15,000
|
|
|
|
78,156
|
|
|
|
64,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal and stock payments received on investments
|
|
|
(8,559
|
)
|
|
|
(11,278
|
)
|
|
|
(22,666
|
)
|
|
|
(28,104
|
)
|
Early pay-offs
|
|
|
(4,315
|
)
|
|
|
(9,777
|
)
|
|
|
(9,908
|
)
|
|
|
(13,231
|
)
|
Accretion of loan fees
|
|
|
527
|
|
|
|
451
|
|
|
|
1,356
|
|
|
|
934
|
|
New loan fees
|
|
|
(40
|
)
|
|
|
(134
|
)
|
|
|
(967
|
)
|
|
|
(651
|
)
|
New equity investments
|
|
|
|
|
|
|
79
|
|
|
|
577
|
|
|
|
79
|
|
Net depreciation on investments
|
|
|
(456
|
)
|
|
|
1,654
|
|
|
|
(3,172
|
)
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending portfolio
|
|
$
|
180,186
|
|
|
$
|
139,003
|
|
|
$
|
180,186
|
|
|
$
|
139,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 debt investments by industry
sector as of September 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Loans at
|
|
|
Percentage
|
|
|
Loans at
|
|
|
Percentage
|
|
|
|
Fair
|
|
|
of Total
|
|
|
Fair
|
|
|
of Total
|
|
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Life Science
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology
|
|
$
|
28,118
|
|
|
|
16.1
|
%
|
|
$
|
30,470
|
|
|
|
23.4
|
%
|
Medical Device
|
|
|
26,499
|
|
|
|
15.2
|
%
|
|
|
19,572
|
|
|
|
15.0
|
%
|
Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-related Technologies
|
|
|
2,574
|
|
|
|
1.5
|
%
|
|
|
4,460
|
|
|
|
3.4
|
%
|
Networking
|
|
|
1,282
|
|
|
|
0.7
|
%
|
|
|
2,285
|
|
|
|
1.8
|
%
|
Semiconductors
|
|
|
9,739
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Software
|
|
|
23,719
|
|
|
|
13.6
|
%
|
|
|
8,745
|
|
|
|
6.7
|
%
|
Data Storage
|
|
|
4,929
|
|
|
|
2.8
|
%
|
|
|
7,912
|
|
|
|
6.1
|
%
|
Communications
|
|
|
5,648
|
|
|
|
3.2
|
%
|
|
|
7,591
|
|
|
|
5.9
|
%
|
Cleantech
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Efficiency
|
|
|
25,479
|
|
|
|
14.6
|
%
|
|
|
16,570
|
|
|
|
12.7
|
%
|
Waste Recycling
|
|
|
4,889
|
|
|
|
2.8
|
%
|
|
|
2,363
|
|
|
|
1.8
|
%
|
Healthcare Information and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostics
|
|
|
22,584
|
|
|
|
13.0
|
%
|
|
|
20,472
|
|
|
|
15.7
|
%
|
Other Healthcare Related Services and Technologies
|
|
|
18,942
|
|
|
|
10.9
|
%
|
|
|
9,794
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174,402
|
|
|
|
100.0
|
%
|
|
$
|
130,234
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
The largest loans may vary from year to year as new loans are
recorded and repaid. Our five largest loans represented
approximately 27% and 31% of total loans outstanding as of
September 30, 2011 and December 31, 2010,
respectively. No single loan represented more than 10% of our
total loans as of September 30, 2011 and December 31,
2010.
As of September 30, 2011 and December 31, 2010,
interest receivable was $2.5 million and $1.9 million,
respectively, which represents one month of accrued interest
income on loans. The increase in 2011 was due to a larger loan
portfolio relative to 2010.
Loan
Portfolio Asset Quality
We use a credit rating system which rates each loan on a scale
of 4 to 1, with 4 being the highest credit quality rating and 3
being the rating for a standard level of risk. A rating of 2 or
1 represents a deteriorating credit quality and increased risk.
The following table shows the classification of our loan
portfolio by credit rating as of September 30, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Loans at
|
|
|
Percentage
|
|
|
Loans at
|
|
|
Percentage
|
|
|
|
Fair
|
|
|
of Loan
|
|
|
Fair
|
|
|
of Loan
|
|
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
($ in thousands)
|
|
|
Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
$
|
34,161
|
|
|
|
19.6
|
%
|
|
$
|
29,054
|
|
|
|
22.3
|
%
|
3
|
|
|
126,168
|
|
|
|
72.3
|
%
|
|
|
94,200
|
|
|
|
72.3
|
%
|
2
|
|
|
14,073
|
|
|
|
8.1
|
%
|
|
|
6,980
|
|
|
|
5.4
|
%
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174,402
|
|
|
|
100.0
|
%
|
|
$
|
130,234
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 and December 31, 2010, our
loan portfolio had a weighted average credit rating of 3.2.
As of September 30, 2011 and December 31, 2010, no
investments were on non-accrual status.
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 set forth below, the results of
operations described below may not be indicative of the results
we report in future periods.
41
Consolidated
Results of Operations for the Three Months Ended
September 30, 2011 and 2010
Consolidated operating results for the three months ended
September 30, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
6,441
|
|
|
$
|
5,189
|
|
Total expenses
|
|
|
3,448
|
|
|
|
1,932
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,993
|
|
|
|
3,257
|
|
Net realized loss on investments
|
|
|
(17
|
)
|
|
|
|
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(217
|
)
|
|
|
1,711
|
|
Credit for loan losses
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
2,759
|
|
|
$
|
5,288
|
|
|
|
|
|
|
|
|
|
|
Average debt investments, at fair value
|
|
$
|
180,951
|
|
|
$
|
137,867
|
|
|
|
|
|
|
|
|
|
|
Average borrowings outstanding
|
|
$
|
80,871
|
|
|
$
|
91,640
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the three months ended
September 30, 2011 was $3.0 million or $0.39 per
share. Excluding the impact of the reduction in the second part
of the incentive fee expense of $0.2 million, net
investment income totaled $2.8 million or $0.37 per share.
Investment
Income
Investment income increased by $1.3 million, or 24.1%, for
the three months ended September 30, 2011 as compared to
the three months ended September 30, 2010. For the three
months ended September 30, 2011, total investment income
consisted primarily of $6.1 million in interest income from
investments, which included $0.5 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 prepayment fees collected from our portfolio
companies. For the three months ended September 30, 2010,
total investment income consisted primarily of $5.0 million
in interest income from investments, which included
$0.5 million in income from the amortization of discounts
and origination fees on investments. For the three months ended
September 30, 2011 and 2010, our dollar-weighted average
annualized yield on average loans was approximately 14.2% and
15.0%, 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 27% and 31% of investment income for the three
months ended September 30, 2011 and 2010, respectively.
Expenses
Total expenses increased by $1.5 million, or 78.5%, to
$3.4 million for the three months ended September 30,
2011 as compared to the three months ended September 30,
2010. Total operating expenses for each period consisted
principally of management fees, incentive and administrative
fees and 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 for the three months ended September 30, 2011
compared to the three months ended September 30, 2010
primarily due to the end of our WestLB Facilitys revolving
term and the scheduled amortization of the remaining balance.
Effective with the completion of our IPO 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 three months ended
September 30, 2011 increased by approximately
$0.4 million compared to the three months ended
September 30, 2010 primarily due to the higher management
fee base. Incentive fees for the three months ended
September 30, 2011 totaled
42
approximately $0.6 million compared to no incentive fees
for the three months ended September 30, 2010. The
incentive fees for the three months ended September 30,
2011 consisted of approximately $0.7 million for part one
of the incentive fee offset by a reduction of previously accrued
part two incentive fees. In connection with the Administration
Agreement, we incurred $0.4 million of administrative
expenses for the three months ended September 30, 2011. We
did not pay an administrative servicing fee for the three months
ended September 30, 2010.
Professional fees and general and administrative expenses
include legal and audit fees, insurance premiums, and
miscellaneous other expenses. These expenses for the three
months ended September 30, 2011 increased by approximately
$0.6 million compared to the three months ended
September 30, 2010 primarily due to the increased cost of
being a public company and the expensing of $0.2 million of
previously capitalized costs related to our efforts to obtain a
license to operate a SBIC.
Net
Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
Realized gains or losses are measured by the difference between
the net proceeds from the repayment or sale and the cost basis
of our investments without regard to unrealized appreciation or
depreciation previously recognized, and includes investments
charged off during the period, net of recoveries. The net change
in unrealized appreciation or depreciation primarily reflects
the change in portfolio investment fair values during the
reporting period, including the reversal of previously recorded
unrealized appreciation or depreciation when gains or losses are
realized.
Consolidated
Results of Operations for the Nine Months Ended
September 30, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
17,871
|
|
|
$
|
13,250
|
|
Total expenses
|
|
|
10,670
|
|
|
|
5,372
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
7,201
|
|
|
|
7,878
|
|
Net realized gain (loss) on investments
|
|
|
5,544
|
|
|
|
(2
|
)
|
Net unrealized (depreciation) appreciation on investments
|
|
|
(2,535
|
)
|
|
|
1,549
|
|
Credit for loan losses
|
|
|
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
10,210
|
|
|
$
|
10,164
|
|
|
|
|
|
|
|
|
|
|
Average debt investments, at fair value
|
|
$
|
162,623
|
|
|
$
|
123,298
|
|
|
|
|
|
|
|
|
|
|
Average borrowings outstanding
|
|
$
|
82,606
|
|
|
$
|
78,195
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the nine months ended
September 30, 2011 was $7.2 million or $0.95 per
share. Excluding the impact of the capital gains incentive fee
expense of $0.7 million, net investment income totaled
$7.9 million or $1.04 per share.
Investment
Income
Investment income increased by $4.6 million, or 34.9%, for
the nine months ended September 30, 2011 as compared to the
nine months ended September 30, 2010. For the nine months
ended September 30, 2011, total investment income consisted
primarily of $16.9 million in interest income from
investments, which included $1.3 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. For the
nine months ended September 30, 2010, total investment
income consisted primarily of $12.9 million in interest
income from investments, which included $0.9 million in
income from the amortization of discounts and
43
origination fees on investments. For the nine months ended
September 30, 2011 and 2010, our dollar-weighted average
annualized yield on average loans was approximately 14.6% and
14.3%, 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 25% and 19% of investment income for the nine
months ended September 30, 2011 and 2010, respectively.
Expenses
Total expenses increased by $5.3 million, or 98.6%, to
$10.6 million for the nine months ended September 30,
2011 as compared to the nine months ended September 30,
2010. 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 for the nine months ended September 30, 2011
compared to the nine months ended September 30, 2010
primarily due to the expiration of our WestLB Facilitys
revolving term and the amortization of the remaining balance.
Effective with the completion of our IPO 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 nine months ended
September 30, 2011 increased by approximately
$1.4 million compared to the nine months ended
September 30, 2010 primarily due to the higher management
fee base. Incentive fees for the nine months ended
September 30, 2011 totaled approximately $2.7 million
compared to no incentive fees for the nine months ended
September 30, 2010. The incentive fees for the nine months
ended September 30, 2011 consisted of approximately
$2.0 million and $0.7 million for part one and part
two of the incentive fee, respectively. In connection with the
Administration Agreement, we incurred $0.9 million of
administrative expenses for the nine months ended
September 30, 2011. We did not pay an administrative
servicing fee for the nine months ended September 30, 2010.
Professional fees and general and administrative expenses
include legal and audit fees, insurance premiums and
miscellaneous other expenses. These expenses for the nine months
ended September 30, 2011 increased by approximately
$1.5 million compared to the nine months ended
September 30, 2010 primarily due to the increased cost of
being a public company and the expensing of previously
capitalized costs related to our efforts to obtain a license to
operate a SBIC.
Net
Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
Realized gains or losses 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. Net change in
unrealized appreciation or depreciation 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 nine months ended September 30, 2011, we had
$5.5 million in net realized gain on investments. Net
realized gain on investments resulted primarily from the sale of
stock through the exercise of warrants in portfolio companies.
Credit
for Loan Losses
For the three and nine months ended September 30, 2010, the
credit for loan losses was $0.3 million and
$0.7 million, respectively. The loan portfolio had a
weighted average credit rating of 3.1 as of September 30,
2010. See Loan Portfolio Asset Quality.
As of October 28, 2010, the date of our election to be
treated as a BDC, we no longer record a credit or provision for
loan losses. We record each individual loan and investment on a
quarterly basis at fair value. Changes in fair value are
recorded through our statement of operations.
44
Consolidated
Results of Operations for the Years Ended December 31, 2010
and 2009, and the Period from March 4, 2008 (Inception) to
December 31, 2008
Compass Horizon, our predecessor for accounting purposes, was
formed as a Delaware limited liability company in January 2008
and had limited operations through March 3, 2008. As a
result, there is no period with which to compare our results of
operations for the period from January 1, 2008 through
March 3, 2008 or for the period from March 4, 2008
through December 31, 2008.
Consolidated operating results for the years ended
December 31, 2010 and 2009, and the period from
March 4, 2008 (inception) to December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
18,207
|
|
|
$
|
15,326
|
|
|
$
|
7,021
|
|
Total expenses
|
|
|
7,823
|
|
|
|
6,769
|
|
|
|
4,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
10,384
|
|
|
|
8,557
|
|
|
|
2,990
|
|
Net realized gains
|
|
|
680
|
|
|
|
138
|
|
|
|
22
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
2,930
|
|
|
|
892
|
|
|
|
(73
|
)
|
Credit (provision) for loan losses
|
|
|
739
|
|
|
|
(274
|
)
|
|
|
(1,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,733
|
|
|
$
|
9,313
|
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average debt investments, at fair value
|
|
$
|
124,027
|
|
|
$
|
109,561
|
|
|
$
|
63,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average borrowings outstanding
|
|
$
|
77,174
|
|
|
$
|
70,582
|
|
|
$
|
37,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Investment
Income
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. Other investment income was primarily comprised
of loan prepayment fees collected from our portfolio companies
and increased primarily due to a higher number of prepayments in
2010.
Investment income increased by $8.3 million, or 118.3%, for
the year ended December 31, 2009 as compared to the period
from March 4, 2008 (inception) to December 31, 2008.
For the year ended December 31, 2009, total investment
income consisted primarily of $14.9 million in interest
income from investments, which included $1.0 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 (i) the
increased average size of the loan portfolio and (ii) there
being a full 12 months of income in 2009 compared to only
10 months in 2008 in light of when we commenced operations.
Other investment income was primarily comprised of loan
prepayment fees collected from our portfolio companies.
For the years ended December 31, 2010, December 31,
2009 and the ten month period ended December 31, 2008, our
dollar-weighted average annualized yield on average loans was
approximately 14.6%, 13.9% and 12.7%, respectively. We compute
the yield on average loans as (i) total investment interest
and other investment income divided by (b) average gross
loans receivable. We used month end loan balances during the
period to compute average loans receivable. Since we commenced
operations in March 2008, the results for the period ended
December 31, 2008 were annualized.
45
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 22%, 23% and 21% of investment income for the
years ended December 31, 2010, December 31, 2009 and
the period from March 4, 2008 (inception) to
December 31, 2008, respectively.
Expenses
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
expenses increased by $2.7 million, or 67.9%, to
$6.8 million for the year ended December 31, 2009 as
compared to the period from March 4, 2008 to
December 31, 2008.
Total operating expenses for each period consisted principally
of management fees and interest expense and, to a lesser degree,
professional fees and general and administrative expenses.
Interest expense, which includes the amortization of debt
issuance costs, increased in 2010 from 2009 primarily from
higher average outstanding debt balances on the WestLB Facility.
Interest expense increased in 2009 from the ten months ended
December 31, 2008 primarily due to higher average
outstanding debt balances on the WestLB Facility, partially
offset by lower rates charged on the WestLB Facility due to a
lower level of the WestLB Facilitys index rate, one-month
LIBOR.
Effective with the completion of our IPO in October 2010, we now
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.
Management fee expense in 2010 increased compared to 2009
primarily due to an increase in the average loan portfolio in
2010 from 2009 and increased in 2009 compared to the ten months
ended December 31, 2008 due to a full twelve months of
expense in 2009 compared to only ten months in 2008. Incentive
fees for the period since our IPO totaled approximately $414,000
compared to no incentives fees prior to the IPO.
In connection with the Administrative Agreement, we have
incurred $88,000 for the period since our IPO through
December 31, 2010. We did not pay an administrative
servicing fee prior to our IPO.
Professional fees and general and administrative expenses
include legal, accounting fees, insurance premiums and
miscellaneous other expenses. These expenses increased in 2010
from 2009 primarily from the increased cost as a public company.
These expenses increased in 2009 from the ten months ended
December 31, 2008 primarily because of the longer period in
2009.
Net
Realized Gains and Net Unrealized Appreciation and
Depreciation
During the years ended December 31, 2010 and 2009, we had
$0.7 million and $0.1 million in net realized gains on
investments, respectively. During the same periods, we had
$2.9 million and $0.9 million in unrealized
appreciation on investments, respectively. Net realized gain on
warrants resulted from the sale of stock through the exercise of
warrants in portfolio companies. For these periods, the net
increase in unrealized appreciation on investments was primarily
from our warrant investments. Net unrealized appreciation on
warrants is the difference between the net changes in warrant
fair values from the prior determination date and the reversal
of previously recorded unrealized appreciation or depreciation
when gains or losses are realized. The increase in net
unrealized appreciation on warrants in 2010 and 2009 is
primarily due to an increase in the enterprise value of a number
of private companies for which we hold warrants. In addition,
the increased net appreciation on warrants is due to the
increase in the share value of the public company warrants held.
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
and the period from March 4, 2008 to December 31, 2008
the provision for loan losses was $0.3 million and
$1.6 million, respectively. The credit rose 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. The
decrease in the provision for loan losses in 2009 compared to
2008 was due to less significant loan growth in 2009. As 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.
46
Liquidity
and Capital Resources
As of September 30, 2011 and December 31, 2010, we had
cash and cash equivalents of $32.6 million and
$76.8 million, respectively. Cash and cash equivalents are
available to fund new investments, reduce borrowings under the
Credit Facilities, pay operating expenses and pay dividends. To
date, our primary sources of capital have been from our IPO, use
of the Credit Facilities and the private placement for
$50 million of equity capital completed on March 4,
2008.
The WestLB Facility had a three year initial revolving term and
on March 3, 2011 the revolving term ended. The balance as
of September 30, 2011 of $66 million will be amortized
based on loan investment payments received through March 3,
2015.
As of September 30, 2011, we had available borrowing
capacity of approximately $59.2 million under our Wells
Facility, subject to existing terms and advance rates.
Our operating activities used cash of $32.4 million for the
nine months ended September 30, 2011, and our financing
activities used cash of $11.8 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 $15.5 million for the
nine months ended September 30, 2010, and our financing
activities provided net cash proceeds of $24.8 million for
the same period. Our operating activities used cash primarily
for investing in portfolio companies that was provided primarily
from our availability under our WestLB Facility.
Our operating activities used cash of $8 million for the
year ended December 31, 2010 and our financing activities
provided net cash proceeds of $75 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 $11 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 operating activities used cash of $90 million for the
10 month period ended December 31, 2008 and our
financing activities provided net cash proceeds of
$110 million for the same period. Our operating activities
used cash primarily for investing in portfolio companies that
was provided primarily from proceeds from an equity private
placement and draws under the WestLB Facility.
Our primary use of available funds is investments in portfolio
companies and cash distributions to holders of our common stock.
We seek to opportunistically raise additional 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 are required to meet an asset
coverage ratio of 200%. This requirement limits the amount that
we may borrow.
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% (or, for our taxable years beginning
in 2011, 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.
47
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 BDC 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.
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.
Current
Borrowings
We, through our wholly-owned subsidiary, Credit I, entered
into the WestLB Facility. Per this agreement, base rate
borrowings bear interest at one-month LIBOR (0.24% as of
September 30, 2011 and 0.26% as of December 31,
2010) plus 2.50%. The rates were 2.74% and 2.76% as of
September 30, 2011 and December 31, 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 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. Per this agreement, the interest rate
is based upon the one-month LIBOR plus a spread of 4%, with a
LIBOR floor of 1%. The rate was 5% as of September 30, 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 and warrants held by Credit II. The Wells
Facility contains covenants that, among other things, require
the 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.
Interest
Rate Swaps and Hedging Activities
In 2008, we entered into two interest rate swap agreements with
WestLB, fixing the rate of $10 million at 3.58% and
$15 million at 3.2% on the first advances of a like amount
of variable rate WestLB Facility borrowings.
48
As of September 30, 2011, only the $10 million
interest rate swap was still outstanding, which expired in
October 2011.
Contractual
Obligations and Off-Balance Sheet Arrangements
A summary of our significant contractual payment obligations as
of September 30, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
years
|
|
|
Borrowings
|
|
$
|
81,885
|
|
|
$
|
36,278
|
|
|
$
|
45,607
|
|
|
$
|
|
|
|
$
|
|
|
Unfunded commitments
|
|
|
18,667
|
|
|
|
9,834
|
|
|
|
8,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
100,552
|
|
|
$
|
46,112
|
|
|
$
|
54,440
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2011, we had unfunded commitments
of approximately $18.7 million. These commitments are
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 Credit Facilities, we have certain
commitments pursuant to the 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 Advisors 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 any
administrative staff. See Note 3 to Consolidated Financial
Statements for additional information regarding the Investment
Management Agreement and the Administration Agreement.
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 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 our 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
49
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
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Quoted prices in active markets for identical assets and
liabilities.
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Level 2
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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.
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Level 3
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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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See Note 5 to Consolidated Financial Statements for further
information regarding fair value.
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. 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
loans 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
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.
50
Allowance
for Loan Losses
Prior to our election to become a BDC, the allowance for loan
losses represented managements 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 borrowers 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, 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 borrowers 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 loans effective
interest rate, the loans 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 to operate 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 generally
relieves 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 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. For the nine
months ended September 30, 2011, no amount was recorded for
U.S. federal excise tax.
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
September 30, 2011 and December 31, 2010.
51
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 nine months ended
September 30, 2010.
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 all 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.
Assuming that the balance sheet as of September 30, 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 balance sheet 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.
The Credit Facilities have floating interest rate provisions
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 if there
is not a corresponding increase in interest income generated by
floating rate assets in our investment portfolio.
52
SENIOR
SECURITIES
Information about our senior securities is shown in the
following table as of September 30, 2011, December 31,
2010, December 31, 2009 and December 31, 2008. The
information contained in the table for the years ended
December 31, 2010 and 2009 and the period from
March 4, 2008 (inception) to December 31, 2008 has
been derived from our audited financial statements and the
information contained in the table in respect of
September 30, 2011 has been derived from unaudited
financial data. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Current Borrowings for more detailed
information regarding the senior securities.
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Total Amount
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Outstanding
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Involuntary
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Average
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Exclusive of
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Asset
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Liquidation
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Market
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Treasury
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Coverage
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Preference
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Value
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Class and Year
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Securities(1)
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per
Unit(2)
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per
Unit(3)
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per
Unit(4)
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|
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(dollar amounts
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|
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|
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in millions)
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Credit Facilities
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2011 (as of September 30, 2011)
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$
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81.9
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$
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2,617
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|
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N/A
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2010
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|
$
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87.4
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|
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$
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2,455
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|
|
|
|
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N/A
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2009
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$
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64.2
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$
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1,927
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N/A
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2008
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|
$
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63.7
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$
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1,782
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|
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|
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N/A
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(1)
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Total amount of senior securities
outstanding at the end of the period presented.
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(2)
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Asset coverage per unit is the
ratio of the total carrying value of our total consolidated
assets, less all liabilities and indebtedness not represented by
senior securities, to the aggregate amount of senior securities
representing indebtedness. Asset coverage per unit is expressed
in terms of dollar amounts per $1,000 of indebtedness.
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(3)
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The amount of which such class of
senior security would be entitled upon the voluntary liquidation
of the issuer in preference to any security junior to it. The
in this column indicates that the SEC
expressly does not require this information to be disclosed for
certain types of securities.
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(4)
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Not applicable because senior
securities are not registered for public trading.
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53
BUSINESS
General
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. We
were formed on March 16, 2010 as a Delaware corporation for
the purpose of acquiring, continuing and expanding the business
of our wholly-owned subsidiary, Compass Horizon and operating as
an externally managed BDC under the 1940 Act. 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 to companies backed by
established venture capital and private equity firms in our
Target Industries. 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. The amount of leverage that we employ depends on
our assessment of market conditions and other factors at the
time of any proposed borrowing.
We have elected to be treated for federal income tax purposes as
a RIC under Subchapter M of the Code. As a RIC, we generally do
not have to pay corporate-level federal income taxes on any net
ordinary income or capital gains that we distribute to our
stockholders if we meet certain
source-of-income,
distribution, asset diversification and other requirements.
We are externally managed and advised by our Advisor. Our
Advisor manages our
day-to-day
operations and also provides all administrative services
necessary for us to operate.
Our
Portfolio
Since our inception and through September 30, 2011, we have
funded 65 portfolio companies and have invested
$337.9 million in loans (including 28 loans that have been
repaid). As of September 30, 2011, our total investment
portfolio consisted of 37 loans which totaled
$174.4 million and our net assets were $132.4 million.
Our existing loans are secured by all or a portion of the
tangible and intangible assets of the applicable portfolio
company. The loans in our loan portfolio generally are not rated
by any rating agency. For the nine months ended
September 30, 2011, our loan portfolio had a
dollar-weighted average annualized yield of approximately 14.6%
(excluding any yield from warrants). As of September 30,
2011, our loan portfolio had a dollar-weighted average term of
approximately 38 months from inception and a
dollar-weighted average remaining term of approximately
28 months. In addition, we held warrants to purchase either
common stock or preferred stock in 48 portfolio companies. As of
September 30, 2011, our loans had an original committed
principal amount of between $1 million and
$12 million, had repayment terms of between 30 and
48 months and bore current pay interest at annual interest
rates of between 10% and 14%.
Our
Advisor
Our investment activities are managed by our Advisor and we
expect to continue to benefit from our Advisors ability to
identify attractive investment opportunities, conduct diligence
on and value prospective investments, negotiate investments and
manage our diversified portfolio of investments. In addition to
the experience gained from the years that they have worked
together both at our Advisor and prior to the formation by our
Advisor of the Company, the members of our investment team have
broad lending backgrounds, with substantial experience at a
variety of commercial finance companies, technology banks and
private debt funds, and have developed a broad network of
contacts within the venture capital and private equity
community. This network of contacts provides a principal source
of investment opportunities.
Our Advisor is led by five senior managers, including its two
co-founders, Robert D. Pomeroy, Jr., our Chief Executive
Officer, and Gerald A. Michaud, our President. The other senior
managers include Christopher
54
M. Mathieu, our Senior Vice President and Chief Financial
Officer, John C. Bombara, our Senior Vice President, General
Counsel and Chief Compliance Officer, and Daniel S. Devorsetz,
our Senior Vice President and Chief Credit Officer.
Our
Strategy
Our investment objective is to maximize our investment
portfolios total return by generating current income from
the loans we make and capital appreciation from the warrants we
receive when making such loans. To further implement our
business strategy, our Advisor employs the following core
strategies:
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Structured Investments in the Venture Capital and Private
Equity Markets. We make loans to
development-stage companies within our Target Industries
typically in the form of secured amortizing loans. The secured
amortizing debt structure provides a lower risk strategy, as
compared to equity investments, to participate in the emerging
technology markets because the debt structures we typically
utilize provide collateral against the downside risk of loss,
provide return of capital in a much shorter timeframe through
current pay interest and amortization of loan principal and have
a senior position in the capital structure to equity in the case
of insolvency, wind down or bankruptcy. Unlike venture capital
and private equity-backed investments, our investment returns
and return of our capital do not require equity investment exits
such as mergers and acquisitions or initial public offerings.
Instead, we receive returns on our loans primarily through
regularly scheduled payments of principal and interest and, if
necessary, liquidation of the collateral supporting the loan.
Only the potential gains from warrants are dependent upon exits.
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Enterprise Value Lending. We and our Advisor
take an enterprise value approach to the loan structuring and
underwriting process. We secure a senior or subordinated lien
position against the enterprise value of a portfolio company and
generally our exposure is less than 25% of the enterprise value
and we obtain pricing enhancements in the form of warrants and
other success-based fees that build long-term asset
appreciation in our portfolio. These methods reduce the downside
risk of Venture Lending. Enterprise value lending requires an
in-depth understanding of the companies and markets served. We
believe that this in-depth understanding of how venture capital
and private equity-backed companies in our Target Industries
grow in value, finance that growth over time and various
business cycles can be carefully analyzed by Venture Lenders who
have substantial experience, relationships and knowledge within
the markets they serve. We believe the experience that our
Advisor possesses gives us enhanced capabilities in making these
qualitative enterprise value evaluations, which we believe can
produce a high quality Venture Loan portfolio with enhanced
returns for our stockholders.
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Creative Products with Attractive Risk-Adjusted
Pricing. Each of our existing and prospective
portfolio companies has its own unique funding needs for the
capital provided from the proceeds of our Venture Loans. These
funding needs include, but are not limited to, funds for
additional development runways, funds to hire or retain sales
staff or funds to invest in research and development in order to
reach important technical milestones in advance of raising
additional equity. Our loans include current pay interest,
commitment fees, pre-payment fees and non-utilization fees. We
believe we have developed pricing tools, structuring techniques
and valuation metrics that satisfy our portfolio companies
requirements while mitigating risk and maximizing returns on our
investments.
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Opportunity for Enhanced Returns. To enhance
our loan portfolio returns, in addition to interest and fees, we
obtain warrants to purchase the equity of our portfolio
companies as additional consideration for making loans. The
warrants we obtain generally include a cashless
exercise provision to allow us to exercise these rights
without requiring us to make any additional cash investment.
Obtaining warrants in our portfolio companies has allowed us to
participate in the equity appreciation of our portfolio
companies which we expect will enable us to generate higher
returns for our investors.
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Direct Origination. We originate transactions
directly with technology, life science, healthcare information
and services and cleantech companies. These transactions are
referred to our Advisor from a number of sources, including
referrals from, or direct solicitation of, venture capital and
private equity firms, portfolio company management teams, legal
firms, accounting firms, investment banks and other lenders that
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55
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represent companies within our Target Industries. Our Advisor
has been the sole or lead originator in substantially all
transactions in which the funds it manages have invested.
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Disciplined and Balanced Underwriting and Portfolio
Management. We use a disciplined underwriting
process that includes obtaining information validation from
multiple sources, extensive knowledge of our Target Industries,
comparable industry valuation metrics and sophisticated
financial analysis related to development-stage companies. Our
Advisors due diligence on investment prospects includes
obtaining and evaluating information on the prospective
portfolio companys technology, market opportunity,
management team, fund raising history, investor support,
valuation considerations, financial condition and projections.
We seek to balance our investment portfolio to reduce the risk
of down market cycles associated with any particular industry or
sector, development stage or geographic area. Our Advisor
employs a hands on approach to portfolio management
requiring private portfolio companies to provide monthly
financial information and to participate in regular updates on
performance and future plans.
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Use of Leverage. We use leverage to increase
returns on equity through revolving credit facilities provided
by WestLB and Wells. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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Customized Loan Documentation Process. Our
Advisor employs an internally managed documentation process that
assures that each loan transaction is documented using our
enterprise value loan documents specifically
tailored to each transaction. Our Advisor uses experienced
in-house senior legal counsel to oversee the documentation and
negotiation of each of our transactions.
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Active Portfolio Management. Because many of
our portfolio companies are privately held, development-stage
companies in our Target Industries, our Advisor employs a
hands on approach to its portfolio management
processes and procedures. Our Advisor requires the private
portfolio companies to provide monthly financial information,
and our Advisor participates in quarterly discussions with the
management and investors of our portfolio companies. Our Advisor
prepares monthly management reporting and internally rates each
portfolio company.
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Portfolio Composition. Monitoring the
composition of the portfolio is an important component of the
overall growth and portfolio management strategy. Our Advisor
monitors the portfolio regularly to avoid undue focus in any
sub-industry,
stage of development or geographic area. By regularly monitoring
the portfolio for these factors we attempt to reduce the risk of
down market cycles associated with any particular industry,
development stage or geographic area.
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Market
Opportunity
We focus our investments primarily in four key industries of the
emerging technology market: technology, life science, healthcare
information and services and cleantech. The technology sectors
we focus on include communications, networking, wireless
communications, data storage, software, cloud computing,
semiconductor, internet and media and consumer-related
technologies. The life science sectors we focus on include
biotechnology, drug delivery, bioinformatics and medical
devices. The healthcare information and services sectors we
focus on include diagnostics, medical record services and
software and other healthcare related services and technologies
that improve efficiency and quality of administered healthcare.
The cleantech sectors we focus on include alternative energy,
water purification, energy efficiency, green building materials
and waste recycling.
We believe that Venture Lending has the potential to achieve
enhanced returns that are attractive notwithstanding the
increased level of risk associated with lending to
development-stage companies. Potential benefits include:
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Higher Interest Rates. Venture Loans typically
bear interest at rates that exceed the rates that would be
available to portfolio companies if they could borrow in
traditional commercial financing transactions. We believe these
rates provide a risk-adjusted return to lenders compared with
other types of debt investing and provide a significantly less
expensive alternative to equity financing for development-stage
companies.
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56
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Loan Support Provided by Cash Proceeds from Equity Capital
Provided by Venture Capital and Private Equity
Firms. In many cases, a Venture Lender makes a
Venture Loan to a portfolio company in conjunction with, or
immediately after, a substantial venture capital or private
equity investment in the portfolio company. This equity capital
investment supports the loan by initially providing a source of
cash to fund the portfolio companys debt service
obligations. In addition, because the loan ranks senior in
priority of payment to the equity capital investment, the
portfolio company must repay that debt before the equity capital
investors realize a return on their investment. If the portfolio
company subsequently becomes distressed, its venture capital and
private equity investors will likely have an incentive to assist
it in avoiding a payment default, which could lead to
foreclosure on the secured assets. We believe that the support
of venture capital and private equity investors increases the
likelihood that a Venture Loan will be repaid.
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Relatively Rapid Amortization of
Loans. Venture Loans typically require that
interest payments begin within one month of closing, and
principal payments begin within twelve months of closing,
thereby returning capital to the lender and reducing the capital
at risk with respect to the investment. Because Venture Loans
are typically made at the time of, or soon after, a portfolio
company completes a significant venture capital or private
equity financing, the portfolio company usually has sufficient
funds to begin making scheduled principal and interest payments
even if it is not then generating revenue
and/or
positive cash flow. If a portfolio company is able to increase
its enterprise value during the term of the loan
(which is typically between 24 and 48 months), the lender
may also benefit from a reduced
loan-to-value
ratio, which reduces the risk of the loan.
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Senior Ranking to Equity and
Collateralization. A Venture Loan is typically
secured by some or all of the portfolio companys assets,
thus making the loan senior in priority to the equity invested
in the portfolio company. In many cases, if a portfolio company
defaults on its loan, the value of this collateral will provide
the lender with an opportunity to recover all or a portion of
its investment. Because holders of equity interests in a
portfolio company will generally lose their investments before
the Venture Lender experiences losses, we believe that the
likelihood of losing all of our invested capital in a Venture
Loan is lower than would be the case with an equity investment.
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Potential Equity Appreciation Through
Warrants. Venture Lenders are typically granted
warrants in portfolio companies as additional consideration for
making Venture Loans. The warrants permit the Venture Lender to
purchase equity securities of the portfolio companies at the
same price paid by the portfolio companys investors for
such preferred stock in the most recent or next equity round of
the portfolio companys financing. Historically, warrants
granted to Venture Lenders have generally had a term of ten
years and been in dollar amounts equal to between 5% and 20% of
the principal loan amount. Warrants provide Venture Lenders with
an opportunity to participate in the potential growth in value
of the portfolio company, thereby increasing the potential
return on investment.
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We believe that Venture Lending also provides an attractive
financing source for portfolio companies, their management teams
and their equity capital investors, because of the following:
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Venture Loans are Typically Less Dilutive than Venture
Capital and Private Equity Financing. Venture
Loans allow a company to access the cash necessary to implement
its business plan without diluting the existing investors in the
company. Typically, the warrants or other equity securities
issued as part of a Venture Lending transaction result in only
minimal dilution to existing investors as compared to the
potential dilution of a new equity round of financing.
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Venture Loans Extend the Time Period During Which a Portfolio
Company Can Operate Before Seeking Additional Equity
Financing. By using a Venture Loan,
development-stage companies can postpone the need for their next
round of equity financing, thereby extending their cash
available to fund operations. This delay can provide portfolio
companies with additional time to improve technology, achieve
development milestones and, potentially, increase the
companys valuation before seeking more equity investments.
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Venture Loans Allow Portfolio Companies to Better Match Cash
Sources with Uses. Debt is often used to fund
infrastructure costs, including office space and laboratory
equipment. The use of debt to fund infrastructure costs allows a
portfolio company to spread these costs over time, thereby
conserving cash
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57
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at a stage when its revenues may not be sufficient to cover
expenses. Similarly, working capital financing may be used to
fund selling and administrative expenses ahead of anticipated
corresponding revenue. In both instances, equity capital is
preserved for research and development expenses or future
expansion.
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Competitive
Strengths
We believe that we, together with our Advisor, possess
significant competitive strengths, including:
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Consistently Execute Commitments and Close
Transactions. Our Advisor and its senior
management and investment professionals have an extensive track
record of originating, underwriting and closing Venture Loans.
Our Advisor has directly originated, underwritten and managed
more than 130 Venture Loans with an aggregate original principal
amount over $800 million since it commenced operations in
2004. In our experience, prospective portfolio companies prefer
lenders that have demonstrated their ability to deliver on their
commitments.
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Robust Direct Origination Capabilities. Our
Advisors managing directors each have significant
experience originating Venture Loans in our Target Industries.
This experience has given each managing director a deep
knowledge of our Target Industries and an extensive base of
transaction sources and references. Our Advisors brand
name recognition in our market has resulted in a steady flow of
high quality investment opportunities that are consistent with
the strategic vision and expectations of our Advisors
senior management.
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Highly Experienced and Cohesive Management
Team. Our Advisor has had the same senior
management team of experienced professionals since its
inception. This consistency allows companies, their management
teams and their investors to rely on consistent and predictable
service, loan products and terms and underwriting standards.
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Relationships with Venture Capital and Private Equity
Investors. Our Advisor has developed strong
relationships with venture capital and private equity firms and
their partners. The strength and breadth of our Advisors
venture capital and private equity relationships would take
considerable time and expense to develop.
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Well-Known Brand Name. Our Advisor has
originated Venture Loans to more than 130 companies in our
Target Industries under the Horizon Technology
Finance brand. Each of these companies is backed by one or
more venture capital or private equity firms. We believe that
the Horizon Technology Finance brand, as a
competent, knowledgeable and active participant in the Venture
Lending marketplace, will continue to result in a significant
number of referrals and prospective investment opportunities in
our Target Industries.
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58
Stages of
Development of Venture Capital and Private Equity-backed
Companies
Below is a typical development curve for a company in our Target
Industries and the various milestones along the development
curve where we believe a Venture Loan may be a preferred
financing solution:
Investment
Criteria
We make investments in companies that are diversified by their
stage of development, their Target Industries and sectors of
Target Industries and their geographical location, as well as by
the venture capital and private equity sponsors that support our
portfolio companies. While we invest in companies at various
stages of development, we require that prospective portfolio
companies be beyond the seed stage of development and have
received at least their first round of venture capital or
private equity financing. We expect a prospective portfolio
company to demonstrate its ability to advance technology and
increase its value over time.
We have identified several criteria that we believe have proven,
and will prove, important in achieving our investment objective.
These criteria provide general guidelines for our investment
decisions. However, we caution you that not all of these
criteria are met by each portfolio company in which we choose to
invest.
Management. Our portfolio companies are
generally led by experienced management that has in-market
expertise in the Target Industry in which the company operates,
as well as extensive experience with development-stage
companies. The adequacy and completeness of the management team
is assessed relative to the stage of development and the
challenges facing the potential portfolio company.
Continuing Support from One or More Venture Capital and
Private Equity Investors. We typically invest in
companies in which one or more established venture capital and
private equity investors have previously invested and continue
to make a contribution to the management of the business. We
believe that established venture capital and private equity
investors can serve as a committed partner and will assist their
portfolio companies and their management teams in creating
value. We take into consideration the total amount raised by the
company, the valuation history, investor reserves for future
investment and the expected timing and milestones to the next
equity round financing.
Operating Plan and Cash Resources. We
generally require that a prospective portfolio company, in
addition to having sufficient access to capital to support
leverage, demonstrate an operating plan capable of generating
cash flows or the ability to raise the additional capital
necessary to cover its operating expenses and service its debt.
Our
59
review of the operating plan will take into consideration
existing cash, cash burn, cash runway and the milestones
necessary for the company to achieve cash flow positive
operations or to access additional equity from the investors.
Enterprise and Technology Value. We expect
that the enterprise value of a prospective portfolio company
should substantially exceed the principal balance of debt
borrowed by the company. Enterprise value includes the implied
valuation based upon recent equity capital invested as well as
the intrinsic value of the companys unique technology,
service or customer base.
Market Opportunity and Exit Strategy. We seek
portfolio companies that are addressing large market
opportunities that capitalize on their competitive advantages.
Competitive advantages may include unique technology, protected
intellectual property, superior clinical results or significant
market traction. As part of our investment analysis, we will
consider potential realization of our warrants through merger,
acquisition or initial public offering based upon comparable
exits in the companys Target Industry.
Investment
Process
Our Advisor has created an integrated approach to the loan
origination, underwriting, approval and documentation process
that effectively combines all of the skills of our
Advisors professionals. This process allows our Advisor to
achieve an efficient and timely closing of an investment from
the initial contact with a prospective portfolio company through
the investment decision, close of documentation and funding of
the investment, while ensuring that our Advisors rigorous
underwriting standards are consistently maintained. Our Board
has delegated authority for all investment decisions to our
Advisor. We believe that the high level of involvement by our
Advisors staff in the various phases of the investment
process allows us to minimize the credit risk while delivering
superior service to our portfolio companies.
Origination. Our Advisors loan
origination process begins with its industry-focused regional
managing directors who are responsible for identifying,
contacting and screening prospects. The managing directors meet
with key decision makers and deal referral sources such as
venture capital and private equity firms and management teams,
legal firms, accounting firms, investment banks and other
lenders to source prospective portfolio companies. We believe
our brand name and management team are well known within the
Venture Lending community, as well as by many repeat
entrepreneurs and board members of prospective portfolio
companies. These broad relationships, which reach across the
Venture Lending industry, give rise to a significant portion of
our Advisors deal origination.
The responsible managing director of our Advisor obtains review
materials from the prospective portfolio company and from those
materials, as well as other available information, determines
whether it is appropriate for our Advisor to issue a non-binding
term sheet. The managing director bases this decision to proceed
on his or her experience, the competitive environment and the
prospective portfolio companys needs and also seeks the
counsel of our Advisors senior management and investment
team.
Term Sheet. If the managing director
determines, after review and consultation with senior
management, that the potential transaction meets our
Advisors initial credit standards, our Advisor will issue
a non-binding term sheet to the prospective portfolio company.
The terms of the transaction are tailored to a prospective
portfolio companys specific funding needs while taking
into consideration market dynamics, the quality of the
management team, the venture capital and private equity
investors involved and applicable credit criteria, which may
include the prospective portfolio companys existing cash
resources, the development of its technology and the anticipated
timing for the next round of equity financing.
Underwriting. Once the term sheet has been
negotiated and executed and the prospective portfolio company
has remitted a good faith deposit, we request additional due
diligence materials from the prospective portfolio company and
arrange for a due diligence visit.
Due Diligence. The due diligence process
includes a formal visit to the prospective portfolio
companys location and interviews with the prospective
portfolio companys senior management team including its
Chief Executive Officer, Chief Financial Officer, Chief
Scientific or Technology Officer, principal marketing or sales
professional and other key managers. The process includes
contact with key analysts that affect the prospective
60
portfolio companys business, including analysts that
follow the technology market, through leaders in our Target
Industries and important customers or partners, if any. Outside
sources of information are reviewed, including industry
publications, scientific and market articles, Internet
publications, publicly available information on competitors or
competing technologies and information known to our
Advisors investment team from their experience in the
technology markets.
A key element of the due diligence process is interviewing key
existing investors in the prospective portfolio company, who are
often also members of the prospective portfolio companys
board of directors. While these board members
and/or
investors are not independent sources of information, their
support for management and willingness to support the
prospective portfolio companys further development are
critical elements of our decision making process.
Investment Memorandum. Upon completion of the
due diligence process and review and analysis of all of the
information provided by the prospective portfolio company and
obtained externally, our Advisors assigned credit officer
prepares an investment memorandum for review and approval. The
investment memorandum is reviewed by our Advisors Chief
Credit Officer and submitted to our Advisors investment
committee for approval.
Investment Committee. Our Board delegates
authority for all investment decisions to our Advisors
investment committee.
Our Advisors investment committee is responsible for
overall credit policy, portfolio management, approval of all
investments, portfolio monitoring and reporting and managing of
problem accounts. The committee interacts with the entire staff
of our Advisor to review potential transactions and deal flow.
This interaction of cross-functional members of our
Advisors staff assures efficient transaction sourcing,
negotiating and underwriting throughout the transaction process.
Portfolio performance and current market conditions are reviewed
and discussed by the investment committee on a regular basis to
assure that transaction structures and terms are consistent and
current.
Loan Closing and Funding. Approved investments
are documented and closed by our Advisors in-house legal
and loan administration staff. Loan documentation is based upon
standard templates created by our Advisor and is customized for
each transaction to reflect the specific deal terms. The
transaction documents typically include a loan and security
agreement, warrant agreement and applicable perfection
documents, including Uniform Commercial Code financing
statements, and, as applicable, may also include a landlord
agreement, patent and trademark security grants, a subordination
agreement and other standard agreements for commercial loans in
the Venture Lending industry. Funding requires final approval by
our Advisors General Counsel, Chief Executive Officer or
President, Chief Financial Officer and Chief Credit Officer.
Portfolio Management and Reporting. Our
Advisor maintains a hands on approach to maintain
communication with our portfolio companies. At least quarterly,
our Advisor contacts our portfolio companies for operational and
financial updates by phone and performs reviews on an annual
basis. Our Advisor may contact portfolio companies deemed to
have greater credit risk on a monthly basis. Our Advisor
requires all private companies to provide financial statements
on a monthly basis. For public companies, our Advisor typically
relies on publicly reported quarterly financials. Our Advisor
also typically receives copies of bank and security statements,
as well as any other information required to verify reported
financial information. Among other things, this allows our
Advisor to identify any unexpected developments in the financial
performance or condition of the portfolio company.
Our Advisor has developed a proprietary credit rating system to
analyze the quality of our loans. Using this system, our Advisor
analyzes and then rates the credit risk within the portfolio on
a monthly basis. Each portfolio company is rated on a 1 through
4 scale, with 3 representing the rating for a standard level of
risk. A rating of 4 represents an improved and better credit
quality. A rating of 2 or 1 represents a deteriorating credit
quality and increasing risk. Newly funded investments are
typically assigned a rating of 3, unless extraordinary
circumstances require otherwise. These investment ratings are
generated internally by our Advisor, and we cannot guarantee
that others would assign the same ratings to our portfolio
investments or similar portfolio investments.
Our Advisor closely monitors portfolio companies rated a 1 or 2
for adverse developments. In addition, our Advisor has regular
contact with the management, board of directors and major equity
holders of these portfolio
61
companies in order to discuss strategic initiatives to correct
the deterioration of the portfolio company (e.g., cost
reductions, new equity issuance or strategic sale of the
business).
The table below describes each rating level:
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Rating
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4
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The portfolio company has performed in excess of our
expectations at underwriting as demonstrated by exceeding
revenue milestones, clinical milestones or other operating
metrics or as a result of raising capital well in excess of our
underwriting assumptions. Generally the portfolio company
displays one or more of the following: its enterprise value
greatly exceeds our loan balance; it has achieved cash flow
positive operations or has sufficient cash resources to cover
the remaining balance of the loan; there is strong potential for
warrant gains from our warrants; and there is a high likelihood
that the borrower will receive favorable future financing to
support operations. Loans rated 4 are the lowest risk profile in
our portfolio and there is no expected risk of principal loss.
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3
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The portfolio company has performed to our expectations at
underwriting as demonstrated by hitting revenue milestones,
clinical milestones or other operating metrics. It has raised,
or is expected to raise, capital consistent with our
underwriting assumptions. Generally the portfolio company
displays one or more of the following: its enterprise value
comfortably exceeds our loan balance; it has sufficient cash
resources to operate per its plan; it is expected to raise
additional capital as needed; and there continues to be
potential for warrant gains from our warrants. All new loans are
rated 3 when approved and thereafter 3 rated loans represent a
standard risk profile, with no loss currently expected.
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2
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The portfolio company has performed below our expectations at
underwriting as demonstrated by missing revenue milestones,
delayed clinical progress or otherwise failing to meet projected
operating metrics. It may have raised capital in support of the
poorer performance but generally on less favorable terms than
originally contemplated at the time of underwriting. Generally
the portfolio company displays one or more of the following: its
enterprise value exceeds our loan balance but at a lower
multiple than originally expected; it has sufficient cash to
operate per its plan but liquidity may be tight; and it is
planning to raise additional capital but there is uncertainty
and the potential for warrant gains from our warrants are
possible, but unlikely. Loans rated 2 represent an increased
level of risk. While no loss is currently anticipated for a 2
rated loan, there is potential for future loss of principal.
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1
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The portfolio company has performed well below plan as
demonstrated by materially missing revenue milestones, delayed
or failed clinical progress or otherwise failing to meet
operating metrics. The portfolio company has not raised
sufficient capital to operate effectively or retire its debt
obligation to us. Generally the portfolio company displays one
or more of the following: its enterprise value may not exceed
our loan balance; it has insufficient cash to operate per its
plan and liquidity may be tight; and there are uncertain plans
to raise additional capital or the portfolio company is being
sold under distressed conditions. There is no potential for
warrant gains from our warrants. Loans rated 1 are generally put
on non-accrual and represent a high degree of risk of loss. The
fair value of 1 rated loans is reduced to the amount that is
expected to be recovered from liquidation of the collateral.
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For a discussion of the ratings of our existing portfolio, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Loan Portfolio
Asset Quality.
Managerial
Assistance
As a BDC, we offer, through our Advisor, and must provide upon
request, managerial assistance to certain of our portfolio
companies. This assistance may involve, among other things,
monitoring the operations of the portfolio companies,
participating in board of directors and management meetings,
consulting with and advising officers of portfolio companies and
providing other organizational and financial guidance.
We may receive fees for these services, though we may reimburse
our Advisor for its expenses related to providing such services
on our behalf.
62
Competition
We compete for investments with a number of investment funds and
other BDCs, as well as traditional financial services companies
such as commercial banks and other financing sources. Some of
our competitors are larger and have greater financial and other
resources than we do. We believe we compete effectively with
these entities primarily on the basis of the experience,
industry knowledge and contacts of our Advisors investment
professionals, its responsiveness and efficient investment
analysis and decision-making processes, its creative financing
products and its customized investment terms. We do not intend
to compete primarily on the interest rates we offer and believe
that some competitors make loans with rates that are comparable
or lower than our rates. For additional information concerning
the competitive risks see Risk Factors Risks
Related to Our Business and Structure We operate in
a highly competitive market for investment opportunities, and if
we are not able to compete effectively, our business, results of
operations and financial condition may be adversely affected and
the value of your investment in us could decline.
Employees
We do not have any employees. Each of our executive officers
described under Management is an employee of our
Advisor. The
day-to-day
investment operations are managed by our Advisor. As of
September 30, 2011, our Advisor had 16 employees,
including investment and portfolio management professionals,
operations and accounting professionals, legal counsel and
administrative staff. In addition, we reimburse our Advisor for
our allocable portion of expenses incurred by it in performing
its obligations under the Administration Agreement, including
our allocable portion of the cost of our Chief Financial Officer
and Chief Compliance Officer and their respective staffs.
Properties
We do not own any real estate or other physical properties
materially important to our operation. Our headquarters and our
Advisors headquarters are currently located at 312
Farmington Avenue, Farmington, Connecticut 06032. We believe
that our office facilities are suitable and adequate to our
business.
Legal
Proceedings
Neither we nor our Advisor are currently subject to any material
legal proceedings.
63
PORTFOLIO
COMPANIES
The following table sets forth certain information as of
September 30, 2011 for each portfolio company in which we
had a debt or equity investment. Other than these investments,
our only relationships with our portfolio companies involve the
managerial assistance we may separately provide to our portfolio
companies, such services being ancillary to our investments, and
the board observer or participation rights we may receive in
connection with our investment. We do not control
and are not an affiliate of any of our portfolio
companies, each as defined in the 1940 Act. In general, under
the 1940 Act, we would control a portfolio company
if we owned more than 25% of its voting securities and would be
an affiliate of a portfolio company if we owned 5%
or more of its voting securities.
The following table sets forth certain information for each
portfolio company in which we had an investment as of
September 30, 2011.
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Name and Address of
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|
|
|
|
|
Interest
|
|
|
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Cost of
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Portfolio Company
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|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
Debt Investments
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
Debt Investments Life Science
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|
|
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ACT Biotech Corporation
717 Market Street, Suite 650
San Francisco, CA 94103
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Biotechnology
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|
Term Loan(1)
Term
Loan(1)
Term
Loan(1)
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|
13.10%
13.01%
13.01%
|
|
$
|
12/1/2013
12/1/2013
12/1/2013
|
|
|
$
|
905
905
1,371
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|
|
|
905
905
1,371
|
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Ambit Biosciences Corporation
4215 Sorrento Valley Blvd.
San Diego, CA 92121
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|
Biotechnology
|
|
Term
Loan(1)
|
|
12.25%
|
|
|
10/1/2013
|
|
|
|
5,066
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|
|
|
5,066
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Anacor Pharmaceuticals,
Inc.(5)
1020 East Meadow Circle
Palo Alto, CA 94303
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|
Biotechnology
|
|
Term
Loan(2)
|
|
9.41%
|
|
|
4/1/2015
|
|
|
|
3,206
|
|
|
|
3,206
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|
GenturaDx, Inc.
24590 Clawiter Road
Hayward, CA 94545
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|
Biotechnology
|
|
Term
Loan(2)
|
|
11.25%
|
|
|
4/1/2014
|
|
|
|
1,903
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|
|
|
1,903
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N30 Pharmaceuticals, LLC
3122 Sterling Circle, Suite 200
Boulder, CO 80301
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|
Biotechnology
|
|
Term
Loan(1)
|
|
11.25%
|
|
|
9/1/2014
|
|
|
|
2,412
|
|
|
|
2,412
|
|
Pharmasset,
Inc.(5)
303-A
College Road East
Princeton, NJ 08540
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|
Biotechnology
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.00%
12.50%
|
|
|
1/1/2012
10/1/2012
|
|
|
|
379
1,453
|
|
|
|
379
1,453
|
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Revance Therapeutics, Inc.
7555 Gateway Blvd.
Newark, CA 94560
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|
Biotechnology
|
|
Convertible
Note(1)
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|
8.00%
|
|
|
2/10/2013
|
|
|
|
62
|
|
|
|
62
|
|
Supernus Pharmaceuticals, Inc.
1550 East Gude Drive
Rockville, MD 20850
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|
Biotechnology
|
|
Term
Loan(2)
|
|
11.00%
|
|
|
8/1/2014
|
|
|
|
2,947
|
|
|
|
2,947
|
|
Tranzyme,
Inc.(5)
4819 Emperor Blvd., Suite 400
Durham, NC 27703
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|
Biotechnology
|
|
Term
Loan(1)
|
|
10.75%
|
|
|
1/1/2014
|
|
|
|
4,538
|
|
|
|
4,538
|
|
Xcovery Holding Company, LLC
505 S. Flagler Drive, Suite 1330
West Palm Beach, FL 33401
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|
Biotechnology
|
|
Term Loan(2)
Term
Loan(2)
|
|
12.00%
12.00%
|
|
|
10/1/2013
7/1/2014
|
|
|
|
1,494
1,477
|
|
|
|
1,494
1,477
|
|
Concentric Medical, Inc.
301 East Evelyn Avenue
Mountain View, CA 94041
|
|
Medical Device
|
|
Term
Loan(1)
|
|
12.04%
|
|
|
9/1/2013
|
|
|
|
6,676
|
|
|
|
6,676
|
|
OraMetrix, Inc.
2350 Campbell Creek Blvd., Suite 400
Richardson, TX 75082
|
|
Medical Device
|
|
Term
Loan(1)
|
|
11.50%
|
|
|
4/1/2014
|
|
|
|
4,669
|
|
|
|
4,669
|
|
PixelOptics, Inc.
5241 Valleypark Drive
Roanoke, VA 24019
|
|
Medical Device
|
|
Term
Loan(2)
|
|
10.75%
|
|
|
11/1/2014
|
|
|
|
9,910
|
|
|
|
9,910
|
|
Tengion,
Inc.(5)
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
|
|
Medical Device
|
|
Term
Loan(2)
|
|
11.75%
|
|
|
1/1/2014
|
|
|
|
4,948
|
|
|
|
4,588
|
|
ViOptix, Inc.
47224 Misson Fall Ct.
Fremont, CA 94539
|
|
Medical Device
|
|
Term
Loan(1)
|
|
13.55%
|
|
|
11/1/2011
|
|
|
|
656
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investments Life Science
|
|
|
54,977
|
|
|
|
54,617
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
|
Interest
|
|
|
|
Cost of
|
|
|
Portfolio Company
|
|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
Debt Investments Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpenPeak, Inc.
1750 Clint Moore Road
Boca Raton, FL 33487
|
|
Communications
|
|
Term
Loan(1)
|
|
11.86%
|
|
$
|
12/1/2013
|
|
|
$
|
6,016
|
|
|
|
5,647
|
|
Starcite, Inc.
1600 Market Street, 27th Floor
Philadelphia, PA 19103
|
|
Consumer-related
Technologies
|
|
Term
Loan(1)
|
|
12.05%
|
|
|
9/1/2012
|
|
|
|
1,604
|
|
|
|
1,604
|
|
Tagged, Inc.
840 Battery Street, 2nd Floor
San Francisco, CA 94111
|
|
Consumer-related
Technologies
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.78%
11.46%
|
|
|
5/1/2012
8/1/2012
|
|
|
|
671
300
|
|
|
|
671
300
|
|
Xtera Communications, Inc.
500 W. Bethany Drive, Suite 100
Allen, TX 75013
|
|
Semiconductors
|
|
Term
Loan(2)
|
|
11.50%
|
|
|
12/1/2014
|
|
|
|
9,739
|
|
|
|
9,739
|
|
Vette Corp.
14 Manchester Square, Suite 210
Portsmouth, NH 03801
|
|
Data Storage
|
|
Term
Loan(1)
|
|
11.75%
|
|
|
7/1/2014
|
|
|
|
4,928
|
|
|
|
4,928
|
|
IntelePeer, Inc.
2855 Campus Drive, Suite 200
San Mateo, CA 94403
|
|
Networking
|
|
Term Loan(1)
Term
Loan(1)
Term
Loan(1)
|
|
12.43%
12.33%
12.33%
|
|
|
4/1/2012
6/1/2012
10/1/2012
|
|
|
|
238
315
729
|
|
|
|
238
315
729
|
|
Construction Software Technologies, Inc.
4500 Lake Forest Drive, Suite 502
Cincinnati, OH 45202
|
|
Software
|
|
Term Loan(2)
Term Loan
|
|
11.75%
11.75%
|
|
|
12/1/2014
6/1/2014
|
|
|
|
3,940
1,969
|
|
|
|
3,940
1,969
|
|
Courion Corporation
1900 West Park Drive, 1st Floor
Westborough, MA 01581
|
|
Software
|
|
Term
Loan(1)
|
|
11.45%
|
|
|
9/1/2014
|
|
|
|
6,889
|
|
|
|
6,889
|
|
Recondo Technology, Inc.
6312 South Fiddlers Green Cir.,
Suite 600 East
Greenwood Village, CO 80111
|
|
Software
|
|
Term Loan
|
|
11.50%
|
|
|
4/1/2015
|
|
|
|
1,923
|
|
|
|
1,923
|
|
Seapass Solutions, Inc.
90 Park Avenue, Suite 1720
New York, NY 10016
|
|
Software
|
|
Term
Loan(2)
|
|
11.75%
|
|
|
11/1/2014
|
|
|
|
4,924
|
|
|
|
4,924
|
|
StreamBase Systems, Inc.
181 Spring Street
Lexington, MA 02421
|
|
Software
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.51%
12.50%
|
|
|
11/1/2013
6/1/2014
|
|
|
|
3,115
960
|
|
|
|
3,115
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investments Technology
|
|
|
48,260
|
|
|
|
47,891
|
|
|
|
|
|
|
|
|
|
|
Debt Investments Cleantech
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cereplast,
Inc.(5)
300 North Continental Blvd., Suite 100
El Segundo, CA 90245
|
|
Waste Recycling
Waste Recycling
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.00%
12.00%
|
|
|
4/1/2014
6/1/2014
|
|
|
|
2,448
2,441
|
|
|
|
2,448
2,441
|
|
Enphase Energy, Inc.
201 1st Street, Suite 300
Petaluma, CA 94952
|
|
Energy Efficiency
|
|
Term Loan(1)
Term Loan
Term Loan
|
|
12.60%
10.75%
10.75%
|
|
|
10/1/2013
4/1/2015
4/1/2015
|
|
|
|
5,697
1,968
2,938
|
|
|
|
5,697
1,968
2,938
|
|
Satcon Technology
Corporation(5)
27 Drydock Avenue
Boston, MA 02210
|
|
Energy Efficiency
|
|
Term
Loan(1)
|
|
12.58%
|
|
|
1/1/2014
|
|
|
|
8,521
|
|
|
|
8,521
|
|
Tigo Energy, Inc.
420 Blossom Hill Road
Los Gatos, CA 95032
|
|
Energy Efficiency
|
|
Term Loan(1)
Revolver(2)
|
|
11.00%
10.75%
(Prime + 7.50)%
|
|
|
8/1/2014
1/1/2014
|
|
|
|
3,422
2,933
|
|
|
|
3,422
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investments Cleantech
|
|
|
30,368
|
|
|
|
30,368
|
|
|
|
|
|
|
|
|
|
|
Debt Investments Healthcare information and
services
|
BioScale, Inc.
4 Maguire Road
Lexington, MA 02421
|
|
Diagnostics
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.00%
11.51%
|
|
|
8/1/2012
1/1/2014
|
|
|
|
1,351
4,941
|
|
|
|
1,351
4,941
|
|
Precision Therapeutics, Inc.
2516 Jane Street
Pittsburgh, PA 15203
|
|
Diagnostics
|
|
Term Loan
|
|
10.25%
|
|
|
12/1/2014
|
|
|
|
6,952
|
|
|
|
6,952
|
|
Radisphere National Radiology Group, Inc.
23625 Commerce Park, Suite 204
Beachwood, OH 44122
|
|
Diagnostics
|
|
Term
Loan(1)
|
|
12.75%
|
|
|
1/1/2014
|
|
|
|
9,340
|
|
|
|
9,340
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
|
Interest
|
|
|
|
Cost of
|
|
|
Portfolio Company
|
|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
Aperio Technologies, Inc.
1360 Park Center Drive
Vista, CA 92081
|
|
Other Healthcare
|
|
Term Loan
|
|
9.64%
|
|
$
|
5/1/2015
|
|
|
$
|
4,929
|
|
|
|
4,929
|
|
Patientkeeper, Inc.
880 Winter Street, Suite 300
Waltham, MA 02451
|
|
Other Healthcare
|
|
Term Loan
|
|
10.50%
|
|
|
12/1/2014
|
|
|
|
5,222
|
|
|
|
5,222
|
|
Singulex, Inc.
1650 Harbor Bay Parkway, Suite 200
Alameda, CA 94502
|
|
Other Healthcare
|
|
Term Loan(1)
Term
Loan(1)
|
|
11.00%
11.00%
|
|
|
3/1/2014
3/1/2014
|
|
|
|
2,968
1,978
|
|
|
|
2,968
1,978
|
|
Talyst, Inc.
11100 NE 8th Street, Suite 600
Bellevue, WA 98004
|
|
Other Healthcare
|
|
Term Loan(1)
Term
Loan(1)
|
|
12.10%
12.05%
|
|
|
12/1/2013
12/1/2013
|
|
|
|
1,924
1,921
|
|
|
|
1,924
1,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investment Healthcare information and
services
|
|
|
41,526
|
|
|
|
41,526
|
|
|
|
|
|
|
|
|
|
|
Total Debt Investments
|
|
|
175,131
|
|
|
|
174,402
|
|
|
|
|
|
|
|
|
|
|
Warrant Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Life Science
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACT Biotech Corporation
717 Market Street, Suite 650
San Francisco, CA 94103
|
|
Biotechnology
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
58
|
|
|
|
67
|
|
Ambit Biosciences, Inc.
4215 Sorrento Valley Blvd.
San Diego, CA 92121
|
|
Biotechnology
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
143
|
|
|
|
98
|
|
Anacor Pharmaceuticals,
Inc.(5)
1020 East Meadow Circle
Palo Alto, CA 94303
|
|
Biotechnology
|
|
Common Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
42
|
|
|
|
22
|
|
Anesiva,
Inc.(5)
650 Gateway Boulevard
South San Francisco, CA 94080
|
|
Biotechnology
|
|
Common Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
GenturaDx, Inc.
24590 Clawiter Road
Hayward, CA 94545
|
|
Biotechnology
|
|
Preferred Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
63
|
|
|
|
60
|
|
N30 Pharmaceuticals, LLC
3122 Sterling Circle, Suite 200
Boulder, CO 80301
|
|
Biotechnology
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
59
|
|
|
|
46
|
|
Novalar Pharmaceuticals, Inc.
12555 High Bluff Drive, Suite 300
San Diego, CA 92130
|
|
Biotechnology
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Revance Therapeutics, Inc.
7555 Gateway Blvd.
Newark, CA 94560
|
|
Biotechnology
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
224
|
|
|
|
489
|
|
Supernus Pharmaceuticals, Inc.
1550 East Gude Drive
Rockville, MD 20850
|
|
Biotechnology
|
|
Preferred Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
16
|
|
|
|
15
|
|
Tranzyme,
Inc.(5)
4819 Emperor Blvd., Suite 400
Durham, NC 27703
|
|
Biotechnology
|
|
Common Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Concentric Medical, Inc.
301 East Evelyn Avenue
Mountain View, CA 94041
|
|
Medical Device
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
84
|
|
|
|
875
|
|
EnteroMedics,
Inc.(5)
2800 Patton Road
Saint Paul, MN 55113
|
|
Medical Device
|
|
Common Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
347
|
|
|
|
2
|
|
OraMetrix, Inc.
2350 Campbell Creek Blvd., Suite 400
Richardson, TX 75082
|
|
Medical Device
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
78
|
|
|
|
67
|
|
PixelOptics, Inc.
5241 Valleypark Drive
Roanoke, VA 24019
|
|
Medical Device
|
|
Preferred Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
96
|
|
|
|
46
|
|
Tengion,
Inc.(5)
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
|
|
Medical Device
|
|
Common Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
|
Interest
|
|
|
|
Cost of
|
|
|
Portfolio Company
|
|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
ViOptix, Inc.
47224 Misson Fall Ct.
Fremont, CA 94539
|
|
Medical Device
|
|
Preferred Stock
Warrants(1)
|
|
|
|
$
|
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants Life Science
|
|
|
1,373
|
|
|
|
1,787
|
|
|
|
|
|
|
|
|
|
|
Warrants Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpenPeak, Inc.
1750 Clint Moore Road
Boca Raton, FL 33487
|
|
Communications
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
Everyday Health, Inc.
45 Main Street
Brooklyn, NY 11201
|
|
Consumer-related
technologies
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
69
|
|
|
|
116
|
|
SnagAJob.com, Inc.
4880 Cox Road, Suite 200
Glenn Allen, VA 23060
|
|
Consumer-related
technologies
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
23
|
|
|
|
270
|
|
Starcite, Inc.
1600 Market Street, 27th Floor
Philadelphia, PA 19103
|
|
Consumer-related
technologies
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
24
|
|
|
|
27
|
|
Tagged, Inc.
840 Battery Street, 2nd Floor
San Francisco, CA 94111
|
|
Consumer-related
technologies
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
17
|
|
|
|
27
|
|
Xtera Communications, Inc.
500 W. Bethany Drive, Suite 100
Allen, TX 75013
|
|
Semiconductors
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
206
|
|
|
|
242
|
|
Vette Corp.
14 Manchester Square, Suite 210
Portsmouth, NH 03801
|
|
Data Storage
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
75
|
|
|
|
48
|
|
XIOtech, Inc.
6455 Flying Cloud Drive
Eden Prairie, MN 55344
|
|
Data Storage
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
22
|
|
|
|
80
|
|
Cartera Commerce, Inc.
One Cranberry Hill, Suite 203
Lexington, MA 02421
|
|
Internet and media
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
16
|
|
|
|
30
|
|
Grab Networks, Inc.
21000 Atlantic Boulevard
Dulles, VA 20166
|
|
Networking
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
IntelePeer, Inc.
2855 Campus Drive, Suite 200
San Mateo, CA 94403
|
|
Networking
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
39
|
|
|
|
524
|
|
Motion Computing, Inc.
8601 RR 2222, Building II
Austin, TX 78730
|
|
Networking
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
7
|
|
|
|
334
|
|
Impinj, Inc.
701 N. 34th Street, Suite 300
Seattle, WA 8103
|
|
Semi-conductor
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Clarabridge, Inc.
11400 Commerce Park Drive, Suite 500
Reston, VA 20191
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
27
|
|
|
|
24
|
|
Construction Software Technologies, Inc.
4500 Lake Forest Drive, Suite 502
Cincinnati, OH 45202
|
|
Software
|
|
Preferred Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
45
|
|
|
|
44
|
|
Courion Corporation
1900 West Park Drive, 1st Floor
Westborough, MA 01581
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
85
|
|
|
|
100
|
|
DriveCam, Inc.
8911 Balboa Ave.
San Diego, CA 92123
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
20
|
|
|
|
7
|
|
Netuitive, Inc.
12700 Sunrise Valley Drive
Reston, VA 20191
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
27
|
|
|
|
21
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
|
Interest
|
|
|
|
Cost of
|
|
|
Portfolio Company
|
|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
Recondo Technology, Inc.
6312 South Fiddlers Green Cr.,
Suite 600 East
Greenwood Village, CO 80111
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
$
|
|
|
|
$
|
47
|
|
|
|
47
|
|
Seapass Solutions, Inc.
90 Park Avenue, Suite 1720
New York, NY 10016
|
|
Software
|
|
Preferred Stock
Warrants(2)
|
|
|
|
|
|
|
|
|
43
|
|
|
|
42
|
|
StreamBase Systems, Inc.
181 Spring Street
Lexington, MA 02421
|
|
Software
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
67
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants Technology
|
|
|
1,029
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
Warrants Cleantech
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cereplast,
Inc.(5)
300 North Continental Blvd., Suite 100
El Segundo, CA 90245
|
|
Waste Recycling
|
|
Common Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
112
|
|
|
|
28
|
|
Enphase Energy, Inc.
201 1st Street, Suite 300
Petaluma, CA 94952
|
|
Energy Efficiency
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
175
|
|
|
|
136
|
|
Satcon Technology
Corporation(5)
27 Drydock Avenue
Boston, MA 02210
|
|
Energy Efficiency
|
|
Common Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
285
|
|
|
|
5
|
|
Tigo Energy, Inc.
420 Blossom Hill Road
Los Gatos, CA 95032
|
|
Energy Efficiency
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
101
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants Cleantech
|
|
|
673
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
Warrants Healthcare information and services
|
BioScale, Inc.
4 Maguire Road
Lexington, MA 02421
|
|
Diagnostics
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
54
|
|
|
|
62
|
|
Precision Therapeutics, Inc.
2516 Jane Street
Pittsburgh, PA 15203
|
|
Diagnostics
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
73
|
|
|
|
158
|
|
Radisphere National Radiology Group, Inc.
23625 Commerce Park, Suite 204
Beachwood, OH 44122
|
|
Diagnostics
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
167
|
|
|
|
372
|
|
Aperio Technologies, Inc.
1360 Park Center Drive
Vista, CA 92081
|
|
Other Healthcare
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
35
|
|
|
|
34
|
|
Patientkeeper, Inc.
880 Winter Street, Suite 300
Waltham, MA 02451
|
|
Other Healthcare
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
269
|
|
|
|
266
|
|
Singulex, Inc.
1650 Harbor Bay Parkway, Suite 200
Alameda, CA 94502
|
|
Other Healthcare
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
40
|
|
|
|
31
|
|
Talyst, Inc.
11100 NE 8th Street, Suite 600
Bellevue, WA 98004
|
|
Other Healthcare
|
|
Preferred Stock
Warrants(1)
|
|
|
|
|
|
|
|
|
100
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants Healthcare information and services
|
|
|
738
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total Warrants
|
|
|
3,813
|
|
|
|
5,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insmed
Incorporated(5)
4851 Lake Brook Drive
Glen Allen, VA 23058
|
|
Biotechnology
|
|
Common
Stock(1)
|
|
|
|
|
|
|
|
|
227
|
|
|
|
169
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address of
|
|
|
|
|
|
Interest
|
|
|
|
Cost of
|
|
|
Portfolio Company
|
|
Sector
|
|
Type of
Investment(3)
|
|
Rate(4)
|
|
Maturity
|
|
Investment(6)
|
|
Fair Value
|
|
Overture Networks Inc.
507 Aiport Blvd., Building 111
Morrisville, NC 27650
|
|
Communications
|
|
Preferred
Stock(1)
|
|
|
|
$
|
|
|
|
$
|
480
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
707
|
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
Total Investment Assets
|
|
$
|
179,651
|
|
|
$
|
180,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WestLB, AG
|
|
Interest rate swap pay
fixed/receive floating, Notional
Amount $10 million
|
|
3.58%
|
|
|
10/14/2011
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Liabilities
|
|
$
|
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Has been pledged as collateral
under the WestLB Facility.
|
|
|
|
(2)
|
|
Has been pledged as collateral
under the Wells Facility.
|
|
|
|
(3)
|
|
All investments are less than 5%
ownership of the class and ownership of the portfolio company.
|
|
|
|
(4)
|
|
All interest is payable in cash due
monthly in arrears, unless otherwise indicated and applies only
to the Companys debt investments. Amount is the annual
interest rate on the debt investment and does not include any
additional fees related to the investment, such as deferred
interest, commitment fees or prepayment fees. The majority of
the debt investments are at fixed rates for the term of the
loan. For each debt investment, we have provided the current
interest rate in effect as of September 30, 2011.
|
|
|
|
(5)
|
|
Portfolio company is a public
company.
|
|
|
|
(6)
|
|
For debt investments, represents
principal balance less unearned income.
|
69
MANAGEMENT
Our business and affairs are managed under the direction of our
Board. Our Board consists of seven members, four of whom are not
interested persons of our Company or of our Advisor
as defined in Section 2(a)(19) of the 1940 Act and are
independent as determined by our Board, consistent
with the rules of NASDAQ. We refer to these individuals as our
independent directors. Our Board elects our
officers, who serve at the discretion of our Board.
Board of
Directors and Executive Officers
Our directors are divided into three classes. Each class of
directors holds office for a three-year term. However, the
initial members of the three classes have initial terms of one,
two and three years, respectively. At each annual meeting of our
stockholders, the successors to the class of directors whose
terms expire at such meeting will be elected to hold office for
a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. This
classification of our Board may have the effect of delaying or
preventing a change in control of our management. Each director
will hold office for the term to which he or she is elected and
until his or her successor is duly elected and qualified. Our
Board may elect directors to fill vacancies that are created
either through an increase in the number of directors or due to
the resignation, removal or death of any director.
Directors
Information regarding our Board is set forth below. We have
divided the directors into two groups independent
directors and interested directors. Interested directors are
interested persons of the company as defined in
Section 2(a)(19) of the 1940 Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Expiration of
|
|
Interested Director
Name
|
|
Age
|
|
|
Position
|
|
Since
|
|
|
Current Term
|
|
|
Robert D. Pomeroy,
Jr.(1)
|
|
|
60
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
2010
|
|
|
|
2013
|
|
Gerald A.
Michaud(1)
|
|
|
59
|
|
|
President and Director
|
|
|
2010
|
|
|
|
2012
|
|
David P.
Swanson(2)
|
|
|
38
|
|
|
Director
|
|
|
2010
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Expiration of
|
|
Independent Director
Name
|
|
Age
|
|
|
Position
|
|
Since
|
|
|
Current Term
|
|
|
James J. Bottiglieri
|
|
|
55
|
|
|
Director
|
|
|
2010
|
|
|
|
2014
|
|
Edmund V. Mahoney
|
|
|
60
|
|
|
Director
|
|
|
2010
|
|
|
|
2012
|
|
Brett N. Silvers
|
|
|
56
|
|
|
Director
|
|
|
2010
|
|
|
|
2012
|
|
Christopher B. Woodward
|
|
|
62
|
|
|
Lead Independent Director
|
|
|
2010
|
|
|
|
2013
|
|
|
|
|
(1)
|
|
Interested person of the Company
due to his position as an officer of the Company.
|
|
|
|
(2)
|
|
Interested person of the Company
due to his indirect ownership in the Advisor.
|
The address for each of Mr. Pomeroy and Mr. Michaud
and each of the independent directors is c/o Horizon Technology
Finance Corporation, 312 Farmington Avenue, Farmington,
Connecticut 06032. The address for Mr. Swanson is Compass
Group Management LLC, 61 Wilton Road, 2nd Floor, Westport,
Connecticut 06880.
70
Executive
Officers Who Are Not Directors
Information regarding our executive officers who are not
directors is as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
Christopher M. Mathieu
|
|
|
46
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
John C. Bombara
|
|
|
47
|
|
|
Senior Vice President, General Counsel, Chief Compliance
Officer
and Secretary
|
Daniel S. Devorsetz
|
|
|
41
|
|
|
Senior Vice President and Chief Credit Officer
|
The address for each executive officer is
c/o Horizon
Technology Finance Corporation, 312 Farmington Avenue,
Farmington, Connecticut 06032.
Biographical
Information
Interested
Directors
Robert D. Pomeroy, Jr., Chief Executive Officer and
Chairman of the Board of
Directors. Mr. Pomeroy co-founded our
Advisor in May 2003 and has been a managing member of our
Advisor and its Chief Executive Officer since its inception.
Mr. Pomeroy was President of GATX Ventures, Inc. (a
subsidiary of GATX Corporation engaged in the venture lending
business) from July 2000 to April 2003, with full profit and
loss responsibility including managing a staff of 39 and
chairing the investment committee with credit authority. GATX
Ventures, Inc. had total assets of over $270 million.
Before joining GATX Ventures in July 2000, Mr. Pomeroy was
Executive Vice President of Transamerica Business Credit (a
subsidiary of Transamerica Corporation engaged in the venture
lending business) and a co-founder of its Transamerica
Technology Finance division. Mr. Pomeroy was the general
manager of Transamerica Technology Finance from September 1996
to July 2000, with full profit and loss responsibility, credit
authority and responsibility for a staff of 50 and over
$480 million in assets. Prior to co-founding Transamerica
Technology Finance in September 1996, Mr. Pomeroy served
from January 1989 to August 1996 as Senior Vice President and
chaired the investment committee of Financing for Science
International, Inc., a publicly traded venture financing and
healthcare leasing company that was acquired by Finova Capital
Corporation in August 1996. Mr. Pomeroy started his career
with Crocker Bank in 1974 and has over 35 years of
diversified lending and leasing experience. Mr. Pomeroy
earned both a Master of Business Administration and a Bachelor
of Science degree from the University of California at Berkeley.
Gerald A. Michaud, President and
Director. Mr. Michaud co-founded our Advisor
in May 2003 and has been a managing member of our Advisor and
its President since its inception. From July 2000 to May 2003,
Mr. Michaud was Senior Vice President of GATX Ventures,
Inc. and its senior business development executive. From
September 1996 to July 2000, Mr. Michaud was Senior Vice
President of Transamerica Business Credit and a co-founder of
its Transamerica Technology Finance division. Mr. Michaud
was the senior business development executive for Transamerica
Technology Finance with oversight of more than $700 million
in loans funded. From May 1993 to September 1996,
Mr. Michaud served as a Vice President of Financing for
Science International, Inc. Prior to 1993, Mr. Michaud
founded and served as President of Venture Leasing and Capital.
Mr. Michaud attended Northeastern University, Rutgers
University and the University of Phoenix, completed a commercial
credit training program with Shawmut Bank and has taken
executive courses at Harvard Business School.
David P. Swanson, Director. Mr. Swanson
has been a partner in The Compass Group since December 2005 and
has been with The Compass Group and its affiliates since August
2001, serving as a Vice President from August 2001 to December
2003 and a Principal from December 2003 to December 2005. He is
a member of the board of directors of AFM Holding Corporation,
Liberty Safe Holding Corporation and CamelBak Acquisition Corp.
From August 1996 to July 1998, Mr. Swanson was with Goldman
Sachs in the Financial Institutions and Distressed Debt
practices. Mr. Swanson earned a Master of Business
Administration from the Harvard Business School MBA program and
a Bachelor of Arts degree in Economics from the University of
Chicago, where he was elected Phi Beta Kappa.
71
Independent
Directors
James J. Bottiglieri,
Director. Mr. Bottiglieri has served as a
director of Compass Diversified Holdings, Inc.
(CODI) since December 2005, as well as its chief
financial officer since its inception in November 2005.
Mr. Bottiglieri has also been an executive vice president
of CODIs external manager since 2005. Previously,
Mr. Bottiglieri was the senior vice president/controller of
WebMD Corporation. Prior to that, Mr. Bottiglieri was with
Star Gas Corporation and a predecessor firm to KPMG LLP.
Mr. Bottiglieri is a graduate of Pace University.
Mr. Bottiglieri serves as a director for a majority of
CODIs subsidiary companies.
Edmund V. Mahoney, Director. Mr. Mahoney
is Vice President, Investments (Chief Investment Officer) of
Vantis Life Insurance Company (Vantis Life) and is
responsible for all of its investment and portfolio management
activities. Prior to joining Vantis Life in 2009,
Mr. Mahoney was Senior Vice President, Compliance of
Hartford Investment Management Company from 1994 through 2009,
an investment adviser registered with the SEC with nearly
$150 billion of assets under management. From 1986 through
1994, Mr. Mahoney was Assistant Vice President and
Assistant Treasurer of Aetna Life and Casualty Company,
responsible for international finance, foreign exchange risk
management, cash management and leasing activities. From 1979
through 1984, Mr. Mahoney was assistant treasurer of Urban
Investment and Development Company, a real estate development
and management company located in Chicago, Illinois, responsible
for the companys risk management, commercial paper and
construction loan programs. Mr. Mahoney earned a Bachelor
of Arts degree from Colby College, a Master of Business
Administration (with distinction) from Babson College and
attended real estate finance related post graduate courses at
The Wharton School of the University of Pennsylvania.
Brett N. Silvers, Director. Mr. Silvers
has been the President and Chief Executive Officer of
WorldBusiness Capital, Inc. since he founded it in 2003. He was
previously the Chairman and Chief Executive Officer of First
International Bancorp, Inc. (NASDAQ: FNCE) for 13 years,
during which time he led the banks expansion, successful
initial public offering and sale to a Fortune 100 Company.
Mr. Silvers currently serves on the Industry Trade Advisory
Committee on Small and Minority Business of the
U.S. Department of Commerce/Office of the U.S. Trade
Representative. He has also served on the Board of Regents of
the University of Hartford, the Board of Directors of the
Private Export Funding Corporation, the New England Advisory
Council of the Federal Reserve Bank of Boston and the Advisory
Committee of the Export-Import Bank of the United States.
Mr. Silvers received his Bachelor of Arts in Political
Science from Yale University and Master of Arts in Law and
Diplomacy from The Fletcher School, Tufts University.
Christopher B. Woodward, Lead Independent
Director. Mr. Woodward is a private investor
and corporate finance business advisor. He has previously held
several domestic and global management positions as a Director,
Deputy Chief Executive Officer and acting Chief Financial
Officer with Canterbury of New Zealand from 2000 through 2009,
as Vice President-Corporate Finance with Montgomery Securities
and its predecessors from 1983 through 1987 and as a senior
finance and management executive with various other large and
small public and private enterprises. Mr. Woodward began
his career with Coopers & Lybrand (a predecessor firm
to PricewaterhouseCoopers) where he was a Certified Public
Accountant engaged in providing audit, tax and financial
advisory services to various sized public and private companies
across a number of industries from 1973 through 1980. During
such time, he was involved in that firms early Silicon
Valley practice as it assisted emerging, venture-backed growth
companies. Mr. Woodward earned both Bachelor of Science and
Master in Business Administration degrees from the Haas School
at the University of California, Berkeley.
Executive
Officers who are not Directors
Christopher M. Mathieu, Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Mathieu
is an original member of the team that founded our Advisor in
May 2003 and its Chief Financial Officer since inception.
Mr. Mathieu has been involved in the accounting, finance
and venture debt industries for more than 22 years. From
July 2000 to May 2003, Mr. Mathieu was Vice
President Life Sciences of GATX Ventures, Inc. and
the primary business development officer for the life science
sector. From September 1996 to July 2000, Mr. Mathieu was
Vice President Life Sciences of Transamerica
Business Credits Technology Finance division where, in
addition to co-developing and implementing the business plan
used to form the division, he was the primary business
development officer responsible for the life science sector and
was directly responsible for more than $200 million
72
in loan originations. From March 1993 to September 1996,
Mr. Mathieu was a Vice President, Finance at Financing for
Science International, Inc. Prior to March 1993,
Mr. Mathieu was a manager with the financial services group
of KPMG working with both public and private banks and
commercial finance companies. Mr. Mathieu graduated with
honors from Western New England College with a Bachelor of
Science in Business Administration degree in accounting and is a
Certified Public Accountant, chartered in the State of
Connecticut.
John C. Bombara, Senior Vice President, General Counsel,
Chief Compliance Officer and
Secretary. Mr. Bombara is an original member
of the team that founded our Advisor in May 2003 and has been
its Senior Vice President, General Counsel and Chief Compliance
Officer since our Advisors inception. Mr. Bombara
handles all legal functions for our Advisor, including
overseeing the negotiation and documentation of its investments.
Mr. Bombara has more than 20 years of experience
providing legal services to financial institutions and other
entities and individuals. Prior to joining our company,
Mr. Bombara served as in-house counsel for GATX Ventures,
Inc. from December 2000 to May 2003 where he directed the legal
operations of the GATX Ventures east coast office in
closing and managing its portfolio of debt and equity
investments in technology and life science companies throughout
the United States. Mr. Bombara also represented GATX
Corporations other venture lending units in Canada and
Europe. In addition, Mr. Bombara was responsible for
assisting and advising senior management, credit analysts and
marketing directors with respect to appropriate deal structures,
market trends, risk management and compliance with corporate
policies and worked with co-participants business
personnel and counsel in facilitating and coordinating joint
investments. Prior to joining GATX, Mr. Bombara was a
partner at the business law firm of Pepe & Hazard,
LLP. Mr. Bombara received his Bachelor of Arts degree from
Colgate University and his Juris Doctor degree from Cornell Law
School.
Daniel S. Devorsetz, Senior Vice President and Chief Credit
Officer. Mr. Devorsetz joined our Advisor in
October 2004 and has been its Senior Vice President and the
Chief Credit Officer since such time. He is responsible for
underwriting and portfolio management. Mr. Devorsetz has
more than 15 years of financial services and lending
experience, including spending the past 10 years in the venture
lending industry. Prior to joining the team, from May 2003 to
October 2004, Mr. Devorsetz was a Vice President in General
Electric Capital Corporations Life Science Finance Group,
where he was primarily responsible for the underwriting and
portfolio management of debt and equity investments to venture
capital-backed life science companies. Prior to that, from
December 2000 to May 2003, Mr. Devorsetz was a Credit
Manager at GATX Ventures, Inc. concentrating on the high tech
and software industries. He was also a member of GATXs
international credit committee. From July 1999 to December 2000,
Mr. Devorsetz was a Vice President and Director of Analysis
for Student Loans with Citigroup. Mr. Devorsetzs
previous experience includes tenures in private placement
investment banking and securitizations at Advest, Inc. and
Ironwood Capital. Mr. Devorsetz received his Bachelor of
Science degree from Cornell University.
Committees
of the Board of Directors
Our Board has the following board committees:
Audit Committee. The members of the audit
committee are James J. Bottiglieri, Brett N. Silvers and
Christopher B. Woodward, each of whom are independent for
purposes of the 1940 Act and NASDAQ corporate governance listing
standards. James J. Bottiglieri serves as the chairman of the
audit committee and is an audit committee financial
expert as defined under the SEC rules. The audit committee
operates pursuant to a written charter approved by our Board
that sets forth the responsibilities of the audit committee. The
audit committee is responsible for selecting our independent
accountants, reviewing the plans, scope and results of the audit
engagement with our independent accountants, approving
professional services provided by our independent accountants,
reviewing the independence of our independent accountants and
reviewing the adequacy of our internal accounting controls. For
the year ended December 31, 2010, the audit committee met
one time.
Nominating and Corporate Governance
Committee. The members of the nominating and
corporate governance committee are James J. Bottiglieri, Brett
N. Silvers and Edmund V. Mahoney, each of whom are independent
for purposes of the 1940 Act and the NASDAQ corporate governance
listing standards. Edmund V. Mahoney serves as the chairman of
the nominating and corporate governance committee. The
nominating and corporate governance committee operates pursuant
to a written charter approved by our Board. The nominating and
corporate governance committee is responsible for identifying,
researching and nominating directors for election by
73
our stockholders, selecting nominees to fill vacancies on our
Board or a committee of our Board, developing and recommending
to our Board a set of corporate governance principles and
overseeing the evaluation of our Board and our management. Our
procedures for stockholder nominees for director are described
under Description of Common Stock That We May
Issue Anti-takeover Effects of Provisions of Our
Certificate of Incorporation, Bylaws, the DGCL and Other
Arrangements. For the year ended December 31, 2010, the
nominating and corporate governance committee met one time.
Compensation Committee. We do not have a
compensation committee because our executive officers do not
receive any direct compensation from us. Decisions regarding
executive compensation, to the extent they arise, will be made
by the independent directors on our Board.
Compensation
of Directors
The following table sets forth compensation received by our
directors during the period from October 28, 2010 to
December 31, 2010. No compensation was paid prior to our
IPO, which includes the period from January 1, 2010 to October
28, 2010.
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
or Paid in
|
|
|
Name
|
|
Cash(1)(2)
|
|
Total
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
Robert D. Pomeroy, Jr.
|
|
|
None
|
|
|
|
None
|
|
Gerald A. Michaud
|
|
|
None
|
|
|
|
None
|
|
David P. Swanson
|
|
|
None
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
James J. Bottiglieri
|
|
$
|
28,750
|
|
|
$
|
28,750
|
|
Edmund V. Mahoney
|
|
$
|
23,750
|
|
|
$
|
23,750
|
|
Brett N. Silvers
|
|
$
|
23,750
|
|
|
$
|
23,750
|
|
Christopher B. Woodward
|
|
$
|
26,250
|
|
|
$
|
26,250
|
|
|
|
|
(1)
|
|
For a discussion of the independent
directors compensation, see below.
|
(2)
|
|
We do not maintain a stock or
option plan, non-equity incentive plan or pension plan for our
directors.
|
As compensation for serving on our Board, each of our
independent directors receives an annual fee of $35,000. Each
member of the audit committee is paid an annual fee of $7,500
and each member of each other committee is paid an annual fee of
$5,000. In addition, the chairman of the audit committee
receives an additional annual fee of $10,000 and each chairman
of any other committee receives an additional annual fee of
$7,500 for their additional services, if any, in these
capacities. Our lead independent director is also paid an annual
fee of $10,000. We reimburse all our directors for their
reasonable
out-of-pocket
expenses incurred in attending our Board and committee meetings.
No compensation is, or is expected to be, paid to directors who
are interested persons of the Company, as such term
is defined in the 1940 Act.
Leadership
Structure of the Board of Directors and its Role in Risk
Oversight
Our Chief Executive Officer, Robert D. Pomeroy, Jr., is
Chairman of our Board and an interested person under
Section 2(a)(19) of the 1940 Act. Christopher B. Woodward
is our lead independent director and presides over executive
sessions of independent directors. Under our bylaws, our Board
is not required to have an independent chairman. Many
significant corporate governance duties of our Board are
executed by committees of independent directors, each of which
has an independent chairman. We believe that it is in the best
interests of our stockholders for Mr. Pomeroy to lead our
Board because of his broad experience. See
Biographical Information
Interested Directors for a description of
Mr. Pomeroys experience. As a co-founder of our
Advisor, Mr. Pomeroy has demonstrated a track record of
achievement on strategic and operating aspects of our business.
While our Board regularly evaluates alternative structures, we
believe that, as a BDC, it is appropriate for one of our
co-founders, Chief Executive Officer and a member of our
Advisors investment committee to perform
74
the functions of Chairman of the Board, including leading
discussions of strategic issues we expect to face. We believe
the current structure of our Board provides appropriate guidance
and oversight while also enabling ample opportunity for direct
communication and interaction between management and our Board.
There are a number of significant risks facing us which are
described under the heading Risk Factors. Our Board
uses its judgment to create and maintain policies and practices
designed to limit or manage the risks we face, including:
(1) the establishment of board-approved policies and
procedures designed to serve our interests, (2) the
application of these policies uniformly to directors, management
and third-party service providers, (3) the establishment of
independent board committees with clearly defined risk oversight
functions and (4) review and analysis by the Board of
reports by management and certain third-party service providers.
Accordingly, our Board has approved a code of ethics to promote
ethical conduct and prohibit certain transactions that could
pose significant risks to us. Our Board has established a
related party transaction review policy, under which it monitors
the risks related to certain transactions that present a
conflict of interest on a quarterly basis. Our Board has also
established and approved an investment valuation process to
manage risks relating to the valuations of our investments and
to ensure that our financial statements appropriately reflect
the performance of our portfolio of assets. Additionally,
through the delegated authority of our Board, the audit
committee has primary oversight over risks relating to our
internal controls over financial reporting and audit-related
risks, while the nominating and corporate governance committee
has primary oversight over risks relating to corporate
governance and oversees the evaluation of our Board and our
management. Under this oversight structure, our management team
manages the risks facing us in our
day-to-day
operations. We caution you, however, that although our Board
believes it has established an effective system of oversight, no
risk management system can eliminate risks or ensure that
particular events do not adversely affect our business.
Directors
Qualifications and Review of Director Nominees
Our nominating and corporate governance committee of our Board
makes recommendations to our Board regarding the size and
composition of our Board. The nominating and corporate
governance committee annually reviews with our Board the
composition of our Board, as a whole, and recommends, if
necessary, measures to be taken so that our Board reflects the
appropriate balance of knowledge, experience, skills, expertise
and diversity required for our Board, as a whole, and contains
at least the minimum number of independent directors required by
applicable laws and regulations. The nominating and corporate
governance committee is responsible for ensuring that the
composition of the members of our Board accurately reflects the
needs of our business and, in furtherance of this goal,
proposing the addition of members and the necessary resignation
of members for purposes of obtaining the appropriate members and
skills. Our directors should possess such attributes and
experience as are necessary to provide a broad range of personal
characteristics including diversity, management skills,
financial skills and technological and business experience. Our
directors should also be able to commit the requisite time for
preparation and attendance at regularly scheduled Board and
committee meetings, as well as be able to participate in other
matters necessary to ensure good corporate governance is
practiced.
In evaluating a director candidate, the nominating and corporate
governance committee considers factors that are in our best
interests and our stockholders best interests, including
the knowledge, experience, integrity and judgment of each
candidate; the potential contribution of each candidate to the
diversity of backgrounds, experience and competencies which our
Board desires to have represented; each candidates ability
to devote sufficient time and effort to his or her duties as a
director; independence and willingness to consider all strategic
proposals; any other criteria established by our Board and any
core competencies or technical expertise necessary to staff our
Boards committees. In addition, the nominating and
corporate governance committee assesses whether a candidate
possesses the integrity, judgment, knowledge, experience, skills
and expertise that are likely to enhance our Boards
ability to manage and direct our affairs and business,
including, when applicable, to enhance the ability of committees
of our Board to fulfill their duties. In addition, the
nominating and corporate governance committee may consider
self-and peer-evaluations provided by each current director to
determine, among other things, that the directors work well
together and operate together effectively.
In addition to fulfilling the above criteria, four of the seven
directors named above are considered independent under NASDAQ
rules (Mr. Pomeroy, Mr. Michaud and Mr. Swanson
being the exception as Mr. Pomeroy and Mr. Michaud are
employees of our Advisor and Mr. Swanson is an indirect
owner of the Advisor), and the
75
nominating and corporate governance committee believes that all
seven nominees are independent of the influence of any
particular stockholder or group of stockholders whose interests
may diverge from the interests of our stockholders as a whole.
Each director brings a strong and unique background and set of
skills to our Board, giving our Board, as a whole, competence
and experience in a wide variety of areas, including corporate
governance and board service, executive management, finance,
private equity, workout and turnaround situations, manufacturing
and marketing. Set forth below are our conclusions with regard
to our directors.
Mr. Pomeroy has more than 35 years of experience in
diversified lending and leasing, including positions in sales,
marketing, and senior management. He has held the positions as
chief executive officer or general manager of each organization
which he has led since 1996. His responsibilities have included:
accountability for the overall profit and loss of the
organization, credit authority and credit committee oversight,
strategic planning, human resource oversight including hiring,
termination and compensation, reporting compliance for his
business unit, investor relations, fund raising and all aspects
of corporate governance. Mr. Pomeroy founded and has
operated our Advisor, a Venture Lending management company.
Prior to founding our Advisor, Mr. Pomeroy was the Senior
Vice President of Financing for Science International, Inc.,
Executive Vice President of Transamerica Business Credit and the
General Manager of its Technology Finance Division and President
of GATX Ventures, Inc. This experience has provided him with the
extensive judgment, experience, skills and knowledge to make a
significant contribution as Chairman of our Board and supporting
its ability to govern our affairs and business.
Mr. Michaud has been President of our Advisor since its
formation. He has extensive knowledge and expertise in venture
lending and has developed, implemented and executed on marketing
strategies and products targeted at the venture backed
technology and life science markets for a period of over
20 years. In addition, he has extensive knowledge in the
formation of compensation plans for key employees involved in
the marketing of venture loans. He is a member of our
Advisors Credit Committee responsible for approving all
investments made by us and oversight of our portfolio. He has
held senior management positions with several venture lending
organizations within public companies, including Transamerica
Business Credit and GATX Ventures, Inc. As senior vice president
and senior business development officer at Transamerica, he was
responsible for more than $700 million in loan
transactions. This experience, particularly with respect to
marketing and business development, has provided
Mr. Michaud with the judgment, knowledge, experience,
skills and expertise that are likely to enhance our Boards
ability to manage and direct our affairs.
Mr. Swanson is a partner in The Compass Group and currently
serves on the board of directors of three privately held
companies. With additional experience and knowledge gained from
other board positions on various committees on private portfolio
companies, he has a broad base of experience and skills to bring
to our Board. Mr. Swanson has gained extensive experience
as a partner with The Compass Group in evaluating and
structuring transactions, completing due diligence, executing
and closing on acquisitions and structuring financings of
operating companies, as well as taking privately held companies
public. Prior to The Compass Group, he gained experience in
investment banking, including capital raising and business
strategy and execution. Mr. Swanson provides our Board with
expertise in business and corporate governance matters and
assists our Board in its ability to manage and direct our
affairs.
Mr. Bottiglieri brings to our Board substantial experience
in identifying, managing and resolving accounting, tax and other
financial issues often encountered by public companies through
his positions as the chief financial officer and a director of
CODI, as well as a director for a majority of CODIs
subsidiary companies, and as the senior vice
president/controller of WebMD. In addition, as the chief
financial officer and director of a public company, CODI,
Mr. Bottiglieri has developed an extensive understanding of
the various periodic reporting requirements and corporate
governance compliance matters that assists our Board in managing
and directing our affairs. This experience, particularly with
respect to the areas of accounting and corporate governance,
provides our Board with expertise that assists our Board in its
ability to manage and direct our affairs.
Mr. Mahoney brings to our Board pertinent experience in
portfolio management, as well as in-depth knowledge of
investment advisor compliance, funds management and performance
measurement and pricing of investments. In addition, through his
past experiences he has unique knowledge of international
finance, as well as risk management strategies for foreign
exchange and property and casualty operations. This vast
experience,
76
particularly in the areas of business, risk management and
compliance matters that affect investment companies, enhances
our Boards ability to manage and direct our affairs.
Mr. Silvers is a former chief executive officer and
director of a public company and FDIC-insured bank. He brings to
our Board extensive knowledge of domestic lending to small and
midsize businesses. From his experience as the current chief
executive officer of a commercial finance company,
Mr. Silvers provides the Board with specialized expertise
in U.S. government guaranteed lending. His government and
regulatory experience, garnered through his roles as a member of
important advisory committees, councils and boards of directors
relevant to our business, complements our Boards oversight
of our Company and enhances its ability to manage and direct our
affairs.
Mr. Woodward brings to our Board a deep understanding of
corporate finance, including experience with private placements,
public offerings, venture capital investing, international
management and financial advising and restructuring.
Additionally, as a practicing CPA with a leading firm,
Mr. Woodward gained extensive accounting and audit
experience. Mr. Woodwards financial and accounting
expertise enhances the Boards oversight of our company and
its ability to manage and direct our affairs.
77
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into the Investment Management Agreement with
the Advisor. The Advisor is registered as an investment adviser
under the Advisers Act. The investment activities are managed by
the Advisor and supervised by the Board, the majority of whom
are independent directors. Under the Investment Management
Agreement, we have agreed to pay the Advisor an annual
management fee based on its adjusted gross assets as well as an
incentive fee based on our investment performance.
Messrs. Pomeroy and Michaud control HTFM, our Advisor and
Administrator.
We have also entered into the Administration Agreement with the
Administrator. Under the Administration Agreement, we have
agreed to reimburse the Administrator for our allocable portion
of overhead and other expenses incurred by the Administrator in
performing its obligations under the Administration Agreement,
including rent and our allocable portion of the costs of
compensation and related expenses of our General Counsel and
Secretary, Chief Compliance Officer, Chief Financial Officer and
their respective staffs. In addition, pursuant to the terms of
the Administration Agreement the Administrator provides us with
the office facilities and administrative services necessary to
conduct our
day-to-day
operations.
The predecessor of the Advisor has granted the Company a
non-exclusive, royalty-free license to use the name
Horizon Technology Finance.
In October 2010, we entered into a registration rights agreement
with respect to 2,645,124 shares acquired by Compass
Horizon Partners, LP and HTF-CHF Holdings LLC in connection with
the exchange of membership interests in Compass Horizon for
shares of our common stock. As a result and subject to the terms
and conditions of the registration rights agreement, at any time
following 365 days after the completion of our IPO the
holders of a
majority-in-interest
of the shares subject to the registration rights agreement
(including permitted transferees) can require up to a maximum of
three times that we file a registration statement under the
Securities Act relating to the resale of all or a part of the
shares. In addition, the registration rights agreement also
provides for piggyback registration rights with respect to any
future registrations of the Companys equity securities and
the right to require us to register the resale of our shares on
a shelf
Form N-2
at any time following 365 days after the completion of the
Companys IPO. In connection with the IPO, Compass Horizon
Partners, LP sold 1,340,000 shares. We are registering
1,305,124 shares pursuant to our contractual obligations
under the registration rights agreement, as well as a total of
17,545 shares acquired by selling stockholders pursuant to
our dividend reinvestment plan.
We believe that we derive substantial benefits from our
relationship with our Advisor. Our Advisor may manage other
investment vehicles (Advisor Funds) with the same
investment strategy as us. The Advisor may provide us an
opportunity to co-invest with the Advisor Funds. Under the 1940
Act, absent receipt of exemptive relief from the SEC, we and our
affiliates may be precluded from co-investing in such
investments. Accordingly, we may apply for exemptive relief
which would permit us to co-invest subject to certain
conditions, including, without limitation, approval of such
investments by both a majority of our directors who have no
financial interest in such transaction and a majority of
directors who are not interested directors as defined in the
1940 Act.
78
OUR
ADVISOR
Our Advisor is located at 312 Farmington Avenue, Farmington,
Connecticut 06032 and serves as our investment advisor pursuant
to the Investment Management Agreement. Our Advisor is
registered as an investment adviser under the Advisers Act.
Subject to the overall supervision of our Board, our Advisor
manages the
day-to-day
operations of, and provides investment advisory and management
services to, us.
Portfolio
Management
The management of our investment portfolio is the responsibility
of our Advisors executive officers and its investment
committee. The investment committee currently consists of Robert
D. Pomeroy, Jr., Chief Executive Officer of our Advisor,
Gerald A. Michaud, President of our Advisor, Daniel S.
Devorsetz, Senior Vice President and Chief Credit Officer of our
Advisor, and Kevin T. Walsh, Vice President and Senior Credit
Officer of our Advisor. For more information regarding the
business experiences of Messrs. Pomeroy, Michaud and
Devorsetz, see Management Biographical
Information Interested Directors and
Management Biographical
Information Executive Officers who are not
Directors.
Below is the biography for the portfolio manager whose biography
has not been included elsewhere in this prospectus.
Kevin T. Walsh, Vice President, Senior Credit Officer of Our
Advisor. Mr. Walsh has been the Senior
Credit Officer of our Advisor since joining our Advisor in March
2006. Mr. Walsh is responsible for the underwriting of
initial investments and the ongoing review of the portfolio
accounts. Mr. Walsh has over 16 years of experience
working with early stage, venture backed technology and life
science companies. Prior to joining our Advisor in March 2006,
Mr. Walsh was a Senior Vice President and Market Manager
for Bridge Banks Technology Banking and Capital Finance
Divisions from September 2004 to March 2006 where he was
responsible for new business generation as well as risk
management activities within the Banks asset-based lending
sector. Prior to Bridge Bank, Mr. Walsh was a Vice
President and Relationship Manager for Silicon Valley Bank in
the Communication & Electronics Practice from
September 1994 to June 2004. Mr. Walsh is a graduate of the
California State University at Hayward, where he earned a
Bachelor of Science degree in Business Administration.
The compensation of the members of the senior management
committee of our Advisor are paid by our Advisor and includes an
annual base salary, in certain cases an annual bonus based on an
assessment of short-term and long-term performance and a portion
of the incentive fee, if any, paid to our Advisor. In addition,
Mr. Pomeroy and Mr. Michaud have equity interests in
our Advisor and may receive distributions of profits in respect
of those interests. See Control Persons and Principal
Stockholders for information on ownership by portfolio
managers of our securities.
79
INVESTMENT
MANAGEMENT AND ADMINISTRATION AGREEMENTS
Our Advisor serves as our investment advisor and is registered
as such under the Advisers Act. Our Advisor manages our
day-to-day
operations and also provides all administrative services
necessary for us to operate.
Investment
Management Agreement
Under the terms of the Investment Management Agreement, our
Advisor:
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determines the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes;
|
|
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|
identifies, evaluates and negotiates the structure of the
investments we make (including performing due diligence on our
prospective portfolio companies); and
|
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|
closes, monitors and administers the investments we make,
including the exercise of any voting or consent rights.
|
Our Advisors services under the Investment Management
Agreement are not exclusive, and it is free to furnish similar
services to other entities so long as its services to us are not
impaired.
Management
Fee
Pursuant to the Investment Management Agreement, we pay our
Advisor a fee for investment advisory and management services
consisting of a base management fee and an incentive fee.
Base Management Fee. The base management fee
is calculated at an annual rate of 2.00% of our gross assets,
payable monthly in arrears. For purposes of calculating the base
management fee, the term gross assets includes any
assets acquired with the proceeds of leverage.
Incentive Fee. The incentive fee has two
parts, as follows:
The first part is calculated and payable quarterly in arrears
based on our Pre-Incentive Fee Net Investment Income for the
immediately preceding calendar quarter. For this purpose,
Pre-Incentive Fee Net Investment Income means interest income,
dividend income and any other income (including any other fees
(other than fees for providing managerial assistance), such as
commitment, origination, structuring, diligence and consulting
fees and fees for providing significant managerial assistance or
other fees that we receive from portfolio companies) accrued
during the calendar quarter, minus our operating expenses for
the quarter (including the base management fee, expenses payable
under the Administration Agreement, and any interest expense and
any dividends paid on any issued and outstanding preferred
stock, but excluding the incentive fee). Pre-Incentive Fee Net
Investment Income includes, in the case of investments with a
deferred interest feature (such as original issue discount, debt
instruments with
payment-in-kind
interest and zero coupon securities), accrued income that we
have not yet received in cash. The incentive fee with respect to
our Pre-Incentive Fee Net Investment Income is 20.00% of the
amount, if any, by which our Pre-Incentive Fee Net Investment
Income for the immediately preceding calendar quarter exceeds a
1.75% (which is 7.00% annualized) hurdle rate and a
catch-up
provision measured as of the end of each calendar quarter. Under
this provision, in any calendar quarter, our Advisor receives no
incentive fee until our net investment income equals the hurdle
rate of 1.75%, but then receives, as a
catch-up,
100.00% of our Pre-Incentive Fee Net Investment income with
respect to that portion of such Pre-Incentive Fee Net Investment
Income, if any, that exceeds the hurdle rate but is less than
2.1875%. The effect of this provision is that, if Pre-Incentive
Fee Net Investment Income exceeds 2.1875% in any calendar
quarter, our Advisor receives 20.00% of our Pre-Incentive Fee
Net Investment Income as if a hurdle rate did not apply.
Pre-Incentive Fee Net Investment Income does not include any
realized capital gains, realized capital losses or unrealized
capital appreciation or depreciation. Because of the structure
of the incentive fee, it is possible that we may pay an
incentive fee in a quarter where we incur a loss. For example,
if we receive Pre-Incentive Fee Net Investment Income in excess
of the quarterly minimum hurdle rate, we pay the applicable
incentive fee even if we have incurred a loss in that quarter
due to realized and unrealized capital losses. Our net
investment income used to calculate this part of the incentive
fee is also included in the amount of our gross assets used to
calculate the 2.00%
80
base management fee. These calculations are appropriately pro
rated for any period of less than three months and adjusted for
any share issuances or repurchases during the quarter for which
the calculations are made.
The following is a graphical representation of the calculation
of the income-related portion of the incentive fee:
Quarterly
Incentive Fee Based on Net Investment Income
Pre-Incentive
Fee Net Investment Income (expressed as a percentage of the
value of net assets)
Percentage
of Pre-Incentive Fee Net Investment Income allocated to first
part of incentive fee
The second part of the incentive fee is determined and payable
in arrears as of the end of each calendar year (or upon
termination of the Investment Management Agreement, as of the
termination date), commencing on December 31, 2010, and
equals 20% of our realized capital gains, if any, on a
cumulative basis from the date of our election to be a BDC
through the end of each calendar year, computed net of all
realized capital losses and unrealized capital depreciation on a
cumulative basis, less all previous amounts paid in respect of
the capital gain incentive fee provided that the incentive fee
determined as of December 31, 2010 was calculated for a
period of shorter than twelve calendar months in order to take
into account the realized capital gains computed net of all
realized capital losses and unrealized capital depreciation for
the period beginning on the date of our election to be a BDC and
ending December 31, 2010.
Examples
of Incentive Fee Calculation
Example
1: Income Related Portion of Incentive Fee for Each Fiscal
Quarter
Alternative
1
Assumptions:
Investment income (including interest, dividends, fees, etc.) =
1.25%
Hurdle
rate(1) =
1.75%
Management
fee(2)=
0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)=
0.20%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other
expenses)) = 0.55%
Pre-Incentive Fee Net Investment Income does not exceed hurdle
rate; therefore, there is no income-related incentive fee.
Alternative
2
Assumptions:
Investment income (including interest, dividends, fees, etc.) =
2.80%
Hurdle
rate(1) =
1.75%
Management
fee(2) =
0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)
= 0.20%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other expenses)) =
2.10%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment
Income (subject to
catch-up)(4)
= 100.00% × (2.10% − 1.75%)
= 0.35%
81
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate,
but does not fully satisfy the
catch-up
provision; therefore, the income related portion of the
incentive fee is 0.35%.
Alternative
3
Assumptions:
Investment income (including interest, dividends, fees, etc.) =
3.00%
Hurdle
rate(1) =
1.75%
Management
fee(2) =
0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3)
= 0.20%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other expenses)) =
2.30%
Incentive fee = 100.00% × Pre-Incentive Fee Net Investment
Income (subject to
catch-up)(4)
Incentive fee = 100.00% ×
catch-up
+ (20.00% × (Pre-Incentive Fee Net Investment Income
− 2.1875%))
Catch up = 2.1875% − 1.75%
= 0.4375%
Incentive fee = (100.00% × 0.4375%) + (20.00% × (2.30%
− 2.1875%))
= 0.4375% + (20.00% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate,
and fully satisfies the
catch-up
provision; therefore, the income related portion of the
incentive fee is 0.46%.
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(1)
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Represents 7.00% annualized hurdle
rate.
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(2)
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Represents 2.00% annualized base
management fee.
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(3)
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Excludes organizational and
offering expenses.
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(4)
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The
catch-up
provision is intended to provide our Advisor with an incentive
fee of 20.00% on all Pre-Incentive Fee Net Investment Income as
if a hurdle rate did not apply when our net investment income
exceeds 2.1875% in any fiscal quarter.
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Example
2: Capital Gains Portion of Incentive Fee
Alternative
1
Assumptions:
Year 1: $20 million investment made in Company A
(Investment A), and $30 million investment made
in Company B (Investment B)
Year 2: Investment A sold for $50 million and fair market
value (FMV) of Investment B determined to be
$32 million
Year 3: FMV of Investment B determined to be $25 million
Year 4: Investment B sold for $31 million
The capital gains portion of the incentive fee, if any, would be:
Year 1: None (No sales transaction)
Year 2: Capital gains incentive fee of $6 million
($30 million realized capital gains on sale of Investment A
multiplied by 20%)
Year 3: None; $5 million ((20% multiplied by
($30 million cumulative capital gains less $5 million
cumulative capital depreciation)) less $6 million (previous
capital gains fee paid in Year 2))
Year 4: Capital gains incentive fee of $200,000;
$6.2 million (($31 million cumulative realized capital
gains multiplied by 20%) less $6 million (capital gains
incentive fee taken in Year 2))
82
Alternative
2
Assumptions:
Year 1: $20 million investment made in Company A
(Investment A), $30 million investment made in
Company B (Investment B) and $25 million
investment made in Company C (Investment C)
Year 2: Investment A sold for $50 million, FMV of
Investment B determined to be $25 million and FMV of
Investment C determined to be $25 million
Year 3: FMV of Investment B determined to be $27 million
and Investment C sold for $30 million
Year 4: FMV of Investment B determined to be $35 million
Year 5: Investment B sold for $20 million
The capital gains incentive fee, if any, would be:
Year 1: None (no sales transaction)
Year 2: $5 million capital gains incentive fee (20%
multiplied by $25 million ($30 million realized
capital gains on Investment A less unrealized capital
depreciation on Investment B))
Year 3: $1.4 million capital gains incentive
fee(1)
($6.4 million (20% multiplied by $32 million
($35 million cumulative realized capital gains less
$3 million unrealized capital depreciation)) less
$5 million capital gains incentive fee received in Year 2
Year 4: None (no sales transaction)
Year 5: None ($5 million (20% multiplied by
$25 million (cumulative realized capital gains of
$35 million less realized capital losses of
$10 million)) less $6.4 million cumulative capital
gains incentive fee paid in Year 2 and Year
3(2)
The hypothetical amounts of returns shown are based on a
percentage of our total net assets and assume no leverage. There
is no guarantee that positive returns will be realized and
actual returns may vary from those shown in this example.
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(1)
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As illustrated in Year 3 of
Alternative 1 above, if we were to be wound up on a date other
than our fiscal year end of any year, we may have paid aggregate
capital gains incentive fees that are more than the amount of
such fees that would be payable if we had been wound up on its
fiscal year end of such year.
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(2)
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As noted above, it is possible that
the cumulative aggregate capital gains fee received by the
Investment Manager ($6.4 million) is effectively greater
than $5 million (20.00% of cumulative aggregate realized
capital gains less net realized capital losses or net unrealized
depreciation ($25 million)).
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Payment
of our expenses
All investment professionals and staff of our Advisor, when and
to the extent engaged in providing investment advisory and
management services, and the compensation and routine overhead
expenses of its personnel allocable to such services, are
provided and paid for by our Advisor. We bear all other costs
and expenses of our operations and transactions, including,
without limitation, those relating to:
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our organization;
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calculating our net asset value (including the cost and expenses
of any independent valuation firms);
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expenses, including travel expense, incurred by our Advisor or
payable to third parties performing due diligence on prospective
portfolio companies, monitoring our investments and, if
necessary, enforcing our rights;
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interest payable on debt, if any, incurred to finance our
investments;
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the costs of all future offerings of our common stock and other
securities, if any;
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the base management fee and any incentive management fee;
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distributions on our shares;
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administration fees payable under the Administration Agreement;
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the allocated costs incurred by Advisor as our Administrator in
providing managerial assistance to those portfolio companies
that request it;
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amounts payable to third parties relating to, or associated
with, making investments;
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transfer agent and custodial fees;
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registration fees;
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listing fees;
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fees and expenses associated with marketing efforts;
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taxes;
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independent director fees and expenses;
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brokerage commissions;
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costs of preparing and filing reports or other documents with
the SEC;
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the costs of any reports, proxy statements or other notices to
our stockholders, including printing costs;
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our allocable portion of the fidelity bond;
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directors and officers/errors and omissions liability insurance,
and any other insurance premiums;
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indemnification payments;
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direct costs and expenses of administration, including audit and
legal costs; and
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all other expenses incurred by us or the Administrator in
connection with administering our business, such as the
allocable portion of overhead under the Administration
Agreement, including rent, the fees and expenses associated with
performing compliance functions and our allocable portion of the
costs of compensation and related expenses of our Chief
Compliance Officer and our Chief Financial Officer and their
respective staffs.
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We reimburse our Advisor for costs and expenses incurred by our
Advisor for office space rental, office equipment and utilities
allocable to the performance by our Advisor of its duties under
the Investment Management Agreement, as well as any costs and
expenses incurred by our Advisor relating to any non-investment
advisory, administrative or operating services provided by our
Advisor to us or in the form of managerial assistance to
portfolio companies that request it.
From time to time, our Advisor may pay amounts owed by us to
third party providers of goods or services. We subsequently
reimburse our Advisor for such amounts paid on our behalf.
Generally, our expenses are expensed as incurred in accordance
with GAAP. To the extent we incur costs that should be
capitalized and amortized into expense we also do so in
accordance with GAAP, which may include amortizing such amount
on a straight line basis over the life of the asset or the life
of the services or product being performed or provided.
Limitation
of liability and indemnification
The Investment Management Agreement provides that our Advisor
and its officers, managers, partners, agents, employees,
controlling persons and any other person or entity affiliated
with our Advisor are not be liable to us for any act or omission
by it in the supervision or management of our investment
activities or for any loss sustained by us except for acts or
omissions constituting willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations under the
Investment Management Agreement. The Investment Management
Agreement also provides for indemnification by us of our Advisor
and its officers, managers, partners, agents, employees,
controlling persons and any other person or entity affiliated
with our Advisor for liabilities incurred by them
84
in connection with their services to us (including any
liabilities associated with an action or suit by or in the right
of us or our stockholders), but excluding liabilities for acts
or omissions constituting willful misfeasance, bad faith or
gross negligence or reckless disregard of their duties under the
Investment Management Agreement subject to certain conditions.
Board
approval of the Investment Management Agreement
Our Board held an in-person meeting on August 3, 2011, and
considered and approved the Investment Management Agreement for
another twelve month period. In its consideration of the
Investment Management Agreement, our Board focused on
information it had received relating to, among other things:
(a) the nature, quality and extent of the advisory and
other services to be provided to us by our Advisor;
(b) comparative data with respect to advisory fees or
similar expenses paid by other BDCs with similar investment
objectives; (c) our projected operating expenses and
expense ratio compared to BDCs with similar investment
objectives; (d) any existing and potential sources of
indirect income to our Advisor or the Administrator from their
relationships with us and the profitability of those
relationships; (e) information about the services to be
performed and the personnel performing such services under the
Investment Management Agreement; (f) the organizational
capability and financial condition of our Advisor and its
affiliates; (g) our Advisors practices regarding the
selection and compensation of brokers that may execute our
portfolio transactions and the brokers provision of
brokerage and research services to our Advisor; and (h) the
possibility of obtaining similar services from other third party
service providers or through an internally managed structure.
Based on the information reviewed and the discussions related
thereto, our Board, including a majority of the non-interested
directors, concluded that the investment management fee rates
are reasonable in relation to the services to be provided.
Duration
and termination
The Investment Management Agreement was approved by our Board on
October 25, 2010 and August 3, 2011. Unless terminated
earlier as described below, it will continue in effect for a
period of two years from its effective date. It will remain in
effect from year to year thereafter if approved annually by our
Board or by the affirmative vote of the holders of a majority of
our outstanding voting securities, including, in either case,
approval by a majority of our directors who are not interested
persons. The Investment Management Agreement will automatically
terminate in the event of its assignment. The Investment
Management Agreement may be terminated by either party without
penalty by delivering notice of termination upon not more than
60 days written notice to the other. See Risk
Factors Risks Related to our Business and
Structure Our Advisor can resign on
60 days notice, and we may not be able to find a
suitable replacement within that time, resulting in a disruption
in our operations that could adversely affect our business,
results of operations or financial condition. We are
dependent upon senior management personnel of our Advisor for
our future success, and if our Advisor is unable to hire and
retain qualified personnel or if our Advisor loses any member of
its senior management team, our ability to achieve our
investment objective could be significantly harmed.
Administration
Agreement
We have entered into an Administration Agreement with the
Administrator, to provide administrative services to us. For
providing these services, facilities and personnel, we reimburse
the Administrator for our allocable portion of overhead and
other expenses incurred by the Administrator in performing its
obligations under the Administration Agreement, including rent,
the fees and expenses associated with performing compliance
functions and our allocable portion of the costs of compensation
and related expenses of our Chief Compliance Officer and our
Chief Financial Officer and their respective staffs.
From time to time, the Administrator may pay amounts owed by us
to third-party providers of goods or services. We subsequently
reimburse the Administrator for such amounts paid on our behalf.
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License
Agreement
We have entered into a license agreement with Horizon Technology
Finance, LLC pursuant to which we were granted a non-exclusive,
royalty-free right and license to use the service mark
Horizon Technology Finance. Under this agreement, we
have a right to use the Horizon Technology Finance
service mark for so long as the Investment Management Agreement
with our Advisor is in effect. Other than with respect to this
limited license, we have no legal right to the Horizon
Technology Finance service mark.
86
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
No person is deemed to control us, as such term is defined in
the 1940 Act.
The following table sets forth certain information with respect
to the beneficial and record ownership of our common stock as of
December 13, 2011 by:
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each person known to us to own beneficially and of record more
than 5% of the outstanding shares of our common stock;
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each of our directors and each of our executive
officers; and
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all of our directors and executive officers as a group.
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The percentage of common stock outstanding is based on
7,636,532 shares of common stock outstanding as of
December 13, 2011.
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Percentage of
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Shares
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Common Stock
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Name of Beneficial
Owner
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Owned
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Outstanding
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Principal Stockholders
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Compass Horizon Partners,
LP(1)(3)
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1,271,414
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16.6
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%
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HTF-CHF Holdings
LLC(2)(3)
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51,255
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*%
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