A BILLION WAYS
TO CHANGE THE
WORLD
2 01 1 A N N UA L R E P O R T
SUCCESSFUL INNOVATIONS
ARE AS DISTINCTIVE AS
THE ENTREPRENEURS WHO
LAUNCH THEM. THERE IS
NO SINGLE “RIGHT WAY”
TO SUCCEED.
High-growth companies with ambitious goals have unique fi nancing needs. As a leading specialty fi nance
company, Hercules Technology Growth Capital provides debt and select equity growth capital to venture
capital and private equity–backed businesses. Whether technology, cleantech, life science, or lower middle
market companies, our customized fi nancing solutions enable entrepreneurial organizations to achieve
critical milestones throughout all stages of development.
NASDAQ STOCK EXCHANGE UNDER SYMBOL: HTGC
FINANCIAL
HIGHLIGHTS
US dollars in millions, except per-share amounts
2009
2010
Total Investment Income
Net Investment Income (NII)
NII per Share
Declared Dividends per Share
Investments, at Value
Cash and Cash Equivalents
Total Assets
Total Liabilities
Total Net Assets
$ 74.3
43.1
1.25
1.26
374.7
124.8
509.0
142.5
366.5
$ 59.5
29.4
0.80
0.80
472.0
107.0
591.2
178.7
412.5
2011
$ 79.9
39.6
0.91
0.88
652.9
64.5
747.4
316.4
431.0
Comparison of 5-Year Cumulative Total Return
$203.0 Million, or $6.69 per Share, in Dividends
Paid to Shareholders Since Inception
140
120
100
80
60
40
20
0
.
5
7
3
$
3
4
2
$
.
.
3
0
0
$
.
3
0
0
$
0
2
.
1
$
3
2
.
1
$
0
2
.
1
$
2
3
.
1
$
6
2
.
1
$
.
1
8
5
$
.
1
0
5
$
0
8
0
$
.
06
07
08
09
10
11
05
06
07
08
09
10
HTGC
S&P 500
NASDAQ Financial 100
Source: Capital IQ
Dividends Declared per Year
Cumulative Dividends Declared
S&P Asset Management and Custody Banks
iShares Dow Jones US Financial Sector Index (IYF)
Cumulative Commitments and Funding ($ in billions)
Total Net Assets ($ in millions)
9
6
6
$
.
.
8
8
0
$
11
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
$1.4
$1.1
$1.5
$1.2
$0.9
$0.7
$2.7
$2.0
$2.1
$1.5
.
7
0
0
4
$
.
5
2
8
3
$
07
08
09
10
11
07
08
Total Commitments*
Total Fundings*
*Debt only
Total Net Assets
.
5
2
1
4
$
0
.
1
3
4
$
10
11
.
5
6
6
3
$
2
3
.
1
09
2011 Annual Report 1
TO OUR VALUED
SHAREHOLDERS,
2011 was exceptionally strong on many fronts. We focused on portfolio growth and continued to build our portfolio with some
of the potentially most promising venture capital and private equity–backed technology-related companies, providing our
individual and institutional investors with a unique way to invest in emerging growth, pre–initial public offering (IPO) companies.
By bolstering our balance sheet and diversifying our liquidity sources throughout the year, we were able to deliver a record
number of commitments and fundings in 2011 against what we believe to be a backdrop of healthy venture capital activity. We
reported solid growth in net investment income for the year, which translated into consistent dividends for our shareholders.
Portfolio Growth In 2011 Hercules reached the $2.7 billion mark in total commitments since inception to over 190 technology-
related companies, including cleantech, life science, and lower middle market technology companies since our founding in
December 2003. Our investment discipline has allowed us to keep our net realized losses to approximately $50.1 million since
inception, representing 1.8 percent of gross commitments, or an annualized loss rate of approximately 25 basis points.
In 2011 we delivered the following portfolio highlights:
• We grew commitments to new and existing portfolio companies to approximately $630.0 million, an increase of
20.5 percent from 2010.
• We put to work signifi cant liquidity, ending the year with total investment assets of approximately $652.9 million, an
increase of 38.3 percent year-over-year and our highest level since inception.
• We maintained a conservative and credit-conscious management underwriting strategy. On a scale of 1 to 5 with 1 being
the highest credit quality, we fi nished the fourth quarter of 2011 with a weighted-average loan grade of 2.01 on the portfolio,
one of the strongest credit quality quarters in Hercules' history.
• We held warrant positions in approximately 109 portfolio companies and direct equity positions in over 35 different portfolio
companies at year-end.
Venture Capital Environment Over the course of 2011, we saw a resurgence in the venture capital investment environment.
In 2011 the venture capital industry made approximately $32.6 billion of new investments in 3,209 entrepreneurial companies,
representing a 10.0 percent increase from 2010. The mergers-and-acquisitions markets were particularly strong, with 460
transactions and deal volume of $46.4 billion in 2011, an increase of 30.0 percent in deal value from 2010. The IPO markets
held steady with 45 IPOs netting $5.4 billion, an increase of 65.0 percent in deal value from 2010, as reported by Dow Jones
VentureSource. These market conditions contributed to liquidity events for seven of our portfolio companies during 2011. One
of these events was the sale of our portfolio company InfoLogix, Inc., which was completed in January 2011 and represented
a gain of more than $8.0 million, the largest gain on a single investment for Hercules to date.
Strong Financial Position We enhanced our liquidity and balance sheet as well as our long-term fi nancial profi le to support
our growth. In April 2011 we successfully closed a private offering of $75.0 million aggregate principal amount of 6.0 percent
convertible senior notes due 2016. We renewed and increased our $300.0 million accordion credit facility with an initial
commitment of $75.0 million through Wells Fargo Capital Finance. We also renewed and increased our Union Bank credit
2 Hercules Technology Growth Capital
facility, increasing it to $55.0 million from $20.0 million while adding Royal Bank of Canada to the syndicate. In January 2011
we repaid $25.0 million of Small Business Administration debentures under our Small Business Investment Company (SBIC)
subsidiary, Hercules Technology II, L.P. In February 2011 we submitted a request to borrow $25.0 million under a new capital
commitment under our SBIC subsidiary Hercules Technology III, L.P., bringing the total available borrowings to $225.0 million.
In addition, during January 2012 we raised approximately $48.0 million in proceeds in an equity offering, further increasing
our fi nancial strength and fl exibility and providing additional capacity to fund growth in our portfolio in 2012.
Dividends We distributed a dividend of $0.22 per share each quarter in 2011 and increased the dividend by 5.0 percent to
$0.23 per share in the fi rst quarter of 2012. Hercules has declared 26 consecutive quarterly dividends since our IPO in June
2005, bringing the total cumulative dividends declared to $6.69 per share at the end of 2011 and $6.92 per share at the end
of the fi rst quarter 2012.
Outlook for 2012 We enter 2012 in a strong liquidity position with a signifi cantly higher level of earning assets on our
balance sheet. The emphasis for 2012 is to expand and diversify our liquidity sources while deploying capital at a prudent
rate. We intend to maintain a measured approach in our investment activity given the fi nancial market uncertainty but remain
optimistic about the venture capital industry opportunities overall in 2012.
Our investment of approximately $9.6 million in Facebook, Inc., in January 2012 demonstrates another innovative way we
intend to provide our shareholders with exposure to what we believe are some of America’s potentially most promising
private companies. We remain confi dent about our ability to further grow and monetize our portfolio of approximately 109
warrant positions and over 35 different equity positions in venture-backed companies for future gains for our shareholders.
We are committed to reinforcing our leadership role as the lender of choice and a trusted fi nancial partner to our portfolio
companies and their venture capital and private equity sponsors.
We are proud of all of our accomplishments during 2011, and we enter 2012 with continued confi dence in Hercules’ ability to
deliver returns to investors in 2012. None of these accomplishments would have been achievable, however, without the talent
and the dedication of our team of investment and management professionals, the guidance of our board of directors, and
the ongoing support of our shareholders.
Sincerely,
Manuel A. Henriquez
M
l A H
i
Co-Founder, Chairman, and Chief Executive Offi cer
2011 Annual Report 3
TECHNOLOGY
We are proud to work with a range of companies—
from household names to the next big innovators in
communication networks, e-commerce, enterprise
software and services, mobility, security, semiconductors,
and other technology-enabled services.
t Facebook: Truly revolution-
ary communication advances
in the history of mankind have
been few. This company started
the most recent one, connect-
ing more than 800 million
people around the world.
t Box: Cloud computing now
makes it possible to connect
and collaborate anywhere,
instantly. Sounds easy, but it’s
hard to make simple. Box does
it for 8+ million individuals,
small businesses, and Fortune
500 companies.
4 Hercules Technology Growth Capital
CLEANTECH
Hercules’ customized debt-fi nancing solutions are
helping cleantech companies accelerate innovation in
power generation, energy effi ciency and management,
carbon management, advanced materials, and more.
t Trilliant: New smart grid
communications solutions
go beyond the meter to give
utilities the technology they
need to enhance energy
effi ciency, lower operating
costs, and integrate renewable
energy sources.
t BrightSource Energy:
Creating steam from the sun
powers utility plants and
industrial companies reliably
and cost-competitively, mini-
mizes environmental impact,
and reduces dependence on
fossil fuels.
2011 Annual Report 5
LIFE SCIENCE
Our portfolio companies are tackling the process of
aging, improving antibiotic effectiveness, developing
new drug delivery systems—and creating a new wave
of life-altering innovation.
t BÂRRX Medical: Acid refl ux
creates more than just heartburn.
It dramatically increases the risk
of esophageal cancer, which has
a dismal fi ve-year survival record.
Technology from BÂRRX is
changing that outcome.
t AVEO Pharmaceuticals: By
combining a genetically defi ned
cancer biology platform with
promising drug candidates,
AVEO is creating a blueprint for
improving cancer therapy and
rapidly bringing new treatments
to market.
6 Hercules Technology Growth Capital
LOWER MIDDLE
MARKET
We partner with a fascinating mix of up-and-coming
companies to help them achieve unique business objectives.
From organic food and healthcare services to telecom and
turnkey cosmetic marketing, our portfolio companies are
outstanding in their fi elds.
t Annie’s: Natural foods with
simple ingredients are some-
thing every family can feel
good about. For more than
20 years, Annie’s continues its
ambitious vision, proving that
convenient foods can also be
healthy foods.
t Pacifi c Child & Family
Associates: Pacifi c Child is
making a world of difference
for children with special needs.
For 24 years it has provided
innovative services to children
with developmental disabilities,
particularly those with autism.
2011 Annual Report 7
$2.7 BILLION WAYS TO
CHANGE THE WORLD
One hundred ninety venture capital and private equity–backed companies are
driving new waves of innovation with our help. We back technology, cleantech,
life science, and select lower middle market company entrepreneurs with
ambitious goals and the potential to achieve them.
26
109
6
CONSECUTIVE QUARTERS
of declared dividend
As of December 31, 2011
COMPANIES with
warrant positions
As of December 31, 2011
COMPANIES completed or in
IPO registration (YTD 2012)
$2.7B
in COMMITMENTS
(December 2011)
$123.3M
in COMMITMENTS
(June IPO 2005)
select portfolio companies
FORM 10-K
2010 Annual Report 3
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
‘ 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 ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes ‘ No È
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 È NO ‘
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 ‘ No ‘
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. ‘
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 ‘ Accelerated filer È Non-accelerated filer ‘ Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ‘ No È
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 $390.1 million based
upon a closing price of $10.52 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.
On March 8, 2012, there were 48,930,591 shares outstanding of the Registrant’s common stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2012 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.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
FORM 10-K
ANNUAL REPORT
Part I.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved SEC Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures
Part II.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III.
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Page
1
27
55
55
55
55
56
60
61
89
91
162
162
163
164
164
164
164
164
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures
165
171
Part IV.
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.
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 select lower middle market technology
companies. We primarily finance privately-held companies backed by leading venture capital and private equity
firms, and also may finance certain 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 through additional offices in Boston, MA, Boulder, CO, and McLean, VA.
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 technology-related companies including clean technology,
life science and select lower middle market technology companies 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 some or all of the assets of the portfolio company.
We also make investments in qualifying small businesses through two wholly-owned, small business
investment company (“SBIC”) subsidiaries, Hercules Technology II, L.P. (“HT II”) and Hercules Technology
III, L.P. (“HT III”). As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other
things, the size and nature of the companies in which they may invest and the structure of those investments. As
of December 31, 2011, we held investments in HT II in 57 companies with a fair value of approximately $198.7
million. HT II’s portfolio companies accounted for approximately 30.4% of our total portfolio at December 31,
2011. As of December 31, 2011, we held investments in HT III in 23 companies with a fair value of
approximately $124.8 million. HT III’s portfolio accounted for approximately 19.1% of our total portfolio at
December 31, 2011.
HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively, and
accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31, 2011.
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 science. Within the life science sub-sector, we
generally focus on medical devices, bio-pharmaceutical, drug discovery, drug delivery, health care services and
information systems companies. Within the clean technology sub-sector, we focus on sustainable and renewable
energy technologies and energy efficiency and monitoring technologies. 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.
1
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, including
the right to convert some portion of our debt into equity, 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 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. 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 select lower middle market companies. We have 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.
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
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. 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,
or the SBA, 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, or the Code. As of January 1, 2006, we have elected to be treated for federal income tax
purposes as a regulated investment company, or a RIC, under Subchapter M of the Code. 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 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 offices in Boston, MA, Boulder, CO and McLean,
VA. 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 to be part of
this Annual Report.
2
We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC
under the Securities Exchange Act of 1934, which we refer to as the Exchange Act. This information is available
at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information
about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. In addition, the
SEC maintains an Internet website, at www.sec.gov, that contains reports, proxy and information statements, and
other information regarding issuers, including us, who file documents electronically with the SEC.
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; and
•
Structured debt with warrants products are less dilutive and complement equity financing from venture
capital and private equity funds.
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 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 emerging growth or expansion stage 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. During 2011, venture capital-
backed companies received, in approximately 3,209 transactions, equity financing in an aggregate amount of
approximately $32.6 billion, representing a 10.1% increase from the same period of the preceding year, as
reported by Dow Jones VentureSource. In addition, overall, the median round size during the three-month
periods ended December 31, 2011 and 2010 was approximately $4.0 million and $4.1 million, respectively. We
believe the larger number of venture-backed companies receiving financing provides us a greater opportunity to
3
provide debt financing to these companies. Overall, seed- and first-round deals made up 45% of the deal flow in
the three months ended December 31, 2011 and later-stage deals made up roughly 55% of the deal activity in the
quarter.
We believe that demand for structured debt financing is currently underserved, in part because of the credit
market collapse in 2008 and the resulting exit of debt capital providers to technology-related companies. The
venture capital market for the technology-related companies in which we invest has been active and is continuing
to show signs of increased investment activity. 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, our team members have originated
structured debt, debt with warrants and equity investments in over 190 technology-related companies,
representing over $2.7 billion in commitments from inception to December 31, 2011, 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.
4
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,
including the right to convert some portion of our debt into equity, 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, including select publicly listed companies and select lower middle market 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,
2011, our proprietary SQL-based database system included over 26,500 technology-related companies and
approximately 6,500 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.
5
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 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 12 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 three to 12 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
approximately 14.0% as of December 31, 2011. As of December 31, 2011, 90.7% of our loans were at floating
rates or floating rates with a floor and 9.3% 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, commitment 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, facility fees and amendment fees.
In addition, the majority of our investments in venture capital-backed companies structured debt 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 approximately 14.0% and may
include an additional end-of-term payment or PIK. In most cases we collateralize our investments by
obtaining security interests in our portfolio companies’ assets, which may include their intellectual
6
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
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 but may be up to $15.0 million for certain clean technology venture investments, carry a
contractual interest rate between Prime and Prime plus 9.0%, 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, 2011, we held equity interests in 40 portfolio companies.
7
A comparison of the typical features of our various investment alternatives is set forth in the chart below.
Structured debt with
warrants
Senior Debt
Equipment Loans
Equity related
Securities
Typical Structure Term debt with
Investment
Horizon
Ranking/Security
warrants
Long term, ranging
from 2 to 7 years,
with an average of 3
years
Senior secured,
either first out or
last out, or second
lien
Term or revolving
debt
Term debt with
warrants
Preferred stock or
common stock
Usually under 3
years
Ranging from 3 to 4
years
Ranging from 3 to 7
years
Senior/First lien
Secured only by
underlying
equipment
None/unsecured
Covenants
Less restrictive;
Mostly financial;
Maintenance-based
Generally
borrowing base and
financial
None
None
Risk Tolerance
Medium/High
Low
High
High
Coupon/Dividend Cash pay—fixed
and floating rate;
Payment-in-kind in
limited cases
Cash pay—floating
or fixed rate
Cash pay-floating or
fixed rate and may
include Payment-in-
kind
Generally none
Customization or
Flexibility
More flexible
Little to none
Little to none
Flexible
Equity Dilution
Low to medium
None to low
Low
High
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. At
December 31, 2011, our investments in life science, lower middle market technology, technology and clean
technology companies accounted for approximately 45.32%, 30.23%, 13.96%, and 10.48% of our total
investments, respectively.
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
8
have received or anticipate to have commitments for their first institutional round of equity financing for early
stage companies. Starting in 2008, we shifted 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 six to twelve months.
Security Interest. In many instances we seek a first priority security interest in all of the portfolio
companies’ 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.
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.
9
Our investment process is summarized in the following chart:
Origination
Deal Sourcing and Screening and Preliminary Due Diligence.
Term Sheet Structuring, Negotiation and Execution.
Underwriting
Formal Due Diligence to Create Investment Memorandum.
Transaction Reviewed By Investment Committee.
Approval
Rejection
Documentation
Loan Documents Drafted and Negotiated.
Due Diligence Finalized.
Loan Documents Executed.
Loan and Compliance Administration
Loan Funded and Recorded.
Ongoing Invoicing and Collection.
Tracking, Monitoring, Reviewing, Reporting, Plotting,
Analyzing, Valuing, Restructuring, Credit Scoring, etc.
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, Clean 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, clean technology, and
life science sub-teams to better source potential portfolio companies.
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, 2011, our proprietary SQL-based database system included over
26,500 technology-related companies and approximately 6,500 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.
10
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 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 approval of a majority of our investment committee and an
affirmative vote by our Chief Executive Officer 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, our Chief Credit Officer and the Senior Managing Directors of Technology, Clean 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.
Loan and Compliance Administration
Our loan and compliance administration group, headed by our Chief Financial Officer and Chief 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 our Board of Directors, accordingly,
regarding the credit and investment grading for each portfolio company as well as changes in the value of
collateral that may occur.
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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 may 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 or maintain it at a grade 3 as the company continues to pursue its business plan.
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.
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, 2011, our investments had a weighted average investment grading of 2.01.
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
12
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 BDC under the Investment Company Act of 1940, as amended, or the “1940
Act. From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter
C of 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 5 of the notes to our consolidated financial statements).
Hercules Technology II, L.P., or HT II, Hercules Technology III, LP, or HT III, and Hercules Technology
IV, L.P., or HT IV, are Delaware limited partnerships that were formed in January 2005, September 2009 and
December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies,
or SBICs, under the authority of the Small Business Administration, or SBA on September 27, 2006 and May 26,
2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other
things, the size and nature of the companies in which they may invest and the structure of those investments. The
Company also formed Hercules Technology SBIC Management, LLC, or HTM, a limited liability company in
November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and
general partner of HT II and HT III (see Note 4 of the notes to our consolidated financial statements).
HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively, and
accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31, 2011.
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 Capital Finance.
Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301.
We also have offices in Boston, MA, Boulder, CO and McLean, VA.
13
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, 2011, we had 51 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. 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
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;
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(b)
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
(c) 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.
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
15
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 7 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.
At our Annual Meeting of Stockholders on June 1, 2011, 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.
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As a result, investors will experience further dilution and additional discounts to the price of our common
stock. 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 (202) 551-8090. 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 also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549.
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
of our wholly-owned subsidiaries that are small business investment companies 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 June 22, 2010 we received approval from the SEC regarding our request 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.
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
On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able
to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business
Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time
SBA guaranteed debentures up to twice the amount of its regulatory capital. As of December 31, 2011, 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. The Company’s net investment of $75.0
million in HT II as of December 31, 2011 fully funds the required regulatory capital for HT II. HT II has a total
of $125.0 million of SBA guaranteed debentures outstanding as of December 31, 2011 and has paid the SBA
commitment fees of approximately $1.5 million. As of December 31, 2011, the Company held investments in
HT II in 57 companies with a fair value of approximately $198.7 million, accounting for approximately 30.4%
of the Company’s total portfolio.
On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to
borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With
the Company’s net investment of $50.0 million in HT III as of December 31, 2011, HT III has the capacity to
18
issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $100.0 million
was outstanding as of December 31, 2011. As of December 31, 2011, HT III has paid commitment fees of
approximately $1.0 million. As of December 31, 2011, the Company held investments in HT III in 23 companies
with a fair value of approximately $124.8 million, accounting for approximately 19.1% of the Company’s total
portfolio.
There is no assurance that HT II or HT III will be able to draw 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
businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II
and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection
therewith, make equity investments.
HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance
with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could,
depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare
outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments.
In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do
not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn,
negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and
HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2011 as a result of having
sufficient capital as defined under the SBA regulations
The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in
March and September and range from 2.88% to 5.73%. Interest payments on SBA debentures are payable semi-
annually. There are no principal payments required on these issues prior to maturity and no prepayment penalties.
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. 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 fees related to HT II debentures that
pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment
was closed in. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The
annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the
year ended December 31, 2011 for HT II was approximately $125.5 million with an average interest rate,
including the annual fee of approximately 6.0%. The average amount of debentures outstanding for the year
ended December 31, 2011 for HT III was approximately $60.0 million with an average interest rate, including the
annual fee of approximately 3.0%.
HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively, and
accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31, 2011.
The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include
restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in
19
accordance with SBA regulations. In addition, HT II and HT III may also be limited in their ability to make
distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with
respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not
assure that our SBIC subsidiaries will receive SBA guaranteed debenture funding, which is dependent upon our
SBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will
have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC
subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC
subsidiaries upon an event of default.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of certain material U.S. federal income tax considerations
relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred
stock or common stock, but does not purport to be a complete description of the income tax considerations
relating thereto.
Election to be Taxed as a RIC
Through December 31, 2005, we were subject to Federal income tax as an ordinary corporation under
subchapter C of the Code. Effective beginning on January 1, 2006 we 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 income
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. On December 31,
2005, immediately before the effective date of our RIC election, we held assets with “built-in gain,” which are
assets whose fair market value as of the effective date of the election exceeded their tax basis as of such date. 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 federal income 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 income 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 (or are deemed to distribute) to stockholders with respect to that year. As described above, we made
the election to recognize 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 U.S. federal income tax at the regular
corporate rates on any income or capital gains 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 business development
company under the 1940 Act;
20
•
•
•
•
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 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 SBICs or
other potential outside managed funds and certain other fees.
Under applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service,
RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will
satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that
shareholders have the opportunity to elect to receive the distribution in cash. 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, then such sales may put downward pressure on the trading price of our stock. We previously
determined to pay a portion 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.
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) 98.2% of our capital gain net income for the 1-year period ending October 31 in that
calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no
federal income tax (the “Excise Tax Avoidance Requirements”). 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 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 a
corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax
21
rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain
cases, increasing interest rates or debt instruments that were 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 and the Excise
Tax Avoidance 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
and the Excise Tax Avoidance Requirement (collectively, the “Distribution Requirements”). 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.” We may be restricted from making distributions under the terms of our debt
obligations themselves unless certain conditions are satisfied. 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. If we are prohibited from making distributions or are unable to obtain cash from other sources to
make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate-
level federal income tax.
In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to
meet the RIC Distribution Requirements. Our SBIC subsidiaries 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 subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA
will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA
regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject to corporate-level
federal income tax.
Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar
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 in excess of net realized long-
term capital losses). 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 and such net operating losses do not
pass through to the RIC’s stockholders. In addition, expenses can be used only to offset investment company
taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in
excess of realized capital gains) to offset the RIC’s investment company taxable income, but may carry forward
such losses, and use them to offset capital gains indefinitely. Due to these limits on the deductibility of expenses
and net capital losses, 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
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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.
Investment income received from sources within foreign countries, or capital gains earned by investing in
securities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard,
withholding tax rates in countries with which the United States does not have a tax treaty are often as high as
35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a
reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax
cannot be determined at this time since the amount of our assets to be invested within various countries is not
now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income
taxes paid by such RIC as paid by its shareholders.
If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their
total assets in investments producing such passive income (“passive foreign investment companies”), We could
be subject to federal income tax and additional interest charges on “excess distributions” received from such
companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is
timely distributed to our shareholders. We would not be able to pass through to our shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any
such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to
limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability.
Foreign exchange gains and losses realized by us in connection with certain transactions involving
non-dollar debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign
currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are
subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may
affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not
directly related to our investment in securities (possibly including speculative currency positions or currency
derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among
the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income.
Failure to Qualify as a Regulated Investment Company
If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may
nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may,
among other things, require us to pay certain corporate-level federal taxes or to dispose of certain assets).
If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable,
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 would be taxable
to our stockholders and if made in a taxable year beginning on or before December 31, 2012 and provided certain
holding period and other requirements were met, 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
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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
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. At December 31, 2011,
approximately 87.4% 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 the Company’s 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 may from time to time engage an independent valuation firm to provide us with
valuation assistance with respect to certain of our portfolio companies 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. The scope of the services rendered by an independent valuation firm is at the discretion of the
Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of
our investments in good faith.
With respect to investments for which market quotations are not readily available or when such market
quotations are deemed not to represent fair value, our board of directors has approved a multi-step valuation
process each quarter, as described below:
(1) our quarterly valuation process begins with the initial valuation of each portfolio company or investment
by the investment professionals responsible for the portfolio investment;
(2) preliminary valuation conclusions are then documented and discussed with our investment committee;
(3) the valuation committee of the board of directors reviews the preliminary valuation of the investment
committee and that of the independent valuation firm and responds to the valuation recommendation of the
independent valuation firm to reflect any comments, if any; and
(4) the board of directors discusses valuations and determines the fair value of each investment in our
portfolio in good faith based on the input of, where applicable, the respective independent valuation firm
and the valuation committee.
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.
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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.
Debt Investments
The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the
fair value of 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. Our debt securities are primarily invested in equity
sponsored technology, life science and clean technology companies. Given the nature of lending to these types of
businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because
there is no known or accessible market or market indexes for these investment securities to be traded or
exchanged.
The Company applies a procedure for debt investments that assumes a sale of investment in a hypothetical
market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical
market does not include scenarios where the underlying security was simply repaid or extinguished, but includes
an exit concept. Under this process, we also evaluate the collateral for recoverability of the debt investments as
well as apply all of its historical fair value analysis. We use pricing on recently issued comparable debt securities
to determine the baseline hypothetical market yields as of the measurement date. We consider each portfolio
company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to
derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows
from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of
the measurement date.
The process includes, 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 than those a
hypothetical market participant would use to estimate fair value, including the proceeds that would be received in
a liquidation analysis.
The Company records unrealized depreciation on investments when it believes that an investment has
decreased in value, including where collection of a loan is doubtful or if under the in exchange premise when the
value of a debt security were to be less than amortized cost of the investment. Conversely, where appropriate, the
Compant records unrealized appreciation if we believe that the underlying portfolio company has appreciated in
value and, therefore, that our investment has also appreciated in value or if under the in exchange premise the
value of a debt security were to be greater than amortized cost.
When originating a debt instrument, we generally receive warrants or other equity-related securities from
the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon
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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.
Equity-Related Securities and Warrants
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. We have a limited number of equity securities in public companies. In
accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily
available are valued at the closing market quote on the valuation date.
The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting
date, privately held warrant and equity related 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, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons
to comparable public companies or other industry benchmarks. 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 warrant and related equity. 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.
Determinations In Connection With Offerings
In connection with each offering of shares of our common stock, the Board of Directors or a committee
thereof is required to make the determination that we are not selling shares of our common stock at a price below
our then current net asset value at the time at which the sale is made. The Board of Directors considers the
following factors, among others, in making such determination:
•
•
•
the net asset value of our common stock disclosed in the most recent periodic report we filed with the
SEC;
our management’s assessment of whether any material change in the net asset value has occurred
(including through the realization of net gains on the sale of our portfolio investments) from the period
beginning on the date of the most recently disclosed net asset value to the period ending two days prior
to the date of the sale of our common stock; and
the magnitude of the difference between the net asset value disclosed in the most recent periodic report
we filed with the SEC and our management’s assessment of any material change in the net asset value
since the date of the most recently disclosed net asset value, and the offering price of the shares of our
common stock in the proposed offering.
Importantly, this determination does not require that we calculate net asset value in connection with each
offering of shares of our common stock, but instead it involves the determination by the Board of Directors or a
committee thereof that we are not selling shares of our common stock at a price below the then current net asset
value at the time at which the sale is made.
Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common
stock at a price below the then current net asset value of our common stock at the time at which the sale is made
or (ii) trigger the undertaking (which we provided to the SEC in the registration statement to which this
prospectus is a part) to suspend the offering of shares of our common stock pursuant to this prospectus if the net
asset value fluctuates by certain amounts in certain circumstances until the prospectus is amended, the Board of
Directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until
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such time that there is no longer the possibility of the occurrence of such event or to undertake to determine net
asset value within two days prior to any such sale to ensure that such sale will not be below our then current net
asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine
net asset value to ensure that such undertaking has not been triggered.
These processes and procedures are part of our compliance policies and procedures. Records will be made
contemporaneously with all determinations described in this section and these records will be maintained with
other records we are required to maintain under the 1940 Act.
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
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.
The 1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs. For
example, under the 1940 Act, BDCs are required to invest at least 70% of their total assets primarily in securities
of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other
high quality debt investments that mature in one year or less. Moreover, qualification for taxation as a RIC under
subchapter M of the Code requires satisfaction of source-of-income and diversification requirements and our
ability to avoid corporate-level taxes on our income and gains depends on our satisfaction of distribution
requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as
a BDC or RIC or could force us to pay unexpected taxes and penalties, which could be material. These
constraints, among others, may hinder our ability to take advantage of attractive investment opportunities and to
achieve our investment objective. Our experience operating under these constraints is limited to the period since
our inception.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting
requirements that could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as the stock
exchange on which our common stock is listed. These entities, including the Public Company Accounting
Oversight Board, the SEC and the Nasdaq Stock Market, have issued a significant number of new and
increasingly complex requirements and regulations over the course of the last several years and continue to
develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the
Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant
corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC
to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Our efforts to
comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses
and a diversion of management’s time from other business activities.
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 applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service,
RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will
27
satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that
shareholders have the opportunity to elect to receive the distribution in cash. 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, then such sales may put downward pressure on the trading price of our stock. We previously
determined to pay a portion 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.
We are dependent upon key management personnel for their time availability and 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. Furthermore, we do not have an employment agreement with Mr. Henriquez and our senior
management is not restricted from creating new investment vehicles subject to compliance with applicable law.
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
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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
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. 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. 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. In addition, our results of operations and financial condition could be adversely
affected.
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
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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. and the $75.0 million in aggregate principal amount of 6.00% convertible senior
notes (the “Convertible Senior Notes”) 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, 2011, we did not have any outstanding borrowings under our credit facility with Union
Bank and approximately $10.2 million outstanding under our credit facility with Wells Fargo. In addition, as of
December 31, 2011, we had approximately $225.0 million of indebtedness outstanding incurred by our SBIC
subsidiaries and $75.0 million of Convertible Senior Notes payable. 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.
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, 2011 our asset coverage ratio under
our regulatory requirements as a business development company was 864.7%, excluding our SBIC debentures as
a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset
coverage ratio. Total leverage when including our SBIC debentures was 237.5% at December 31, 2011.
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, 2011, portfolio investments, which are valued at fair value by the Board of Directors, were
approximately 87.4% 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 applying a valuation process for the types of investments we make, which includes but is not
limited to deriving a hypothetical exit price. 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.
30
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, 2011 that represent greater than 5% of net assets:
(in thousands)
December 31, 2011
Fair Value
Percentage of
Net Assets
Women’s Marketing, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aveo Pharmaceuticals, Inc.
Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacira Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anthera Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brightsource Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revance Therapeutics, Inc.
$29,796
$28,997
$27,154
$26,396
$26,185
$25,549
$21,944
6.9%
6.7%
6.3%
6.1%
6.1%
5.9%
5.1%
Women’s Marketing, Inc. is a media solutions company, delivering premium media at value pricing across
all platforms.
Aveo Pharmaceuticals, Inc. is a biopharmaceutical company dedicated to the discovery and development of
new, targeted cancer therapeutics.
Tectura Corporation is an IT services firm that specializes in Microsoft Business Solutions applications.
Pacira Pharmaceuticals, Inc. is an emerging specialty pharmaceutical company focused on the development,
commercialization and manufacture of new pharmaceutical products.
Anthera Pharmaceuticals, Inc. is a biopharmaceutical company focused on developing and commercializing
products to treat serious diseases, including cardiovascular and autoimmune diseases.
Brightsource Energy, Inc. designs, develops and sells solar thermal power systems that deliver reliable,
clean energy to utilities and industrial companies.
Revance Therapeutics, Inc. is a biopharmaceutical company developing products that transport drugs across
skin to deliver at specific and targeted depths.
Our financial results could be materially adversely 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.
Our equity ownership in a portfolio company may represent a control investment. Our ability to exit an
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 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.
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Regulations governing our operations as a business development company may 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.
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.”
32
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
prior to receiving the related cash.
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
33
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 facilities limit 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, changes in our portfolio composition, 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.
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
34
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 its then existing
credit facility (the “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, 2011, the Company recorded an increase on participation liability and
decreased its unrealized gains by a net amount of approximately $217,000 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 $715,000
at December 31, 2011 and is included in accrued liabilities and decreased the unrealized gain recognized by us at
December 31, 2011. 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, such as the Wells Facility and Union Bank Facility, could constrain our ability to grow our
business.
In August 2008, we entered into the Wells Facility, which we renewed on June 20, 2011. Under this three-
year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility
contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million,
funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other
customary conditions. We expect to continue discussions with various other potential lenders to join the new
facility; however, there can be no assurances that additional lenders will join the Wells Facility.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus
3.50%, with a floor of 5.00% and an advance rate of 50% against eligible loans. The Wells Facility is secured by
loans in the borrowing base. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each
payment date on or before September 1, 2011. The monthly payment of a non-use fee thereafter shall depend on
the average balance that was outstanding on a scale between 0.0% and 0.75%. From September 1, 2011 through
September 30, 2011, this non-use fee was 0.75%. On June 20, 2011 we paid an additional $1.1 million in
structuring fees in connection with the Wells Facility which is being amortized through June 2014. At
December 31, 2011, we had approximately $10.2 million outstanding under the Wells Facility. In January 2012,
we repaid the entire principal balance outstanding, approximately $10.2 million, as of December 31, 2011 under
the Wells Fargo facility.
The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries,
in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated
indebtedness, that is in excess of $314.0 million plus 90% of the cumulative amount of equity raised after
35
March 31, 2011. 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, 2011.
On February 10, 2010, we entered into the Union Bank Facility. On November 2, 2011, we renewed and
amended the Union Bank Facility and added a new lender under the Union Bank Facility. Union Bank and RBC
Capital Markets have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank
Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0
million, funded by additional lenders and with the agreement of Union Bank and subject to other customary
conditions. We expect to continue discussions with various other potential lenders to join the new facility;
however, there can be no assurances that additional lenders will join the Union Bank Facility.
Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR
plus 2.25% with a floor of 4.0%. At December 31, 2011, there were no borrowings outstanding under the Union
Bank Facility. The Union Bank Facility requires the payment of a non-use fee of 0.25% annually. The Union
Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate
equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires
payment of interest on a monthly basis. All outstanding principal is due upon maturity.
The Union Bank Facility requires various financial and operating covenants. These covenants require us to
maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding
subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds
received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on
November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months
with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a
non-use fee of 0.50% annually. Union Bank Facility also 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, 2011.
The current lenders under the Wells Facility and the Union Bank 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. These facilities 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 require or 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 these facilities 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.
36
In addition to regulatory restrictions that restrict our ability to raise capital, the Wells Facility, the Union
Bank Facility and the Convertible Senior Notes 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 and the Convertible Senior
Notes 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. Our ability to continue to comply with these covenants in the future depends on many factors, some of
which are beyond our control. 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 under the Wells Facility and the Union Bank facility or the trustee or holders under the
Convertible Senior Notes, could accelerate repayment under the facilities or the Convertible Senior Notes and
thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to
pay dividends. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition—
Borrowings.”
Two of our wholly-owned subsidiaries are licensed by the U.S. Small Business Administration, and as a
result, we will be subject to SBA regulations.
Our wholly-owned subsidiaries HT II and HT III are licensed to act as SBICs and are regulated by the SBA.
As of December 31, 2011, HT II’s and HT III’s portfolio companies accounted for approximately 30.4% and
19.1%, respectively, of our total portfolio. The SBIC licenses allow our SBIC subsidiaries 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 and HT III to forego attractive investment opportunities that are not
permitted under SBA regulations.
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 either HT II or HT III fail to
comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or
prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/
or limit HT II or HT III from making new investments. Such actions by the SBA would, in turn, negatively affect
us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the
terms of the SBIC’s leverage as of December 31, 2010 as a result of having sufficient capital as defined under the
SBA regulations. See “Item 1. Business—Small Business Administration Regulations.”
37
Our wholly-owned SBIC subsidiaries 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 subsidiaries. We will be partially
dependent on our SBIC subsidiaries 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 subsidiaries to make certain
distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. 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.
There is no assurance that HT II or HT III will be able to draw up to the maximum limit available under
the SBIC program.
On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able
to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. As
of December 31, 2011, HT II had the potential to borrow up to $125.0 million of SBA-guaranteed debentures
under the SBIC program. With our net investment of $75.0 million in HT II as of December 31, 2011, HT II has
the capacity to issue a total of $125.0 million of SBA guaranteed debentures, subject to SBA approval, of which
$125.0 million is outstanding as of December 31, 2011.
On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to
borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. As of
December 31, 2011, HT III had the potential to borrow up to $100.0 million of SBA-guaranteed debentures
under the SBIC program. With our net investment of $50.0 million in HT III as of December 31, 2011, HT III
has the capacity to issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of
which $100.0 million was outstanding as of December 31, 2011.
On December 31, 2011, there was $225.0 million principal amount of indebtedness outstanding incurred by
our SBIC subsidiaries. Should HT II or HT III pay down any amount of debentures, or should the maximum limit
be increased in excess of $225 million, there is no assurance that HT II or HT III will be able to draw up to the
maximum limit available under the SBIC program. Access to the remaining leverage is subject to SBA approval
and compliance with SBA regulations.
In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%,
including annual fees. In February 2011, we submitted a request to the SBA to borrow $25.0 million under a new
capital commitment and in April 2011, the SBA approved a $25.0 million dollar commitment for HT III bringing
the total available borrowings to $225.0 million, of which $125.0 million was available in HT II and $100.0
million was available in HT III.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at 6.63%, including
annual fees. We plan to submit a request to the SBA to borrow the $24.3 million under a new capital
commitment under HT III, subject to SBA approval. There can be no assurances that the SBA will approve our
new capital commitment request or the pricing to be consistent with the September 2011 pricing or that we will
have drawn on any possible commitment.
Our wholly-owned SBIC subsidiaries 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
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from certain of our subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially
dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements.
Our SBIC subsidiaries 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 subsidiaries to make certain
distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC
subsidiaries are 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. See “Item 1. Business—Small Business
Administration Regulations.”
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, asset 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 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
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.
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Risks Related to Current Economic and Market Conditions
Capital markets may experience periods of disruption and instability and we cannot predict when these
conditions will occur. Such market conditions could materially and adversely affect debt and equity capital
markets in the United States and abroad, which could have a negative impact on our business, financial
condition and results of operations.
The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the
debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of
certain major financial institutions. Despite actions of the United States federal government and foreign
governments, these events contributed to worsening general economic conditions that have materially and
adversely impacted the broader financial and credit markets and reduced the availability of debt and equity
capital for the market as a whole and financial services firms in particular. While indicators suggest improvement
in the capital markets, these conditions could deteriorate in the future. During such market disruptions, we may
have difficulty raising debt or equity capital especially as a result of regulatory constraints.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing
indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our
investments may make it difficult for us to sell such investments if required. As a result, we may realize
significantly less than the value at which we have recorded our investments. In addition, significant changes in
the capital markets, including the disruption and volatility, have had, and may in the future have, a negative
effect on the valuations of our investments and on the potential for liquidity events involving our investments. An
inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material
adverse impact on our business, financial condition and results of operations.
The impact of recent financial reform legislation on us is uncertain.
In light of current conditions in the U.S. and global financial markets and the U.S. and global economy,
legislators, the presidential administration and regulators have increased their focus on the regulation of the
financial services industry. The Dodd-Frank Act institutes a wide range of reforms that will have an impact on all
financial institutions. Many of these provisions are subject to rule making procedures and studies that will be
conducted in the future. Accordingly, we cannot predict the effect the Dodd-Frank Act or its implementing
regulations will have on our business, results of operations or financial condition.
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.
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.
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.
As of December 31, 2011, we did not have any outstanding borrowings under the Union Bank Facility and
had approximately $10.2 million of borrowings outstanding under the Wells Facility. In addition, as of
December 31, 2011, we had approximately $225.0 million principal amount of indebtedness outstanding incurred
by our SBIC subsidiaries and $75.0 million of Senior Convertible Notes payable. Available borrowing capacity
under these facilities as of December 31, 2011 was $119.8 million and subject to terms and conditions and
approvals of the SBA.
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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, 2011, approximately 57.5% of the fair value of our portfolio was composed of
investments in four industries: 20.1% was composed of investments in the drug discovery and development
industry, 18.0% was composed of investments in the internet consumer and business services industry; 9.8% was
composed of investments in the clean technology industry and 9.6% was composed of investments in the drug
delivery industry. 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 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
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.
Overcapacity in technology-related industries, together with cyclical economic downturns, may result 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.
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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.
A natural disaster may also impact the operations of our portfolio companies, including our technology-
related portfolio companies. The nature and level of natural disasters cannot be predicted and may be exacerbated
by global climate change. A portion of our technology-related portfolio companies rely on items assembled or
produced in areas susceptible to natural disasters, and may sell finished goods into markets susceptible to natural
disasters. A major disaster, such as an earthquake, tsunami, flood or other catastrophic event could result in
disruption to the business and operations of our technology-related portfolio companies.
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.
Our investments in the clean technology industry are subject to many risks, including volatility, intense
competition, unproven technologies, periodic downturns and potential litigation.
Our investments in clean technology, or cleantech, companies are subject to substantial operational risks,
such as underestimated cost projections, unanticipated operation and maintenance expenses, loss of government
subsidies, and inability to deliver cost-effective alternative energy solutions compared to traditional energy
products. In addition, energy companies employ a variety of means of increasing cash flow, including increasing
utilization of existing facilities, expanding operations through new construction or acquisitions, or securing
additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition
risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind
and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can
vary from market to market and period to period, resulting in volatility in production levels and profitability. In
addition, our cleantech companies 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 clean technology companies can and often do fluctuate
suddenly and dramatically and the markets in which clean technology companies operate are generally
characterized by abrupt business cycles and intense competition. Demand for cleantech and renewable energy is
also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases.
A change in prices in these energy products could reduce demand for alternative energy. Our investments in
cleantech companies also face potential litigation, including significant warranty and product liability claims, as
well as class action and government claims arising from the increased attention to the industry from the failure of
Solyndra. Such litigation could adversely affect the business and results of operations of our cleantech portfolio
companies. There is also particular uncertainty about whether agreements providing incentives for reductions in
greenhouse gas emissions, such as the Kyoto Protocol, will continue and whether countries around the world will
enact or maintain legislation that provides incentives for reductions in greenhouse gas emissions, without which
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such investments in clean technology dependent portfolio companies may not be economical or financing for
such projects may become unavailable. As a result, these portfolio company investments face considerable risk,
including the risk that favorable regulatory regimes expire or are adversely modified. This could, in turn,
materially adversely affect the value of the clean technology companies in our portfolio.
Our investments in the life science industry are subject to extensive government regulation, litigation risk
and certain other risks particular to that industry.
We have invested and plan to continue investing in companies in the life science industry that are subject to
extensive regulation by the Food and Drug Administration and to a lesser extent, other federal and state agencies.
If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant
penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce
medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for
their products and, even if approved, these products may not be accepted in the marketplace. In addition, new
laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio
company in this industry. Portfolio companies in the life science industry may also have a limited number of
suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a
risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any
of these factors could materially and adversely affect the operations of a portfolio company in this industry and,
in turn, impair our ability to timely collect principal and interest payments owed to us.
Our investments in the drug discovery industry are subject to numerous risks, including competition,
extensive government regulation, product liability and commercial difficulties.
Our investments in the drug discovery industry are subject to numerous risks. The successful and timely
implementation of the business model of our drug discovery portfolio companies depends on their ability to adapt
to changing technologies and introduce new products. As competitors continue to introduce competitive
products, the development and acquisition of innovative products and technologies that improve efficacy, safety,
patient’s and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio
companies. The success of new product offerings will depend on many factors, including the ability to properly
anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture
products in an economic and timely manner, obtain or maintain advantageous positions with respect to
intellectual property, and differentiate products from those of competitors. Failure by our portfolio companies to
introduce planned products or other new products or to introduce products on schedule could have a material
adverse effect on our business, financial condition and results of operations.
Further, the development of products by drug discovery companies requires significant research and
development, clinical trials and regulatory approvals. The results of product development efforts may be affected
by a number of factors, including the ability to innovate, develop and manufacture new products, complete
clinical trials, obtain regulatory approvals and reimbursement in the US and abroad, or gain and maintain market
approval of products. In addition, patents attained by others can preclude or delay the commercialization of a
product. There can be no assurance that any products now in development will achieve technological feasibility,
obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development process,
including after significant funds have been invested. Products may fail to reach the market or may have only
limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes,
inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved
uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the
infringement of intellectual property rights of others.
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 business development company, 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
43
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 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. If macro and micro market conditions should deteriorate, 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 a material adverse effect on our
results of operations.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be
unable to repay our loans during such periods. In such periods, our non-performing assets are likely to increase
and the value of our portfolio is likely to decrease during such periods. 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 materially adversely affect 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 and could materially adversely affect our
ability to service our outstanding borrowings.
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
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
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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
and could materially adversely affect our ability to service our outstanding borrowings.
A lack of initial public offering opportunities may cause companies to stay in our portfolio longer, leading
to lower returns, unrealized depreciation, or realized losses.
A 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 lack of IPO opportunities for venture capital-backed companies can also cause
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
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
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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.
Economic downturns or recessions could impair the value of the collateral for our loans to our portfolio
companies, increase our funding costs, limit our access to the credit and capital markets, impair the ability
of a portfolio company to satisfy covenants imposed by its lenders and consequently increase the possibility
of an adverse effect on our business, financial condition and results of operations.
Many of our portfolio companies are susceptible to economic 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. 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 may constitute 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.
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
46
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
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 and our results of operations and financial condition.
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
47
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 and our results of operations and financial condition.
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. Our total investments at value in foreign companies were approximately $14.3 million or 1.9% of
total assets at December 31, 2011. 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.
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.
48
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.
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 and could adversely affect our
ability to service our outstanding borrowings.
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 and could materially adversely affect our ability to service our
outstanding borrowings.
49
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.
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.
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We may not realize expected returns on warrants received in connection with our debt investments.
We generally receive warrants in connection with our debt investments. At December 31, 2011, we held
warrant positions received in connection with our debt investments in approximately 4.6% of our total portfolio
investments. If we do not receive the returns that are anticipated on the warrants, our investment returns on our
portfolio companies, and the value of an investment in us, may be lower than expected.
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 2011, we received early loan repayments and pay down of working capital loans of approximately $247.3
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, 2011, approximately 63% of our portfolio company loans were secured by a first priority
security in all of the assets of the portfolio company, 36% of our portfolio company loans were secured by a
second priority security in all of the assets of the portfolio company and 1% 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, could adversely affect our results of operation and financial condition 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. These investments represent approximately 10.3% of the outstanding
balance of our portfolio as of December 31, 2011. 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. 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 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.
52
Provisions of our charter and bylaws could deter takeover attempts and have an adverse impact on the price
of our common stock.
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. 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.
We may again obtain the approval of our stockholders to issue shares of our common stock at prices below
the then current net asset value per share of our common stock. If we receive such approval from the
stockholders, we may again issue shares of our common stock at a price below the then current net asset
value per share of common stock. Any such issuance could materially dilute your interest in our common
stock and reduce our net asset value per share.
We may again obtain the approval of our stockholders to issue shares of our common stock at prices below
the then current net asset value per share of our common stock. Such approval has allowed and may again allow
us to access the capital markets in a way that we typically are unable to do as a result of restrictions that, absent
stockholder approval, apply to business development companies under the 1940 Act. Any decision to sell shares
of our common stock below the then current net asset value per share of our common stock is subject to the
determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests.
Any sale or other issuance of shares of our common stock at a price below net asset value per share has
resulted and will continue to result in an immediate dilution to your interest in our common stock and a reduction
of our net asset value per share. This dilution would occur as a result of 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. Because the number of future shares of common stock that may be issued below our net
asset value per share and the price and timing of such issuances are not currently known, we cannot predict the
actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our net asset
value per share of any such issuance at this time. We caution you that such effects may be material, and we
undertake to describe all the material risks and dilutive effects of any offering that we make at a price below our
then current net asset value in the future in a prospectus supplement issued in connection with any such offering.
We cannot predict whether shares of our common stock will trade above, at or below our net asset value.
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.
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 our best interests and the best interests of
our stockholders have approved the practice of making such sales.
At our Annual Meeting of Stockholders on June 1, 2011, our 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 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
53
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 securities at a price below net asset
value during the year ended December 31, 2011.
Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long
term.
Shares of business development companies may trade at a market price that is less than the net asset value
that is attributable to those shares. Our shares have traded above and below our NAV. The possibility that our
shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over
the long term is separate and distinct from the risk that our net asset value will decrease. It is not possible to
predict whether our shares will trade at, above or below net asset value in the future.
The price of our common stock may fluctuate significantly.
As with any company, the price of our common stock will fluctuate with market conditions and other
factors, which 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, SBICs 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.
54
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
None.
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 14,500 square feet of office space
in Palo Alto, CA for our corporate headquarters. We also lease office space in Boston, MA, Boulder, CO and
McLean, VA.
Item 3.
Legal Proceedings
As of December 31, 2011, we were not a party to any material 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.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
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 fiscal quarter during the two most recently completed fiscal years.
Quarter Ended
March 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The last reported price for our common stock on March 7, 2012 was $10.91 per share.
Price Range
High
Low
$11.15
11.50
10.57
10.91
11.40
11.36
10.80
9.99
$ 9.16
8.62
9.13
9.87
10.42
10.09
8.51
8.20
As of February 6, 2012, we had 37 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
9,000 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 or at a significant discount to the net assets attributable to those shares.
SALES OF UNREGISTERED SECURITIES
During 2011, 2010 and 2009, the Board of Directors elected to receive approximately $105,000, $105,000
and $22,000 respectively, of their compensation in the form of common stock and the Company issued 9,942,
10,479 and 3,334 shares, respectively, to the directors based on the closing prices of the common stock on the
specified election dates.
During 2011 and 2010, we issued approximately 167,000 and 199,000 shares, respectively, of common
stock to shareholders in connection with the dividend reinvestment plan. These issuances were not subject to the
registration requirements of the Securities Act of 1933, as amended. The aggregate value the shares of our
common stock issued under our dividend reinvestment plan was approximately $1.6 million.
ISSUER PURCHASES OF EQUITY SECURITIES
In February 2010, the Board of Directors approved a $35.0 million open market share repurchase program.
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. The
Company 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.
56
As a 1940 Act reporting company, the Company 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.
On February 7, 2012, the Company approved the extension of the stock repurchase plan as previously
approved under the same terms and conditions that allows the Company to repurchase up to $35.0 million of its
common stock. Unless renewed, the stock repurchase plan will expire on August 26, 2012.
During the year ended December 31, 2011, the Company did not repurchase any common stock.
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 2012 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) 98.2% 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 years ended December 31, 2011 and 2010, we did not record a provision for excise tax since we
have paid out greater than 98% of our taxable earnings for each fiscal year.
57
The following table summarizes dividends declared and paid or to be paid on all shares, including restricted
stock, to date:
Date Declared
Record Date
Payment Date
Amount Per Share
November 17, 2005
January 27, 2006
May 5, 2006
August 28, 2006
December 1, 2006
October 27, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . November 1, 2005
December 9, 2005 . . . . . . . . . . . . . . . . . . . . . . . . .
January 6, 2006
April 3, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 10, 2006
July 19, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 31, 2006
October 16, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . November 6, 2006
February 7, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . February 19, 2007 March 19, 2007
June 18, 2007
May 3, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 16, 2007
August 2, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 16, 2007
September 17, 2007
November 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . November 16, 2007 December 17, 2007
February 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . February 15, 2008 March 17, 2008
June 16, 2008
May 8, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 16, 2008
August 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 15, 2008
September 19, 2008
November 6, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . November 14, 2008 December 15, 2008
February 12, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . February 23, 2009 March 30, 2009
June 15, 2009
May 7, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2009
September 14, 2009
August 6, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 14, 2009
October 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . October 20, 2009
November 23, 2009
December 16, 2009 . . . . . . . . . . . . . . . . . . . . . . . . December 24, 2009 December 30, 2009
February 11, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . February 19, 2010 March 19, 2010
June 18, 2010
May 3, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 12, 2010
August 2, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 12, 2010
September 17, 2010
November 4, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . November 10, 2010 December 17, 2010
March 24, 2011
March 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 10, 2011
June 23, 2011
May 5, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 11, 2011
August 4, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 15, 2011
September 15, 2011
November 3, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . November 14, 2011 November 29, 2011
February 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . March 12, 2012
March 15, 2012
$0.03
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.34
0.34
0.34
0.32*
0.30
0.30
0.30
0.04
0.20
0.20
0.20
0.20
0.22
0.22
0.22
0.22
0.23
$6.92
*
Dividend paid in cash and stock.
On February 27, 2012 the Board of Directors increased the quarterly dividend by 5.0% and declared a cash
dividend of $0.23 per share to be paid on March 15, 2012 to shareholders of record as of March 12, 2012. This
dividend would represent the Company’s twenty-sixth consecutive dividend declaration since its initial public
offering, bringing the total cumulative dividend declared to date to $6.92 per share.
Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly
distributions in an amount that approximates 90—100% of our taxable quarterly income or potential annual
income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or
fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was
earned, while maintaining the option to spill over our excess taxable income.
Distributions in excess of our current and accumulated earnings and profits generally 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. The determination of the tax attributes of our distributions is made annually as of the end of our
fiscal year based upon its taxable income for the full year and distributions paid for the full year. Of the
dividends declared during the year ended December 31, 2011 and 2010, 100% were distributions of ordinary
income. There can be no certainty to stockholders that this determination is representative of what the tax
attributes of our 2012 distributions to stockholders will actually be.
58
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. During
2011 and 2010, we issued approximately 167,000 and 199,000 shares, respectively, of common stock to
shareholders in connection with the dividend reinvestment plan.
PERFORMANCE GRAPH
The following stock performance graph compares the cumulative stockholder return assuming that, on
December 31, 2006, 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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Hercules Technology Growth Capital . . .
$140
$120
$100
$80
$60
$40
$20
$0
12/31/06
6/30/07
12/31/07
6/30/08
12/31/08
6/30/09
12/31/09
6/30/10
12/31/10
6/30/11
12/31/11
Hercules Technology Growth Capital
S&P 500
S&P Asset Management & Custody Banks
NASDAQ Financial 100
Dow Jones US Financial Sector Index - IYF (iShares)
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2011 Dow Jones & Co. All rights reserved.
This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of
Section 18 of the 1934 Act. The stock price performance included in the above graph is not necessarily indicative
of future stock price performance.
59
Item 6.
Selected Financial Data
Selected Consolidated Financial Data
The following consolidated financial data is derived from our audited consolidated financial statements.
The selected consolidated financial data should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and
related notes included elsewhere herein. Historical data is not necessarily indicative of results to be expected for
any future period.
($ in thousands, except per share data)
2011
2010
2009
2008
2007
As of December 31,
Balance sheet data:
Investments, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $652,870 $472,032 $374,669 $578,211 $525,492
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
7,856
541,943
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,206
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400,737
Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,242
608,672
226,214
382,458
64,474
747,394
316,354
431,041
124,828
508,967
142,452
366,515
107,014
591,247
178,716
412,531
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) . . . . . . . . . . . . . . . . . . . . . . . . . . $
585,767
30,045
37,058
168,196
401,618
23,690
46,724
117,200
9.83 $
9.50 $
325,134
14,450
35,085
11,700
10.29 $
536,964
17,883
23,364
82,000
11.56 $
477,643
21,646
26,203
130,602
12.31
(1) Based on common shares outstanding at period end.
(in thousands, except per share amounts)
2011
2010
2009
2008
2007
Investment income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,346 $ 54,700
4,774
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,474
Operating expenses:
9,509
79,855
62,200 $ 67,283
8,552
12,077
75,835
74,277
48,757
5,127
53,884
For the Years Ended December 31,
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
13,252
2,635
7,992
13,260
3,128
16,388
40,267
8,572
1,259
7,086
10,474
2,709
13,183
30,100
9,387
1,880
7,281
10,737
1,888
12,625
31,173
13,121
2,649
6,899
11,595
1,590
13,185
35,854
investment gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . .
39,981
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,981
Net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . .
2,643
Provision for excise tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(203)
Net increase in unrealized appreciation on investments . . . . . .
(21,426)
(18,986)
Net realized and unrealized gain . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in net assets resulting from operations . . . . . . . . . $46,936 $ 4,982 $ 13,572 $ 20,995
29,374
—
29,374
(26,382)
—
1,990
(24,392)
43,104
—
43,104
(30,801)
—
1,269
(29,532)
39,588
—
39,588
2,741
—
4,607
7,348
4,404
1,290
5,437
9,135
1,127
10,262
21,393
32,491
2
32,489
2,791
(139)
7,268
9,920
42,409
Change in net assets per common share (basic): . . . . . . . . . . . . $
1.08 $
0.12 $
0.38 $
0.64 $
1.50
Cash dividends declared per common share . . . . . . . . . . . . . . . $
0.88 $
0.80 $
1.26 $
1.32 $
1.20
60
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our future operating results;
our business prospects and the prospects of our prospective portfolio companies;
the impact of investments that we expect to make;
the impact of a protracted decline in the liquidity of credit markets on our business;
our informal relationships with third parties including in the venture capital industry;
the expected market for venture capital investments and our addressable market;
the dependence of our future success on the general economy and its impact on the industries in which
we invest;
our ability to access debt markets and equity markets;
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 BDC, a SBIC and a RIC;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the timing, form and amount of any dividend distributions;
the impact of fluctuations in interest rates on our business;
the valuation of any investments in portfolio companies, particularly those having no liquid trading
market; and
our ability to recover unrealized losses.
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 “Item 1A. 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.
61
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 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 firm providing customized loans to public and private technology-related
companies, including clean technology, life science and select lower middle market technology companies at all
stages of development. We primarily finance privately-held companies backed by leading venture capital and
private equity firms, and also may finance certain 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 through additional offices in Boston, MA, Boulder, CO, and McLean, VA.
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 technology-related companies including clean technology,
life science and select lower middle market technology companies 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 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. 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.
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, or the Code. As of January 1, 2006, we have elected to be treated for federal income tax
purposes as a regulated investment company, or a RIC, under Subchapter M of the Code. 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.
62
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. 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 select lower middle market companies. We have 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.
Portfolio and Investment Activity
The total value of our investment portfolio was $652.9 million at December 31, 2011 as compared to $472.0
million at December 31, 2010.
During the year ended December 31, 2011 we made debt commitments to new and existing portfolio
companies, including restructured loans, totaling $628.3 million. Debt commitments for the year ended
December 31, 2011 included commitments of approximately $402.5 million to 34 new portfolio companies and
$225.8 million to 16 existing companies.
During the year ended December 31, 2011, we funded approximately $433.4 million of debt investments.
During the year ended December 31, 2011 we made and funded equity commitments of approximately $2.1
million to four existing companies.
At December 31, 2011, we had unfunded contractual commitments of approximately $168.2 million to
twenty-nine new and existing companies. Approximately $92.0 million of these unfunded origination activity
commitments are dependent upon the portfolio company reaching certain milestones before the Hercules debt
commitment becomes available.
These commitments will be subject to the same underwriting and ongoing portfolio maintenance as the
on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn,
unfunded commitments do not necessarily represent future cash requirements. In addition, we have
approximately $82.5 million of non-binding term sheets outstanding to seven new and existing companies at
December 31, 2011. Non-binding outstanding term sheets are subject to completion of our due diligence and
final approval process, as well as the 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.
The fair value of the loan portfolio at December 31, 2011 was approximately $585.8 million, compared to a
fair value of approximately $401.5 million at December 31, 2010. The fair value of the equity portfolio at
December 31, 2011 and 2010 was approximately $37.1 million and $46.7 million, respectively. The fair value of
our warrant portfolio at December 31, 2011 and 2010 was approximately $30.0 million and $23.7 million,
respectively.
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, 2011, we received normal principal amortization repayments of approximately $65.2 million, and
early repayments and working line of credit pay-downs of approximately $182.1 million, including
approximately $23.8 million in early repayments associated with the sale of Infologix, Inc. During the year ended
December 31, 2011, we restructured our debt investments in three portfolio companies for approximately $8.1
million, $4.7 million and $3.3 million, converted $4.4 million of debt to equity.
63
Total portfolio investment activity (inclusive of unearned income) as of and for each of the years ended
December 31, 2011 and 2010 was as follows:
(in millions)
December 31,
2011
December 31,
2010
Beginning Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of 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 depreciation in investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructure fundings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructure payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 472.0
433.4
2.1
(18.6)
(65.2)
(182.1)
6.6
4.7
16.1
(16.1)
Ending Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 652.9
$ 374.7
320.4
2.3
(34.2)
(81.6)
(114.5)
3.3
1.6
78.4
(78.4)
$ 472.0
The following table shows the fair value of our portfolio of investments by asset class as of December 31,
2011 and December 31, 2010 (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, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$482,268
133,544
30,181
—
6,877
$652,870
73.9%
20.4%
4.6%
0.0%
1.1%
100.0%
$357,963
59,251
26,813
8,094
19,911
$472,032
75.8%
12.6%
5.7%
1.7%
4.2%
100.0%
A summary of our investment portfolio at value by geographic location is as follows:
(in thousands)
United States . . . . . . . . . . . . . . . . . .
England . . . . . . . . . . . . . . . . . . . . . .
Iceland . . . . . . . . . . . . . . . . . . . . . . .
Ireland . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . .
Israel . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$634,736
8,266
4,970
3,842
672
384
$652,870
97.2%
1.3%
0.7%
0.6%
0.1%
0.1%
100.00%
$438,585
10,653
—
—
20,876
1,918
$472,032
92.9%
2.3%
0.0%
0.0%
4.4%
0.4%
100.00%
Our portfolio companies are primarily privately held expansion-and established-stage companies in the
biotechnology, drug discovery, drug delivery, specialty pharmaceuticals, therapeutics, clean technology,
communications and networking, consumer and business products, electronics and computers, information
services, internet consumer and business services and products, surgical 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.
64
For years ended December 31, 2011 and 2010, our ten largest portfolio companies represented approximately
37.9% and 57.5% of the total fair value of our investments in portfolio companies, respectively. At December 31,
2011 and 2010, we had seven and six investments, respectively, that represented 5% or more of our net assets. At
December 31, 2011, we had seven equity investments representing approximately 63.8% 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, 2010, we had three equity investments which represented approximately 48.0% of the total
fair value of our equity investments, and each represented 5% or more of the total fair value of such investments.
As of December 31, 2011, approximately 57.5% of the fair value of our portfolio was composed of
investments in four industries: 20.1% was composed of investments in the drug discovery and development
industry, 18.0% was composed of investments in the internet consumer and business services industry; 9.8% was
composed of investments in the clean technology industry and 9.6% was composed of investments in the drug
delivery industry.
As of December 31, 2011, over 99% of our debt investments were in a senior secured first lien position, and
more than 90.7% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a
Prime or LIBOR based interest rate floor. As a result, we believe we are well positioned to benefit should market
rates increase. Our investments in senior secured debt with warrants 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. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio
company, with a strike price equal to the most recent equity financing round. As of December 31, 2011, we held
warrants in 109 portfolio companies, with a fair value of approximately $30.0 million. The fair value of the warrant
portfolio has increased by approximately 26.6% as compared to the fair value of $23.7 million at December 31,
2010. These warrant holdings would require us to invest approximately $73.7 million to exercise such warrants.
Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s
performance and overall market conditions. Of the warrants which have monetized since inception, we have
realized warrant gain multiples in the range of approximately 1.04x to 8.74x based on the historical rate of return on
our investments. 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.
As required by the 1940 Act, we classify our investments by level of control. “Control investments” are
defined in the 1940 Act as investments in those companies that we are deemed to “control.” Generally, under the
1940 Act, we are deemed to “control” a company in which we have invested if we own 25% or more of the
voting securities of such company or have greater than 50% representation on its board. “Affiliate investments”
are investments in those companies that are “affiliated companies” of us, as defined in the 1940 Act, which are
not Control Investments. We are deemed to be an “affiliate” of a company in which we have invested if we own
5% or more but less than 25% of the voting securities of such company. “Non-control/ non-affiliate Investments”
are investments that are neither control investments nor affiliate investments.
The following table summarizes our realized and unrealized gain and loss and changes in our unrealized
appreciation and depreciation on control and affiliate investments at December 31, 2011 and December 31, 2010:
(in thousands)
December 31, 2011
Portfolio Company
Type
MaxVision Holding, LLC.
E-Band Communiations,
. . . Control
Corp. . . . . . . . . . . . . . . . . . . Non-Controlled Affiliate
Total . . . . . . . . . . . . . . . . . . . .
Fair Value at
December 31, 2011
Investment
Income
Unrealized
(Depreciation)/
Appreciation
Reversal of
Unrealized
(Depreciation)/
Appreciation
Realized
Gain/(Loss)
$889
14
$903
$(5,158)
(3,425)
$(8,583)
$—
—
$—
$—
—
$—
$1,027
—
$1,027
65
(in thousands)
December 31, 2010
Portfolio Company
Type
InfoLogix, Inc. . . . . . . . . . . Control
E-Band Communiations,
Corp.
. . . . . . . . . . . . . . . Non-Controlled Affiliate
Total
. . . . . . . . . . . . . . . . .
Fair Value at
December 31, 2010
Investment
Income
Unrealized
(Depreciation)
/Appreciation
Reversal of
Unrealized
(Depreciation)
/Appreciation
Realized
Gain/(Loss)
$40,181
3,069
$43,250
$3,013
—
$3,013
$ 77
795
$872
$128
—
$128
$2,517
—
$2,517
Our investment in InfoLogix, Inc., a company that was a control investment as of December 31, 2010, was
sold to Stanley Black & Decker (NYSE:SWK) in January 2011. Approximately $8.3 million of realized gains
and $8.4 million of net change in unrealized depreciation was recognized on this control investment during the
three-month period ended March 31, 2011.
The following table shows the fair value of our portfolio by industry sector at December 31, 2011 and
December 31, 2010 (excluding unearned income):
(in thousands)
Drug Discovery & Development
. . . . . . . .
Internet Consumer & Business Services . . .
Clean Technology . . . . . . . . . . . . . . . . . . . .
Drug Delivery . . . . . . . . . . . . . . . . . . . . . . .
Information Services . . . . . . . . . . . . . . . . . .
Specialty Pharma . . . . . . . . . . . . . . . . . . . .
Media/Content/Info . . . . . . . . . . . . . . . . . . .
Therapeutic . . . . . . . . . . . . . . . . . . . . . . . . .
Communications & Networking . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . .
Biotechnology Tools . . . . . . . . . . . . . . . . . .
Diagnostic . . . . . . . . . . . . . . . . . . . . . . . . . .
Surgical Devices . . . . . . . . . . . . . . . . . . . . .
Semiconductors . . . . . . . . . . . . . . . . . . . . . .
Consumer & Business Products . . . . . . . . .
Electronics & Computer Hardware . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$131,428
117,542
64,587
62,665
45,850
39,384
38,476
35,911
28,618
27,850
18,693
15,158
11,566
9,733
4,186
1,223
—
$652,870
20.1%
18.0%
9.9%
9.6%
7.0%
6.0%
5.9%
5.5%
4.4%
4.3%
2.9%
2.3%
1.8%
1.5%
0.6%
0.2%
0.0%
100.0%
$ 52,777
7,255
25,722
35,250
10,857
63,607
25,300
2,223
65,098
96,508
5,987
14,911
10,172
3,227
45,316
7,819
3
$472,032
11.2%
1.5%
5.4%
7.5%
2.3%
13.5%
5.4%
0.5%
13.8%
20.4%
1.3%
3.2%
2.1%
0.7%
9.6%
1.6%
0.0%
100.0%
66
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 risk 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, 2011 and 2010, respectively:
(in thousands)
Investment Grading
1
2
3
4
5
December 31, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$104,516
403,114
70,388
6,722
1,027
$585,767
17.8%
68.8%
12.0%
1.2%
0.2%
100.0%
$ 65,345
232,713
90,739
8,776
4,045
$401,618
16.3%
57.9%
22.6%
2.2%
1.0%
100.0%
As of December 31, 2011, our investments had a weighted average investment grading of 2.01 as compared
to 2.21 at December 31, 2010. 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. At December 31, 2011,
43 portfolio companies were graded 2, twelve portfolio companies were graded 3, two portfolio companies were
graded 4, and two were graded 5 as compared to 23, eight, two and two portfolio companies, respectively, at
December 31, 2010. The improvement in investment grading for the period ended December 31, 2011 was driven
in part by meaningful progress in the economy and among our portfolio companies, many of which have
experienced improved operating performance and greater access to the venture capital market as they secure new
equity financings. At December 31, 2011, we had one loan on non accrual with a fair market value of
approximately $1.0 million compared to two loans at December 31, 2010 with a fair value of approximately $4.0
million.
The effective yield on our debt investments during the year was 17.2% 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 investments was approximately 12.64%
at December 31, 2011, a slight decrease compared to 13.92% at December 31, 2010, impacted primarily by the
early pay off of higher yielding investments during 2011. 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 approximately 14.0 % as of
December 31, 2011. 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, commitment fees, success
fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt.
67
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. We recognize
nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific
loan modifications. Loan exit fees to be paid at the termination of the loan are accreted into interest income over
the contractual life of the loan. We had approximately $4.5 million and $6.6 million of unamortized fees at
December 31, 2011 and December 31, 2010, respectively, and approximately $4.4 million and $5.1 million in
exit fees receivable at December 31, 2011 and December 31, 2010, respectively.
We have loans in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual
rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest
income. To maintain our status as a RIC, this non-cash source of 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. We recorded approximately $1.7 million
and $2.3 million in PIK income in the twelve month periods ended December 31, 2011 and 2010.
In some cases, we may collateralize our investments by obtaining a first priority security interest in a
portfolio company’s assets, which may include their intellectual property. In other cases, we may obtain a
negative pledge covering a company’s intellectual property.
At December 31, 2011, approximately 63.0% of our portfolio company loans were secured by a first priority
security in all of the assets of the portfolio company, 36.0% of the loans were to portfolio companies that were
prohibited from pledging or encumbering their intellectual property and 1.0% of portfolio company loans had an
equipment only lien.
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.
Results of Operations
Comparison of periods ended December 31, 2011 and 2010
Investment Income
Interest income totaled approximately $70.3 million and $54.7 million for 2011 and 2010, respectively.
Income from commitment, facility and loan related fees totaled approximately $9.5 million 2011, compared with
$4.8 million for 2010. The increase in interest income was directly related to an increase in the average
investment portfolio outstanding in 2011 than in 2010.
In 2011 and 2010, interest income included approximately $7.4 million and $6.2 million of income from
accrued exit fees, respectively. The year over year increase is attributed to an increase in the average investment
portfolio outstanding in 2011 than in 2010.
At December 31, 2011 and 2010, we had approximately $10.3 million and $6.6 million of deferred income
related to commitment, facility and loan related fees, respectively. The increase in deferred income was attributed
to increased investment originations in 2011.
68
The following table shows the PIK-related activity for the years ended December 31, 2011 and 2010, at
cost:
(in thousands)
Beginning PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PIK interest capitalized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments received from PIK loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PIK converted to other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Twelve months ended
December 31,
2011
2010
$ 3,955
2,093
(3,567)
(440)
—
$ 2,315
3,054
(1,084)
—
(330)
Ending PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,041
$ 3,955
The increase in payments received from PIK loans during the year ended December 31, 2011 includes $1.5
million of PIK collected in conjunction with the sale of our investment in Infologix, Inc. in the first quarter of
2011.
Operating Expenses
Operating expenses, which are comprised of interest and fees, general and administrative and employee
compensation, totaled approximately $40.3 million and $30.1 million during the periods ended December 31,
2011 and 2010, respectively.
Interest and fees totaled approximately $15.9 million and $9.8 million during the periods ended
December 31, 2011 and 2010, respectively. This $6.1 million year over year increase is largely attributed to $1.4
million of incremental interest and fee expense due to the increase in SBA debentures from $170.0 million as of
December 31, 2010 to $225.0 million as of December 31, 2011 and $4.5 million of interest and fee expenses
during the period ended December 31, 2011 related to the $75.0 million of Convertible Senior Notes issued on
April 15, 2011. Additionally, we incurred approximately $767,000 of non cash interest expense during the period
ended December 31, 2011 attributed to the accretion of the fair value of the conversion feature on the Convertible
Senior Notes. We had a weighted average cost of debt comprised of interest and fees of approximately 6.23% at
December 31, 2011, as compared to 6.27% as of December 31, 2010. The increase was primarily attributed to the
weighted average cost of debt on the senior convertible notes of 8.1% offset by a lower weighted average cost of
debt on outstanding SBA debentures at 5.0% in 2011 as compared to 6.1% in 2010.
General and administrative expenses include legal, consulting, accounting fees, printer fees, insurance
premiums, rent, workout and various other expenses. Expenses increased to approximately $8.0 million from
$7.1 million for the periods ended December 31, 2011 and 2010, respectively, largely due to an increase in
accounting and printer fees from approximately $1.0 million to $1.6 million during the same periods,
respectively.
Employee compensation and benefits totaled approximately $13.3 million and $10.5 million during the
periods ended December 31, 2011 and 2010, respectively. The $2.8 million increase is due to $1.6 million of
increases in compensation expense attributable to increases in headcount, executive severance payments and
payroll taxes associated with restricted stock vesting and $1.2 million in increases in variable compensation
expense. Stock-based compensation totaled approximately $3.1 million and $2.7 million during the periods
ended December 31, 2011 and 2010, respectively. This increase is due to the incremental expense attributed to
restricted stock grants issued in the first quarter of 2011.
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, 2011 totaled $39.6 million
as compared with a net investment income before income tax expense in 2010 of approximately $29.4 million. The
changes are made up of the items described above under “Investment Income” and “Operating Expenses.”
69
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 includes 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 2011, we generated realized gains totaling approximately $11.1 million primarily due to the sale of
warrants and equity investments in 3 portfolio companies. We recognized realized losses in 2011 of
approximately $8.4 million on the disposition of investments in 13 portfolio companies. We recognized realized
gains of approximately $4.7 million during the year ended December 31, 2010 primarily due to the sale of
warrants and common stock of twelve portfolio companies. We recognized realized losses in 2010 of
approximately $31.1 million on the disposition of investments in ten portfolio companies. A summary of realized
gains and losses for the years end December 31, 2011 and 2010 is as follows:
(in millions)
December 31,
2011
2010
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,092
(8,351)
$ 4,677
(31,059)
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,741
$(26,382)
During the year ended December 31, 2011 net change in unrealized appreciation totaled approximately $4.6
million from loan, warrant and equity investments. Approximately $9.0 million was due to net unrealized
appreciation on debt investments attributable to reversal of unrealized depreciation to realized loss of
approximately $5.0 million on one technology debt investment and due to the reversal of unrealized depreciation
of approximately $3.1 million on one life science debt investment as a result of improvements at the portfolio
company. Approximately $5.8 million of net unrealized depreciation on equity investments during the year ended
December 31, 2011, was primarily attributable to the sale of InfoLogix, Inc. resulting in the reversal of $7.7
million of unrealized appreciation on equity investments to realized gains offset by approximately $1.9 million of
net appreciation due to net increases in private and public portfolio company valuations. For the year ended
December 31, 2010 approximately $ 3.6 million and approximately $500,000 of the net unrealized depreciation
was attributable to debt and warrant investments, respectively, and approximately $5.2 million of appreciation
that was attributable to equity investments. During the year ended December 31, 2011, net unrealized investment
appreciation recognized by the Company was reduced by approximately $217,000 due to the warrant
participation agreement with Citigroup. For a more detailed discussion of the warrant participation agreement,
see the discussion set forth under “—Borrowings.”
The following table itemizes the change in net unrealized appreciation (depreciation) of investments for
2011 and 2010:
(in thousands)
December 31,
2011
2010
Gross unrealized appreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized depreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of prior period net unrealized appreciation upon a realization event
. . . . . . . . . . .
. . . . . . . . . . .
Reversal of prior period net unrealized depreciation upon a realization event
Citigroup Warrant Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58,980
(49,327)
(13,224)
8,395
(217)
$ 40,696
(64,465)
(3,902)
29,674
(13)
Net unrealized appreciation/(depreciation) on portfolio investments . . . . . . . . . . . . . . . . . .
$ 4,607
$ 1,990
For a more detailed discussion, see the discussion set forth under “—Critical Accounting Policies—
Valuation of Portfolio Investments.”
70
Income and Excise Taxes
We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires
that deferred income taxes be determined based upon the estimated future tax effects 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.
Net Increase in Net Assets Resulting from Operations and Earnings Per Share
For the year ended December 31, 2011 net increase in net assets resulting from operations totaled
approximately $46.9 million compared to net income of approximately $5.0 million for the period ended
December 31, 2010. These changes are made up of the items previously described.
Basic and fully diluted net change in net assets per common share were $1.08 and $1.07, respectively, for
the year ended December 31, 2011, compared to a basic and fully diluted net income per share of $0.12 and
$0.12, respectively, for the year ended December 31, 2010.
Comparison of periods ended December 31, 2010 and 2009
Investment Income
Interest income totaled approximately $54.7 million and $62.2 million for 2010 and 2009, respectively. The
decrease in interest income was directly related to a lower average investment portfolio outstanding in 2010 than
in 2009. In 2010 and 2009, interest income included approximately $6.2 million and $6.7 million of income from
accrued exit fees, respectively. Income from commitment, facility and loan related fees such as amendment fees
and pre-payment penalties totaled approximately $4.8 million and $12.1 million for 2010 and 2009, respectively.
At December 31, 2010 and 2009, we had approximately $6.6 million and $2.4 million of deferred income related
to commitment and facility fees, respectively. The increase in deferred income was attributed to increased
investment originations in 2010.
Operating Expenses
Operating expenses, which are comprised of interest and fees, general and administrative and employee
compensation, totaled approximately $30.1 million and $31.2 million during the periods ended December 31,
2010 and 2009, respectively.
Interest and fees totaled approximately $9.8 million and $11.3 million during the periods ended
December 31, 2010 and 2009, respectively. This $1.5 million year over year decrease is primarily attributable to
the interest expense and one time fees incurred in 2009 on the Citigroup Credit Facility that was paid off in full
in March of 2009 offset by an increase in interest expense on higher borrowings under our SBA debentures.
General and administrative expenses include legal, consulting and accounting fees, insurance premiums,
rent, workout and various other expenses. Expenses decreased to $7.1 million from $7.3 million for the periods
ended December 31, 2010 and 2009, respectively, primarily due to lower workout related expenses.
Employee compensation and benefits totaled approximately $10.5 million and $10.7 million during the
periods ended December 31, 2010 and 2009, respectively. This decrease is primarily due to a lower bonus
accrual during the period ended December 31, 2010 as compared to 2009. Stock-based compensation totaled
approximately $2.7 million and $1.9 million during the periods ended December 31, 2010 and 2009,
respectively. These increases were due to the higher expense attributed to restricted stock grants issued in the
first quarter of 2010.
71
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, 2010 totaled $29.4 million
as compared with a net investment income before income tax expense in 2009 of approximately $43.1 million. The
changes are made up of the items described above under “Investment 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 2010, we generated realized gains totaling approximately $4.7 million primarily due to the sale of
warrants and common stock of 12 portfolio companies. We recognized realized losses in 2010 of approximately
$31.1 million on the disposition of investments in 10 portfolio companies. We recognized realized gains of
approximately $3.7 million during the year ended December 31, 2009 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 16 portfolio companies. A summary of realized gains and losses for
the years end December 31, 2010 and 2009 is as follows:
(in thousands)
December 31,
2010
2009
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,677
(31,059)
$ 3,738
(34,539)
Net realized (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(26,382)
$(30,801)
For the year ended December 31, 2010, net unrealized appreciation totaled approximately $2.0 million and
for the year ended December 31, 2009, net unrealized appreciation totaled approximately $1.3 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, 2010, net unrealized
investment appreciation recognized by the company was reduced by approximately $13,000 for a warrant
participation agreement with Citigroup. For a more detailed discussion, see the discussion set forth under
“—Borrowings.” The following table itemizes the change in net unrealized appreciation (depreciation) of
investments for 2010 and 2009:
(in thousands)
December 31,
2010
2009
Gross unrealized appreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized depreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of prior period net unrealized appreciation upon a realization event
. . . . . . . . . . .
. . . . . . . . . . .
Reversal of prior period net unrealized depreciation upon a realization event
Citigroup Warrant Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 40,696
(64,465)
(3,902)
29,674
(13)
$ 42,272
(73,969)
(2,319)
35,256
29
Net unrealized appreciation/(depreciation) on portfolio investments . . . . . . . . . . . . . . . . . .
$ 1,990
$ 1,269
72
Net Increase in Net Assets Resulting from Operations and Earnings Per Share
For the year ended December 31, 2010 net increase in net assets resulting from operations totaled
approximately $5.0 million compared to net income of approximately $13.6 million for the period ended
December 31, 2009. These changes are made up of the items previously described.
Basic and fully diluted net change in net assets per common share were $0.12 and $0.12, respectively, for
the year ended December 31, 2010, compared to a basic and fully diluted net income per share of $0.38 and
$0.37, respectively, for the year ended December 31, 2009.
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are derived from our credit facilities, SBA debentures, Convertible
Senior Notes and cash flows from operations, including investment sales and repayments, and income earned.
Our primary use of funds from operations includes investments in portfolio companies and payments of fees and
other operating expenses we incur. We have used, and expect to continue to use, our credit facilities, SBA
debentures and the proceeds from the rotation of our portfolio and from public and private offerings of securities
to finance our investment objectives. We may raise additional equity or debt capital through both registered
offerings off a shelf registration and private offerings of securities, by securitizing a portion of our investments or
borrowing from the SBA through our SBIC subsidiaries, among other sources.
At December 31, 2011, we had approximately $10.2 million of outstanding borrowings under the Wells
Facility, $75.0 million of Convertible Senior Notes payable and $225.0 million SBA debentures payable. We had
no borrowings outstanding under the Union Bank Facility. As of December 31, 2010, we had $170.0 million of
SBA debentures payable and no borrowings outstanding under our credit facilities.
At December 31, 2011, we had $184.3 million in available liquidity, including $64.5 million in cash and
$119.8 million in credit facilities. At December 31, 2011, we had available borrowing capacity of approximately
$65.0 million under the Wells Facility and $55.0 million under the Union Bank Facility, subject to existing terms
and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit
accounts.
During the year ended December 31, 2011, our operating activities used $139.5 million of cash and cash
equivalents, compared to $93.2 million used during the year ended December 31, 2010. The $46.3 million
increase in cash used in operating activities resulted primarily from increased investing activity. During the year
ended December 31, 2011, our financing activities provided $97.2 million of cash, compared to $75.3 million
during the year ended December 31, 2010. This $21.9 million increase in cash provided by financing activities
was due primarily due to the issuance of $75.0 million of Convertible Senior Notes in April 2011.
As of December 31, 2011, net assets totaled $431.0 million, with a net asset value per share of $9.83. We
intend to generate additional cash primarily from 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 as well as from
future borrowings as required to meet our lending activities. Our primary use of funds will be investments in
portfolio companies and cash distributions to holders of our common stock.
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, existing
investors will experience dilution. During our 2011 Annual Shareholder Meeting held on June 1, 2011, our
shareholders authorized us, with the approval of its Board of Directors, to sell up to 20% of our outstanding
common stock at a price below our then current net asset value per share and to offer and issue debt with
warrants or debt convertible into shares of our common stock at an exercise or conversion price that will not be
73
less than the fair market value per share but may be below the then current net asset value per share. However,
there can be no assurance that these capital resources will be available 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, 2011 our asset coverage ratio under our regulatory requirements as a business
development company was 864.7%, excluding our SBIC debentures as a result of our exemptive order from the
SEC which allows us to exclude all SBA leverage from our asset coverage ratio. Total leverage when including
our SBIC debentures was 237.5% at December 31, 2011. As a result of the SEC exemptive order, our ratio of
total assets on a consolidated basis to outstanding indebtedness may be less than 200%, which while providing
increased investment flexibility, also may increase our exposure to risks associated with leverage.
At December 31, 2011 and December 31, 2010, we had the following borrowing capacity and outstanding
amounts:
December 31, 2011
December 31, 2010
Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Senior Notes(2) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Debenture(3)
$ 55,000
75,000
75,000
225,000
Total Available
Carrying
Value(1)
$ —
10,187
70,353
225,000
Total Available
$ 20,000
50,000
—
225,000
Carrying
Value(1)
$ —
—
—
170,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$430,000
$305,540
$295,000
$170,000
(1) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.
(2) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount
(3)
initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was
$4,647 at December 31, 2011.
In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. In
February 2011, we submitted a request to the SBA to borrow $25.0 million under a new capital commitment and in April 2011, the SBA
approved a $25.0 million dollar commitment for HT III bringing the total available borrowings to $225.0 million, of which $125.0
million was available in HT II and $100.0 million was available in HT III.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. We
plan to submit a request to the SBA to borrow the $24.3 million under a new capital commitment under HT III, subject to SBA approval.
There can be no assurances that the SBA will approve our new capital commitment request or the pricing to be consistent with the
September 2011 pricing or that we will have drawn on any possible commitment.
On September 27, 2006, HT II received a license and on May 26, 2010 HT III received a license to operate
as SBICs under the SBIC program and are able to borrow funds from the SBA against eligible investments. As of
December 31, 2011, all required contributed capital from the Company has been invested into HT II and HT III.
The Company is the sole limited partner of HT II and HT III and HTM is the general partner. HTM is a wholly-
owned subsidiary of the Company. If HT II or HT III fails to comply with applicable SBA regulations, the SBA
could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare
outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments.
In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have
sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect
us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the
terms of the SBIC’s leverage as of December 31, 2011 as a result of having sufficient capital as defined under the
SBA regulations. HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively,
and accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31,
2011.
With our net investment of $75.0 million in HT II as of December 31, 2011, HT II has the capacity to issue
a total of $125.0 million of SBA guaranteed debentures, of which $125.0 million was outstanding at
74
December 31, 2011. As of December 31, 2011, 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. As of December 31, 2011, HT II has paid the SBA commitment fees of approximately $1.5 million. As of
December 31, 2011, we held investments in HT II in 57 companies with a fair value of approximately $198.7
million, accounting for approximately 30.4% of our total portfolio at December 31, 2011.
As of December 31, 2011, the maximum statutory limit on the dollar amount of combined outstanding SBA
guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. As of December 31, 2011,
HT III had the potential to borrow up to $100.0 million of SBA-guaranteed debentures under the SBIC program.
With our net investment of $50.0 million in HT III as of December 31, 2011, HT III has the capacity to issue a
total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $100.0 million was
outstanding at December 31, 2011. As of December 31, 2011, HT III has paid the SBA commitment fees of
approximately $1.0 million. As of December 31, 2011, we held investments in HT III in 23 companies with a fair
value of approximately $124.8 million accounting for approximately 19.1% of our total portfolio at
December 31, 2011.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at 6.63%, including
annual fees. We plan to submit a request to the SBA to borrow the $24.3 million under a new capital
commitment under HT III, subject to SBA approval. There can be no assurances that the SBA will approve our
new capital commitment request or the pricing to be consistent with the September 2011 pricing or that we will
have drawn on any possible commitment.
Our net asset value may decline as a result of economic conditions in the United States. Our continued
compliance with the covenants under our credit facilities, Convertible Senior Notes and SBA debentures depend
on many factors, some of which are beyond our control. Material net asset devaluation could have a material
adverse effect on our operations and could require us to reduce our borrowings order to comply with certain
covenants, including the ratio of total assets to total indebtedness. We believe that our current cash and cash
equivalents, cash generated from operations, and funds available from the credit facilities will be sufficient to
meet our working capital and capital expenditure commitments for at least the next 12 months.
Commitments and Contingencies
Our commitments and contingencies consist primarily of unfunded commitments to extend credit, in the
form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are
not reflected on our balance sheet. Our unfunded commitments may be significant from time to time.
As of December 31, 2011, we had unfunded origination activity commitments of approximately $168.2
million. Approximately $92.0 million of these unfunded debt commitments are dependent upon the portfolio
company reaching certain milestones before the debt commitment becomes available. 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. Closed commitments generally fund 70-80% of
the committed amount in aggregate over the life of the commitment. We intend to use cash flow from normal and
early principal repayments, SBA debentures, our Wells Facility, our Union Bank Facility and proceeds from
Convertible Senior 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.
In addition, we had approximately $82.5 million of non-binding term sheets with seven companies
outstanding, which generally convert to contractual commitments within approximately 45 to 60 days of signing.
Non-binding outstanding term from prior release are subject to completion of the Company’s due diligence and
final approval process, as well as the 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.
75
Contractual Obligations
The following table shows our contractual obligations as of December 31, 2011:
Contractual Obligations(1)(2)
Payments due by period
(in thousands)
Total
Less than
1 year
1 - 3 years
3 - 5 years
After
5 years
Borrowings(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Lease Obligations(5) . . . . . . . . . . . . . . . . . . . . .
$305,540
8,497
$ — $10,187
2,294
1,244
$70,353
2,520
$225,000
2,439
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$314,037
$1,244
$12,481
$72,873
$227,439
(1) Excludes commitments to extend credit to our portfolio companies.
(2) We also have warrant participation with Citigroup. See “Borrowings.”
(3)
Includes borrowings under the Wells Facility, Union Bank Facility and the SBA debentures. There were no outstanding borrowings
under the Union Bank Facility at December 31, 2011.
(4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal
amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible
Senior Notes was $4,647 at December 31, 2011.
(5) Long-term facility leases.
Certain premises are leased under agreements which expire at various dates through December 2013. Total
rent expense amounted to approximately $1.1 million, $1.0 million and $966,000 during the years ended
December 31, 2011, 2010 and 2009, respectively.
We and our executives and directors are covered by Directors and Officers Insurance, with the directors and
officers being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in
the 1940 Act.
Borrowings
Long-term SBA Debentures
On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able
to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business
Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time
SBA guaranteed debentures up to twice the amount of its regulatory capital. As of December 31, 2011, 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. HT II has a total of $125.0 million of SBA
guaranteed debentures outstanding as of December 31, 2011 and has paid the SBA commitment fees of
approximately $1.5 million. As of December 31, 2011, the Company held investments in HT II in 57 companies
with a fair value of approximately $198.7 million, accounting for approximately 30.4% of our total portfolio at
December 31, 2011.
On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to
borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With
the Company’s net investment of $50.0 million in HT III as of December 31, 2011, HT III has the capacity to
issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $100.0 million
was outstanding as of December 31, 2011. As of December 31, 2011, HT III has paid commitment fees of
approximately $1.0 million. As of December 31, 2011, the Company held investments in HT III in 23 companies
with a fair value of approximately $124.8 million accounting for approximately 19.1% of our total portfolio at
December 31, 2011.
There is no assurance that HT II or HT III will be able to draw up to the maximum limit available under the
SBIC program.
76
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 subsidiaries HT II
and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection
therewith, make equity investments.
HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance
with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could,
depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare
outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments.
In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do
not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn,
negatively affect us because HT II and III are our wholly owned subsidiaries. HT II and HT III were in
compliance with the terms of the SBIC’s leverage as of December 31, 2011 as a result of having sufficient capital
as defined under the SBA regulations.
The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in
March and September and range from 2.88% to 5.73%. Interest payments on SBA debentures are payable semi-
annually. There are no principal payments required on these issues prior to maturity and no prepayment penalties.
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. 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 fees related to HT II debentures that
pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment
was closed in. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The
annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the
year ended December 31, 2011 for HT II was approximately $125.5 million with an average interest rate of
approximately 6.0%. The average amount of debentures outstanding for the year ended December 31, 2011 for
HT III was approximately $60.0 million with an average interest rate of approximately 3.0%.
77
We reported the following SBA debentures outstanding as of December 31, 2011 and December 31, 2010:
(in thousands) Issuance/Pooling Date
Maturity Date
Interest Rate(1)
2011
2010
December 31,
SBA Debentures
September 26, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2017
March 26, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2018
September 24, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2018
March 25, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2019
September 23, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2019
September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2020
September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2020
March 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2021
September 21, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2021
October 18, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022
Total SBA Debentures . . . . . . . . . . . . . . . . . . . . . . .
6.43%
6.38%
6.63%
5.53%
4.64%
3.62%
3.50%
4.37%
3.16%
1.35%(2)
$ 12,000
58,050
13,750
18,400
3,400
6,500
22,900
28,750
25,000
36,250
$ 12,000
58,050
38,750
18,400
3,400
6,500
32,900
—
—
—
$225,000
$170,000
(1)
(2)
Interest rate includes annual charge
Interim interest on the October 18, 2011 borrowing will pool on March 20, 2012 at which date the principal interest rate will be set.
In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%,
including annual fees. In February 2011, we submitted a request to the SBA to borrow $25.0 million under a new
capital commitment and in April 2011, the SBA approved a $25.0 million dollar commitment for HT III bringing
the total available borrowings to $225.0 million, of which $125.0 million was available in HT II and $100.0
million was available in HT III.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at 6.63%, including
annual fees. We plan to submit a request to the SBA to borrow the $24.3 million under a new capital
commitment under HT III, subject to SBA approval. There can be no assurances that the SBA will approve our
new capital commitment request or the pricing to be consistent with the September 2011 pricing or that we will
have drawn on any possible commitment.
Wells Facility
In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells
Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, we renewed the Wells Facility. Under this three-
year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility
contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million,
funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other
customary conditions. We expect to continue discussions with various other potential lenders to join the new
facility; however, there can be no assurances that additional lenders will join the Wells Facility.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus
3.50%, with a floor of 5.00% and an advance rate of 50% against eligible loans. The Wells Facility is secured by
loans in the borrowing base. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each
payment date on or before September 1, 2011. The monthly payment of a non-use fee thereafter shall depend on
the average balance that was outstanding on a scale between 0.0% and 0.75%. From September 1, 2011 through
September 30, 2011, this non-use fee was 0.75%. On June 20, 2011 we paid an additional $1.1 million in
structuring fees in connection with the Wells Facility which is being amortized through June 2014. There was
approximately $10.2 million outstanding debt under the Wells Facility at December 31, 2011. In January 2012,
we repaid the entire principal balance outstanding, approximately $10.2 million, as of December 31, 2011 under
the Wells Fargo facility.
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The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries,
in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated
indebtedness, that is in excess of $314.0 million plus 90% of the cumulative amount of equity raised after
March 31, 2011. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every
dollar of equity capital that we subsequently raise. 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, 2011.
Union Bank Facility
On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with
Union Bank (the “Union Bank Facility”). On November 2, 2011, we renewed and amended the Union Bank
Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets have
made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an
accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by
additional lenders and with the agreement of Union Bank and subject to other customary conditions. We expect
to continue discussions with various other potential lenders to join the new facility; however, there can be no
assurances that additional lenders will join the Union Bank Facility.
Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR
plus 2.25% with a floor of 4.0%. The Union Bank Facility requires the payment of a non-use fee of 0.25%
annually. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes
an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally
requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. At December 31,
2011, there were no borrowings outstanding on this facility.
The Union Bank Facility requires various financial and operating covenants. These covenants require us to
maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding
subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds
received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on
November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months
with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a
non-use fee of 0.50% annually. Union Bank Facility also 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, 2011.
Convertible Senior Notes
In April 2011, we issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes (the
“Convertible Senior Notes”) due 2016. As of December 31, 2011, the carrying value of the Convertible Senior
Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded
upon issuance of the Convertible Senior Notes, is approximately $70.4 million.
The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted
or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per
year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011.
The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our
existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior
Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated;
effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that
we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all
79
existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or
similar facilities.
Prior to the close of business on the business day immediately preceding October 15, 2015, holders may
convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after
October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity
Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver,
as the case may be, at our election, cash, shares of its common stock or a combination of cash and shares of its
common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal
amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share
of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for
any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the
conversion rate will be increased for converting holders.
We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the
Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes
may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to
100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid
interest through, but excluding, the required repurchase date.
In accounting for the Convertible Senior Notes, we estimated that the values of the debt and the embedded
conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The
original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes has initially
be recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result,
we record interest expense comprised of both stated interest expense as well as accretion of the original issue
discount resulting in an estimated effective interest rate of approximately 8.2%.
As of December 31, 2011, the components of the carrying value of the Convertible Senior Notes were as
follows:
(in thousands)
As of December 31, 2011
Principal amount of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue discount, net of accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,000
(4,647)
$70,353
For the three and twelve months ended December 31, 2011, the components of interest expense and cash
paid for interest expense for the Convertible Senior Notes were as follows:
(in thousands)
Three Months Ended
December 31, 2011
Twelve Months Ended
December 31, 2011
Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of original issue discount
. . . . . . . . . . . . . . . . . .
Amortization of debt issuance cost . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . .
$1,125
271
144
$1,540
$2,250
$3,187
767
409
$4,363
$2,250
As of December 31, 2011, we are in compliance with the terms of the indentures governing the Convertible
Senior Notes. See Note 4 to our consolidated financial statements for more detail on the Convertible Senior
Notes.
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Citibank Credit Facility
We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the
“Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. which expired under normal terms.
During the first quarter of 2009, we paid off all remaining principal and interest owed under the Credit Facility.
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 were 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
$715,000 as of December 31, 2011 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, we have paid Citigroup approximately $1.1 million under the warrant participation agreement thereby
reducing its realized gains by this amount. We will continue to pay Citigroup under the warrant participation
agreement until the Maximum Participation Limit is reached or the warrants expire.
At December 31, 2011 and December 31, 2010, the Company had the following borrowing capacity and
outstanding borrowings:
Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Senior Notes(2) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Debenture(3)
December 31, 2011
December 31, 2010
Total
Available
$ 55,000
75,000
75,000
225,000
Carrying
Value(1)
$ —
10,187
70,353
225,000
Total
Available
$ 20,000
50,000
—
225,000
Carrying
Value
$ —
—
—
170,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$430,000
$305,540
$295,000
$170,000
(1) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.
(2) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount
(3)
initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was
$4,647 at December 31, 2011.
In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. In
February 2011, we submitted a request to the SBA to borrow $25.0 million under a new capital commitment and in April 2011, the SBA
approved a $25.0 million dollar commitment for HT III bringing the total available borrowings to $225.0 million, of which $125.0
million was available in HT II and $100.0 million was available in HT III.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. We
plan to submit a request to the SBA to borrow the $24.3 million under a new capital commitment under HT III, subject to SBA approval.
There can be no assurances that the SBA will approve our new capital commitment request or the pricing to be consistent with the
September 2011 pricing or that we will have drawn on any possible commitment.
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Dividends
The following table summarizes our dividends declared and paid or to be paid on all shares, including
restricted stock, to date:
Date Declared
Record Date
Payment Date
Amount Per Share
August 16, 2007
November 16, 2007
February 15, 2008
November 1, 2005
January 6, 2006
April 10, 2006
July 31, 2006
November 6, 2006
February 19, 2007
October 27, 2005 . . . . . . . . . . . . . . . . . .
December 9, 2005 . . . . . . . . . . . . . . . . .
April 3, 2006 . . . . . . . . . . . . . . . . . . . . .
July 19, 2006 . . . . . . . . . . . . . . . . . . . . .
October 16, 2006 . . . . . . . . . . . . . . . . . .
February 7, 2007 . . . . . . . . . . . . . . . . . .
May 3, 2007 . . . . . . . . . . . . . . . . . . . . . . May 16, 2007
August 2, 2007 . . . . . . . . . . . . . . . . . . . .
November 1, 2007 . . . . . . . . . . . . . . . . .
February 7, 2008 . . . . . . . . . . . . . . . . . .
May 8, 2008 . . . . . . . . . . . . . . . . . . . . . . May 16, 2008
August 7, 2008 . . . . . . . . . . . . . . . . . . . .
November 6, 2008 . . . . . . . . . . . . . . . . .
February 12, 2009 . . . . . . . . . . . . . . . . .
May 7, 2009 . . . . . . . . . . . . . . . . . . . . . . May 15, 2009
August 6, 2009 . . . . . . . . . . . . . . . . . . . .
October 15, 2009 . . . . . . . . . . . . . . . . . .
December 16, 2009 . . . . . . . . . . . . . . . .
February 11, 2010 . . . . . . . . . . . . . . . . .
May 3, 2010 . . . . . . . . . . . . . . . . . . . . . . May 12, 2010
August 2, 2010 . . . . . . . . . . . . . . . . . . . .
November 4, 2010 . . . . . . . . . . . . . . . . .
March 1, 2011 . . . . . . . . . . . . . . . . . . . . March 10, 2011
May 5, 2011 . . . . . . . . . . . . . . . . . . . . . . May 11, 2011
August 4, 2011 . . . . . . . . . . . . . . . . . . . .
November 3, 2011 . . . . . . . . . . . . . . . . .
February 27, 2012 . . . . . . . . . . . . . . . . . March 12, 2012
August 14, 2009
October 20, 2009
December 24, 2009
February 19, 2010
August 15, 2008
November 14, 2008
February 23, 2009
August 12, 2010
November 10, 2010
August 15, 2011
November 14, 2011
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 19, 2008
December 15, 2008
March 30, 2009
June 15, 2009
September 14, 2009
November 23, 2009
December 30, 2009
March 19, 2010
June 18, 2010
September 17,2010
December 17, 2010
March 24, 2011
June 23, 2011
September 15, 2011
November 29, 2011
March 15, 2012
$0.03
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.30
0.34
0.34
0.34
0.32*
0.30
0.30
0.30
0.04
0.20
0.20
0.20
0.20
0.22
0.22
0.22
0.22
0.23
$6.92
* Dividend paid in cash and stock.
On February 27, 2012 the Board of Directors increased the quarterly dividend by 5.0% and declared a cash
dividend of $0.23 per share that is to be paid on March 15, 2012 to shareholders of record as of March 12, 2012.
This dividend is the Company’s twenty-sixth consecutive quarterly dividend declaration since its initial public
offering, and will bring the total cumulative dividend declared to date to $6.92 per share.
Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly
distributions in an amount that approximates 90—100% of our taxable quarterly income or potential annual
income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or
fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was
earned, while maintaining the option to spill over our excess taxable income.
Distributions in excess of our current and accumulated earnings and profits would generally 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. The determination of the tax attributes of our distributions is made annually as of the end of our
fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the
dividends declared during the year ended December 31, 2011 and 2010, 100% were distributions of ordinary
income. There can be no certainty to stockholders that this determination is representative of what the tax
attributes of our 2012 distributions to stockholders will actually be.
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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,
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.
We intend to distribute quarterly dividends to our stockholders. In order to avoid certain excise taxes
imposed on RICs, we currently intend to 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) 98.2% 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 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). 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 can offer no assurance that we will achieve results that will permit the payment of any cash distributions
and, if we issue senior securities, we will 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 “Regulation”.
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 the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash
dividends. See “Dividend Reinvestment Plan” in the accompanying prospectus.
Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act.
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.
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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.
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,
Fair Value Measurements). At December 31, 2011, approximately 87.4% 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. Our debt securities are primarily invested in equity sponsored technology-related
companies including life science, clean technology and select lower middle market technology companies. Given
the nature of lending to these types of businesses, our investments in these portfolio companies are generally
considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for
these investment securities to be traded or exchanged. As such, it values substantially all of its investments at fair
value as determined in good faith pursuant to a consistent valuation policy and our 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 our investments
determined in good faith by our Board may differ significantly from the value that would have been used had a
readily available market existed for such investments, and the differences could be material.
Our Board of Directors may from time to time engage 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. The scope of the services rendered by an independent valuation firm is at the discretion
of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair
value of our investments in good faith.
With respect to investments for which market quotations are not readily available or when such market
quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation
process each quarter, as described below:
(1) our quarterly valuation process begins with the initial valuation of each portfolio company or investment
by the investment professionals responsible for the portfolio investment;
(2) preliminary valuation conclusions are then documented and discussed with our investment committee;
(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment
committee and that of the independent valuation firm and responds to the valuation recommendation of the
independent valuation firm to reflect any comments, if any, and
(4) the Board of Directors discusses valuations and determines the fair value of each investment in our
portfolio in good faith based on the input of, where applicable, the respective independent valuation firm
and the valuation committee.
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 does not 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.
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We have 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.
Debt Investments
We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of
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. Our debt securities are primarily invested in equity sponsored
technology, life science and clean technology companies. Given the nature of lending to these types of
businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because
there is no known or accessible market or market indexes for these investment securities to be traded or
exchanged.
We apply a procedure for debt investments that assumes a sale of investment in a hypothetical market to a
hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does
not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit
concept. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as
apply all of its historical fair value analysis. We use pricing on recently issued comparable debt securities to
determine the baseline hypothetical market yields as of the measurement date. We consider each portfolio
company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to
derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows
from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of
the measurement date.
Our process includes, 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 than those a
hypothetical market participant would use to estimate fair value, including the proceeds that would be received in
a liquidation analysis.
We record unrealized depreciation on investments when we believe that an investment has decreased in
value, including where collection of a loan is doubtful or if under the in exchange premise when the value of a
debt security were to be less than amortized cost of the investment. Conversely, where appropriate, we 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 or if under the in exchange premise the value of a
debt security were to be greater than amortized cost.
When originating a debt instrument, we generally receive warrants or other equity-related securities from
the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon
85
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.
Equity-Related Securities and Warrants
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. We have a limited number of equity securities in public companies. In
accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily
available are valued at the closing market quote on the valuation date.
We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date,
privately held warrant and equity related 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, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to
comparable public companies or other industry benchmarks. 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 our valuation of the warrant and related equity. 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.
Income Recognition.
We record interest income on the accrual basis and we recognize it 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 generally place the loan on
non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any
uncollected interest related to prior periods is reversed from income in the period that collection of the interest
receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has
sufficient collateral value and is in the process of collection. As of December 31, 2011, we had one portfolio
company on non-accrual status with an approximate cost of $7.7 million and a fair value of approximately $1.0
million. There were two loans on non-accrual status with an aggregate cost of approximately $11.4 million and a
fair value of approximately $4.0 million as of December 31, 2010. During the three months ended March 31,
2011 we recognized a realized loss of approximately $5.2 million on our warrant, equity and debt investments in
one of these portfolio companies.
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, 2011,
2010 and 2009, approximately $1.7 million, $2.3 million and $2.9 million in PIK income was recorded
respectively.
86
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.
We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter
relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including
prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred
loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific
debt outstanding.
Equity Offering Expenses
Our offering costs, excluding underwriters’ fees, are charged against the proceeds from equity offerings
when received.
Debt Issuance Costs
Debt issuance costs are being amortized over the life of the related debt instrument using the straight line
method, which closely approximates the effective yield method.
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 123R “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 98.2% of our capital gain net income for each one year period ending on October 31. At
December 31, 2011 , 2010 and 2009, no excise tax was recorded. 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 May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)
2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and
87
Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 was issued concurrently
with International Financial Reporting Standards No.13 (“IFRS 13”), Fair Value Measurements, to provide
largely identical guidance about fair value measurement and disclosure requirements as is currently required
under ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). The new standards do not extend
the use of fair value but, rather, provide guidance about how fair value should be applied where it already is
required or permitted under IFRS or GAAP. For GAAP, most of the changes are clarifications of existing
guidance or wording changes to align with IFRS 13. ASU 2011-04 eliminates the concepts of in-use and in-
exchange when measuring fair value of all financial instruments. For Level 3 fair value measurements, the ASU
requires that our disclosure include quantitative information about significant unobservable inputs, a qualitative
discussion about the sensitivity of the fair value measurement to changes in the unobservable inputs and the
interrelationship between inputs, and a description of our valuation process. Public companies are required to
apply ASU 2011-04 prospectively for interim and annual periods beginning after December 15, 2011. We are
currently evaluating the impact of the adoption of ASU 2011-04 on our financial statements and disclosures.
Subsequent Events
As of February 29, 2011, we have:
a. Closed commitments of approximately $36.9 million to new and existing portfolio companies, and
funded approximately $30.0 million since the close of the fourth quarter of 2011.
b.
Pending commitments (signed non-binding term sheets) of approximately $51.0 million.
The table below summarizes our year-to-date closed and pending commitments as follows:
Closed and Pending Commitments (in millions)
Q1-12 Closed Commitments (as of February 29, 2012) (a,b) . . . . . . . . . . . . . . . . . . .
Pending Commitments (as of February 29, 2012) (b) . . . . . . . . . . . . . . . . . . . . . . . . .
Year-to-date 2012 Closed and Pending Commitments . . . . . . . . . . . . . . . . . . . . . . . .
$36.9
51.0
$87.9
Notes:
a. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters
from close.
b. Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future
cash requirements.
Dividend Declaration
On February 27, 2012 the Board of Directors increased the quarterly dividend by 5.0% and declared a cash
dividend of $0.23 per share that will be payable on March 15, 2012 to shareholders of record as of March 12,
2012. This dividend would represent the Company’s twenty-sixth consecutive dividend declaration since its
initial public offering, bringing the total cumulative dividend declared to date to $6.92 per share.
Liquidity and Capital Resources
In January 2012, we closed a public offering of 5,000,000 shares of common stock at $9.61 per share,
resulting in proceeds of $48,050,000 before deducting offering expenses.
In January 2012, we repaid the entire principal balance outstanding (approximately $10.2 million as of
December 31, 2011) under the Wells Fargo facility.
88
In February 2012, we repaid six SBA debentures with principal totaling $24.25 million under our first
license. The weighted average interest rate on repaid debentures (including the 0.906% SBA annual charge levied
on each debenture) was 6.63%. The total amount paid, including unpaid interest and annual charges through
March 1, 2012, was approximately $24.3 million
Portfolio Company Developments
On February 3, 2012, Cempra, Inc. completed its initial public offering of 8,400,000 shares of common
stock at a price to the public of $6.00 per share. At December 31, 2011, we held approximately 371,000 warrants
in Cempra, Inc.
In January 2012, BÂRRX Medical, Inc. completed the sale of all of its outstanding shares to Coviden plc in
a transaction for an aggregate consideration of approximately $325.0 million, net of cash and short-term
investments. In connection with the sale, we expect to realize a net gain of approximately $2.2-$2.3 million in the
first quarter of 2012 and a full repayment of our loan to BÂRRX Medical.
In January 2012, Hercules received full repayment of its $5.0 million term loan with Merrion
Pharmaceuticals, Inc.
In December 2011, Hercules entered into an agreement to acquire approximately $9.6 million through a
secondary marketplace in Facebook, Inc., the social networking company for an aggregate of 307,500 shares at
an average price of $31.08 per share. The investments were subject to certain closing conditions and a right of
first refusal by Facebook, Inc. which expired thirty days after the date of investment. At December 31, 2011
these assets were held as Other Assets. In February 2012, Hercules was notified that Facebook Inc. had not
exercised its repurchase right with respect to any of the shares and had executed all documents necessary to fully
transfer the ownership of the shares to Hercules.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as
the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the
difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on
our cash flows. Changes in the general level of interest rates can affect our net investment income, which is the
difference between the interest income earned on interest earning assets and our interest expense incurred in
connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other
things, our ability to acquire and originate loans and securities and the value of our investment portfolio.
As of December 31, 2011, approximately 90.7% of our portfolio loans were at variable rates or variable
rates with a floor and 9.3% 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 rate 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 2.88% to 5.73%. 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 related to HT III debentures that
pooled on September 21, 2011 was 0.285%. The annual fees related to HT II debentures that pooled on
89
September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment was closed
in. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding
for the year ended December 31, 2011 for HT II was approximately $125.5 million with an average interest rate
of approximately 6.0%, and for HT III was approximately $60.0 million with an average interest rate of
approximately 3.0%. Interest is payable semiannually 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.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus
3.50% with a floor of 5.0%. 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. The Wells Facility requires the monthly payment of a
non-use fee of 0.3% for each payment date on or before September 1, 2011. From September 1, 2011 through
September 30, 2011, this non-use fee was 0.75%. The monthly payment of a non-use fee thereafter shall depend
on the average balance that was outstanding on a scale between 0.0% and 0.75%. All outstanding principal is due
upon maturity. There were approximately $10.2 million of borrowings outstanding under this facility at
December 31, 2011. The facility expires in June 2014.
Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR
plus 2.25% with a floor of 4.0%. The Union Bank Facility required the payment of an unused fee of 0.25%
annually. The Union Bank 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 Union Bank Facility generally
requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. There were no
outstanding borrowings under this facility at December 31, 2011. In June 2011, the maturity date under the credit
facility was extended from July 31, 2011 to December 31, 2011, subject to the same terms and conditions. On
November 2, 2011, we renewed and amended the Union Bank Facility. The Union Bank Facility requires the
payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain
unchanged, including the stated interest rate. The Union Bank Facility will mature on November 2, 2014,
revolving through the first 24 months with a term out provision for the remaining 12 months.
Borrowings under the Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless
previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest
at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year,
commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank
senior in right of payment to the our existing and future indebtedness that is expressly subordinated in right of
payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured
indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness
(including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such
indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred
by our subsidiaries, financing vehicles or similar facilities.
Because we currently borrow, and plan to borrow in the future, 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 the funds borrowed. Accordingly, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on our net investment income. In periods of rising interest
rates, our cost of funds would increase, which could reduce our net investment income if there is not a
corresponding increase in interest income generated by variable rate assets in our investment portfolio.
90
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Assets and Liabilities as of December 31, 2011 and 2010 . . . . . . . . . . . . . . . . .
Consolidated Schedule of Investments as of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Schedule of Investments as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the three years ended December 31, 2011 . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2011 . . . . . . . .
Consolidated Statements of Cash Flows for the three years ended December 31, 2011 . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements
Schedule of Investments and Advances to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92
94
95
116
134
135
136
137
166
91
Report of Independent Registered Public Accounting Firm
To Board of Directors and Shareholders of
Hercules Technology Growth Capital, Inc.
In our opinion, the consolidated statement of assets and liabilities, including the consolidated schedule of
investments, as of December 31, 2011 and 2010 and the related consolidated statements of operations, of changes
in net assets, and of cash flows for the years then ended present fairly, in all material respects, the financial
position of Hercules Technology Growth Capital, Inc. and its subsidiaries at December 31, 2011 and 2010, and
the results of their operations and their cash flows for each of the two years in the period ended December 31,
2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on
the financial statement schedule, and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. Our procedures included confirmation of securities at December 31, 2011 by correspondence with
the custodian and brokers, and where replies were not received, we performed other auditing procedures. We
believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
/s/ PricewaterhouseCoopers LLP
San Francisco, CA
March 9, 2012
92
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 operations, changes in net assets and cash
flows of Hercules Technology Growth Capital, Inc. (the Company) for the year ended December 31, 2009. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated results of operations, changes in its net assets and its cash flows of Hercules Technology Growth
Capital, Inc. for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Francisco, California
March 12, 2010
93
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
December 31,
2011
2010
Assets
Investments:
Non-Control/Non-Affiliate investments (cost of $642,038 and $445,782,
respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affiliate investments (cost of $3,236 and $2,880, respectively) . . . . . . . . . . . . . . . . . .
Control investments (cost of $11,266 and $31,743, respectively) . . . . . . . . . . . . . . . .
$651,843
—
1,027
$428,782
3,069
40,181
Total investments, at value (cost of $656,540 and $480,405, respectively) . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
652,870
64,474
5,820
24,230
472,032
107,014
4,520
7,681
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$747,394
$591,247
Liabilities
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wells Fargo Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term Liabilities (Convertible Debt) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies (Note 9)
$ 10,813
10,187
70,353
225,000
$
8,716
—
—
170,000
$316,353
$178,716
Net assets consist of:
Common stock, par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized depreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated realized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions in excess of investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
484,244
(3,431)
(43,042)
(6,774)
43
477,549
(8,038)
(51,033)
(5,990)
Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$431,041
$412,531
Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$747,394
$591,247
Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized) . . . .
Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,853
9.83
$
43,444
9.50
$
See notes to consolidated financial statements.
94
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Anthera Pharmaceuticals Inc.
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Drug Discovery
& Development
Senior Debt
Matures September 2014
Interest rate Prime + 7.3% or
Floor rate of 10.55% . . . . . . . . . . . . . . . . $25,000 $ 24,433 $ 25,183
Total Anthera Pharmaceuticals Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,433
25,183
Aveo Pharmaceuticals, Inc.
Drug Discovery
& Development
Senior Debt
Matures June 2014
Interest rate Prime + 7.15% or
Floor rate of 11.9% . . . . . . . . . . . . . . . . . $25,000
25,360
26,110
Total Aveo Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,360
26,110
Dicerna Pharmaceuticals, Inc.
Drug Discovery
& Development
Senior Debt
Matures January 2015
Interest rate Prime + 4.40% or
Floor rate of 10.15% . . . . . . . . . . . . . . . . $12,000
11,665
11,665
Total Dicerna Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,665
11,665
NextWave Pharmaceuticals
Drug Discovery
& Development
Senior Debt
Matures June 2015
Interest rate Prime + 4.3% or
Floor rate of 9.55% . . . . . . . . . . . . . . . . . $ 6,000
Total NextWave Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concert Pharmaceuticals
Drug Discovery
& Development
Senior Debt
Matures July 2015
Interest rate Prime + 3.25% or
Floor rate of 8.25% . . . . . . . . . . . . . . . . . $ 7,500
Total Concert Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PolyMedix, Inc.
Drug Discovery
& Development
Senior Debt
Matures September 2013
Interest rate Prime + 7.1% or
Floor rate of 12.35% . . . . . . . . . . . . . . . . $ 6,763
Total PolyMedix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,925
5,925
5,926
5,926
7,350
7,350
7,350
7,350
6,594
6,594
6,729
6,729
Aegerion Pharmaceuticals, Inc.
Drug Discovery
& Development
Senior Debt
Matures September 2014
Interest rate Prime + 5.65% or
Floor rate of 10.40% . . . . . . . . . . . . . . . . $10,000
10,070
10,070
Total Aegerion Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,070
10,070
Chroma Therapeutics, Ltd.(5)
Drug Discovery
& Development
Senior Debt
Matures September 2013
Interest rate Prime + 7.75% or
Floor rate of 12.00% . . . . . . . . . . . . . . . . $ 7,633
Total Chroma Therapeutics, Ltd.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,958
7,958
7,879
7,879
NeurogesX, Inc.
Drug Discovery
& Development
Senior Debt
Matures February 2015
Interest rate Prime + 6.25% or
Floor rate of 9.50% . . . . . . . . . . . . . . . . . $15,000
14,558
14,558
Total NeurogesX, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,558
14,558
Total Debt Drug Discovery & Development (26.79%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113,913
115,470
See notes to consolidated financial statements.
95
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
E-band Communications, Corp.(6)
Communications
& Networking
Convertible Senior Debt
Due on demand
Interest rate Fixed 6.00% . . . . . . . . . . . . .
$ 356
$
356 $ —
Total E-Band Communications, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
356
—
Intelepeer, Inc.
Communications
& Networking
Senior Debt
Matures May 2013
Interest rate Prime + 8.12% or
Floor rate of 11.37% . . . . . . . . . . . . . . . . .
Senior Debt
$6,524
6,346
6,476
Matures May 2012
Interest rate Prime + 4.25% . . . . . . . . . . . .
$1,100
Total Intelepeer, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ahhha, Inc.
Communications
& Networking
Senior Debt
Matures January 2015
Interest rate Fixed 10.00% . . . . . . . . . . . .
$ 350
Total Ahhha, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pac-West Telecomm, Inc.
Communications
& Networking
Senior Debt
Matures October 2014
Interest rate Prime + 7.50% or
Floor rate of 12.00% . . . . . . . . . . . . . . . . .
$4,369
Total Pac-West Telecomm, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PeerApp, Inc.(4)
Communications
& Networking
Senior Debt
Matures April 2013
Interest rate Prime + 7.5% or
Floor rate of 11.50% . . . . . . . . . . . . . . . . .
$1,776
Total PeerApp, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PointOne, Inc.
Communications
& Networking
Senior Debt
Matures April 2013
Interest rate Libor + 9.0% or
Floor rate of 11.50% . . . . . . . . . . . . . . . . .
$8,308
Total PointOne, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stoke, Inc(4)
Communications
& Networking
Senior Debt
Matures May 2013
Interest rate Prime + 7.0% or
Floor rate of 10.25% . . . . . . . . . . . . . . . . .
$2,627
Total Stoke, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,100
7,446
1,070
7,546
345
345
345
345
4,196
4,196
4,196
4,196
1,814
1,814
1,835
1,835
8,107
8,107
8,100
8,100
2,586
2,586
2,612
2,612
Total Debt Communications & Networking (5.71%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,850
24,634
Central Desktop, Inc.
Software
Senior Debt
Total Central Desktop, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures April 2014
Interest rate Prime + 6.75% or
Floor rate of 10.50% . . . . . . . . . . . . . . . . .
$3,000
2,894
2,894
2,954
2,954
See notes to consolidated financial statements.
96
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Clickfox, Inc.
Industry
Type of Investment(1)
Software
Senior Debt
Principal
Amount Cost(2) Value(3)
Matures July 2013
Interest rate Prime + 6.00% or
Floor rate of 11.25% . . . . . . . . . . . . . . .
$3,999
$ 3,920 $ 4,000
Total Clickfox, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,920
4,000
Kxen, Inc.(4)
Software
Senior Debt
Matures January 2015
Interest rate Prime + 5.08% or
Floor rate of 8.33% . . . . . . . . . . . . . . . .
$3,000
Total Kxen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RichRelevance, Inc.
Software
Senior Debt
Matures January 2015
Interest rate Prime + 3.25% or
Floor rate of 7.50% . . . . . . . . . . . . . . . .
$5,000
Total RichRelevance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blurb, Inc
Software
Senior Debt
Matures December 2015
Interest rate Prime +5.25% or
Floor rate 8.5 % . . . . . . . . . . . . . . . . . . .
$5,000
Total Blurb, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SugarSync Inc.
Software
Senior Debt
Matures April 2015
Interest rate Prime + 4.50% or
Floor rate of 8.25% . . . . . . . . . . . . . . . .
$2,000
Total SugarSync Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
White Sky, Inc.
Software
Senior Debt
Matures June 2014
Interest rate Prime + 7.00% or
Floor rate of 10.25% . . . . . . . . . . . . . . .
$1,418
Total White Sky, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TaDa Innovations, Inc.
Software
Senior Debt
Matures June 2012
Interest rate Prime + 3.25% or
Floor rate of 6.50% . . . . . . . . . . . . . . . .
$ 100
Total TaDa Innovations, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,958
2,958
2,858
2,858
4,879
4,879
4,879
4,879
4,873
4,873
4,873
4,873
1,950
1,950
1,950
1,950
1,357
1,357
1,400
1,400
90
90
90
90
Total Debt Software (5.34%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,921
23,004
Maxvision Holding, LLC.(7)(8)
Electronics &
Computer Hardware
Senior Debt
Matures December 2013
Interest rate Prime + 8.25% or
Floor rate of 12.00%, PIK
interest 5.00% . . . . . . . . . . . . . . . . . . . . .
Senior Debt
Matures December 2013
Interest rate Prime + 6.25% or
Floor rate of 10.00%, PIK
interest 2.00% . . . . . . . . . . . . . . . . . . . . .
$4,185
4,143
—
$2,539
2,515
—
See notes to consolidated financial statements.
97
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Revolving Line of Credit
Matures December 2013
Interest rate Prime + 5.00% or
Floor rate of 8.50% . . . . . . . . . . . . . . . . . . $
892 $ 1,027 $ 1,027
Total Maxvision Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,685
1,027
Total Debt Electronics & Computer Hardware (0.24%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,685
1,027
Althea Technologies, Inc.
Specialty
Pharmaceuticals
Senior Debt
Matures October 2013
Interest rate Prime + 7.70% or
Floor rate of 10.95% . . . . . . . . . . . . . . . . . $10,359
10,315
10,584
Total Althea Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,315
10,584
Pacira Pharmaceuticals, Inc.(4)
Specialty
Pharmaceuticals
Senior Debt
Matures August 2014
Interest rate Prime + 6.25% or
Floor rate of 10.25% . . . . . . . . . . . . . . . . . $11,250
11,257
11,397
Senior Debt
Matures August 2014
Interest rate Prime + 8.65% or
Floor rate of 12.65% . . . . . . . . . . . . . . . . . $15,000
14,386
14,574
Total Pacira Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,643
25,971
Quatrx Pharmaceuticals Company
Specialty
Pharmaceuticals
Convertible Senior Debt
Matures March 2012
Interest rate 8.00% . . . . . . . . . . . . . . . . . . . $ 1,888
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,888
1,888
1,888
1,888
Total Debt Specialty Pharmaceuticals (8.92%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,846
38,443
Achronix Semiconductor Corporation
Semiconductors Senior Debt
Total Achronix Semiconductor Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kovio Inc.
Semiconductors Senior Debt
Matures January 2015
Interest rate Prime + 7.75% or
Floor rate of 11.00% . . . . . . . . . . . . . . . . . $ 2,500
2,329
2,329
2,329
2,329
Matures March 2015
Interest rate Prime + 5.50% or
Floor rate of 9.25% . . . . . . . . . . . . . . . . . . $ 1,250
1,218
1,218
Kovio Inc.
Semiconductors Senior Debt
Matures March 2015
Interest rate Prime + 6.00% or
Floor rate of 9.75% . . . . . . . . . . . . . . . . . . $ 3,000
Total Kovio Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,910
4,128
2,910
4,128
Total Debt Semiconductors (1.50%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,457
6,457
AcelRX Pharmaceuticals, Inc.
Drug Delivery
Senior Debt
Matures December 2014
Interest rate Prime + 3.25% or
Floor rate of 8.50% . . . . . . . . . . . . . . . . . . $10,000
9,773
9,579
See notes to consolidated financial statements.
98
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Total AcelRX Pharmaceuticals, Inc.
Alexza Pharmaceuticals, Inc.(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,545
19,157
Drug Delivery Senior Debt
Senior Debt
Matures December 2014
Interest rate Prime + 3.25% or
Floor rate of 8.50% . . . . . . . . . . . . . . . . . . . $10,000 $ 9,772 $ 9,578
Total Alexza Pharmaceuticals, Inc.
BIND Biosciences, Inc.
Matures October 2013
Interest rate Prime + 6.5% or
Floor rate of 10.75% . . . . . . . . . . . . . . . . . . $10,497
10,537
10,695
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,537
10,695
Drug Delivery Senior Debt
Matures July 2014
Interest rate Prime + 7.45% or
Floor rate of 10.70% . . . . . . . . . . . . . . . . . . $ 5,000
4,730
4,730
4,880
4,880
4,765
4,765
3,819
3,819
Total BIND Biosciences, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrion Pharmaceuticals, Inc.(5)
Drug Delivery Senior Debt
Matures January 2015
Interest rate Prime + 9.20% or
Floor rate of 12.45% . . . . . . . . . . . . . . . . . . $ 5,000
Total Merrion Pharmaceuticals, Inc.
Revance Therapeutics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drug Delivery Senior Debt
Matures March 2015
Interest rate Prime + 6.60% or
Floor rate of 9.85% . . . . . . . . . . . . . . . . . . . $22,000
21,379
21,379
Total Revance Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,379
21,379
Total Debt Drug Delivery (13.90%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,956
59,930
Gelesis, Inc.
Therapeutic
Senior Debt
Matures April 2013
Interest rate Prime + 8.75% or
Floor rate of 12.00% . . . . . . . . . . . . . . . . . . $ 3,428
Total Gelesis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc.
Senior Debt
Therapeutic
Matures October 2013
Interest rate Prime + 8.25% or
Floor rate of 11.50% . . . . . . . . . . . . . . . . . . $ 5,336
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Gynesonics, Inc.
Oraya Therapeutics, Inc.(4)
Therapeutic
Senior Debt
Matures March 2015
Interest rate Prime + 4.75% or
Floor rate of 9.50% . . . . . . . . . . . . . . . . . . . $ 7,500
Total Oraya Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacific Child & Family Associates, LLC
Senior Debt
Therapeutic
Matures January 2015
Interest rate LIBOR + 8.0% or
Floor rate of 10.50% . . . . . . . . . . . . . . . . . . $ 4,965
Revolving Line of Credit
Matures January 2015
Interest rate LIBOR + 6.5% or
Floor rate of 9.00% . . . . . . . . . . . . . . . . . . . $ 1,500
See notes to consolidated financial statements.
99
3,514
3,514
3,254
3,254
5,309
5,309
5,383
5,383
7,377
7,377
7,377
7,377
4,932
4,932
1,485
1,412
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Senior Debt
Matures January 2015
Interest rate LIBOR + 10.50% or
Floor rate of 13.0%, PIK
interest 3.75% . . . . . . . . . . . . . . . . . . . . $ 5,900 $ 6,259 $ 6,436
Total Pacific Child & Family Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,676
12,780
Total Debt Therapeutic (6.68%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,876
28,794
InXpo, Inc.
Internet Consumer &
Business Services
Senior Debt
Matures March 2014
Interest rate Prime + 7.5% or
Floor rate of 10.75% . . . . . . . . . . . . . . . $ 3,192
Total InXpo, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,083
3,083
3,147
3,147
Westwood One Communications
Internet Consumer &
Business Services
Senior Debt
Matures October 2016
Interest rate of 8.00% . . . . . . . . . . . . . . . $21,000
19,059
19,479
Total Westwood One Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,059
19,479
Reply! Inc.(4)
Internet Consumer &
Business Services
Senior Debt
Matures June 2015
Interest rate Prime + 6.87% or
Floor rate of 10.12% . . . . . . . . . . . . . . . $13,000
12,877
13,131
Total Reply! Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,877
13,131
MedCall
Internet Consumer &
Business Services
Senior Debt
Matures January 2016
Interest rate LIBOR + 7.50% or
Floor rate of 9.50% . . . . . . . . . . . . . . . . $ 5,168
Total MedCall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,051
5,051
5,051
5,051
ScriptSave (Medical Security Card
Company, LLC)
Internet Consumer &
Business Services
Senior Debt
Matures February 2016
Interest rate LIBOR + 8.75% . . . . . . . . $19,646
19,307
19,896
Total ScriptSave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,307
19,896
Trulia, Inc.(4)
Internet Consumer &
Business Services
Senior Debt
Matures March 2015
Interest rate Prime + 2.75% or
Floor rate of 6.00% . . . . . . . . . . . . . . . . $ 5,000
4,871
4,871
Senior Debt
Matures March 2015
Interest rate Prime + 5.50% or
Floor rate of 8.75% . . . . . . . . . . . . . . . . $ 5,000
Total Trulia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vaultlogix, Inc.
Internet Consumer &
Business Services
Senior Debt
Matures September 2016
Interest rate Libor + 8.50% or
Floor rate of 10.00%, PIK
interest 2.50% . . . . . . . . . . . . . . . . . . . . $ 7,500
Senior Debt
4,871
9,742
4,871
9,742
7,441
7,441
Matures September 2015
Interest rate Libor + 7.00% or
Floor rate of 8.50% . . . . . . . . . . . . . . . . $11,500
11,335
11,335
See notes to consolidated financial statements.
100
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Revolving Line of Credit
Matures September 2015
Interest rate Libor + 6.00% or
Floor rate of 7.50% . . . . . . . . . . . . . . . $
300 $
284 $
284
Total Vaultlogix, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,060
19,060
Tectura Corporation
Internet Consumer
& Business Services
Senior Debt
Matures December 2012
Interest rate 11% . . . . . . . . . . . . . . . . . $ 5,625
6,834
6,834
Revolving Line of Credit
Senior Debt
Matures August 2012
Interest rate 11% . . . . . . . . . . . . . . . . . $ 2,500
Revolving Line of Credit
Matures July 2012
Interest rate 11%, PIK
interest 1.00% . . . . . . . . . . . . . . . . . . . $17,487
Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,556
2,556
17,738
27,128
17,738
27,128
Total Debt Internet Consumer & Business Services (27.06%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,307
116,634
Box.net, Inc.(4)
Information Services Senior Debt
Matures March 2015
Interest rate Prime + 3.75% or
Floor rate of 7.50% . . . . . . . . . . . . . . . $ 9,647
Senior Debt
Matures July 2014
Interest rate Prime + 5.25% or
Floor rate of 8.50% . . . . . . . . . . . . . . . $ 1,590
9,432
9,432
1,613
1,645
Total Box.net, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,045
11,077
Cha Cha Search, Inc.
Information Services Senior Debt
Total Cha Cha Search, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jab Wireless, Inc.
Information Services Senior Debt
Matures February 2015
Interest rate Prime + 6.25% or
Floor rate of 9.50% . . . . . . . . . . . . . . . $ 3,000
2,926
2,926
2,903
2,903
Matures August 2016
Interest rate Prime + 6.25% or
Floor rate of 6.75% . . . . . . . . . . . . . . . $20,272
19,993
19,993
Total Jab Wireless, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,993
19,993
Total Debt Information Services (7.88%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,964
33,973
Optiscan Biomedical, Corp.
Diagnostic
Senior Debt
Matures December 2013
Interest rate Prime + 8.20% or
Floor rate of 11.45% . . . . . . . . . . . . . . $10,750
10,884
11,147
Total Optiscan Biomedical, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,884
11,147
Total Debt Diagnostic (2.59%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,884
11,147
See notes to consolidated financial statements.
101
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
deCODE genetics ehf.(5)
Biotechnology Tools Senior Debt
Matures September 2014
Interest rate Prime + 10.25% or
Floor rate of 13.50%, PIK
interest 2.00% . . . . . . . . . . . . . . . . . . . . $ 5,000 $ 4,664 $ 4,664
Total deCODE genetics ehf. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labcyte, Inc.
Biotechnology Tools Senior Debt
4,664
4,664
Matures May 2013
Interest rate Prime + 8.6% or
Floor rate of 11.85% . . . . . . . . . . . . . . . $ 2,416
Total Labcyte, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cempra Holdings LLC
Biotechnology Tools Senior Debt
Matures December 2015
Interest rate Prime + 7.05% or
Floor rate of 10.30% . . . . . . . . . . . . . . . $10,000
Total Cempra Holdings LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,425
2,425
2,479
2,479
9,721
9,721
9,721
9,721
Total Debt Biotechnology Tools (3.91%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,810
16,864
Entrigue Surgical, Inc.
Surgical Devices
Senior Debt
Matures December 2014
Interest rate Prime + 5.90% or
Floor rate of 9.65% . . . . . . . . . . . . . . . . $ 3,000
Total Entrigue Surgical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmedics, Inc.(4)
Surgical Devices
Senior Debt
Matures February 2014
Interest rate Prime + 9.70% or
Floor rate of 12.95% . . . . . . . . . . . . . . . $ 8,375
Total Transmedics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,879
2,879
2,879
2,879
8,602
8,602
8,602
8,602
Total Debt Surgical Devices (2.66%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,481
11,481
Neoprobe (pka Navidea)
Media/Content/ Info Senior Debt
Total Neoprobe (pka Navidea) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s Marketing, Inc.
Media/Content/ Info Senior Debt
Matures December 2014
Interest rate Prime + 6.75% or
Floor rate of 10.00% . . . . . . . . . . . . . . . $ 7,000
Matures May 2016
Interest rate Libor + 9.50% or
Floor rate of 12.00%, PIK
interest 3.00% . . . . . . . . . . . . . . . . . . . . $10,000
Senior Debt
6,733
6,733
6,733
6,733
9,956
10,156
Matures November 2015
Interest rate Libor + 7.50% or
Floor rate of 10.0% . . . . . . . . . . . . . . . . $ 9,710
9,503
9,896
See notes to consolidated financial statements.
102
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Senior Debt
Matures November 2015
Interest rate Libor + 7.50% or
Floor rate of 10.0% . . . . . . . . . . . . . . . . . . . . $ 9,956 $ 9,744 $ 9,744
Total Women’s Marketing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,203
29,796
Total Debt Media/Content/Info (8.47%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,936
36,529
BrightSource Energy, Inc.
Clean Tech Senior Debt
Matures December 2011
Interest rate Prime + 7.75% or
Floor rate of 11.0% . . . . . . . . . . . . . . . . . . . . $11,250
11,122
11,122
Senior Debt
Matures December 2012
Interest rate Prime + 9.55% or
Floor rate of 12.8% . . . . . . . . . . . . . . . . . . . . $13,750
13,593
13,593
Total BrightSource Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,715
24,715
EcoMotors, Inc.
Clean Tech Senior Debt
Matures February 2014
Interest rate Prime + 6.1% or
Floor rate of 9.35% . . . . . . . . . . . . . . . . . . . . $ 4,879
Total EcoMotors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enphase Energy, Inc.
Clean Tech Senior Debt
Matures June 2014
Interest rate Prime + 5.75% or
Floor rate of 9.0% . . . . . . . . . . . . . . . . . . . . . $ 4,898
Total Enphase Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NanoSolar, Inc.
Clean Tech Senior Debt
Matures September 2014
Interest rate Prime + 7.75% or
Floor rate of 11.0% . . . . . . . . . . . . . . . . . . . . $ 9,212
Total NanoSolar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Integrated Photovoltaics
Clean Tech Senior Debt
Matures February 2015
Interest rate Prime + 7.375% or
Floor rate of 10.625% . . . . . . . . . . . . . . . . . . $ 3,000
Total Integrated Photovoltaics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Propel Biofuels, Inc.
Clean Tech Senior Debt
Matures September 2013
Interest rate of 11.0% . . . . . . . . . . . . . . . . . . $ 1,348
Total Propel Biofuels, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SCIenergy, Inc.(4)
Clean Tech Senior Debt
4,713
4,713
4,859
4,859
4,784
4,784
4,748
4,748
8,795
8,795
8,795
8,795
2,875
2,875
2,875
2,875
1,356
1,356
1,320
1,320
Matures October 2014
Interest rate 6.25% . . . . . . . . . . . . . . . . . . . . . $
202
202
202
Total SCIenergy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Debt
Matures August 2015
Interest rate Prime + 4.90% or
Floor rate of 8.15% . . . . . . . . . . . . . . . . . . . . $ 5,000
4,883
5,085
4,883
5,085
See notes to consolidated financial statements.
103
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Solexel, Inc.
Industry
Type of Investment(1)
Clean Tech
Senior Debt
Principal
Amount Cost(2) Value(3)
Matures June 2013
Interest rate Prime + 8.25% or
Floor rate of 11.50% . . . . . . . . . . . . . . . .
Senior Debt
$ 937
$
594 $
594
Total Solexel, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures June 2013
Interest rate Prime + 7.25% or
Floor rate of 10.50% . . . . . . . . . . . . . . . .
$8,120
8,389
8,983
8,389
8,983
Total Debt Clean Tech (14.24%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,306
61,380
Total Debt (135.90%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
589,192
585,767
Acceleron Pharmaceuticals, Inc.
Drug Discovery
& Development
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Acceleron Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anthera Pharmaceuticals Inc.
Drug Discovery
& Development
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Anthera Pharmaceuticals Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dicerna Pharmaceuticals, Inc.
Drug Discovery
& Development
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Dicerna Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EpiCept Corporation
Drug Discovery
& Development Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants EpiCept Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concert Pharmaceuticals
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Concert Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NextWave Pharmaceuticals
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total NextWave Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Horizon Therapeutics, Inc.
Drug Discovery
& Development Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Horizon Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrimack Pharmaceuticals, Inc.
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Merrimack Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paratek Pharmaceuticals, Inc.
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . . . .
Total Paratek Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
69
35
143
541
443
984
236
28
311
575
4
4
234
234
126
126
231
231
155
155
137
137
42
273
51
366
551
451
1,002
69
—
137
206
15
15
233
233
125
125
—
—
1,116
1,116
68
68
See notes to consolidated financial statements.
104
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Drug Discovery
& Development Common Stock Warrants . . . . . . . . . . . . . . . . . . . . .
$ 480 $
Portfolio Company
PolyMedix, Inc.
Total PolyMedix, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portola Pharmaceuticals, Inc.
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Portola Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aegerion Pharmaceuticals, Inc.
Drug Discovery
& Development Common Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Aegerion Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chroma Therapeutics, Ltd.(5)
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Chroma Therapeutics, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NeurogesX, Inc.
Drug Discovery
& Development Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total NeurogesX, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
97
207
207
480
152
152
69
69
1,115
1,115
490
490
503
503
387
387
122
122
Total Warrants Drug Discovery & Development (1.17%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,283
5,059
Affinity Videonet, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Affinity Videonet, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IKANO Communications, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total IKANO Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intelepeer, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Intelepeer, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neonova Holding Company
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Neonova Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pac-West Telecomm, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Pac-West Telecomm, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PeerApp, Inc.(4)
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total PeerApp, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peerless Network, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Peerless Network, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ping Identity Corporation
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Ping Identity Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102
102
45
72
117
101
101
94
94
121
121
61
61
95
95
52
52
165
165
—
—
—
92
92
28
28
—
—
23
23
206
206
109
109
See notes to consolidated financial statements.
105
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
PointOne, Inc.
Communications
& Networking
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . .
$ 131 $
Total PointOne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purcell Systems, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Purcell Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stoke, Inc(4)
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Stoke, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
123
123
53
65
118
Total Warrants Communications & Networking (0.23%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,115
Atrenta, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Atrenta, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blurb, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Blurb, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Braxton Technologies, LLC.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Braxton Technologies, LLC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bullhorn, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Bullhorn, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Central Desktop, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Central Desktop, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clickfox, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Clickfox, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forescout Technologies, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Forescout Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HighRoads, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total HighRoads, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kxen, Inc.(4)
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Kxen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RichRelevance, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total RichRelevance, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rockyou, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . . .
Total Rockyou, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136
95
231
323
636
959
189
189
43
43
108
108
329
329
99
99
45
45
47
47
98
98
116
116
5
5
121
121
149
81
230
979
815
284
1,099
855
636
1,491
—
—
229
229
398
398
522
522
142
142
7
7
22
22
12
12
1
1
See notes to consolidated financial statements.
106
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Sportvision, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
$
39 $ —
Total Sportvision, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SugarSync Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total SugarSync Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daegis Inc. (pka Unify Corporation)
Software
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Daegis Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
White Sky, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total White Sky, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TaDa Innovations, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total TaDa Innovations, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WildTangent, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total WildTangent, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
78
78
1,434
1,434
54
54
25
25
238
238
—
162
162
237
237
3
3
25
25
22
22
Total Warrants Software (1.01%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,132
4,372
Luminus Devices, Inc.
Electronics &
Computer Hardware Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Luminus Devices, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shocking Technologies, Inc.
Electronics &
Computer Hardware Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Shocking Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Warrant Electronics & Computer Hardware (0.05%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Althea Technologies, Inc.
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Althea Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacira Pharmaceuticals, Inc.(4)
Specialty
Pharmaceuticals
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Pacira Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quatrx Pharmaceuticals Company
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
334
84
183
601
63
63
664
309
309
1,086
1,086
528
528
—
—
—
—
196
196
196
516
516
425
425
—
—
Total Warrants Specialty Pharmaceuticals (0.22%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,923
941
Annie’s, Inc.
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Annie’s, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPA Holdings, LLC
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total IPA Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
321
321
275
275
250
250
58
58
See notes to consolidated financial statements.
107
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Market Force Information, Inc.
Consumer &
Business Products Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
$
24 $ 118
Total Market Force Information, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
118
Wageworks, Inc.
Consumer &
Business Products Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Wageworks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seven Networks, Inc.
Consumer &
Business Products Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Seven Networks, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
252
252
174
174
2,495
2,495
—
—
Total Warrant Consumer & Business Products (0.68%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,046
2,921
Achronix Semiconductor Corporation
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Achronix Semiconductor Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enpirion, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Enpirion, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iWatt, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total iWatt, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kovio Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Kovio Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NEXX Systems, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total NEXX Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quartics, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Quartics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160
160
157
157
46
582
628
92
92
297
297
53
53
145
145
—
—
3
10
13
4
4
1,328
1,328
—
—
Total Warrants Semiconductors (0.35%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,387
1,490
AcelRX Pharmaceuticals, Inc.
Drug Delivery
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total AcelRX Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alexza Pharmaceuticals, Inc.(4)
Drug Delivery
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Alexza Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BIND Biosciences, Inc.
Drug Delivery
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total BIND Biosciences, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrion Pharmaceuticals, Inc.(5)
Drug Delivery
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Merrion Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transcept Pharmaceuticals, Inc.
Drug Delivery
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Transcept Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revance Therapeutics, Inc.
Drug Delivery
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Revance Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178
178
356
645
645
291
291
214
214
36
51
87
557
557
41
41
82
72
72
427
427
194
194
62
93
155
565
565
Total Warrant Drug Delivery (0.35%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,150
1,495
See notes to consolidated financial statements.
108
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Gelesis
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
$
78 $ 106
Total Gelesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BARRX Medical, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total BARRX Medical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EKOS Corporation
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total EKOS Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light Science Oncology, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Light Science Oncology, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novasys Medical, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Novasys Medical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oraya Therapeutics, Inc.(4)
Therapeutic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Oraya Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
76
76
327
327
228
228
99
99
125
125
551
551
106
189
189
—
—
233
233
—
—
13
13
551
551
Total Warrants Therapeutic (0.25%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,484
1,092
Cozi Group, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Cozi Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Invoke Solutions, Inc.
Internet Consumer &
Business Services
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Invoke Solutions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
InXpo, Inc.
Internet Consumer
& Business Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total InXpo, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prism Education Group, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Prism Education Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RazorGator Interactive Group, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total RazorGator Interactive Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reply! Inc.(4)
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Reply! Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trulia, Inc.(4)
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Trulia, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147
147
6
6
11
15
44
82
98
98
43
43
1,224
1,224
320
320
188
188
—
—
—
—
—
—
—
—
56
56
—
—
—
—
395
395
413
413
See notes to consolidated financial statements.
109
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Portfolio Company
Tectura Corporation
Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
Internet Consumer
& Business Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
$
51 $
26
26
Total Warrants Internet Consumer & Business Services (0.21%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,153
890
Lilliputian Systems, Inc.
Energy
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Lilliputian Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Energy (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Box.net, Inc.(4)
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Box.net, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buzznet, Inc.
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Buzznet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cha Cha Search, Inc.
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Cha Cha Search, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Magi.com (pka Hi5 Networks, Inc.)
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Magi.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jab Wireless, Inc.
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Jab Wireless, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solutionary, Inc.
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Solutionary, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intelligent Beauty, Inc.
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Intelligent Beauty, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zeta Interactive Corporation
Information Services Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Zeta Interactive Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106
49
155
155
117
73
193
383
9
9
58
58
213
213
265
265
96
96
230
230
172
172
—
—
—
—
1,557
2,280
233
4,070
—
—
1
1
—
—
332
332
—
—
83
83
237
237
Total Warrants Information Services (1.10%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,426
4,723
Optiscan Biomedical, Corp.
Diagnostic
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Optiscan Biomedical, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Diagnostic (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
deCODE genetics ehf.(5)
Biotechnology Tools Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total deCODE genetics ehf.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labcyte, Inc.
Biotechnology Tools Common Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Labcyte, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cempra Holdings LLC
Biotechnology Tools Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Total Cempra Holdings LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NuGEN Technologies, Inc.
Biotechnology Tools Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . .
1,069
1,069
1,069
305
305
197
197
187
187
45
33
872
872
872
305
305
263
263
186
186
203
15
See notes to consolidated financial statements.
110
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Total NuGEN Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
78
$218
Total Warrants Biotechnology Tools (0.23%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767
972
Entrigue Surgical, Inc.
Surgical Devices
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Entrigue Surgical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmedics, Inc.(4)
Surgical Devices
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Transmedics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Warrants Surgical Devices (0.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glam Media, Inc.
Media/Content/ Info Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Glam Media, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neoprobe (pka Navidea)
Media/Content/ Info Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Neoprobe (pka Navidea) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Everyday Health, Inc. (Waterfront Media,
Inc.)
Media/Content/ Info Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Everyday Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87
87
85
85
225 —
225 —
312
482
482
244
244
60
60
85
2
2
245
245
504
504
Total Warrants Media/Content/Info (0.17%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
786
751
BrightSource Energy, Inc.(4)
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total BrightSource Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calera, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Calera, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EcoMotors, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total EcoMotors, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enphase Energy, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Enphase Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GreatPoint Energy, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total GreatPoint Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NanoSolar, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total NanoSolar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Propel Biofuels, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Propel Biofuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SCIenergy, Inc.(4)
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total SCIenergy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solexel, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Solexel, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trilliant, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
Total Trilliant, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Integrated Photovoltaics
Clean Tech
Preferred Stock Warrants . . . . . . . . . . . . . . . . . . . .
675
675
513
513
154
154
308
102
102
548
548
355
355
211
211
8
130
138
1,161
1,161
162
162
82
834
834
475
475
323
323
646
49
49
208
208
355
355
170
170
2
30
32
275
275
82
82
81
See notes to consolidated financial statements.
111
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Total Integrated Photovoltaics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
82 $
81
Total Warrants Clean Tech (0.74%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,255
3,207
Total Warrants (6.97%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,107
30,045
Aegerion Pharmaceuticals, Inc.
Drug Discovery
& Development
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Aegerion Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aveo Pharmaceuticals
Drug Discovery
& Development
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Aveo Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dicerna Pharmaceuticals, Inc.
Drug Discovery
& Development
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Dicerna Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inotek Pharmaceuticals Corp.
Drug Discovery
& Development
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Inotek Pharmaceuticals Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrimack Pharmaceuticals, Inc.
Drug Discovery
& Development
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Merrimack Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paratek Pharmaceuticals, Inc.
Drug Discovery
& Development
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,092
1,092
2,411
2,411
842
842
503
503
1,500
1,500
2,887
2,887
374
374
—
—
2,000
2,000
3,825
3,825
1,000
1,000
1,231
1,231
Total Equity Drug Discovery & Development (2.49%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,937
10,728
Acceleron Pharmaceuticals, Inc.
Acceleron Pharmaceuticals, Inc.
Acceleron Pharmaceuticals, Inc.
Acceleron Pharmaceuticals, Inc.
Drug Delivery
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Acceleron Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transcept Pharmaceuticals, Inc.
Drug Delivery
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Transcept Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
243
98
60
1,000
1,401
500
500
163
138
61
724
1,086
325
325
Total Equity Drug Delivery (0.33%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,901
1,411
E-band Communications, Corp.(6)
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total E-Band Communications, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neonova Holding Company
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
Total Neonova Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peerless Network, Inc.
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
Total Peerless Network, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,880
2,880
250
250
—
—
212
212
1,000
1,000
2,335
2,335
See notes to consolidated financial statements.
112
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Stoke, Inc(4)
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
$ 500 $ 458
Total Stoke, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
458
Total Equity Communications & Networking (0.70%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,630
3,005
Atrenta, Inc.
Software
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Atrenta, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity Software (0.11%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maxvision Holding, LLC.(7)(8)
Electronics &
Computer Hardware Common Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Maxvision Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spatial Photonics, Inc.
Electronics &
Computer Hardware Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Spatial Photonics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
250
250
3,581
3,581
268
268
Total Equity Electronics & Computer Hardware (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,849
Quatrx Pharmaceuticals Company
Specialty
Pharmaceuticals
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity Specialty Pharmaceuticals (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPA Holdings, LLC
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total IPA Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Force Information, Inc.
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Market Force Information, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caivis Acquisition Corporation
Consumer &
Business Products
Common Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Caivis Acquisition Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wageworks, Inc.
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .
Total Wageworks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750
750
750
500
500
500
500
880
880
250
250
474
474
474
—
—
—
—
—
—
—
—
360
360
491
491
—
—
388
388
Total Equity Consumer & Business Products (0.29%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,130
1,239
iWatt, Inc.
Semiconductors
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total iWatt, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NEXX Systems, Inc.
Semiconductors
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total NEXX Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
490
490
277
277
984
984
802
802
Total Equity Semiconductors (0.41%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767
1,786
See notes to consolidated financial statements.
113
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Portfolio Company
BARRX Medical, Inc.
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,500 $3,628
Total BARRX Medical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,500
3,628
Gelesis
Therapeutic
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Gelesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc
Gynesonics, Inc
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Gynesonics, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novasys Medical, Inc.
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Novasys Medical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
425
500
925
250
283
533
1,000
1,000
108
519
520
1,147
156
295
451
799
799
Total Equity Therapeutic (1.40%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,958
6,025
Cozi Group, Inc.
Internet Consumer &
Business Services
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cozi Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RazorGator Interactive Group, Inc.
Internet Consumer &
Business Services
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total RazorGator Interactive Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
177
1,000
1,000
44
44
—
—
Total Equity Internet Consumer & Business Services (0.01%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177
44
Box.net, Inc.(4)
Information Services Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Box.net, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
1,500
2,000
3,543
2,564
6,107
Buzznet, Inc.
Information Services Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Buzznet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Magi.com (pka Hi5 Networks, Inc.)
Information Services Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Magi.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solutionary, Inc.
Information Services Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Solutionary, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Good Technologies, Inc. (Visto Inter)
Information Services Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Good Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zeta Interactive Corporation
Information Services Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Zeta Interactive Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
250
250
250
250
250
603
603
500
500
26
26
247
247
55
55
90
90
629
629
Total Equity Information Services (1.66%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,853
7,154
Novadaq Technologies, Inc. (5)
Diagnostic
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Novadaq Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,057
1,057
671
671
Optiscan Biomedical, Corp.
Diagnostic
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,655
2,468
Total Optiscan Biomedical, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,655
2,468
Total Equity Diagnostic (0.73%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,712
3,139
See notes to consolidated financial statements.
114
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount Cost(2) Value(3)
Biotechnology Tools Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . .
$
427 $
Portfolio Company
Kamada, LTD.(5)
Total Kamada, LTD.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NuGEN Technologies, Inc.
Biotechnology Tools Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Total NuGEN Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity Biotechnology Tools (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmedics, Inc. (4)
Surgical Devices
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Transmedics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
427
500
500
927
1,400
1,400
384
384
473
473
857
—
Total Equity Surgical Devices (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,400
—
Everyday Health, Inc. (Waterfront
Media, Inc.)
Media/Content/ Info Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Everyday Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
1,000
1,196
1,196
Total Equity Media/Content/Info (0.28%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
1,196
Total Equity (8.60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,241
37,058
Total Investments (151.47%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$656,540 $652,870
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 $34,519, $39,387 and $4,868 respectively. The tax cost of investments is $658,010
(3) Except for warrants in thirteen publicly traded companies and common stock in five publicly traded
companies, all investments are restricted at December 31, 2011 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 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% but not more than 50% of the voting securities of the company
(8) Debt is on non-accrual status at December 31, 2011, and is therefore considered non-income producing.
See notes to consolidated financial statements.
115
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Aveo Pharmaceuticals, Inc.
Drug Discovery
Senior Debt
Principal
Amount
Cost(2)
Value(3)
Matures September 2013
Interest rate Prime + 7.15% or
Floor rate of 11.9% . . . . . . . . . . . . . . .
$25,000
$26,108
$26,108
Total Aveo Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,108
26,108
Dicerna Pharmaceuticals, Inc.
Drug Discovery
Senior Debt
Matures July 2012
Interest rate Prime + 9.20% or
Floor rate of 12.95% . . . . . . . . . . . . . .
$ 4,699
Total Dicerna Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PolyMedix, Inc.
Drug Discovery
Senior Debt
Matures September 2013
Interest rate Prime + 7.1% or
Floor rate of 12.35% . . . . . . . . . . . . . .
$10,000
Total PolyMedix, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portola Pharmaceuticals, Inc.
Drug Discovery
Senior Debt
Matures April 2011
Interest rate Prime + 2.16% . . . . . . . . .
$ 1,666
Total Portola Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,678
4,678
4,707
4,707
9,605
9,605
9,605
9,605
2,033
2,033
2,033
2,033
Total Drug Discovery (10.29%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,424
42,453
IKANO Communications, Inc.
Communications &
Networking
Senior Debt
Matures August 2011
Interest rate 12.00% . . . . . . . . . . . . . . .
$ 1,654
Total IKANO Communications, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intelepeer, Inc.
Communications &
Networking
Senior Debt
Matures May 2013
Interest rate Prime + 8.125% . . . . . . . .
$ 7,624
Total Intelepeer, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,953
1,953
1,953
1,953
7,469
7,469
7,459
7,459
Opsource, Inc.(4)
Communications &
Networking
Senior Debt
Matures June 2013
Interest rate Prime + 7.75% or Floor
rate of 11.00% . . . . . . . . . . . . . . . . . . .
Senior Debt
Matures October 2013
Interest rate Prime + 7.25% or Floor
rate of 10.50% . . . . . . . . . . . . . . . . . . .
Revolving Line of Credit
Matures June 2011
Interest rate Prime + 5.25% or Floor
rate of 8.50% . . . . . . . . . . . . . . . . . . . .
Total Opsource, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pac-West Telecomm, Inc.
Communications &
Networking
Senior Debt
Matures April 2013
Interest rate Prime + 7.5% or Floor
rate of 11.50% . . . . . . . . . . . . . . . . . . .
$10,000
Total Pac-West Telecomm, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116
$ 5,000
4,888
4,888
$ 2,000
1,944
1,905
$ 1,500
1,458
8,290
1,458
8,251
9,634
9,634
9,634
9,634
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Industry
Type of Investment(1)
Communications &
Networking
Senior Debt
Matures April 2013
Interest rate Prime + 7.5% or Floor
rate of 11.50% . . . . . . . . . . . . . . . . .
Principal
Amount
Cost(2)
Value(3)
$ 2,911
$ 2,855
$ 2,792
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,855
2,792
Communications &
Networking
Senior Debt
Matures May 2013
Interest rate Prime + 7.0% or
Floor rate of 10.25% . . . . . . . . . . . .
$ 4,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications &
Networking
Senior Debt
Matures December 2012
Interest rate 11% . . . . . . . . . . . . . . .
Revolving Line of Credit
Matures July 2011
Interest rate 11% . . . . . . . . . . . . . . .
3,883
3,883
3,883
3,883
$ 5,625
5,512
5,512
$17,477
18,488
24,000
18,488
24,000
Portfolio Company
PeerApp, Inc.
Total PeerApp, Inc.
Stoke, Inc(4)
Total Stoke, Inc.
Tectura Corporation
Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Communications & Networking (14.05%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,084
57,972
Blurb, Inc.
Software
Senior Debt
Total Blurb, Inc.
Clickfox, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software
Senior Debt
Matures June 2011
Interest rate Prime + 3.50% or
Floor rate of 8.5% . . . . . . . . . . . . . .
$ 1,162
1,392
1,392
1,392
1,392
Matures July 2013
Interest rate Prime + 6.00% or
Floor rate of 11.25% . . . . . . . . . . . .
Revolving Line of Credit
Matures July 2011
Interest rate Prime + 5.00% or
Floor rate of 12.00% . . . . . . . . . . . .
$ 2,000
$ 6,000
5,801
5,801
1,997
7,798
1,997
7,798
17,386
17,386
17,386
17,386
Total Clickfox, Inc.
HighJump Acquisition, LLC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software
Senior Debt
Matures May 2013
Interest rate Libor + 8.75% or
Floor rate of 12.00% . . . . . . . . . . . .
$17,500
Total HighJump Acquisition, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infologix, Inc (4)(7)
Senior Debt
Software
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% . . . . . . . . . . . . .
Senior Debt
Matures December 2010
Interest rate 18.00% . . . . . . . . . . . . .
Senior Debt
Matures April 2013
Interest rate 8.00% . . . . . . . . . . . . . .
Senior Debt
$ 5,500
5,162
5,162
1,110
1,126
$12,317
12,317
12,317
$ 2,178
2,178
2,178
$ 1,350
1,350
1,350
Matures September 2011
Interest rate 10.00% . . . . . . . . . . . . .
Total Infologix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
500
509
22,626
509
22,642
See notes to consolidated financial statements.
117
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Unify Corporation
Industry
Type of Investment(1)
Software
Senior Debt
Matures June 2015
Interest rate Libor + 8.25% or
Floor rate of 10.25% . . . . . . . . . . . .
Revolving Line of Credit
Matures June 2015
Interest rate Libor + 7.25% or
Floor rate of 9.25% . . . . . . . . . . . . .
Principal
Amount
Cost(2)
Value(3)
$24,000
$22,248
$22,968
$3,750
3,731
3,475
25,979
26,443
Total Software (18.34%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,181
75,661
Luminus Devices, Inc.
Electronics &
Computer Hardware
Senior Debt
Matures December 2011
Interest rate 11.875% . . . . . . . . . . .
$
540
Total Luminus Devices, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
540
540
540
540
Maxvision Holding, LLC.
Electronics &
Computer Hardware
Senior Debt
Matures October 2012
Interest rate Prime + 7.25% or
Floor rate of 10.75% . . . . . . . . . . . .
Senior Debt
Matures April 2012
Interest rate Prime + 5.0% or Floor
rate of 8.5% . . . . . . . . . . . . . . . . . . .
Revolving Line of Credit
Matures April 2012
Interest rate Prime + 5.0% or Floor
rate of 8.5% . . . . . . . . . . . . . . . . . . .
$ 5,000
5,377
377
$ 3,409
3,382
3,382
$ 3,100
3,163
3,163
6,922
Total Maxvision Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,922
Total Electronics & Computer Hardware (1.81%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,462
7,462
Althea Technologies, Inc.
Specialty
Pharmaceuticals
Senior Debt
Matures October 2013
Interest rate Prime + 7.70% or
Floor rate of 10.95% . . . . . . . . . . . .
$12,000
Total Althea Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chroma Therapeutics, Ltd.(5)
Specialty
Pharmaceuticals
Senior Debt
Matures September 2013
Interest rate Prime + 7.75% or
Floor rate of 12.00% . . . . . . . . . . . .
$10,000
Total Chroma Therapeutics, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,661
11,661
11,661
11,661
9,797
9,797
10,021
10,021
Pacira Pharmaceuticals, Inc.
Specialty
Pharmaceuticals
Senior Debt
Matures May 2014
Interest rate Prime + 6.25% or
Floor rate of 10.25% . . . . . . . . . . . .
Senior Debt
$11,250
11,105
11,105
Total Pacira Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures May 2014
Interest rate Prime + 8.65% or
Floor rate of 12.65% . . . . . . . . . . . .
$15,000
13,747
24,852
13,749
24,854
See notes to consolidated financial statements.
118
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount
Cost(2)
Value(3)
QuatRx Pharmaceuticals Company
Specialty
Pharmaceuticals
Senior Debt
Matures October 2011
Interest rate Prime + 8.90% or
Floor rate of 12.15% . . . . . . . . . . . . .
Convertible Senior Debt
$ 9,306
$ 9,474
$ 9,474
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,362
11,941
Matures March 2012 . . . . . . . . . . . . .
$ 1,888
1,888
2,467
Total Specialty Pharmaceuticals (14.18%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,672
58,477
IPA Holdings, LLC (4)
Consumer &
Business Products
Senior Debt
Matures November 2012
Interest rate Prime + 7.75% or
Floor rate of 12.0% . . . . . . . . . . . . . .
Senior Debt
Matures May 2013 Interest
rate Prime + 10.75% or
Floor rate of 15.0% . . . . . . . . . . . . . .
Revolving Line of Credit
Matures November 2012
Interest rate Prime + 7.25% or
Floor rate of 11.50% . . . . . . . . . . . . .
$ 8,250
8,505
8,158
$ 6,500
7,019
6,995
$
856
761
761
Total IPA Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,285
15,914
Trading Machines, Inc.
Consumer &
Business Products
Senior Debt
Matures January 2014
Interest rate Prime + 10.25% or
Floor rate of 13.50% . . . . . . . . . . . . .
$ 9,812
Total Trading Machines, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,644
8,644
4,000
4,000
Velocity Technology Solutions, Inc.
Consumer &
Business Products
Senior Debt
Matures February 2015
Interest rate LIBOR + 8% or Floor
rate of 11.00% . . . . . . . . . . . . . . . . .
Senior Debt
Matures February 2015
Interest rate LIBOR + 10% or
Floor rate of 13.00% . . . . . . . . . . . . .
$15,417
15,072
14,574
$ 8,333
8,317
8,526
Total Velocity Technology Solutions, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,389
23,100
Total Consumer & Business Products (10.43%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,318
43,014
Alexza Pharmaceuticals, Inc. (4)
Drug Delivery
Senior Debt
Matures October 2013
Interest rate Prime + 6.5% or
Floor rate of 10.75% . . . . . . . . . . . . .
$15,000
Total Alexza Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labopharm USA, Inc. (5)
Drug Delivery
Senior Debt
Matures December 2012
Interest rate 10.95% . . . . . . . . . . . . .
$20,000
Total Labopharm USA, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,526
14,526
14,472
14,472
19,873
19,873
19,873
19,873
Total Drug Delivery (8.33%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,399
34,345
See notes to consolidated financial statements.
119
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
BARRX Medical, Inc.
Industry
Type of Investment(1)
Therapeutic
Senior Debt
Principal
Amount Cost(2) Value(3)
Mature December 2011
Interest rate 11.00% . . . . . . . . . . . . . .
$2,901
$ 3,349 $ 3,349
Total BARRX Medical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,349
3,349
Gelesis, Inc. (8)
Therapeutic
Senior Debt
Matures May 2012
Interest rate Prime + 7.5% or
Floor rate of 10.75% . . . . . . . . . . . . . .
$2,771
Total Gelesis, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc.
Therapeutic
Senior Debt
Mature October 2013
Interest rate Prime + 8.25% or
Floor rate of 11.50% . . . . . . . . . . . . . .
$6,500
Total Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacific Child & Family Associates, LLC
Therapeutic
Senior Debt
2,799
2,799
45
45
6,277
6,277
6,277
6,277
Matures January 2015
Interest rate LIBOR + 8.0% or
Floor rate of 10.50% . . . . . . . . . . . . . .
Senior Debt
Matures January 2015
Interest rate LIBOR + 10.50% or
Floor rate of 13.0% . . . . . . . . . . . . . . .
$6,539
6,392
5,802
$5,900
5,996
5,996
Total Pacific Child & Family Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,388
11,798
Total Therapeutic (5.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,813
21,469
RazorGator Interactive Group, Inc. (4)
Internet Consumer &
Business Services
Revolving Line of Credit
Matures October 2011
Interest rate Prime + 9.50% or
Floor rate of 14.00% . . . . . . . . . . . . . .
$2,108
Total RazorGator Interactive Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reply! Inc. (4)
Internet Consumer &
Business Services
Senior Debt
Matures June 2013
Interest rate Prime + 6.5% or
Floor rate of 9.75% . . . . . . . . . . . . . . .
$5,000
Total Reply! Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,855
1,855
1,855
1,855
4,645
4,645
4,645
4,645
Total Internet Consumer & Business Services (1.58%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,500
6,500
Box.net, Inc.
Information Services Senior Debt
Matures May 2011
Interest rate Prime + 1.50% or
Floor rate of 7.50% . . . . . . . . . . . . . . .
Senior Debt
$ 213
270
270
Total Box.net, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures September 2011
Interest rate Prime + 0.50% or
Floor rate of 6.50% . . . . . . . . . . . . . . .
$ 127
139
409
139
409
See notes to consolidated financial statements.
120
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Intelligent Beauty, Inc.
Industry
Type of Investment(1)
Information Services
Senior Debt
Principal
Amount
Cost(2)
Value(3)
Matures March 2013
Interest rate Prime + 8.0% or
Floor rate of 11.25% . . . . . . . . . . . .
Senior Debt
$ 5,812
$ 5,563
$ 5,557
Total Intelligent Beauty, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures October 2013
Interest rate Prime + 8.0% or
Floor rate of 11.25% . . . . . . . . . . . .
$ 2,000
1,942
7,505
1,942
7,499
Total Information Services (1.92%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,914
7,908
Optiscan Biomedical, Corp.
Diagnostic
Senior Debt
Matures June 2011
Interest rate 10.25% . . . . . . . . . . . .
$10,750
Total Optiscan Biomedical, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,392
10,392
10,392
10,392
Total Diagnostic (2.52%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,392
10,392
Labcyte, Inc.
Biotechnology Tools
Senior Debt
Total Labcyte, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures May 2013
Interest rate Prime + 8.6% or
Floor rate of 11.85% . . . . . . . . . . . .
$ 3,885
3,760
3,760
3,821
3,821
Total Biotechnology Tools (0.93%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,760
3,821
Transmedics, Inc. (4)
Surgical Devices
Senior Debt
Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures February 2014
Interest rate Prime + 9.70% or
Floor rate of 12.95% . . . . . . . . . . . .
$ 8,375
8,913
8,913
8,913
8,913
Total Surgical Devices (2.16%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,913
8,913
BrightSource Energy, Inc.
Clean Tech
Senior Debt
Matures December 2011
Interest rate Prime + 7.75% or
Floor rate of 11.0% . . . . . . . . . . . . .
Senior Debt
$ 3,750
3,265
3,265
Matures June 2012
Interest rate Prime + 9.55% or
Floor rate of 12.80% . . . . . . . . . . . .
$ 4,583
Total BrightSource Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calera, Inc.
Clean Tech
Senior Debt
Matures July 2013
Interest rate Prime + 7.0% or
Floor rate of 10.25% . . . . . . . . . . . .
$ 3,621
Total Calera, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,156
7,421
4,156
7,421
3,109
3,109
3,109
3,109
See notes to consolidated financial statements.
121
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
GreatPoint Energy, Inc.
Industry
Type of Investment(1)
Clean Tech
Senior Debt
Principal
Amount
Cost(2)
Value(3)
Matures October 2013
Interest rate Prime + 8.2% or
Floor rate of 11.45% . . . . . . . . . . . . . .
$ 5,000
$ 4,322
$ 4,322
Total GreatPoint Energy, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,322
4,322
Propel Biofuels, Inc.
Clean Tech
Senior Debt
Total Propel Biofuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solexel, Inc.
Clean Tech
Senior Debt
Matures September 2013
Interest rate 11.0% . . . . . . . . . . . . . . .
$ 2,118
1,880
1,880
1,850
1,850
Matures June 2013
Interest rate Prime + 8.25% or
Floor rate of 11.50% . . . . . . . . . . . . . .
Senior Debt
$ 1,109
1,010
1,010
Total Solexel, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matures June 2013
Interest rate Prime + 7.25% or
Floor rate of 10.50% . . . . . . . . . . . . . .
$ 6,000
5,519
6,529
5,519
6,529
Total Clean Tech (5.63%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,261
23,231
Acceleron Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Acceleron Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aveo Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Aveo Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dicerna Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Dicerna Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EpiCept Corporation
Drug Discovery Common Stock Warrants . . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . . .
Total EpiCept Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Horizon Therapeutics, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Total Horizon Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrimack Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Total Merrimack Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paratek Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
35
39
143
190
104
24
288
236
842
206
30
28
264
4
40
44
231
231
155
155
137
137
922
189
100
1,211
686
165
59
770
630
2,310
182
33
25
240
112
10
122
—
—
170
170
155
155
See notes to consolidated financial statements.
122
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
PolyMedix, Inc.
Industry
Type of Investment(1)
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Principal
Amount
Total PolyMedix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portola Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock Warrants . . . . . . . . . . . .
Total Portola Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost(2) Value(3)
$ 480
$ 248
480
152
152
248
505
505
Total Drug Discovery (1.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,448
4,961
Affinity Videonet, Inc
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Affinity Videonet, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IKANO Communications, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total IKANO Communications, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intelepeer, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Intelepeer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neonova Holding Company
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Neonova Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opsource, Inc. (4)
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Opsource, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pac-West Telecomm, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Pac-West Telecomm, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PeerApp, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total PeerApp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peerless Network, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Peerless Network, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ping Identity Corporation
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Ping Identity Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purcell Systems, Inc.
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Purcell Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102
102
45
72
117
101
101
94
94
223
223
121
121
61
61
95
95
52
52
123
123
180
180
—
—
—
111
111
12
12
105
105
147
147
66
66
138
138
6
6
330
330
See notes to consolidated financial statements.
123
Portfolio Company
Seven Networks, Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
$ 174
$
Total Seven Networks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stoke, Inc(4)
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Stoke, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tectura Corporation
Communications
& Networking
Preferred Stock Warrants . . . . . . . . . . . .
Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
174
53
65
118
51
51
40
40
210
132
342
10
10
Total Communications & Networking (0.36%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,432
1,487
Atrenta, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Atrenta, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blurb, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Blurb, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Braxton Technologies, LLC.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Braxton Technologies, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bullhorn, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Bullhorn, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clickfox, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . . .
Total Clickfox, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forescout Technologies, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Forescout Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GameLogic, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total GameLogic, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HighRoads, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total HighRoads, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infologix, Inc (4) (7)
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Infologix, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PSS Systems, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total PSS Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rockyou, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Rockyou, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sportvision, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . . .
Total Sportvision, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102
34
95
231
25
299
324
189
189
43
43
177
152
329
99
99
92
92
44
44
725
725
51
51
117
117
39
39
46
15
22
83
349
228
577
—
—
234
234
643
643
1,286
14
14
—
—
65
65
1,394
1,394
17
17
186
186
—
—
See notes to consolidated financial statements.
124
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Unify Corporation
Industry
Type of Investment(1)
Software
Preferred Stock Warrants . . . . . . . . . . .
Principal
Amount
Cost(2) Value(3)
$1,434
$ 693
Total Unify Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,434
WildTangent, Inc.
Software
Preferred Stock Warrants . . . . . . . . . . .
Total WildTangent, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
238
238
693
10
10
Total Software (1.11%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,955
4,559
Luminus Devices, Inc.
Electronics &
Computer Hardware
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Total Luminus Devices, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shocking Technologies, Inc.
Electronics &
Computer Hardware
Preferred Stock Warrants . . . . . . . . . . .
Total Shocking Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spatial Photonics, Inc. (8)
Electronics &
Computer Hardware
Preferred Stock Warrants . . . . . . . . . . .
Total Spatial Photonics Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VeriWave, Inc.
Electronics &
Computer Hardware
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Total VeriWave, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Electronics & Computer Hardware (0.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aegerion Pharmaceuticals, Inc.
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . .
Total Aegerion Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Althea Technologies, Inc.
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . .
Total Althea Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chroma Therapeutics, Ltd. (5)
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . .
Total Chroma Therapeutics, Ltd.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pacira Pharmaceuticals, Inc.
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . .
Total Pacira Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QuatRx Pharmaceuticals Company
Specialty
Pharmaceuticals
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183
84
334
601
63
63
130
130
54
46
100
894
69
69
310
310
490
490
—
—
—
—
90
90
—
—
—
—
—
90
762
762
275
275
632
632
1,086
1,086
1,255
1,255
220
308
528
—
—
—
Total Specialty Pharmaceuticals (0.71%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,483
2,924
See notes to consolidated financial statements.
125
Portfolio Company
Annie’s, Inc.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . .
$ 321
$
Total Annie’s, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPA Holdings, LLC (4)
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . .
Total IPA Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Force Information, Inc.
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . .
Total Market Force Information, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading Machines, Inc.
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . .
Total Trading Machines, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wageworks, Inc.
Consumer &
Business Products
Preferred Stock Warrants . . . . . . . . . . .
Total Wageworks, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
321
275
275
24
24
878
878
252
252
75
75
—
—
61
61
—
—
1,443
1,443
Total Consumer & Business Products (0.38%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,750
1,579
Enpirion, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . .
Total Enpirion, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iWatt, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Total iWatt, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NEXX Systems, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . .
Total NEXX Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quartics, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . .
Total Quartics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solarflare Communications, Inc.
Semiconductors
Preferred Stock Warrants . . . . . . . . . . .
Total Solarflare Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157
157
46
51
73
459
629
297
297
53
53
83
83
1
1
1
32
44
391
468
1,113
1,113
—
—
—
—
Total Semiconductors (0.38%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,219
1,582
Alexza Pharmaceuticals, Inc. (4)
Drug Delivery
Preferred Stock Warrants . . . . . . . . . . .
Total Alexza Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labopharm USA, Inc. (5)
Drug Delivery
Common Stock Warrants . . . . . . . . . . .
Total Labopharm USA, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transcept Pharmaceuticals, Inc.
Drug Delivery
Common Stock Warrants . . . . . . . . . . .
Common Stock Warrants . . . . . . . . . . .
Total Transcept Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
645
645
635
635
36
51
87
193
193
329
329
60
16
76
Total Drug Delivery (0.14%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,367
598
See notes to consolidated financial statements.
126
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Therapeutic
Preferred Stock Warrants . . . . . . . . . .
$
Portfolio Company
BARRX Medical, Inc.
Total BARRX Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EKOS Corporation
Therapeutic
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total EKOS Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . .
Total Gynesonics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light Science Oncology, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . .
Total Light Science Oncology, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novasys Medical, Inc.
Therapeutic
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total Novasys Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Therapeutic (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cozi Group, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . .
Total Cozi Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Invoke Solutions, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total Invoke Solutions, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prism Education Group, Inc.
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . .
Total Prism Education Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RazorGator Interactive Group, Inc. (4)
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total RazorGator Interactive Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reply! Inc. (4)
Internet Consumer &
Business Services
Preferred Stock Warrants . . . . . . . . . .
Total Reply! Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
28
1,183
1,224
320
320
Total Internet Consumer & Business Services (0.11%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,816
Lilliputian Systems, Inc.
Energy
Preferred Stock Warrants . . . . . . . . . .
Common Stock Warrants . . . . . . . . . .
Total Lilliputian Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Energy (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106
49
155
155
See notes to consolidated financial statements.
127
76
76
175
153
328
228
228
99
99
71
54
125
856
147
147
56
26
82
43
43
$ 70
70
—
—
—
221
221
26
26
1
8
9
326
—
—
74
18
92
50
50
—
—
—
—
320
320
462
—
3
3
3
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Information Services
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
$
Portfolio Company
Box.net, Inc.
Total Box.net, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buzznet, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total Buzznet, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
hi5 Networks, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total hi5 Networks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jab Wireless, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total Jab Wireless, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solutionary, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total Solutionary, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intelligent Beauty, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total Intelligent Beauty, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coveroo, Inc.
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total Coveroo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zeta Interactive Corporation
Information Services
Preferred Stock Warrants . . . . . . . . . .
Total Zeta Interactive Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Information Services (0.17%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,181
Optiscan Biomedical, Corp.
Diagnostic
Preferred Stock Warrants . . . . . . . . . .
Total Optiscan Biomedical, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,069
1,069
Total Diagnostic (0.15%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,069
Kamada, LTD. (5)
Biotechnology Tools
Preferred Stock Warrants . . . . . . . . . .
Total Kamada, LTD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labcyte, Inc.
Biotechnology Tools Common Stock Warrants . . . . . . . . . .
Total Labcyte, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NuGEN Technologies, Inc.
Biotechnology Tools
Preferred Stock Warrants . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . .
Total NuGEN Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Biotechnology Tools (0.05%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Crux Biomedical, Inc.
Surgical Devices
Preferred Stock Warrants . . . . . . . . . .
Total Crux Biomedical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transmedics, Inc. (4)
Surgical Devices
Preferred Stock Warrants . . . . . . . . . .
Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Surgical Devices (0.04%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159
159
192
192
45
33
78
429
37
37
225
225
262
See notes to consolidated financial statements.
128
73
117
190
9
9
213
213
264
264
94
2
96
230
230
7
7
172
172
$184
117
301
—
—
—
—
122
122
—
—
—
230
230
—
—
57
57
710
637
637
637
164
164
—
—
44
1
45
209
—
—
159
159
159
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Glam Media, Inc.
Industry
Type of Investment(1)
Media/Content/Info
Preferred Stock Warrants . . . . . . . . . . .
Principal
Amount
Cost(2) Value(3)
$ 482
$ 283
Total Glam Media, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Waterfront Media, Inc. (Everyday Health)
Preferred Stock Warrants . . . . . . . . . . .
Total Everyday Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Media/Content/Info (0.22%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BrightSource Energy, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Total BrightSource Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calera, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Total Calera, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GreatPoint Energy, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Total GreatPoint Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Propel Biofuels, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Total Propel Biofuels, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solexel, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Total Solexel, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trilliant, Inc.
Clean Tech
Preferred Stock Warrants . . . . . . . . . . .
Preferred Stock Warrants . . . . . . . . . . .
Total Trilliant, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
482
60
60
542
675
675
513
513
548
548
211
211
335
335
89
73
162
283
630
630
913
674
674
527
527
627
627
192
192
292
292
99
81
180
Total Clean Tech (0.60%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,444
2,492
Acceleron Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Acceleron Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dicerna Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Dicerna Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inotek Pharmaceuticals Corp.
Drug Discovery
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Inotek Pharmaceuticals Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrimack Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Merrimack Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paratek Pharmaceuticals, Inc.
Drug Discovery
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Paratek Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,340
1,340
503
503
1,500
1,500
2,000
2,000
1,000
1,000
2,316
2,316
503
503
—
—
1,546
1,546
999
999
Total Drug Discovery (1.30%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,343
5,364
E-band Communications, Corp. (6)
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total E-Band Communications, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neonova Holding Company
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . . .
Total Neonova Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,880
2,880
3,069
3,069
250
250
140
140
See notes to consolidated financial statements.
129
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Peerless Network, Inc.
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Communications
& Networking
Preferred Stock . . . . . . . . . . . . . . . . . .
$1,000
$ 1,930
Total Peerless Network, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
1,930
Stoke, Inc (4)
Communications &
Networking
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Stoke, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
500
500
500
Total Communications & Networking (1.37%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,630
5,639
Atrenta, Inc.
Software
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Atrenta, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infologix, Inc (4) (7)
Software
Common Stock . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . .
Common Stock . . . . . . . . . . . . . . . . . .
Total Infologix, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
250
5,000
36
3,355
8,391
143
143
9,620
69
6,455
16,144
Total Software (3.95%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,641
16,287
Maxvision Holding, LLC.
Electronics &
Computer Hardware Common Stock . . . . . . . . . . . . . . . . . .
Total Maxvision Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spatial Photonics, Inc. (8)
Electronics &
Computer Hardware
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Spatial Photonics Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Electronics & Computer Hardware (0.06%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aegerion Pharmaceuticals, Inc.
Specialty
Pharmaceuticals
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Aegerion Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QuatRx Pharmaceuticals Company
Specialty
Pharmaceuticals
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Quatrx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
81
768
768
849
—
—
267
267
267
1,475
1,475
2,206
2,206
750
750
—
—
Total Specialty Pharmaceuticals (0.53%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,225
2,206
IPA Holdings, LLC (4)
Consumer &
Business Products
Common Stock . . . . . . . . . . . . . . . . . .
Total IPA Holding, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Force Information, Inc.
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Market Force Information, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading Machines, Inc.
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Trading Machines, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
500
500
500
50
50
—
—
439
439
—
—
See notes to consolidated financial statements.
130
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Wageworks, Inc.
Industry
Type of Investment(1)
Principal
Amount
Cost(2) Value(3)
Consumer &
Business Products
Preferred Stock . . . . . . . . . . . . . . . . . .
$ 250
$ 283
Total Wageworks, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
Total Consumer & Business Products (0.18%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,300
iWatt, Inc.
Semiconductors
Preferred Stock . . . . . . . . . . . . . . . . . .
Total iWatt, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NEXX Systems, Inc.
Semiconductors
Preferred Stock . . . . . . . . . . . . . . . . . .
Total NEXX Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solarflare Communications, Inc.
Semiconductors
Common Stock . . . . . . . . . . . . . . . . . .
Total Solarflare Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
490
490
277
277
641
641
283
722
941
941
704
704
—
—
Total Semiconductors (0.40%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,408
1,645
Transcept Pharmaceuticals, Inc.
Drug Delivery
Common Stock . . . . . . . . . . . . . . . . . .
Total Transcept Pharmaceuticals, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Drug Delivery (0.07%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BARRX Medical, Inc.
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . .
Total BARRX Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gynesonics, Inc.
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Gynesonics, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novasys Medical, Inc.
Therapeutic
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Novasys Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
500
500
1,500
1,500
532
532
1,000
1,000
308
308
308
1,890
1,890
456
456
1,159
1,159
Total Therapeutic (0.85%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,032
3,505
Cozi Group, Inc.
Internet Consumer &
Business Services
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Cozi Group, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RazorGator Interactive Group, Inc. (4)
Internet Consumer &
Business Services
Preferred Stock . . . . . . . . . . . . . . . . . .
Total RazorGator Interactive Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
177
1,000
1,000
Total Internet Consumer & Business Services (0.07%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,177
Box.net, Inc.
Information Services
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Box.net, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buzznet, Inc.
Information Services
Preferred Stock . . . . . . . . . . . . . . . . . .
Total Buzznet, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XL Education Corp.
Information Services Common Stock . . . . . . . . . . . . . . . . . .
500
500
250
250
880
292
292
—
—
292
500
500
37
37
880
See notes to consolidated financial statements.
131
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
Portfolio Company
Industry
Type of Investment(1)
Principal
Amount
Cost(2)
Value(3)
Total XL Education Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
880
$
hi5 Networks, Inc.
Information Services
Preferred Stock . . . . . . . . . . . . . . . . .
Total hi5 Networks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solutionary, Inc.
Information Services
Preferred Stock . . . . . . . . . . . . . . . . .
Total Solutionary, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Good Technologies, Inc.
Information Services Common Stock . . . . . . . . . . . . . . . . .
Total Good Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zeta Interactive Corporation
Information Services
Preferred Stock . . . . . . . . . . . . . . . . .
Total Zeta Interactive Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
250
250
250
603
603
500
500
880
247
247
50
50
150
150
375
375
Total Information Services (0.54%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,233
2,239
Novadaq Technologies, Inc. (5)
Diagnostic
Common Stock . . . . . . . . . . . . . . . . .
Total Novadaq Technologies, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optiscan Biomedical, Corp.
Diagnostic
Preferred Stock . . . . . . . . . . . . . . . . .
Total Optiscan Biomedical, Corp.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,415
1,415
3,655
3,655
675
675
3,207
3,207
Total Diagnostic (0.94%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,070
3,882
Kamada, LTD. (5)
Biotechnology Tools Common Stock . . . . . . . . . . . . . . . . .
Total Kamada, LTD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NuGEN Technologies, Inc.
Biotechnology Tools
Preferred Stock . . . . . . . . . . . . . . . . .
Total NuGEN Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
752
752
500
500
1,754
1,754
203
203
Total Biotechnology Tools (0.47%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,252
1,957
Crux Biomedical, Inc.
Surgical Devices
Preferred Stock . . . . . . . . . . . . . . . . .
Total Crux Biomedical, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250
250
—
—
Transmedics, Inc. (4)
Surgical Devices
Preferred Stock . . . . . . . . . . . . . . . . .
1,100
1,100
Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,100
1,100
Total Surgical Devices (0.27%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,350
1,100
Waterfront Media, Inc. (Everyday
Health)
Media/Content/Info
Preferred Stock . . . . . . . . . . . . . . . . .
Total Everyday Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
1,000
1,310
1,310
Total Media/Content/Info (0.32%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
1,310
Total Investments (114.42%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$480,405
$472,032
See notes to consolidated financial statements.
132
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2010
(dollars in thousands)
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 $22,458, $32,232 and $9,774 respectively. The tax cost of investments is $481,432
(3) Except for warrants in ten publicly traded companies and common stock in five publicly traded companies,
all investments are restricted at December 31, 2010 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 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% but not more than 50% of the voting securities of the company
(8) Debt is on non-accrual status at December 31, 2010, and is therefore considered non-income producing.
See notes to consolidated financial statements.
133
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Dollars in thousands, except per share data)
Investment Income:
Interest income
For the Years Ended
December 31,
2011
2010
2009
Non Control/Non Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$69,552
—
794
$ 51,417
—
3,283
$ 61,781
153
266
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,346
54,700
62,200
Fees
Non Control/Non Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains (losses) on invesmtents
Non Control/Non Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in unrealized appreciation on investments
Non Control/Non Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net realized (unrealized) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,883
19
1,175
12,077
74,277
9,387
1,880
7,281
10,737
1,888
12,625
31,173
43,104
9,400
14
95
9,509
5,045
—
(271)
4,774
79,855
59,474
8,572
1,259
7,086
10,474
2,709
13,183
30,100
29,374
13,252
2,635
7,992
13,260
3,128
16,388
40,267
39,588
2,741
—
—
2,741
(28,873)
—
2,491
(26,501)
(4,300)
—
(26,382)
(30,801)
(3,976)
3,425
5,158
4,607
7,348
1,118
795
77
1,990
(12,426)
5,334
8,361
1,269
(24,392)
(29,532)
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,936
$ 4,982
$ 13,572
Net investment income before provision for income taxes and investment gains and losses
per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in net assets resulting from operations per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
0.91
1.08
1.07
$
$
$
0.80
0.12
0.12
$
$
$
1.25
0.38
0.37
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,988
36,156
34,486
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,299
36,870
34,891
See notes to consolidated financial statements.
134
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands)
Common Stock
Shares Par Value
Capital
in excess
of par
value
Unrealized
Appreciation
on
Investments
Accumulated
Realized
Gains
(Losses) on
Investments
Distributions
in Excess of
Investment
Income
Provision
for Income
Taxes on
Investment
Gains
Net
Assets
Balance at January 1, 2009 . . . . . . . . . . . . 33,096
$ 33
$395,760
$(11,297)
$ 3,906
$ (5,602)
$(342)
$382,458
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . —
Issuance of common stock . . . . . . . .
Issuance of common stock under
restricted stock plan . . . . . . . . . . .
Issuance of common stock under
dividend reinvestment plan . . . . .
Issuance of common stock dividend
—
3 —
307 —
307 —
in first quarter of 2009 . . . . . . . . . 1,921
Dividends declared . . . . . . . . . . . . . . —
Stock-based compensation . . . . . . . . —
Tax Reclassification of
stockholders’ equity in
accordance with generally
accepted accounting principles . . . —
2
—
—
—
22
—
2,862
9,530
—
1,983
1,269
—
(30,801)
—
43,104
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(43,914)
—
—
—
—
—
—
—
—
—
13,572
22
—
2,862
9,532
(43,914)
1,983
—
—
(1,121)
—
(1,234)
2,355
Balance at December 31, 2009 . . . . . . . . . 35,634
$ 35
$409,036
$(10,028)
$(28,129)
$ (4,057)
$(342)
$366,515
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . — $— $ — $ 1,990
—
2661
531
1
Issuance of common stock . . . . . . . .
Issuance of common stock under
restricted stock plan . . . . . . . . . . .
Acquisition of common stock under
repurchase plan . . . . . . . . . . . . . . .
Issuance of common stock under
485 —
—
(403) —
(3,699)
dividend reinvestement plan . . . . .
Retired shares from net issuance . . .
Public Offering . . . . . . . . . . . . . . . . . 7,187
Dividends declared . . . . . . . . . . . . . . —
Stock-based compensation . . . . . . . . —
Tax Reclassification of
199 —
(189) —
7
—
—
1,927
(1,934)
68,097
—
2,790
—
—
—
—
—
—
—
$(26,382)
—
—
—
—
—
—
—
—
$ 29,374
—
$ —
—
$
4,982
2,662
—
—
—
—
—
(28,816)
—
—
—
—
—
—
—
—
—
(3,699)
1927
(1,934)
68,104
(28,816)
2,790
stockholders’ equity in
accordance with generally
accepted accounting principles . . . —
—
(1,329)
—
3,478
(2,149)
—
—
Balance at December 31, 2010 . . . . . . . . . 43,444
$ 43
$477,549
$ (8,038)
$(51,033)
$ (5,648)
$(342)
$412,531
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . — $— $ — $ 4,607
—
981
188
1
Issuance of common stock . . . . . . . .
Issuance of common stock under
140 —
—
restricted stock plan . . . . . . . . . . .
Issuance of common stock as stock
dividend . . . . . . . . . . . . . . . . . . . .
Retired shares from net issuance . . .
Issuance of the Convertible Senior
Notes (see Note 4)
. . . . . . . . . . . . —
Dividends declared . . . . . . . . . . . . . . —
Stock-based compensation . . . . . . . . —
Tax Reclassification of stockholders'
equity in accordance with
generally accepted accounting
principles . . . . . . . . . . . . . . . . . . . —
167 —
(86) —
—
—
—
—
—
—
—
—
—
1,649
(952)
5,190
—
3,195
$ 2,741
—
$ 39,588
—
$ —
—
$ 46,936
982
—
—
—
—
—
—
—
—
—
—
(38,490)
—
—
—
—
—
—
—
—
1,649
(952)
5,190
(38,490)
3,195
—
(3,368)
—
5,250
(1,882)
—
—
Balance at December 31, 2011 . . . . . . . . . 43,853
$ 44
$484,244
$ (3,431)
$(43,042)
$ (6,432)
$(342)
$431,041
See notes to consolidated financial statements.
135
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
2011
2010
2009
Cash flows from operating activities:
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,936 $
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in and
4,982 $ 13,572
provided by operating activities:
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments received on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized (gain) loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized appreciation due to lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of paid-in-kind principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of loan discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of loan exit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred loan origination revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned fees related to unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of loan discount on Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt fees and issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation and amortization of restricted stock grants . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued in lieu of Director compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Interest and fees receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable (payable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excise tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(445,066)
247,325
17,733
(4,607)
(2,741)
—
(1,943)
(6,999)
(94)
2,420
615
767
1,688
348
3,195
—
(1,300)
318
(563)
—
2,443
—
(322,331)
196,119
7,613
(1,990)
26,382
(13)
(3,246)
(4,526)
437
4,013
172
—
539
400
2,790
105
(1,200)
(276)
350
(41)
(3,529)
—
(89,188)
274,819
5,769
(1,269)
30,801
29
(2,959)
(5,463)
(4,649)
(4,446)
—
—
448
367
1,983
22
1,478
2,396
(70)
—
2,484
(196)
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(139,525)
(93,250)
225,928
Cash flows from investing activities:
Purchases of capital equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(189)
(25)
(214)
(244)
350
106
(134)
(360)
(494)
Cash flows from financing activities:
Proceeds from issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchase program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings of credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for issuance costs for Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees paid for credit facilities and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
—
(36,843)
92,500
(27,313)
75,000
(3,110)
(3,065)
68,727
(3,699)
(26,889)
39,400
—
—
(31,519)
98,988
— (185,170)
—
—
(2,209)
—
—
(147)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,199
75,330
(117,848)
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(42,540)
107,014
(17,814)
124,828
107,586
17,242
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,474 $ 107,014 $ 124,828
Supplemental disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,270 $
66 $
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,649 $
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,274 $
39 $
9,386
228
1,927 $ 12,394
See notes to consolidated financial statements.
136
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, from seed and
emerging growth to expansion and established stages of development, which include select publicly listed
companies and select lower middle market technology companies. The Company sources its investments through
its principal office located in Silicon Valley, as well as through its additional offices in Boston, MA, Boulder, CO
and McLean, VA. The Company was incorporated under the General Corporation Law of the State of Maryland
in December 2003.
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 5).
Hercules Technology II, L.P. (“HT II”), Hercules Technology III, LP (“HT III”), and Hercules Technology
IV, L.P. (“HT IV”), are Delaware limited partnerships that were formed in January 2005, September 2009 and
December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies
(“SBICs”), under the authority of the Small Business Administration (“SBA”), on September 27, 2006 and
May 26, 2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning,
among other things, the size and nature of the companies in which they may invest and the structure of those
investments. The Company also formed Hercules Technology SBIC Management, LLC, or HTM, a limited
liability company in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the
limited partner and general partner of HT II and HT III (see Note 4).
HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively, and
accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31, 2011.
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). The Company currently qualifies as a RIC for
federal income tax purposes, which allows the Company to avoid paying corporate income taxes on any income
or gains that the Company distributes to our stockholders. The purpose of establishing these entities is to satisfy
the RIC tax requirement that at least 90% of the Company’s 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.
2. Valuation of Investments
The Company’s 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, Fair Value Measurements). At December 31, 2011, 87.4% 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
137
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. The Company’s debt securities are primarily invested in equity sponsored technology-related
companies including life science, clean technology and select lower middle market technology companies. Given
the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are
considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for
these investment securities to be traded or exchanged. As such, the Company 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 readily available market existed for such investments, and the differences
could be material.
Our Board of Directors may from time to time engage an independent valuation firm to provide the
Company with valuation assistance with respect to certain of the Company’s portfolio investments on a quarterly
basis. The Company intends to continue to engage an independent valuation firm to provide management with
assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter
unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an
independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is
ultimately and solely responsible for determining the fair value of the Company’s investments in good faith.
With respect to investments for which market quotations are not readily available or when such market
quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step
valuation process each quarter, as described below:
(1) the Company’s quarterly valuation process begins with the initial valuation of each portfolio company or
investment by the investment professionals responsible for the portfolio investment;
(2) preliminary valuation conclusions are then documented and discussed with the Company’s investment
committee;
(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment
committee and that of the independent valuation firm and responds to the valuation recommendation of the
independent valuation firm to reflect any comments, if any; and
(4) the Board of Directors discusses valuations and determines the fair value of each investment in our
portfolio in good faith based on the input of, where applicable, the respective independent valuation firm
and the valuation committee.
The Company 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 does not 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.
138
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.
Debt Investments
The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the
fair value of 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. The Company’s debt securities are primarily invested
in equity sponsored technology, life science and clean technology companies. Given the nature of lending to
these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets
under ASC 820 because there is no known or accessible market or market indexes for these investment securities
to be traded or exchanged.
The Company applies a procedure for debt investments that assumes a sale of investment in a hypothetical
market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical
market does not include scenarios where the underlying security was simply repaid or extinguished, but includes
an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt
investments as well as applies all of its historical fair value analysis. The Company uses pricing on recently
issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement
date. The Company considers each portfolio company’s credit rating, security liens and other characteristics of
the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the
measurement date. The anticipated future cash flows from each investment are then discounted at the
hypothetical yield to estimate each investment’s fair value as of the measurement date.
The Company’s process includes, 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, the Company may consider other factors to
estimate fair value, including the proceeds that would be received in a liquidation analysis.
The Company records unrealized depreciation on investments when it believes that an investment has
decreased in value, including where collection of a loan is doubtful or if under the in exchange premise when the
value of a debt security was to be less than amortized cost of the investment. 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 or if under the in exchange premise the
value of a debt security were to be greater than amortized cost.
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
139
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.
Equity-Related Securities and Warrants
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. We have a limited number of equity securities in public companies. In
accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily
available are valued at the closing market quote on the valuation date.
The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting
date, privately held warrant and equity related 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, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons
to comparable public companies or other industry benchmarks. 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 warrant and related equity. 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.
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, 2011 and 2010:
(in thousands)
Description
Senior secured debt . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
Description
Senior secured debt . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Subordinated debt
Preferred stock . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments at Fair Value as of December 31, 2011
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$ —
—
6,679
—
$6,679
$ —
—
—
3,761
$3,761
$585,767
30,289
90
26,284
$642,430
Investments at Fair Value as of December 31, 2010
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$ —
—
—
4,943
—
$4,943
$ —
—
—
16,144
6,289
$22,433
$394,198
7,420
24,607
1,030
17,401
$444,656
12/31/2011
$585,767
30,289
6,769
30,045
$652,870
12/31/2010
$394,198
7,420
24,607
22,117
23,690
$472,032
140
The table below presents reconciliation for all financial 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, 2011 and 2010.
Balance,
January 1,
2011
Net Realized
Gains (losses)(1)
Net change in
unrealized
appreciation or
depreciation(2) Purchases Sales Repayments Exit
Gross
Transfers
into
Level 3(3)
Gross
Transfers
out of
Level 3(3)
Balances,
December 31,
2011
(in thousands)
$(4,301)
$ 9,050
$454,640 $ — $(263,432) $— $ — $(4,388)
585,767
Senior Debt . . . . $394,198
Subordinated
Debt . . . . . . . .
7,420
Preferred
—
Stock . . . . . . .
24,607
(1,441)
Common
—
838
— —
(7,420) —
—
1,860 —
— — 4,425
—
—
—
30,289
90
26,284
Stock . . . . . . .
Warrants . . . . . .
1,030
17,401
—
(1,054)
(940)
5,243
— —
6,507 (497)
—
— —
— (51) —
—
(1,265)
Total
. . . . . . . . . $444,656
$(6,796)
$14,191
$463,007 $(497) $(270,852) $ (51) $4,425
$(5,653) $642,430
(in thousands)
Balance,
January 1,
2010
Net Realized
Gains (losses)(1)
Net change in
unrealized
appreciation
or depreciation(2)
Purchases,
sales,
repayments,
and exit, net
Transfer
in & out of
Level 3
Balances,
December 31,
2010
Senior Debt . . . . . . . . . . . . . . . . . $319,129
—
. . . . . . . . . . .
Subordinated Debt
6,005
Senior Debt-Second Lien . . . . . .
22,875
Preferred Stock . . . . . . . . . . . . . .
1,773
Common Stock . . . . . . . . . . . . . .
11,076
Warrants . . . . . . . . . . . . . . . . . . .
$(12,835)
—
—
(1,250)
(15,037)
(1,225)
Total
. . . . . . . . . . . . . . . . . . . . . . $360,858
$(30,347)
$(3,076)
—
—
(995)
(743)
568
$(4,246)
$ 98,058
7,420
(6,005)
2,603
15,037
8,650
$(7,078)
—
—
1,374
—
(1,668)
$394,198
7,420
—
24,607
1,030
17,401
$125,764
$(7,372)
$444,656
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.
(1)
(2)
(3) Transfers in/out of Level 3 relate to the conversion of MaxVision Holding, LLC. debt to equity during the second quarter, the conversion
of Gelesis, Inc. debt to equity in the fourth quarter, and the initial public offering of Pacira Pharmaceuticals, Inc.
For the year ended December 31, 2011, approximately $9.1 million and $3.8 million in unrealized
appreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at
the reporting date. For the same period, approximately $480,000 in unrealized depreciation was recorded for
equity Level 3 investments relating to assets still held at the reporting date.
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 investments that are neither Control Investments
nor Affiliate Investments.
141
The following table summarizes our realized and unrealized gain and loss and changes in our unrealized
appreciation and depreciation on control and affiliate investments at December 31, 2011 and December 31, 2010:
(in thousands)
December 31, 2011
Type
Fair Value at
December 31, 2011
Investment
Income
Unrealized
(Depreciation)/
Appreciation
Reversal of
Unrealized
(Depreciation)/
Appreciation
Realized
Gain/(Loss)
Portfolio Company
MaxVision Holding,
LLC.
. . . . . . . . . . . . . . Control
E-Band Communiations,
Corp.
. . . . . . . . . . . . . . Non-Controlled Affiliate
Total . . . . . . . . . . . . . . . .
$1,027
—
$1,027
$889
14
$903
$(5,158)
(3,425)
$(8,583)
$—
—
$—
$—
—
$—
(in thousands)
December 31, 2010
Portfolio Company
Type
InfoLogix, Inc.
E-Band Communiations,
. . . . . . . . Control
Corp.
. . . . . . . . . . . . . . Non-Controlled Affiliate
Total . . . . . . . . . . . . . . . .
Fair Value at
December 31, 2010
Investment
Income
$40,181
$3,013
3,069
$43,250
—
$3,013
Unrealized
(Depreciation)/
Appreciation
Reversal of
Unrealized
(Depreciation)/
Appreciation
Realized
Gain/(Loss)
$ 77
795
$872
$128
—
$128
$2,517
—
$2,517
The Company’s investment in InfoLogix, Inc., a company that was a Control Investment as of
December 31, 2010, was sold to Stanley Black & Decker (NYSE:SWK) in January 2011. Approximately $8.3
million of realized gains and $8.4 million of net change in unrealized depreciation was recognized on this control
investment during the three-month period ended March 31, 2011.
Income Recognition
Interest income is recorded on the accrual basis and the Company will recognize it 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 generally place the loan
on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any
uncollected interest related to prior periods is reversed from income in the period that collection of the interest
receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has
sufficient collateral value and is in the process of collection.
There was one loan on non-accrual status as of December 31, 2011 with an approximate cost of $7.7 million
and fair value of approximately $1.0 million. There were two loans on non-accrual as of December 31, 2010 with
an aggregate cost of approximately $11.4 million and fair value of approximately $4.0 million and five loans on
non-accrual as of December 31, 2009 with an aggregate cost of approximately $25.5 million and fair value of
approximately $10.5 million.
During the years ended December 31, 2011 and 2010, the Company made investments in debt securities,
including restructured loans, totaling approximately $433.4 million and $320.4 million, respectively. During the
years ended December 31, 2011 and 2010, the Company funded equity investments of approximately
$2.1 million and $2.3 million, respectively.
142
During the years ended December 31, 2011 and 2010, the Company recognized $9.3 million and
$2.6 million in realized gains, respectively from the sale of common stock in its public portfolio companies.
During the years ended December 31, 2011 and 2010, the Company recognized realized losses of approximately
$6.5 million and $29.0 million, respectively million from equity, loan, and warrant investments in portfolio
companies that have been liquidated.
The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest,
computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan
and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of 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, 2011, 2010 and 2009, the Company recognized approximately
$1.7 million, $2.3 million and $2.9 million in PIK income, respectively. The Company recognizes nonrecurring
fees amortized over the remaining term of the loan relating to specific loan modifications. Certain fees may still
be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver
fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan
pay-off or material modification of the specific debt outstanding.
Loan origination, and commitment fees received in full at the inception of a loan or upon modification 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 $4.5 million, $6.6 million and $2.4 million of unamortized fees
at December 31, 2011, 2010 and 2009, respectively, and approximately $4.4 million, $5.1 million $6.6 million in
exit fees receivable at December 31, 2011, 2010 and 2009, respectively.
In some cases, the Company collateralizes its investments by obtaining a first priority security interest in a
portfolio company’s assets, which may include their intellectual property. In other cases, the Company may
obtain a negative pledge covering a company’s intellectual property. At December 31, 2011, approximately 63%
of the Company’s portfolio company loans were secured by a first priority security in all of the assets of the
portfolio company, 36% of the loans were to portfolio companies that were prohibited from pledging or
encumbering their intellectual property and 1% of portfolio company loans had an equipment only lien.
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 and 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)
As of December 31
2011
2010
Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Debenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 906
5,828
2,477
$ 250
4,917
—
$9,211
$5,167
Cash Equivalents
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.
143
Stock Based Compensation
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 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
company taxable income in any calendar year and 98.2% 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 years ended December 31, 2011 and
2010. 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 2011, 2010 and 2009, the Company issued approximately
167,000, 199,000 and 307,000 shares, respectively, of common stock to shareholders in connection with the
dividend reinvestment plan.
Segments
The Company lends to and invests in portfolio companies in various technology-related companies,
including clean technology, life science, and lower middle market companies. The Company separately evaluates
144
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.
Reclassifications
Certain prior period information has been reclassified to conform to current year presentation.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)
2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 was issued concurrently
with International Financial Reporting Standards No.13 (“IFRS 13”), Fair Value Measurements, to provide
largely identical guidance about fair value measurement and disclosure requirements as is currently required
under ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). The new standards do not extend
the use of fair value but, rather, provide guidance about how fair value should be applied where it already is
required or permitted under IFRS or GAAP. For GAAP, most of the changes are clarifications of existing
guidance or wording changes to align with IFRS 13. ASU 2011-04 eliminates the concepts of in-use and in-
exchange when measuring fair value of all financial instruments. For Level 3 fair value measurements, the ASU
requires that our disclosure include quantitative information about significant unobservable inputs, a qualitative
discussion about the sensitivity of the fair value measurement to changes in the unobservable inputs and the
interrelationship between inputs, and a description of our valuation process. Public companies are required to
apply ASU 2011-04 prospectively for interim and annual periods beginning after December 15, 2011. The
Company is currently evaluating the impact of the adoption of ASU 2011-04 on its financial statements and
disclosures.
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, 2011 and 2010 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, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$482,268
133,544
30,181
—
6,877
$652,870
73.9%
20.4%
4.6%
0.0%
1.1%
100.0%
$357,963
59,251
26,813
8,094
19,911
$472,032
75.8%
12.6%
5.7%
1.7%
4.2%
100.0%
145
A summary of the Company’s investment portfolio, at value, by geographic location is as follows:
(in thousands)
United States . . . . . . . . . . . . . . . . . . . . . . .
England . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$634,736
8,266
4,970
3,842
672
384
$652,870
97.2%
1.3%
0.7%
0.6%
0.1%
0.1%
100.0%
$438,585
10,653
—
—
20,876
1,918
$472,032
92.9%
2.3%
0.0%
0.0%
4.4%
0.4%
100.0%
The following table shows the fair value of our portfolio by industry sector as of December 31, 2011 and
2010 (excluding unearned income):
(in thousands)
Drug Discovery & Development
Internet Consumer & Business
December 31, 2011
December 31, 2010
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
. . . . . . .
$131,428
20.1%
$ 52,777
Services . . . . . . . . . . . . . . . . . . . . . . . . .
Clean Tech . . . . . . . . . . . . . . . . . . . . . . . .
Drug Delivery . . . . . . . . . . . . . . . . . . . . . .
Information Services . . . . . . . . . . . . . . . . .
Specialty Pharma . . . . . . . . . . . . . . . . . . .
Media/Content/Info . . . . . . . . . . . . . . . . . .
Therapeutic . . . . . . . . . . . . . . . . . . . . . . . .
Communications & Networking . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . .
Biotechnology Tools . . . . . . . . . . . . . . . . .
Diagnostic . . . . . . . . . . . . . . . . . . . . . . . . .
Surgical Devices . . . . . . . . . . . . . . . . . . . .
Semiconductors . . . . . . . . . . . . . . . . . . . . .
Consumer & Business Products . . . . . . . .
Electronics & Computer Hardware . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117,542
64,587
62,665
45,850
39,384
38,476
35,911
28,618
27,850
18,693
15,158
11,566
9,733
4,186
1,223
—
18.0%
9.9%
9.6%
7.0%
6.0%
5.9%
5.5%
4.4%
4.3%
2.9%
2.3%
1.8%
1.5%
0.6%
0.2%
0.0%
7,255
25,722
35,250
10,857
63,607
25,300
2,223
65,098
96,508
5,987
14,911
10,172
3,227
45,316
7,819
3
11.2%
1.5%
5.4%
7.5%
2.3%
13.5%
5.4%
0.5%
13.8%
20.4%
1.3%
3.2%
2.1%
0.7%
9.6%
1.6%
0.0%
$652,870
100.0%
$472,032
100.0%
During the years ended December 31, 2011 and 2010, the Company made investments in debt securities
totaling $433.6 million and $320.4 million, respectively, and made investments in equity securities of
approximately $2.1 and $2.3 million, respectively. In addition, during the year ended December 31, 2011, the
Company converted approximately $4.4 million of debt to equity in two portfolio companies. No single portfolio
investment represents more than 10% of the fair value of the investments as of December 31, 2011 and 2010.
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 Convertible Senior Notes and the SBIC
146
debentures as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration,
and low fixed interest rates. Based on market quotations on or around December 31, 2011 the Convertible Senior
Notes were trading for $0.885 per dollar at par value. 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 $247.9 million, compared to the carrying amount of $225.0 million as
of December 31, 2011.
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 investments is discussed
in Note 1.
4. Borrowings
Long-term SBA Debentures
On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able
to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital.
Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can
have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. As of
December 31, 2011, 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. The
Company’s net investment of $75.0 million in HT II as of December 31, 2011 fully funds the required regulatory
capital for HT II. HT II has a total of $125.0 million of SBA guaranteed debentures outstanding as of
December 31, 2011 and has paid the SBA commitment fees of approximately $1.5 million. As of December 31,
2011, the Company held investments in HT II in 57 companies with a fair value of approximately $198.7 million,
accounting for approximately 30.4% of the Company’s total portfolio.
On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to
borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With
the Company’s net investment of $50.0 million in HT III as of December 31, 2011, HT III has the capacity to
issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $100.0 million
were outstanding as of December 31, 2011. As of December 31, 2011, HT III has paid the SBA commitment fees
of approximately $1.0 million. As of December 31, 2011, the Company held investments in HT III in 23
companies with a fair value of approximately $124.8 million, accounting for approximately 19.1% of the
Company’s total portfolio. See Note 16.
There is no assurance that HT II or HT III will be able to draw 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
businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II
and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection
therewith, make equity investments.
147
HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance
with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could,
depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare
outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments.
In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do
not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn,
negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and
HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2011 as a result of having
sufficient capital as defined under the SBA regulations.
The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in
March and September and range from 2.88% to 5.73%. Interest payments on SBA debentures are payable semi-
annually. There are no principal payments required on these issues prior to maturity and no prepayment penalties.
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. 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 fees related to HT II debentures that
pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment
was closed in. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The
annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the
year ended December 31, 2011 for HT II was approximately $125.5 million with an average interest rate of
approximately 6.0%. The average amount of debentures outstanding for the quarter ended December 31, 2011 for
HT III was approximately $60.0 million with an average interest rate of approximately 3.0%.
HT II and HT III hold approximately $217.2 million and $167.1 million in assets, respectively, and
accounted for approximately 21.7% and 16.7% of our total assets prior to consolidation at December 31, 2011.
The Company reported the following SBA debentures outstanding on its Consolidated Balance Sheet as of
December 31, 2011 and December 31, 2010:
(in thousands) Issuance/Pooling Date
Maturity Date
Interest Rate(1)
2011
2010
December 31,
SBA Debentures:
September 26, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2017
March 26, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2018
September 24, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2018
March 25, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2019
September 23, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2019
September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2020
September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2020
March 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2021
September 21, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . September 1, 2021
October 18, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022
Total SBA Debentures . . . . . . . . . . . . . . . . . . . . . . .
6.43%
6.38%
6.63%
5.53%
4.64%
3.62%
3.50%
4.37%
3.16%
1.35%(2)
$ 12,000
58,050
13,750
18,400
3,400
6,500
22,900
28,750
25,000
36,250
$ 12,000
58,050
38,750
18,400
3,400
6,500
32,900
—
—
—
$225,000
$170,000
(1)
(2)
Interest rate includes annual charge
Interim interest on the October 18, 2011 borrowing will pool on March 20, 2012 at which date the principal interest rate will be set.
148
At December 31, 2011 and December 31, 2010, the Company had the following borrowing capacity and
outstanding borrowings:
December 31, 2011
December 31, 2010
Total
Available
Carrying
Value(1)
Total
Available
Carrying
Value(1)
Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Senior Notes(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Debenture(3)
$ 55,000
75,000
75,000
225,000
$ — $ 20,000
50,000
—
225,000
10,187
70,353
225,000
$ —
—
—
170,000
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$430,000
$305,540
$295,000
$170,000
(1) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.
(2) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount
(3)
initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was
$4,647 at December 31, 2011.
In January 2011, we repaid $25.0 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. In
February 2011, we submitted a request to the SBA to borrow $25.0 million under a new capital commitment and in April 2011, the SBA
approved a $25.0 million dollar commitment for HT III bringing the total available borrowings to $225.0 million, of which $125.0
million was available in HT II and $100.0 million was available in HT III.
In February 2012, we repaid $24.3 million of SBA debentures under HT II, priced at approximately 6.63%, including annual fees. We
plan to submit a request to the SBA to borrow the $24.3 million under a new capital commitment under HT III, subject to SBA approval.
There can be no assurances that the SBA will approve our new capital commitment request or the pricing to be consistent with the
September 2011 pricing or that we will have drawn on any possible commitment.
Convertible Senior Notes
In April 2011, the Company issued $75.0 million in aggregate principal amount of 6.00% convertible senior
notes (the “Convertible Senior Notes”) due 2016.
The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted
or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per
year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011.
The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of
payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to
the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured
indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured
indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the
assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade
payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities.
Prior to the close of business on the business day immediately preceding October 15, 2015, holders may
convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after
October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity
Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay
or deliver, as the case may be, at its election, cash, shares of its common stock or a combination of cash and
shares of its common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000
principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89
per share of common stock). The conversion rate will be subject to adjustment in some events but will not be
adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity
Date, the conversion rate will be increased for converting holders.
The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided
for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior
149
Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a
repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus
accrued and unpaid interest through, but excluding, the required repurchase date.
The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff
Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated
at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior
Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the
conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the
accompanying consolidated balance sheet. As a result, the Company records interest expense comprised of both
stated interest expense as well as accretion of the original issue discount. Additionally, the issuance costs
associated with the Convertible Senior Notes were allocated to the debt and equity components in proportion to
the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. At
the time of issuance, the debt issuance costs and equity issuance costs were approximately $2.9 million and
$224,000, respectively. At the time of issuance and as of December 31, 2011, the equity component, net of
issuance costs, as recorded in the “capital in excess of par value” in the balance sheet was approximately $5.2
million.
As of December 31, 2011, the components of the carrying value of the Convertible Senior Notes were as
follows:
(in thousands)
As of December 31, 2011
Principal amount of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issue discount, net of accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,000
(4,647)
$70,353
For the three and twelve months ended December 31, 2011, the components of interest expense and cash
paid for interest expense for the Convertible Senior Notes were as follows:
(in thousands)
Three Months Ended
December 31, 2011
Twelve Months Ended
December 31, 2011
Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of original issue discount
. . . . . . . . . . . . . . . . . .
Amortization of debt issuance cost . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . .
$1,125
271
144
$1,540
$2,250
$3,187
767
409
$4,363
$2,250
The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the
stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.2% for the year
ended December 31, 2011. As of December 31, 2011, we are in compliance with the terms of the indentures
governing the Convertible Senior Notes.
Wells Facility
In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells
Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, we renewed the Wells Facility. Under this three-
year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility
contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million,
funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other
150
customary conditions. We expect to continue discussions with various other potential lenders to join the new
facility; however, there can be no assurances that additional lenders will join the Wells Facility.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus
3.50%, with a floor of 5.00% and an advance rate of 50% against eligible loans. The Wells Facility is secured by
loans in the borrowing base. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each
payment date on or before September 1, 2011. The monthly payment of a non-use fee thereafter shall depend on
the average balance that was outstanding on a scale between 0.0% and 0.75%. From September 1, 2011 through
September 30, 2011, this non-use fee was 0.75%. On June 20, 2011 we paid an additional $1.1 million in
structuring fees in connection with the Wells Facility which is being amortized through June 2014. There was
approximately $10.2 of outstanding debt under the Wells Facility at December 31, 2011.
The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries,
in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated
indebtedness, that is in excess of $314.0 million plus 90% of the cumulative amount of equity raised after
March 31, 2011. 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, 2011.
Union Bank Facility
On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with
Union Bank (the “Union Bank Facility”). On November 2, 2011, we renewed and amended the Union Bank
Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets have
made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an
accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by
additional lenders and with the agreement of Union Bank and subject to other customary conditions. We expect
to continue discussions with various other potential lenders to join the new facility; however, there can be no
assurances that additional lenders will join the Union Bank Facility.
Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR
plus 2.25% with a floor of 4.0%. At December 31, 2011, there were no borrowings outstanding on this facility.
The Union Bank Facility requires the payment of a non-use fee of 0.25% annually. The Union Bank Facility is
collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of
eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a
monthly basis. All outstanding principal is due upon maturity.
The Union Bank Facility requires various financial and operating covenants. These covenants require us to
maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding
subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds
received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on
November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months
with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a
non-use fee of 0.50% annually. Union Bank Facility also 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, 2011.
Citibank Credit Facility
The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit
facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. During the first quarter of
151
2009, the Company paid off all remaining principal and interest owed under the Citibank Credit Facility.
Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and
warrants collateralized under the Citibank 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 were 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 Citibank Credit Facility was 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 $715,000 as of December 31, 2011 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. 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.
5. Income Taxes
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, 2011 and 2010, 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)
December 31,
2011
2010
Distributions in excess of investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated realized gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,882)
5,250
(3,368)
$(2,149)
3,478
(1,329)
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, 2011 and 2010 was ordinary income in the amounts of $38.5 million and $28.8 million,
respectively.
The aggregate gross unrealized appreciation of our investments over cost for federal income tax purposes
was $34.5 million and $22.4 million as of December 31, 2011 and 2010, respectively. The aggregate gross
unrealized depreciation of our investments under cost for federal income tax purposes was $39.4 million and
$32.2 million as of December 31, 2011 and 2010, respectively. The net unrealized depreciation over cost for
federal income tax purposes was $4.9 million as of December 31, 2011 and net unrealized depreciation over cost
for federal income tax purposes was $9.8 million as of December 31, 2010. The aggregate cost of securities for
federal income tax purposes was $658.0 million and $481.4 million as of December 31, 2011 and 2010,
respectively.
152
At December 31, 2011 and 2010, 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)
December 31,
2011
2010
Accumulated Capital Gains (Losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Temporary Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed Ordinary Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized Appreciation (Depreciation)
$(48,567)
(16)
236
(4,901)
$(50,057)
(6,260)
220
(8,963)
Components of Distributable Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(53,248)
$(65,060)
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. The Company is currently not undergoing any tax examinations. The Company does not
anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2008,
2009 and 2010 federal tax years for the Company remain subject to examination by the IRS. The 2007, 2008,
2009 and 2010 state tax years for the Company remain subject to examination by the California Franchise Tax
Board.
6.Shareholders’ Equity
The Company is authorized to issue 100,000,000 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”). Warrants for 88,323 shares were exercised in 2008
for net proceeds of approximately $934,000 and 283,614 warrants expired in June of 2009.
On August 2, 2011, the Company approved the extension of the stock repurchase plan as previously
approved on February 8, 2010 under the same terms and conditions that allows the Company to repurchase up to
$35.0 million of its common stock for an additional six month period with a new expiration date of February 26,
2012. During the year ended December 31, 2011, the Company did not repurchase any common stock.
During 2011, 2010 and 2009 the Board of Directors elected to receive approximately $105,000, $105,000,
and $22,000 respectively, of their compensation in the form of common stock and the Company issued 9,942,
10,479, and 3,334 respectively, to the directors based on the closing prices of the common stock on the specified
election dates.
The Company has issued stock options for common stock subject to future issuance, of which 4,231,444 and
4,729,849 were outstanding at December 31, 2011 and 2010, respectively.
7. Equity Incentive Plan
The Company and its stockholders have authorized and adopted the 2004 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 8,000,000 shares of common stock under the 2004 Plan. 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.
153
The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the
“2006 Plan” and, together with the 2004 Plan, the “Plans”) 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 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.
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, the independent members of its 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.
A summary of restricted stock activity under the Company’s 2006 and 2004 Plans for each of the three
periods ended December 31, 2011 is as follows:
Outstanding at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 Plan
2004 Plan
16,668
5,000
—
21,668
—
—
21,668
10,000
—
228,150
306,500
(4,175)
530,475
491,500
(3,872)
1,018,103
296,600
(123,502)
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,668
1,191,201
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.
154
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, 2011 is as follows:
Outstanding at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common
Stock
Options
3,931,528
1,357,000
—
(364,123)
4,924,405
575,250
(520,666)
(249,140)
4,729,849
617,700
(178,101)
(938,004)
4,231,444
Five-Year
Warrants
10,692
—
—
(10,692)
—
—
—
—
—
—
—
—
—
Weighted-average exercise price at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
11.40
$ —
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, 2011, options
for approximately 3.6 million shares were exercisable at a weighted average exercise price of approximately
$11.40 per share with weighted average of remaining contractual term of 2.16 years. The Company determined
that the fair value of options granted under the 2006 and 2004 Plans during the years ended December 31, 2011,
2010 and 2009 was approximately $1.3 million, $1.0 million and $746,000, respectively. During the years ended
December 31, 2011, 2010 and 2009, approximately $557,000, $719,000 and $977,000, of share-based cost due to
stock option grants was expensed, respectively. As of December 31, 2011, there was $833,000 of total
unrecognized compensation costs related to stock options. These costs are expected to be recognized over a
weighted average period of 2.1 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,
2011:
Expected Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.39%
10%
4.5
46.39% 31.52%-45.88%
10%
4.5
10%
4.5
0.68%-2.15% 0.89%-2.51%
1.77%-2.22%
2011
2010
2009
The following table summarizes stock options outstanding and exercisable at December 31, 2011:
(Dollars in thousands, except
exercise price)
Range of exercise prices
Options outstanding
Options Exercisable
Weighted
average
remaining
contractual
life
Number of
shares
Aggregate
intrinsic
value
Weighted
average
exercise
price
Number of
shares
Weighted
average
remaining
contractual
life
Aggregate
intrinsic
value
Weighted
average
exercise
price
$4.21-$8.49 . . . . . . . . . . . .
478,623
$8.67-$13.40 . . . . . . . . . . . 3,044,571
708,250
$13.87-$14.02 . . . . . . . . . .
$4.21-$14.02 . . . . . . . . . . . 4,231,444
4.14
2.71
2.04
2.76
$2,409,038 $ 4.38
395,297
58,354 $12.28 2,486,475
708,250
— $14.02
$2,467,392 $11.40 3,590,022
155
4.09
1.89
2.04
2.16
$1,999,634 $ 4.38
17,066 $12.28
— $14.02
$2,016,700 $11.75
In 2011, 2010 and 2009, the Company granted approximately 306,600 and 491,500 and 306,500 shares,
respectively, of restricted stock pursuant to the Plans. Each restricted stock award granted in 2011, 2010 and
2009 is subject to lapse as to 25% of the award one year after the date of grant and ratably over the succeeding 36
months subject to a four year forfeiture schedule. 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 2009. The
Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the
years ended December 31, 2011,2010 and 2009 was approximately $3.4 million, $5.1 million and $1.3 million,
respectively. During the years ended December 31, 2011, 2010 and 2009, the Company expensed approximately
$2.6 million, $2.0 million and $1.0 million of compensation expense related to restricted stock, respectively. As
of December 31, 2011, there was approximately $5.2 million of total unrecognized compensation costs related to
restricted stock. These costs are expected to be recognized over a weighted average period of 2.57 years.
The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which
allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the
exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive
order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock
to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make, and does not
preclude the participant from electing to make, a cash payment at the time of option exercise or to pay taxes on
restricted stock.
8. Earnings per Share
Shares used in the computation of the Company’s basic and diluted earnings per share are as follows:
(in thousands, except per share data)
Numerator
Year Ended December 31,
2011
2010
2009
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . $ 46,936 $ 4,982 $ 13,572
(43,914)
Less: Dividends declared-common and restricted shares . . . . . . . . . . . . . . . . .
(28,816)
(38,492)
Undistributed earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,444
(23,834)
(30,342)
Undistributed earnings-common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Dividend declared-common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,444
37,826
(23,834)
28,228
(30,342)
43,377
Numerator for basic and diluted change in net assets per common share . . . . $ 46,270 $ 4,394 $ 13,035
Denominator
Basic weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . .
Common shares issuable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,988
311
36,156
714
34,486
405
Weighted average common shares outstanding assuming dilution . . . . . . . . . .
43,299
36,870
34,891
Change in net assets per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.08 $
1.07 $
0.12 $
0.12 $
0.38
0.37
The calculation of change in net assets resulting from operations per common share—assuming dilution,
excludes all anti-dilutive shares. For the years ended December 31, 2011, 2010 and 2009, 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 2,583,707, 5,168,022 and 4,124,000; shares, respectively.
9. Commitments and Contingencies
The Company’s commitments and contingencies consist primarily of unused commitments to extend credit,
in the form of loans to the Company’s portfolio companies. The balance of unfunded commitments to extend
156
credit at December 31, 2011 totaled approximately $168.2 million. Since a portion of these commitments may
expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In
addition, the Company had approximately $82.5 million of non-binding term sheets outstanding at December 31,
2011. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final
approval process, as well as the 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.
Certain premises are leased under agreements which expire at various dates through December 2013. Total
rent expense amounted to approximately $1.1 million, $1.0 million and $966,000 during the years ended
December 31, 2011, 2010 and 2009, respectively.
Future commitments under the credit facility and operating leases were as follows at December 31, 2011:
Contractual Obligations(1)(2)
Payments due by period
(in thousands)
Total
Less than
1 year
1 - 3
years
3 - 5
years
After 5
years
Borrowings(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Lease Obligations(5) . . . . . . . . . . . . . . . . . . . . . .
$305,540
8,497
$ — $10,187
2,294
1,244
$70,353
2,520
$225,000
2,439
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$314,037
$1,244
$12,481
$72,873
$227,439
(1) Excludes commitments to extend credit to our portfolio companies.
(2) The Company also has a warrant participation agreement with Citigroup. See Note 4.
(3)
Includes borrowings under the SBA debentures and Wells Facility. There were no outstanding borrowings under the Union Bank facility
at December 31, 2011.
(4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal
amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible
Senior Notes was $4,647 at December 31, 2011.
(5) Long-term facility leases.
As of December 31, 2011, the Company was not a party to any material 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.
10. 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.
11. Concentrations of Credit Risk
The Company’s customers are primarily small and medium sized companies in the biotechnology, drug
discovery, drug delivery, specialty pharmaceuticals, therapeutics, clean technology, communications and
networking, consumer and business products, electronics and computers, information services, internet consumer
and business services and products, 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.
157
For years ended December 31, 2011 and 2010, our ten largest portfolio companies represented
approximately 37.9% and 57.5% of the total fair value of our investments in portfolio companies, respectively.
At December 31, 2011 and 2010, we had seven and six investments, respectively, that represented 5% or more of
our net assets. At December 31, 2011, we had seven equity investments representing approximately 63.8% 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, 2010, we had three equity investments which represented approximately 48.0% of
the total fair value of our equity investments, and each represented 5% or more of the total fair value of such
investments.
12. Financial Highlights
Following is a schedule of financial highlights for five years ended December 31, 2011.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
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(3) . . . . . . . . . . . . . . . . . . . . . . . .
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
For the Years Ended December 31,
2011
2010
2009
2008
2007
$
$
$
9.50
0.92
0.06
0.11
1.09
0.07
(0.90)
0.07
9.83
9.44
(0.83)%
43,853
$
10.29
0.81
(0.73)
0.06
0.14
(0.21)
(0.80)
0.08
9.50
10.36
7.70%
43,444
$
$
11.56
1.25
0.03
(0.90)
0.38
(0.44)
(1.26)
0.05
10.29
10.39
45.63%
35,634
$
$
12.31
1.23
0.07
(0.66)
0.64
(0.12)
(1.32)
0.05
11.56
7.92
(25.60)%
33,096
$
$
11.65
1.15
0.09
0.26
1.5
0.32
(1.20)
0.04
12.31
12.42
(4.42)%
32,541
$
$
42,988
$431,041
36,156
$412,531
34,486
$366,515
32,619
$382,458
28,295
$400,737
9.61%
8.25%
8.23%
8.85%
6.46%
9.45%
8.05%
11.38%
9.86%
9.81%
$238,873
$142,410
$147,446
$196,928
$ 66,334
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5.56
$
3.94
$
4.28
$
6.04
$
2.34
(1) For 2011, 2010, 2009 and 2008, net investment income per share is calculated as net investment income divided by the weighted average
shares outstanding.
(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, 2011, 2010, 2009, 2008 and 2007 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.
158
13. Senior Securities
Information about our senior securities is shown in the following table for the periods as of December 31,
2011, 2010, 2009, 2008, 2007, 2006, 2005 and 2004.
Asset Coverage
per Unit(2)
Average
Market
Value
per Unit(3)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized Credit Facility with Wells Fargo Capital Finance
December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitized Credit Facility with Union Bank, NA
December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small Business Administration Debentures (HT II)(4)
December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small Business Administration Debentures (HT III)(5)
December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Convertible Notes
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
—
$ 25,000,000
—
—
—
—
—
—
—
$ 51,000,000
$ 41,000,000
$ 79,200,000
$ 89,582,000
—
—
$ 10,186,830
—
—
—
—
—
—
—
—
—
—
—
$ 55,050,000
$127,200,000
$130,600,000
$150,000,000
$125,000,000
—
—
—
—
—
—
$ 20,000,000
$100,000,000
—
$ 2,505
—
—
—
—
—
—
—
$ 2,505
$ 7,230
$ 6,755
$ 6,689
—
—
73,369
—
—
—
—
—
—
—
—
—
—
—
$ 9,718
$ 4,711
$ 3,806
$ 3,942
$ 5,979
—
—
—
—
—
—
$29,564
$ 7,474
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
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
885
$ 70,352,983
10,623
(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.
159
(4)
(5)
Issued by HT II, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage
requirements of the 1940 Act.
Issued by HT III, one of our SBIC subsidiaries, to the SBA. These categories of senior securities were not subject to the asset coverage
requirements of the 1940 Act.
(6) The Company’s Wells Facility and Union Bank Facility had no borrowings outstanding during the periods noted above.
14. Selected Quarterly Data (Unaudited)
The following tables set forth certain quarterly financial information for each of the last eight quarters ended
December 31, 2011. 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)
15. Subsequent Events
Dividend Declaration
Quarter Ended
3/31/2011
6/30/2011
9/30/2011
12/31/2011
$19,152
$20,820
$18,684
$21,200
9,804
(1,177)
0.23
10,360
24,317
0.24
8,593
6,223
0.14
10,831
17,574
0.25
Quarter Ended
3/31/2010
6/30/2010
9/30/2010
12/31/2010
$12,520
$14,501
$15,646
$16,807
5,612
5,714
0.16
6,863
(4,630)
(0.14)
8,148
(7,823)
(0.23)
8,751
11,721
0.30
On February 27, 2012 the Board of Directors increased the quarterly dividend by 5.0% and declared a cash
dividend of $0.23 per share to be paid on March 15, 2012 to shareholders of record as of March 12, 2012. This
dividend will represent the Company’s twenty-sixth consecutive dividend declaration since its initial public
offering, bringing the total cumulative dividend declared to date to $6.92 per share.
Liquidity and Capital Resources
In January 2012, the Company closed a public offering of 5,000,000 shares of common stock at $9.61 per
share, resulting in net proceeds of $48,050,000 before deducting offering expenses payable by the Company.
In January 2012, the Company repaid the entire principal balance outstanding (approximately $10.2 million
as of December 31, 2011) under the Wells Fargo facility.
In February 2012, the Company repaid six SBA debentures with principal totaling $24.25 million. The
weighted average interest rate on repaid debentures (including the 0.906% SBA annual charge levied on each
debenture) was 6.521%. The total amount paid, including unpaid interest and annual charges through March 1,
2012, was approximately $25.0 million.
Portfolio Company Developments
On February 3, 2012, Cempra, Inc. completed its initial public offering of 8,400,000 shares of common stock
at a price to the public of $6.00 per share. At December 31, 2011 Hercules held approximately 371,000 warrants in
Cempra, Inc.
160
In January 2012, BÂRRX Medical, Inc. completed the sale of all of its outstanding shares to Coviden plc in
a transaction for an aggregate consideration of approximately $325.0 million, net of cash and short-term
investments. In connection with the sale, the Company expects to realize a net gain of approximately $2.2-$2.3
million in the first quarter of 2012 and a full repayment of the Company’s loan to BÂRRX Medical.
In January 2012, Hercules received full payment of its $5.0 million term loan with Merrion Pharmaceuticals, Inc.
In December 2011, Hercules entered into an agreement to acquire approximately $9.6 million through a
secondary marketplace in Facebook, Inc., the social networking company for an aggregate of 307,500 shares at
an average price of $31.08 per share. The investments were subject to certain closing conditions and a right of
first refusal by Facebook, Inc. which expired thirty days after the date of investment. At December 31, 2011
these assets were held as Other Assets. In February 2012, Hercules was notified that Facebook Inc. had not
exercised its repurchase right with respect to any of the shares and had executed all documents necessary to fully
transfer the ownership of the shares to Hercules.
161
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
The management of Hercules Technology Growth Capital, Inc. (the “Company”) has established disclosure
controls and procedures to ensure that the information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and that such information is accumulated and communicated to
management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
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
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, approved and monitored by the Company’s
Board of Directors, and implemented by 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, 2011 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, 2011.
162
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has
been audited by Pricewaterhousecoopers LLP, an independent registered public accounting firm who also audited
the Company’s consolidated financial statements, as stated in their report, which is included in this Annual
Report on Form 10K.
Remediation of Previously Disclosed Material Weakness
As described in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2011, the Company identified a material weakness in its internal control over financial reporting. In particular,
management became aware of matters where existing controls did not operate effectively to detect manual input
errors in calculations used to derive the fair value of some investment portfolio holdings as of the measurement
date, thereby impacting reported amounts with respect to investments and net increase (decrease) in unrealized
appreciation on investments. The Company initiated a remediation effort during the second quarter of 2011 to
address the material weakness. During the remediation effort the Company:
•
•
•
added additional reviews of the accuracy of the number of equity security holdings as of the
measurement date;
added additional reviews of manually input data used in the calculations supporting the fair value of
investments as of the measurement date; and
added experienced professionals to augment and upgrade its financial staff to address issues of
timeliness and completeness in financial reporting.
The Company continued its implementation and assessment of the additional controls during the third and
fourth quarters of 2011 and found them to be operating effectively and have concluded as of December 31, 2011,
this material weakness has been remediated.
Changes in Internal Control Over Financial Reporting in 2011
As a result of the remediation of the material weakness described above, there were changes in our internal
control over financial reporting during the three months ended December 31, 2011, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting. There were no other
changes in our internal control over financial reporting during the three months ended December 31, 2011, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
163
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information in response to this Item is incorporated herein by reference to the information provided in our
definitive Proxy Statement for our 2012 Annual Meeting of Shareholders (the “2012 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 2012 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 2012 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 2012 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 Registered
Public Accountants” in our 2012 Proxy Statement and is incorporated in this Annual Report by reference to this
item.
164
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, 2011 and
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Schedule of Investments as of December 31, 2011 . . . . . . . . . . . . . . . . .
Consolidated Schedule of Investments as of December 31, 2010 . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the three years ended December 31,
94
95
116
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
Consolidated Statements of Changes in Net Assets for the three years ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135
Consolidated Statements of Cash Flows for the three years ended December 31,
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136
137
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.
165
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of and for the year ended December 31, 2011
(in thousands)
Schedule 12-14
Portfolio Company
Control Innvestments
MaxVision . . . . . . . . . . . . . . . . . . Senior Debt
Investment(1)
Revolving Line of Credit
Common Stock
Affiliate Investments
E-band Communications, Inc. . . . Senior Debt
Preferred Stock
Total Control and Affliate
Investments . . . . . . . . . . . . . . .
Amount of
Interest
Credited to
Income(2)
As of
December 31,
2010
Fair Value
Gross
Additions(3)
Gross
Reductions(4)
As of
December 31,
2011
Fair Value
$—
889
—
889
14
—
14
$3,759
3,163
—
6,922
—
3,069
3,069
$ —
—
3,500
3,500
356
—
356
$ (3,759)
(2,136)
(3,500)
(9,395)
(356)
(3,069)
(3,425)
$ —
1,027
—
1,027
—
—
—
$903
$9,991
$3,856
$(12,820)
$1,027
(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, 2011.
(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.
166
3. Exhibits
Please note that the agreements included as exhibits to this Form 10-K are included to provide information
regarding their terms and are not intended to provide any other factual or disclosure information about us or the
other parties to the agreements. The agreements contain representations and warranties by each of the parties to
the applicable agreement that have been made solely for the benefit of the other parties to the applicable
agreement and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit
Number
Description
3(a)
3(b)
3(c)
3(d)
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)
Articles of Amendment and Restatement.(8)
Amended and Restated Bylaws.(8)
Articles of Amendment, dated March 6, 2007.(7)
Articles of Amendment, dated April 5, 2011.(22)
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)
10(k)
Form of Custody Agreement between the Company and Union Bank of California.(8)
167
Exhibit
Number
10(l)
10(m)
10(n)
10(o)
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)
Description
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)
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)
10(ee)
Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill,
LLC dated August 25, 2008.(18)
168
Exhibit
Number
10(ff)
10(gg)
10(hh)
10(ii)
10(jj)
10(kk)
10(ll)
Description
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)
Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A.
dated February 10, 2010.(21)
Indenture between Hercules Technology Growth Capital, Inc. and U.S. Bank National Association,
dated as of April 15, 2011.(23)
Form of Note under the Indenture dated as of April 15, 2011.(23)
Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and
Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24)
10(mm)
Amended and Restated Loan and Security Agreement between the Company and Union Bank, N.A.,
dated November 2, 2011.(25)
14
21.2*
23.1*
23.2*
31(a)*
31(b)*
32(a)*
32(b)*
Code of Ethics.(8)
List of Subsidiaries.
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99*
Consent of VentureSource.
(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.
169
(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.
(22) Previously filed as part of a Form 8-K filed with the Commission on April 11, 2011.
(23) Previously filed as part of a Form 8-K filed with the Commission on April 18, 2011.
(24) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 24, 2011.
(25) Previously filed as part of a Form 8-K filed with the Commission on November 11, 2011.
*
Filed herewith
170
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.
SIGNATURES
Date: March 9, 2012
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 9, 2012.
Signature
Title
Date
/S/ MANUEL A. HENRIQUEZ
Manuel A. Henriquez
/S/
JESSICA BARON
Jessica Baron
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Vice President Finance and Interim
Chief Financial Officer (principal
accounting officer)
March 9, 2012
March 9, 2012
/S/ ALLYN C. WOODWARD, JR
Director
March 9, 2012
Allyn C. Woodward, Jr.
/S/
JOSEPH W. CHOW
Joseph W. Chow
Director
March 9, 2012
/S/ ROBERT P. BADAVAS
Director
March 9, 2012
Robert P. Badavas
171
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CORPORATE
INFORMATION
Corporate Headquarters
400 Hamilton Avenue, Suite 310
Palo Alto, California 94301
www.htgc.com
Independent Registered Public Accounting Firm
PricewaterhouseCoopers, LLP
San Francisco, California
Transfer Agent and Registrar
American Stock Transfer and Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
www.amstock.com
The transfer agent maintains shareholder records for
Hercules Technology Growth Capital, Inc. Please contact
it directly for changes of address, transfers of stock,
and replacements of lost certifi cates.
Form 10-K Annual Report
The company is pleased to provide corporate
information without charge upon written request to:
Investor Relations Department
Hercules Technology Growth Capital, Inc.
400 Hamilton Avenue, Suite 310
Palo Alto, California 94301
T (650) 289-3060
F (650) 473-9194
Investor Relations on the Web
For more information related to investing in the company,
please see the Investor Relations tab on our website at
www.htgc.com.
Stock Listing
Common stock traded on the Nasdaq Stock Market
under the symbol: HTGC
Board of Directors
Robert P. Badavas
Director
Joseph W. Chow
Director
Manuel A. Henriquez
Co-Founder, Chairman, and Chief Executive Offi cer
Allyn C. Woodward, Jr.
Director
Management
Manuel A. Henriquez
Co-Founder, Chairman, and Chief Executive Offi cer
Jessica Baron
Chief Financial Offi cer
Scott Bluestein
Chief Credit Offi cer
H. Scott Harvey
Co-Founder and Chief Legal Offi cer
Todd Jaquez-Fissori
Managing Director and Group Head,
Cleantech and Technology
Parag I. Shah
Senior Managing Director and Group Head,
Life Science
The statements contained in this Annual Report that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of
future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking
statements including, without limitation, the risks, uncertainties, including the uncertainties surrounding the current market, and other factors we identify from time to
time in our fi lings with the Securities and Exchange Commission. Although we believe that the assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect.
You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this Annual Report are made as of the date
hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events.
Financing the Growth of Tomorrow’s Companies Today™
PALO ALTO, CA
Headquarters
BOSTON, MA
BOULDER, CO
McLEAN, VA
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
T (650) 289-3060
F (650) 473-9194
31 St. James Avenue, Suite 790
Boston, MA 02116
T (617) 314-9973
F (617) 314-9997
10955 Westmoor Drive, Suite 400
Westminster, CO 80021
T (303) 410-4417
F (866) 212-1031
1600 Tysons Boulevard, 8th Floor
McLean, VA 22102
T (703) 245-3184
F (703) 245-3001
WWW. HTGC.COM