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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
(cid:1)(cid:1)(cid:1)(cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 814-00702
Hercules Technology Growth Capital, Inc.
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
74-3113410
(I.R.S. Employer
Identification Number)
400 Hamilton Avenue, Suite 310
Palo Alto, California 94301
(Address of principal executive offices)
(650) 289-3060
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Common Shares, par value $0.001 per share
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:1) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes (cid:1) No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES NO (cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S- during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer (cid:1) Accelerated filer Non-accelerated filer (cid:1) Smaller reporting company (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
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Act). Yes (cid:1) No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the
last business day of the registrant’s most recently completed second fiscal quarter was approximately $266.4 million based
upon a closing price of $8.40 reported for such date on the NASDAQ Select Global Market. Common shares held by each
executive officer and director and by each person who owns 5% or more of the outstanding common shares have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended and shall not
be deemed to be an admission that such persons are affiliates of the Registrant.
The number of outstanding common shares of the registrant as of March 9, 2010 was 35,626,791.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2010 Annual Meeting of
Shareholders to be filed within 120 days after the close of the registrant’s year end are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
FORM 10-K
ANNUAL REPORT
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved SEC Staff Comments
Properties
Legal Proceedings
Reserved
Part I.
Part II.
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Part III.
Item 15.
Signatures
Exhibits and Financial Statement Schedules
Part IV.
Page
1
23
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48
48
48
49
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54
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77
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Hercules Technology Growth Capital, Inc., our logo and other trademarks of Hercules Technology Growth Capital, Inc.
are the property of Hercules Technology Growth Capital, Inc. All other trademarks or trade names referred to in this Annual
Report on Form 10-K are the property of their respective owners.
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In this Annual Report on Form 10-K, or Annual Report, the “Company,” “HTGC,” “we,” “us” and “our” refer to
Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the
context otherwise requires.
Item 1.
Business
PART I
GENERAL
We are a specialty finance company that provides debt and equity growth capital to technology-related companies at
various stages of development from seed and emerging growth to expansion and established stages of development, which
include select publicly listed companies and lower middle market companies. We primarily finance privately-held companies
backed by leading venture capital and private equity firms and also may finance certain select publicly-traded companies that
lack access to public capital or are sensitive to equity ownership dilution. We source our investments through our principal
office located in Silicon Valley, as well as our additional offices in Boston and Boulder.
Our goal is to be the leading structured debt financing provider of choice for venture capital and private equity-backed
technology-related companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and
invest in a broad range of companies active in the technology and life-science industries and to offer a full suite of growth
capital products up and down the capital structure. We invest primarily in structured debt with warrants and, to a lesser extent,
in senior debt and equity investments. We use the term “structured debt with warrants” to refer to any debt investment, such as
a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to
purchase common or preferred stock. Our structured debt with warrants investments will typically be secured by select or all
of the assets of the portfolio company.
We focus our investments in companies active in the technology industry sub-sectors characterized by products or
services that require advanced technologies, including, but not limited to, computer software and hardware, networking
systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, Internet
consumer and business services, telecommunications, telecommunications equipment, renewable or alternative energy, media
and life sciences. Within the life sciences sub-sector, we generally focus on medical devices, bio-pharmaceutical, drug
discovery, drug delivery, health care services and information systems companies. We refer to all of these companies as
“technology-related” companies and intend, under normal circumstances, to invest at least 80% of the value of our assets in
such businesses.
Our investment objective is to maximize our portfolio total return by generating current income from our debt
investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our
net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture
capital and private equity backed technology-related companies with attractive current yields and the potential for equity
appreciation and realized gains. Our structured debt investments typically include warrants or other equity interests, giving us
the potential to realize equity-like returns on a portion of our investments. Our equity ownership in our portfolio companies
may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio
companies in connection with future equity financing rounds. Capital that we provide directly to venture capital and private
equity backed technology-related companies is generally used for growth and general working capital purposes as well as in
select cases for acquisitions or recapitalizations.
Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments in
technology-related companies at various stages of development. Consistent with regulatory
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requirements, we invest primarily in United States based companies and to a lesser extent in foreign companies. Since 2007,
our investing emphasis has been primarily on private companies following or in connection with a subsequent institutional
round of equity financing, which we refer to as expansion-stage companies and private companies in later rounds of financing
and certain public companies, which we refer to as established-stage companies and lower middle market companies. We have
also historically focused our investment activities in private companies following or in connection with the first institutional
round of financing, which we refer to as emerging-growth companies.
CURRENT ECONOMIC AND MARKET ENVIRONMENT
The U.S. capital and credit markets have been experiencing disruption and volatility since the summer of 2008 as
evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing
of credit risk in the broadly syndicated credit market and the failure of many major financial institutions. These events have
contributed to a continuing economic recession that is materially and adversely impacting the broader financial and credit
markets and reducing the availability of credit and equity capital for the markets as a whole and financial services firms in
particular, including us.
At the same time, the venture capital market for the technology-related companies in which we invest has been active, but
is continuing to show signs of stress and reduced investment activity. Therefore, to the extent we have capital available; we
believe this is an opportune time to invest on a limited basis in the structured lending market for technology-related
companies. While today’s economy creates potentially new attractive lending opportunities, our outlook remains cautious as
the economic environment may cause additional portfolio stress. Due to the continuing economic slowdown and due to
reduced venture capital investment activity, we determined that it would be prudent to substantially curtail new investment
activity in 2009 in order to have working capital available to support our existing portfolio companies. These changes were
made to manage our credit performance, maintain adequate liquidity and manage our operating expenses in this extremely
challenging and unprecedented credit environment.
Like many other companies, we have continued to engage in activities to deleverage our balance sheet and strengthen
cash resources available to us.
• As discussed herein, on March 25, 2009, we paid off all outstanding borrowings under the Citigroup Global Markets
Realty Corp. and Deutsche Bank Securities Inc. credit facility (the “Credit Facility”).
• To minimize disruptions in our business as a result of current market conditions, we entered into an amendment with
Wells Fargo Foothill, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360
million to $250 million, as discussed in the Wells Facility section of “Borrowings.” In February 2010, we extended
the facility by one year to August 2011.
• As of December 31, 2009, the maximum statutory limit on the dollar amount of outstanding debentures guaranteed
by the U.S. Small Business Administration (“SBA”) issued to a single small business investment company (“SBIC”)
is $150.0 million. As of December 31, 2009, Hercules Technology II, L.P. (“HT II”), our wholly owned SBIC
subsidiary, has regulatory capital of $68.55 million and a commitment from the SBA to issue debentures up to
$137.1 million, of which approximately $130.6 million was outstanding as of December 31, 2009. There is no
assurance that HT II will be able to draw up to the maximum limit available under the SBIC program. In addition,
we are eligible to be approved for a second license which would allow us to draw an aggregate of $225.0 million
with an additional investment of $37.5 million of regulatory capital. We submitted our application to obtain a second
lender license, and, in February 2010, we responded to the SBA’s comment letter relating to our second lender
license. We anticipate that the license should be approved during the spring of 2010; however there can be no
assurance that the SBA will grant us a second lender license or when the license will be approved.
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• In addition, to strengthen our liquidity position and preserve cash, in March 2009, 90% of our first quarter 2009
dividend was paid with approximately 1.9 million newly issued shares of common stock and 10% or approximately
$1.1 million, was paid in cash.
• In February 2010, we completed our credit facility negotiations with Union Bank providing a one year credit facility
of $20.0 million. Pricing of the credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50%
against eligible loans, and secured by loans in the borrowing base.
Despite the current capital market disruption and recession, we continue to see a steady pace of new investments by
venture capitalists. As a result of this favorable level of venture capital investment activities, we are experiencing an increase
in new investment origination activities which commenced in the fourth quarter of 2009, and would expect it to continue to the
extent the venture capital community continues to accelerate its own pace of new investments. To the extent that we are able,
we intend to seek new investment opportunities; however, we remain cautious and conservative in our investment and credit
management strategies and we do not expect to see significant growth in the portfolio until the second half of 2010.
CORPORATE HISTORY AND OFFICES
We are a Maryland Corporation formed in December 2003 that began investment operations in September 2004. We are
an internally managed, non-diversified, closed-end investment company that has elected to be treated as a business
development company under the Investment Company Act of 1940 Act. As a business development company, we are required
to meet various regulatory tests. A business development company is required to invest at least 70% of its total assets in
“qualifying assets,” including securities of private and thinly traded public U.S. companies, cash, cash equivalents, U.S.
government securities and high-quality debt investments that mature in one year or less. A business development company
also must meet a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including
accrued interest payable) except for debentures issued by the Small Business Administration, and any preferred stock we may
issue in the future, of at least 200% subsequent to each borrowing or issuance of senior securities. See “Item 1. Business—
Regulation as a Business Development Company”.
From incorporation through December 31, 2005, we were taxed as a corporation under Subchapter C of the Internal
Revenue Code of 1986 or as amended (the “Code”). We have elected to be treated for federal income tax purposes as a
regulated investment company, or “RIC,” under the Code. In order to continue to qualify as a RIC for federal income tax
purposes, we must meet certain requirements, including certain minimum distribution requirements. See “Item 1. Business—
Certain United States Federal Income Tax Considerations.”
Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301 and our
telephone number is (650) 289-3060. We also have additional offices in Boston, Boulder and Chicago. We maintain a website
on the Internet at www.herculestech.com. Information contained in our website is not incorporated by reference into this
Annual Report, and you should not consider that information as part of this Annual Report. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as any amendments to those reports, are available
free of charge through our website as soon as reasonably practicable after we file them with the Securities and Exchange
Commission (“SEC”). These reports are also available on the SEC’s website at www.sec.gov.
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OUR MARKET OPPORTUNITY
We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S.
economy and that continued growth is supported by ongoing innovation and performance improvements in technology
products as well as the adoption of technology across virtually all industries in response to competitive pressures. We believe
that an attractive market opportunity exists for a specialty finance company focused primarily on investments in structured
debt with warrants in technology-related companies for the following reasons:
• Technology-related companies have generally been underserved by traditional lending sources;
• Unfulfilled demand exists for structured debt financing to technology-related companies as the number of lenders
has declined due to the recent financial market turmoil;
• Structured debt with warrants products are less dilutive and complement equity financing from venture capital and
private equity funds; and
• Valuations currently assigned to technology-related companies in private financing rounds have generally decreased
since 2008 as a result of the turmoil in the general market and should provide a good opportunity for attractive
capital returns.
Technology-Related Companies are Under served by Traditional Lenders. We believe many viable technology-related
companies backed by financial sponsors have been unable to obtain sufficient growth financing from traditional lenders,
including financial services companies such as commercial banks and finance companies, particularly due to the recent credit
market dislocation and because traditional lenders have continued to consolidate and have adopted a more risk-averse
approach to lending. More importantly, we believe traditional lenders are typically unable to underwrite the risk associated
with financial sponsor-backed companies effectively.
The unique cash flow characteristics of many technology-related companies include significant research and development
expenditures and high projected revenue growth thus often making such companies difficult to evaluate from a credit
perspective. In addition, the balance sheets of emerging-growth and expansion-stage companies often include a
disproportionately large amount of intellectual property assets, which can be difficult to value. Finally, the speed of innovation
in technology and rapid shifts in consumer demand and market share add to the difficulty in evaluating technology-related
companies.
Due to the difficulties described above, we believe traditional lenders are generally refraining from entering the structured
mezzanine marketplace, instead preferring the risk-reward profile of asset based lending. Traditional lenders generally do not
have flexible product offerings that meet the needs of technology-related companies. The financing products offered by
traditional lenders typically impose on borrowers many restrictive covenants and conditions, including limiting cash outflows
and requiring a significant depository relationship to facilitate rapid liquidation.
Unfulfilled Demand for Structured Debt Financing to Technology-Related Companies. Private debt capital in the form
of structured debt financing from specialty finance companies continues to be an important source of funding for technology-
related companies. We believe that the level of demand for structured debt financing is a function of the level of annual
venture equity investment activity. In 2009, venture capital-backed companies received, in approximately 2,400 transactions,
equity financing in an aggregate amount of approximately $20.5 billion, representing a 32% decrease from the preceding year,
as reported by Dow Jones VentureSource. In addition, overall, the median round size in 2009 was $5.0 million, down from
$7.0 million in 2008. These decreases were primarily a result of contraction of the capital markets experienced during the past
year. Overall, seed- and first-round deals made up 18% of the deal flow in 2009, and later-stage deals made up roughly 56% of
all capital invested.
We believe that demand for structured debt financing is currently under served, in part because of the credit market
collapse in 2008 and the resulting exit of debt capital providers to technology-related companies during
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2008 and 2009. In addition, lending requirements of traditional lenders have recently become more stringent due to the
significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated market, and the
financial turmoil affecting the banking system and financial market, which have negatively impacted the debt and equity
capital market in the United States and most other markets. At the same time, the venture capital market for the technology-
related companies in which we invest has continued to be active. Therefore, to the extent we have capital available, we believe
this is an opportune time to be active in the structured lending market for technology-related companies.
Structured Debt with Warrants Products Complement Equity Financing From Venture Capital and Private Equity
Funds. We believe that technology-related companies and their financial sponsors will continue to view structured debt
securities as an attractive source of capital because it augments the capital provided by venture capital and private equity
funds. We believe that our structured debt with warrants product provides access to growth capital that otherwise may only be
available through incremental investments by existing equity investors. As such, we provide portfolio companies and their
financial sponsors with an opportunity to diversify their capital sources. Generally, we believe technology-related companies
at all stages of development target a portion of their capital to be debt in an attempt to achieve a higher valuation through
internal growth. In addition, because financial sponsor-backed companies have reached a more mature stage prior to reaching a
liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended
period prior to liquidity events.
OUR BUSINESS STRATEGY
Our strategy to achieve our investment objective includes the following key elements:
Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals. We
have assembled a team of experienced investment professionals with extensive experience as venture capitalists, commercial
lenders, and originators of structured debt and equity investments in technology-related companies. Our investment
professionals have, on average, more than 15 years of experience as equity investors in, and/or lenders to, technology-related
companies. In addition, at Hercules, our team members have originated structured debt, debt with warrants and equity
investments in over 130 technology-related companies, representing over $1.6 billion in commitments, and have developed a
network of industry contacts with investors and other participants within the venture capital and private equity communities. In
addition, members of our management team also have operational, research and development and finance experience with
technology-related companies. We have established contacts with leading venture capital and private equity fund sponsors,
public and private companies, research institutions and other industry participants, which should enable us to identify and
attract well-positioned prospective portfolio companies.
We concentrate our investing activities generally in industries in which our investment professionals have investment
experience. We believe that our focus on financing technology-related companies will enable us to leverage our expertise in
structuring prospective investments, to assess the value of both tangible and intangible assets, to evaluate the business
prospects and operating characteristics of technology-related companies and to identify and originate potentially attractive
investments with these types of companies.
Mitigate Risk of Principal Loss and Build a Portfolio of Equity-Related Securities. We expect that our investments have
the potential to produce attractive risk adjusted returns through current income, in the form of interest and fee income, as well
as capital appreciation from equity-related securities. We believe that we can mitigate the risk of loss on our debt investments
through the combination of loan principal amortization, cash interest payments, relatively short maturities, security interests in
the assets of our portfolio companies, and on select investment covenants requiring prospective portfolio companies to have
certain amounts of available cash at the time of our investment and the continued support from a venture capital or private
equity firm at the time we make our investment.
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Historically our structured debt investments to technology-related companies, typically include warrants or other equity
interests, giving us the potential to realize equity-like returns on a portion of our investment. In addition, in some cases, we
receive the right to make additional equity investments in our portfolio companies in connection with future equity financing
rounds. We believe these equity interests will create the potential for meaningful long-term capital gains in connection with the
future liquidity events of these technology-related companies.
Provide Customized Financing Complementary to Financial Sponsors’ Capital. We offer a broad range of investment
structures and possess expertise and experience to effectively structure and price investments in technology-related companies.
Unlike many of our competitors that only invest in companies that fit a specific set of investment parameters, we have the
flexibility to structure our investments to suit the particular needs of our portfolio companies. We offer customized financing
solutions ranging from senior debt to equity capital, with a focus on structured debt with warrants.
We use our relationships in the financial sponsor community to originate investment opportunities. Because venture
capital and private equity funds typically invest solely in the equity securities of their portfolio companies, we believe that our
debt investments will be viewed as an attractive and complimentary source of capital, both by the portfolio company and by
the portfolio company’s financial sponsor. In addition, we believe that many venture capital and private equity fund sponsors
encourage their portfolio companies to use debt financing for a portion of their capital needs as a means of potentially
enhancing equity returns, minimizing equity dilution and increasing valuations prior to a subsequent equity financing round or
a liquidity event.
Invest at Various Stages of Development. We provide growth capital to technology-related companies at all stages of
development, from emerging-growth companies, to expansion-stage companies and established-stage companies. We believe
that this provides us with a broader range of potential investment opportunities than those available to many of our
competitors, who generally focus their investments on a particular stage in a company’s development. Because of the flexible
structure of our investments and the extensive experience of our investment professionals, we believe we are well positioned to
take advantage of these investment opportunities at all stages of prospective portfolio companies’ development.
Benefit from Our Efficient Organizational Structure. We believe that the perpetual nature of our corporate structure
enables us to be a long-term partner for our portfolio companies in contrast to traditional mezzanine and investment funds,
which typically have a limited life. In addition, because of our access to the equity markets, we believe that we may benefit
from a lower cost of capital than that available to private investment funds. We are not subject to requirements to return
invested capital to investors nor do we have a finite investment horizon. Capital providers that are subject to such limitations
are often required to seek a liquidity event more quickly than they otherwise might, which can result in a lower overall return
on an investment.
Deal Sourcing Through Our Proprietary Database. We have developed a proprietary and comprehensive structured
query language-based (SQL) database system to track various aspects of our investment process including sourcing,
originations, transaction monitoring and post-investment performance. As of December 31, 2009, our proprietary SQL-based
database system included over 20,000 technology-related companies and approximately 4,800 venture capital, private equity
sponsors/investors, as well as various other industry contacts. This proprietary SQL system allows us to maintain, cultivate and
grow our industry relationships while providing us with comprehensive details on companies in the technology-related
industries and their financial sponsors.
OUR INVESTMENTS AND OPERATIONS
We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on structured
debt with warrants.
We generally seek to invest in companies that have been operating for at least six to 12 months prior to the date of our
investment. We anticipate that such entities may, at the time of investment, be generating revenues or will have a business plan
that anticipates generation of revenues within 24 to 48 months. Further, we anticipate that on
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the date of our investment we will generally obtain a lien on available assets, which may or may not include intellectual
property, and these companies will have sufficient cash on their balance sheet to operate as well as potentially amortize their
debt for at least three to nine months following our investment. We generally require that a prospective portfolio company, in
addition to having sufficient capital to support leverage, demonstrate an operating plan capable of generating cash flows or
raising the additional capital necessary to cover its operating expenses and service its debt, for an additional six to twelve
months subject to market conditions.
We expect that our investments will generally range from $1.0 million to $25.0 million. We typically structure our debt
securities to provide for amortization of principal over the life of the loan, but may include an interest-only period of 3 to 18
months for emerging growth and expansion-stage companies and longer for established-stage companies. Our loans will be
collateralized by a security interest in the borrower’s assets, although we may not have the first claim on these assets and the
assets may not include intellectual property. Our debt investments carry fixed or variable contractual interest rates which
generally ranged from Prime to 17% as of December 31, 2009. As of December 31, 2009, 61.3% of our loans were at variable
rates or variable rates with a floor and 38.7% of the loans were at fixed rates. In addition to the cash yields received on our
loans, in some instances, certain loans may also include any of the following: end of term payments, exit fees, balloon
payment fees, success fees, payment-in-kind (“PIK”) provisions or prepayment fees, which we may be required to include in
income prior to receipt. We also generate revenue in the form of commitment and facility fees.
In addition, the majority of our venture capital-backed companies structured debt investments generally have equity
enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an
opportunity for potential capital appreciation. The warrants typically will be immediately exercisable upon issuance and
generally will remain exercisable for the lesser of five to seven years or one to three years after completion of an initial public
offering. The exercise prices for the warrants varies from nominal exercise prices to exercise prices that are at or above the
current fair market value of the equity for which we receive warrants. We may structure warrants to provide minority rights
provisions or on a very select basis put rights upon the occurrence of certain events. We generally target a total annualized
return (including interest, fees and value of warrants) of 12% to 25% for our debt investments.
Typically, our structured debt and equity investments take one of the following forms:
• Structured debt with warrants. We seek to invest a majority of our assets in structured debt with warrants of
prospective portfolio companies. Traditional “mezzanine” debt is a layer of high-coupon financing between debt and
equity that most commonly takes the form of subordinated debt coupled with warrants, combining the cash flow and
risk characteristics of both senior debt and equity. However, our investments in structured debt with warrants may be
the only debt capital on the balance sheet of our portfolio companies, and in many cases we have a first priority
security interest in all of our portfolio company’s assets, or in certain investments we may have a negative pledge on
intellectual property. Our structured debt with warrants typically have maturities of between two and seven years,
with full amortization after an interest only period for emerging-growth or expansion-stage companies and longer
deferred amortization for select established-stage companies. Our structured debt with warrants generally carry a
contractual interest rate between Prime and 17% and may include an additional end-of-term payment or PIK (“Paid
in Kind”), and are in an amount between $1.0 million and $25.0 million. In most cases we collateralize our
investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual
property. In other cases we may prohibit a company from pledging or otherwise encumbering their intellectual
property. We may structure our structured debt with warrants with restrictive affirmative and negative covenants,
default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board
observation rights.
• Senior Debt. We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by
accounts receivable and/or inventory financing of prospective portfolio companies. Senior debt has a senior position
with respect to a borrower’s scheduled interest and principal payments and holds a first priority security interest in
the assets pledged as collateral. Senior debt also may impose covenants on a borrower with regard to cash flows and
changes in capital structure, among
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other items. We generally collateralize our investments by obtaining security interests in our portfolio companies’
assets, which may include their intellectual property. In other cases we may obtain a negative pledge covering a
company’s intellectual property. Our senior loans, in certain instances, may be tied to the financing of specific
assets. In connection with a senior debt investment, we may also provide the borrower with a working capital line-
of-credit that will carry an interest rate ranging from Prime or LIBOR plus a spread with a floor, generally maturing
in one to three years, and will be secured by accounts receivable and/or inventory.
• Equipment Loans. We intend to invest a limited portion of our assets in equipment-based loans to early-stage
prospective portfolio companies. Equipment-based loans are secured by a first priority security interest in only the
specific assets financed. These loans are generally for amounts up to $3.0 million, carry a contractual interest rate
between Prime and Prime plus 10%, and have an average term between three and four years. Equipment loans may
also include end of term payments.
• Equity-Related Securities. The equity-related securities we hold consist primarily of warrants or other equity
interests generally obtained in connection with our structured debt investments. In addition to the warrants received
as a part of a structured debt financing, we typically receive the right to make equity investments in a portfolio
company in connection with that company’s next round of equity financing. We may also on certain debt
investments have the right to convert a portion of the debt investment into equity. These rights will provide us with
the opportunity to further enhance our returns over time through opportunistic equity investments in our portfolio
companies. These equity-related investments are typically in the form of preferred or common equity and may be
structured with a dividend yield, providing us with a current return, and with customary anti-dilution protection and
preemptive rights. In the future, we may achieve liquidity through a merger or acquisition of a portfolio company, a
public offering of a portfolio company’s stock or by exercising our right, if any, to require a portfolio company to
buy back the equity-related securities we hold. We may also make stand alone direct equity investments into
portfolio companies in which we may not have any debt investment in the company. As of December 31, 2009, we
held equity interests in 39 portfolio companies.
A comparison of the typical features of our various investment alternatives is set forth in the chart below.
Typical Structure
Investment
Horizon
Senior Debt
Term or revolving
debt
Usually under 3
years
Ranking/Security
Senior/First lien
Covenants
Generally
borrowing base
and financial
Risk Tolerance
Low
Coupon/Dividend
Cash pay—floating
or fixed rate
Structured debt with
warrants
Term debt with
warrants
Long term, ranging
from 2 to 7 years,
with an average of
3 years
Equipment Loans
Term debt with
warrants
Equity Securities
Preferred stock or
common stock
Ranging from 3 to 4
years
Ranging from 3 to
7 years
Senior secured,
either first out or
last out second lien
Secured only by
underlying
equipment
Less restrictive;
Mostly financial;
Maintenance-based
Medium/High
Cash pay—fixed
and floating rate;
Payment-in-kind in
limited cases
None
High
Cash pay-floating
or fixed rate and
may include
Payment-in-kind
None/unsecured
None
High
Generally none
Customization or
Flexibility
Equity Dilution
Little to none
More flexible
Little to none
Flexible
None to low
Low to medium
Low
High
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Investment Criteria
We have identified several criteria, among others, that we believe are important in achieving our investment objective
with respect to prospective portfolio companies. These criteria, while not inclusive, provide general guidelines for our
investment decisions.
Portfolio Composition. While we generally focus our investments in venture capital and private equity-backed
technology-related companies, we seek to diversify across various financial sponsors as well as across various stages of
companies’ development and various technology industry sub-sectors and geographies. During 2009, we began increasing our
investments in lower middle market companies that may be or are approaching an operational level where they are EBITDA
positive and possibly cash flow positive thereby decreasing their reliance on additional venture capital or private equity
investments.
Continuing Support from One or More Financial Sponsors. We generally invest in companies in which one or more
established financial sponsors have previously invested and continue to make a contribution to the management of the
business. We believe that having established financial sponsors with meaningful commitments to the business is a key
characteristic of a prospective portfolio company. In addition, we look for representatives of one or more financial sponsors to
maintain seats on the Board of Directors of a prospective portfolio company as an indication of such commitment.
Company Stage of Development. While we invest in companies at various stages of development, we generally require
that prospective portfolio companies be beyond the seed stage of development and generally have received or anticipate to
have commitments for their first institutional round of equity financing for early stage companies. Starting in 2008, we began
shifting our focus to expansion and established-stage companies that have revenues or significant anticipated revenue growth.
We expect a prospective portfolio company to demonstrate progress in its product development or demonstrate a path towards
revenue generation or increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective
portfolio company is a key factor in determining the value that we ascribe to any warrants or other equity securities that we
may acquire in connection with an investment in debt securities.
Operating Plan. We generally require that a prospective portfolio company, in addition to having potential access to
capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise
the additional capital necessary to cover its operating expenses and service its debt for a specific period. Specifically, we
require that a prospective portfolio company demonstrate at the time of our proposed investment that it has cash on its balance
sheet, or is in the process of completing a financing so that it will have cash on its balance sheet, sufficient to support its
operations for a minimum of three to nine months.
Security Interest. In many instances we seek a first priority security interest in all of the portfolio company’s tangible and
intangible assets as collateral for our debt investment, subject in some cases to permitted exceptions. In other cases we may
obtain a negative pledge prohibiting a company from pledging or otherwise encumbering their intellectual property. Although
we do not intend to operate as an asset-based lender, the estimated liquidation value of the assets, if any, collateralizing the
debt securities that we hold is an important factor in our credit analysis and subject to assumptions that may change over the
life of the investment especially when attempting to estimate the value of intellectual property. We generally evaluate both
tangible assets, such as accounts receivable, inventory and equipment, and intangible assets, such as intellectual property,
customer lists, networks and databases.
Covenants. Our investments may include one or more of the following covenants; cross-default, or material adverse
change provisions, require the portfolio company to provide periodic financial reports and operating metrics and will typically
limit the portfolio company’s ability to incur additional debt, sell assets, dividend recapture, engage in transactions with
affiliates and consummate an extraordinary transaction, such as a merger or recapitalization without our consent. In addition,
we may require other performance or financial based covenants, as we deem appropriate.
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Exit Strategy. Prior to making a debt investment that is accompanied by an equity-related security in a prospective
portfolio company, we analyze the potential for that company to increase the liquidity of its equity through a future event that
would enable us to realize appreciation in the value of our equity interest. Liquidity events may include an initial public
offering, a private sale of our equity interest to a third party, a merger or an acquisition of the company or a purchase of our
equity position by the company or one of its stockholders.
Investment Process
We have organized our management team around the four key elements of our investment process:
• Origination;
• Underwriting;
• Documentation; and
• Loan and Compliance Administration.
Our investment process is summarized in the following chart:
Origination
The origination process for our investments includes sourcing, screening, preliminary due diligence and deal structuring
and negotiation, all leading to an executed non-binding term sheet. Our investment origination team, which consists of
approximately 27 investment professionals, is headed by our Senior Managing Directors of Technology and Life Science, and
our Chief Executive Officer. The origination team is responsible for sourcing potential investment opportunities and members
of the investment origination team use their extensive relationships with various leading financial sponsors, management
contacts within technology-related companies, trade sources, technology conferences and various publications to source
prospective portfolio companies. Our investment origination team is divided into middle market, technology and life sciences
sub-teams to better source potential portfolio companies.
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In addition, we have developed a proprietary and comprehensive SQL-based database system to track various aspects of
our investment process including sourcing, originations, transaction monitoring and post-investment performance. As of
December 31, 2009, our proprietary SQL-based database system included over 20,000 technology-related companies and
approximately 4,800 venture capital private equity sponsors/investors, as well as various other industry contacts. This
proprietary SQL system allows our origination team to maintain, cultivate and grow our industry relationships while providing
our origination team with comprehensive details on companies in the technology-related industries and their financial
sponsors.
If a prospective portfolio company generally meets certain underwriting criteria, we perform preliminary due diligence,
which may include high level company and technology assessments, evaluation of its financial sponsors’ support, market
analysis, competitive analysis, identify key management, risk analysis and transaction size, pricing, return analysis and
structure analysis. If the preliminary due diligence is satisfactory, and the origination team recommends moving forward, we
then structure, negotiate and execute a non-binding term sheet with the potential portfolio company. Upon execution of a term
sheet, the investment opportunity moves to the underwriting process to complete formal due diligence review and approval.
Underwriting
The underwriting review includes formal due diligence and approval of the proposed investment in the portfolio
company.
Due Diligence. Our due diligence on a prospective investment is typically completed by two or more investment
professionals whom we define as the underwriting team. The underwriting team for a proposed investment consists of the deal
sponsor who typically possesses general industry knowledge and is responsible for originating and managing the transaction,
other investment professional(s) who perform due diligence, credit and corporate financial analyses and, as needed, our Chief
Legal Officer and other legal professionals. To ensure consistent underwriting, we generally use our standardized due
diligence methodologies, which include due diligence on financial performance and credit risk as well as an analysis of the
operations and the legal and applicable regulatory framework of a prospective portfolio company. The members of the
underwriting team work together to conduct due diligence and understand the relationships among the prospective portfolio
company’s business plan, operations and financial performance.
As part of our evaluation of a proposed investment, the underwriting team prepares an investment memorandum for
presentation to the investment committee. In preparing the investment memorandum, the underwriting team typically
interviews with select key management of the company and select financial sponsors and assembles information necessary to
the investment decision. If and when appropriate, the investment professionals may also contact industry experts and
customers, vendors or, in some cases, competitors of the company.
Approval Process. The sponsoring managing director or principal presents the investment memorandum to our
investment committee for consideration. The unanimous approval of our investment committee is required before we proceed
with any investment. The members of our investment committee are our Chief Executive Officer, our Chief Legal Officer, our
Chief Financial Officer and the Senior Managing Directors of Technology and Life Science. The investment committee
generally meets weekly and more frequently on an as-needed basis. The Senior Managing Directors abstain from voting with
respect to investments they originate.
Documentation
Our documentation group, headed by our Chief Legal Officer, administers the front-end documentation process for our
investments. This group is responsible for documenting the term sheet approved by the investment committee to memorialize
the transaction with a prospective portfolio company. This group negotiates loan documentation and, subject to the approval of
the Chief Legal Officer and/or the Associate General Counsel, final documents are prepared for execution by all parties. The
documentation group generally uses the services of external law firms to complete the necessary documentation.
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Loan and Compliance Administration
Our loan and compliance administration group, headed by our Chief Financial Officer and Senior Credit Officer,
administers loans and tracks covenant compliance, if applicable, of our investments and oversees periodic reviews of our
critical functions to ensure adherence with our internal policies and procedures. After funding of a loan in accordance with the
investment committee’s approval, the loan is recorded in our loan administration software and our SQL-based database
system. The loan and compliance administration group is also responsible for ensuring timely interest and principal payments
and collateral management as well as advising the investment committee on the financial performance and trends of each
portfolio company, including any covenant violations that occur, to aid us in assessing the appropriate course of action for
each portfolio company and evaluating overall portfolio quality. In addition, the loan and compliance administration group
advises the investment committee and the Valuation Committee of the board, accordingly, regarding the credit and investment
grading for each portfolio company as well as changes in the value of collateral that may occur.
The loan and compliance administration group monitors our portfolio companies in order to determine whether the
companies are meeting our financing criteria and their respective business plans and also monitors the financial trends of each
portfolio company from its monthly or quarterly financial statements to assess the appropriate course of action for each
company and to evaluate overall portfolio quality. In addition, our management team closely monitors the status and
performance of each individual company through our SQL-based database system and periodic contact with our portfolio
companies’ management teams and their respective financial sponsors.
Credit and Investment Grading System. Our loan and compliance administration group uses an investment grading system
to characterize and monitor our outstanding loans. Our loan and compliance administration group monitors and, when
appropriate, recommends changes to investment grading. Our investment committee reviews the recommendations and/or
changes to the investment grading, which are submitted on a quarterly basis to the Valuation Committee and our Board of
Directors for approval.
From time to time, we will identify investments that require closer monitoring or become workout assets. We develop a
workout strategy for workout assets and our investment committee monitors the progress against the strategy. We will incur
losses from our investing activities, however, we work with our troubled portfolio companies in order to recover as much of
our investments as is practicable, including possibly taking control of the portfolio company. There can be no assurance that
principal will be recovered.
We use the following investment grading system approved by our Board of Directors:
Grade 1. Loans involve the least amount of risk in our portfolio. The borrower is performing above expectations, and
the trends and risk profile is generally favorable.
Grade 2. The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially
graded 2.
Grade 3. The borrower may be performing below expectations, and the loan’s risk has increased materially since
origination. We increase procedures to monitor a borrower that may have limited amounts of cash remaining
on the balance sheet, is approaching its next equity capital raise within the next three to six months, or if the
estimated fair value of the enterprise may be lower than when the loan was originated. We will generally
lower the loan grade to a level 3 even if the company is performing in accordance to plan as it approaches the
need to raise additional cash to fund its operations. Once the borrower closes its new equity capital raise, we
may increase the loan grade back to grade 2.
Grade 4. The borrower is performing materially below expectations, and the loan risk has substantially increased since
origination. Loans graded 4 may experience some partial loss or full return of principal but are expected to
realize some loss of interest which is not anticipated to be repaid in full, which, to the extent not already
reflected, may require the fair value of the loan to be reduced to the amount we anticipate will be recovered.
Grade 4 investments are closely monitored.
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Grade 5. The borrower is in workout, materially performing below expectations and a significant risk of principal loss
is probable. Loans graded 5 will experience some partial principal loss or full loss of remaining principal
outstanding is expected. Grade 5 loans will require the fair value of the loans be reduced to the amount, if any,
we anticipate will be recovered.
At December 31, 2009, our investments had a weighted average investment grading of 2.71.
Managerial Assistance
As a business development company, we are required to offer, and provide upon request, managerial assistance to our
portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies,
participating in board and management meetings, consulting with and advising officers of portfolio companies and providing
other organizational and financial guidance. We may receive fees for these services.
COMPETITION
Our primary competitors provide financing to prospective portfolio companies and include non-bank financial
institutions, federally or state chartered banks, venture debt funds, financial institutions, venture capital funds, private equity
funds, investment funds and investment banks. Many of these entities have greater financial and managerial resources than we
have, and the 1940 Act imposes certain regulatory restrictions on us as a business development company to which many of our
competitors are not subject. However, we believe that few of our competitors possess the expertise to properly structure and
price debt investments to venture capital and private equity backed technology-related companies. We believe that our
specialization in financing technology-related companies will enable us to determine a range of potential values of intellectual
property assets, evaluate the business prospects and operating characteristics of prospective portfolio companies and, as a
result, identify investment opportunities that produce attractive risk-adjusted returns. For additional information concerning the
competitive risks we face, see “Item 1A. Risk Factors—Risks Related to our Business and Structure—We operate in a highly
competitive market for investment opportunities, and we may not be able to compete effectively.”
CORPORATE STRUCTURE
We are a Maryland corporation and an internally-managed, non-diversified, closed-end investment company that has
elected to be regulated as a business development company under the 1940 Act. Hercules Technology II, L.P. (“HT II”), our
wholly-owned subsidiary, is licensed under the Small Business Investment Act of 1958 as a Small Business Investment
Company (“SBIC”). Hercules Technology SBIC Management, LLC (“HTM”), another wholly-owned subsidiary, functions as
the general partner of our subsidiary HT II. Hercules Funding I LLC, our wholly owned subsidiary, and Hercules Funding
Trust I function are vehicles we used to collateralize loans under our Credit Facility and are currently inactive. We also use
wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to permit us
to hold portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and
still satisfy the RIC tax requirement that at least 90% of our gross income for income tax purposes is investment income. Our
wholly owned subsidiary, Hercules Funding II, LLC, functions as a vehicle to collateralize loans under our securitized facility
with Wells Fargo Foothill, Inc.
Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301. We also
have offices in: Boston, Massachusetts; Boulder, Colorado and Chicago, Illinois.
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BROKERAGE ALLOCATIONS AND OTHER PRACTICES
Because we generally acquire and dispose of our investments in privately negotiated transactions, we rarely use brokers
in the normal course of business. In those cases where we do use a broker, we do not execute transactions through any
particular broker or dealer, but will seek to obtain the best net results for Hercules, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational
facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we generally seek reasonably
competitive execution costs, we may not necessarily pay the lowest spread or commission available. Subject to applicable
legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such
services, we may pay a higher commission than other brokers would charge if we determine in good faith that such
commission is reasonable in relation to the services provided.
EMPLOYEES
As of December 31, 2009, we had 45 employees, including approximately 27 investment and portfolio management
professionals all of whom have extensive experience working on financing transactions for technology-related companies.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
The following discussion is a general summary of the material prohibitions and descriptions governing business
development companies generally. It does not purport to be a complete description of all of the laws and regulations affecting
business development companies.
A business development company primarily focuses on investing in or lending to private companies and making
managerial assistance available to them. A business development company provides stockholders with the ability to retain the
liquidity of a publicly-traded stock, while sharing in the possible benefits of investing in emerging-growth, expansion-stage or
established-stage companies. The 1940 Act contains prohibitions and restrictions relating to transactions between business
development companies and their directors and officers and principal underwriters and certain other related persons and
requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our
election as, a business development company unless approved by a majority of our outstanding voting securities. A majority of
the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such
company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present or represented
by proxy, or (ii) more than 50% of the outstanding shares of such company.
Qualifying Assets
Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying
assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our
proposed business are the following:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been
during the preceding 13 months, an affiliated person of an eligible
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portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer which:
(a)
is organized under the laws of, and has its principal place of business in, the United States;
(b)
(c)
is not an investment company (other than a small business investment company wholly owned by the business
development company) or a company that would be an investment company but for certain exclusions under
the 1940 Act; and
does not have any class of securities listed on a national securities exchange; or if it has securities listed on a
national securities exchange such company has a market capitalization of less than $250 million; is controlled
by the business development company and has an affiliate of a business development company on its board of
directors; or meets such other criteria as may be established by the SEC.
(2) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations
as they came due without material assistance other than conventional lending or financing arrangements.
(3) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready
market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(4) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above,
or pursuant to the exercise of warrants or rights relating to such securities.
(5) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from
the time of investment.
Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more
than 25% of the outstanding voting securities of the portfolio company.
We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act.
Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in
the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest
more than 10% of the value of our total assets in the securities of such investment companies in the aggregate. With regard to
that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments
might subject our stockholders to additional expenses.
Significant Managerial Assistance
In order to count portfolio securities as qualifying assets for the purpose of the 70% test discussed above, a business
development company must either control the issuer of the securities or must offer to make available significant managerial
assistance; except that, where the business development company purchases such securities in conjunction with one or more
other persons acting together, one of the other persons in the group may make available such managerial assistance. Making
available significant managerial assistance means, among other things, any arrangement whereby the business development
company, through its directors, officers or employees, offers to provide and, if accepted, does so provide, significant guidance
and counsel concerning the management, operations or business objectives and policies of a portfolio company through
monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and
advising a portfolio company’s officers or other organizational or financial guidance.
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Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash
equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of
investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets.
Typically, we invest in U.S. treasury bills or in repurchase agreements, provided that such agreements are fully collateralized
by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an
investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon
future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There
is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if
more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the
diversification tests imposed on us by the Code in order to qualify as a RIC for federal income tax purposes. Thus, we do not
intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the
creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Warrants and Options
Under the 1940 Act, a business development company is subject to restrictions on the amount of warrants, options,
restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount
of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase
capital stock cannot exceed 25% of the business development company’s total outstanding shares of capital stock. This amount
is reduced to 20% of the business development company’s total outstanding shares of capital stock if the amount of warrants,
options or rights issued pursuant to an executive compensation plan would exceed 15% of the business development
company’s total outstanding shares of capital stock. We have received exemptive relief from the SEC permitting us to issue
stock options and restricted stock to our employees and directors subject to the above conditions, among others. For a
discussion regarding the conditions of this exemptive relief, see Note 6 to our consolidated financial statements.
Senior Securities; Coverage Ratio
We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior
to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such
issuance. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common
shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least
200% after deducting the amount of such dividend, distribution, or purchase price. We may also borrow amounts up to 5% of
the value of our total assets for temporary or emergency purposes. For a discussion of the risks associated with the resulting
leverage, see “Item 1A. Risk Factors—Risks Related to Our Business & Structure—Because we borrow money, there could be
increased risk in investing in our company.”
Capital Structure
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may,
however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or
rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors
determines that such sale is in the best interests of the Company and our stockholders have approved the practice of making
such sales. Our stockholders approved a proposal at our 2009 annual meeting of Stockholders permitting us to sell up to an
amount equal to 20% of our outstanding common stock at a price below our net asset value. We did not conduct any public
offering of our shares at a price below our net asset value during 2009. We intend to include a similar proposal in our proxy
statement for our 2010
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Annual Meeting of Stockholders. In any such case, the price at which our securities are to be issued and sold may not be less
than a price which, in the determination of our board of directors, closely approximates the market value of such securities
(less any distributing commission or discount).
Code of Ethics
We have adopted and will maintain a code of ethics that establishes procedures for personal investments and restricts
certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment
accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with
the code’s requirements. Our code of ethics will generally not permit investments by our employees in securities that may be
purchased or held by us. We may be prohibited under the 1940 Act from conducting certain transactions with our affiliates
without the prior approval of our directors who are not interested persons and, in some cases, the prior approval of the SEC.
Our code of ethics is posted on our website at www.herculestech.com and was filed with the SEC as an exhibit to the
registration statement (Registration No. 333-126604) for our initial public offering. You may read and copy the code of ethics
at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-202-942-8090. In addition, the code of ethics is available on the EDGAR Database
on the SEC’s Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee,
by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section,
Washington, D.C. 20549.
Privacy Principles
We are committed to maintaining the privacy of our stockholders and safeguarding their non-public personal information.
The following information is provided to help you understand what personal information we collect, how we protect that
information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-
public personal information of our stockholders may become available to us. We do not disclose any non-public personal
information about our stockholders or former stockholders, except as permitted by law or as is necessary in order to service
stockholder accounts (for example, to a transfer agent).
We restrict access to non-public personal information about our stockholders to our employees with a legitimate business
need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public
personal information of our stockholders.
Proxy Voting Policies and Procedures
We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case
basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we
generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal
if there exists compelling long-term reasons to do so.
Our proxy voting decisions are made by our investment committee, which is responsible for monitoring each of our
investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the
decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any
contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision
making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce
any attempted influence from interested parties.
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Exemptive Relief
On June 21, 2005, we filed a request with the SEC for exemptive relief to allow us to take certain actions that would
otherwise be prohibited by the 1940 Act, as applicable to business development companies. Specifically, we requested that the
SEC permit us to issue stock options to our non-employee directors as contemplated by Section 61(a)(3)(B)(i)(II) of the 1940
Act. On February 15, 2007, we received approval from the SEC on this exemptive request. In addition, in June 2007, we filed
an amendment to the February 2007 order to adjust the number of shares issued to the non-employee directors. On October 10,
2007, we received approval from the SEC on this amended exemptive request.
On April 5, 2007, we received an exemptive relief from the SEC that permits us to exclude the indebtedness that our
wholly-owned subsidiary, HT II, which is qualified as a small business investment company, issues to the Small Business
Administration from the 200% asset coverage requirement applicable to us.
On May 2, 2007, we received approval from the SEC on our exemptive request permitting us to issue restricted stock to
our employees, officers and directors. On June 21, 2007, our shareholders approved amendments to the 2004 Equity Incentive
Plan and 2006 Non-Employee Incentive Plan permitting such restricted grants.
On November 9, 2009 we filed a request with the SEC for exemptive relief that would permit our employees to exercise
their stock options and restricted stock and pay any related income taxes using a cashless exercise program. There can be no
assurance that such relief will be granted.
Other
We will be periodically examined by the SEC for compliance with the 1934 Act and the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director
or officer against any liability to our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person’s office.
We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the
federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their
implementation. We have designated Mr. Harvey, our Chief Legal Officer, as our Chief Compliance Officer who is
responsible for administering these policies and procedures.
Small Business Administration Regulations
HT II, our wholly-owned subsidiary, is licensed by the Small Business Administration as a small business investment
company (“SBIC”) under Section 301(c) of the Small Business Investment Act of 1958. In February 2009, the American
Recovery and Reinvestment Act of 2009 included a provision increasing the current SBA borrowing limit to $150.0 million.
At December 31, 2009, we had invested approximately $68.55 million in regulatory capital in HT II permitting us to borrow
up to $137.1 million under our guaranteed debentures commitment from the SBA, of which, $130.6 million was outstanding.
The maximum borrowing available from the SBA could be increased to $150.0 million with an additional regulatory capital
investment of $6.45 million allowing us access to an additional $12.9 million, subject to SBA approval. The limit may be
increased to $225.0 million with the approval of a second SBIC lender license and an additional investment of $37.5 million of
regulatory capital. We have submitted an application for a second license, although there is no assurance that such license will
be granted. In addition, there is no assurance that we will be able to draw up to the maximum limit available under the SBIC
program. As of December 31, 2009, the investments held by HT II represented approximately 33.6% of our total investments.
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SBICs are designed to stimulate the flow of private capital to eligible small businesses. Under present SBA regulations,
eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average annual
fully taxed net income not exceeding $6 million for the two most recent fiscal years. In addition, SBICs must devote 25% of
its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not
exceeding $6 million and has average annual fully taxed net income not exceeding $2 million for the two most recent fiscal
years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in
which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA
regulations, small business investment companies may make long-term loans to small businesses, invest in the equity
securities of such businesses and provide them with consulting and advisory services. Through our wholly-owned subsidiary
HT II, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity
investments.
HT II will be periodically examined and audited by the SBA’s staff to determine its compliance with SBIC regulations.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material federal income tax considerations applicable to us.
Conversion to Regulated Investment Company Status
Prior to 2006, we were taxed as a C Corporation under the Code. We operate to qualify as a regulated investment
company, or RIC, under Subchapter M of the Code. If we qualify as a RIC and annually distribute to our stockholders in a
timely manner at least 90% of our investment company taxable income, we will not be subject to federal income tax on the
portion of our taxable income and capital gains we distribute to our shareholders. Taxable income generally differs from net
income as defined by generally accepted accounting principles due to temporary and permanent timing differences in the
recognition of income and expenses, returns of capital and net unrealized appreciation or depreciation.
We have met the criteria specified below to qualify as a RIC, and elected to be treated as a RIC under Subchapter M of
the Code with the filing of our federal tax return for 2006. As a RIC, we generally will not have to pay corporate taxes on any
income we distribute to our stockholders as dividends, which allows us to reduce or eliminate our corporate level tax. Prior to
the effective date of our RIC election, we were taxed as a regular corporation under Subchapter C of the Code. On
December 31, 2005, we held assets with “built-in gain,” which are assets whose fair market value as of the effective date of the
election exceeds their tax basis. We elected to recognize all of our net built-in gains at the time of the conversion and paid tax
on the built-in gain with the filing of our 2005 tax return. In making this election, we marked our portfolio to market at the
time of our RIC election and paid approximately $294,000 in tax on the resulting gains.
Taxation as a Regulated Investment Company
For any taxable year in which we:
• qualify as a RIC; and
• distribute at least 90% of our net ordinary income and realized net short-term gains in excess of realized net long-
term capital losses, if any (the “Annual Distribution Requirement”);
We generally will not be subject to federal income tax on the portion of our investment company taxable income and net
capital gain ( i.e., net realized long-term capital gains in excess of net realized short-term capital losses) we distribute to
stockholders with respect to that year. As described above, we made the election to recognize
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built-in gains as of the effective date of our election to be treated as a RIC and therefore will not be subject to built-in gains tax
when we sell those assets. However, if we subsequently acquire built-in gain assets from a C corporation in a carryover basis
transaction, then we may be subject to tax on the gains recognized by us on dispositions of such assets unless we make a
special election to pay corporate-level tax on such built-in gain at the time the assets are acquired.) We will be subject to
United States federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed
distributed) to our stockholders.
In order to qualify as a RIC for federal income tax purposes and obtain the tax benefits of RIC status, in addition to
satisfying the Annual Distribution Requirement, we must, among other things:
• have in effect at all times during each taxable year an election to be regulated as a regulated investment company
under the 1940 Act;
• derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to
certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our
business of investing in such stock or securities and (b) net income derived from an interest in a “qualified publicly
traded limited partnership” (the “90% Income Test”); and
• diversify our holdings so that at the end of each quarter of the taxable year:
•
•
at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities,
securities of other RICs, and other securities if such other securities of any one issuer do not represent more
than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and
no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities
or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as
determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or
businesses or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification
Tests”).
Qualified earnings may exclude such income as management fees received in connection with our SBIC or other potential
outside managed funds and certain other fees.
Pursuant to a recent revenue procedure issued by the IRS, the IRS has indicated that it will treat distributions from certain
publicly traded RICs (including BDCs) that are paid part in cash and part in stock as dividends that would satisfy the RIC’s
annual distribution requirements and qualify for the dividends paid deduction for income tax purposes. In order to qualify for
such treatment, the revenue procedure requires that at least 10% of the total distribution be paid in cash and that each
shareholder have a right to elect to receive its entire distribution in cash. If the number of share-holders electing to receive cash
would cause cash distributions in excess of 10%, then each shareholder electing to receive cash would receive a proportionate
share of the cash to be distributed (although no shareholder electing to receive cash may receive less than 10% of such
shareholder’s distribution in cash). This revenue procedure applies to distributions made with respect to taxable years ending
prior to January 1, 2012.
As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we
distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year,
(2) 98% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income
realized, but not distributed, in the preceding year. We will not be subject to excise taxes on amounts on which we are required
to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year,
we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax
year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried
over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to
certain declaration and payment guidelines. To the extent we choose to carry over taxable income into
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the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends
may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and
distributed in the current year, or returns of capital.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we
hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with
payment-in-kind interest or back-end fee interest, in certain cases, increasing interest rates or issued with warrants), we must
include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of
whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued
will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution
to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any
corresponding cash amount.
Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the
lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-
term, depending on how long we held a particular warrant.
We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement. However,
under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior
securities are outstanding unless certain “asset coverage” tests are met. See “Regulation—Senior Securities; Coverage Ratio.”
Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by (1) the illiquid nature of
our portfolio, or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of
assets in order to meet the Distribution Requirements, we may make such dispositions at times that, from an investment
standpoint, are not advantageous.
Any transactions in options, futures contracts, hedging transactions, and forward contracts will be subject to special tax
rules, the effect of which may be to accelerate income to us, defer losses, cause adjustments to the holding periods of our
investments, convert long-term capital gains into short-term capital gains, convert short-term capital losses into long-term
capital losses or have other tax consequences. These rules could affect the amount, timing and character of distributions to
stockholders. We do not currently intend to engage in these types of transactions.
A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is,
generally, ordinary income plus net realized short-term capital gains). If our expenses in a given year exceed gross taxable
income (e.g., as the result of large amounts of equity-based compensation), we would experience a net operating loss for that
year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be
used only to offset investment company taxable income, not net capital gain. Due to these limits on the deductibility of
expenses, we may for tax purposes have aggregate taxable income for several years that we are required to distribute and that
is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those
years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may
realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, you may receive
a larger capital gain distribution than you would have received in the absence of such transactions.
Failure to Qualify as a Regulated Investment Company
If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular
corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Such
distributions (if made in a taxable year beginning on or before December 31, 2010) would be taxable to our stockholders and,
provided certain holding period and other requirements were met,
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could qualify for treatment as “qualified dividend income” eligible for the 15% maximum rate to the extent of our current and
accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributions would be eligible for
the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a
capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification
requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC.
Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year
prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could
be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as
a RIC that are recognized within the subsequent 10 years, unless we made a special election to pay corporate-level tax on such
built-in gain at the time of our requalification as a RIC.
DETERMINATION OF NET ASSET VALUE
We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the
value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common
stock outstanding. As of the date of this report, we do not have any preferred stock outstanding.
At December 31, 2009, approximately 73% of our total assets represented investments in portfolio companies recorded at
fair value, as determined by the Board of Directors. Value, as defined in Section 2(a) (41) of the 1940 Act, is (i) the market
price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value
is as determined in good faith by the Board of Directors in accordance with established valuation procedures and the
recommendation of the Valuation Committee of the Board of Directors. Since there is typically no readily available market
value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good
faith by our Board of Directors pursuant to a valuation policy and a consistent valuation process. Due to the inherent
uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our
investments determined in good faith by our Board of Directors may differ significantly from the value that would have been
used had a ready market existed for such investments, and the differences could be material.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each individual investment
on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has decreased
in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record
unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our
investment has also appreciated in value, where appropriate.
As a business development company, we invest primarily in illiquid securities including debt and equity-related securities
of private companies. Our investments are generally subject to some restrictions on resale and generally have no established
trading market. Because of the type of investments that we make and the nature of our business, our valuation process requires
an analysis of various factors. Our valuation methodology includes the examination of, among other things, the underlying
investment performance, financial condition and market changing events that impact valuation, estimated remaining life, and
interest rate spreads of similar securities as of the measurement date. If there is a significant deterioration of the credit quality
of a debt investment, we may consider other factors that a hypothetical market participant would use to estimate fair value,
including the proceeds that would be received in a liquidation analysis.
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With respect to private debt and equity-related securities, each investment is valued using industry valuation benchmarks
and, where appropriate, equity values are assigned a discount reflecting the illiquid nature of the investment and our minority,
non-control position. When a qualifying external event such as a significant purchase transaction or public offering occurs, the
pricing indicated by the external event will be used to corroborate our private debt or equity valuation.
We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external
event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation
measurement date. We may consider, but are not limited to, industry valuation methods such as price to enterprise value or
price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry
benchmarks in our evaluation of the fair value of our investment. Securities that are traded in the over-the-counter market or
on a stock exchange will be valued at the closing price on the valuation date.
Our Board of Directors has engaged an independent valuation firm to provide us with valuation assistance with respect to
certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to
provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless
directed by the Board of Directors to cancel such valuation services. However, our Board of Directors is ultimately and solely
responsible for determining the fair value of our investments in good faith.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should consider carefully the risks described below
and all other information contained in this Annual Report, including our financial statements and the related notes and the
schedules and exhibits to this Annual Report. The risks set forth below are not the only risks we face. If any of the following
risks 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 common stock could decline, and you may lose all or part of your investment.
Risks Related to our Business Structure and Current Economic and Market Conditions
We have a limited operating history as a business development company, which may affect our ability to manage our
business and may impair your ability to assess our prospects.
We were incorporated in December 2003 and commenced investment operations in September 2004. We are subject to all
of the business risks and uncertainties associated with any new business enterprise, including the risk that we will not achieve
our investment objective and that the value of our common stock could decline substantially. We have a limited operating
history as a business development company. As a result, we have limited operating results under these regulatory frameworks
that can demonstrate to you either their effect on the business or our ability to manage the business within these frameworks. If
we fail to maintain our status as a business development company or fail to qualify as a RIC, our operating flexibility and
results of operations would be significantly affected.
We are currently in a period of capital markets disruption and recession and we do not expect these conditions to
improve in the near future.
The United States has been in a recession since late 2007. Disruptions in the capital markets have increased the spread
between the yields realized on risk-free and higher risk securities, resulting in illiquidity in the debt capital markets. We
believe these conditions may continue for a prolonged period of time or worsen in the future. A prolonged period of market
illiquidity may cause us to reduce the value of loans we originate and/or fund, which could have an adverse effect on our
business, financial condition, and results of operations. Unfavorable
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economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by
lenders not to extend credit to us. These events could prevent us from increasing our investment originations and negatively
impact our operating results.
Despite the current capital market disruption and recession, venture capitalists increased their investment activity during
the second half of 2009. As a result of this favorable level of venture capital investment activities, we are experiencing an
increase in new investment origination activities which commenced in the fourth quarter of 2009, and we expect it to continue
as the venture capital community continues to make new investments. To the extent that we are able, we intend to seek new
investment opportunities; however, we remain cautious and conservative in our investment and credit management strategies
and we do not expect to see any significant balance sheet loan portfolio growth until the second half of 2010 or beyond.
Current market conditions have materially and adversely impacted debt and equity capital markets in the United States,
which could result in a negative impact on our business and operations.
The debt and equity capital markets in the United States have been negatively impacted by significant write-offs in the
financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated market,
among other things. These events, along with the deterioration of the housing market, the failure of major financial institutions
and the resulting United States Federal government actions have led to worsening general economic conditions, which have
materially and adversely impacted the broader financial and credit markets and have reduced the availability of debt and equity
capital for the market as a whole and financial firms in particular. Commercial finance companies have previously utilized the
securitization market to finance some investment activities and we had intended to use securitization financing. Due to the
current dislocation of the securitization market, which we believe may continue for an extended period of time, access to this
funding source has essentially been eliminated. We and other companies in the commercial finance sector may have to access
alternative debt markets in order to grow. The debt capital that will be available may be at a higher cost, and terms and
conditions may be less favorable which could negatively affect our financial performance and results. In addition, the
prolonged continuation of further deterioration of current market conditions could adversely impact our business.
We have and may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in
excess of the cash you receive.
Under a revenue procedure issued by the Internal Revenue Service, RICs are permitted to treat certain distributions made
with respect to tax years ending prior to January 1, 2012, and payable in up to 90% in their stock, as taxable dividends that will
satisfy their annual distribution obligations for federal income tax and excise tax purposes. We previously determined to pay
90% of our first quarter 2009 dividend in shares of newly issued common stock, and we may in the future determine to
distribute taxable dividends that are payable in part in our common stock. Taxable stockholders receiving such dividends will
be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such
distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits
for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such
dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax,
the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price
of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S.
tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition,
if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it
may put downward pressure on the trading price of our stock.
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We are dependent upon key management personnel for our future success, particularly Manuel A. Henriquez, and if we
are not able to hire and retain qualified personnel, or if we lose any member of our senior management team, our ability
to implement our business strategy could be significantly harmed.
We depend upon the members of our senior management, particularly Mr. Henriquez, as well as other key personnel for
the identification, final selection, structuring, closing and monitoring of our investments. These employees have critical
industry experience and relationships on which we rely to implement our business plan. If we lose the services of
Mr. Henriquez, or of any other senior management members, we may not be able to operate the business as we expect, and our
ability to compete could be harmed, which could cause our operating results to suffer. We believe our future success will
depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not
succeed in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect.
Our business model depends to a significant extent upon strong referral relationships with venture capital and private
equity fund sponsors, and our inability to develop or maintain these relationships, or the failure of these relationships to
generate investment opportunities, could adversely affect our business.
We expect that members of our management team will maintain their relationships with venture capital and private equity
firms, and we will rely to a significant extent upon these relationships to provide us with our deal flow. If we fail to maintain
our existing relationships, our relationships become strained as a result of enforcing our rights with respect to non-performing
portfolio companies in protecting our investments or we fail to develop new relationships with other firms or sources of
investment opportunities, then we will not be able to grow our investment portfolio. In addition, persons with whom members
of our management team have 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.
We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively.
A number of entities compete with us to make the types of investments that we plan to make in prospective portfolio
companies. We compete with a large number of venture capital and private equity firms, as well as with other investment
funds, investment banks and other sources of financing, including traditional financial services companies such as commercial
banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial,
technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and/or
access to funding sources that are not available to us. This may enable some competitors to make commercial loans with
interest rates that are comparable to or lower than the rates that we typically offer. We may lose prospective portfolio
companies if we do not match competitors’ pricing, terms and structure. If we do match 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 and build their market shares. Furthermore, many potential competitors are not
subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company or that the Code
would impose on us as a RIC. If we are not able to compete effectively, our business, financial condition, and results of
operations will be adversely affected. As a result of this competition, there can be no assurance that we will be able to identify
and take advantage of attractive investment opportunities that we identify, or that we will be able to fully invest our available
capital.
Because we intend to distribute substantially all of our income to our stockholders in order to qualify as a RIC, we will
continue to need additional capital to finance our growth. If additional funds are unavailable or not available on
favorable terms, our ability to grow will be impaired.
In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid
payment of income taxes, we intend to distribute to our stockholders substantially all of our ordinary income and realized net
capital gains except for certain realized net long-term capital gains, which we
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may retain, pay applicable income taxes with respect thereto and elect to treat as deemed distributions to our stockholders. As
a business development company, we generally are required to meet a coverage ratio of total assets to total borrowings and
other senior securities, which includes all of our borrowings and any preferred stock that we may issue in the future, of at least
200%. This requirement limits the amount that we may borrow. 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. Given the current dislocation in the credit
market, 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. If we are unable to incur additional debt, we
may be required to raise additional equity at a time when it may be disadvantageous to do so. In addition, shares of closed-end
investment companies have recently traded at discounts to their net asset values and our stock has been 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. If our common stock trades below its net asset value, we generally will not be able to issue additional shares of our
common stock at its market price without first obtaining the approval for such issuance from our stockholders and our
independent directors. 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.
Because we borrow money, there could be increased risk in investing in our company.
Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and
may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation
event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify
the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities.
Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging
would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not
leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our
common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in
excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the
leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed
funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we
incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive
pressures. We and, indirectly our stockholders will bear the cost associated with our leverage activity. Our secured credit
facilities with Wells Fargo Capital Finance LLC and Union Bank, N.A. contain financial and operating covenants that could
restrict our business activities, including our ability to declare dividends if we default under certain provisions.
As of December 31, 2009, there was no outstanding borrowing under Wells Facility. In addition, as of December 31,
2009, we had approximately $130.6 million outstanding under the SBA debenture program.
As a business development company, generally we are not permitted to incur indebtedness unless immediately after such
borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of
the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our
outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset
coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If this ratio declines
below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt
when it is disadvantageous to do so, and we may not be able to make distributions. As of December 31, 2009 our asset
coverage for senior indebtedness is well over 200% since we exclude SBA leverage from this ratio and we have no other
borrowings outstanding.
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Because most of our investments typically are not in publicly-traded securities, there is uncertainty regarding the value
of our investments, which could adversely affect the determination of our net asset value.
At December 31, 2009, portfolio investments, which are valued at fair value by the Board of Directors, were
approximately 73% of our total assets. We expect our investments to continue to consist primarily of securities issued by
privately-held companies, the fair value of which is not 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.
There is no single standard for determining fair value in good faith. We value these securities at fair value as determined
in good faith by our Board of Directors, based on the recommendations of our Valuation Committee. The Valuation
Committee uses its best judgment in arriving at the fair value of these securities. As a result, determining fair value requires
that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently
applied valuation process for the types of investments we make. However, the Board of Directors retains ultimate authority as
to the appropriate valuation of each investment. 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. We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ determination of
the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net
change in unrealized appreciation or depreciation. Our net asset value could be adversely affected if our determinations
regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal
of such securities.
Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant
investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and
the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The
following table shows the fair value of the totals of investments held in portfolio companies at December 31, 2009 that
represent greater than 5% of net assets:
(in thousands)
Infologix, Inc.
Zayo Bandwidth, Inc.
Labopharm USA, Inc.
December 31, 2009
Fair Value
$ 32,184
24,317
21,025
Percentage of
Net Assets
8.8%
6.6
5.7
InfoLogix, Inc. is a provider of enterprise mobility and radio frequency identification (RFID) solutions. The Company
provides these solutions to its customers by utilizing a combination of products and services, including consulting, business
software applications, managed services, mobile workstations and devices, and wireless infrastructure. At December 31, 2009
we owned a controlling interest in this portfolio company.
Zayo Bandwidth Corporation owns and operates fiber optic networks in various regions of the United States and provides
bandwidth services to carriers, web-centric companies, public institutions and enterprises.
Labopharm, Inc. is a specialty pharmaceutical company that, together with its subsidiaries, develops drugs using its
proprietary controlled-release technologies.
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Our financial results could be negatively affected if these portfolio companies or any of our other significant portfolio
companies encounter financial difficulty and fail to repay their obligations or to perform as expected.
Regulations governing our operations as a business development company affect our ability to, and the manner in
which, we raise additional capital, which may expose us to risks.
Our business will require a substantial amount of capital. We may acquire additional capital from the issuance of senior
securities, including borrowings, securitization transactions or other indebtedness, or the issuance of additional shares of our
common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may
issue debt securities, other evidences of 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. Under the 1940 Act, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset
coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In
addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or
purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after
deducting the amount of such dividend, distribution, or purchase price. Our ability to pay dividends or issue additional senior
securities would be restricted if our asset coverage ratio were not at least 200%. If the value of our assets declines, we may be
unable to satisfy this 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 such sales may be disadvantageous. As a result of issuing senior securities, we would also be
exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred
stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights
and might have rights, preferences, or privileges more favorable than those of our common stockholders and the issuance of
preferred stock could have the effect of delaying, deferring, or preventing a transaction or a change of control that might
involve a premium price for holders of our common stock or otherwise be in your best interest.
To the extent that we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of
common stock to finance operations. Other than in certain limited situations such as rights offerings, as a business
development company, we are generally not able to issue our common stock at a price below net asset value without first
obtaining required approvals from our stockholders and our independent directors. If we raise additional funds by issuing more
common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of
our stockholders at that time will decrease, and you might experience dilution. Moreover, we can offer no assurance that we
will be able to issue and sell additional equity securities in the future, on favorable terms or at all.
In addition to issuing securities to raise capital as described above, we anticipate that, in the future, we may securitize our
loans to generate cash for funding new investments. The securitization market has effectively shut down with the recent
financial market collapse and we cannot assure you that will be able to securitize our loans in the near future, or at all. An
inability to successfully securitize our loan portfolio could limit our ability to grow our business and fully execute our business
strategy.
Our equity ownership in a portfolio company may represent a Control Investment. Our ability to exit a debt or equity
investment in a timely manner because we are in a control position or have access to inside information in the portfolio
company could result in a realized loss on the investment.
If we obtain a Control Investment in a portfolio company our ability to divest ourselves from a debt or equity investment
could be restricted due to illiquidity in a private stock, limited trading volume on a public company’s stock, inside information
on a company’s performance, insider blackout periods, or other factors that could prohibit us from disposing of the investment
as we would if it were not a Control Investment. Additionally, we may choose not to take certain actions to protect a debt
investment in a Control Investment portfolio
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company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a
realized loss on the investment.
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity,
and management of the company may make decisions that could decrease the value of our portfolio holdings.
We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may
make business decisions with which we disagree, and the stockholders and management of such company may take risks or
otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease
the value of our portfolio holdings.
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business
development company or be precluded from investing according to our current business strategy.
As a business development company, we may not acquire 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. See “Item 1. Business—
Regulation as a Business Development Company.”
We believe that most of the senior loans we make will constitute qualifying assets. However, we may be precluded from
investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940
Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business
development company, which would have a material adverse effect on our business, financial condition and results of
operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which
could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to
comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such
investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we
may have to sell the investments at a substantial loss.
A failure on our part to maintain our qualification as a business development company would significantly reduce our
operating flexibility.
If we fail to continuously qualify as a business development company, we might be subject to regulation as a registered
closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility. In addition,
failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to
bring an enforcement action against us. For additional information on the qualification requirements of a business development
company, see “Item 1. Business—Regulation as a Business Development Company.”
We may have difficulty paying our required distributions if we recognize income before or without receiving cash
representing such income.
In accordance with generally accepted accounting principles and tax requirements, we include in income certain amounts
that we have not yet received in cash, such as contracted payment-in-kind interest, which represents contractual interest added
to a loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances,
certain loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees or prepayment
fees. The increases in loan balances as a result of contracted payment-in-kind arrangements are included in income for the
period in which such payment-in-kind interest was accrued, which is often in advance of receiving cash payment, and are
separately identified on our statements of cash flows. We also may be required to include in income certain other amounts that
we will not receive in cash.
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Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation
process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments
and warrants will be allocated to the warrants that we receive. This will generally result in “original issue discount” for tax
purposes, which we must recognize as ordinary income, increasing the amount that we are required to distribute to qualify for
the federal income tax benefits applicable to RICs. Because these warrants generally will not produce distributable cash for us
at the same time as we are required to make distributions in respect of the related original issue discount, we would need to
obtain cash from other sources or to pay a portion of our distributions using shares of newly issued common stock, consistent
with Internal Revenue Service requirements, to satisfy such distribution requirements.
Other features of the debt instruments that we hold may also cause such instruments to generate an original issue
discount, resulting in a dividend distribution requirement in excess of current cash interest received. Since in certain cases we
may recognize income before or without receiving cash representing such income, we may have difficulty meeting the RIC tax
requirement to distribute 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. Under such circumstances, we may have to sell some of our assets, raise additional debt or
equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash
from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify for the federal
income tax benefits allowable to RICs and, thus, become subject to a corporate-level income tax on all our income. See
“Item 1. Business—Certain United States Federal Income Tax Considerations.”
There is a risk that you may not receive distributions or that our distributions may not grow over time.
We intend to make distributions on a quarterly basis to our stockholders. We cannot assure you that we will achieve
investment results, or our business may not perform in a manner that will allow us to make a specified level of distributions or
year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business
development company, we may be limited in our ability to make distributions. Also, our credit facility limits our ability to
declare dividends if we default under certain provisions.
If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which
could adversely affect our financial condition and results of operations and cause the value of your investment to
decline.
Our ability to achieve our investment objective will depend on our ability to sustain growth. Sustaining growth will
depend, in turn, on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that
meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing
capabilities, our management of the investment process, our ability to provide efficient services and our access to financing
sources on acceptable terms. Failure to manage our future growth effectively could have a material adverse effect on our
business, financial condition and results of operations.
Our quarterly and annual operating results are subject to fluctuation as a result of the nature of our business, and if we
fail to achieve our investment objective, the net asset value of our common stock may decline.
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, but not limited to, the interest rate payable on the debt securities that we acquire, the default
rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized
gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of
these factors, results for any period should not be relied upon as being indicative of performance in future periods.
In addition, any of these factors could negatively impact our ability to achieve our investment objectives, which may
cause our net asset value of our common stock to decline.
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Fluctuations in interest rates may adversely affect our profitability.
A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate
on the debt securities in which we invest. Because we will borrow money to make investments, our net investment income is
dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds.
Typically, we anticipate that our interest-earning investments will accrue and pay interest at both variable and fixed rates, and
that our interest-bearing liabilities will accrue interest at variable rates. As a result, there can be no assurance that a significant
change in market interest rates will not have a material adverse effect on our net investment income. We anticipate using a
combination of equity and long-term and short-term borrowings to finance our investment activities.
A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new
loans and investments. We expect that most of our current initial investments in debt securities will be at floating rate with a
floor. However, in the event that we make investments in debt securities at variable rates, a significant increase in market
interest rates could also result in an increase in our non-performing assets and a decrease in the value of our portfolio because
our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest
rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest
rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our
capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse
movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we engage in
hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged
portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse
effect on our business, financial condition, and results of operations.
Our realized gains are reduced by amounts paid pursuant to the warrant participation agreement.
Citigroup, a former credit facility provider to Hercules, has an equity participation right through a warrant participation
agreement on the pool of loans and certain warrants formerly collateralized under the then existing Citigroup Facility. Pursuant
to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. As a
result, Citigroup is entitled to 10% of the realized gains on certain warrants until the realized gains paid to Citigroup pursuant
to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation
agreement continue even after the Citigroup Facility is terminated until the Maximum Participation Limit has been reached.
During the year ended December 31, 2009, the Company reduced its realized gain by approximately $175,000 for
Citigroup’s participation in the gain on sale of equity securities and recorded a decrease on participation liability and increased
its unrealized gains by a net amount of approximately $29,000 for Citigroup’s participation. Since inception of the agreement,
we have paid Citigroup approximately $1.1 million under the warrant participation agreement thereby reducing our realized
gains. In addition, our realized gains will be reduced by the amounts owed to Citigroup under the warrant participation
agreement. The value of Citigroup’s participation right on unrealized gains in the related equity investments since inception of
the agreement was approximately $468,000 at December 31, 2009 and is included in accrued liabilities and increased the
unrealized gain recognized by us at December 31, 2009. Citigroup’s rights under the warrant participation agreement increase
our cost of borrowing and reduce our realized gains.
It is likely that the terms of any long-term or revolving credit or warehouse facility we may enter into in the future could
constrain our ability to grow our business.
On August 25, 2008, we entered into the Wells Facility, a two-year revolving senior secured credit facility with an
optional one-year extension with initial commitments of $50 million at closing. The Wells Facility has
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the capacity to increase to $300 million if additional lenders are added to the lending syndicate. See Note 4 to our consolidated
financial statements. As of December 31, 2009, we have no outstanding borrowings under the Wells Facility. In February
2010, we extended the Wells Facility maturity to August of 2011 from August 2010 under the same terms and conditions of
the existing agreement.
As of December 31, 2009, we had not added any additional lenders under the Wells Facility, although if the credit
markets re-open we intend to do so in the future. Due to current credit conditions as a result of the recession, our cost of
borrowing may increase with the addition of additional lenders under the Wells Facility.
The current lenders under the Wells Facility have, and any future lender or lenders will have, fixed dollar claims on our
assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to
our assets in the collateral pool. In addition, we may grant a security interest in our assets in connection with any such
borrowing. We expect such a facility to contain customary default provisions such as a minimum net worth amount, a
profitability test, and a restriction on changing our business and loan quality standards. In addition, such facilities are expected
to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially, the business
our portfolio companies that are financed through the facilities. An event of default under any credit facility would likely
result, among other things, in termination of the availability of further funds under that facility and an accelerated maturity
date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the business of the
portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash
payment allowed to us under our facility until the lender has been paid in full, reduce our liquidity and cash flow and impair
our ability to grow our business and maintain our status as a RIC.
The terms of future available financing may place limits on our financial and operating flexibility. If we are unable to
obtain sufficient capital in the future, we may:
• be forced to reduce or discontinue our operations;
• not be able to expand or acquire complementary businesses; and
• not be able to develop new services or otherwise respond to changing business conditions or competitive pressures.
In addition to regulatory restrictions that restrict our ability to raise capital, the Wells Facility and the Union Bank
Facility contain various covenants which, if not complied with, could accelerate repayment under the facility, thereby
materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends.
The credit agreements governing the Wells Facility and the Union Bank Facility both require us to comply with certain
financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios,
including asset coverage, debt to equity and interest coverage. The Wells Facility was amended, effective April 30, 2009, to
decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments
under all lines of credit not exceeding $250 million. To the extent our total commitments exceed $250 million, the minimum
tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In
addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently
raised by the Company. As of December 31, 2009, we were in compliance with the covenants under the Wells Facility. The
Union Bank Facility was put into place on February 10, 2010. Our ability to continue to comply with these covenants in the
future depends on many factors, some of which are beyond our control. For example, during the quarter ended December 31,
2009, as a result of depreciation of the fair value of our investments, our net worth declined to approximately $366 million
from $382 million at December 31, 2008. Accordingly, there are no assurances that we will be able to comply with these
covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver from
the lenders, could accelerate repayment under the facilities and thereby have a material adverse impact on our liquidity,
financial condition, results of operations and ability to pay dividends.
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If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to
curtail or cease our new lending and investment activities, our net asset value could decrease and our level of
distributions and liquidity could be affected adversely.
The current economic and capital markets conditions in the U.S. have severely reduced capital availability. Reflecting
concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing
funding to borrowers. This market turmoil and tightening of credit have led to increased market volatility and widespread
reduction of business activity generally.
Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time
to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit
market conditions, including interest rate levels and the availability of credit generally, and financial, business and other
factors, many of which are beyond our control. The prolonged continuation or worsening of current economic and capital
market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all.
As of December 31, 2009, we had no outstanding borrowings under the Wells Facility and $130.6 million under SBA
debenture and $69.4 million available borrowing capacity under these facilities, subject to terms and conditions.
In February of 2010, we closed on our new $20.0 million credit facility with Union Bank, a one year revolving credit
facility. Pricing of credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and
secured by loans in the borrowing base.
As of December 31, 2009, we have been unable to secure additional lenders under our Wells Facility. There can be no
assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are
unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity
resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make
new commitments or fundings to our portfolio companies.
One of our wholly-owned subsidiaries is licensed by the U.S. Small Business Administration, and as a result, we will be
subject to SBA regulations.
Our wholly-owned subsidiary HT II is licensed to act as a small business investment company and is regulated by the
SBA. The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the
issuance of a capital commitment by the SBA and other customary procedures. The SBA regulations require, among other
things, that a licensed SBIC be examined periodically and audited by an independent auditor to determine the SBIC’s
compliance with the relevant SBA regulations.
Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not
exceeding $18.0 million and an average annual net income after Federal income taxes not exceeding $6.0 million for the two
most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have a
tangible net worth not exceeding $6.0 million and an average annual net income after Federal income taxes not exceeding $2.0
million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine
eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of
employees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in
the equity securities of such businesses and provide them with consulting and advisory services. The SBA also places certain
limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds
for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause HT II to
forego attractive investment opportunities that are not permitted under SBA regulations.
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SBA regulations currently limit the amount that our SBIC subsidiary may borrow up to a maximum of $150 million when
it has at least $75 million in regulatory capital, receives a capital commitment from the SBA and has been through an
examination by the SBA subsequent to licensing. As of December 31, 2009, 33.6% of our total investment portfolio is in our
SBIC subsidiary.
Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine
its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an
SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of
capital stock of a licensed SBIC. If HT II fails to comply with applicable SBA regulations, the SBA could, depending on the
severity of the violation, limit or prohibit HT II’s use of debentures, declare outstanding debentures immediately due and
payable, and/or limit HT II from making new investments. Such actions by the SBA would, in turn, negatively affect us
because HT II is our wholly owned subsidiary.
Our wholly-owned SBIC subsidiary may be unable to make distributions to us that will enable us to meet or maintain
RIC status, which could result in the imposition of an entity-level tax.
In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to
distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our
subsidiaries, which includes the income from our SBIC subsidiary. We will be partially dependent on our SBIC subsidiary for
cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiary may be limited by the Small
Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be
necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiary
to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver and if our
SBIC subsidiary is unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and
a consequent imposition of an entity-level tax on us.
If we are unable to satisfy Code requirements for qualification as a RIC, then we will be subject to corporate-level
income tax, which would adversely affect our results of operations and financial condition.
We elected to be treated as a RIC for federal income tax purposes with the filing of our federal corporate income tax
return for 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of
income, diversification and distribution requirements contained in Subchapter M of the Code, or if we fail to maintain our
election to be regulated as a business development company under the 1940 Act. If we fail to qualify for the federal income tax
benefits allowable to RICs for any reason and remain or become subject to a corporate-level 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. Any net operating losses that we incur in
periods during which we qualify as a RIC will not offset net capital gains (i.e., net realized long-term capital gains in excess of
net realized short-term capital losses) that we are otherwise required to distribute, and we cannot pass such net operating losses
through to our stockholders. In addition, net operating losses that we carry over to a taxable year in which we qualify as a RIC
normally cannot offset ordinary income or capital gains.
Changes in laws or regulations governing our business could negatively affect the profitability of our operations.
Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern business development
companies, SBICs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing
business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions
that affect our operations, including our loan originations,
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maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions,
collection and foreclosure procedures, 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 than those in which we currently conduct
business, then we may have to incur significant expenses in order to comply or we may have to restrict our operations. In
addition, if we do not comply with applicable laws, regulations and decisions, then 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.
Results may fluctuate and may not be indicative of future performance.
Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be
indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but
are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our
debt investments, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or
losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter
competition in our markets, and general economic conditions.
Risks Related to Our Investments
Our investments are concentrated in certain industries and in a number of technology-related companies, which subjects
us to the risk of significant loss if any of these companies default on their obligations under any of their debt securities
that we hold, or if any of the technology-related industry sectors experience a downturn.
We have invested and intend to continue investing in a limited number of technology-related companies. A consequence
of this limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small
number of investments perform poorly or if we need to write down the value of any one investment. Beyond the asset
diversification requirements to which we will be subject as a RIC, we do not have fixed guidelines for diversification or
limitations on the size of our investments in any one portfolio company and our investments could be concentrated in
relatively few issuers. In addition, we have invested in and intend to continue investing, under normal circumstances, at least
80% of the value of our total assets (including the amount of any borrowings for investment purposes) in technology-related
companies. As of December 31, 2009, approximately 56.5% of the fair value of our portfolio was composed of investments in
four industries: 15.7% was composed of investments in the communications and networking industry; 16.6% was composed of
investments in the software industry; 14.0% was composed of investments in the drug discovery industry; and 10.2% was
composed of investments in the information services industries. As a result, a downturn in technology-related industry sectors
and particularly those in which we are heavily concentrated could materially adversely affect our financial condition.
Our investments may be concentrated in portfolio companies which may have limited operating histories and financial
resources.
We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories.
These companies may be particularly vulnerable to economic downturns such as the current recession, may have more limited
access to capital and higher funding costs, may have a weaker financial position and may need more capital to expand or
compete. These businesses also may experience substantial variations in operating results. They may face intense competition,
including from companies with greater financial, technical and marketing resources. Furthermore, some of these companies do
business in regulated industries and could be affected by changes in government regulation. Accordingly, these factors could
impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their
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obligations to us, and may adversely affect the return on, or the recovery of, our investment in these companies. We cannot
assure you that any of our investments in our portfolio companies will be successful. Our portfolio companies compete with
larger, more established companies with greater access to, and resources for, further development in these new technologies.
We may lose our entire investment in any or all of our portfolio companies.
Our investment strategy focuses on technology-related companies, which are subject to many risks, including volatility,
intense competition, shortened product life cycles and periodic downturns, and you could lose all or part of your
investment.
We have invested and will continue investing primarily in technology-related companies, many of which may have
narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market
conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related
companies can and often do fluctuate suddenly and dramatically. In addition, technology-related markets are generally
characterized by abrupt business cycles and intense competition. Beginning in mid-2000, there was substantial excess
production capacity and a significant slowdown in many technology-related industries. This overcapacity, together with a
cyclical economic downturn, resulted in substantial decreases in the market capitalization of many technology-related
companies. While such valuations have recovered to some extent, such decreases in market capitalization may occur again,
and any future decreases in technology-related company valuations may be substantial and may not be temporary in nature.
Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors.
Because of rapid technological change, the average selling prices of products and some services provided by technology-
related companies have historically decreased over their productive lives. As a result, the average selling prices of products
and services offered by technology-related companies may decrease over time, which could adversely affect their operating
results, 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.
We have invested in and may continue investing in technology-related companies that do not have venture capital or
private equity firms as equity investors, and these companies may entail a higher risk of loss than do companies with
institutional equity investors, which could increase the risk of loss of your investment.
Our portfolio companies will often require substantial additional equity financing to satisfy their continuing working
capital and other cash requirements and, in most instances, to service the interest and principal payments on our investment.
Portfolio companies that do not have venture capital or private equity investors may be unable to raise any additional capital to
satisfy their obligations or to raise sufficient additional capital to reach the next stage of development. Portfolio companies that
do not have venture capital or private equity investors may be less financially sophisticated and may not have access to
independent members to serve on their boards, which means that they may be less successful than portfolio companies
sponsored by venture capital or private equity firms. Accordingly, financing these types of companies may entail a higher risk
of loss than would financing companies that are sponsored by venture capital or private equity firms.
Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio
investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair market
value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may
take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise
value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity), the nature and
realizable value of any collateral, the portfolio company’s
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ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does
business, a comparison of the portfolio company’s securities to publicly traded securities, changes in the interest rate
environment and the credit markets generally that may affect the price at which similar investments may be made in the future
and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale
occurs, we use the pricing indicated by the external event to corroborate our valuation. Decreases in the market values or fair
values of our investments are recorded as unrealized depreciation. The continuing unprecedented declines in prices and
liquidity in the capital markets have resulted in some net unrealized depreciation in our portfolio. As of December 31, 2009,
conditions in the public and private debt and equity markets had continued to deteriorate and pricing levels continued to
decline. As a result, in the future, depending on market conditions, we could incur substantial realized losses and may suffer
substantial unrealized depreciation in future periods, which could have a material adverse impact on our business, financial
condition and results of operations.
Economic recessions or downturns could impair the ability of our portfolio companies to repay loans, which, in turn,
could increase our non-performing assets, decrease the value of our portfolio, reduce our volume of new loans and harm
our operating results, which might have an adverse effect on our results of operations.
The U.S. and most other markets have entered into a period of recession. Many of our portfolio companies may be
susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. Therefore, our
non-performing assets are likely to increase and the value of our portfolio is likely to decrease during such periods. There were
five loans on non-accrual status as of December 31, 2009 with a fair value of approximately $10.5 million. There were four
loans on non-accrual status as of December 31, 2008 with a fair value of approximately $864,000. Adverse economic
conditions also may 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 also could increase our funding costs, limit our access to the capital markets or result
in a decision by lenders not to extend credit to us.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could
trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the
debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new
terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though we may have
structured our investment as senior debt or secured debt, depending on the facts and circumstances, including the extent to
which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re-
characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. These events could harm
our financial condition and operating results.
Generally, we do not control our portfolio companies. These portfolio companies may face intense competition, including
competition from companies with greater financial resources, more extensive research and development, manufacturing,
marketing and service capabilities and greater number of qualified and experienced managerial and technical personnel. They
may need additional financing which they are unable to secure and which we are unable or unwilling to provide, or they may
be subject to adverse developments unrelated to the technologies they acquire.
Any unrealized losses we experience on our investment portfolio may be an indication of future realized losses, which
could reduce our income available for distribution.
As a business development company, we are required to carry our investments at market value or, if no market value is
ascertainable, at fair value as determined in good faith by or under the direction of our Board of
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Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any
unrealized losses in our investment portfolio could be an indication of a portfolio company’s inability to meet its repayment
obligations to us with respect to the affected investments. This could result in realized losses in the future and ultimately in
reductions of our income available for distribution in future periods.
A continuing lack of initial public offering opportunities may cause companies to stay in our portfolio longer, leading to
lower returns, unrealized depreciation, or realized losses.
Beginning in about 2001, fewer venture capital-backed companies per annum have been able to complete initial public
offerings (“IPOs”) than in the years of the previous decade. For the year ended December 31, 2009, only 8 venture capital-
backed companies completed IPOs in the United States according to Dow Jones Venture Source. Now that some of our
companies are becoming more mature, a continuing lack of IPO opportunities for venture capital-backed companies could lead
to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the
amount of available funding for early-stage companies in particular as, in general, venture-capital firms are being forced to
provide additional financing to late-stage companies that cannot complete an IPO. In the best case, such stagnation would
dampen returns, and in the worst case, could lead to unrealized depreciation and realized losses as some companies run short
of cash and have to accept lower valuations in private fundings or are not able to access additional capital at all. A continuing
lack of IPO opportunities for venture capital-backed companies is also causing some venture capital firms to change their
strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such
companies to access capital and to fulfill their potential, which can result in unrealized depreciation and realized losses in such
companies by other companies such as ourselves who are co-investors in such companies.
To the extent venture capital or private equity firms decrease or discontinue funding to their portfolio companies, our
portfolio companies may not be able to meet their obligations under the debt securities that we hold.
Most of our portfolio companies rely heavily on future rounds of funding from venture capital or private equity firms in
order to continue operating their businesses and repaying their obligations to us under the debt securities that we hold. Venture
capital and private equity firms in turn rely on their limited partners to pay in capital over time in order to fund their ongoing
and future investment activities.
To the extent that venture capital and private equity firms’ limited partners are unable to fulfill their ongoing funding
obligations, the venture capital or private equity firms may be unable to continue financially supporting the ongoing operations
of our portfolio companies. As a result, our portfolio companies may be unable to repay their obligations under the debt
securities that we hold, which would harm our financial condition and results of operations.
If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses.
We believe that our portfolio companies generally will be able to repay our loans from their available capital, from future
capital-raising transactions, or from cash flow from operations. However, to attempt to mitigate credit risks, we will typically
take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries
and, in some cases, the equity interests of our portfolio companies held by their stockholders. In many cases, our loans will
include a period of interest-only payments. There is a risk that the collateral securing our loans may decrease in value over
time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the
success of the business and market conditions, including as a result of the inability of a portfolio company to raise additional
capital. In some circumstances, our lien could be subordinated to claims of other creditors. Additionally, deterioration in a
portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied
by deterioration in the value of the collateral for the loan. Moreover, in the case of some of our
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structured debt with warrants, we may not have a first lien position on the collateral. Consequently, the fact that a loan is
secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or that we will
be able to collect on the loan should we be forced to enforce our remedies.
In addition, because we invest in technology-related companies, a substantial portion of the assets securing our
investment may be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and
accounts receivable. Intellectual property, if any, that is securing our loan could lose value if, among other things, the
company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked
or expires. Inventory may not be adequate to secure our loan if our valuation of the inventory at the time that we made the loan
was not accurate or if there is a reduction in the demand for the inventory.
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.
The economic recession and future downturns or recessions could impair the value of the collateral for our loans to our
portfolio companies and consequently increase the possibility of an adverse effect on our financial condition and results
of operations.
Many of our portfolio companies are susceptible to the current economic recession and may be unable to repay our loans
during such periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to
decrease during such periods. Adverse economic conditions may also decrease the value of collateral securing some of our
loans and the value of our equity investments.
In particular, intellectual property owned or controlled by our portfolio companies constitutes an important portion of the
value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our
portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a
foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be
impaired by such events.
Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income
and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or
result in a decision by lenders not to extend credit to us.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could
trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the
debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new
terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though we may have
structured our investment as senior debt or secured debt, depending on the facts and circumstances, including the extent to
which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re-
characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. These events could harm
our financial condition and operating results.
We do not control our portfolio companies. These portfolio companies may face intense competition, including
competition from companies with greater financial resources, more extensive research and development, manufacturing,
marketing and service capabilities and greater number of qualified and experienced managerial and technical personnel. They
may need additional financing which they are unable to secure and which we are unable or unwilling to provide, or they may
be subject to adverse developments unrelated to the technologies they acquire.
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We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.
In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing
the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make
loans that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio
company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a
sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan
or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced
by acts or omissions by owners or managers of the assets.
In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan,
or our loan may be subject to equitable subordination. In addition, certain of our loans are subordinate to other debt of the
portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio
company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan
exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept
prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings
relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and
the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may
decline in value, causing us to suffer losses.
If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio
company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing
collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the
underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is
unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.
The inability of our portfolio companies to commercialize their technologies or create or develop commercially viable
products or businesses would have a negative impact on our investment returns.
The possibility that our portfolio companies will not be able to commercialize their technology, products or business
concepts presents significant risks to the value of our investment. Additionally, although some of our portfolio companies may
already have a commercially successful product or product line when we invest, technology-related products and services
often have a more limited market- or life-span than have products in other industries. Thus, the ultimate success of these
companies often depends on their ability to continually innovate, or raise additional capital, in increasingly competitive
markets. Their inability to do so could affect our investment return. In addition, the intellectual property held by our portfolio
companies often represents a substantial portion of the collateral, if any, securing our investments. We cannot assure you that
any of our portfolio companies will successfully acquire or develop any new technologies, or that the intellectual property the
companies currently hold will 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.
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 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 management team to obtain adequate information to
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evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about
these companies, then we may not make a fully informed investment decision, and we may not receive the expected return on
our investment or lose some or all of the money invested in these companies. Also, privately-held companies frequently have
less diverse product lines and a smaller market presence than do larger competitors. Privately-held companies are, thus,
generally more vulnerable to economic downturns and may experience more substantial variations in operating results than do
larger competitors. 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 company’s development, and high turnover of personnel is common in technology-related
companies. The loss of one or more key managers can hinder or delay a company’s 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 impact our investment returns.
If our portfolio companies are unable to protect their intellectual property rights, then our business and prospects could
be harmed. If our portfolio companies are required to devote significant resources to protecting their intellectual
property rights, then the value of our investment could be reduced.
Our future success and competitive position depend in part upon the ability of our portfolio companies to obtain and
maintain proprietary technology used in their products and services, which will often represent a significant portion of the
collateral, if any, securing our investment. The portfolio companies will 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 in order to
enforce their patents, copyrights or other intellectual property rights, to protect their trade secrets, to determine the validity and
scope of the proprietary rights of others or to 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 upon or misappropriate a third party’s
patent or other proprietary rights, that portfolio company could be required to pay damages to such third party, alter its own
products or processes, obtain a license from the third party and/or cease activities utilizing such proprietary rights, including
making or selling products utilizing such proprietary rights. Any of the foregoing events could negatively affect both the
portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own,
as well as any collateral securing our investment.
We may not be able to realize our entire investment on equipment-based loans in the case of default.
We may from time-to-time provide loans that will be collateralized only by equipment of the portfolio company. If the
portfolio company defaults on the loan we would take possession of the underlying equipment to satisfy the outstanding debt.
The residual value of the equipment at the time we would take possession may not be sufficient to satisfy the outstanding debt
and we could experience a loss on the disposition of the equipment.
Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies.
Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies.
These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of
foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs,
less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing
contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.
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Some of our portfolio companies may need additional capital, which may not be readily available.
Our portfolio companies will often require substantial additional equity financing to satisfy their continuing working
capital and other requirements, and in most instances to service the interest and principal payments on our investment. Each
round of venture financing is typically intended to provide a company with only enough capital to reach the next stage of
development. We cannot predict the circumstances or market conditions under which our portfolio companies will seek
additional capital. 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 unfavorable to us, 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
traditional lenders. Accordingly, financing these types of companies may entail a higher risk of loss than would financing
companies that are able to utilize traditional credit sources.
We may be unable or decide not to make additional cash investments in our portfolio companies which could result in
our losing our initial investment if the portfolio company fails.
We may have to make additional cash investments in our portfolio companies to protect our overall investment value in
the particular company. We retain the discretion to make any additional investments as our management determines. The
failure to make such additional investments may jeopardize the continued viability of a portfolio company, and our initial (and
subsequent) investments. Moreover, additional investments may limit the number of companies in which we can make initial
investments. In determining whether to make an additional investment our management will exercise its business judgment
and apply criteria similar to those used when making the initial investment. We cannot assure you that we will have sufficient
funds to make any necessary additional investments, which could adversely affect our success and result in the loss of a
substantial portion or all of our investment in a portfolio company.
If our investments do not meet our performance expectations, you may not receive distributions.
We intend to make distributions 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 to increase the amount of these distributions from time to time. In
addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability
to make distributions. See “Regulation.” Also, restrictions and provisions in any future credit facilities may limit our ability to
make distributions. As a RIC, 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. See “Item 1.
Business—Certain United States Federal Income Tax Considerations—Taxation as a Regulated Investment Company.” We
cannot assure you that you will receive distributions at a particular level or at all.
We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may
have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for
us.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds
to such company or have the opportunity to increase our investment in a successful situation, for example, the exercise of a
warrant to purchase common stock. Any decision we make not to make a follow-on investment or any inability on our part to
make such an investment may have a negative impact on a portfolio company in need of such an investment or may result in a
missed opportunity for us to increase our participation in a successful operation and may dilute our equity interest or otherwise
reduce the expected yield on our investment. Moreover, a follow-on investment may limit the number of companies in which
we can make initial investments. In determining whether to make a follow-on investment, our management will exercise its
business judgment and apply criteria similar to those used when making the initial investment. There is no assurance that we
will make, or will have sufficient funds to make, follow-on investments and this could adversely affect our success and result
in the loss of a substantial portion or all of our investment in a portfolio company.
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Any unrealized depreciation that we experience on our loan portfolio may be an indication of future realized losses,
which could reduce our income available for distribution.
As a business development company, we are required to carry our investments at market value or, if no market value is
ascertainable, at the fair value as determined in good faith by our Board of Directors in accordance with procedures approved
by our Board of Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized
depreciation. Any unrealized depreciation in our loan portfolio could be an indication of a portfolio company’s 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 in reductions of our income available for distribution in future periods.
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 generally invest in debt securities with terms of up to seven years and hold such investments until maturity, and we
do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We
invest and expect to continue investing in companies whose securities have no established trading market and whose securities
are and will be subject to legal and other restrictions on resale or whose securities are and will be less liquid than are publicly-
traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. 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 achieve liquidity in our investments in
the near-term. However, to maintain our qualification as a business development company and as a RIC, we may have to
dispose of investments if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks.
Our investments are usually subject to contractual or legal restrictions on resale, or are otherwise illiquid, because there is
usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for
us to dispose of the investments at a favorable price and, as a result, we may suffer losses.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest primarily in debt securities issued by our portfolio companies. In some cases, portfolio companies will be
permitted to have other debt that ranks equally with, or senior to, the debt securities in which we invest. Such 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 the debt securities in which we invest. Also, 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 distribution
in respect of our investment. After repaying such senior creditors, such portfolio company might not have any remaining assets
to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would
have to share on a pari passu basis any distributions with other creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy. In addition, we would not be in a position to control any portfolio
company by investing in its debt securities. 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 companies, as representatives of the
holders of their common equity, may take risks or otherwise act in ways that do not best serve our interests as debt investors.
Our equity related investments are highly speculative, and we may not realize gains from these investments. If our equity
investments do not generate gains, then the return on our invested capital will be lower than it would otherwise be, which
could result in a decline in the value of shares of our common stock.
When we invest in debt securities, we generally expect to acquire warrants or other equity securities as well. Our goal is
ultimately to dispose of these equity interests and realize gains upon disposition of such interests.
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Over time, the gains that we realize on these equity interests may offset, to some extent, losses that we experience on defaults
under debt securities that we hold. However, the equity interests that 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 that we do realize
on the disposition of any equity interests may not be sufficient to offset any other losses that we experience.
We generally do not control our portfolio companies and therefore our portfolio companies may make decisions with
which we disagree.
Generally, we do not control any of our portfolio companies, even though we may have board observation rights and our
debt agreements may contain certain restrictive covenants. 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.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and
reduce our return on equity.
In 2009, we received early loan repayments and paydown of working capital loans of approximately $171.9 million. We
are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this
occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio
companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we
could experience significant delays in 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 elect 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.
We may not realize gains from our equity investments.
When we invest in debt securities, we generally expect to acquire warrants or other equity securities as well. However,
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 that we do realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience.
Our financial results could be negatively affected if we are unable to recover our principal investment as a result of a
negative pledge on the intellectual property of our portfolio companies.
In some cases, we collateralize our investments by obtaining a first priority security interest in a portfolio companies’
assets, which may include their intellectual property. In other cases, we may obtain a first priority security interest in a portion
of a portfolio company’s assets and a negative pledge covering a company’s intellectual property and a first priority security
interest in the proceeds from such intellectual property. In the case of a negative pledge, the portfolio company cannot
encumber or pledge their intellectual property without our permission. In the event of a default on a loan, the intellectual
property of the portfolio company will most likely be liquidated to provide proceeds to pay the creditors of the company. As a
result, a negative pledge may affect our ability to fully recover our principal investment. In addition, there can be no assurance
that our security interest in the proceeds of the intellectual property will be enforceable in a court of law or bankruptcy court.
At December 31, 2009, approximately 71.9 % of our portfolio company loans were secured by a first priority security in
all of the assets of the portfolio company, 1.9 % of our portfolio company loans were secured by a second priority security in
all of the assets of the portfolio company and 26.2 % portfolio company loans were prohibited from pledging or encumbering
their intellectual property pursuant to negative pledges.
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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 company’s 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. This
could negatively impact our ability to pay dividends and cause the loss of all or part of your investment.
Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to
such loans.
Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to
claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair,
inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its
affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity
interests in a client. We have made direct equity investments or received warrants in connection with loans representing
approximately 13.4% of the aggregate outstanding balance of our portfolio as of December 31, 2009. Payments on one or
more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable
subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of
one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or
influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were
unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be
entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us
at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after
all of its obligations relating to its debt and preferred securities had been satisfied.
Risks Related to Our Common Stock
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.
Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity
capital.
If our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares
of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our
independent directors. Shares of business development companies, including shares of our common stock, have been trading at
discounts to their net asset values. As of December 31, 2009, our net asset value per share was $10.29. The daily average
closing price of our shares on the NASDAQ Global Select Market for the quarter ended December 31, 2009 was $9.79. If our
common stock trades below net asset value, the higher cost of equity capital may result in it being unattractive to raise new
equity, which may limit our
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ability to grow. The risk of trading below net asset value 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.
Provisions of the Maryland General Corporation Law, and of our charter and bylaws, could deter takeover attempts and
have an adverse impact on the price of our common stock.
The Maryland General Corporation Law and our charter and bylaws contain provisions that may have the effect of
discouraging, delaying, or making difficult a change in control of our company or the removal of our incumbent directors. We
will be covered by the Business Combination Act of the Maryland General Corporation Law to the extent that such statute is
not superseded by applicable requirements of the 1940 Act. However, our Board of Directors has adopted a resolution
exempting from the Business Combination Act any business combination between us and any person to the extent that such
business combination receives the prior approval of our board, including a majority of our directors who are not interested
persons as defined in the 1940 Act. In addition, our bylaws contain a provision exempting from the Control Share Acquisition
Act any and all acquisitions by any person of shares of our stock. The Business Combination Act (if our board should repeal
the resolution) and the Control Share Acquisition Act (if we amend our bylaws to be subject to that Act) may discourage
others from trying to acquire control of us and increase the difficulty of consummating any offer.
Under our charter, our Board of Directors is divided into three classes serving staggered terms, which will make it more
difficult for a hostile bidder to acquire control of us. In addition, our Board of Directors may, without stockholder action,
authorize the issuance of shares of stock in one or more classes or series, including preferred stock. Subject to compliance with
the 1940 Act, our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of
stock of any class or series that we have authority to issue. The existence of these provisions, among others, may have a
negative impact on the price of our common stock and may discourage third party bids for ownership of our company. These
provisions may prevent any premiums being offered to you for shares of our common stock.
If we conduct an offering of our common stock at a price below net asset value, investors are likely to incur immediate
dilution upon the closing of the offering.
At our Annual Meeting of Stockholders on June 3, 2009, our stockholders approved a proposal authorizing us to sell up to
20% of our common stock at a price below the Company’s net asset value per share, subject to Board approval of the offering.
If we were to issue shares at a price below net asset value, such sales would result in an immediate dilution to existing
common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This
dilution would also include a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting
interest in us than the increase in our assets resulting from such issuance.
In addition, if we determined to conduct additional offerings in the future there may be even greater discounts if we
determine to conduct such offerings at prices below net asset value. As a result, investors will experience further dilution and
additional discounts to the price of our common stock.
Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently
known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our common stocks at a price below
our net asset value during year ended December 31, 2009.
Current levels of market volatility are high. Our common stock price has been and continues to be volatile and may
decrease substantially.
The capital and credit market have been experiencing high volatility and disruption for more than 12 months. In 2009, we
experienced greater than usual stock price volatility. In some cases, the markets have
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produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’
underlying financial strength. If current levels of market volatility continue or worsen, there can be no assurance that we will
not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial
condition and results of operations.
In addition, the trading price of our common stock following an offering may fluctuate substantially. The price of the
common stock that will prevail in the market after an offering may be higher or lower than the price you paid 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, but are not limited to, the following:
• price and volume fluctuations in the overall stock market from time to time;
• significant volatility in the market price and trading volume of securities of RICs, business development companies
or other financial services companies;
• any inability to deploy or invest our capital;
• fluctuations in interest rates;
• any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities
analysts;
• the financial performance of specific industries in which we invest in on a recurring basis;
• announcement of strategic developments, acquisitions, and other material events by us or our competitors, or
operating performance of companies comparable to us;
• changes in regulatory policies or tax guidelines with respect to RICs or business development companies;
• losing RIC status;
• actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations
of securities analysts;
• changes in the value of our portfolio of investments;
• realized losses in investments in our portfolio companies;
• general economic conditions and trends;
• inability to access the capital markets;
• loss of a major funded source; or
• departures of key personnel.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation
has often been brought against that company. Due to the potential volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in substantial costs and could divert management’s attention
and resources from our business.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2.
Properties
Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our
operation or any of our subsidiaries. Currently, we lease approximately 11,200 square feet of office space in Palo Alto,
California for our corporate headquarters. We also lease office space in: Boston, Massachusetts; Boulder, Colorado; Chicago,
Illinois; and San Diego, California (which was closed in January 2009 and the office space was subleased).
Item 3.
Legal Proceedings
As of December 31, 2009, we were not a party to any legal proceedings. However, from time to time, we may be party to
certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under
contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with
certainty, we do not expect these proceedings will have a material effect upon our financial condition or results of operations.
Item 4.
Reserved
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the NASDAQ Global Select Market under the symbol “HTGC.” The following table sets
forth the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market for each
of the quarterly periods during 2009 and 2008. Our common stock may trade at prices that are at, above, or below our net asset
value.
Quarter Ended
March 31, 2008
June 30, 2008
September 30, 2008
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
Price Range
High
12.75
11.32
11.35
10.24
8.62
8.89
8.33
11.22
Low
9.59
8.93
7.95
4.57
3.93
4.76
10.35
8.96
As of February 11, 2010, we had 40 stockholders of record. Most of the shares of our common stock are held by brokers
and other institutions on behalf of stockholders. We believe that there are currently approximately 12,000 additional beneficial
holders of our common stock.
Shares of business development companies may trade at a market price that is less than the value of the net assets
attributable to those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at
premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will
decrease. At times, our shares of common stock have traded at a premium to net asset value and with the recent collapse of the
financial markets, our shares of common stock have traded at a significant discount to the net assets attributable to those
shares.
SALES OF UNREGISTERED SECURITIES
During 2009, one of our Directors elected to take part of his compensation in the form of common stock in lieu of cash.
We issued a total of 3,334 shares of common stock to the Director with an aggregate price for the shares of common stock of
approximately $22,000.
ISSUER PURCHASES OF EQUITY SECURITIES
On May 5, 2009, our Board of Directors approved a $15.0 million share repurchase program. The program expired on
November 7, 2009 and we did not repurchases any shares of our common stock under the program.
In February 2010, the Board of Directors approved a $35.0 million open market share repurchase program. This program
replaces a $15 million repurchase program which expired in November 2009. We may repurchase common stock in the open
market, including block purchases, at prices that may be above or below the net asset value as reported in its then most
recently published financial statements. We anticipate that the manner, timing,
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and amount of any share purchases will be determined by company management based upon the evaluation of market
conditions, stock price, and additional factors in accordance with regulatory requirements. As a 1940 Act reporting company,
we are required to notify shareholders of the existence of a repurchase program when such a program is initiated or
implemented. The repurchase program does not require us to acquire any specific number of shares and may be extended,
modified, or discontinued at any time.
EQUITY COMPENSATION PLAN INFORMATION
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under
the heading “Executive Compensation—Equity Compensation Plan Information” in our definitive proxy statement for our
2010 Annual Meeting of Stockholders.
DIVIDEND POLICY
As a RIC, we intend to distribute quarterly dividends to our stockholders. To the extent we do not distribute during each
calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our
capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year, and (3) any ordinary
income and net capital gains for the preceding year that were not distributed during such years we are required to pay a 4%
excise tax on our undistributed income. To the extent that we earn annual taxable income in excess of dividends paid from
such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will
be available for distribution in the next year as permitted by the Code. We will not be subject to excise taxes on amounts on
which we are required to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits
applicable to RICs, we will be required to distribute to our stockholders with respect to each taxable year at least 90% of our
ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses. We currently
intend to retain for investment realized net long-term capital gains in excess of realized net short-term capital losses. Please
refer to “Item 1. Business—Certain United States Federal Income Tax Considerations” for further information regarding the
consequences of our retention of net capital gains. We may, in the future, make actual distributions to our stockholders of
some or all realized net long-term capital gains in excess of realized net short-term capital losses. We can offer no assurance
that we will achieve results that will permit the payment of any 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 Item 1. Business—“Regulation as a Business
Development Company.”
For the year ended December 31, 2009, we did not record a provision for excise tax since we have paid out greater than
98% of our taxable earnings for 2009. For the year ended December 31, 2008, we recorded a provision for excise tax of
approximately $203,000. Effective in 2009, our Board of Directors adopted a policy to distribute four quarterly distributions in
an amount that approximates 90-95% of our taxable income. In addition, at the end of the year we may also pay an additional
special dividend, such that we may distribute approximately 98% of our annual taxable income in the year it was earned,
instead of spilling over our excess taxable income.
Pursuant to a recent revenue procedure issued by the IRS, the IRS has indicated that it will treat distributions from certain
publicly traded RICs (including BDCs) that are paid part in cash and part in stock as dividends that would satisfy the RIC’s
annual distribution requirements and qualify for the dividends paid deduction for income tax purposes. In order to qualify for
such treatment, the revenue procedure requires that at least 10% of the total distribution be paid in cash and that each
shareholder have a right to elect to receive its entire distribution in cash. If too many shareholders elect to receive cash, each
shareholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no shareholder
electing to receive cash may receive less than 10% of such shareholder’s distribution in cash). This revenue procedure applies
to distribution made with respect to taxable year ending prior to January 1, 2012. During the quarter ended March 31, 2009 we
made a distribution to our shareholders that was comprised of approximately 90% of our common stock and approximately
10% in cash.
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On February 11, 2010, the Board of Directors declared a cash dividend of $0.20 per share to shareholders of record as of
February 19, 2010 and payable on March 19, 2010.
The following table summarizes dividends declared and paid on all shares as of December 31, 2009:
Date Declared
October 27, 2005
December 9, 2005
April 3, 2006
July 19, 2006
October 16, 2006
February 7, 2007
May 3, 2007
August 2, 2007
November 1, 2007
February 7, 2008
May 8, 2008
August 7, 2008
November 6, 2008
February 12, 2009
May 7, 2009
August 6, 2009
October 15, 2009
December 16, 2009
Record Date
November 1, 2005
January 6, 2006
April 10, 2006
July 31, 2006
November 6, 2006
February 19, 2007
May 16, 2007
August 16, 2007
November 16, 2007
February 15, 2008
May 16, 2008
August 15, 2008
November 14, 2008
February 23, 2009
May 15, 2009
August 14, 2009
October 20, 2009
December 24, 2009
Payment Date
November 17, 2005
January 27, 2006
May 5, 2006
August 28, 2006
December 1, 2006
March 19, 2007
June 18, 2007
September 17, 2007
December 17, 2007
March 17, 2008
June 16, 2008
September 15, 2008
December 15, 2008
March 30, 2009
June 15, 2009
September 14, 2009
November 23, 2009
December 30, 2009
Amount Per Share
0.025
$
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.340
0.340
0.340
0.320*
0.300
0.300
0.300
0.040
5.005
$
* Dividend paid in cash and stock. On February 12, 2009, the Board of Directors announced a dividend of $0.32 per share to
shareholders of record as of February 23, 2009. In accordance with the Internal Revenue Procedure released in January
2009, our Board of Directors determined that 90% of the dividend would be paid in newly issued shares of common stock
and no more than 10% of the dividend would be paid in cash. On March 30, 2009, we paid approximately $1.1 million in
cash and issued approximately 1.9 million common shares as a stock dividend in satisfaction of the dividend declared on
February 12, 2009. The market value per share of common stock used to compute the stock dividend (the “Dividend Share
Value”) was the volume weighted average price per share of HTGC’s common stock for the three business day period of
March 23, March 24 and March 25, 2009.
We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend,
cash dividends will be automatically reinvested in additional shares of our common stock unless you specifically “opt out” of
the dividend reinvestment plan and choose to receive cash dividends.
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PERFORMANCE GRAPH
The following stock performance graph compares the cumulative stockholder return assuming that, on June 9, 2005, a
person invested $100 in each of our common stock, the S&P 500 Index, the S&P Asset Management & Custody Banks Index,
the NASDAQ Financial 100 and the Dow Jones U.S. Financial Sector Index—IYF (iShares). The graph measures total
shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are
reinvested in like securities.
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Item 6.
Selected Financial Data
Selected Consolidated Financial Data
The following consolidated financial data is derived from our audited consolidated financial statements. The selected
consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere herein.
Historical data is not necessarily indicative of results to be expected for any future period.
($ in thousands, except per share data)
Balance sheet data:
Investments, at value
Cash and cash equivalents
Total assets
Total liabilities
Total net assets
Other Data:
Total debt investments, at value
Total warrant investments, at value
Total equity investments, at value
Unfunded Commitments
Net asset value per share
(1)
2009
As of December 31,
2007
2006
2008
2005
$370,437 $581,301 $529,972 $283,234 $176,673
124,828 17,242
7,856 16,404 15,362
508,967 608,672 541,943 301,142 193,648
142,452 226,214 141,206 45,729 79,296
366,515 382,458 400,737 255,413 114,352
320,902 540,054 482,123 266,724 166,646
5,160
14,450 17,883 21,646
4,867
35,085 23,364 26,203
11,700 82,000 130,602 55,500 30,200
11.67
$ 10.29 $
8,441
8,069
11.56 $
12.31 $
11.65 $
(1)
Based on common shares outstanding at period end.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Investment income:
Interest
Fees
Total investment income
Operating expenses:
Interest
Loan fees
General and administrative
Employee Compensation:
Compensation and benefits
Stock-based compensation
Total employee compensation
Total operating expenses
Net investment income before provision for income taxes and
investment gains and losses
Provision for income taxes
Net investment income
Net realized gain (loss) on investments
Provision for excise tax
Net increase in unrealized appreciation on investments
Net realized and unrealized gain
Net increase in net assets resulting from operations
Change in net assets per common share (basic):
Dividends declared per common share
2009
For the Years Ended December 31,
2007
2008
2006
2005
$ 62,200
12,077
74,277
$ 67,283
8,552
75,835
$48,757
5,127
53,884
$26,278
3,230
29,508
$ 9,791
876
10,667
9,387
1,880
7,281
13,121
2,649
6,899
4,404
1,290
5,437
5,770
810
5,409
1,801
1,098
2,285
10,737
1,888
12,625
31,173
11,595
1,590
13,185
35,854
9,135
1,127
10,262
21,393
5,779
617
6,396
18,385
43,104
—
43,104
(30,801)
—
1,269
(29,532)
$ 13,572
0.38
$
1.26
$
39,981
—
39,981
2,643
(203)
(21,426)
(18,986)
$ 20,995
0.64
$
1.32
$
32,491
2
32,489
2,791
(139)
7,268
9,920
$42,409
1.50
$
1.20
$
11,123
643
10,480
(1,604)
—
2,508
904
$11,384
0.85
$
0.90
$
3,706
252
3,958
9,142
1,525
255
1,270
482
—
353
835
$ 2,105
$ 0.30
$ 0.33
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The matters discussed in this report, as well as in future oral and written statements by management of Hercules
Technology Growth Capital, that are forward-looking statements are based on current management expectations that involve
substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied
by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance.
We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or
“continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new
investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain
certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement
in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-
looking statements contained in this report include statements as to:
• the impact of a protracted decline in the liquidity of the credit markets on our business;
• timing, form and amount of any dividend distributions;
• impact of fluctuation of interest rates on our business;
• valuation of our investments in portfolio companies;
• our ability to access the debt and equity markets;
• our future operating results;
• our business prospects and the prospects of our prospective portfolio companies;
• our ability to recover unrealized losses;
• the impact of investments that we expect to make;
• our informal relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• our regulatory structure and tax status;
• our ability to operate as a business development company and a regulated investment company;
• the adequacy of our cash resources and working capital; and
• the timing of cash flows, if any, from the operations of our portfolio companies.
For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this
report, please see the discussion under “Risk Factors.” You should not place undue reliance on these forward-looking
statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are
made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after
the date of this report.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and
other financial information appearing elsewhere in this report. In addition to historical information, the following discussion
and other parts of this report contain forward-looking information that
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involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking
information due to the factors discussed under Item 1A—“Risk Factors” and “Forward-Looking Statements” of this Item 7.
Overview
We are a specialty finance company that provides debt and equity growth capital to technology-related companies at
various stages of development which include select publicly listed companies and lower middle market companies. We
primarily finance privately-held companies backed by leading venture capital and private equity firms, and may also finance
custom select publicly traded companies that lack access to public capital or are sensitive to equity ownership dilution. We
source our investments through our principal office located in Silicon Valley and we have additional offices in the Boston and
Boulder.
Our goal is to be the leading structured debt financing provider of choice for venture capital and private equity backed
technology-related companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and
invest in a broad range of companies active in the technology and life science industries and to offer a full suite of growth
capital products up and down the capital structure. We invest primarily in structured debt with warrants and, to a lesser extent,
in senior debt and equity investments. Our equity ownership in our portfolio companies may represent a controlling interest.
We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan,
that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our
structured debt with warrants investments will typically be secured by some or all of the assets of the portfolio company.
Our investment objective is to maximize our portfolio total return by generating current income from our debt
investments and capital appreciation from our equity-related investments. We are an internally managed, non-diversified
closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a
business development company, we are required to comply with certain regulatory requirements. For instance, we generally
have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash
equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.
From incorporation through December 31, 2005, we were taxed as a corporation under Subchapter C of the Internal
Revenue Code (the Code). We are treated for federal income tax purposes as a RIC under Subchapter M of the Code as of
January 1, 2006. To qualify for the benefits allowable to a RIC, we must, among other things, meet certain source-of-income
and asset diversification and income distribution requirements. Pursuant to this election, we generally will not have to pay
corporate-level taxes on any income that we distribute to our stockholders. However, such an election and qualification to be
treated as a RIC requires that we comply with certain requirements contained in Subchapter M of the Code. For example, a
RIC must meet certain requirements, including source-of-income, asset diversification and income distribution requirements.
The income source requirement mandates that we receive 90% or more of our income from qualified earnings, typically
referred to as “good income.” Qualified earnings may exclude such income as management fees received in connection with
our SBIC or other potential outside managed funds and certain other fees.
Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily
in technology-related companies at various stages of their development. Consistent with regulatory requirements, we invest
primarily in United States based companies and to a lesser extent in foreign companies. During 2008 and 2009, our investing
emphasis has been primarily on private companies following or in connection with a subsequent institutional round of equity
financing, which we refer to as expansion-stage companies and private companies in later rounds of financing and certain
public companies, which we refer to as established-stage companies and lower middle market companies. We expect to
continue this investment strategy in 2010 and, to a limited amount, increase investments in early stage companies as the
investment activity by
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venture capitalist increases in this sector. We have also historically focused our investment activities in private companies
following or in connection with the first institutional round of financing, which we refer to as emerging-growth companies.
Current Economic and Market Environment
The U.S. capital and credit markets have been experiencing extreme disruption and volatility since the summer of 2008 as
evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing
of credit risk in the broadly syndicated credit market and the failure of many major financial institutions. These events have
contributed to a continuing severe economic recession that is materially and adversely impacting the broader financial and
credit markets and reducing the availability of credit and equity capital for the markets as a whole and financial services firms
in particular, including us.
At the same time, the venture capital market for the technology-related companies in which we invest has been active, but
is continuing to show signs of stress and reduced investment activity. Therefore, to the extent we have capital available; we
believe this is an opportune time to invest on a limited basis in the structured lending market for technology-related
companies. While today’s economy creates potentially new attractive lending opportunities, our outlook remains cautious for
at least the next two quarters as the economic environment may cause additional portfolio stress. Due to the continuing
economic slowdown and due to reduced venture capital investment activity, we determined that it would be prudent to
substantially curtail new investment activity in 2009 in order to have working capital available to support our existing portfolio
companies. These changes were made to manage our credit performance, maintain adequate liquidity and manage our
operating expenses in this extremely challenging and unprecedented credit environment.
Like many other companies, we have continued to engage in activities to deleverage our balance sheet and strengthen
cash resources available to us.
• As discussed herein, on March 25, 2009, we paid off all outstanding borrowings under the Citigroup Global Markets
Realty Corp. and Deutsche Bank Securities Inc. credit facility (“the Credit Facility”).
• To minimize disruptions in our business as a result of current market conditions, we entered into an amendment with
Wells Fargo Foothill, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360
million to $250 million, as discussed in the Wells Facility section of “Borrowings.” In February 2010 we extended
the facility by one year to August 2011.
• As of December 31, 2009, the maximum statutory limit on the dollar amount of outstanding debentures guaranteed
by the U.S. Small Business Administration (“SBA”) issued to a single small business investment company (“SBIC”)
is $150.0 million. As of December 31, 2009, Hercules Technology II, L.P. (“HT II”), our wholly owned SBIC
subsidiary, has regulatory capital of $68.55 million and a commitment from the SBA to issue debentures up to
$137.1 million, of which approximately $130.6 million was outstanding as of December 31, 2009. There is no
assurance that HT II will be able to draw up to the maximum limit available under the SBIC program. In addition,
we are eligible to be approved for a second license which would allow us to draw an aggregate of $225 million with
an additional investment of $37.5 million of regulatory capital. We submitted our application to obtain a second
lender license, and, in February 2010, we responded to the SBA’s comment letter relating to our second lender
license. We anticipate that the license should be approved during the spring of 2010; however there can be no
assurance that the SBA will grant us a second lender license or when the license will be approved.
• In addition, to strengthen our liquidity position and preserve cash, in March 2009, 90% of our first quarter 2009
dividend was paid with approximately 1.9 million newly issued shares of common stock and 10% or approximately
$1.1 million, was paid in cash.
• In February 2010, we completed our credit facility negotiations with Union Bank providing a one year credit facility
of $20.0 million. Pricing of the credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50%
against eligible loans, and secured by loans in the borrowing base.
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Portfolio and Investment Activity
The total value of our investment portfolio was $370.4 million at December 31, 2009, as compared to $581.3 million at
December 31, 2008. During the year ended December 31, 2009, we had debt commitments to 21 portfolio companies totaling
$180.7 million and funded $95.5 million under these commitments and commitments from prior years. We also made equity
investments totaling approximately $2.9 million during the year ended December 31, 2009. The fair value of our equity and
warrant portfolios at December 31, 2009 were $35.1 million and $14.5 million, respectively. For the year ended December 31,
2009, we recognized net unrealized depreciation on our debt, and warrant portfolios of approximately $4.7 million and $1.4
million and net unrealized appreciation on our equity portfolio of approximately $7.3 million, in accordance with ASC Topic
820, Fair Value Measurements and Disclosures, (“ASC 820”), formerly known as FAS 157.
At December 31, 2009, we had unfunded contractual commitments of $11.7 million to five portfolio companies. These
commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-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, we executed six non-binding term sheets for approximately
$93.5 million for proposed future commitments. Non-binding outstanding term sheets are subject to completion of Hercules’
due diligence and final approval process as well as negotiation of definitive documentation with the prospective portfolio
companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.
In response to the current lack of liquidity in the debt and capital markets, during 2008 and 2009 we slowed our
origination activities, adopting a slow and steady investment strategy and shifting our focus to established-stage companies.
These changes were made to manage our credit performance, maintain adequate liquidity and to manage our operating
expenses in this extremely challenging and unprecedented credit environment. In 2009, we continued our origination and
follow-on investment activity consistent with our slow and steady investment strategy. Investing in accordance with this
strategy may result in limited, no, or negative growth until market conditions improve, and may negatively impact our
operating results.
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. During the year ended December 31, 2009, we received normal principal
repayments of $110.6 million, and early repayments and working line of credit paydowns totaling $171.9 million. Total
portfolio investment activity (exclusive of unearned income) as of and for each of the years ended December 31, 2009 and
2008 was as follows:
(in millions)
Beginning Portfolio
Debt investments
Equity Investments
Sale of investments
Principal payments received on investments
Early pay-offs and recoveries
Accretion of loan discounts and paid-in-kind principal
Net change in unrealized appreciation on investments
Ending Portfolio
57
December 31,
2009
December 31,
2008
$
$
581.3
95.5
2.9
(36.5)
(110.6)
(171.9)
8.4
1.3
370.4
$
$
530.0
346.0
5.9
(17.5)
(110.3)
(159.6)
8.2
(21.4)
581.3
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The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2009 and
December 31, 2008 (excluding unearned income):
(in thousands)
Senior secured debt with
warrants
Senior secured debt
Preferred stock
Senior debt-second lien with
warrants
Common Stock
December 31, 2009
December 31, 2008
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
$
229,454
99,725
22,875
6,173
12,210
370,437
61.9%
26.9%
6.2%
1.7%
3.3%
100.0%
$
$
445,574
106,266
21,249
6,097
2,115
581,301
76.6%
18.2%
3.8%
1.0%
0.4%
100.0%
A summary of the company’s investment portfolio at value by geographic location is as follows:
(in thousands)
United States
Canada
Israel
Netherlands
December 31, 2009
December 31, 2008
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
$
344,984
21,567
1,310
2,576
370,437
93.1%
5.8%
0.4%
0.7%
100.0%
$
$
537,470
21,210
19,621
3,000
581,301
92.5%
3.6%
3.4%
0.5%
100.0%
Our portfolio companies are primarily privately held expansion-and established-stage companies in the
biopharmaceutical, communications and networking, consumer and business products, electronics and computers, energy,
information services, internet consumer and business services, medical devices, semiconductor and software industry sectors.
These sectors are characterized by high margins, high growth rates, consolidation and product and market extension
opportunities. Value is often vested in intangible assets and intellectual property.
The largest companies vary from year to year as new loans are recorded and loans pay off. Loan revenue, consisting of
interest, fees, and recognition of gains on equity interests, can fluctuate dramatically when a loan is paid off or a related equity
interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. For
years ended December 31, 2009 and 2008, our ten largest portfolio companies represented approximately 51.5% and 33.6% of
the total fair value of our investments in portfolio companies, respectively. At December 31, 2009 and 2008, we had three and
six investments, respectively, that represented 5% or more of our net assets. At December 31, 2009, we had five equity
investments representing approximately 50.3% of the total fair value of our equity investments, and each represented 5% or
more of the total fair value of our equity investments. At December 31, 2008, we had six equity investments which represented
approximately 43.8% of the total fair value of our equity investments, and each represented 5% or more of the total fair value
of such investments.
As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are
defined in the 1940 Act as investments in those companies that the Company is deemed to “Control.” Generally, under the
1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting
securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in
those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, which are not Control
Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less
than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are
neither Control Investments nor Affiliate Investments.
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At December 31, 2009, we had an investment in one portfolio company deemed to be a Control Investment and no
investments in 2008 were deemed to be Control Investments. $1.4 million in investment income was derived from our debt
investments in this portfolio company. No realized gains or losses related to Control Investments were recognized during the
years ended December 31, 2009, 2008 and 2007. We recognized unrealized appreciation of approximately $8.4 million on
Control Investments in 2009. No unrealized appreciation or depreciation was recognized on Control Investments during the
year end December 31, 2008 and 2007.
At December 31, 2009, the Company had an investment in one portfolio company deemed to be an Affiliate. Income
derived from this investment was zero, as this is a non-income producing equity investment. At December 31, 2008, the
Company had three portfolio companies deemed to be Affiliates. For the year ended December 31, 2008, income derived from
three investments was less than $230,000. One company that was an Affiliate in 2008 performed a capital raise in 2009 which
resulted in our ownership percentage decreasing to less than 5% of the voting securities in the portfolio company. As a result,
this portfolio company is no longer an Affiliate. We recognized a realized loss of approximately $4.0 million in the second
quarter of 2009 in a portfolio company that was an Affiliate prior to the disposal of the investment. No realized gains or losses
related to Affiliates were recognized in 2008 or 2007. During the year end December 31, 2009, we recognized unrealized
appreciation of approximately $4.0 million related to Affiliates, primarily attributable to the reversal of unrealized depreciation
to realized loss. During the years end December 31, 2008 and 2007, we recognized unrealized depreciation of approximately
$3.3 million and $1.7 million on Affiliate investments, respectively.
The following table shows the fair value of our portfolio by industry sector at December 31, 2009 and December 31, 2008
(excluding unearned income):
December 31, 2009
December 31, 2008
(in thousands)
Software
Communications &
networking
Drug discovery
Information services
Consumer & business
products
Specialty pharmaceuticals
Drug delivery
Internet consumer &
business services
Electronics & computer
hardware
Therapeutic
Semiconductors
Diagnostic
Biotechnology tools
Surgical Devices
Media/Content/Info
Energy
Investments at Fair
Value
$
61,647
58,088
51,848
37,740
25,467
25,193
21,493
20,352
17,701
13,470
11,481
11,399
9,669
2,410
2,375
104
370,437
$
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
16.6%
$
80,885
15.7%
14.0%
10.2%
6.9%
6.8%
5.8%
5.5%
4.8%
3.6%
3.1%
3.1%
2.6%
0.7%
0.6%
—
100.0%
118,133
70,320
63,533
25,250
29,870
24,952
19,759
40,481
15,661
17,766
13,494
29,124
10,013
17,667
4,393
581,301
$
59
13.9%
20.3%
12.1%
10.9%
4.3%
5.1%
4.3%
3.4%
7.0%
2.7%
3.1%
2.3%
5.0%
1.7%
3.1%
0.8%
100.0%
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We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and
monitor our expected level of returns on the debt investments in our portfolio with 1 being the highest quality. See “Item 1.
Business—Investment Process—Loan and Compliance Administration.” The following table shows the distribution of our
outstanding debt investments on the 1 to 5 investment grading scale at fair value as of December 31, 2009 and 2008,
respectively:
(in thousands)
Investment Grading
1
2
3
4
5
December 31, 2009
December 31, 2008
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
$
15,777
147,520
108,716
38,384
10,505
320,902
4.9%
46.0
33.9
11.9
3.3
100.00%
$
$
22,293
326,106
159,980
29,460
2,215
540,054
4.1%
60.4
29.6
5.5
0.4
100.00%
As of December 31, 2009, our investments had a weighted average investment grading of 2.71 as compared to 2.39 at
December 31, 2008. We intend for our shift in focus to expansion- and established-stage companies, to assist us in maintaining
our portfolio credit quality despite current market volatility. However, there is no guarantee that this strategy will be
successful. Our policy is to lower the grading on our portfolio companies as they approach the point in time when they will
require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our
financing criteria and their respective business plans. Various companies in our portfolio will require additional funding in the
near term or have not met their business plans and have therefore been downgraded until their funding is complete or their
operations improve. Risk ratings are used by us to indicate companies requiring clear monitoring and are not generally
indicative of loan valuation. At December 31, 2009, 17 portfolio companies were graded 3 and 4 portfolio companies were
graded 4, as compared to 19 and 5 portfolio companies, respectively, at December 31, 2008. At December 31, 2009 and 2008,
5 portfolio companies were graded 5.
The effective yield on our debt investments during the year was 16.7% and was attributed in part to interest charges and
fees related to loan restructurings and acceleration of fee income recognition from early loan repayments. The overall weighted
average yield to maturity of our loan obligations was approximately 13.6% at December 31, 2009, increased slightly compared
to 12.9% at December 31, 2008, attributed to increased investments to both expansion and established-stage companies and
asset based financing offered to more mature middle market companies. The weighted average yield to maturity is computed
using the interest rates in effect at the inception of each of the loans, and includes amortization of the loan facility fees,
commitment fees and market premiums or discounts over the expected life of the debt investments, weighted by their
respective costs when averaged and based on the assumption that all contractual loan commitments have been fully funded and
held to maturity.
We generate revenue in the form of interest income, primarily from our investments in debt securities, and commitment
and facility fees. Fees generated in connection with our debt investments are recognized over the life of the loan or, in some
cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity-
related securities that we acquire from our portfolio companies. Our investments generally range from $1.0 million to
$25.0 million. Our debt investments have a term of between two and seven years and typically bear interest at a rate ranging
from prime to 17% as of December 31, 2009. In addition to the cash yields received on our loans, in some instances, our loans
may also include any of the following: end-of-term payments, exit fees, balloon payment fees, PIK provisions, prepayment
fees, and diligence fees, which may be required to be included in income prior to receipt. In most cases, we collateralize our
investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In
other cases, we may obtain a negative pledge covering a company’s intellectual property.
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At December 31, 2009, approximately 71.9% of our portfolio company loans were secured by a first priority security in
all of the assets of the portfolio company, 1.9% of our portfolio company loan was secured by a second priority security in all
of the assets of the portfolio company and 26.2% of our portfolio company loans were prohibited from pledging or
encumbering their intellectual property. Interest on debt securities is generally payable monthly, with amortization of principal
typically occurring over the term of the security for emerging-growth, expansion-stage and established-stage companies. In
addition, certain loans may include an interest-only period ranging from three to eighteen months for emerging-growth and
expansion-stage companies and longer for established-stage companies. In limited instances in which we choose to defer
amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities
and any accrued but unpaid interest become due at the maturity date.
Our investments in structured debt with warrants also generally have equity enhancement features, typically in the form
of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. As of
December 31, 2009, we have received warrants in connection with the majority of our debt investments in our portfolio
companies. We currently hold warrants in 83 portfolio companies, with a fair value of approximately $14.5 million. The fair
value of the warrant portfolio has decreased by 19% as compared to the fair value of $17.9 million at December 31, 2008,
primarily due to a decrease in fair value. These warrant holdings would allow us to invest approximately $48.7 million if such
warrants are exercised. However, these warrants may not appreciate in value and, in fact, may decline in value. Accordingly,
we may not be able to realize gains from our warrant interests.
Results of Operations
Comparison of periods ended December 31, 2009 and 2008
Operating Income
Interest income totaled approximately $62.2 million and $67.3 million for 2009 and 2008, respectively. The decrease in
interest income was directly related to decreases in investment assets. In 2009 and 2008, interest income included
approximately $6.7 million and $4.3 million of income from accrued exit fees. Income from commitment, facility and loan
related fees such as amendment fees and pre-payment penalties totaled approximately $12.1 million and $8.6 million for 2009
and 2008, respectively. At December 31, 2009 and 2008, we had approximately $2.4 million and $6.9 million of deferred
income related to commitment and facility fees, respectively. The decrease in deferred income was attributed to the
amortization of fee income and the lower deferred income due to lower investment originations.
Operating Expenses
Operating expenses totaled approximately $31.2 million and $35.9 million during 2009 and 2008, respectively. Operating
expenses for the years ended December 31, 2009 and 2008 included interest expense, loan fees and unused commitment fees
of approximately $11.3 million and $15.8 million, respectively. The 28.6% decrease in interest expense was primarily due to
lower outstanding loan balances on our credit facilities and lower cost of financing. The average debt balance outstanding in
2009 is $147.4 million as compared to $196.9 million in 2008. The weighted average cost of debt was approximately 7.7% at
December 31, 2009 as compared to 8.0% at December 31, 2008. Employee compensation and benefits were approximately
$10.7 million and $11.6 million during 2009 and 2008, respectively. The decrease in employee compensation and benefits is
primarily due to the reduction in workforce in the first quarter of 2009. General and administrative expenses, including legal
and accounting fees, insurance premiums, rent and various other expenses totaled $7.3 million and $6.9 million in 2009 and
2008 respectively. We incurred approximately $1.9 million of stock-based compensation expense in 2009 as compared to $1.6
million in 2008 due to additional option and restricted stock grants made in 2009. We anticipate that operating expenses will
increase over the next twelve months as we expanded our investment and operations team in fourth quarter of 2009 and in
anticipation of building our investment portfolio in 2010.
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Net Investment Income Before Income Tax Expense and Investment Gains and Losses
Net investment income before income tax expense for the year ended December 31, 2009 totaled $43.1 million as
compared with a net investment income before income tax expense in 2008 of approximately $40.0 million. The changes are
made up of the items described above under “Operating Income” and “Operating Expenses.”
Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost
basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include
investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily
reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded
unrealized appreciation or depreciation when gains or losses are realized.
In 2009, we generated realized gains totaling approximately $3.7 million primarily due to the sale of warrants and
common stock of four portfolio companies. We recognized realized losses in 2009 of approximately $34.5 million on the
disposition of investments in sixteen portfolio companies. We recognized realized gains of approximately $6.9 million during
the year ended December 31, 2008 from the sale of common stock of nine portfolio companies. We recognized realized losses
in 2008 of approximately $4.3 million on the disposition of investments in ten portfolio companies. A summary of realized
gains and losses for the years end December 31, 2009 and 2008 is as follows:
(in thousands)
Realized gains
Realized losses
Net realized gains (losses)
December 31,
2009
$ 3,738
(34,539)
$(30,801)
2008
$ 6,925
(4,282)
$ 2,643
For the year ended December 31, 2009, net unrealized investment appreciation totaled approximately $1.3 million and for
the year ended December 31, 2008, net unrealized depreciation totaled approximately $21.4 million. The year to year increase
is primarily due to the reversal of unrealized depreciation to realized losses. The net unrealized appreciation and depreciation
of investments is based on portfolio asset valuations determined in good faith by our Board of Directors. During the year
ended December 31, 2009, net unrealized investment appreciation recognized by the company was reduced by approximately
$29,000 for a warrant participation agreement with Citigroup. For a more detailed discussion, see the discussion set forth
under “Borrowings” of this Item 7. The following table itemizes the change in net unrealized appreciation (depreciation) of
investments for 2009 and 2008:
(in thousands)
Gross unrealized appreciation on portfolio investments
Gross unrealized depreciation on portfolio investments
Reversal of prior period net unrealized appreciation (depreciation) upon a realization event
Citigroup Warrant Participation
Net unrealized appreciation (depreciation) on portfolio investments
December 31,
2009
$ 42,272
(73,969)
32,937
29
$ 1,269
2008
$ 6,139
(25,250)
(2,458)
143
$(21,426)
Income and Excise Taxes
We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, formerly known as FAS 109
which requires that deferred income taxes be determined based upon the estimated future tax effects
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of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law.
Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized.
Through December 31, 2005, we were taxed under Subchapter C of the Code. We elected to be treated as a RIC under
Subchapter M of the Code with the filing of our 2006 federal income tax return. Provided we continue to qualify as a RIC, our
income generally will not be subject to federal income or excise taxes to the extent we make the requisite distributions to
stockholders. At December 31, 2009, no excised tax provision was recorded since we have paid out distributable earnings. See
“Item 1. Business—Certain United States Federal Income Tax Considerations.” Of the dividends declared during the year
ended December 31, 2009, 100% was comprised of ordinary income. In 2008, of the dividends paid, $1.23 was comprised of
ordinary income and $0.09 was comprised of capital gains.
Net Increase in Net Assets Resulting from Operations and Earnings Per Share
For the year ended December 31, 2009 net increase in net assets resulting from operations totaled approximately
$13.6 million compared to net income of approximately $21.0 million for the period ended December 31, 2008. These changes
are made up of the items previously described.
Basic and fully diluted net change in net assets per common share were $0.38 and $0.37, respectively, for the year ended
December 31, 2009, compared to both basic net and fully diluted net income per share of $0.64 for the year ended
December 31, 2008.
Comparison of periods ended December 31, 2008 and 2007
Operating Income
Interest income totaled approximately $67.3 million and $48.8 million for 2008 and 2007, respectively. In 2008 and 2007,
interest income included approximately $4.3 million and $1.8 million of income from accrued exit fees, respectively. Income
from commitment and facility fees totaled approximately $8.6 million and $5.1 million for 2008 and 2007, respectively. The
increase in both interest and fee income was directly related to increases in origination activity, as net loan investments at fair
value grew by $57.9 million by the end of 2008. At December 31, 2008 and 2007, we had approximately $6.9 million and $6.6
million of deferred income related to commitment and facility fees.
Operating Expenses
Operating expenses totaled approximately $35.9 million and $21.4 million during 2008 and 2007, respectively. Operating
expenses for the years ended December 31, 2008 and 2007 included interest expense, loan fees and unused commitment fees
of approximately $15.8 million and $5.7 million, respectively. The 177.2% increase in interest expense was primarily due to a
higher average debt balance of $196.9 million in 2008 as compared to $66.3 million in 2007. The weighted average cost of
debt was approximately 8% at December 31, 2008 as compared to 6.5% at December 31, 2007. The increase was primarily
due to higher interest rates and fees under our Credit Facility after the loan was amended in May 2008 and as we entered into
the amortization period on October 31, 2008. Employee compensation and benefits were approximately $11.6 million and $9.1
million during 2008 and 2007, respectively. The increase in employee compensation and benefits is due to increased number
of employees from 38 to 45 and salary increases at the beginning of the year. General and administrative expenses include
legal and accounting fees, insurance premiums, rent and various other expenses totaling $6.9 million and $5.4 million in 2008
and 2007 respectively.
Net Investment Income Before Income Tax Expense and Investment Gains and Losses
Net investment income before income tax expense for the year ended December 31, 2008 totaled $40.0 million as
compared with a net investment income before income tax expense in 2007 of approximately $32.5 million. This change is
made up of the items described above.
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Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost
basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include
investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily
reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded
unrealized appreciation or depreciation when gains or losses are realized.
In 2008, we generated realized gains totaling approximately $6.9 million from the sale of common stock of two software,
two drug discovery, one advanced specialty materials & chemicals, one therapeutic, one diagnostic, one communications &
networking and one computer hardware portfolio companies. We recognized realized losses in 2008 of approximately $4.3
million on the disposition of investments in ten portfolio companies. We recognized realized gains of approximately $3.6
million during the year ended December 31, 2007 from seven portfolio companies. We recognized realized losses in 2007 of
approximately $800,000 on the disposition of warrants of six portfolio companies. A summary of realized and unrealized gains
and losses for the years end December 31, 2008 and 2007 is as follows:
(in millions)
Realized gains
Realized losses
Net realized gains
December 31,
2008
$ 6.9
(4.3)
$ 2.6
2007
$ 3.6
(0.8)
$ 2.8
For the year ended December 31, 2008, net unrealized investment depreciation totaled approximately $21.4 million and
for the year ended December 31, 2007, net unrealized appreciation totaled approximately $7.3 million. The year to year
decrease primarily reflects the impact in the general decline in the financial market in the second half of 2008. The net
unrealized appreciation and depreciation of investments is based on portfolio asset valuations determined in good faith by our
Board of Directors. As of December 31, 2008, the net unrealized investment appreciation recognized by the company was
reduced by approximately $143,000 for a warrant participation agreement with Citigroup. For a more detailed discussion, see
the discussion set forth under “Borrowings” of this Item 7. The following table itemizes the change in net unrealized
appreciation (depreciation) of investments for 2008 and 2007:
($ in millions)
Gross unrealized appreciation on portfolio investments
Gross unrealized depreciation on portfolio investments
Reversal of prior period net unrealized appreciation upon a realization
Citigroup Warrant Participation
Net unrealized appreciation/(depreciation) on portfolio investments
December 31,
2008
$ 6.1
(25.2)
(2.4)
0.1
$(21.4)
2007
$17.7
(9.4)
(0.3)
(0.7)
$ 7.3
Income Taxes
Through December 31, 2005 we were taxed under Subchapter C of the Code. We elected to be treated as a RIC under
Subchapter M of the Code with the filing of our 2006 federal income tax return. Provided we continue to qualify as a RIC, our
income generally will not be subject to federal income or excise taxes to the extent we make the requisite distributions to
stockholders. At December 31, 2008, we elected to pay an excise tax of approximately $203,000 on approximately $5.0
million of undistributed earnings from operations and capital gains that we distributed in 2009. Of the dividends declared
during the year ended December 31, 2008, $1.23 comprised ordinary income and $0.09 comprised long-term capital gains.
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Net Increase in Net Assets Resulting from Operations and Earnings Per Share
For the year ended December 31, 2008, net income totaled approximately $21.0 million compared to net income of
approximately $42.4 million for the period ended December 31, 2007. These changes are made up of the items previously
described.
Basic and fully diluted net income per share were both $0.64, for the year ended December 31, 2008, compared to basic
net income per share of $1.50 and fully diluted net income per share of $1.49 for the year ended December 31, 2007.
Financial Condition, Liquidity and Capital Resources
At December 31, 2009, we had approximately $124.8 million in cash and cash equivalents and available borrowing
capacity of $50.0 million under our Wells Credit Facility and $19.4 million availability under the SBA program, subject to
existing terms and advance rates. Of this amount, $12.9 million requires commitment approval from the SBA and investment
of additional regulatory capital of $6.45 million. We primarily invest cash on hand in interest bearing deposit accounts.
For the year ended December 31, 2009, net cash provided by operating activities totaled approximately $225.9 million as
compared to cash used by operations of $27.5 million in 2008. This increase was due primarily due to principal payments
received on our debt investments of $282.5 million offset by $98.4 million used for investments, as compared to $269.9
million of proceeds received in principal payments offset by $351.9 million used for investments in our portfolio companies in
2008. Cash used in investing activities for the year ended December 31, 2009, totaled approximately $494,000 and was
primarily used for the purchase of computer equipment, leasehold improvements and office furniture and other long term
assets. Net cash reductions attributable to financing activities totaled $117.8 million for the year ended December 31, 2009. In
2009, we had borrowings of $3.4 million of SBA debentures, net paydowns of $99.0 million from our credit facilities; we
made cash dividend payments of $31.5 million and paid fees of $147,000 on our credit facilities and debenture borrowings.
As of December 31, 2009, net assets totaled $366.5 million, with a net asset value per share of $10.29. We intend to
generate additional cash primarily from future borrowings as well as cash flows from operations, including income earned
from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government
securities and other high-quality debt investments that mature in one year or less. Our primary use of funds will be investments
in portfolio companies and cash distributions to holders of our common stock. After we have used our current capital
resources, we expect to raise additional capital 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. To the extent we determine to raise additional
equity through an offering of our common stock at a price below net asset value, which we have received shareholder approval
to do, existing investors will experience dilution. However, there can be no assurance that these capital resources will be
available in the near term given the credit constraints of the banking and capital markets.
As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of
December 31, 2009, we are in compliance with the asset coverage ratio.
As of December 31, 2009, we had $130.6 million under the SBA program and there were no outstanding borrowings
under the Wells Facility. As of December 31, 2009, there were $76.3 million of loans in the Wells Facility collateral pools
and, based on eligible loans in the pools and existing advance rates, we have access to approximately $8.2 million of
borrowing capacity available under the $50.0 million currently available through the Wells Facility.
In addition, Citigroup has an equity participation right of 10% of the realized gains on certain warrants collateralized
under the Credit Facility. However, no additional warrants are included in collateral subsequent to the facility amendment on
May 2, 2007. See Note 3 to the consolidated financial statements for discussion of the participation right.
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On September 27, 2006, HT II received a license to operate as a Small Business Investment Company under the SBIC
program and is able to borrow funds from the SBA against eligible previously approved investments and additional
contributions to regulatory capital. In February 2009, the American Recovery and Reinvestment Act of 2009 included a
provision increasing the current limit to $150.0 million, the increase of approximately $12.9 million from the previous $137.1
million limit as of December 31, 2008, subject to periodic adjustments by the SBA. At December 31, 2009 we had a
commitment from the SBA permitting us to draw up to $137.1 million. The maximum borrowing available from the SBA
could be increased to $150.0 million with an additional regulatory capital investment by us of approximately $6.5 million,
subject to SBA approval. At December 31, 2009, we had a net investment of $68.55 million in HT II, and there are
investments in 43 companies with a fair value of approximately $124.5 million. Investments held by HT II comprised
approximately 33.6% of the fair value of our investments at December 31, 2009. The Company is the sole limited partner of
HT II and HTM is the general partner. HTM is a wholly-owned subsidiary of the Company. If HT II fails to comply with
applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s use of
debentures, declare outstanding debentures immediately due and payable, and/or limit HT II from making new investments.
Such actions by the SBA would, in turn, negatively affect us because HT II is our wholly owned subsidiary.
The SBA leverage limit may be increased by an additional $75.0 million to a total of $225.0 million with the approval of
a second SBIC lender license and the additional investment of $37.5 million of regulatory capital. We have submitted an
application for a second license, although there is no assurance that such license will granted. In addition, there is no assurance
that we will be able to draw up to the maximum limit available under the SBIC program. In addition, in February 2010,
Hercules completed its credit facility negotiations with Union Bank providing a one year credit facility of $20.0 million.
Pricing of the credit facility is LIBOR +2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and secured
by loans in the borrowing base.
At December 31, 2009 and December 31, 2008, we had the following borrowing capacity and outstandings:
(in thousands)
Wells Facility
SBA Debenture
Total
December 31, 2009
December 31, 2008
Facility
Amount
$ 50,000
150,000
$200,000
Amount
Outstanding
$
—
130,600
$ 130,600
Facility
Amount
$ 50,000
137,100
$187,100
Amount
Outstanding
$
—
127,200
$ 127,200
At our Annual Meeting of Stockholders on June 3, 2009, stockholders approved a proposal authorizing us to sell up to
20% of our common stock at a price below our net asset value per share, subject to Board approval of the offering. If we
determine to conduct an offering to raise equity capital at a price below our net asset value, stockholders will experience
immediate dilution following the offering. See Item 1A—Risk Factors. We intend to include a similar proposal in our proxy
statement for 2010.
Off Balance Sheet Arrangements
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily
of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to
provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant
from time to time. As of December 31, 2009, we had unfunded commitments of approximately $11.7 million. These
commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-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. We intend to use cashflow from normal and early principal repayments,
SBA debentures and our Wells Facility to fund these commitments. However, there can be no assurance that we will have
sufficient capital available to fund these commitments as they come due.
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Contractual Obligations
The following table shows our contractual obligations as of December 31, 2009:
(1)(2)
Contractual Obligations
Borrowings
(3)
Operating lease obligations
(4)
Total
Payments due by period
(in thousands)
2012
Total
2011
2010
2014 Thereafter
$130,600 $— $— $— $— $— $130,600
—
$134,257 $991 $967 $991 $708 $— $130,600
3,657
708
991
991
967
—
2013
(1) Excludes commitments to extend credit to our portfolio companies.
(2) We also have warrant participation with Citigroup. See “Borrowings.”
(3)
(4) Long-term facility leases.
Includes borrowings under the Credit Facility and the SBA debentures. There were no outstanding borrowings under the Wells Facility at December, 31, 2009.
Borrowings
Through Hercules Funding Trust I, an affiliated statutory trust, we had a securitized credit facility (the “Credit Facility”)
with Citigroup Global Markets Realty Corp. and Deutsche Bank Securities Inc. On October 31, 2008, the Company’s Credit
Facility expired under the normal terms. All subsequent payments secured from the portfolio companies whose debt was
included in the Credit Facility collateral pool were to be applied against interest and principal outstanding under the Credit
Facility until April 30, 2009, when all outstanding interest and principal were due and payable. During the amortization period,
borrowings under the Credit Facility bore interest at a rate per annum equal to LIBOR plus 6.50%. At December 31, 2008,
$89.6 million was outstanding under the Credit Facility. During the first quarter of 2009, we paid off all remaining principal
and interest owed under the Credit Facility using approximately $10.4 million from our regular principal and interest
collection, approximately $36.7 million of borrowings from the Wells Facility and approximately $42.5 million from early
payoffs.
Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants
collateralized under the Credit Facility. Pursuant to the warrant participation agreement, we granted to Citigroup a 10%
participation in all warrants held as collateral. However, no additional warrants are included in collateral subsequent to the
facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the
realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The
obligations under the warrant participation agreement continue even after the Credit Facility is terminated until the Maximum
Participation Limit has been reached. During the year ended December 31, 2009, we recorded a reduction of the derivative
liability related to this obligation and decreased its unrealized losses by approximately $29,000 for Citigroup’s participation in
unrealized gains in the warrant portfolio. The value of their participation right on unrealized gains in the related equity
investments was approximately $468,000 at December 31, 2009 and is included in accrued liabilities. Based on the Company’s
average borrowings for the year ended December 31, 2009 and December 31, 2008, the amount of expense it recorded for its
realized and unrealized gains for the related periods, the additional cost of borrowings as a result of the warrant participation
agreement could increase by approximately 1.48% and 0.09%, respectively. There can be no assurances that the unrealized
appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants,
thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, Citigroup has been paid
approximately $1.1 million under the warrant participation agreement thereby reducing our realized gains by this amount.
In January 2005, the Company formed HT II and HTM. HT II is licensed as a SBIC. HT II borrows funds from the SBA
against eligible investments and additional deposits to regulatory capital. Under the Small Business Investment Act and current
SBA policy applicable to SBICs, an SBIC can have outstanding at any time
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SBA guaranteed debentures up to twice the amount of its regulatory capital. The February 2009 enacted American Recovery
and Reinvestment Act of 2009 (“Stimulus Bill”) contains provisions to increase the borrowing capacity of participants in the
SBIC program. As of December 31, 2009, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed
debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. With $68.55 million of
regulatory capital as of December 31, 2009, HT II has the current capacity to issue up to a total of $137.1 million of SBA
guaranteed debentures, of which $130.6 million was outstanding. Currently, HT II has paid commitment fees of approximately
$1.4 million. There is no assurance that HT II will be able to draw up to the maximum limit available under the SBIC program.
Included in the February Stimulus Bill is a provision, which allows for existing SBIC entities to obtain a second license
and gain access to additional leverage of up to $75 million, for a maximum of $225.0 million combined SBIC leverage
(subject to additional required capitalization of its second wholly owned SBIC subsidiary). Hercules has filed an application
for a second SBIC license.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA
regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have
average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must
devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a
tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the
two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which
depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross
sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of
such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiary HT II, the
Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity
investments.
Through our wholly-owned subsidiary HT II, the Company plans to provide long-term loans to qualifying small
businesses, and in connection therewith, make equity investments. HT II is periodically examined and audited by the SBA’s
staff to determine its compliance with SBIC regulations. As of December 31, 2009, HT II could draw up to $137.1 million of
leverage from the SBA as noted above. Borrowings under the program are charged interest based on ten year treasury rates
plus a spread and the rates are generally set for a pool of debentures issued by the SBA in six month periods. The rates of
borrowings under the various draws from the SBA beginning in April 2007 and set semiannualy in March and September
range from 4.233% to 5.725%. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the
leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual
fee on debenture pooling date on September 23, 2009 was 0.406%. The annual fees on other debentures have been set at
0.906%. The average amount of debentures outstanding for the year ended December 31, 2009 was approximately $129.4
million and the average interest rate was approximately 6.27%. Interest payments are payable semi-annually and there are no
principal payments required on these issues prior to maturity. Debentures under the SBA generally mature ten years after being
borrowed. Based on the initial draw down date of April 2007, the initial maturity of our SBA debentures will occur in April
2017.
On August 25, 2008, the Company, through a special purpose wholly-owned subsidiary of the Company, Hercules
Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total
commitments of $50 million, with Wells Fargo Foothill as a lender and as an arranger and administrative agent. The Wells
Facility has the capacity to increase to $300 million if additional lenders are added to the syndicate. The Wells Facility expires
on August 25, 2011, unless the option to extend the facility is exercised by the parties to the agreement. To date, we have not
added any additional lenders under the Wells Facility but intend to seek to do so when the financial markets reopen.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to Libor plus 3.25% or PRIME
plus 2.0%, but not less than 5.0%. The average debt outstanding under the Wells Facility for the year
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ended December 31, 2009 was approximately $2.8 million and the average interest rate was approximately 5.4%. The Wells
Facility requires the payment of a non-use fee of 0.5% annually, which was reduced to 0.3% upon the one year anniversary of
the credit facility on August 25, 2009. The Wells Facility is collateralized by debt investments in our portfolio companies, and
includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires
payment of interest on a monthly basis. All outstanding principal is due upon maturity, which includes the extension if
exercised. We paid a one- time structuring fee of $750,000 in connection with the Wells Facility which is being amortized
over a 2 year period. There was no outstanding debt under the Wells Facility at December 31, 2009. In February 2010, the
facility was extended an additional year until August 2011 and we paid a $375,000 extension fee.
The Wells Facility requires various financial and operating covenants. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth of $360 million. The Wells Facility was amended, effective April 30, 2009,
to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total
commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceed $250 million;
the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for
dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity
capital subsequently raised by us. The Wells Facility provides for customary events of default, including, but not limited to,
payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance
with all covenants at December 31, 2009.
Debt financing costs are fees and other direct incremental costs incurred by us in obtaining debt financing and are
recognized as prepaid expenses amortized into the consolidated statement of operations as loan fees over the term of the
related debt instrument. As part of the Credit Facility, at December 31, 2008, we had prepaid debt financing costs of
approximately $466,000, no prepaid charges as of December 31, 2009 as the total debt has been paid off fully in the first
quarter of 2009. The prepaid debt financing costs incurred by us in connection with the Wells Facility was approximately
$325,000 and $814,000, net of accumulated amortization as of December 31, 2009 and 2008, respectively. In addition, as part
of the SBA debenture, we had approximately $3.6 million and $3.9 million, net of accumulated amortization, of prepaid
commitment and leverage fees as of December 31, 2009 and 2008, respectively.
In February of 2010, we closed on our new $20.0 million credit facility with Union Bank, a one year revolving credit
facility. Pricing of credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and
secured by loans in the borrowing base.
We plan to aggregate pools of funded loans using the conduits that we may seek until a sufficiently large pool of funded
loans is created which can then be securitized at a later date. We expect that any loans included in a securitization facility may
be securitized on a non-recourse basis with respect to the credit losses on the loans. The current credit market dislocation has
essentially eliminated access to this funding source and there can be no assurance that we will be able to complete this
securitization strategy, or that it will be successful if or when the securitization market is reestablished. See “Item 1.
Business—Capital Structure.”
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Dividends
The following table summarizes our dividends declared and paid on all shares, including restricted stock as of
December 31, 2009:
Date Declared
October 27, 2005
December 9, 2005
April 3, 2006
July 19, 2006
October 16, 2006
February 7, 2007
May 3, 2007
August 2, 2007
November 1, 2007
February 7, 2008
May 8, 2008
August 7, 2008
November 6, 2008
February 12, 2009
May 7, 2009
August 6, 2009
October 15, 2009
December 16, 2009
Record Date
November 1, 2005
January 6, 2006
April 10, 2006
July 31, 2006
November 6, 2006
February 19, 2007
May 16, 2007
August 16, 2007
November 16, 2007
February 15, 2008
May 16, 2008
August 15, 2008
November 14, 2008
February 23, 2009
May 15, 2009
August 14, 2009
October 20, 2009
December 24, 2009
Payment Date
November 17, 2005
January 27, 2006
May 5, 2006
August 28, 2006
December 1, 2006
March 19, 2007
June 18, 2007
September 17, 2007
December 17, 2007
March 17, 2008
June 16, 2008
September 15, 2008
December 15, 2008
March 30, 2009
June 15, 2009
September 14, 2009
November 23, 2009
December 30, 2009
Amount
Per Share
$0.025
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.300
0.340
0.340
0.340
0.320*
0.300
0.300
0.300
0.040
$5.005
Of the dividends declared during the year ended December 31, 2009, 100% is distribution of ordinary income. Of the
dividends declared during the year ended December 31, 2008, $1.23 comprised ordinary income and $0.09 comprised long
term capital gains.
On February 12, 2009, the Board of Directors declared a dividend of $0.32 per share to shareholders of record as of
February 23, 2009 and payable on March 30, 2009. In accordance with Revenue Procedure 2009-15 providing temporary
guidance regarding certain stock distribution for public traded RICs, our Board of Directors determined that approximately
90% of the dividend would be paid in newly issued shares of our common stock and no more than 10% will be paid in cash.
The liquidity provided to us by paying 90% of the dividend in newly issued shares of common stock will assist us in
preservation of capital, which we believe is prudent in the current economy.
Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid
from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is
mailed to our stockholders. 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 tax return of capital to our stockholders.
We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its
shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee
income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes
due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized
appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains
realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to
recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes
or other amounts,
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including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable
income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes
contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from
contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt
securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and
depreciation and amortization expense.
Pursuant to a recent revenue procedure, the IRS has indicated that it will treat distributions from certain publicly traded
RICs (including BDCs) that are paid part in cash and part in stock as dividends that would satisfy the RIC’s annual distribution
requirements and qualify for the dividends paid deduction for income tax purposes. In order to qualify for such treatment, the
revenue procedure requires that at least 10% of the total distribution be paid in cash and that each shareholder have a right to
elect to receive its entire distribution in cash. If the number of share-holders electing to receive cash would cause cash
distributions to be in excess of 10%, then each shareholder electing to receive cash would receive a proportionate share of the
cash to be distributed (although no shareholder electing to receive cash may receive less than 10% of such shareholder’s
distribution in cash). This revenue procedure applies to distributions made with respect to taxable years ending prior to
January 1, 2012.
We have distributed and currently intend to distribute sufficient dividends to eliminate taxable income. Effective in 2009,
our Board of Directors adopted a policy to distribute four quarterly distributions in an amount that approximates 90-95% of
our taxable income. In addition, at the end of the year we may also pay an additional special dividend, such that we may
distribute approximately 98% of our annual taxable income in the year it was earned, instead of spilling over our excess
taxable income. We will continue to review our dividend policy on a periodic basis. We are subject to a nondeductible federal
excise tax if we do not distribute at least 98% of our capital gains and net income for each one year period ending on
October 31st. In December 2009 we paid a special fifth dividend of $0.04 per share and, as such, at December 31, 2009, no
excise tax was recorded because we distributed greater than 98% of capital gains and net income in 2009.
The table below shows the detail of our distributions for the years ended December 31, 2009 and 2008:
(in thousands)
Ordinary Income
Capital Gains
Return of Capital
Tax Reported on tax form 1099-DIV
2009
$43,914
—
—
$43,914
2008
$40,780
2,502
—
$43,282
On February 11, 2010, the Board of Directors declared a cash dividend of $0.20 per share to shareholders of record as of
February 19, 2010 and payable on March 19, 2010.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and
expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are
based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results
of operations and financial condition.
Valuation of Portfolio Investments. The most significant estimate inherent in the preparation of our consolidated
financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of
investments recorded.
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At December 31, 2009, approximately 73% of our total assets represented investments in portfolio companies that are
valued at fair value by the Board of Directors. Value, as defined in Section 2(a) (41) of the 1940 Act, is (i) the market price for
those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as
determined in good faith by the Board of Directors in accordance with established valuation procedures and the
recommendation of the Valuation Committee of the Board of Directors. Since there is typically no readily available market
value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good
faith by our board pursuant to a valuation policy and a consistent valuation process. Due to the inherent uncertainty in
determining the fair value of investments that do not have a readily available market value, the fair value of our investments
determined in good faith by our board may differ significantly from the value that would have been used had a ready market
existed for such investments, and the differences could be material.
Consistent with ASC 820, the Company determines fair value to be the amount for which an investment could be
exchanged in a current sale, which assumes an orderly disposition over a reasonable period of time between willing parties
other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that no ready market exists for
substantially all of the securities in which it invests.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each individual investment
on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has decreased
in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate,
we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and,
therefore, that our investment has also appreciated in value.
As a business development company, we invest primarily in illiquid securities including debt and equity-related securities
of private companies. Our investments are generally subject to some restrictions on resale and generally have no established
trading market. Because of the type of investments that we make and the nature of our business, our valuation process requires
an analysis of various factors. Our valuation methodology includes the examination of, among other things, the underlying
investment performance, financial condition and market changing events that impact valuation, estimated remaining life, and
interest rate spreads of similar securities as of the measurement date. If there is a significant deterioration of the credit quality
of a debt investment, we may consider other factors that a hypothetical market participant would use to estimate fair value,
including the proceeds that would be received in a liquidation analysis.
With respect to private debt and equity securities, each investment is valued using industry valuation benchmarks, and,
where appropriate, the value is assigned a discount reflecting the illiquid nature of the investment, and our minority, non-
control position. When a qualifying external event such as a significant purchase transaction, public offering, or subsequent
debt or equity sale occurs, the pricing indicated by the external event will be used to corroborate our private debt or equity
valuation. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external
event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation
measurement date. We may consider, but are not limited to, industry valuation methods such as price to enterprise value or
price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry
benchmarks in our evaluation of the fair value of our investment. Securities that are traded in the over-the-counter market or
on a stock exchange will be valued at the prevailing bid price on the valuation date.
Our Board of Directors has engaged an independent valuation firm to provide us with valuation assistance with respect to
certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to
provide us with assistance regarding our determination of the fair value of selected
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portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. However, our
Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith.
Income Recognition. Interest income is recorded on the accrual basis and is recognized as earned in accordance with the
contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Original Issue Discount,
(“OID”), initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt
securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days
or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other
obligations, we will, as a general matter, place the loan on non-accrual status and cease recognizing interest income on that
loan until all principal has been paid. However, we may make exceptions to this policy if the investment has sufficient
collateral value and is in the process of collection. There were five and four loans on non-accrual status as of December 31,
2009 and 2008 with a fair value of approximately $10.5 million and $864,000, respectively. The cost of non-accrual loans are
approximately $25.5 million and $2.9 million as of December 31, 2009 and 2008, respectively. The increase of the non-accrual
loan value in 2009 is primarily driven by the investment in one consumer business portfolio company. There were no loans on
non accrual status as of December 31, 2007.
Paid-In-Kind and End of Term Income. Contractual paid-in-kind (“PIK”) interest, which represents contractually
deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual
basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is
insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest
due. In addition, we may also be entitled to an end-of-term payment that we amortize into income over the life of the loan. To
maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even
though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the
liquidation of certain investments. For the year ended December 31, 2009, 2008 and 2007, approximately $2.9 million,
$1.0 million and $381,000 in PIK income was recorded respectively.
Fee Income. Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence
and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and
other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management
fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then
amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity
interests are received from the borrower as additional origination fees.
Stock-Based Compensation. We have issued and may, from time to time, issue additional stock options and restricted
stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We
follow ASC 718, formally known as FAS 123 “Share-Based Payments” to account for stock options granted. Under ASC 718,
compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the
award and is recognized.
Federal Income Taxes. We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and,
as such, will not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To
qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code.
We are subject to a non-deductible federal excise tax if we do not distribute at least 98% of our taxable income and 98% of our
capital gain net income for each 1 year period ending on October 31. At December 31, 2009, no excise tax was recorded. At
December 31, 2008, we recorded a liability for excise tax of approximately $203,000 on income and capital gains of
approximately $5.0 million which was distributed in 2009.
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Because federal income tax regulations differ from accounting principles generally accepted in the United States,
distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for
financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among
capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of
income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the
treatment of short-term gains as ordinary income for tax purposes.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards
No. 168—The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, or
SFAS 168. SFAS 168 introduced a new Accounting Standard Codification, or ASC, which organized current and future
accounting standards into a single codified system. SFAS 168, which is now referred to as ASC Topic 105—Generally
Accepted Accounting Principles, or ASC 105, under the new codification, superseded, but did not significantly change, all
previously existing accounting standards. ASC 105 was effective for interim periods ending after September 15, 2009.
We adopted ASC 105 beginning with our quarter report on Form 10Q for the quarter ended September 30, 2009. In
connection with adoption of this standard, The Company’s discussion about specific accounting standards must now reference
the standards as set forth in the new codification. The original reference as well as the new ASC reference has been included to
assist readers of the financial statements.
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1—Interim Disclosures about Fair
Value of Financial Instruments, which was subsequently incorporated into ASC Topic 825—Financial Instruments. The April
2009 guidance requires disclosures about financial instruments, including fair value, carrying amount, and method and
significant assumptions used to estimate the fair value. This standard was adopted as of June 30, 2009. The adoption of this
standard did not have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. FAS 115-2 and 124-2, Recognition and Presentation of Other-
Than-Temporary Impairment, which was subsequently included in ASC 320-10-35. This guidance amends the existing
guidance regarding impairments for investments in debt securities. Specifically, it changes how companies determine if an
impairment is considered to be other-than-temporary and the related accounting. This standard also requires increased
disclosures. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS 165—Subsequent Events, which was subsequently included in ASC Topic 855—
Subsequent Events, or ASC 855. This guidance establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued, and specifically requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date. We adopted this guidance during the
quarter ended June 30, 2009.
In February 2010, the FASB issued ASU 2010-09 to amend ASC 855 to address certain implementation issues, including
(1) eliminating the requirement for SEC filers to disclose the date through which it has evaluated subsequent events, (2)
clarifying the period through which conduit bond obligors must evaluate subsequent events, and (3) refining the scope of the
disclosure requirements for reissued financial statements. The adoption of this standard did not have a significant impact on
our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of
Stock and Cash (“ASU 2001-01”), which addresses the accounting for a distribution to
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shareholders that offers them the ability to elect to receive their entire distribution in cash or shares of equivalent value with a
potential limitation on the total amount of cash that shareholders can receive in the aggregate. ASU 2010-01 clarifies that the
stock portion of such a distribution is considered a share issuance reflected prospectively in earnings per share. ASU 2010-01
is effective for interim and annual periods ending after December 15, 2009 and should be applied on a prospective basis. We
adopted the requirements of ASU 2010-01 in the fourth quarter of 2009 and its adoption did not have a material effect on our
consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”),
which amends ASC 820 and requires additional disclosure related to recurring and non-recurring fair value measurements with
respect to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies
existing disclosure requirements related to the level of disaggregation and disclosure about inputs and valuation techniques.
ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009 except for disclosures related to
activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. Management is currently evaluating the impact on our consolidated financial
statements of adopting ASU 2010-06.
Subsequent Events
Dividend Declaration
On February 11, 2010, the Board of Directors announced a dividend of $0.20 per share to shareholders of record as of
February 19, 2010 and payable on March 19, 2010. This is the Company’s eighteenth consecutive quarterly dividend
declaration since its initial public offering, and will bring the total cumulative dividends declared to-date to $5.21 per share.
Liquidity and Capital Resources
In February of 2010, we closed on our new $20.0 million credit facility with Union Bank, a one year revolving credit
facility. Pricing of the credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans,
and secured by loans in the borrowing base.
In February 2010, we extended the maturity date of the Wells Facility to August of 2011 from August 2010 under the
same terms and conditions of the existing agreement. We have also commenced negotiations to expand the Wells Facility.
In February 2010, we responded to the Small Business Administration’s comment letter relating to our second SBIC
license for an additional $75 million of borrowings. We anticipate that the license should be approved during the spring of
2010; however there can be no assurance that the SBA will grant Hercules a second license or when the license will be
approved.
Share Repurchase Program
In February 2010, our Board of Directors approved a $35.0 million open market share repurchase program. This program
replaces a $15.0 million repurchase program which expired in November 2009. We may repurchase common stock in the open
market, including block purchases, at prices that may be above or below the net asset value as reported in our then most
recently published financial statements. We anticipate that the manner, timing, and amount of any share purchases will be
determined by company management based upon the evaluation of market conditions, stock price, and additional factors in
accordance with regulatory requirements. As a 1940 Act reporting company, we are required to notify shareholders of the
existence of a repurchase
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program when such a program is initiated or implemented. The repurchase program does not require Hercules to acquire any
specific number of shares and may be extended, modified, or discontinued at any time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. As of December 31, 2009, approximately
61.3% of our portfolio loans were at variable rates or at variable rates with a floor rate and 38.7% of our loans were at fixed
rates. Over time additional investments may be at variable rates. We do not currently engage in any hedging activities.
However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures,
options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit
our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with
respect to our portfolio of investments. Interest rates on our borrowings are based primarily on LIBOR. Borrowings under our
SBA program are fixed at the ten-year treasury every March and September for borrowings of the preceding six months.
Borrowings under the program are charged interest based on ten year treasury rates plus a spread and the rates are generally set
for a pool of debentures issued by the SBA in six month periods. The rates of borrowings under the various draws from the
SBA beginning in April 2007 and set semiannually in March and September range from 4.233% to 5.725%. In addition, the
SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the
SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fee on debenture pooling date on
September 23, 2009 was 0.406%. The annual fees on other debentures have been set at 0.906%. Interest is payable semi-
annually and there are no principal payments required on these issues prior to maturity. Debentures under the SBA generally
mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA
debentures will occur in April 2017.
Interest payments on our SBA debentures are payable semi-annually and there are no principal payments required on
these issues prior to maturity.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.25% or
PRIME plus 2.0%, but not less than 5.0%. The Wells Facility requires the payment of a non-use fee of 0.5% annually, which
was reduced to 0.3% upon the one year anniversary of the credit facility on August 25, 2009. The Wells Facility is
collateralized by debt investment in our portfolio companies, and includes an advance rate equal to 50% of eligible loans
placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding
principal is due upon maturity, which includes the extension if exercised. There were no borrowings outstanding under this
facility at December 31, 2009. In February 2010 the facility was extended an additional year to August 2011 under the same
terms and conditions.
In February of 2010, we closed on our $20.0 million credit facility with Union Bank, a one year revolving credit facility.
Pricing of credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and secured
by loans in the borrowing base.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Management’s Annual Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities as of December 31, 2009 and December 31, 2008
Consolidated Schedule of Investments as of December 31, 2009
Consolidated Schedule of Investments as of December 31, 2008
Consolidated Statements of Operations for the three years ended December 31, 2009
Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2009
Consolidated Statements of Cash Flows for the three years ended December 31, 2009
Notes to Consolidated Financial Statements
Schedule of Investments In and Advances to Affiliates
78
79
81
82
94
108
109
110
111
138
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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Hercules Technology Growth Capital, Inc. (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control
over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the
supervision of the Company’s principal executive and principal financial and accounting officer, and effected by the
Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting
principles.
The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009 based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Based on this
assessment, management has concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2009.
The Company’s internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young
LLP, an independent registered public accounting firm who also audited the Company’s consolidated financial statements.
Their attestation report on the Company’s internal control over financial reporting appears on Page 80.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Hercules Technology Growth Capital, Inc.
We have audited the accompanying consolidated statements of assets and liabilities of Hercules Technology Growth
Capital, Inc. (the Company) including the consolidated schedules of investments, as of December 31, 2009 and 2008, and the
related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period
ended December 31, 2009, and the consolidated financial highlights for each of the five years in the period ended December
31, 2009. These financial statements and financial highlights are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and financial highlights. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by
correspondence with the custodian or by other appropriate auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects,
the consolidated financial position of Hercules Technology Growth Capital, Inc. at December 31, 2009 and 2008, the
consolidated results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended
December 31, 2009 and the consolidated financial highlights for each of the five years in the period ended December 31, 2009,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Hercules Technology Growth Capital, Inc.’s internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 12, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, California
March 12, 2010
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Hercules Technology Growth Capital, Inc.
We have audited Hercules Technology Growth Capital, Inc.’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Hercules Technology Growth Capital, Inc.’s management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hercules Technology Growth Capital, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statements of assets and liabilities, including the consolidated schedules of investments of Hercules
Technology Growth Capital, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations,
changes in net assets, and cash flows for each of the three years in the period ended December 31, 2009 and the consolidated
financial highlights for each of the five years in the period ended December 31, 2009. Our report dated March 12, 2010
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, California
March 12, 2010
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
December 31,
2009
December 31,
2008
$ 335,979
2,274
32,184
370,437
(2,425)
124,828
10,309
5,818
508,967
11,852
—
130,600
142,452
$ 366,515
$
35
409,036
(10,028)
(28,129)
(4,399)
$ 366,515
35,634
10.29
$
$ 579,079
2,222
—
581,301
(6,871)
17,242
8,803
8,197
608,672
9,432
89,582
127,200
226,214
$ 382,458
$
33
395,760
(11,297)
3,906
(5,944)
$ 382,458
33,096
11.56
$
Assets
Investments:
Non-Control/Non-Affiliate investments (cost of $353,648 and $583,592)
Affiliate investments (cost of $2,880 and $8,756)
Control investments (cost of $23,823 and $0, respectively)
Total investments, at value (cost of $380,351 and $592,348 respectively)
Deferred loan origination revenue
Cash and cash equivalents
Interest receivable
Other assets
Total assets
Liabilities
Accounts payable and accrued liabilities
Short-term credit facility
Long-term SBA debentures
Total liabilities
Net assets
Net assets consist of:
Common stock, par value
Capital in excess of par value
Unrealized depreciation on investments
Accumulated realized gains (losses) on investments
Distributions in excess of investment income
Total net assets
Shares of common stock outstanding ($0.001 par value, 60,000 authorized)
Net asset value per share
See notes to consolidated financial statements.
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Portfolio Company
Acceleron Pharmaceuticals, Inc.
Total Acceleron Pharmaceuticals, Inc.
Aveo Pharmaceuticals, Inc.
Total Aveo Pharmaceuticals, Inc.
Dicerna Pharmaceuticals, Inc.
Total Dicerna Pharmaceuticals, Inc.
Elixir Pharmaceuticals, Inc.
Total Elixir Pharmaceuticals, Inc.
EpiCept Corporation
Total EpiCept Corporation
Horizon Therapeutics, Inc.
Total Horizon Therapeutics, Inc.
Inotek Pharmaceuticals Corp.
Total Inotek Pharmaceuticals Corp.
Merrimack Pharmaceuticals, Inc.
Total Merrimack Pharmaceuticals, Inc.
Paratek Pharmaceuticals, Inc.
Total Paratek Pharmaceuticals, Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2009
(dollars in thousands)
Industry
Type of Investment
Drug Discovery Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
(1)
Drug Discovery
Senior Debt
Matures May 2012
Interest rate 11.13%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Drug Discovery
Senior Debt
Matures April 2012
Interest rate Prime + 9.20% or Floor rate of
12.95%
Preferred Stock Warrants
Preferred Stock Warrants
Drug Discovery Senior Debt
Matures October 2011
Interest rate Prime + 9.25% or Floor rate of
12.5%
Preferred Stock Warrants
Drug Discovery Common Stock Warrants
Common Stock Warrants
Drug Discovery Senior Debt
Matures July 2011
Interest rate Prime + 1.50%
Preferred Stock Warrants
$
4,699
Drug Discovery Preferred Stock
Drug Discovery Preferred Stock Warrants
Preferred Stock
Drug Discovery Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
82
Principal
Amount Cost
(2)
Value
(3)
$
69 $ 1,157
215
35
2,508
1,243
3,880
1,347
$ 14,564
14,509
190
104
24
14,827
14,509
725
219
76
15,529
$
6,603
6,434
206
31
6,671
6,434
128
22
6,584
$
8,067
8,067
217
8,284
8,067
—
8,067
8
40
48
38
201
239
4,638
231
4,869
1,500
1,500
155
2,000
2,155
137
1,000
1,137
4,638
—
4,638
353
353
269
1,699
1,968
55
1,000
1,055
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Portola Pharmaceuticals, Inc.
Total Portola Pharmaceuticals, Inc.
Recoly, N.V.
(5)
Total Recoly, N.V.
Total Drug Discovery (14.15%)*
Affinity Videonet, Inc.
(4)
Total Affinity Videonet, Inc.
E-band Communications, Inc.
(6)
Total E-Band Communications, Inc.
IKANO Communications, Inc.
Total IKANO Communications, Inc.
Neonova Holding Company
Total Neonova Holding Company
Peerless Network, Inc.
Total Peerless Network, Inc.
Ping Identity Corporation
Total Ping Identity Corporation
Industry
Drug Discovery
Type of Investment
(1)
Senior Debt
Matures April 2011
Interest rate Prime + 2.16%
Preferred Stock Warrants
Drug Discovery
Senior Debt
Matures June 2012
Interest rate Prime + 4.25%
Communications
& Networking
Senior Debt
Senior Debt
Matures June 2012
Interest rate Prime + 8.75% or
Floor rate of 12.00%
Matures June 2012
Interest rate Prime + 14.75% or
Floor rate of 18.00%
Revolving Line of Credit
Matures June 2012
Interest rate Prime + 9.75% or
Floor rate of 13.00%
Preferred Stock Warrants
Communications
& Networking
Preferred Stock
Communications
& Networking
Senior Debt
Matures August 2011
Interest rate 12.00%
Preferred Stock Warrants
Preferred Stock Warrants
Communications
& Networking
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Preferred Stock Warrants
See notes to consolidated financial statements.
83
Principal
Amount Cost
(2)
Value
(3)
$
6,666
$ 6,667
$ 6,671
152
288
6,819 6,959
$
2,576 2,576 2,576
2,576 2,576
50,233 51,848
$
2,318
2,326
2,326
$
2,000
2,052
2,052
$
500
500
500
102
83
4,980 4,961
2,880 2,274
2,880 2,274
$
6,472 6,472 6,472
45 —
72 —
6,589 6,472
94
250
344
42
247
289
95 —
800
800
1,000
1,095
52
168
52
168
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Purcell Systems, Inc.
Total Purcell Systems, Inc.
Rivulet Communications, Inc.
(4)
Total Rivulet Communications, Inc.
Seven Networks, Inc.
Total Seven Networks, Inc.
Stoke, Inc.
Total Stoke, Inc.
Tectura Corporation
Total Tectura Corporation
Zayo Bandwidth, Inc.
Total Zayo Bandwith, Inc.
Total Communications & Networking (15.85%)*
Atrenta, Inc.
Total Atrenta, Inc.
Industry
Type of Investment
(1)
Communications
& Networking
Preferred Stock Warrants
Communications
& Networking
Senior Debt
Matures March 2010
Interest rate Prime + 8.00% or
Floor rate of 12%
Preferred Stock Warrants
Common Stock
Communications
& Networking
Communications
& Networking
Preferred Stock Warrants
Preferred Stock Warrants
Communications
& Networking
Senior Debt
Matures September 2010
Interest rate Prime + 10.75% or
Floor rate of 14.00%
Revolving Line of Credit
Matures July 2011
Interest rate Prime + 10.75% or
Floor rate of 14.00%
Revolving Line of Credit
Matures July 2011
Interest rate Prime + 10.75% or
Floor rate of 14.00%
Preferred Stock Warrants
Principal
Amount Cost
(2)
Value
(3)
$
123
$
386
123
386
$
1,063
1,060
146
250
1,456
1,060
—
—
1,060
174
174
53
53
11
11
81
81
$
1,875
1,875
1,875
$
9,908
10,238
10,238
$
5,000
5,156
51
17,320
5,156
—
17,269
Communications
& Networking
Senior Debt
Matures November 2013
Interest rate Libor + 5.25%
$ 24,750
Software Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
84
24,750
24,750
59,816
102
34
95
250
481
24,317
24,317
58,088
99
32
159
375
665
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Blurb, Inc.
Total Blurb, Inc.
Braxton Technologies, LLC.
Total Braxton Technologies, LLC.
Bullhorn, Inc.
Total Bullhorn, Inc.
Clickfox, Inc.
Total Clickfox, Inc.
Forescout Technologies, Inc.
Total Forescout Technologies, Inc.
GameLogic, Inc.
Total GameLogic, Inc.
HighJump Acquisition, LLC.
Total HighJump Acquisition, LLC.
HighRoads, Inc.
Total HighRoads, Inc.
Infologix, Inc.
(4)(7)
Total Infologix, Inc.
Intelliden, Inc.
Total Intelliden, Inc.
PSS Systems, Inc.
Total PSS Systems, Inc.
Rockyou, Inc.
Total Rockyou, Inc.
Industry Type of Investment
(1)
Software
Senior Debt
Matures June 2011
Interest rate Prime + 3.50% or
Floor rate of 8.5%
Preferred Stock Warrants
Preferred Stock Warrants
Software Preferred Stock Warrants
Software Preferred Stock Warrants
Software
Senior Debt
Matures September 2011
Interest rate Prime + 5.00% or
Floor rate of 10.25%
Revolving Line of Credit
Matures July 2010
Interest rate Prime + 8.50% or
Floor rate of 13.5%
Preferred Stock Warrants
Software Preferred Stock Warrants
Software Preferred Stock Warrants
Software
Senior Debt
Matures May 2013
Interest rate Libor + 8.75% or
Floor rate of 12.00%
Software Preferred Stock Warrants
Software
Senior Debt
Matures November 2013
Interest rate 12.00%
Convertible Senior Debt
Matures November 2014
Interest rate 12.00%
Revolving Line of Credit
Matures May 2011
Interest rate 12.00%
Common Stock Warrants
Common Stock
Software Preferred Stock Warrants
Software Preferred Stock Warrants
Software Preferred Stock Warrants
See notes to consolidated financial statements.
Principal
Amount Cost
(2)
Value
(3)
$
3,329 $ 3,234 $ 3,234
25
128
69
299
3,558 3,431
188
188
43
43
116
116
248
248
$
3,754 3,683 3,683
$
2,000 2,003 2,003
177
143
5,863 5,829
99
99
92
92
77
77
1
1
$ 15,000 15,000 15,000
15,000 15,000
44
44
13
13
$
5,500 5,500 5,500
$
5,000 5,004 10,060
$
7,559 7,559 7,559
760 1,494
5,000 7,571
23,823 32,184
18 —
18 —
51
51
117
117
71
71
140
140
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Savvion, Inc.
(4)
Industry
Software
Type of Investment
(1)
Senior Debt
Total Savvion, Inc.
Sportvision, Inc.
Total Sportvision, Inc.
WildTangent, Inc.
Total WildTangent, Inc.
Total Software (16.82%)*
Luminus Devices, Inc.
Total Luminus Devices, Inc.
Maxvision Holding, LLC.
Total Maxvision Holding, LLC
Shocking Technologies, Inc.
Total Shocking Technologies, Inc.
Spatial Photonics, Inc.
Total Spatial Photonics Inc.
Matures February 2011
Interest rate Prime + 7.75% or
Floor rate of 11.00%
Revolving Line of Credit
Matures May 2010
Interest rate Prime + 6.75% or
Floor rate of 10.00%
Preferred Stock Warrants
Software
Preferred Stock Warrants
Software
Preferred Stock Warrants
Electronics &
Computer
Hardware
Senior Debt
Matures December 2011
Interest rate 12.875%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Electronics &
Computer
Hardware
Senior Debt
Matures October 2012
Interest rate Prime + 5.50%
Senior Debt
Matures April 2012
Interest rate Prime + 2.25%
Revolving Line of Credit
Matures April 2012
Interest rate Prime + 2.25%
Common Stock
Electronics &
Computer
Hardware
Senior Debt
Matures December 2010
Interest rate Prime + 2.50%
Preferred Stock Warrants
Electronics &
Computer
Hardware
Senior Debt
Matures April 2011
Interest rate 10.066%
Senior Debt
Mature April 2011
Interest rate 9.217%
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
86
Principal
Amount Cost
(2)
Value
(3)
$
2,117 $ 2,065 $ 2,065
$
1,500 1,500 1,500
52
183
3,617 3,748
39
39
47
47
77
238
238
77
53,272 61,647
$
1,062 1,062 1,062
183 —
84 —
334 —
1,663 1,062
$
5,000 5,220 5,220
$
4,409 4,409 4,409
$
$
2,500 2,580 2,580
81
170
12,290 12,379
1,867 1,858 1,858
63
119
1,921 1,977
$
1,980 1,957 1,957
$
197
197
197
129 —
500
129
2,783 2,283
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
VeriWave, Inc.
Total VeriWave, Inc.
Industry
Electronics &
Computer
Hardware
(1)
Type of Investment
Preferred Stock Warrants
Preferred Stock Warrants
Total Electronics & Computer Hardware (4.83%)*
Aegerion Pharmaceuticals, Inc.
(4)
Specialty
Pharmaceuticals
Aegerion Pharmaceuticals, Inc.
Total Aegerion Pharmaceuticals, Inc.
QuatRx Pharmaceuticals Company
Total QuatRx Pharmaceuticals Company
Total Specialty Pharmaceuticals (6.87%)*
Annie’s, Inc.
Total Annie’s, Inc.
IPA Holdings, LLC.
(4)
Specialty
Pharmaceuticals
Consumer &
Business
Products
Consumer &
Business
Products
Total IPA Holding, LLC.
Senior Debt
Matures September 2011
Interest rate Prime + 2.50% or
Floor rate of 11.00%
Convertible Senior Debt
Matures December 2010
Preferred Stock Warrants
Preferred Stock
Senior Debt
Matures October 2011
Interest rate Prime + 8.90% or
Floor rate of 12.15%
Convertible Senior Debt
Matures March 2010
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Senior Debt - Second Lien
Matures April 2011
Interest rate LIBOR + 6.50% or
Floor rate of 10.00%
Preferred Stock Warrants
Senior Debt
Matures November 2012
Interest rate Prime + 8.25% or
Floor rate of 12.5%
Senior Debt
Matures May 2013
Interest rate Prime + 11.25% or
Floor rate of 15.5%
Revolving Line of Credit
Matures November 2012
Interest rate Prime + 7.75% or
Floor rate of 12.00%
Common Stock Warrants
Common Stock
See notes to consolidated financial statements.
87
Principal
Amount
Cost
(2)
$
54
Value
(3)
$ —
46
100
—
—
18,757
17,701
$
$
$
$
5,481
5,482
5,482
279
279
69
1,000
6,830
279
253
1,019
7,033
15,417
15,299
15,299
1,888
1,888
220
307
750
18,464
25,294
2,861
—
—
—
18,160
25,193
$
6,000
6,060
321
6,381
6,060
113
6,173
$
$
$
9,500
9,633
9,633
6,500
6,625
6,625
856
856
275
500
17,889
856
—
120
17,234
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Market Force Information, Inc.
Total Market Force Information, Inc.
OnTech Operations, Inc.
(8)
Total OnTech Operations, Inc.
Wageworks, Inc.
Total Wageworks, Inc.
Industry
Consumer &
Business
Products
Consumer &
Business
Products
Consumer &
Business
Products
(1)
Type of Investment
Preferred Stock Warrants
Preferred Stock
Senior Debt
Matures June 2010
Interest rate 16.00%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Preferred Stock Warrants
Preferred Stock
Total Consumer & Business Products (6.95%)*
(8)
Custom One Design, Inc.
Semiconductors
Senior Debt
Total Custom One Design, Inc.
Enpirion, Inc.
Semiconductors
Total Enpirion, Inc.
iWatt Inc.
Total iWatt Inc.
NEXX Systems, Inc.
(4)
Total NEXX Systems, Inc.
Matures September 2010
Interest rate 11.50%
Common Stock Warrants
Senior Debt
Matures August 2011
Interest rate Prime + 2.00% or
Floor rate of 7.625%
Preferred Stock Warrants
Semiconductors
Preferred Stock Warrants
Preferred Stock
Semiconductors
Senior Debt
Matures March 2010
Interest rate Prime + 3.50% or
Floor rate of 11.25%
Revolving Line of Credit
Matures June 2010
Interest rate Prime + 8.00% or
Floor rate of 13.25%
Revolving Line of Credit
Matures June 2010
Interest rate Prime + 8.00% or
Floor rate of 14.00%
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
88
Principal
Amount
Cost
(2)
$
24
Value
(3)
$ —
$
106
500
524
267
267
106
452
218
1,000
1,776
—
—
—
—
—
252
1,425
250
502
27,072
368
1,793
—
25,467
$
426
422
18
440
122
—
122
$
5,094
5,055
157
5,212
628
490
1,118
5,053
2
5,055
—
950
950
$
$
$
565
423
423
3,000
3,000
3,000
500
500
562
6
4,491
500
784
332
5,039
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Quartics, Inc.
Total Quartics, Inc.
Solarflare Communications, Inc.
Total Solarflare Communications, Inc.
Total Semiconductors (3.13%)*
Labopharm USA, Inc.
(5)
Total Labopharm USA, Inc.
Transcept Pharmaceuticals, Inc.
Total Transcept Pharmaceuticals, Inc.
Total Drug Delivery (5.86%)*
BARRX Medical, Inc.
Total BARRX Medical, Inc.
EKOS Corporation
Total EKOS Corporation
(8)
Gelesis, Inc.
Total Gelesis, Inc.
Gynesonics, Inc.
Total Gynesonics, Inc.
Industry
Semiconductors
Type of Investment
Senior Debt
(1)
Principal
Amount
Cost
(2)
Value
(3)
Matures May 2010
Interest rate 10.00%
Preferred Stock Warrants
Semiconductors
Senior Debt
Matures August 2010
Interest rate 11.75%
Preferred Stock Warrants
Common Stock
Drug Delivery
Senior Debt
Matures June 2012
Interest rate 10.95%
Common Stock Warrants
Drug Delivery Common Stock Warrants
Common Stock Warrants
Common Stock
Therapeutic
Senior Debt
Mature December 2011
Interest rate 11.00%
Revolving Line of Credit
Matures May 2010
Interest rate 10.00%
Preferred Stock Warrants
Preferred Stock
Therapeutic
Senior Debt
Interest rate Prime + 2.00%
Matures November 2010
Preferred Stock Warrants
Preferred Stock Warrants
Therapeutic
Senior Debt
Matures May 2012
Interest rate Prime + 7.5% or
Floor rate of 10.75%
Preferred Stock Warrants
Therapeutic
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
89
$
139 $
134 $
53
187
134
—
134
$
197
$
20,000
181
83
641
905
12,353
181
—
—
181
11,481
19,718
687
20,405
36
51
500
587
20,992
19,718
1,307
21,025
94
91
283
468
21,493
$
$
5,481
5,473
5,473
1,000
1,000
76
1,500
8,050
1,000
111
2,303
8,887
$
2,677
2,629
175
153
2,957
2,630
—
—
2,630
$
2,847
2,814
58
2,872
—
—
—
18
250
268
5
627
632
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Light Science Oncology, Inc.
Total Light Science Oncology, Inc.
Novasys Medical, Inc.
(4)
Industry
Therapeutic
Therapeutic
Type of Investment
Preferred Stock Warrants
(1)
Senior Debt
Matures January 2010
Interest rate 9.70%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Total Novasys Medical, Inc.
Total Therapeutic (3.68%)*
Cozi Group, Inc.
Total Cozi Group, Inc.
Invoke Solutions, Inc.
Total Invoke Solutions, Inc.
Prism Education Group Inc.
Total Prism Education Group Inc.
RazorGator Interactive Group, Inc.
(4)
Total RazorGator Interactive Group, Inc.
Spa Chakra, Inc.
(8)
Internet Consumer
& Business
Services
Preferred Stock Warrants
Preferred Stock
Internet Consumer
& Business
Services
Preferred Stock Warrants
Preferred Stock Warrants
Internet Consumer
& Business
Services
Senior Debt
Matures December 2010
Interest rate 11.25%
Preferred Stock Warrants
Internet Consumer
& Business
Services
Internet Consumer
& Business
Services
Revolving Line of Credit
Matures May 2010
Interest rate Prime + 6.00% or
Floor rate of 12.00%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Senior Debt
Principal
Amount
Cost
(2)
Value
(3)
$
$
99
99
26
26
$
295
$
801
295
71
54
1,000
1,420
15,665
295
—
—
1,000
1,295
13,470
148
—
177
325
56
26
82
789
43
832
7
7
129
29
158
790
104
894
$
10,000
10,000
14
28
1,000
11,042
10,000
223
33
1,037
11,293
Total Spa Chakra, Inc.
Total Internet Consumer & Business Services (5.55%)*
Lilliputian Systems, Inc.
Energy
Total Lilliputian Systems, Inc.
Total Energy (0.03%)*
Matures from December 2009 to October
2011
Interest rate from 16.45% to 17%
Preferred Stock Warrants
$
12,482
Preferred Stock Warrants
Common Stock Warrants
12,778
1
12,779
25,060
107
48
155
155
8,000
—
8,000
20,352
104
—
104
104
See notes to consolidated financial statements.
90
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Portfolio Company
Box.net, Inc.
Total Box.net, Inc.
Buzznet, Inc.
Total Buzznet, Inc.
XL Education Corp.
Total XL Education Corp.
hi5 Networkss, Inc.
Total hi5 Networks, Inc.
Jab Wireless, Inc.
Total Jab Wireless, Inc.
Solutionary, Inc.
Total Solutionary, Inc.
Ancestry.com, Inc.
Total Ancestry.com, Inc.
Good Technologies, Inc.
Total Good Technologies Inc.
Coveroo, Inc.
Total Coveroo, Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Industry Type of Investment
Information
Services
Senior Debt
(1)
Matures May 2011
Interest rate Prime + 1.50%
Senior Debt
Matures September 2011
Interest rate Prime + 0.50%
Preferred Stock Warrants
Information
Services
Preferred Stock Warrants
Preferred Stock
Information
Services
Information
Services
Common Stock
Senior Debt
Matures December 2010
Interest rate Prime + 2.5%
Senior Debt
Matures June 2011
Interest rate Prime + 0.5%
Preferred Stock Warrants
Information
Services
Senior Debt
Matures November 2012
Interest rate Prime + 3.50% or
Floor rate of 9.5%
Revolving Line of Credit
Matures October 2010
Interest rate Prime + 3.50% or
Floor rate of 9.5%
Preferred Stock Warrants
Information
Services
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Information
Services
Common Stock
Common Stock
Information
Services
Preferred Stock Warrants
See notes to consolidated financial statements.
91
Principal
Amount
Cost
(2)
Value
(3)
$
$
676
$
658
$
658
287
287
73
1,018
287
53
998
9
250
259
880
880
—
74
74
880
880
$
1,559
1,559
1,559
$
3,401
3,356
213
5,128
3,356
—
4,915
$
14,750
14,891
14,892
$
2,500
2,504
265
17,660
2,504
151
17,547
94
2
250
346
452
452
603
603
—
—
83
83
880
880
603
603
7
7
—
—
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Zeta Interactive Corporation
Industry
Type of Investment
(1)
Information Services
Senior Debt
Total Zeta Interactive Corporation
Total Information Services (10.30%)*
Novadaq Technologies, Inc.
Total Novadaq Technologies, Inc.
Optiscan Biomedical, Corp.
(5)
Optiscan Biomedical, Corp.
Total Optiscan Biomedical, Corp.
Total Diagnostic (3.11%)*
Kamada, LTD.
(5)
Total Kamada, LTD.
Labcyte, Inc.
Total Labcyte, Inc.
NuGEN Technologies, Inc.
Total NuGEN Technologies, Inc.
Solace Pharmaceuticals, Inc.
(4)
Total Solace Pharmaceuticals, Inc.
Total Biotechnology Tools (2.64%)*
Crux Biomedical, Inc.
Total Crux Biomedical, Inc.
Matures November 2012
Interest rate 9.50%
Senior Debt
Matures November 2012
Interest rate 10.50%
Preferred Stock Warrants
Preferred Stock
Diagnostic
Common Stock
Diagnostic
Senior Debt
Matures June 2011
Interest rate 10.25%
Preferred Stock Warrants
Preferred Stock
Biotechnology Tools Common Stock Warrants
Common Stock
Biotechnology Tools
Senior Debt
Matures November 2012
Interest rate Prime + 8.6% or
Floor rate of 11.85%
Common Stock Warrants
Biotechnology Tools Senior Debt
Matures November 2010
Interest rate Prime + 3.45% or
Floor rate of 6.75%
Senior Debt
Matures November 2010
Interest rate Prime + 1.70% or
Floor rate of 6.75%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Biotechnology Tools
Senior Debt
Matures August 2012
Interest rate Prime + 4.25% or
Floor rate of 9.85%
Preferred Stock Warrants
Preferred Stock Warrants
Surgical Devices
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
92
Principal
Amount
Cost
(2)
Value
(3)
$
4,731 $ 4,732 $ 4,731
$
6,484 6,719 6,719
172 —
310
500
12,123 11,760
38,476 37,740
542
1,567
542
1,567
$
7,696 7,516 7,515
342
760
3,000 3,000
11,276 10,857
12,843 11,399
159
149
794 1,161
953 1,310
$
3,500 3,323 3,323
235
192
3,515 3,558
$
785
780
780
$
$
442
442
442
391
45
41
33
587
500
1,800 2,241
2,617 2,560 2,560
42 —
54 —
2,656 2,560
8,924 9,669
37 —
26
26
250
287
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2009
(dollars in thousands)
Portfolio Company
Transmedics, Inc.
(4)(8)
Total Transmedics, Inc.
Total Surgical Devices (0.66%)*
Glam Media, Inc.
Total Glam Media, Inc.
Waterfront Media Inc.
Total Waterfront Media Inc.
Total Media/Content/Info (0.65%)*
Total Investments
Industry
Surgical Devices
Type of Investment
(1)
Senior Debt
Matures December 2011
Interest rate Prime + 5.25% or
Floor rate of 10.50%
Preferred Stock Warrants
Media/Content/Info Preferred Stock Warrants
Media/Content/Info Preferred Stock Warrants
Preferred Stock
Principal
Amount
Cost
(2)
Value
(3)
$
9,475
$
9,384
225
9,609
9,896
482
482
60
1,000
1,060
$
2,384
—
2,384
2,410
283
283
592
1,500
2,092
1,542
2,375
$380,351
$370,437
Value as a percent of net assets
*
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $17,409, $30,495 and $13,086,
respectively. The tax cost of investments is $379,600.
(3) Except for warrants in five publicly traded companies and common stock in five publicly traded companies, all investments are restricted at December 31, 2009.
No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio
companies.
(4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the
voting securities of the company.
(7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners as least 25% or more of the voting securities
of such company or has greater than 50% representation on its board.
(8) Debt is on non-accrual status at December 31, 2009, and is therefore considered non-income producing.
See notes to consolidated financial statements.
93
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2008
(dollars in thousands)
Portfolio Company
Acceleron Pharmaceuticals, Inc. (0.64%)*
(4)
Industry
Drug Discovery
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Acceleron Pharmaceuticals, Inc. (0.35%)
Total Acceleron Pharmaceuticals, Inc.
(4)
Aveo Pharmaceuticals, Inc. (3.99%)
Total Aveo Pharmaceuticals, Inc.
Elixir Pharmaceuticals, Inc. (2.91%)
(4)
Total Elixir Pharmaceuticals, Inc.
(4)
EpiCept Corporation (0.33%)
Total EpiCept Corporation
Horizon Therapeutics, Inc. (1.92%)
(4)
Total Horizon Therapeutics, Inc.
Inotek Pharmaceuticals Corp. (0.30%)
Total Inotek Pharmaceuticals Corp.
Memory Pharmaceuticals Corp. (2.87%)
(4)
Total Memory Pharmaceuticals Corp.
(4)
Merrimack Pharmaceuticals, Inc. (0.19%)
Merrimack Pharmaceuticals, Inc. (0.68%)
Total Merrimack Pharmaceuticals, Inc.
(4)
Paratek Pharmaceuticals, Inc. (0.04%)
Paratek Pharmaceuticals, Inc. (0.24%)
Total Paratek Pharmaceuticals, Inc.
Portola Pharmaceuticals, Inc. (3.14%)
(4)
Total Portola Pharmaceuticals, Inc.
Senior Debt
Matures January 2010
Interest rate 10.25%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Drug Discovery
Senior Debt
Matures November 2011
Interest rate 11.13%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Drug Discovery
Senior Debt
Matures December 2010 Interest rate Prime +
4.50%
Preferred Stock Warrants
Drug Discovery
Senior Debt
Matures April 2009
Interest rate 15.00%
Common Stock Warrants
Common Stock Warrants
Drug Discovery
Senior Debt
Matures July 2011
Interest rate Prime + 1.50%
Preferred Stock Warrants
Drug Discovery Preferred Stock
Drug Discovery
Senior Debt
Matures December 2010
Interest rate 11.45%
Common Stock Warrants
Drug Discovery Preferred Stock Warrants
Preferred Stock
Drug Discovery Preferred Stock Warrants
Preferred Stock
Drug Discovery
Senior Debt
Matures September 2011
Interest rate Prime + 2.16%
Preferred Stock Warrants
See notes to consolidated financial statements.
94
$
1,753 $ 1,728 $ 1,728
596
69
35
116
1,243 1,354
3,075 3,794
$ 15,000 14,904 14,904
257
190
83
104
24
28
15,222 15,272
$ 11,000 11,000 11,000
217
116
11,217 11,116
$
8
8
8
992
161
40
250
209 1,250
$
7,200 7,042 7,042
231
281
7,273 7,323
1,500 1,144
1,500 1,144
$ 11,879 10,979 10,979
1,751 —
12,730 10,979
155
743
2,000 2,610
2,155 3,353
164
137
1,000
926
1,137 1,090
$ 11,668 11,600 11,600
152
399
11,752 11,999
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Portfolio Company
Recoly, N.V. (0.79%)
(6)
Total Recoly, N.V.
Total Drug Discovery (18.39%)
(4)
Affinity Videonet, Inc. (1.70%)
Total Affinity Videonet, Inc.
E-Band Communications, Inc. (0.24%)
(7)
Total E-Band Communications, Inc.
IKANO Communications, Inc. (3.22%)
(4)
Total IKANO Communications, Inc.
Kadoink, Inc. (0.50%)
(4)
Kadoink, Inc. (0.07%)
Total Kadoink, Inc.
Neonova Holding Company (2.35%)
Neonova Holding Company (0.06%)
Total Neonova Holding Company
Peerless Network, Inc. (0.34%)
(5)(7)
Peerless Network, Inc. (0.00%)
Total Peerless Network, Inc.
Ping Identity Corporation (0.00%)
(4)
Total Ping Identity Corporation
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Industry
Drug Discovery
Senior Debt
Type of Investment
(1)
Matures May 2012
Interest rate Prime + 4.25%
Principal
Amount Cost
(2)
Value
(3)
$
3,000 $ 3,000 $ 3,000
3,000 3,000
69,270 70,320
$
4,000 3,942 3,942
$
2,000 2,000 2,000
$
500
500
500
75
57
6,517 6,499
2,000
2,000
904
904
$ 11,946 11,946 11,946
147
45
73
221
12,064 12,314
$
$
$
1,879 1,832 1,832
72
73
250
250
2,155 2,154
9,000 8,931 8,931
66
94
250
224
9,275 9,221
1,378 1,318 1,318
95 —
1,000 —
2,413 1,318
52
52
2
2
Communications
& Networking
Senior Debt
Matures June 2012
Interest rate Prime + 4.50%
Senior Debt
Matures June 2012
Interest rate Prime + 5.50%
Revolving Line of Credit
Matures June 2012
Interest rate Prime + 3.50%
Preferred Stock Warrants
Communications
& Networking
Preferred Stock
Communications
& Networking
Senior Debt
Matures April 2011
Interest rate 11.00%
Preferred Stock Warrants
Preferred Stock Warrants
Communications
& Networking
Senior Debt
Matures April 2011
Interest rate Prime + 2.00%
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Senior Debt
Matures September 2012
Interest rate Prime + 3.25%
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Senior Debt
Matures June 2011
Interest rate Prime + 3.25%
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Preferred Stock Warrants
See notes to consolidated financial statements.
95
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
Purcell Systems, Inc. (2.55%)
Industry
Communications
& Networking
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Total Purcell Systems, Inc.
Rivulet Communications, Inc. (0.51%)
(5)
Rivulet Communications, Inc. (0.00%)
Total Rivulet Communications, Inc.
Seven Networks, Inc. (2.64%)
(4)
Total Seven Networks, Inc.
Stoke, Inc. (0.71%)
Total Stoke, Inc.
Tectura Corporation (6.54%)
(4)
Total Tectura Corporation
Senior Debt
Matures June 2010
Interest rate Prime + 3.50%
Revolving Line of Credit
Matures July 2009
Interest rate Prime + 2.75%
Senior Debt
Matures July 2011
Interest rate Prime + 3.50%
Preferred Stock Warrants
Communications
& Networking
Senior Debt
Matures April 2010
Interest rate 10.50%
Preferred Stock Warrants
Preferred Stock
Communications
& Networking
Senior Debt
Matures April 2010
Interest rate Prime + 6.00%
Revolving Line of Credit
Matures September 2009
Interest rate Prime + 5.00%
Preferred Stock Warrants
Communications
& Networking
Communications
& Networking
Senior Debt
Matures August 2010
Interest rate 10.55%
Senior Debt
Matures August 2010
Interest rate 10.05%
Senior Debt
Matures August 2010
Interest rate 7.30%
Preferred Stock Warrants
Senior Debt
Matures April 2012
Interest rate LIBOR + 6.90%
Revolving Line of Credit
Matures April 2009
Interest rate LIBOR + 6.35%
Revolving Line of Credit
Matures March 2009
Interest rate LIBOR + 7.50%
Preferred Stock Warrants
See notes to consolidated financial statements.
96
$
1,659 $ 1,601 $ 1,601
$
6,000 6,000 6,000
$
$
1,600 1,600 1,600
123
538
9,324 9,739
1,982 1,960 1,960
50 —
250
4
2,260 1,964
$
6,941 6,875 6,875
$
3,000 3,000 3,000
174
208
10,049 10,083
$
574
545
545
$
1,144 1,144 1,144
$
946
946
946
53
91
2,688 2,726
$
7,232 7,439 7,439
$ 12,000 12,000 12,000
$
5,507 5,507 5,507
77
51
24,997 25,023
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
Wireless Channels, Inc. (3.04%)
(4)
Total Wireless Channels, Inc.
Zayo Bandwidth, Inc. (6.42%)
Total Zayo Bandwith, Inc.
Total Communications & Networking (30.89%)
Atrenta, Inc. (2.36%)
(5)
Atrenta, Inc. (0.05%)
Total Atrenta, Inc.
Blurb, Inc. (1.76%)
Total Blurb, Inc.
Braxton Technologies, LLC. (2.64%)
(5)
Total Braxton Technologies, LLC.
Bullhorn, Inc. (0.26%)
Total Bullhorn, Inc.
Cittio, Inc. (0.19%)
Total Cittio, Inc.
Industry
Communications
& Networking
Type of Investment
(1)
Senior Debt
Matures April 2010
Interest rate Prime + 4.25%
Senior Debt
Matures August 2010
Interest rate Prime + 0.50%
Preferred Stock Warrants
Communications
& Networking
Senior Debt
Matures November 2013
Interest rate Libor + 5.25%
Software
Software
Senior Debt
Matures January 2010
Interest rate 11.50%
Revolving Line of Credit
Matures October 2009
Interest rate Prime + 2.00%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Senior Debt
Matures December 2009
Interest rate 9.55%
Senior Debt
Matures June 2011
Interest rate Prime + 3.50%
Preferred Stock Warrants
Preferred Stock Warrants
Software
Senior Debt
Matures July 2012
Interest rate Libor + 7.25%
Preferred Stock Warrants
Software
Senior Debt
Matures November 2010
Interest rate Prime + 3.75%
Preferred Stock Warrants
Software
Senior Debt
Matures May 2010
Interest rate 11.00%
Preferred Stock Warrants
See notes to consolidated financial statements.
97
Principal
Amount
Cost
(2)
Value
(3)
$ 10,000
$ 10,384
$ 10,384
$
895
895
155
11,434
895
344
11,623
$ 25,000
25,000
25,000
120,228
24,563
24,563
118,133
$
$
$
$
2,789
2,742
2,742
6,000
6,000
103
34
71
250
9,200
6,000
176
58
43
197
9,216
1,414
1,405
1,405
5,000
4,701
25
299
6,430
4,701
350
276
6,732
$ 10,000
9,916
188
10,104
9,916
172
10,088
$
782
$
731
760
43
803
720
53
773
760
222
982
720
—
720
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Form 10-K
Page 103 of 149
Table of Contents
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
Clickfox, Inc. (0.65%)
Total Clickfox, Inc.
Forescout Technologies, Inc. (0.40%)
(4)
(4)
Total Forescout Technologies, Inc.
GameLogic, Inc. (0.00%)
Total GameLogic, Inc.
(4)
Gomez, Inc. (0.22%)
Total Gomez, Inc.
HighJump Acquisition, LLC. (3.92%)
(4)
Total HighJump Acquisition, LLC.
HighRoads, Inc. (0.02%)
Total HighRoads, Inc.
Infologix, Inc. (5.49%)
(4)
(4)
Total Infologix, Inc.
Intelliden, Inc. (0.37%)
Total Intelliden, Inc.
Oatsystems, Inc. (0.00%)
Total Oatsystems, Inc.
Proficiency, Inc. (0.00%)
(4)
(6)(7)(8)
Proficiency, Inc. (0.00%)
Total Proficiency, Inc.
Industry
Software
Senior Debt
Type of Investment
(1)
Matures September 2011
Interest rate 10.25%
Preferred Stock Warrants
Software
Senior Debt
Matures August 2009
Interest rate 11.15%
Revolving Line of Credit
Matures March 2009
Interest rate Prime + 2.25%
Preferred Stock Warrants
Software Preferred Stock Warrants
Software Preferred Stock Warrants
Software
Senior Debt
Matures May 2013
Interest rate Prime + 7.50%
Software Preferred Stock Warrants
Software
Senior Debt
Matures May 2012
Interest rate Prime + 8.75%
Revolving Line of Credit
Matures November 2009
Interest rate Prime + 6.75%
Senior Debt
Matures February 2010
Interest rate 13.20%
Preferred Stock Warrants
Software
Software Preferred Stock Warrants
Software
Senior Debt
Matures August 2012
Interest rate 8.00%
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
98
Principal
Amount Cost
(2)
Value
(3)
$
2,500 $ 2,357 $ 2,357
163
131
2,520 2,488
$
906
892
892
$
500
500
500
99
130
1,491 1,522
92
92
35
35
3
3
833
833
$ 15,000 15,000 15,000
15,000 15,000
44
44
59
59
$ 12,000 12,007 12,007
$
9,000 9,000 9,000
21,007 21,007
$
1,399 1,394 1,394
18
38
1,412 1,432
67 —
67 —
$
1,500 1,497 —
97 —
2,750 —
4,344 —
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Form 10-K
Page 104 of 149
Table of Contents
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
PSS Systems, Inc. (0.65%)
(4)
Industry
Software
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Total PSS Systems, Inc.
(4)
Rockyou, Inc. (0.72%)
Total Rockyou, Inc.
Savvion, Inc. (1.42%)
(4)
(4)
Total Savvion, Inc.
Sportvision, Inc. (0.02%)
Total Sportvision, Inc.
WildTangent, Inc. (0.01%)
Total WildTangent, Inc.
Total Software (21.15%)
Luminus Devices, Inc. (3.08%)
(4)
Total Luminus Devices, Inc.
Maxvision Holding, LLC. (2.71%)
(4)
Maxvision Holding, LLC. (0.07%)
Total Maxvision Holding, LLC
Shocking Technologies, Inc. (0.94%)
(4)
Total Shocking Technologies, Inc.
Senior Debt
Matures May 2010
Interest rate 11.48%
Preferred Stock Warrants
Software
Senior Debt
Software
Matures May 2011
Interest rate Prime + 2.50%
Preferred Stock Warrants
Senior Debt
Matures April 2009
Interest rate Prime + 3.45%
Revolving Line of Credit
Matures March 2009
Interest rate Prime + 4.45%
Revolving Line of Credit
Matures March 2009
Interest rate Prime + 3.00%
Preferred Stock Warrants
Software
Preferred Stock Warrants
Software
Preferred Stock Warrants
Electronics &
Computer
Hardware
Senior Debt
Matures December 2010
Interest rate 12.875%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Electronics &
Computer
Hardware
Senior Debt
Matures October 2012
Interest rate Prime + 5.50%
Senior Debt
Matures April 2012
Interest rate Prime + 2.25%
Common Stock
Electronics &
Computer
Hardware
Senior Debt
Matures December 2010
Interest rate 9.75%
Senior Debt
Matures December 2010
Interest rate 7.50%
Preferred Stock Warrants
See notes to consolidated financial statements.
99
$
$
2,423 $ 2,403 $ 2,403
51
96
2,454 2,499
2,750 2,674 2,674
117
66
2,791 2,740
$
331
279
279
$
3,366 3,366 3,366
$
1,619 1,619 1,619
53
168
5,317 5,432
39
39
91
91
41
238
238
41
84,161 80,885
$ 11,792 11,514 11,514
183
50
84
25
189
334
12,115 11,778
$
5,000 5,000 5,000
$
5,167 5,363 5,363
81
268
10,444 10,631
$
225
192
192
$
3,365 3,365 3,365
55
63
3,620 3,612
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Form 10-K
Page 105 of 149
Table of Contents
Portfolio Company
SiCortex, Inc. (1.83%)
Total SiCortex, Inc.
Spatial Photonics, Inc. (0.97%)
(4)
Spatial Photonics, Inc. (0.13%)
Total Spatial Photonics Inc.
VeriWave, Inc. (0.85%)
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Industry
Electronics &
Computer
Hardware
Electronics &
Computer
Hardware
Electronics &
Computer
Hardware
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Senior Debt
Matures December 2010
Interest rate 10.95%
Preferred Stock Warrants
Senior Debt
Matures April 2011
Interest rate 10.066%
Senior Debt
Mature April 2011
Interest rate 9.217%
Preferred Stock Warrants
Preferred Stock
Senior Debt
Matures May 2010
Interest rate 10.75%
Revolving Line of Credit
Matures September 2009
Interest rate Prime + 4.50%
Preferred Stock Warrants
Preferred Stock Warrants
Senior Debt
$
7,364 $ 7,274 $ 6,774
164
216
7,438 6,990
$
3,216 3,146 3,146
$
321
321
321
251
131
500
500
4,098 4,218
$
2,549 2,507 2,507
$
630
630
630
76
54
38
46
3,237 3,251
40,952 40,480
Matures September 2011
Interest rate Prime + 2.50%
Covertible Senior Debt Matures December 2009 Interest
rate Prime + 2.50%
Preferred Stock Warrants
Preferred Stock
$
$
Total VeriWave, Inc.
Total Electronics & Computer Hardware (10.58%)
Aegerion Pharmaceuticals, Inc. (2.08%)
(5)
Specialty
Pharmaceuticals
Aegerion Pharmaceuticals, Inc. (0.26%)
Total Aegerion Pharmaceuticals, Inc.
(4)
Panacos Pharmaceuticals, Inc. (0.00%)
Panacos Pharmaceuticals, Inc. (0.01%)
Total Panacos Pharmaceuticals, Inc.
(4)
Quatrx Pharmaceuticals Company (5.26%)
(4)
Quatrx Pharmaceuticals Company (0.20%)
Total Quatrx Pharmaceuticals Company
Total Specialty Pharmaceuticals (7.81%)
Specialty
Pharmaceuticals Common Stock Warrants
Common Stock
Specialty
Pharmaceuticals
Senior Debt
Matures October 2011
Interest rate Prime +4.85%
Covertible Senior Debt Matures May 2009 Interest rate
Prime + 2.50%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
100
7,525 7,525 7,525
178
178
178
69
272
1,000 1,000
8,772 8,975
877
410
1,287
11
28
39
$ 20,000 19,761 19,761
$
82
82
82
220
143
308
120
750
750
21,121 20,856
31,180 29,870
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Form 10-K
Page 106 of 149
Table of Contents
Portfolio Company
Annie’s, Inc. (1.59%)
Total Annie’s, Inc.
IPA Holdings, LLC. (4.50%)
(4)
IPA Holding, LLC.(0.12%)
Total IPA Holding, LLC.
Market Force Information, Inc. (0.01%)
(4)
Market Force Information, Inc. (0.07%)
Total Market Force Information, Inc.
(8)
OnTech Operations, Inc. (0.01%)
OnTech Operations, Inc. (0.00%)
Total OnTech Operations, Inc.
Wageworks, Inc. (0.23%)
(4)
Wageworks, Inc. (0.07%)
Total Wageworks, Inc.
Total Consumer & Business Products (6.60%)
Custom One Design, Inc. (0.14%)
(8)
Total Custom One Design, Inc.
Enpirion, Inc. (1.97%)
Total Enpirion, Inc.
(4)
iWatt Inc. (0.07%)
iWatt Inc. (0.25%)
Total iWatt Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Industry
Consumer &
Business
Products
Consumer &
Business
Products
Consumer &
Business
Products
Consumer &
Business
Products
Consumer &
Business
Products
Type of Investment
(1)
Senior Debt - Second Lien
Matures April 2011
Interest rate LIBOR + 6.50%
Preferred Stock Warrants
Senior Debt
Matures November 2012
Interest rate Prime + 3.50%
Senior Debt
Matures May 2013
Interest rate Prime + 6.00%
Revolving Line of Credit
Matures November 2012
Interest rate Prime + 2.50%
Common Stock
Preferred Stock Warrants
Preferred Stock
Revolving Line of Credit
Matures June 2009
Interest rate Prime + 5.625%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Preferred Stock Warrants
Preferred Stock
Semiconductors
Senior Debt
Matures September 2010
Interest rate 11.50%
Common Stock Warrants
Semiconductors
Senior Debt
Matures August 2011
Interest rate Prime + 4.00%
Preferred Stock Warrants
Semiconductors Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
101
Principal
Amount Cost
(2)
Value
(3)
$
6,000 $ 5,824 $ 5,824
321
273
6,145 6,097
$ 10,000 10,000 10,000
$
6,500 6,590 6,590
$
600
600
600
500
447
17,690 17,637
24
500
40
274
524
314
$
54
54
54
453 —
218 —
1,000 —
54
1,725
252
881
266
250
502 1,147
26,586 25,249
$
775
765
523
18 —
523
783
$
7,500 7,389 7,389
157
136
7,546 7,525
28
46
13
51
13
73
222
458
490
961
1,118 1,237
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Form 10-K
Page 107 of 149
Table of Contents
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
NEXX Systems, Inc. (2.03%)
(4)
Industry
Semiconductors
Senior Debt
Type of Investment
(1)
Matures March 2010
Interest rate Prime + 3.50%
Revolving Line of Credit
Matures December 2009
Interest rate Prime + 3.00%
Revolving Line of Credit
Matures December 2009
Interest rate Prime + 5.00%
Preferred Stock Warrants
Semiconductors
Senior Debt
Total NEXX Systems, Inc.
(4)(8)
Quartics, Inc. (0.08%)
Total Quartics, Inc.
Solarflare Communications, Inc. (0.11%)
(4)
Semiconductors
Solarflare Communications, Inc. (0.00%)
Total Solarflare Communications, Inc.
Total Semiconductors (4.65%)
Labopharm, Inc. (5.55%)
(4)(6)
Total Labopharm USA, Inc.
Transcept Pharmaceuticals, Inc. (0.90%)
(5)
Transcept Pharmaceuticals, Inc. (0.07%)
Total Transcept Pharmaceuticals, Inc.
Total Drug Delivery (6.52%)
BARRX Medical, Inc.(0.86%)
(4)
(4)
BARRX Medical, Inc. (0.36%)
Total BARRX Medical, Inc.
Matures August 2010
Interest rate 8.80%
Preferred Stock Warrants
Senior Debt
Matures August 2010
Interest rate 11.75%
Preferred Stock Warrants
Preferred Stock
Drug Delivery
Senior Debt
Matures December 2011
Interest rate 10.95%
Common Stock Warrants
Common Stock Warrants
Drug Delivery
Senior Debt
Matures October 2009
Interest rate 10.69%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Therapeutic
Senior Debt
Mature December 2011
Interest rate 11.00%
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
102
Principal
Amount Cost
(2)
Value
(3)
$
2,659 $ 2,593 $ 2,593
$
4,605 4,605 4,605
$
395
395
395
165
182
7,758 7,775
$
629
601
286
53 —
286
654
$
464
420
420
83 —
641 —
420
1,144
19,003 17,766
$ 20,000 19,582 19,582
458 1,206
422
143
20,183 21,210
$
$
3,353 3,334 3,334
46
35
75
51
500
287
3,920 3,742
24,103 24,952
3,333 3,270 3,270
63
41
1,500 1,388
4,833 4,699
file://c:\WINNT\Profiles\hallers\Desktop\2010 Form 10-K hercules.htm
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Form 10-K
Page 108 of 149
Table of Contents
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
EKOS Corporation (1.29%)
Industry
Therapeutic
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Total EKOS Corporation
Gelesis, Inc. (0.39%)
(4)
Total Gelesis, Inc.
Gynesonics, Inc. (0.02%)
Gynesonics, Inc. (0.08%)
Total Gynesonics, Inc.
Light Science Oncology, Inc. (0.01%)
Total Light Science Oncology, Inc.
(4)
Novasys Medical, Inc. (0.96%)
Novasys Medical, Inc.(0.12%)
Total Novasys Medical, Inc.
Power Medical Interventions, Inc. (0.00%)
Total Power Medical Interventions, Inc.
Total Therapeutic (4.09%)
Cozi Group, Inc. (0.04%)
Cozi Group, Inc. (0.06%)
Total Cozi Group, Inc.
Invoke Solutions, Inc. (0.29%)
(4)
Total Invoke Solutions, Inc.
Prism Education Group Inc. (0.42%)
Total Prism Education Group Inc.
Senior Debt
Matures November 2010
Interest rate Prime + 2.00%
Preferred Stock Warrants
Preferred Stock Warrants
Therapeutic
Senior Debt
Matures May 2012
Interest rate Prime + 5.65%
Preferred Stock Warrants
Therapeutic
Preferred Stock Warrants
Preferred Stock
Therapeutic
Preferred Stock Warrants
Therapeutic
Senior Debt
Matures February 2010
Interest rate 9.70%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Therapeutic
Common Stock Warrants
Internet Consumer
& Business
Services
Internet Consumer
& Business
Services
Preferred Stock Warrants
Preferred Stock
Senior Debt
Matures November 2009
Interest rate Prime + 3.75%
Preferred Stock Warrants
Preferred Stock Warrants
Internet Consumer
& Business
Services
Senior Debt
Matures December 2010
Interest rate 11.25%
Preferred Stock Warrants
See notes to consolidated financial statements.
103
$
$
5,000 $ 4,846 $ 4,846
51
175
153
25
5,174 4,922
1,500 1,477 1,477
27
27
1,504 1,504
18
250
268
98
98
92
304
396
26
26
$
3,607 3,588 3,588
56
71
25
54
555
444
4,268 4,113
1
21
21
1
16,166 15,661
147
177
324
150
225
375
$
983
990
990
101
56
23
26
1,072 1,114
$
1,516 1,492 1,492
115
43
1,535 1,607
file://c:\WINNT\Profiles\hallers\Desktop\2010 Form 10-K hercules.htm
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Form 10-K
Page 109 of 149
Table of Contents
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
RazorGator Interactive Group, Inc. (0.94%)
(5)
Industry
Internet Consumer
& Business
Services
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
RazorGator Interactive Group, Inc. (0.45%)
Total RazorGator Interactive Group, Inc.
Serious USA, Inc. (0.36%)
Total Serious USA, Inc.
Spa Chakra, Inc. (2.61%)
Total Spa Chakra, Inc.
Total Internet Consumer & Business Services (5.17%)
Lilliputian Systems, Inc. (1.15%)
(4)
Total Lilliputian Systems, Inc.
Total Energy (1.15%)
Active Response Group, Inc. (2.58%)
(4)
Active Response Group, Inc. (0.03%)
Total Active Response Group, Inc.
Box.net, Inc. (0.37%)
(4)
Total Box.net, Inc.
Buzznet, Inc. (0.00%)
Buzznet, Inc. (0.06%)
Total Buzznet, Inc.
Revolving Line of Credit
Matures January 2009
Interest rate Prime + 1.80%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Internet Consumer
& Business
Services
Senior Debt
Matures February 2011
Interest rate Prime + 7.00%
Preferred Stock Warrants
Internet Consumer
& Business
Services
Senior Debt
Matures June 2010
Interest rate 14.45%%
Energy
Information
Services
Information
Services
Senior Debt
Matures March 2010
Interest rate Prime + 6.00%
Preferred Stock Warrants
Senior Debt
Matures March 2012
Interest rate LIBOR + 6.55%
Revolving Line of Credit
Matures December 2009
Interest rate Prime + 14.00%
Common Stock Warrants
Preferred Stock Warrants
Common Stock
Senior Debt
Matures June 2011
Interest rate Prime + 1.50%
Senior Debt
Matures September 2011
Interest rate Prime + 0.50%
Preferred Stock Warrants
Information
Services
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
104
$
3,000 $ 3,000 $ 3,000
562
13
29
42
1,000 1,708
4,042 5,312
$
2,906 2,851 1,351
93 —
2,944 1,351
$ 10,000 10,000 10,000
10,000 10,000
19,917 19,759
$
4,324 4,204 4,204
155
190
4,359 4,394
4,359 4,394
$
6,905 6,863 6,863
$
3,000 3,000 3,000
11
92
11
46
105
105
10,106 9,990
$
1,000
950
950
$
400
400
400
73
48
1,423 1,398
9 —
224
224
250
259
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Form 10-K
Page 110 of 149
Table of Contents
Portfolio Company
hi5 Networkss, Inc. (2.21%)
Total hi5 Networks, Inc.
Jab Wireless, Inc. (3.94%)
(4)
Total Jab Wireless, Inc.
Solutionary, Inc. (1.68%)
(4)
Solutionary, Inc. (0.04%)
Total Solutionary, Inc.
The Generation Networks, Inc. (1.52%)
(4)
The Generation Networks, Inc. (0.12%)
Total The Generation Networks, Inc.
Visto Corporation
Total Visto Corporation (0.16%)
Wallop Technologies, Inc. (0.03%)
Total Wallop Technologies, Inc.
Zeta Interactive Corporation (3.74%)
(4)
Zeta Interactive Corporation (0.13%)
Total Zeta Interactive Corporation
Total Information Services (16.61%)
Novadaq Technologies, Inc. (0.05%)
Total Novadaq Technologies, Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Industry
Information
Services
Type of Investment
(1)
Senior Debt
Matures December 2010
Interest rate Prime + 2.5%
Information
Services
Information
Services
Senior Debt
Matures June 2011
Interest rate Prime + 0.5%
Preferred Stock Warrants
Senior Debt
Matures November 2012
Interest rate Prime + 6.50%
Preferred Stock Warrants
Senior Debt
Matures June 2010
Interest rate LIBOR + 5.50%
Revolving Line of Credit
Matures June 2010
Interest rate LIBOR + 5.00%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Information
Services
Senior Debt
Matures December 2012
Interest rate 7.42%
Common stock
Common Stock
Information
Services
Senior Debt
Matures April 2010
Interest rate 10.00%
Preferred Stock Warrants
Information
Services
Senior Debt
Matures November 2011
Interest rate Prime +2.00%
Senior Debt
Matures November 2011
Interest rate Prime +3.00%
Preferred Stock Warrants
Preferred Stock
Diagnostic
Common Stock
See notes to consolidated financial statements.
105
Principal
Amount Cost
(2)
Value
(3)
$
3,000 $ 3,000 $ 3,000
$
5,496 5,363
213
8,576
5,363
75
8,438
$ 15,000 14,822 14,822
246
264
15,086 15,068
$
4,599 4,809
4,809
$
1,500 1,500
94
2
250
6,655
1,500
125
3
162
6,599
$
5,930 5,930
500
6,430
5,826
471
6,297
603
603
603
603
$
134
131
131
7 —
131
138
$
6,164 6,063
6,063
$
8,000
8,000 8,000
222
172
500
500
14,735 14,785
64,011 63,533
1,626
1,626
193
193
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
Optiscan Biomedical, Corp. (2.69%)
(4)
Industry
Diagnostic
Type of Investment
(1)
Principal
Amount Cost
(2)
Value
(3)
Senior Debt
Matures June 2011
Interest rate 10.25%
Preferred Stock Warrants
Preferred Stock
$ 10,000 $ 9,518 $ 9,518
760
783
3,000 3,000
13,278 13,301
14,904 13,494
Biotechnology Tools
Senior Debt
Matures May 2011
Interest rate Prime + 10.50%
Convertible Debt
Revolving Line of Credit
Matures December 2009
Interest rate Prime + 9.50%
Preferred Stock Warrants
Preferred Stock Warrants
$
$
$
Biotechnology Tools
Senior Debt
2,800 2,797 2,797
250
250
250
1,840 1,840 1,840
106 —
68 —
5,061 4,887
Total Kamada, LTD.
NuGEN Technologies, Inc. (0.67%)
Biotechnology Tools
Matures February 2012
Interest rate 10.60%
Common Stock Warrants
Common Stock Warrants
Senior Debt
Matures November 2010
Interest rate Prime + 3.45%
Senior Debt
Matures November 2010
Interest rate Prime + 1.70%
Preferred Stock Warrants
Preferred Stock Warrants
Preferred Stock
Biotechnology Tools
Senior Debt
Matures August 2012
Interest rate Prime + 4.25%
Preferred Stock Warrants
Surgical Devices
Preferred Stock Warrants
Preferred Stock
See notes to consolidated financial statements.
106
$ 20,000 19,572 19,572
41
531
8
20
20,123 19,621
$
1,548 1,520 1,520
$
$
892
892
892
161
45
18
33
500
265
2,990 2,856
1,750 1,711 1,711
42
49
1,753 1,760
29,927 29,124
37 —
26
250
26
287
Optiscan Biomedical, Corp. (0.79%)
Total Optiscan Biomedical, Corp.
Total Diagnostic (3.53%)
Guava Technologies, Inc. (1.28%)
Total Guava Technologies, Inc.
Kamada, LTD. (5.13%)
(6)
NuGEN Technologies, Inc. (0.07%)
Total NuGEN Technologies, Inc.
Solace Pharmaceuticals, Inc.(0.46%)
(5)
Total Solace Pharmaceuticals, Inc.
Total Biotechnology Tools (7.61%)
Crux Biomedical, Inc. (0.00%)
Crux Biomedical, Inc. (0.01%)
Total Crux Biomedical, Inc.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2008
(dollars in thousands)
Portfolio Company
Transmedics, Inc. (2.61%)
(5)
Industry
Surgical Devices
Type of Investment
(1)
Senior Debt
Matures December 2011
Interest rate Prime + 5.25%
Preferred Stock Warrants
Total Transmedics, Inc.
Total Surgical Devices (2.62%)
Glam Media, Inc. (2.18%)
Total Glam Media, Inc.
Waterfront Media Inc. (2.08%)
(5)
Waterfront Media Inc. (0.36%)
Total Waterfront Media Inc.
Total Media/Content/Info (4.62%)
Total Investments (151.99%)
Media/Content/Info
Revolving Line of Credit
Matures April 2009
Interest rate Prime + 1.50%
Preferred Stock Warrants
Media/Content/Info
Senior Debt
Matures September 2010
Interest rate Prime + 3.00%
Revolving Line of Credit
Matures October 2009
Interest rate Prime + 1.25%
Preferred Stock Warrants
Preferred Stock
Principal
Amount Cost
(2)
Value
(3)
9,814
$ 10,000 $ 9,814 $
173
224
9,987
10,038
10,325 10,013
$
8,285
8,139
483
8,622
8,139
209
8,348
$
2,597
2,574
2,574
$
5,000
5,000
60
1,000
8,634
5,000
393
1,353
9,320
17,256 17,668
$592,348 $581,301
Value as a percent of net assets
*
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $8,473, $22,551 and $14,078,
respectively. The tax cost of investments is $595,379.
(3) Except for warrants in six publicly traded companies and common stock in three publicly traded companies, all investments are restricted at December 31, 2008
and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company
uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt and warrant investments of this portfolio company have been pledged as collateral under the Credit Facility. Citigroup has an equity participation right on
loans collateralized under the Credit Facility. The value of their participation right on unrealized gains in the related equity investments was approximately
$498,000 at December 31, 2008 and is included in accrued liabilities and reduced the cumulative unrealized gain recognized by the Company at December 31,
2008.
(5) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(6) Non-U.S. company or the company’s principal place of business is outside the United States.
(7) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the
voting securities of the company. All other investments are less than 5% owned.
(8) Debt is on non-accrual status at December 31, 2008, and is therefore considered non-income producing.
See notes to consolidated financial statements.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Investment Income:
Interest income
Non Control/Non Affiliate investments
Affiliate investments
Control investments
Total interest income
Non Control/Non Affiliate investments
Affiliate investments
Control investments
Fees
Total fees
Total investment income
Operating expenses:
Interest
Loan fees
General and administrative
Employee Compensation:
Compensation and benefits
Stock-based compensation
Total employee compensation
Provision for income taxes
Net investment income
Net realized gain (loss) on investments
Non Control/Non Affiliate investments
Affiliate investments
Control investments
Change in net assets per common share:
Weighted average shares outstanding
Basic
Diluted
Basic
Diluted
Basic
Diluted
Total operating expenses
Net investment income before provision for income taxes and investment gains and losses
Total net realized gain (loss) on investments
Provision for excise tax
Net increase (decrease) in unrealized appreciation on investments
Non Control/Non Affiliate investments
Affiliate investments
Control investments
Total net increase (decrease) in unrealized appreciation on investments
Total net realized and unrealized gain (loss)
Net increase in net assets resulting from operations
Net investment income before provision for income taxes and investment gains and losses per common share (see note 13):
For the Years Ended
December 31,
2008
2009
2007
$ 61,781
153
266
62,200
$ 67,080
203
—
67,283
$48,757
—
—
48,757
10,883
19
1,175
12,077
74,277
8,533
19
—
8,552
75,835
5,127
—
—
5,127
53,884
9,387
1,880
7,281
13,121
2,649
6,899
4,404
1,290
5,437
10,737
1,888
12,625
31,173
43,104
—
43,104
(26,501)
(4,300)
—
(30,801)
—
(12,426)
5,334
8,361
1,269
(29,532)
$ 13,572
11,595
1,590
13,185
35,854
39,981
—
39,981
2,643
—
—
2,643
(203)
(18,082)
(3,344)
—
(21,426)
(18,986)
$ 20,995
$
$
$
$
1.25
1.23
0.38
0.37
$
$
$
$
1.23
1.23
0.64
0.64
9,135
1,127
10,262
21,393
32,491
2
32,489
2,791
—
2,791
(139)
8,980
(1,712)
—
7,268
9,920
$42,409
$
$
$
$
1.15
1.14
1.50
1.49
34,486
32,619
28,295
34,891
32,619
28,387
See notes to consolidated financial statements.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands)
Balance at December 31, 2006
operations
Issuance of common stock from warrant
Net increase in net assets resulting from
Issuance of common stock
Issuance of common stock in public offerings,
net of offering costs
exercises
reinvestment plan
Issuance of common stock under restricted
stock plan
Dividends declared
Stock-based compensation
Balance at December 31, 2007
Issuance of common stock under dividend
operations
Net increase in net assets resulting from
Issuance of common stock
Issuance of common stock from exercise of
warrants
stock plan
reinvestment plan
Issuance of common stock under restricted
Issuance of common stock under dividend
Dividends declared
Tax reclassification of stockholders’ equity in
accordance with generally accepted
accounting principles
Stock-based compensation
Balance at December 31, 2008
291
250
7
—
—
32,541 $
—
7
88
238
222
—
—
—
33,096 $
Common Stock
Shares Par Value
21,927 $
Capital
in excess
of par
value
22 $257,235 $
Unrealized
Appreciation
on
Investments
Accumulated
Realized
Gains
(Losses) on
Investments
Distributions
in Excess of
Investment
Income
Provision
for Income
Taxes on
Investment
Gains
2,861 $
(1,972) $
(2,732) $
Net
Assets
— $255,413
—
26
—
—
—
371
10,040
11
128,331
—
3,071
—
3,304
7,268
—
—
—
—
2,791
—
32,488
—
(139)
—
42,409
371
—
—
—
—
—
—
—
128,342
—
3,071
—
3,304
—
—
1,140
—
—
—
33 $393,452 $
—
—
—
10,129 $
—
—
—
819 $
—
(33,313)
—
(3,557) $
—
—
(33,313)
—
—
1,140
(139) $400,737
—
—
—
—
—
—
—
70
934
—
1,414
—
(21,426)
—
2,643
—
39,981
—
(203)
—
20,995
70
—
—
—
—
—
—
—
—
—
—
—
—
934
—
—
(43,282)
—
—
1,414
(43,282)
(1,700)
1,590
—
—
33 $395,760 $
—
—
(11,297) $
444
—
3,906 $
1,256
—
(5,602) $
—
—
—
1,590
(342) $382,458
operations
Net increase in net assets resulting from
Issuance of common stock
Issuance of common stock under restricted
Issuance of common stock under dividend
stock plan
reinvestment plan
Issuance of common stock dividend in first
quarter of 2009
Dividends declared
Stock-based compensation
Tax reclassification of stockholders’ equity in
accordance with generally accepted
accounting principles
Balance at December 31, 2009
—
3
307
307
1,921
—
—
—
—
—
—
22
—
—
2,862
2
—
—
9,530
—
1,983
1,269
—
(30,801)
—
43,104
—
—
—
13,572
22
—
—
—
—
—
—
—
—
—
—
—
—
—
(43,914)
—
—
—
—
2,862
—
—
—
9,532
(43,914)
1,983
—
35,634 $
(1,121)
—
35 $409,036 $
—
(10,028) $
(1,234)
(28,129) $
2,355
(4,057) $
—
—
(342) $366,515
See notes to consolidated financial statements.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by (used in) operating activities:
Purchase of investments
Principal payments received on investments
Proceeds from sale of investments
Net unrealized appreciation on investments
Net unrealized appreciation on investments due to lender
Net realized loss (gain) on investments
Accretion of paid-in-kind principal
Accretion of loan discounts
Accretion of loan exit fees
Depreciation
Stock-based compensation
Common stock issued in lieu of Director compensation
Amortization of deferred loan origination revenue
Change in operating assets and liabilities:
Purchases of capital equipment and leasehold improvements
Other long-term assets
Interest receivable
Prepaid expenses and other assets
Income tax receivable
Accounts payable
Excise tax payable
Accrued liabilities
Deferred loan origination revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net
Dividends paid
Borrowings of credit facilities
Repayments of credit facilities
Fees paid for credit facilities and debentures
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosure:
Interest paid
Income taxes paid
Stock dividend
For the Years Ended December 31,
2008
2007
2009
$ 13,572
$ 20,995
$ 42,409
(98,413)
282,544
5,769
(1,269)
29
30,801
(2,959)
(5,463)
(4,649)
367
1,983
22
(4,821)
1,487
4,335
—
(70)
(196)
2,484
375
225,928
(134)
(360)
(494)
—
(31,519)
98,988
(185,170)
(147)
(117,848)
107,586
17,242
$ 124,828
(351,928)
269,930
20,170
21,426
143
(2,643)
(954)
(7,239)
(1,588)
306
1,590
70
(5,175)
(830)
506
—
302
98
1,840
5,454
(27,527)
(606)
(6)
(612)
934
(41,868)
252,499
(169,967)
(4,073)
37,525
9,386
7,856
$ 17,242
(368,118)
128,683
5,966
(7,268)
(82)
(2,791)
(321)
(2,115)
(974)
204
1,140
371
(3,016)
(2,506)
(421)
34
(360)
139
1,758
6,158
(201,110)
(181)
215
34
131,413
(30,009)
246,550
(153,300)
(2,126)
192,528
(8,548)
16,404
7,856
$
$
9,386
—
9,532
$ 10,880
6
—
$
2,812
2
—
See notes to consolidated financial statements.
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company that provides debt and equity
growth capital to technology-related companies at various stages of development, which include select publicly listed
companies and lower middle market companies. The Company sources its investments through its principal office located in
Silicon Valley, as well as through its additional offices in the Boston, Massachusetts, Boulder, Colorado and Chicago, Illinois.
The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The
Company commenced operations on February 2, 2004 and commenced investment activities in September 2004.
The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated
as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal
Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company has elected to be treated for tax purposes as a
regulated investment company, or RIC, under the Code (see Note 4).
The Company formed Hercules Technology II, L.P. (“HT II”), which was licensed on September 27, 2006, to operate as a
Small Business Investment Company (“SBIC”) under the authority of the Small Business Administration (“SBA”). As an
SBIC, HT II is subject to a variety of regulations concerning, among other things, the size and nature of the companies in
which it may invest and the structure of those investments. The Company also formed Hercules Technology SBIC
Management, LLC (“HTM”), a limited liability company. HTM is a wholly-owned subsidiary of the Company. The Company
is the sole limited partner of HT II and HTM is the general partner (see Note 4).
The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and
limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs, (or other forms of
pass-through entities). We currently qualify as a RIC for federal income tax purposes, which allows us to avoid paying
corporate income taxes on any income or gains that we distribute to our stockholders. The purpose of establishing these
entities is to satisfy the RIC tax requirement that at least 90% of our gross income for income tax purposes is investment
income.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company
accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the
Securities Act of 1933 and the Securities and Exchange Act of 1934, the Company does not consolidate portfolio company
investments.
Summary of Significant Accounting Policies
Use of Estimates
The accompanying consolidated financial statements are presented in conformity with accounting principles generally
accepted in the United States. This requires management to make estimates and assumptions that affect the amounts and
disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known, and actual results could differ from those estimates.
Valuation of Investments
Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification
(“ASC”) topic 820 Fair Value Measurements and Disclosures, (formerly known as SFAS No. 157,
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Fair Value Measurements). At December 31, 2009, approximately 73% of the Company’s total assets represented investments
in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a) (41) of the
1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other
securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily
available market value for the investments in the Company’s portfolio, it values substantially all of its investments at fair value
as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with
the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that
do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its
Board may differ significantly from the value that would have been used had a ready market existed for such investments, and
the differences could be material.
Our Board of Directors has engaged an independent valuation firm to provide us with valuation assistance with respect to
certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to
provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless
directed by the Board of Directors to cancel such valuation services. However, our Board of Directors is ultimately and solely
responsible for determining the fair value of our investments in good faith.
We adopted ASC 820 on January 1, 2008. ASC 820 establishes a framework for measuring the fair value of the assets
and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair
value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level
within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but doesn’t expand the use of fair value in any new circumstances. ASC 820
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
In October 2008, the Financial Accounting Standards Board, or the FASB, issued ASC 820-10-35, formerly known as
FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, which
clarifies the application of ASC 820 in a market that is not active. More specifically, this standard states that significant
judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed
sales and are not representative of fair value in an orderly transaction. The standard also provides further guidance that the use
of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable
when relevant observable inputs are not available. In addition, the standard provides guidance on the level of reliance of broker
quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a
quote that does not reflect actual market transactions and a quote that is not a binding offer.
Consistent with ASC 820, the Company determines fair value to be the amount for which an investment could be
exchanged in a current sale, which assumes an orderly disposition over a reasonable period of time between willing parties
other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that no ready market exists for
substantially all of the securities in which it invests.
In accordance with ASC 820, the Company has considered the principal market, or the market in which it exits its
portfolio investments with the greatest volume and level of activity. ASC 820 requires that the portfolio investment is assumed
to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous
market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are
independent, knowledgeable, and willing and able to transact. The Company believes that the market participants for its
investments are primarily other technology-related companies. Such participants acquire the company’s investments in order
to gain access to the underlying assets of the portfolio company. As such, the Company believes the estimated value of the
collateral of the portfolio company, up to the cost value of the investment, represents the fair value of the investment.
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Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio
investment, although the Company’s valuation policy is intended to provide a constant basis for determining the fair value of
portfolio investments. Unlike banks, the Company is not permitted to provide a general reserve for anticipated loan losses.
Instead, the Company must determine the fair value of each individual investment on a quarterly basis. The Company records
unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection
of a loan or realization of an equity security is doubtful. Conversely, where appropriate, the Company records unrealized
appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has
also appreciated in value.
As a business development company providing debt and equity capital primarily to technology-related companies, the
Company invests primarily in illiquid securities including debt and equity-related securities of private companies. The
Company’s investments are generally subject to some restrictions on resale and generally have no established trading market.
Because of the type of investments that the Company makes and the nature of its business, its valuation process requires an
analysis of various factors that might be considered in a hypothetical secondary market. The Company’s valuation
methodology includes the examination of criteria similar to those used in its original investment decision, including, among
other things, the underlying investment performance, the current portfolio company’s financial condition and market changing
events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of
the measurement date. If there is a significant deterioration of the credit quality of a debt investment, we may consider other
factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in
a liquidation analysis.
When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the
borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their
respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related
securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted
into interest income over the life of the loan.
At each reporting date, privately held debt and equity securities are valued based on an analysis of various factors
including, but not limited to, the portfolio company’s operating performance and financial condition and general market
conditions that could impact the valuation. When an external event occurs, such as a purchase transaction, public offering, or
subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the
debt and equity securities. The Company periodically reviews the valuation of its portfolio companies that have not been
involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or
decreased since the last valuation measurement date. The Company may consider, but is not limited to, industry valuation
methods such as price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable
public companies or other industry benchmarks in its evaluation of the fair value of its investment. We have a limited number
of equity securities in public companies. In accordance with the 1940 Act, unrestricted minority-owned publicly traded
securities for which market quotations are readily available are valued at the closing market quote on the valuation date.
An unrealized loss is recorded when an investment has decreased in value, including: where collection of a loan is
doubtful, there is an adverse change in the underlying collateral or operational performance, there is a change in the borrower’s
ability to pay, or there are other factors that lead to a determination of a lower valuation for the debt or equity security.
Conversely, unrealized appreciation is recorded when the investment has appreciated in value. Securities that are traded in the
over the counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Board of
Directors estimates the fair value of warrants and other equity-related securities in good faith using a Black-Scholes pricing
model and consideration of the issuer’s earnings, sales to third parties of similar securities, the comparison to publicly traded
securities, and other factors.
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The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of
judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly
related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of
assets carried at Level 1 fair value generally are equities listed in active markets.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in
connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued
assets that are generally included in this category are warrants held in a public company.
Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the
measurement date. It includes prices or valuations that require inputs that are both significant to the fair value
measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt
investments and warrants and equities held in a private company.
Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of
significant input to the valuations as of December 31, 2009 and 2008:
(in thousands)
Description
Senior secured debt
Senior debt-second lien
Preferred stock
Common stock
Warrants
(in thousands)
Description
Senior secured debt
Senior debt-second lien
Preferred stock
Common stock
Warrants
12/31/2009
$314,842
6,060
22,875
12,210
14,450
$370,437
12/31/2008
$534,230
5,824
21,249
2,115
17,883
$581,301
Investments at Fair Value as of December 31, 2009
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
$
—
—
—
1,986
—
1,986
$
$
—
—
—
8,451
3,374
11,825
$
$
314,842
6,060
22,875
1,773
11,076
356,626
Investments at Fair Value as of December 31, 2008
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
—
—
—
221
—
221
$
$
—
—
—
—
2,931
2,931
$
$
534,230
5,824
21,249
1,894
14,952
578,149
$
$
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The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis,
excluding accrued interest components, using significant unobservable inputs (Level 3) for the year ended December 31, 2009
and 2008
(in thousands)
Senior debt
Senior debt-second lien
Preferred stock
Common stock
Warrants
Total
(in thousands)
Senior debt
Senior debt-second lien
Preferred stock
Common stock
Warrants
Total
Balance,
January 1,
2009
$534,230
5,824
21,249
1,894
14,952
$578,149
Balance,
January 1,
2008
$482,123
—
23,265
500
16,852
$522,740
Net Realized
(1)
Gains (losses)
$
(27,192)
—
(3,000)
(105)
(1,150)
(31,447)
$
$
Net Realized
(1)
Gains (losses)
$
(2,089)
—
(923)
—
(246)
(3,258)
$
Net change in
unrealized
appreciation
(2)
or depreciation
4,698
$
—
4,373
(749)
(4,116)
4,206
$
Net change in
unrealized
appreciation
(2)
or depreciation
$
(4,596)
—
(7,330)
104
(5,854)
(17,676)
Purchases,
sales,
repayments,
and exit, net
$(196,894)
236
661
1,204
1,390
$(193,403)
Purchases,
sales,
repayments,
and exit, net
$ 58,792
5,824
6,237
1,290
4,200
$ 76,343
Transfer
in & out of
Level 3
$ —
—
(408)
(471)
—
(879)
$
Transfer
in & out of
Level 3
$ —
—
—
—
—
$ —
Balances,
December 31,
2009
$ 314,842
6,060
22,875
1,773
11,076
$ 356,626
Balances,
December 31,
2008
$ 534,230
5,824
21,249
1,894
14,952
$ 578,149
(1)
(2)
Includes net realized gains /(losses) recorded as realized gains or losses in the accompanying consolidated statements of operations.
Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations.
As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are
defined in the 1940 Act as investments in those companies that the Company is deemed to “Control.” Generally, under the
1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting
securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in
those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, which are not Control
Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less
than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are
neither Control Investments nor Affiliate Investments.
At December 31, 2009, The Company had an investment in one portfolio company deemed to be a Control Investment
and no investments in 2008 were deemed to be Control Investments. $1.4 million in investment income was derived from our
debt investments in this portfolio company. No realized gains or losses related to Control Investments were recognized during
the years end December 31, 2008 and 2007. The Company recognized unrealized appreciation of approximately $8.4 million
on Control Investments in 2009. No unrealized appreciation or depreciation was recognized on Control Investments during the
year end December 31, 2008 and 2007.
At December 31, 2009, the Company had an investment in one portfolio company deemed to be an Affiliate. Income
derived from this investment was zero, as this is a non-income producing equity investment. At December 31, 2008, the
Company had three portfolio companies deemed to be Affiliates.
For the year ended December 31, 2008, income derived from three investments was less than $230,000. One company
that was an Affiliate in 2008 performed a capital raise in 2009 which resulted in the Company’s ownership percentage
decreasing to less than 5% of the voting securities in the portfolio company. As a result,
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this portfolio company is no longer an Affiliate. We recognized a realized loss of approximately $4.0 million in the second
quarter of 2009 in a portfolio company that was an Affiliate prior to the disposal of the investment. No realized gains or losses
related to Affiliates were recognized in 2008 or 2007. During the year end December 31, 2009, The Company recognized
unrealized appreciation of approximately $5.3 million related to Affiliates, primarily attributable to the reversal of unrealized
depreciation to realized losses on one of the Affiliates. During the years end December 31, 2008 and 2007, The Company
recognized unrealized depreciation of approximately $3.3 million and $1.7 million on Affiliate investments, respectively.
Security transactions are recorded on the trade-date basis.
Income Recognition
Interest income is recorded on the accrual basis to the extent it is expected to be collected. Original Issue Discount
(“OID”), represents the estimated fair value of detachable equity warrants obtained in conjunction with the acquisition of debt
securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days
or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other
obligations, the Company will, as a general matter, place the loan on non-accrual status and cease recognizing interest income
on that loan until all principal and interest has been brought current through payment. However, Hercules may make
exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. There were five
loans on non-accrual status as of December 31, 2009 with an aggregated cost of $25.5 million and fair values of $10.5 million.
There were four loans on non-accrual as of December 31, 2008 with an aggregate cost of $2.9 million and fair value of
approximately $864,000.
Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that
is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected
to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or
if it does not expect the portfolio company to be able to pay all principal and interest due. To maintain its status as a RIC, PIK
income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash.
Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. For the
years ended December 31, 2009, 2008 and 2007, the Company recognized approximately $2.9 million, $1.0 million and
$381,000 in PIK income, respectively.
Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee
income as an enhancement to the related loan’s yield over the contractual life of the loan. Loan exit fees to be paid at the
termination of the loan are accreted into fee income over the contractual life of the loan. The Company had approximately $2.4
million, $6.9 million and $6.6 million of unamortized fees at December 31, 2009, 2008 and 2007, respectively, and
approximately $6.6 million, $3.6 million $2.0 million in exit fees receivable at December 31, 2009, 2008 and 2007,
respectively.
In certain investment transactions, the Company may provide advisory services. For services that are separately
identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the
investment transaction closes. The Company had no income from advisory services in 2009, 2008 and 2007.
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Financing costs
Debt financing costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing and
are recognized as prepaid expenses amortized into the consolidated statement of operations as loan fees over the term of the
related debt instrument. Prepaid financing costs, net of accumulated amortization, were as follows:
(in thousands)
Credit Facility
Wells Facility
SBA Debenture
Cash Equivalents
As of December 31
2008
2009
$ 466
$ —
814
325
3,922
3,622
$5,202
$3,947
The Company considers money market funds and other highly liquid short-term investments with a maturity of less than
90 days to be cash equivalents.
Stock Based Compensation
The Company recognizes share based compensation in accordance with ASC topic 718, formerly known as FAS 123,
Share-Based Payment. Under ASC 718, compensation expense associated with stock based compensation is measured at the
grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair
value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating
stock price volatility, forfeiture rate and expected option life.
Earnings Per Share (EPS)
Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of
common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future
service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of
basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to
restricted stock for which future service is required as a condition to the delivery of the underlying common stock.
Income Taxes
We operate to qualify to be taxed as a RIC under the Internal Revenue Code. Generally, a RIC is entitled to deduct
dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our net taxable
interest, dividend and fee income, as well as our net realized capital gains. Taxable income includes our net taxable interest,
dividend and fee income, as well as our net realized capital gains. Taxable income generally differs from net income for
financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. In
addition, taxable income generally excludes any unrealized appreciation or depreciation in our investments, because gains and
losses are not included in taxable income until they are realized and required to be recognized. Taxable income includes
certain income, such as contractual payment-in-kind interest and amortization of discounts and fees that is required to be
accrued for tax purposes even though cash collections of such income are generally deferred until repayment of the loans or
debt securities that gave rise to such income.
We have distributed and currently intend to distribute sufficient dividends to eliminate taxable income. We are subject to
a nondeductible federal excise tax of 4% if we do not distribute at least 98% of our investment
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company taxable income in any calendar year and 98% of our capital gain net income for each one year period ending on
October 31. We did not record an excise tax provision for the year ended December 31, 2009. In 2008, we recorded a
provision for excise tax of approximately $203,000, on income and capital gains of approximately $5.0 million, which were
distributed in 2009. The maximum amount of excess taxable income that may be carried over for distribution in the next year
under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment
guidelines.
Dividends
Dividends and distributions to common stockholders are approved by the Board of Directors on a quarterly basis and the
dividend payable is recorded on the ex-dividend date.
We have adopted an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of
our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare a
cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividend
automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. During 2009 and
2008, the Company issued approximately 307,000 and 222,000 shares, respectively, of common stock to shareholders in
connection with the dividend reinvestment plan.
On February 12, 2009, the Board of Directors announced a dividend of $0.32 per share payable to shareholders March 30,
2009. In accordance with the Internal Revenue Procedure released in January 2009, our Board of Directors determined that
90% of the dividend would be paid in newly issued shares of common stock and no more than 10% of the dividend would be
paid in cash. The total dividend distribution was approximately $10.6 million of which $1.1 million was paid in cash and we
distributed approximately 1.9 million shares of common stock. The market value per share of common stock used to compute
the stock dividend was based on the volume weighted average price per share of the Company’s common stock for the three
business day period of March 23, March 24 and March 25, 2009.
Segments
The Company lends to and invests in portfolio companies in various technology-related and life science sectors. The
Company separately evaluates the performance of each of its lending and investment relationships. However, because each of
these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a
single lending and investment segment. All segment disclosures are included in or can be derived from the Company’s
consolidated financial statements.
Reclassifications
Certain prior period information has been reclassified to conform to current year presentation.
Recent Accounting Pronouncements
In 2008, the Financial Accounting Standards Board (FASB) issued an update to Accounting Standards Codification
(ASC) 260, Earnings per Share, that required us to calculate EPS using the two-class method beginning January 1, 2009. As a
result, unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our
restricted stock , are considered to be participating securities. The adoption of this standard did not change previously reported
basic and diluted change in net assets per share for 2008 and 2007.
In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards
No. 168—The FASB Accounting Standards Codification and Hierarchy of Generally
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Accepted Accounting Principles, or SFAS 168. SFAS 168 introduced a new Accounting Standard Codification, or ASC, which
organized current and future accounting standards into a single codified system. SFAS 168, which is now referred to as ASC
Topic 105—Generally Accepted Accounting Principles, or ASC 105, under the new codification, superseded, but did not
significantly change, all previously existing accounting standards. ASC 105 was effective for interim periods ending after
September 15, 2009.
The Company adopted ASC 105 beginning with our quarter report on Form 10Q for the quarter ended September 30,
2009. In connection with adoption of this standard, The Company’s discussion about specific accounting standards must now
reference the standards as set forth in the new codification. The original reference as well as the new ASC reference has been
included to assist readers of the financial statements.
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1—Interim Disclosures about Fair
Value of Financial Instruments, which was subsequently incorporated into ASC Topic 825—Financial Instruments. The April
2009 guidance requires disclosures about financial instruments, including fair value, carrying amount, and method and
significant assumptions used to estimate the fair value. This standard was adopted as of June 30, 2009. The adoption of this
standard did not have a significant impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. FAS 115-2 and 124-2, Recognition and Presentation of Other-
Than-Temporary Impairment, which was subsequently included in ASC 320-10-35. This guidance amends the existing
guidance regarding impairments for investments in debt securities. Specifically, it changes how companies determine if an
impairment is considered to be other-than-temporary and the related accounting. This standard also requires increased
disclosures. The adoption of this standard did not have a significant impact on the Company’s consolidated financial
statements.
In May 2009, the FASB issued SFAS 165—Subsequent Events, which was subsequently included in ASC Topic 855—
Subsequent Events, or ASC 855. This guidance establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued, and specifically requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date. The Company adopted this guidance
during the quarter ended June 30, 2009. For the period ended December 31, 2009, management has evaluated all subsequent
events through the filing date of this report.
In January 2010, the FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of
Stock and Cash (“ASU 2001-01”), which addresses the accounting for a distribution to shareholders that offers them the ability
to elect to receive their entire distribution in cash or shares of equivalent value with a potential limitation on the total amount
of cash that shareholders can receive in the aggregate. ASU 2010-01 clarifies that the stock portion of such a distribution is
considered a share issuance reflected prospectively in earnings per share. ASU 2010-01 is effective for interim and annual
periods ending after December 15, 2009 and should be applied on a prospective basis. The Company adopted the requirements
of ASU 2010-01 in the fourth quarter of 2009 and its adoption did not have a material effect on our consolidated financial
statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”),
which amends ASC 820 and requires additional disclosure related to recurring and non-recurring fair value measurements with
respect to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies
existing disclosure requirements related to the level of disaggregation and disclosure about inputs and valuation techniques.
ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009 except for disclosures related to
activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. Management is currently evaluating the impact on our consolidated financial
statements of adopting ASU 2010-06.
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In February 2010, the FASB issued ASU 2010-09 to amend ASC 855 to address certain implementation issues, including
(1) eliminating the requirement for SEC filers to disclose the date through which it has evaluated subsequent events, (2)
clarifying the period through which conduit bond obligors must evaluate subsequent events, and (3) refining the scope of the
disclosure requirements for reissued financial statements. The adoption of this standard did not have a significant impact on
the Company’s consolidated financial statements.
2. Investments
Investments consist of securities issued by privately- and publicly-held companies consisting of senior debt, subordinated
debt, warrants and preferred equity securities. Our investments are identified in the accompanying consolidated schedule of
investments. Our debt securities are payable in installments with final maturities generally from 3 to 7 years and are generally
collateralized by all assets of the borrower.
A summary of the composition of the Company’s investment portfolio as of December 31, 2009 and 2008 at fair value is
shown as follows:
(in thousands)
Senior secured debt with
warrants
Senior secured debt
Preferred stock
Senior debt-second lien
with warrants
Common Stock
December 31, 2009
December 31, 2008
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
$
229,454
99,725
22,875
6,173
12,210
370,437
61.9%
26.9%
6.2%
1.7%
3.3%
100.0%
$
$
445,574
106,266
21,249
6,097
2,115
581,301
76.6%
18.2%
3.8%
1.0%
0.4%
100.0%
A summary of the Company’s investment portfolio, at value, by geographic location is as follows:
(in thousands)
United States
Canada
Israel
Netherlands
December 31, 2009
December 31, 2008
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
$
344,984
21,567
1,310
2,576
370,437
93.1%
5.8%
0.4%
0.7%
100.0%
$
$
537,470
21,210
19,621
3,000
581,301
92.5%
3.6%
3.4%
0.5%
100.0%
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The following table shows the fair value of our portfolio by industry sector as of December 31, 2009 and 2008 (excluding
unearned income):
December 31, 2009
December 31, 2008
(in thousands)
Software
Communications &
networking
Drug discovery
Information services
Consumer & business
products
Specialty pharmaceuticals
Drug delivery
Internet consumer &
business services
Electronics & computer
hardware
Therapeutic
Semiconductors
Diagnostic
Biotechnology tools
Surgical Devices
Media/Content/Info
Energy
Investments at Fair
Value
$
61,647
58,088
51,848
37,740
25,467
25,193
21,493
20,352
17,701
13,470
11,481
11,399
9,669
2,410
2,375
104
370,437
$
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
16.6%
$
80,885
15.7%
14.0%
10.2%
6.9%
6.8%
5.8%
5.5%
4.8%
3.6%
3.1%
3.1%
2.6%
0.7%
0.6%
—
100.0%
118,133
70,320
63,533
25,250
29,870
24,952
19,759
40,481
15,661
17,766
13,494
29,124
10,013
17,667
4,393
581,301
$
13.9%
20.3%
12.1%
10.9%
4.3%
5.1%
4.3%
3.4%
7.0%
2.7%
3.1%
2.3%
5.0%
1.7%
3.1%
0.8%
100.0%
During the years ended December 31, 2009 and 2008, the Company made investments in debt securities totaling $95.5
million and $346.0 million, respectively, and made investments in equity securities of approximately $3.0 million and $5.9
million, respectively. In addition, during the year ended December 31, 2009, the Company converted approximately $6.4
million of debt to equity in three portfolio companies. As a result of the debt conversion in Infologix, Inc. during the fourth
quarter, the Company obtained a controlling interest in the portfolio company. The Company and converted $3.1 million of
debt to equity during the year ended December 31, 2008. No single portfolio investment represents more than 10% of the fair
value of the investments as of December 31, 2009 and 2008.
3. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective
in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents,
receivables, accounts payable and accrued liabilities approximate the fair values of such items due to the short maturity of such
instruments. The SBIC debentures remain a strategic advantage due to their flexible structure, long-term duration, and low
fixed interest rates. As of December 31, 2009, calculated based on the net present value of payments over the term of the notes
using estimated market rates for similar notes and remaining terms, the fair value of its SBIC debentures would be
approximately $141.6 million, compared to carrying amount of $130.6 million as of December 31,2009.
See the accompanying consolidated schedule of investments for the fair value of the Company’s investments. The
methodology for the determination of the fair value of the Company’s investment is discussed in Note 1.
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4. Borrowings
Credit Facility
The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Credit
Facility”) with Citigroup Global Markets Realty Corp. and Deutsche Bank Securities Inc. On October 31, 2008, the
Company’s Credit Facility expired under the normal terms. All subsequent payments secured from the portfolio companies
whose debt was included in the Credit Facility collateral pool were to be applied against interest and principal outstanding
under the Credit Facility until April 30, 2009, when all outstanding interest and principal were due and payable. During the
amortization period, borrowings under the Credit Facility bore interest at a rate per annum equal to LIBOR plus 6.50%. At
December 31, 2008, $89.6 million was outstanding under the Credit Facility. During the first quarter of 2009, the Company
paid off all remaining principal and interest owed under the Credit Facility using approximately $10.4 million from our regular
principal and interest collection, approximately $36.7 million borrowing from the Wells Facility and approximately $42.5
million from early payoffs.
Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants
collateralized under the Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a
10% participation in all warrants held as collateral. However, no additional warrants are included in collateral subsequent to
the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the
realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The
obligations under the warrant participation agreement continue even after the Credit Facility is terminated until the Maximum
Participation Limit has been reached. The value of their participation right on unrealized gains in the related equity
investments was approximately $468,000 at December 31, 2009 and is included in accrued liabilities. There can be no
assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in
the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement,
the Company has paid Citigroup approximately $1.1 million under the warrant participation agreement thereby reducing its
realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the
Maximum Participation Limit is reached or the warrants expire.
Long-term SBA Debentures
In January 2005, the Company formed HT II and HTM. HT II is licensed as a SBIC. HT II borrows funds from the SBA
against eligible investments and additional deposits to regulatory capital. Under the Small Business Investment Act and current
SBA policy applicable to SBICs, an SBIC can have outstanding at any time SBA guaranteed debentures up to twice the
amount of its regulatory capital. As of December 31, 2009, the maximum statutory limit on the dollar amount of outstanding
SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. With
$68.55 million of regulatory capital as of December 31, 2009, HT II has the current capacity to issue up to a total of $137.1
million of SBA guaranteed debentures, of which $130.6 million was outstanding. Currently, HT II has paid commitment fees
of approximately $1.4 million. There is no assurance that HT II will be able to draw up to the maximum limit available under
the SBIC program.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA
regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have
average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must
devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a
tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the
two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which
depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross
sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of
such
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businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiary HT II, the Company
plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.
HT II is periodically examined and audited by the Small Business Administration’s staff to determine its compliance with
small business investment company regulations. As of December 31, 2009, HT II could draw up to $137.1 million of leverage
from the SBA as noted above. Borrowings under the program are charged interest based on ten year treasury rates plus a
spread and the rates are generally set for a pool of debentures issued by the SBA in six month periods. The rates of borrowings
under various draws from the SBA beginning in April 2007 and set semiannually in March and September range from 4.233%
to 5.725%. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage
commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fee on
debenture pooling date on September 23, 2009 was 0.406%. The annual fees on all other debentures issued to The Company
have been set at 0.906%. The average amount of debentures outstanding for the year ended December 31, 2009 was
approximately $129.4 million and the average interest rate was approximately 6.27%. Interest is payable semi-annually and
there are no principal payments required on these issues prior to maturity. Debentures under the SBA generally mature ten
years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will
occur in April 2017.
Wells Facility
On August 25, 2008, the Company, through a special purpose wholly-owned subsidiary of the Company, Hercules
Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total
commitments of $50 million, with Wells Fargo Foothill as a lender and as an arranger and administrative agent (the “Wells
Facility”). The Wells Facility has the capacity to increase to $300 million if additional lenders are added to the syndicate. The
Wells Facility was originally set to expire on August 25, 2010. In February 2010, the Company extended the maturity date to
August 2011 under the same terms and conditions of the existing agreement.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to Libor plus 3.25% or PRIME
plus 2.0%, but not less than 5.0%. The average debt outstanding under the Wells Facility for the year ended December 31,
2009 was approximately $2.8 million and the average interest rate was approximately 5.4%. The Wells Facility requires the
payment of a non-use fee of 0.5% annually, which was reduced to 0.3% on the one year anniversary of the credit facility. The
Wells Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50% of
eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All
outstanding principal is due upon maturity, which includes the extension if exercised. We paid a one time $750,000 structuring
fee in connection with the Wells Facility which is being amortized over a 2 year period. There was no outstanding debt under
the Wells Facility at December 31, 2009.
The Wells Facility requires various financial and operating covenants. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth of $360 million. The Wells Facility was amended, effective April 30, 2009,
to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total
commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250
million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a
dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of
equity capital subsequently raised by the Company. The Wells Facility provides for customary events of default, including, but
not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in
compliance with all covenants at December 31, 2009.
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At December 31, 2009 and December 31, 2008, the Company had the following borrowing capacity and outstandings:
(in thousands)
Wells Facility
SBA Debenture
Total
5. Income Taxes
December 31, 2009
December 31, 2008
Facility
Amount
$ 50,000
150,000
$200,000
Amount
Outstanding
$
—
130,600
$ 130,600
Facility
Amount
$ 50,000
137,100
$187,100
Amount
Outstanding
$
—
127,200
$ 127,200
The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will
not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.
To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to
distributing at least 90% of its investment company taxable income, as defined by the Code. Because federal income tax
regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax
regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences
may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial
statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as
ordinary income for tax purposes. During the year ended December 31, 2009 and 2008, the Company reclassified for book
purposes amounts arising from permanent book/tax differences primarily related to accelerated revenue recognition for income
tax purposes, respectively, as follows:
(in thousands)
Distributions in excess of investment income
Accumulated realized gains (losses)
Additional paid-in capital
2009
$ 2,355
(1,234)
(1,121)
2008
$ 1,256
444
(1,700)
For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term
capital gains or a combination thereof. The tax character of distributions paid for the years ended December 31, 2009 and 2008
was as follows:
(in thousands)
Ordinary Income
(a)
Capital Gains
Return of Capital
Tax Reported on tax form 1099-DIV
(a) Ordinary income is reported on form 1099-DIV as non-qualified.
2009
$43,914
—
—
$43,914
2008
$40,780
2,501
—
$43,281
The aggregate gross unrealized appreciation of our investments over cost for federal income tax purposes was $17.4
million and $8.5 million as of December 31, 2009 and 2008, respectively. The aggregate gross unrealized depreciation of our
investments under cost for federal income tax purposes was $30.5 million and $22.6 million as of December 31, 2009 and
2008, respectively. The net unrealized depreciation over cost for federal income tax purposes was $13.1 million as of
December 31, 2009 and net unrealized depreciation over cost for federal income tax purposes was $14.1 million as of
December 31, 2008. The aggregate cost of securities for federal income tax purposes was $379.6 million and $595.4 million as
of December 31, 2009 and 2008, respectively.
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At December 31, 2009 and 2008, the components of distributable earnings on a tax basis detailed below differ from the
amounts reflected in the Company’s Statement of Net Assets and Liabilities by temporary book/tax differences primarily
arising from the treatment of loan related yield enhancements.
(in thousands)
Accumulated Capital Gains (Losses)
Other Temporary Differences
Undistributed Ordinary Income
Unrealized Appreciation (Depreciation)
Components of Distributable Earnings
2009
$(27,153)
(6,974)
849
(9,278)
$(42,556)
2008
$ —
(4,729)
5,723
(14,329)
$(13,335)
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109, which is codified in FASB ASC Topic 740, Income Taxes (“ASC 740”), on January 1, 2007. ASC
740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an uncertain tax position
is required to meet before tax benefits associated with such uncertain tax position are recognized in the consolidated financial
statements. The adoption of ASC 740 did not require a cumulative effect adjustment to the January 1, 2007 undistributed net
realized earnings. The Company will classify interest and penalties, if any, related to unrecognized tax benefits as a component
of provision for income taxes.
Based on an analysis of our tax position, there are no uncertain tax positions that met the recognition or measurement
criteria of ASC 740. The Company is currently not subject to income tax examinations. The 2006, 2007 and 2008 federal tax
years for Hercules remain subject to examination by the IRS.
6. Shareholders’ Equity
The Company is authorized to issue 60,000,000 shares of common stock with a par value of $0.001. Each share of
common stock entitles the holder to one vote.
In conjunction with a June 2004 private placement, the Company issued warrants to purchase one share of common stock
within five years (the “Five Year Warrants”). The warrants expired in June of 2009.
A summary of activity in the 5 Year Warrants for each of the three periods ended December 31, 2009 is as follows:
Outstanding at January 1, 2007
Warrants issued
Warrants cancelled
Warrants exercised
Outstanding at December 31, 2007
Warrants issued
Warrants cancelled
Warrants exercised
Outstanding at December 31, 2008
Warrants issued
Warrants exercised
Warrants expired
Outstanding at December 31, 2009
Five-Year
Warrants
616,672
—
—
(244,735)
371,937
—
—
(88,323)
283,614
—
—
(283,614)
—
The Company received net proceeds of approximately $934,000 and $3.1 million from the exercise of the 5-Year
Warrants in the periods ended December 31, 2008 and 2007. No warrants were exercised in 2009.
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On January 3, 2007, in connection with the December 12, 2006 common stock issuance, the underwriters exercised their
overallotment option and purchased an additional 840,000 shares of common stock for additional net proceeds of
approximately $10.9 million.
On June 4, 2007, the Company raised approximately $102.2 million, net of issuance costs, in a public offering of
8.0 million shares of its common stock. On June 19, 2007, in connection with the same common stock issuance, the
underwriters exercised their over-allotment option and purchased an additional 1.2 million shares of common stock for
additional net proceeds of approximately $15.4 million.
During 2009, 2008 and 2007 the Board of Directors elected to receive approximately $22,000, $70,000 and $371,000
respectively, of their compensation in the form of common stock and the Company issued 3,334, 6,668 and 26,668 shares,
respectively, to the directors based on the closing prices of the common stock on the specified election dates.
Common stock subject to future issuance is as follows:
Stock options and warrants
Warrants issued in June 2004
Common stock reserved
7. Equity Incentive Plan
2009
4,924,405
—
4,924,405
2008
3,942,219
283,614
4,225,833
The Company and its stockholders have authorized and adopted an equity incentive plan (the “2004 Plan”) for purposes
of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is
authorized to issue 7,000,000 shares of common stock. Unless terminated earlier by the Company’s Board of Directors, the
2004 Plan will terminate on June 9, 2014, and no additional awards may be made under the 2004 Plan after that date.
The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan”)
for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized
to issue 1,000,000 shares of common stock. Unless terminated earlier by the Company’s Board of Directors, the 2006 Plan will
terminate on May 29, 2016 and no additional awards may be made under the 2006 Plan after that date. The Company filed an
exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006
Plan which was approved on October 10, 2007.
On June 21, 2007, the shareholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of
restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both
Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of
shares of stock issued or delivered by Hercules during the terms of the Plans. The proposed amendments further specify that
no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under
the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding
warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not
exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such
exercise of all of the Company’s outstanding warrants, options and rights issued to Hercules directors, officers and employees,
together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting
securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and
rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our
outstanding voting securities.
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In conjunction with the amendment and in accordance with the exemptive order, on June 21, 2007 the Company made an
automatic grant of shares of restricted common stock to Messrs. Badavas, Chow and Woodward, its independent Board of
Directors, in the amounts of 1,667, 1,667 and 3,334 shares, respectively. In May 2008, the Company issued restricted shares to
Messrs. Badavas and Chow in the amount of 5,000 shares each. In June 2009, the Company issued 5,000 restricted stock
shares to Mr. Woodward. The shares were issued pursuant to the 2006 Plan and vest 33% on an annual basis from the date of
grant and deferred compensation cost will be recognized ratably over the three year vesting period.
In 2009 and 2008, the company issued 306,500 and 248,650 restricted shares, respectively, pursuant to the 2004 Plan.
There were 530,475 restricted shares outstanding as of December 31, 2009. The shares granted in 2008 vest 25% per year on
an annual basis from the date of grant and the shares granted in 2009 vest as to 25% on the first anniversary of the grant and
ratably over the succeeding 36 months. Share based compensation cost will be recognized ratably over the four year vesting
period. No restricted stock was granted pursuant to the 2004 Plan prior to 2008. A summary of restricted stock activity under
the Company’s 2006 and 2004 Plans for each of the three periods ended December 31, 2009 is as follows:
Outstanding at January 1, 2007
Granted
Cancelled
Outstanding at December 31, 2007
Granted
Cancelled
Outstanding at December 31, 2008
Granted
Cancelled
Outstanding at December 31, 2009
2006 Plan
—
6,668
—
6,668
10,000
—
16,668
5,000
—
21,668
2004 Plan
—
—
—
—
248,650
(20,500)
228,150
306,500
(4,175)
530,475
In conjunction with stock options issued in 2004, the Company issued warrants to purchase one share of common stock
within five years. The warrants expired in June 2009.
A summary of common stock options and warrant activity under the Company’s 2006 and 2004 Plans for each of the
three periods ended December 31, 2009 is as follows:
Outstanding at January 1, 2007
Granted
Exercised
Cancelled
Outstanding at December 31, 2007
Granted
Exercised
Cancelled
Outstanding at December 31, 2008
Granted
Exercised
Cancelled
Outstanding at December 31, 2009
Weighted-average exercise price at December 31, 2009
Common
Stock
Options
1,881,013
1,131,000
—
(111,500)
2,900,513
1,319,086
—
(288,072)
3,931,527
1,357,000
—
(364,122)
4,924,405
10.72
$
Five-Year
Warrants
56,551
—
(45,859)
—
10,692
—
—
—
10,692
—
—
(10,692)
—
$ —
Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may
be exercised for a period ending seven years after the date of grant. At December 31, 2009, options
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for approximately 3.1 million shares were exercisable at a weighted average exercise price of approximately $12.96 per share
with weighted average of remaining contractual term of 3.62 years. The Company determined that the fair value of options and
warrants granted under the 2006 and 2004 Plans during the years ended December 31, 2009, 2008 and 2007 was
approximately $746,000, $1.2 million and $1.6 million, respectively. During the years ended December 31, 2009, 2008 and
2007, approximately $977,000 $1.0 million and $1.1 million, of share-based cost was expensed, respectively. As of
December 31, 2009, there was $1.0 million of total unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 2.0 years. The fair value of options granted is based upon a
Black-Scholes option pricing model using the assumptions in the following table for each of the three periods ended
December 31, 2009:
Expected Volatility
Expected Dividends
Expected term (in years)
Risk-free rate
2009
2008
2007
31.52%-45.88%
10%
4.5
23%
8%-10%
4.5
24%
8%
4.5
1.77%-2.22%
2.27%-3.18%
4.29-4.92%
The following table summarizes stock options outstanding and exercisable at December 31, 2009:
(Dollars in thousands)
Range of exercises
prices
$4.21-$6.59
$6.74-$10.39
$10.49-$15.00
$4.21-$15.00
8. Earnings per Share
Number of
shares
1,124,500
343,279
3,456,626
4,924,405
Options outstanding
Weighted
average
remaining
contractual
life
Aggregate
Intrinsic
value
6,941
182
—
7,123
6.21
6.69
3.76
4.52
Weighted
average
exercise
price
Number of
shares
4.22
9.86
—
75,352
12.93 3,036,165
10.72 3,111,517
Options exercisable
Weighted
average
remaining
contractual
life
Aggregate
Intrinsic
value
—
5.99
3.56
3.62
—
24
—
24
Weighted
average
exercise
price
—
10.07
13.04
12.96
In June 2008, the FASB issued ASC 260 (formerly known FASB EITF 03-6-1). Under this standard, unvested awards of
share-based payments with non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock
issued under the 2004 Plan and 2006 Plan, are considered participating securities for purposes of calculating change in net
assets per share. Under the two-class method, a portion of net increase in net assets resulting from operations is allocated to
these participating securities and therefore is excluded from the calculation of change in net assets per share allocated to
common stock, as shown in the table below. This standard requires retrospective application for periods prior to the effective
date and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these
provisions. This standard was effective for financial statements issued for fiscal years beginning after December 15, 2008. The
Company adopted this standard beginning with financial statements ended March 31, 2009. The adoption of the standard did
not change the previously reported basic change in net assets per share and diluted change in net assets per share for the years
ended December 31, 2008 and 2007.
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Computation and reconciliation of change in net assets per common share are as follows:
(in thousands, except per share data)
Numerator
Net increase in net assets resulting from operations
Less: Dividends declared-common and restricted shares
Undistributed earnings
Undistributed earnings-common shares
Add: Dividend declared-common shares
Numerator for basic and diluted change in net assets per common share
Denominator
Basic weighted average common shares outstanding
Common shares issuable
Weighted average common shares outstanding assuming dilution
Change in net assets per common share
Basic
Diluted
Year Ended December 31
2008
2009
2007
$ 13,572
43,914
(30,342)
(30,342)
43,377
13,035
34,486
405
34,891
$ 20,995
43,281
(22,286)
(22,286)
43,048
20,762
32,619
—
32,619
$42,410
33,313
9,097
9,096
33,309
42,405
28,295
92
28,387
$
$
0.38
0.37
$
$
0.64
0.64
$ 1.50
$ 1.49
The calculation of change in net assets per common share—assuming dilution, excludes all anti-dilutive shares. For the
years ended December 31, 2009, 2008 and 2007, the number of anti-dilutive shares, as calculated based on the weighted
average closing price of the Company’s common stock for the periods, was approximately 4,124,000; 3,844,000; and
2,217,000 shares, respectively.
9. Related-Party Transactions
During February 2007, Farallon Capital Management, L.L.C and its related affiliates and Manuel Henriquez, the
Company’s CEO, exercised warrants to purchase 132,480 and 75,075 shares of the Company’s common stock, respectively.
The exercise price of the warrants was $10.57 per share resulting in net proceeds to the company of approximately $2.2
million.
In conjunction with the Company’s public offering completed on June 4, 2007 and the related over-allotment exercise,
the Company agreed to pay JMP Securities LLC a fee of approximately $1.6 million as co-manager of the offering.
In connection with the sale of public equity investments, the Company paid JMP Securities LLC approximately $49,000,
$80,000 and $22,000 respectively, in brokerage commissions during the years ended December 31, 2009, 2008 and 2007,
respectively.
10. Commitments and Contingencies
In the normal course of business, the Company is party to financial instruments with off-balance sheet risk. These
instruments consist primarily of unused commitments to extend credit, in the form of loans, to the Company’s portfolio
companies. The balance of unused commitments to extend credit at December 31, 2009 totaled approximately $93.5 million.
Since this commitment may expire without being drawn upon, the total commitment amount does not necessarily represent
future cash requirements.
Certain premises are leased under agreements which expire at various dates through December 2013. Total rent expense
amounted to approximately $966,000, $957,000 and $749,000 during the years ended December 31, 2009, 2008 and 2007,
respectively.
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Future commitments under the credit facility and operating leases were as follows at December 31, 2009:
(1)(2)
Contractual Obligations
Borrowings
(3)
Operating lease obligations
(4)
Total
Payments due by period
(in thousands)
2012
Total
2011
2010
2014 Thereafter
$130,600 $— $— $— $— $— $130,600
—
$134,257 $991 $967 $991 $708 $— $130,600
3,657
991
991
708
967
—
2013
(1) Excludes commitments to extend credit to our portfolio companies.
(2) The Company also has a warrant participation agreement with Citigroup. See Note 3.
(3)
(4) Long-term facility leases.
Includes borrowings under the SBA debentures. There were no outstanding borrowings under the Wells Facility at December 31, 2009.
As of December 31, 2009, the Company was not a party to any legal proceedings. However, from time to time, we may
be party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights
under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted
with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of
operations.
11. Indemnification
The Company and its executives are covered by Directors and Officers Insurance, with the directors and officers being
indemnified by the Company to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
12. Concentrations of Credit Risk
The Company’s customers are primarily small and medium sized companies in the biopharmaceutical, communications
and networking, consumer and business products, electronics and computers, energy, information services, internet consumer
and business services, medical devices, semiconductor and software industry sectors. These sectors are characterized by high
margins, high growth rates, consolidation and product and market extension opportunities. Value is often vested in intangible
assets and intellectual property.
The largest portfolio companies vary from year to year as new loans are recorded and loans pay off. Loan revenue,
consisting of interest, fees, and recognition of gains on equity interests, can fluctuate dramatically when a loan is paid off or a
related equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio
companies. For the years ended December 31, 2009 and 2008, the Company’s ten largest portfolio companies represented
approximately 51.5% and 33.6%, respectively, of the total fair value of its investments. At December 31, 2009, we had five
equity investments which represented 50.3% of the total fair value of its equity investments and each represents 5% or more of
the total fair value of such investments. At December 31, 2008, we had six equity investments representing approximately
43.8% of the total fair value of our equity investments and each represents 5% or more of the total fair value of such
investments.
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13. Financial Highlights
Following is a schedule of financial highlights for five years ended December 31, 2009.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
2009
2008
For the Years Ended December 31,
2007
2006
2005
$
11.56
$ 12.31
$ 11.65
$
11.67
$
12.18
1.25
0.03
(0.90)
0.38
(0.44)
(1.26)
1.23
0.07
(0.66)
0.64
(0.12)
(1.32)
1.15
0.09
0.26
1.50
0.32
(1.20)
0.78
(0.12)
0.19
0.85
0.28
(1.20)
0.18
0.07
0.05
0.30
(0.82)
(0.03)
0.05
0.05
0.04
0.05
0.04
$
10.29
$ 11.56
$ 12.31
$
11.65
$
11.67
$
10.39
$
7.92
$ 12.42
45.6%
(3)
(25.60)%
(3)
(4.42)%
(3)
$
14.25
28.86%
(3)
$
11.99
(7.58)%
(4)
35,634
33,096
32,541
21,927
9,802
34,486
$366,515
32,619
$382,458
28,295
$400,737
13,352
$255,413
6,939
$114,352
8.23%
8.85%
6.46%
13.11%
11.57%
11.38%
$147,446
9.86%
$196,928
9.81%
$ 66,334
7.93%
$ 77,795
1.93%
$ 20,285
$
4.28
$
6.04
$
2.34
$
5.83
$
2.92
Per share data:
Net asset value at beginning
of period
Net investment income
(1)
Net realized gain (loss)
on investments
Net unrealized
appreciation
(depreciation) on
investments
Total from investment
operations
Net increase/(decrease)
in net assets from
capital share
transactions
Distributions
Stock-based
compensation
expense included in
investment income
(2)
Net asset value at end of
period
Ratios and supplemental
data:
Per share market value at
end of period
Total return
Shares outstanding at end of
period
Weighted average number of
common shares
outstanding
Net assets at end of period
Ratio of operating expense
to average net assets
Ratio of net investment
income before provision
for income tax expense
and investment gains and
losses to average net
assets
Average debt outstanding
Weighted average debt per
common share
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Portfolio turnover
1.38%
3.39%
0.42%
1.50%
0.60%
(1) For 2009 and 2008, basic and diluted net investment income per share are calculated as net investment income divided by the basic and diluted weighted average
share outstanding. Basic net investment income per share calculated under the two class methods are $1.23 and $1.22 for 2009 and 2008, respectively. Diluted net
investment income per share calculated under the two class methods are $1.22 and $1.22 for 2009 and 2008, respectively. There is no difference of net investment
income calculated under the two class method and as disclosed above for 2007, 2006, and 2005.
(2) Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment loss includes the expense associated with
the granting of stock options which is offset by a corresponding increase in paid-in capital.
(3) The total return for the period ended December 31, 2009, 2008, 2007 and 2006 equals the change in the ending market value over the beginning of period price per
share plus dividends paid per share during the period, divided by the beginning price.
(4) The total return for the period ended December 31, 2005 is for a shareholder who owned common shares throughout the period, and received one additional
common share for every two 5 Year Warrants cancelled. Shareholders who purchased common shares on January 26, 2005, exercised 1 Year Warrants, or
purchased common shares in the initial public offering will have a different total return. The Company completed its initial public offering on June 11, 2005; prior
to that date shares were issued in private placements.
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14. Senior Securities
Information about Company’s senior securities is shown in the following table for the periods as of December 31, 2009,
2008, 2007, 2006, 2005 and 2004.
Class and Year
Bridge Loan Credit Facility with Alcmene
Funding L.L.C.
December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2009
Securitized Credit Facility
December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2009
Small Business Administration
Debentures
(4)
December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2009
Wells Facility
December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008
December 31, 2009
Total
Amount
Outstanding
Exclusive of
Treasury
(1)
Securities
—
$ 25,000
—
—
—
—
—
$ 51,000
$ 41,000
$ 79,200
$ 89,582
—
—
—
—
$ 55,050
$ 127,200
$ 130,600
—
—
—
—
—
—
Asset Coverage
per Unit
(2)
Average
Market
Value
per Unit
(3)
$
$
$
$
$
$
$
$
—
2,505
—
—
—
—
—
2,505
7,230
6,755
6,689
—
—
—
—
9,718
4,711
3,806
—
—
—
—
—
—
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Total amount of each class of senior securities outstanding at the end of the period presented, rounded to nearest thousand.
(2) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness
not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset
Coverage per Unit.
(3) Not applicable because senior securities are not registered for public trading.
(4)
Issued by our SBIC subsidiary to the SBA. These categories of senior securities were not subject to the asset coverage requirements of the 1940 Act.
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15. Selected Quarterly Data (Unaudited)
The following tables set forth certain quarterly financial information for each of the eight quarters ended December 31,
2009. This information was derived from our unaudited consolidated financial statements. Results for any quarter are not
necessarily indicative of results for the full year or for any further quarter.
(in thousands, except per share data)
Total investment income
Net investment income before provision for income taxes and investment
gains and losses
Net increase (decrease) in net assets resulting from operations
Change in net assets per common share (basic)
Total investment income
Net investment income before provision for income taxes and investment
gains and losses
Net increase (decrease) in net assets resulting from operations
Change in net assets per common share (basic)
Quarter Ended
3/31/2009
$ 20,450
6/30/2009
$ 19,480
9/30/2009
$ 17,681
12/31/2009
$ 16,666
11,558
4,482
0.14
$
11,821
(13,059)
(0.38)
$
10,347
13,690
0.39
$
9,377
8,459
0.24
$
Quarter Ended
3/31/2008
$ 15,600
6/30/2008
$ 19,022
9/30/2008
$ 19,248
12/31/2008
$ 21,963
9,000
11,037
0.34
$
9,972
8,358
0.25
$
9,992
12,538
0.38
$
11,015
(10,939)
(0.33)
$
16. Subsequent Events
Dividend Declaration
On February 11, 2010, the Board of Directors announced a dividend of $0.20 per share to shareholders of record as of
February 19, 2010 and payable on March 19, 2010. This is the Company’s eighteenth consecutive quarterly dividend
declaration since its initial public offering, and will bring the total cumulative dividends declared to-date to $5.21 per share.
Liquidity and Capital Resources
In February of 2010, we closed on our new $20.0 million credit facility with Union Bank, a one year revolving credit
facility. Pricing of credit facility is LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and
secured by loans in the borrowing base.
In February 2010, we extended the Wells Fargo Foothill facility maturity to August of 2011 from August 2010 under the
same terms and conditions of the existing agreement. We have also commenced negotiations to expand the Credit Facility.
In February 2010, we responded to the Small Business Administration’s comment letter relating to our second SBIC
license for an additional $75 million of borrowings. We anticipate that the license should be approved during the spring of
2010; however, there can be no assurance that the SBA will grant Hercules a second license or when the license will be
approved.
Share Repurchase Program
In February 2010, the Board of Directors approved a $35 million open market share repurchase program. This program
replaces a $15 million repurchase program which expired in November 2009. Hercules may repurchase common stock in the
open market, including block purchases, at prices that may be above or below the net asset value as reported in its then most
recently published financial statements. Hercules anticipates that the manner, timing, and amount of any share purchases will
be determined by company management based upon the evaluation of market conditions, stock price, and additional factors in
accordance with regulatory requirements. As a 1940 Act reporting company, Hercules is required to notify shareholders of the
existence of a repurchase program when such a program is initiated or implemented. The repurchase program does not require
Hercules to acquire any specific number of shares and may be extended, modified, or discontinued at any time.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9a. Controls and Procedures
1. Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer, Chief Financial and Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer, Chief Financial and Accounting
Officer have concluded that our disclosure controls and procedures are effective in timely alerting them of material
information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934.
2. Internal Control Over Financial Reporting
a. Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for the assessment of the
effectiveness of internal control over financial reporting.
Management’s annual report on internal control over financial reporting is set forth under the heading “Management’s
Annual Report on Internal Control Over Financial Reporting” in this Annual Report which is included on page 80.
b. Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation report on our internal
control over financial reporting, which is included at the beginning of Part II, Item 8 of this Annual Report on Form 10-K.
c. Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9b. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information in response to this Item is incorporated herein by reference to the information provided in our definitive
Proxy Statement for our 2010 Annual Meeting of Shareholders (the “2010 Proxy Statement”) to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 under the headings
“PROPOSAL I: ELECTION OF DIRECTORS,” “INFORMATION ABOUT EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS” and “CERTAIN RELATIONSHIPS AND TRANSACTIONS.”
We have adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of
business conduct and ethics is available on our website at http//www.herculestech.com. We will report any amendments to or
waivers of a required provision of the code of business conduct and ethics on our website or in a Form 8-K.
Item 11. Executive Compensation
The information with respect to compensation of executives and directors is contained under the caption “Compensation
of Executive Officers and Directors” in our 2010 Proxy Statement and is incorporated in this Annual Report by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information with respect to security ownership of certain beneficial owners and management is contained under the
captions “Security Ownership of Certain Beneficial Owners and Management” and “Compensation of Executive Officers and
Directors” in our 2010 Proxy Statement and is incorporated in this Annual Report by reference in response to this item.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information with respect to certain relationships and related transactions is contained under the caption “Certain
Relationships and Transactions” and the caption “Proposal I: Election of Directors” in our 2010 Proxy Statement and is
incorporated in this Annual Report by reference in response to this item.
Item 14. Principal Accountant Fees and Services
The information with respect to principal accountant fees and services is contained under the captions “Principal
Accountant Fees and Services” and “Proposal II: Ratification of Selection of Independent Auditors” in our 2010 Proxy
Statement and is incorporated in this Annual Report by reference to this item.
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Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
PART IV
The following financial statements of Hercules Technology Growth Capital, Inc. (the “Company” or the
“Registrant”) are filed herewith:
AUDITED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of December 31, 2009 and
December 31, 2008
Consolidated Schedule of Investments as of December 31, 2009
Consolidated Schedule of Investments as of December 31, 2008
Consolidated Statements of Operations for the three years ended December 31, 2009
Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2009
Consolidated Statements of Cash Flows for the three years ended December 31, 2009
Notes to Consolidated Financial Statements
81
82
94
108
109
110
111
2. The following financial statement schedule is filed herewith:
Schedule 12-14 Investments In and Advances to Affiliates
3. Exhibits required to be filed by Item 601 of Regulation S-K.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Hercules Technology Growth Capital, Inc.
We have audited the consolidated statements of assets and liabilities of Hercules Technology Growth Capital, Inc., (the
Company) including the consolidated schedules of investments, as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended
December 31, 2009, and the consolidated financial highlights for each of the five years in the period ended December 31, 2009
and have issued our report thereon dated March 12, 2010 (included elsewhere in the Form 10-K). Our audits also included the
financial statement schedule listed in Item 15 of this Form 10-K. This schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
March 12, 2010
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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFLIATES
As of and for the year ended December 31, 2009
(in thousands)
Schedule 12-14
Portfolio Company
Control Investments
InfoLogix, Inc.
(5)
Affiliate Investments
E-band Communications, Inc.
Proficiency, Inc.
(6)
Peerless Network, Inc.
(6)
Total Control and Affliate
Investments
Investment
(1)
Amount of
Interest
Credited to
(2)
Income
As of
December 31,
2008
Fair Value
Gross
Additions
(3)
Gross
Reductions
(4)
As of
December 31,
2009
Fair Value
$
Senior Debt
Convertible Senior Debt
Revolving Line of Credit
Common stock warrants
Common stock
$
77
85
104
266
12,007
—
9,000
—
—
21,007
$ 2,049
10,060
603
1,494
7,571
21,777
$ 8,556
—
2,044
—
—
10,600
$
1,370
—
Preferred Stock
Senior Debt
Preferred stock warrants
Preferred Stock
Senior Debt
Preferred stock warrants
Preferred Stock
—
150
3
158
904
—
—
—
1,318
—
—
2,222
5,500
10,060
7,559
1,494
7,571
32,184
2,274
—
—
—
1,370
—
2,274
$
419
$
2,222
$23,147
$ 10,600
$
34,458
(1) Stock and warrants are generally non-income producing and restricted. The principal amount for debt is shown in the Consolidated Schedule of Investments as of
December 31, 2009.
(2) Represents the total amount of interest or dividends credited to income for the portion of the year an investment was an affiliate or control investment.
(3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of
discounts and closing fees and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increase in
unrealized appreciation or net decreases in unrealized depreciation.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing
securities for one or more new securities. Gross reductions also include net increase in unrealized depreciation or net decreases in unrealized appreciation.
(5) Not a Control Investment in 2008. During the fourth quarter of 2009, as a result of debt conversion, the Company obtained a controlling interest in InfoLogix Inc.
(6) As of December 31, 2008, the investments were classified as Affiliate investments. As of December 31, 2009, the investments are not classified as Affiliate
investments. In 2009, the Company recognized a realized loss on Proficiency investment and in 2009, the Company didn’t participate a new equity round with
Peerless Network, Inc, which resulted a decrease of the percentage of ownership to less than 5%.
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3. Exhibits
Exhibit
Number
3(a)
3(b)
3(c)
4(a)
4(b)
4(c)
4(d)
4(e)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
10(m)
10(n)
10(o)
Description
Articles of Amendment and Restatement.(8)
Amended and Restated Bylaws.(8)
Articles of Amendment.(7)
Specimen certificate of the Company’s common stock, par value $.001 per share.(1)
Form of Dividend Reinvestment Plan.(1)
Indenture between Hercules Funding Trust I and U.S. Bank National Association dated as of August 1,
2005.(2)
Registration Rights Agreement dated June 22, 2004 between the Company and JMP Securities LLC.(1)
Registration Rights Agreement dated March 2, 2006 between the Company and affiliates of Farallon
Management, L.L.C.(3)
Credit Agreement dated as of April 12, 2005 between Hercules Technology Growth Capital, Inc. and
Alcmene Funding, L.L.C.(8)
Pledge and Security Agreement dated as of April 12, 2005 between Hercules Technology Growth
Capital, Inc. and Alcmene Funding, L.L.C.(8)
First Amendment to Credit and Pledge Security Agreement dated August 1, 2005 between Hercules
Technology Growth Capital, Inc. and Alcmene Funding L.L.C.(2)
Second Amendment to Credit and Pledge and Security Agreement by and among Hercules Technology
Growth Capital, Inc. and Alcmene Funding, L.L.C., as lender and administrative agent for the lenders,
dated March 6, 2006.(12)
Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc.
dated as of August 1, 2005.(2)
Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding LLC, Hercules
Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial Services, Inc.
dated as of August 1, 2005.(2)
Indenture between Hercules Funding Trust I & U.S. Bank National Association dated as of August 1,
2005.(2)
Note Purchase Agreement among Hercules Funding Trust I, Hercules Funding I LLC, Hercules
Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp. dated as of August 1, 2005.
(2)
Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2007 Amendment and
Restatement).(10)
Hercules Technology Growth Capital, Inc. 2006 Non-Employee Director Plan (2007 amendment and
Restatement).(11)
Form of Custody Agreement between the Company and Union Bank of California.(8)
Form of Restricted Stock Award under the 2004 Equity Incentive Plan.(19)
Subscription Agreement by and among the Company and the subscribers named therein dated March 2,
2006.(17)
Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan.(8)
Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan.(8)
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Exhibit
Number
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
10(v)
10(w)
10(x)
10(y)
10(z)
10(aa)
10(bb)
10(cc)
10(dd)
10(ee)
10(ff)
10(gg)
10(hh)
Description
Form of Registrar Transfer Agency and Service Agreement between the Company and American Stock
Transfer & Trust Company.(8)
Warrant Agreement dated June 22, 2004 between the Company and American Stock Transfer & Trust
Company, as warrant agent.(9)
Side Letter dated February 2, 2004 between the Company and Jolson Merchant Partners Group LLC (now
known as JMP Group LLC).(9)
Letter Agreement dated February 22, 2005 between the Company and JMP Asset Management LLC.(8)
Letter Agreement dated February 22, 2005 between the Company and Farallon Capital Management,
L.L.C.(8)
Subscription Agreement dated February 2, 2004 between the Company and the subscribers named therein.
(8)
Lease Agreement dated June 13, 2006 between the Company and 400 Hamilton Associates.(4)
Third Amendment to Sale and Servicing Agreement among Hercules Funding Trust I, Hercules Funding
LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association and Lyon Financial
Services, Inc. dated as of July 28, 2006.(5)
Second Omnibus Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, Hercules
Technology Growth Capital, Inc., U.S. Bank National Association, Lyon Financial Services, Inc. and
Citigroup Global Markets Realty Corp. dated December 6, 2006.(6)
Fifth Amendment to Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules
Funding I, LLC, Hercules Technology Growth Capital, Inc., U.S. Bank National Association, Lyon
Financial Services, Inc. and Citigroup Global Markets Realty Corp. dated March 30, 2007.(13)
Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules
Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup
Global Markets Inc., and Deutsche Bank AG dated as of May 2, 2007.(14)
Fourth Amendment to the Warrant Participation Agreement dated as of May 2, 2007.(15)
Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I,
Hercules Funding I LLC, and Citigroup Global Markets, Inc. dated as of May 2, 2007.(15)
First Amendment to Amended and Restated Note Purchase Agreement by and among the Company,
Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc. dated as of May 7,
2008.(16)
Second Amendment to Amended and Restated Sale and Servicing Agreement by and among Hercules
Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial
Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG dated as of May 7, 2008.(16)
Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC
dated August 25, 2008.(18)
Sale and Servicing Agreement among Hercules Funding II LLC, the Company, Lyon Financial Services,
Inc., and Wells Fargo Foothill, LLC, dated August 25, 2008.(18)
Form of SBA Debenture.(19)
First Amendment to Loan and Security Agreement.(20)
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Exhibit
Number
10(ii)
14
21*
23.1*
31(a)*
31(b)*
32(a)*
32(b)*
Description
Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A. dated
February 10, 10.(21)
Code of Ethics.(8)
List of Subsidiaries.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial and Accounting Officer Certification Pursuant to Rule 13a-14 of the Securities Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Principal Financial and Accounting Officer Certification pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Previously filed as part of Pre-Effective Amendment No. 2, as filed June 8, 2005 (Registration No. 333-122950) to the Registration Statement on Form N-2 of
the Company.
Previously filed as part of a Form 8-K filed with the Commission on August 5, 2005.
Previously filed as part of a Form 8-K filed with the Commission on March 2, 2006.
Previously filed as part of a Form 8-K filed with the Commission on June 13, 2006.
Previously filed as part of a Form 8-K filed with the Commission on July 28, 2006.
Previously filed as part of a Form 8-K filed with the Commission on December 6, 2006.
Previously filed as part of the Current Report on Form 8-K of the Company, as filed March 9, 2007.
Previously filed as part of a Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950) to the Registration Statement on Form N-2 of the
Company.
Previously filed as part of the Registration Statement on Form N-2 of the Company, as filed on February 22, 2005.
(9)
(10) Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed June 22, 2007.
(11) Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed October 10, 2007.
(12) Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604) to the Registration Statement on Form N-2 of
the Company.
(13) Previously filed as part of the Current Report on Form 8-K of the Company, as filed April 3, 2007.
(14) Previously filed as part of the Current Report on Form 8-K of the Company, as filed May 5, 2007.
(15) Previously filed as part of the Pre-Effective Amendment No. 1, as filed May 15, 2007 (File No. 333-141828), to the Registration Statement on Form N-2 of the
Company.
(16) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 5, 2008 (File No. 333-150403 ) to the Registration Statement on Form N-2 of the
Company.
(17) Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604) to the Registration Statement on Form N-2 of
the Company.
(18) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 27, 2008.
(19) Previously filed as part of a Form 10-K filed with the Commission on March 16, 2009.
(20) Previously filed as part of a Form 10-Q filed with the Commission on May 11, 2009.
(21) Previously filed as part of a Form 8-K filed with the Commission on February 17, 2010.
*
Filed herewith
141
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 12, 2010
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
By:
/S/ MANUEL A. HENRIQUEZ
Manuel A. Henriquez
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the following capacities on March 16, 2010.
Signature
Title
Date
/s/ MANUEL A. HENRIQUEZ
Manuel A. Henriquez
Chairman of the Board, President and
Chief Executive Officer (principal
executive officer)
/s/ DAVID M. LUND
David M. Lund
Chief Financial Officer (principal
financial and accounting officer)
/s/ ALLYN C. WOODWARD, JR
Allyn C. Woodward, Jr.
/s/ JOSEPH W. CHOW
Joseph W. Chow
/s/ ROBERT P. BADAVAS
Robert P. Badavas
Director
Director
Director
142
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
March 12, 2010
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Exhibit
Number
Descriptions
EXHIBIT INDEX
21
23.1
31(a)
31(b)
32(a)
32(b)
List of Subsidiaries.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial and Accounting Officer Certification Pursuant to Rule 13a-14 of the Securities Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Principal Financial and Accounting Officer Certification pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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