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HRZN > SEC Filings for HRZN > Form 10-Q on 8-May-2012All Recent SEC Filings

Show all filings for HORIZON TECHNOLOGY FINANCE CORP

Form 10-Q for HORIZON TECHNOLOGY FINANCE CORP


8-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this section, except where the context suggests otherwise, the terms "we," "us," "our" and "Horizon Technology Finance" refer to Horizon Technology Finance Corporation and its consolidated subsidiaries. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q . Amounts are stated in thousands, except shares and per share data and where otherwise noted.

Overview

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

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

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

Portfolio Composition and Investment Activity



The following table shows our portfolio composition by asset class as of
March 31, 2012 and December 31, 2011:



                                            March 31, 2012                                 December 31, 2011
                                                                 % of                                            % of
                                  # of            Fair           Total            # of            Fair           Total
                               Investments        Value        Portfolio       Investments        Value        Portfolio
Term loans                               33     $ 158,516            94.7 %              37     $ 172,363            96.8 %
Revolving loans                           1         2,943             1.8 %               -             -             0.0 %
Equipment loans                           1           550             0.3 %               1           923             0.5 %
Total loans                              35       162,009            96.8 %              38       173,286            97.3 %
Warrants                                 48         4,638             2.8 %              47         4,098             2.3 %
Equity                                    3           649             0.4 %               3           629             0.4 %
Total                                           $ 167,296           100.0 %                     $ 178,013           100.0 %

Total portfolio investment activity for the three months ended March 31, 2012 and 2011 was as follows:

                                                  For the three       For the three
                                                  Months ended        Months ended
                                                 March 31, 2012      March 31, 2011
Beginning portfolio                              $       178,013     $       136,810
New loan funding                                          31,700              28,833
Less refinanced balances                                 (18,739 )            (2,770 )
Net new loan funding                                      12,961              26,063
Principal payments received on investments                (9,120 )            (7,759 )
Early pay-offs                                           (14,205 )            (3,347 )
Accretion of loan fees                                       642                 395
New loan fees                                               (182 )              (513 )
New equity                                                     -                 577
Proceeds from sale of investments                              -                (321 )
Net realized gain on investments                               -                 289
Net (depreciation) appreciation on investments              (813 )             1,022
Ending portfolio                                 $       167,296     $       153,216

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 March 31, 2012 and December 31, 2011:

                                             March 31, 2012                  December 31, 2011
                                       Loans at        Percentage        Loans at        Percentage
                                         Fair           of Total           Fair           of Total
                                         Value         Portfolio          Value          Portfolio
Life Science
Biotechnology                         $    40,979             25.3 %   $     39,854             23.0 %
Medical Device                             18,344             11.3 %         19,281             11.1 %
Technology
Consumer-Related Technologies                 190              0.1 %          1,762              1.0 %
Networking                                    550              0.4 %            923              0.5 %
Software                                   22,998             14.2 %         23,354             13.5 %
Data Storage                                1,937              1.2 %          3,437              2.0 %
Internet and Media                          1,962              1.2 %              -                -
Communications                                  -                -            5,134              3.0 %
Semiconductors                             11,797              7.3 %         11,765              6.8 %
Cleantech
Energy Efficiency                          25,162             15.5 %         23,790             13.7 %
Waste Recycling                             4,089              2.5 %          4,455              2.6 %
Healthcare Information and Services
Diagnostics                                16,756             10.4 %         21,347             12.3 %
Other Healthcare Related Services          17,245             10.6 %         18,184             10.5 %
Total                                 $   162,009            100.0 %   $    173,286            100.0 %

The largest loans may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 32% and 28% of total loans outstanding as of March 31, 2012 and December 31, 2011, respectively. No single loan represented more than 10% of our total loans as of March 31, 2012 and December 31, 2011.

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 March 31, 2012 and December 31, 2011:

                      March 31, 2012                December 31, 2011
                Loans at       Percentage       Loans at       Percentage
                  Fair          of Loan           Fair          of Loan
Credit Rating     Value        Portfolio         Value         Portfolio
4               $  38,897             24.0 %   $   30,108             17.4 %
3                 107,353             66.3 %   $  119,753             69.1 %
2                  13,822              8.5 %   $   23,425             13.5 %
1                   1,937              1.2 %            -                -
Total           $ 162,009            100.0 %   $  173,286            100.0 %

As of March 31, 2012 and December 31, 2011, our loan portfolio had a weighted average credit rating of 3.2 and 3.1, respectively. As of March 31, 2012, there was one investment on non-accrual status with an approximate cost of $4.9 million and fair value of approximately $1.9 million. There were no loans on non-accrual status as of December 31, 2011.

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