Hercules Capital
HERCULES TECHNOLOGY GROWTH CAPITAL INC (Form: 10-Q, Received: 05/08/2007 17:18:00)
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-00702

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland   743113410
(State or Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)

400 Hamilton Ave., Suite 310

Palo Alto, California 94301

  94301
(Address of Principal Executive Offices)   (Zip Code)

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

 


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 periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

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 and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   ¨             Accelerated Filer   x             Non-Accelerated Filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    YES   ¨     NO   x

On May 8, 2007, there were 23,102,418 shares outstanding of the Registrant’s common stock, $0.001 par value.

 



Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I.

  

FINANCIAL INFORMATION

   2

Item 1.

   Consolidated Financial Statements    2
  

Consolidated Statements of Assets and Liabilities as of March 31, 2007 (unaudited) and December 31, 2006

   2
  

Consolidated Schedule of Investments as of March 31, 2007 (unaudited)

   3
  

Consolidated Schedule of Investments as of December 31, 2006

   12
  

Consolidated Statements of Operations for the three-month periods ended March 31, 2007 and 2006 (unaudited)

   20
  

Consolidated Statements of Changes in Net Assets for the three-month periods ended March 31, 2007 and 2006 (unaudited)

   21
  

Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2007 and 2006 (unaudited)

   22
  

Notes to Consolidated Financial Statements (unaudited)

   23

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    34

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    44

Item 4.

   Controls and Procedures    45

PART II.

  

OTHER INFORMATION

  

Item 1.

   Legal Proceedings    45

Item 1a.

   Risk Factors    45

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    46

Item 3.

   Defaults Upon Senior Securities    46

Item 4.

   Submission of Matters to a Vote of Security Holders    46

Item 5.

   Other Information    46

Item 6.

   Exhibits    47

Signatures

   48

 

1


Table of Contents

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “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. CONSOLIDATED FINANCIAL STATEMENTS

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

    

March 31,

2007
(unaudited)

    December 31,
2006
 

Assets

    

Investments, at value (cost of $338,325,156 and $279,946,465, respectively)

   $ 342,483,418     $ 283,233,751  

Deferred loan origination revenue

     (4,312,934 )     (3,450,971 )

Cash and cash equivalents

     41,488,328       16,404,214  

Interest receivable

     3,976,516       2,906,831  

Other assets

     2,636,706       2,048,384  
                

Total assets

     386,272,034       301,142,209  

Liabilities

    

Accounts payable

     1,115,721       540,376  

Accrued liabilities

     2,545,573       4,189,011  

Short-term loans payable

     113,000,000       41,000,000  
                

Total liabilities

     116,661,294       45,729,387  
                

Net assets

   $ 269,610,740     $ 255,412,822  
                

Net assets consist of:

    

Par value

   $ 23,091     $ 21,927  

Capital in excess of par value

     271,996,278       257,234,729  

Unrealized appreciation on investments

     3,676,707       2,860,654  

Accumulated realized gains (losses) on investments

     (1,682,312 )     (1,972,014 )

Distributions in excess of investment income

     (4,403,024 )     (2,732,474 )
                

Total net assets

   $ 269,610,740     $ 255,412,822  
                

Shares of common stock outstanding ($0.001 par value, 60,000,000 authorized)

     23,090,751       21,927,034  
                

Net asset value per share

   $ 11.68     $ 11.65  
                

See notes to consolidated financial statements (unaudited).

 

2


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(unaudited)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Acceleron Pharmaceuticals, Inc. (1.57%)* (4)

  Drug Discovery   Senior Debt      
   

Matures June 2009

Interest rate 10.25%

  $ 3,868,591   $ 3,793,731   $ 3,793,731
    Preferred Stock Warrants       69,106     413,349
    Preferred Stock Warrants       34,996     32,709

Acceleron Pharmaceuticals, Inc. (0.41%)

    Preferred Stock       1,000,000     1,111,112
                 

Total Acceleron Pharmaceuticals, Inc.

    4,897,833     5,350,901

Aveo Pharmaceuticals, Inc. (5.57%) (4)

  Drug Discovery   Senior Debt      
   

Matures September 2009

Interest rate 10.75%

  $ 15,000,000     14,863,247     14,863,247
    Preferred Stock Warrants       144,056     107,840
    Preferred Stock Warrants       46,288     41,439
                 

Total Aveo Pharmaceuticals, Inc.

    15,053,591     15,012,526

Elixir Pharmaceuticals, Inc. (3.71%) (4)

  Drug Discovery   Senior Debt      
   

Matures June 2010

Interest rate Prime + 2.45%

  $ 10,000,000     9,868,289     9,868,289
    Preferred Stock Warrants       149,510     139,244
                 

Total Elixir Pharmaceuticals, Inc.

    10,017,799     10,007,533

EpiCept Corporation (3.75%) (4)

  Drug Discovery   Senior Debt      
   

Matures August 2009

Interest rate 11.70%

  $ 10,000,000     9,377,181     9,377,181
    Common Stock Warrants       794,633     740,783
                 

Total EpiCept Corporation

    10,171,814     10,117,964

Memory Pharmaceuticals Corp. (2.13%)

  Drug Discovery   Senior Debt      
   

Matures February

2011 Interest rate 11.45%

  $ 6,000,000     4,966,633     4,966,633
    Common Stock Warrants       1,057,399     786,899
                 

Total Memory Pharmaceuticals Corp.

    6,024,032     5,753,532

Merrimack Pharmaceuticals, Inc. (2.28%) (4)

  Drug Discovery   Convertible Senior Debt      
   

Matures October 2008

Interest rate 11.15%

  $ 5,514,385     5,449,928     5,736,928
    Preferred Stock Warrants       155,456     398,921
                 

Total Merrimack Pharmaceuticals, Inc.

    5,605,384     6,135,849

Paratek Pharmaceuticals, Inc. (2.12%) (4)

  Drug Discovery   Senior Debt      
   

Matures June 2008

Interest rate 11.10%

  $ 5,675,635     5,622,203     5,622,203
    Preferred Stock Warrants       137,396     101,151
                 

Total Paratek Pharmaceuticals, Inc.

    5,759,599     5,723,354

Portola Pharmaceuticals, Inc. (5.57%) (4)

  Drug Discovery   Senior Debt      
   

Matures September 2010

Interest rate Prime + 1.75%

  $ 15,000,000     14,865,809     14,865,809
    Preferred Stock Warrants       151,557     139,614
                 

Total Portola Pharmaceuticals, Inc.

    15,017,366     15,005,423

 

3


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Sirtris Pharmaceuticals, Inc. (3.80%) (4)

  Drug Discovery   Senior Debt      
   

Matures April 2011

Interest rate 10.60%

  $ 10,000,000     9,928,937     9,928,937
    Preferred Stock Warrants       88,829     316,536

Sirtris Pharmaceuticals, Inc. (0.19%)

    Preferred Stock       500,000     500,000
                 

Total Sirtris Pharmaceuticals, Inc.

    10,517,766     10,745,473
                 

Total Drug Discovery (31.10%)

    83,065,184     83,852,555
                 

IKANO Communications, Inc. (8.38%) (4)

  Communications &   Senior Debt      
  Networking  

Matures March 2011

Interest rate 11.00%

  $ 22,500,000   $ 22,500,000   $ 22,500,000
    Preferred Stock Warrants       45,460     30,260
    Preferred Stock Warrants       72,344     50,900
                 

Total IKANO C  3 / 4 ommunications, Inc.

    22,617,804     22,581,160

Interwise, Inc. (0.72%) (4)

  Communications &   Senior Debt      
  Networking  

Matures August 2008

Interest rate 17.50%

  $ 1,894,705     1,701,456     1,701,456
    Preferred Stock Warrants       268,401     237,599
                 

Total Interwise, Inc.

    1,969,857     1,939,055

Pathfire, Inc. (1.74%) (4)

  Communications &   Senior Debt      
  Networking  

Matures December 2008

Interest rate Prime + 3.65%

  $ 4,713,221     4,678,068     4,678,068
    Preferred Stock Warrants       63,276     13,390
                 

Total Pathfire, Inc.

    4,741,344     4,691,458

Ping Identity Corporation (0.92%) (4)

  Communications &   Senior Debt      
  Networking  

Matures June 2009

Interest rate 11.50%

  $ 2,343,556     2,309,476     2,309,476
    Preferred Stock Warrants       51,801     157,848
                 

Total Ping Identity Corporation

    2,361,277     2,467,324

Rivulet Communications, Inc. (1.30%) (4)

  Communications &   Senior Debt      
  Networking  

Matures September 2009

Interest rate 10.60%

  $ 3,500,000     3,463,969     3,463,969
    Preferred Stock Warrants       50,710     37,876

Rivulet Communications, Inc. (0.09%)

    Preferred Stock       250,000     250,000
                 

Total Rivulet Communications, Inc.

    3,764,679     3,751,845

Simpler Networks Corp. (1.98%) (4)

  Communications &   Senior Debt      
  Networking  

Matures July 2009

Interest rate 11.75%

  $ 4,707,907     4,606,291     4,606,291
    Preferred Stock Warrants       160,241     733,919

Simpler Networks Corp. (0.19%)

    Preferred Stock       500,000     500,000
                 

Total Simpler Networks Corp.

    5,266,532     5,840,210

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Wireless Channels, Inc. (4.63%)

  Communications &   Senior Debt      
  Networking  

Matures April 2010

Interest rate 9.25%

  $ 2,500,000     2,348,971     2,348,971
    Subordinated Debt      
   

Matures April 2010

Interest rate Prime + 4.25%

  $ 10,000,000     10,000,000     10,000,000
    Preferred Stock Warrants       155,139     158,872
                 

Total Wireless Channels, Inc.

    12,504,110     12,507,843
                 

Total Communications & Networking (19.95%)

    53,225,603     53,778,895
                 

Atrenta, Inc. (1.82%) (4)

  Software   Senior Debt      
   

Matures June 2009

Interest rate 11.50%

  $ 4,707,075     4,643,687     4,643,687
    Preferred Stock Warrants       102,396     194,647
    Preferred Stock Warrants       33,760     63,869

Atrenta, Inc. (0.09%)

    Preferred Stock       250,000     250,000
                 

Total Atrenta, Inc.

    5,029,843     5,152,203

Blurb, Inc. (0.09%)

  Software   Senior Debt      
   

Matures December 2009

Interest rate 9.55%

  $ 250,000   $ 238,530   $ 238,530
    Preferred Stock Warrants       12,904     12,034
                 

Total Blurb, Inc.

    251,434     250,564

Compete, Inc. (1.31%) (4)

  Software   Senior Debt      
   

Matures March 2009

Interest rate Prime + 3.50%

  $ 3,530,663     3,490,402     3,490,402
    Preferred Stock Warrants       62,067     46,064
                 

Total Compete, Inc.

    3,552,469     3,536,466

Forescout Technologies, Inc. (1.11%) (4)

  Software   Senior Debt      
   

Matures August 2009

Interest rate 11.15%

  $ 2,500,000     2,455,217     2,455,217
    Revolving Line of Credit      
   

Matures August 2007

Interest rate Prime + 1.49%

  $ 500,000     500,000     500,000
    Preferred Stock Warrants       55,593     48,020
                 

Total Forescout Technologies, Inc.

    3,010,810     3,003,237

GameLogic, Inc. (1.11%) (4)

  Software   Senior Debt      
   

Matures December 2009

Interest rate Prime + 4.125%

  $ 3,000,000     2,961,173     2,961,173
    Preferred Stock Warrants       52,604     39,291
                 

Total GameLogic, Inc.

    3,013,777     3,000,464

Gomez, Inc. (0.35%) (4)

  Software   Senior Debt      
   

Matures December 2007

Interest rate 12.25%

  $ 946,303     938,525     938,525
    Preferred Stock Warrants       35,000     14,466
                 

Total Gomez, Inc.

    973,525     952,991

HighRoads, Inc. (0.65%) (4)

  Software   Senior Debt      
   

Matures February 2009

Interest rate 11.65%

  $ 1,751,086     1,723,912     1,723,912
    Preferred Stock Warrants       44,466     33,159
                 

Total HighRoads, Inc.

    1,768,378     1,757,071

 

5


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Intelliden, Inc. (1.11%)

  Software   Senior Debt      
   

Matures February 2010

Interest rate 13.20%

  $ 3,000,000     2,985,453     2,985,453
    Preferred Stock Warrants       17,542     15,796
                 

Total Intelliden, Inc.

    3,002,995     3,001,249

Inxight Software, Inc. (1.39%) (4)

  Software   Senior Debt      
   

Matures February 2008

Interest rate 10.00%

  $ 3,747,308     3,729,819     3,729,819
    Preferred Stock Warrants       55,963     24,430
                 

Total Inxight Software, Inc.

    3,785,782     3,754,249

Oatsystems, Inc. (2.17%) (4)

  Software   Senior Debt      
   

Matures September 2009

Interest rate 11.00%

  $ 5,826,735     5,771,694     5,771,694
    Preferred Stock Warrants       67,484     50,437
                 

Total Oatsystems, Inc.

    5,839,178     5,822,131

Proficiency, Inc. (1.51%) (5)

  Software   Senior Debt      
   

Matures July 2008

Interest rate 12.00%

  $ 4,000,000     3,960,318     3,960,318
    Preferred Stock Warrants       96,370     106,725
                 

Total Proficiency, Inc.

    4,056,688     4,067,043

PSS Systems, Inc. (0.13%)

  Software   Senior Debt      
   

Matures March 2010

Interest rate 10.74%

  $ 350,000   $ 300,217   $ 300,217
    Preferred Stock Warrants       51,205     53,257
                 

Total PSS Systems, Inc.

    351,422     353,474

Savvion, Inc. (1.84%) (4)

  Software   Senior Debt      
   

Matures March 2009

Interest rate Prime + 3.45%

  $ 1,899,414     1,899,414     1,899,414
    Revolving Line of Credit      
   

Matures March 2007

Interest rate Prime + 2.00%

  $ 3,000,000     3,000,000     3,000,000
    Preferred Stock Warrants       52,135     39,070
                 

Total Savvion, Inc.

    4,951,549     4,938,484

Sportvision, Inc. (0.01%)

  Software   Preferred Stock Warrants       39,339     26,992
                 

Total Sportvision, Inc.

    39,339     26,992

Talisma Corp. (0.55%) (4)

  Software   Subordinated Debt      
   

Matures December 2007

Interest rate 11.25%

  $ 1,461,961     1,451,072     1,451,072
    Preferred Stock Warrants       49,000     19,430
                 

Total Talisma Corp.

    1,500,072     1,470,502
                 

Total Software (15.24%)

    41,127,261     41,087,120
                 

Agami Systems, Inc. (2.60%) (4)

  Electronics &   Senior Debt      
  Computer Hardware  

Matures August 2009

Interest rate 11.00%

  $ 7,000,000     6,931,616     6,931,616
    Preferred Stock Warrants       85,601     74,782
                 

Total Agami Systems, Inc.

    7,017,217     7,006,398

 

6


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Cornice, Inc. (0.99%) (4)

  Electronics &   Senior Debt      
  Computer Hardware  

Matures November 2008

Interest rate Prime + 4.50%

  $ 2,736,819     2,680,376     2,680,376
    Preferred Stock Warrants       101,597     —  
    Preferred Stock Warrants       35,353     —  
    Preferred Stock Warrants       135,403     —  
                 

Total Cornice, Inc.

    2,952,729     2,680,376

Luminus Devices, Inc. (5.41%) (4)

  Electronics &   Senior Debt      
  Computer Hardware  

Matures August 2009

Interest rate 12.50%

  $ 14,558,264     14,346,470     14,346,470
    Preferred Stock Warrants       183,290     141,418
    Preferred Stock Warrants       83,529     79,349
                 

Total Luminus Devices, Inc.

    14,613,289     14,567,237

NeoScale Systems, Inc. (1.11%)

  Electronics &   Senior Debt      
  Computer Hardware  

Matures October 2009

Interest rate 10.75%

  $ 3,000,000     2,980,339     2,980,339
    Preferred Stock Warrants       23,593     21,329
                 

Total NeoScale Systems, Inc.

    3,003,932     3,001,668

Sling Media, Inc. (0.53%)

  Electronics &   Preferred Stock Warrants       38,968     933,910
  Computer Hardware   Preferred Stock       500,000     500,000
                 

Total Sling Media, Inc.

    538,968     1,433,910

ViDeOnline Communications, Inc. (0.11%) (4)

  Electronics & Computer Hardware   Preferred Stock Warrants     $ —     $ 296,474
                 

Total ViDeOnline Communications, Inc.

    —       296,474
                 

Total Electronics & Computer Hardware (10.75%)

    28,126,135     28,986,063
                 

Quatrx Pharmaceuticals Company (6.55%) (4)

  Specialty   Senior Debt      
  Pharmaceuticals  

Matures January 2010

Interest rate Prime + 3.00%

  $ 17,635,698     17,484,205     17,484,205
    Preferred Stock Warrants       220,354     167,782
                 

Total Quatrx Pharmaceuticals Company

    17,704,559     17,651,987

Aegerion Pharmaceuticals, Inc. (3.71%)

  Specialty   Senior Debt      
  Pharmaceuticals  

Matures August 2010

Interest rate Prime + 2.50%

  $ 10,000,000     9,931,806     9,931,806
    Preferred Stock Warrants       69,207     70,795
                 

Total Aegerion Pharmaceuticals, Inc.

    10,001,013     10,002,601
                 

Total Specialty Pharmaceuticals (10.26%)

    27,705,572     27,654,588
                 

BabyUniverse, Inc. (1.88%) (4)

  Consumer & Business   Senior Debt      
  Products  

Matures July 2009

Interest rate Prime + 2.35%

  $ 5,000,000     4,756,082     4,756,082
    Commmon Stock Warrants       325,224     308,431
                 

Total BabyUniverse, Inc.

    5,081,306     5,064,513

Market Force Information, Inc. (0.66%) (4)

  Consumer & Business   Senior Debt      
  Products  

Matures May 2009

Interest rate 10.45%

  $ 1,660,375     1,644,701     1,644,701
    Preferred Stock Warrants       23,823     143,058

Market Force Information, Inc. (0.19%)

    Preferred Stock       500,000     500,000
                 

Total Market Force Information, Inc.

    2,168,524     2,287,759

 

7


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

Wageworks, Inc. (5.13%) (4)

  Consumer & Business Products   Senior Debt      
   

Matures November 2008

Interest rate Prime + 4.00%

  $ 12,811,228     12,697,244     12,697,244
    Preferred Stock Warrants       251,964     1,123,874

Wageworks, Inc. (0.09%)

    Preferred Stock       249,995     249,995
                 

Total Wageworks, Inc.

    13,199,203     14,071,113
                 

Total Consumer & Business Products (7.95%)

    20,449,033     21,423,385
                 

Ageia Technologies, Inc. (2.44%) (4)

  Semiconductors   Senior Debt      
   

Matures August 2008

Interest rate 10.25%

  $ 6,519,688     6,475,603     6,475,603
    Convertible Debt       43,316     43,316
    Preferred Stock Warrants       99,190     67,663

Ageia Technologies, Inc. (0.19%)

    Preferred Stock       500,000     500,000
                 

Total Ageia Technologies

    7,118,109     7,086,582

Cradle Technologies (0.02%)

  Semiconductors   Preferred Stock Warrants       79,150     59,303
                 

Total Cradle Technologies

    79,150     59,303

iWatt Inc. (1.50%) (4)

  Semiconductors   Senior Debt      
   

Matures September 2009

Interest rate Prime + 2.75%

  $ 2,000,000     1,963,453     1,963,453
    Revolving Line of Credit      
   

Matures September 2007

Interest rate Prime + 1.75%

  $ 2,035,000     2,035,000     2,035,000
    Preferred Stock Warrants       45,684     39,180
                 

Total iWatt Inc.

    4,044,137     4,037,633

NEXX Systems, Inc. (2.60%) (4)

  Semiconductors   Senior Debt      
   

Matures February 2010

Interest rate Prime + 2.75%

  $ 5,000,000   $ 4,925,409   $ 4,925,409
    Revolving Line of Credit      
   

Matures December 2009

Interest rate Prime + 1.75%

  $ 2,000,000     2,000,000     2,000,000
    Preferred Stock Warrants       83,116     79,800
                 

Total NEXX Systems, Inc.

    7,008,525     7,005,209
                 

Total Semiconductors (6.75%)

    18,249,921     18,188,727
                 

Labopharm USA, Inc. (2.09%) (4)(5)

  Drug Delivery   Senior Debt      
   

Matures July 2008

Interest rate 11.95%

  $ 5,701,506     5,638,468     5,638,468
                 

Total Labopharm USA, Inc.

    5,638,468     5,638,468

TransOral Pharmaceuticals, Inc. (3.60%) (4)

  Drug Delivery   Senior Debt      
   

Matures October 2009

Interest rate 10.69%

  $ 9,470,464     9,399,755     9,399,755
    Preferred Stock Warrants       35,630     122,134
    Preferred Stock Warrants       51,067     191,549

TrasnOral Pharmaceuticals, Inc. (0.19%)

    Preferred Stock       500,000     500,000
                 

Total TransOral Pharmaceuticals, Inc.

    9,986,452     10,213,438
                 

Total Drug Delivery (5.88%)

    15,624,920     15,851,906
                 

 

8


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost ( 2)   Value (3)

BARRX Medical, Inc. (0.56%)

  Therapeutic        
    Preferred Stock       1,500,000     1,500,000
                 

Total BARRX Medical, Inc.

    1,500,000     1,500,000

Gynesonics, Inc. (0.76%) (4)

  Therapeutic   Senior Debt      
   

Matures October 2009

Interest rate 9.50%

  $ 2,000,000     1,987,462     1,987,462
    Preferred Stock Warrants       17,552     53,842

Gynesonics, Inc. (0.09%)

    Preferred Stock       250,000     250,000
                 

Total Gynesonics, Inc.

    2,255,014     2,291,304

Novasys Medical, Inc. (2.96%) (4)

  Therapeutic   Senior Debt      
   

Matures January 2010

Interest rate 9.70%

  $ 8,000,000     8,000,000     8,000,000
                 

Total Novasys Medical, Inc.

    8,000,000     8,000,000

Power Medical Interventions, Inc. (0.01%)

  Therapeutic        
    Common Stock Warrants       20,687     28,786
                 

Total Power Medical Interventions, Inc.

    20,687     28,786
                 

Total Therapeutic (4.38%)

    11,775,701     11,820,090
                 

Hedgestreet, Inc. (1.41%) (4)

  Internet Consumer &   Senior Debt      
  Business Services  

Matures March 2009

Interest rate 11.30%

  $ 3,802,555     3,769,878     3,769,878
    Preferred Stock Warrants       54,956     41,866
                 

Total Hedgestreet, Inc.

    3,824,834     3,811,744

Invoke Solutions, Inc. (0.82%) (4)

  Internet Consumer &   Senior Debt      
  Business Services  

Matures December 2008

Interest rate 11.25%

  $ 2,187,234     2,162,886     2,162,886
    Preferred Stock Warrants       43,826     33,322
                 

Total Total Invoke Solutions, Inc.

    2,206,712     2,196,208

RazorGator Interactive Group, Inc. (1.11%) (4)

  Internet Consumer &   Senior Debt      
  Business Services  

Matures January 2008

Interest rate 9.95%

  $ 2,396,133   $ 2,392,871   $ 2,392,871
    Preferred Stock Warrants       13,050     561,742
    Preferred Stock Warrants       28,478     26,161

RazorGator Interactive Group, Inc. (0.63%)

    Preferred Stock       1,000,000     1,708,178
                 

Total RazorGator Interactive Group, Inc.

    3,434,399     4,688,952
                 

Total Internet Consumer & Business Services (3.97%)

    9,465,945     10,696,904
                 

Lilliputian Systems, Inc. (3.15%) (4)

  Energy   Senior Debt   $ 8,500,000    
   

Matures March 2010

Interest rate 9.75%

      8,466,078     8,466,078
    Preferred Stock Warrants       48,460     36,946
                 

Total Lilliputian Systems, Inc.

    8,514,538     8,503,024
                 

Total Energy (3.15%)

    8,514,538     8,503,024
                 

 

9


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2007

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Active Response Group, Inc. (2.41%)

  Information Services   Senior Debt   $ 6,500,000    
   

Matures March 2012

Interest rate Libor + 6.55%

      6,454,684     6,454,684
    Common Stock Warrants       46,084     47,178
                 

Total Active Response Group, Inc.

    6,500,768     6,501,862

Buzznet, Inc. (0.09%)

  Information Services   Senior Debt      
   

Matures March 2010

Interest rate 10.25%

  $ 250,000     241,626     241,626
    Preferred Stock Warrants       8,613     8,843
                 

Total Buzznet, Inc.

    250,239     250,469

Solutionary, Inc. (0.04%)

  Information Services   Preferred Stock Warrants       93,827     96,055
                 

Total Solutionary, Inc.

    93,827     96,055

Wallop Technologies, Inc. (0.09%)

  Information Services   Senior Debt      
   

Matures March 2010

Interest rate 10.00%

  $ 237,207     229,942     229,942
    Preferred Stock Warrants       7,473     7,650
                 

Total Wallop Technologies, Inc.

    237,415     237,592
                 

Total Information Services (2.63%)

    7,082,249     7,085,978
                 

Optiscan Biomedical, Corp. (0.31%) (4)

  Diagnostic   Senior Debt      
   

Matures March 2008

Interest rate 15.00%

  $ 815,291     784,135     784,135
    Preferred Stock Warrants       80,486     59,548

Optiscan Biomedical, Corp. (0.37%)

    Preferred Stock       1,000,000     1,000,000
                 

Total Optiscan Biomedical, Corp.

    1,864,621     1,843,683

Xillix Technologies Corp. (1.41%) (4)(5)

  Diagnostic   Senior Debt      
   

Matures December 2008

Interest rate 12.40%

  $ 3,975,834     3,801,585     3,801,585
    Common Stock Warrants       313,108     -
                 

Total Xillix Technologies Corp.

    4,114,693     3,801,585
                 

Total Diagnostic (2.09%)

    5,979,314     5,645,268
                 

Guava Technologies, Inc. (1.80%) (4)

  Biotechnology Tools   Senior Debt      
   

Matures July 2009

Interest rate Prime + 3.25%

  $ 4,847,134   $ 4,781,887   $ 4,781,887
    Preferred Stock Warrants       105,399     78,193
                 

Total Guava Technologies, Inc.

    4,887,286     4,860,080

NuGEN Technologies, Inc. (0.02%)

  Biotechnology Tools   Preferred Stock Warrants       44,837     45,902
                 

Total NuGEN Technologies, Inc.

    44,837     45,902
                 

Total Biotechnology Tools (1.82%)

    4,932,123     4,905,982
                 

Waterfront Media Inc. (1.11%)

  Media/Content/ Info   Senior Debt      
   

Matures December 2010

Interest rate Prime + 3.00%

  $ 1,000,000     941,994     941,994
    Revolving Line of Credit      
   

Matures March 2008

Interest rate Prime + 1.25%

  $ 2,000,000     2,000,000     2,000,000
    Preferred Stock Warrants       59,663     60,939
                 

Total Waterfront Media Inc.

    3,001,657     3,002,933
                 

Total Media/Content/Info (1.11%)

    3,001,657     3,002,933
                 

Total Investments (127.03%)

  $ 338,325,156   $ 342,483,418
                 

 

10


Table of Contents

 * 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 appreciation totaled $5,745,612, $1,587,350 and $4,158,262, respectively.
(3) Except for warrants in four publicly traded companies, all investments are restricted at March 31, 2007 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt and warrant investments of this portfolio company have been pledged as collateral under the Citigroup Facility. Citigroup has an equity participation right on loans collateralized under the Citigroup Facility. The value of their participation right on unrealized gains in the related equity investments was approximately $432,000 at March 31, 2007 and is included in accrued liabilities and reduces the unrealized gain recognized by the Company at March 31, 2007.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) All investments are less than 5% owned.

See notes to consolidated financial statements (unaudited).

 

11


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Acceleron Pharmaceuticals, Inc. (1.74%)* (4)

 

Biopharmaceuticals

 

Senior Debt
Matures June 2009
Interest rate 10.25%

  $ 4,069,607   $ 3,987,624   $ 3,987,624
   

Preferred Stock Warrants

      69,106     417,115
   

Preferred Stock Warrants

      34,996     34,393

Acceleron Pharmaceuticals, Inc. (0.44%)

   

Preferred Stock

      1,000,000     1,111,112
                 

Total Acceleron Pharmaceuticals, Inc.

    5,091,726     5,550,244

Aveo Pharmaceuticals, Inc. (5.88%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures September 2009
Interest rate 10.75%

  $ 15,000,000     14,849,099     14,849,099
   

Preferred Stock Warrants

      144,056     115,212
   

Preferred Stock Warrants

      46,288     43,771
                 

Total Aveo Pharmaceuticals, Inc.

    15,039,443     15,008,082

Elixir Pharmaceuticals, Inc. (3.92%)

 

Biopharmaceuticals

 

Senior Debt
Matures June 2010
Interest rate Prime + 2.45%

  $ 10,000,000     9,857,610     9,857,610
   

Preferred Stock Warrants

      74,755     73,334
   

Preferred Stock Warrants

      74,755     73,334
                 

Total Elixir Pharmaceuticals, Inc.

    10,007,120     10,004,278

EpiCept Corporation (3.84%)

 

Biopharmaceuticals

 

Senior Debt
Matures August 2009
Interest rate 11.70%

  $ 10,000,000     9,312,750     9,312,750
   

Common Stock Warrants

      794,633     507,592
                 

Total EpiCept Corporation

    10,107,383     9,820,342

Guava Technologies, Inc. (2.26%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures July 2009
Interest rate Prime + 3.25%

  $ 5,266,485     5,193,710     5,193,710
   

Revolving Line of Credit
Matures December 2007
Interest rate Prime + 2.00%

  $ 500,000     500,000     500,000
   

Preferred Stock Warrants

      105,399     83,940
                 

Total Guava Technologies, Inc.

    5,799,109     5,777,650

Labopharm USA, Inc. (2.58%) (4)(5)

 

Biopharmaceuticals

 

Senior Debt
Matures July 2008
Interest rate 11.95%

  $ 6,675,417     6,598,870     6,598,870
                 

Total Labopharm USA, Inc.

    6,598,870     6,598,870

Merrimack Pharmaceuticals, Inc. (2.61%) (4)

 

Biopharmaceuticals

 

Convertible Senior Debt
Matures October 2008
Interest rate 11.15%

  $ 6,043,382     5,967,550     6,254,550
   

Preferred Stock Warrants

      155,456     409,159
                 

Total Merrimack Pharmaceuticals, Inc.

    6,123,006     6,663,709

Paratek Pharmaceuticals, Inc. (2.62%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures June 2008
Interest rate 11.10%

  $ 6,651,586     6,586,705     6,586,705
   

Preferred Stock Warrants

      137,396     110,553
                 

Total Paratek Pharmaceuticals, Inc.

    6,724,101     6,697,258

 

12


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Portola Pharmaceuticals, Inc. (4.41%) .

 

Biopharmaceuticals

 

Senior Debt
Matures September 2010
Interest rate Prime + 1.75%

  $ 11,250,000   $ 11,145,804   $ 11,145,804
   

Preferred Stock Warrants

      113,668     107,489
                 

Total Portola Pharmaceuticals, Inc

    11,259,472     11,253,293

Quatrx Pharmaceuticals Company (7.05%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures January 2010
Interest rate Prime + 3.00%

  $ 18,000,000     17,834,735     17,834,735
   

Preferred Stock Warrants

      220,354     179,708
                 

Total Quatrx Pharmaceuticals Company

    18,055,089     18,014,443

Sirtris Pharmaceuticals, Inc. (3.91%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures April 2011
Interest rate 10.60%

  $ 10,000,000     9,924,495     9,924,495
   

Preferred Stock Warrants

      88,829     70,986
                 

Total Sirtris Pharmaceuticals, Inc.

    10,013,324     9,995,481

TransOral Pharmaceuticals, Inc. (3.92%) (4)

 

Biopharmaceuticals

 

Senior Debt
Matures October 2009
Interest rate 10.69%

  $ 10,000,000     9,921,976     9,921,976
   

Preferred Stock Warrants

Preferred Stock Warrants

     
 
35,630
51,067
   
 
28,265
50,548
                 

Total TransOral Pharmaceuticals, Inc.

    10,008,673     10,000,789
                 

Total Biopharmaceuticals (45.18%)

    114,827,316     115,384,439
                 

Atrenta, Inc. (2.03%) (4)

 

Software

 

Senior Debt
Matures June 2009
Interest rate 11.50%

  $ 5,000,000     4,929,298     4,929,298

 

Atrenta, Inc. (0.10%)

   

Preferred Stock Warrants

Preferred Stock Warrants

Preferred Stock

     
 
 
102,396
33,760
250,000
   
 
 
200,285
65,719
250,000
                 

Total Atrenta, Inc.

    5,315,454     5,445,302

Blurb, Inc. (0.10%)

 

Software

 

Senior Debt
Matures December 2009
Interest rate 9.55%

  $ 250,000     237,454     237,454
   

Preferred Stock Warrants

      12,904     12,653
                 

Total Blurb, Inc.

    250,358     250,107

Compete, Inc. (1.52%) (4)

 

Software

 

Senior Debt
Matures March 2009
Interest rate Prime + 3.50%

  $ 3,884,338     3,839,045     3,839,045
   

Preferred Stock Warrants

      62,067     49,247
                 

Total Compete, Inc.

    3,901,112     3,888,292

Forescout Technologies, Inc. (0.78%)

 

Software

 

Senior Debt
Matures August 2009
Interest rate 11.15%

  $ 2,000,000     1,950,584     1,950,584
   

Preferred Stock Warrants

      55,593     50,800
                 

Total Forescout Technologies, Inc.

    2,006,177     2,001,384

 

13


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

GameLogic, Inc. (1.17%) (4)

 

Software

 

Senior Debt
Matures December 2009
Interest rate Prime + 4.125%

  $ 3,000,000   $ 2,957,416   $ 2,957,416
   

Preferred Stock Warrants

      52,604     41,860
                 

Total GameLogic, Inc.

    3,010,020     2,999,276

Gomez, Inc. (0.48%) (4)

 

Software

 

Senior Debt
Matures December 2007
Interest rate 12.25%

  $ 1,212,506     1,201,811     1,201,811
   

Preferred Stock Warrants

      35,000     18,832
                 

Total Gomez, Inc.

    1,236,811     1,220,643

HighRoads, Inc. (0.77%) (4)

 

Software

 

Senior Debt
Matures February 2009
Interest rate 11.65%

  $ 1,954,723     1,923,844     1,923,844
   

Preferred Stock Warrants

      44,466     35,484
                 

Total HighRoads, Inc.

    1,968,310     1,959,328

Intelliden, Inc. (1.17%)

 

Software

 

Senior Debt
Matures February 2010
Interest rate 13.20%

  $ 3,000,000     2,984,169     2,984,169
   

Preferred Stock Warrants

      17,542     16,688
                 

Total Intelliden, Inc.

    3,001,711     3,000,857

Inxight Software, Inc. (1.60%) (4)

 

Software

 

Senior Debt
Matures February 2008
Interest rate 10.00%

  $ 4,073,794     4,051,059     4,051,059
   

Preferred Stock Warrants

      55,963     29,800
                 

Total Inxight Software, Inc.

          4,107,022     4,080,859

Oatsystems, Inc. (2.36%) (4)

 

Software

 

Senior Debt
Matures September 2009
Interest rate 11.00%

  $ 6,000,000     5,973,007     5,973,007
   

Preferred Stock Warrants

      33,742     26,881
                 

Total Oatsystems, Inc.

    6,006,749     5,999,888

Proficiency, Inc. (1.43%) (5)

 

Software

 

Senior Debt
Matures July 2008
Interest rate 12.00%

  $ 4,000,000     3,951,815     3,548,185
   

Preferred Stock Warrants

      96,370     115,977
                 

Total Proficiency, Inc.

    4,048,185     3,664,162

Savvion, Inc. (1.58%) (4)

 

Software

 

Senior Debt
Matures March 2009
Interest rate Prime + 3.45%

  $ 1,000,000     1,000,000     1,000,000
   

Revolving Line of Credit
Matures March 2007
Interest rate Prime + 2.00%

  $ 3,000,000     2,991,311     2,991,311
   

Preferred Stock Warrants

      52,135     41,743
                 

Total Savvion, Inc.

    4,043,446     4,033,054

Sportvision, Inc. (0.01%)

 

Software

 

Preferred Stock Warrants

      39,339     29,667
                 

Total Sportvision, Inc.

    39,339     29,667

 

14


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Talisma Corp. (0.74%) (4)

 

Software

 

Subordinated Debt
Matures December 2007
Interest rate 11.25%

  $ 1,873,774   $ 1,858,802   $ 1,858,802
   

Preferred Stock Warrants

      49,000     25,259
                 

Total Talisma Corp.

    1,907,802     1,884,061
                 

Total Software (15.84%)

    40,842,496     40,456,880
                 

BabyUniverse, Inc. (1.90%) (4)

 

Consumer & Business Products

 

Senior Debt
Matures July 2009
Interest rate Prime + 2.35%

  $ 5,000,000     4,728,980     4,728,980
   

Common Stock Warrants

      325,224     146,299
                 

Total BabyUniverse, Inc.

    5,054,204     4,875,279

Market Force Information, Inc. (0.70%) (4)

 

Consumer & Business Products

 

Senior Debt
Matures May 2009
Interest rate 10.45%

  $ 1,777,064     1,759,510     1,759,510
   

Preferred Stock Warrants

      23,823     19,197
                 

Total Market Force Information, Inc.

    1,783,333     1,778,707

Wageworks, Inc. (5.89%) (4)

 

Consumer & Business Products

 

Senior Debt
Matures November 2008
Interest rate Prime + 4.00%

  $ 14,036,422     13,904,441     13,904,441
   

Preferred Stock Warrants

      251,964     1,140,998

Wageworks, Inc. (0.10%)

   

Preferred Stock

      249,995     249,995
                 

Total Wageworks, Inc.

    14,406,400     15,295,434
                 

Total Consumer & Business Products (8.59%)

    21,243,937     21,949,420
                 

IKANO Communications, Inc. (0.03%)

 

Communications

 

Preferred Stock Warrants

      45,460     33,391
 

& Networking

 

Preferred Stock Warrants

      72,344     55,530
                 

Total IKANO Communications, Inc.

    117,804     88,921

Interwise, Inc. (0.83%) (4)

 

Communications & Networking

 

Senior Debt
Matures August 2008
Interest rate 17.50%

  $ 2,094,999     1,869,542     1,869,542
   

Preferred Stock Warrants

      268,401     244,653
                 

Total Interwise, Inc.

    2,137,943     2,114,195

Pathfire, Inc. (1.84%) (4)

 

Communications & Networking

 

Senior Debt
Matures December 2008
Interest rate Prime + 3.65%

  $ 4,713,221     4,672,795     4,672,795
   

Preferred Stock Warrants

      63,276     16,918
                 

Total Pathfire, Inc.

    4,736,071     4,689,713

Ping Identity Corporation (1.05%) (4)

 

Communications & Networking

 

Senior Debt
Matures June 2009
Interest rate 11.50%

  $ 2,569,123     2,530,953     2,530,953
   

Preferred Stock Warrants

      51,801     160,500
                 

Total Ping Identity Corporation

    2,582,754     2,691,453

 

15


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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Rivulet Communications, Inc. (1.37%) (4)

 

Communications & Networking

 

Senior Debt
Matures September 2009
Interest rate 10.60%

  $ 3,500,000   $ 3,459,966   $ 3,459,966
   

Preferred Stock Warrants

      50,710     40,352

Rivulet Communications, Inc. (0.10%)

   

Preferred Stock

      250,000     250,000
                 

Total Rivulet Communications, Inc.

    3,760,676     3,750,318

Simpler Networks Corp. (2.20%) (4)

 

Communications & Networking

 

Senior Debt
Matures July 2009
Interest rate 11.75%

  $ 5,000,000     4,886,659     4,886,659
   

Preferred Stock Warrants

      160,241     742,688

Simpler Networks Corp. (0.20%)

   

Preferred Stock

      500,000     500,000
                 

Total Simpler Networks Corp.

    5,546,900     6,129,347
                 

Total Communications & Networking (7.62%)

    18,882,148     19,463,947

Adiana, Inc. (0.53%) (4)

 

Medical Devices & Equipment

 

Senior Debt
Matures June 2008
Interest rate Prime + 6.00%

  $ 1,346,551     1,312,938     1,312,938
   

Preferred Stock Warrants

      67,225     52,427

Adiana, Inc. (0.20%)

   

Preferred Stock

      500,000     500,000
                 

Total Adiana, Inc.

    1,880,163     1,865,365

BARRX Medical, Inc. (0.59%)

 

Medical Devices & Equipment

 

Preferred Stock

      1,500,000     1,500,000
                 

Total BARRX Medical, Inc.

    1,500,000     1,500,000

Gynesonics, Inc. (0.80%)

 

Medical Devices & Equipment

 

Senior Debt
Matures October 2009
Interest rate 9.50%

  $ 2,000,000     1,986,209     1,986,209
   

Preferred Stock Warrants

      17,552     54,735
                 

Total Gynesonics, Inc.

    2,003,761     2,040,944

Novasys Medical, Inc. (3.13%) (4)

 

Medical Devices & Equipment

 

Senior Debt
Matures January 2010
Interest rate 9.70%

  $ 8,000,000     8,000,000     8,000,000
                 

Total Novasys Medical, Inc.

    8,000,000     8,000,000

Optiscan Biomedical, Corp. (0.40%) (4)

 

Medical Devices & Equipment

 

Senior Debt
Matures March 2008
Interest rate 15.00%

  $ 1,006,259     967,314     967,314
   

Preferred Stock Warrants

      80,486     64,478

Optiscan Biomedical, Corp. (0.39%)

   

Preferred Stock

      1,000,000     1,000,000
                 

Total Optiscan Biomedical, Corp.

    2,047,800     2,031,792

Power Medical Interventions, Inc. (0.01%)

 

Medical Devices & Equipment

 

Common Stock Warrants

      20,687     30,200
                 

Total Power Medical Interventions, Inc.

    20,687     30,200

 

16


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Xillix Technologies Corp. (1.53%) (4)(5)(6)

  Medical Devices & Equipment  

Senior Debt
Matures December 2008
Interest rate 12.40%

  $ 3,975,834   $ 3,775,493   $ 3,775,493
   

Common Stock Warrants

      313,108     122,206
                 

Total Xillix Technologies Corp.

    4,088,601     3,897,699
                 

Total Medical Devices & Equipment (7.58%)

    19,541,012     19,366,000
                 

Hedgestreet, Inc. (1.67%) (4)

  Internet Consumer & Business  

Senior Debt
Matures March 2009
Interest rate 11.30%

  $ 4,263,806     4,226,674     4,226,674
 

Services

 

Preferred Stock Warrants

      54,956     44,836
                 

Total Hedgestreet, Inc.

    4,281,630     4,271,510

Invoke Solutions, Inc. (0.97%) (4)

  Internet Consumer & Business  

Senior Debt
Matures December 2008
Interest rate 11.25%

  $ 2,466,574     2,438,574     2,438,574
 

Services

 

Preferred Stock Warrants

      43,826     35,741
                 

Total Invoke Solutions, Inc.

    2,482,400     2,474,315

RazorGator Interactive Group, Inc. (1.25%) (4)

  Internet Consumer & Business  

Senior Debt
Matures January 2008
Interest rate 9.95%

  $ 2,637,626     2,633,276     2,633,276
 

Services

 

Preferred Stock Warrants

      13,050     570,026

RazorGator Interactive Group, Inc. (0.67%)

   

Preferred Stock

      1,000,000     1,708,178
                 

Total RazorGator Interactive Group, Inc.

    3,646,326     4,911,480
                 

Total Internet Consumer & Business Services (4.56%)

    10,410,356     11,657,305
                 

Agami Systems, Inc. (2.75%) (4)

  Electronics & Computer Hardware  

Senior Debt
Matures August 2009
Interest rate 11.00%

  $ 7,000,000     6,924,288     6,924,288
   

Preferred Stock Warrants

      85,601     79,040
                 

Total Agami Systems, Inc.

    7,009,889     7,003,328

Cornice, Inc. (1.44%) (4)

  Electronics & Computer Hardware  

Senior Debt
Matures November 2008
Interest rate Prime + 4.50%

  $ 3,524,664     3,459,755     3,459,755
   

Preferred Stock Warrants

      101,597     80,181
   

Preferred Stock Warrants

      35,353     27,571
   

Preferred Stock Warrants

      135,403     106,862
                 

Total Cornice, Inc.

    3,732,108     3,674,369

 

17


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

Luminus Devices, Inc. (5.88%) (4)

  Electronics & Computer Hardware  

Senior Debt
Matures August 2009
Interest rate 12.50%

  $ 15,000,000     14,765,514     14,765,514
   

Preferred Stock Warrants

      183,290     161,106
   

Preferred Stock Warrants

      83,529     83,466
                 

Total Luminus Devices, Inc.

    15,032,333     15,010,086

NeoScale Systems, Inc. (1.17%) (4)

  Electronics & Computer Hardware  

Senior Debt
Matures October 2009
Interest rate 10.75%

  $ 3,000,000   $ 2,978,373   $ 2,978,373
   

Preferred Stock Warrants

      23,593     22,525
                 

Total NeoScale Systems, Inc.

    3,001,966     3,000,898

Sling Media, Inc. (0.56%)

  Electronics & Computer  

Preferred Stock Warrants

      38,968     936,565
  Hardware  

Preferred Stock

      500,000     500,000
                 

Total Sling Media, Inc.

    538,968     1,436,565

ViDeOnline Communications, Inc. (0.18%) (4)

  Electronics & Computer Hardware  

Senior Debt
Matures May 2009
Interest rate 15.00%

  $ 461,158     461,158     461,158
   

Preferred Stock Warrants

      —       —  
                 

Total ViDeOnline Communications, Inc.

    461,158     461,158
                 

Total Electronics & Computer Hardware (11.98%)

    29,776,422     30,586,404
                 

Ageia Technologies, Inc. (2.76%) (4)

 

Semiconductors

 

Senior Debt
Matures August 2008
Interest rate 10.25%

  $ 7,027,806     6,975,456     6,975,456
   

Preferred Stock Warrants

      99,190     73,604

Ageia Technologies, Inc. (0.20%)

   

Preferred Stock

      500,000     500,000
                 

Total Ageia Technologies

    7,574,646     7,549,060

Cradle Technologies (0.02%)

 

Semiconductors

 

Preferred Stock Warrants

      79,150     63,647
                 

Total Cradle Technologies

    79,150     63,647

iWatt Inc. (1.27%) (4)

 

Semiconductors

 

Senior Debt
Matures September 2009
Interest rate Prime + 2.75%

  $ 2,000,000     1,959,537     1,959,537
   

Revolving Line of Credit
Matures September 2007
Interest rate Prime + 1.75%

  $ 1,250,000     1,250,000     1,250,000
   

Preferred Stock Warrants

      45,684     41,417
                 

Total iWatt Inc.

    3,255,221     3,250,954

 

18


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2006

(Continued)

 

Portfolio Company

 

Industry

 

Type of Investment (1)

  Principal
Amount
  Cost (2)   Value (3)

NEXX Systems, Inc. (1.96%) (4)

 

Semiconductors

 

Senior Debt
Matures February 2010
Interest rate Prime + 2.75%

  $ 4,000,000     3,919,015     3,919,015
   

Revolving Line of Credit
Matures December 2009
Interest rate Prime + 1.75%

  $ 1,000,000     1,000,000     1,000,000
   

Preferred Stock Warrants

      83,116     83,938
                 

Total NEXX Systems, Inc.

    5,002,131     5,002,953
                 

Total Semiconductors (6.21%)

    15,911,148     15,866,614
                 

Lilliputian Systems, Inc. (3.33%) (4)

 

Energy

 

Senior Debt
Matures March 2010
Interest rate 9.75%

  $ 8,500,000   $ 8,463,170   $ 8,463,170
   

Preferred Stock Warrants

      48,460     39,572
                 

Total Lilliputian Systems, Inc.

    8,511,630     8,502,742
                 

Total Energy (3.33%)

    8,511,630     8,502,742
                 

Total Investments (110.89%)

  $ 279,946,465   $ 283,233,751
                 

* 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 appreciation totaled $4,919,518, $1,632,232 and $3,287,286, respectively.
(3) Except for warrants in three publicly traded companies, all investments are restricted at December 31, 2006 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt and warrant investments of this portfolio company have been pledged as collateral under the Citigroup Facility. Citigroup has an equity participation right on loans collateralized under the Citigroup Facility. The value of their participation right on unrealized gains in the related equity investments was approximately $377,000 at December 31, 2006 and is included in accrued liabilities and reduces the unrealized gain recognized by the Company at December 31, 2006.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Debt is on non-accrual status at December 31, 2006, and is therefore considered non-income producing.
(7) All investments are less than 5% owned.

 

See notes to consolidated financial statements.

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

     Three Months Ended March 31,  
     2007    2006  

Investment income:

     

Interest

   $ 9,035,989    $ 5,634,539  

Fees

     642,957      852,594  
               

Total investment income

     9,678,946      6,487,133  

Operating expenses:

     

Interest

     685,965      1,676,982  

Loan fees

     266,108      250,793  

Compensation and benefits

     1,939,561      1,205,081  

General and administrative

     1,308,235      1,185,392  

Stock-based compensation

     253,750      123,000  
               

Total operating expenses

     4,453,619      4,441,248  

Net investment income before provision for income taxes and investment gains and losses

     5,225,327      2,045,885  

Provision for income taxes

     —        1,760,000  
               

Net investment income

     5,225,327      285,885  

Net realized gain (loss) on investments

     289,702      (1,740,370 )

Net increase in unrealized appreciation on investments

     816,053      3,959,481  
               

Net realized and unrealized gain

     1,105,755      2,219,111  
               

Net increase in net assets resulting from operations

   $ 6,331,082    $ 2,504,996  
               

Net investment income before provision for income taxes and investment gains and losses per common share:

     

Basic

   $ 0.23    $ 0.21  
               

Diluted

   $ 0.23    $ 0.21  
               

Change in net assets per common share:

     

Basic

   $ 0.28    $ 0.25  
               

Diluted

   $ 0.27    $ 0.25  
               

Weighted average shares outstanding

     

Basic

     22,871,000      9,912,595  
               

Diluted

     23,120,000      9,958,861  
               

See notes to consolidated financial statements (unaudited).

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

       

Capital in
excess

of par value

 

Unrealized

Appreciation
on

Investments

 

Accumulated

Realized
Gains(Losses)

on
Investments

   

Distributions

in Excess of

Investment
Income

   

Net

Assets

 
  Common Stock          
    Shares   Par Value          

Balance at December 31, 2005

  9,801,965   $ 9,802   $ 114,524,833   $ —     $ —       $ (182,305 )     114,352,330  

Net increase in net assets resulting from operations

  —       —       —       674,089     1,545,022       285,885       2,504,996  

Issuance of common stock

  432,900     433     4,999,567     —       —         —         5,000,000  

Dividends declared

  —       —       —       —       —         (2,940,591 )     (2,940,591 )

Stock-based compensation

  —       —       123,000     —       —         —         123,000  
                                             

Balance at March 31, 2006

  10,234,865   $ 10,235   $ 119,647,400   $ 674,089   $ 1,545,022     $ (2,837,011 )   $ 119,039,735  
                                             

Balance at December 31, 2006

  21,927,034   $ 21,927   $ 257,234,729   $ 2,860,654   $ (1,972,014 )   $ (2,732,474 )   $ 255,412,822  
                —    

Net increase net assets resulting from operations

  —       —       —       816,053     289,702       5,225,327       6,331,082  

Issuance of common stock

  11,667     12     166,243     —       —         —         166,255  

Issuance of common stock in public offering overallotment exercise

  840,000     840     10,851,687           10,852,527  

Issuance of common stock from warrant exercises

  256,128     256     2,707,017           2,707,273  

Issuance of common stock under dividend reinvestment plan

  55,922     56     782,852     —       —         —         782,908  

Dividends declared

  —       —       —       —       —         (6,895,877 )     (6,895,877 )

Stock-based compensation

  —       —       253,750     —       —         —         253,750  
                                             

Balance at March 31, 2007

  23,090,751     23,091     271,996,278     3,676,707     (1,682,312 )     (4,403,024 )     269,610,740  
                                             

See notes to consolidated financial statements (unaudited).

 

21


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Three Months Ended March 31,  
     2007     2006  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 6,331,082     $ 2,504,996  

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

    

Purchase of investments

     (80,230,522 )     (33,000,000 )

Principal payments received on investments

     21,897,727       33,921,115  

Proceeds from sale of investments

     873,002       1,691,638  

Net unrealized appreciation on investments

     (870,977 )     (4,118,896 )

Net unrealized appreciation on investments due to lender

     54,924       159,415  

Net realized appreciation on investments

     (289,702 )     1,740,370  

Warrant values for loans not funded

     (138,664 )     —    

Accretion of loan discounts

     (474,455 )     (425,074 )

Accretion of loan exit fees

     (283,482 )     (163,819 )

Depreciation

     47,400       9,598  

Stock-based compensation

     253,750       123,000  

Common stock issued in lieu of Director compensation

     166,255       —    

Amortization of deferred loan origination revenue

     (661,699 )     (608,172 )

Change in operating assets and liabilities:

    

Interest receivable

     (786,203 )     (115,507 )

Prepaid expenses and other current assets

     (751,012 )     145,107  

Income tax receivable

     29,294       —    

Deferred tax asset

     —         1,273,000  

Accounts payable

     575,345       432,022  

Income tax payable

     —         (1,288,000 )

Accrued liabilities

     (1,714,437 )     1,000,926  

Deferred loan origination revenue

     1,523,662       853,850  
                

Net cash provided by (used in) operating activities

     (54,448,712 )     4,135,569  

Cash flows from investing activities:

    

Purchases of capital equipment

     (87,481 )     (2,944 )

Other long-term assets

     173,476       —    
                

Net cash provided by (used in) investing activities

     85,995       (2,944 )

Cash flows from financing activities:

    

Proceeds from issuance of common stock, net

     13,559,800       5,000,000  

Dividends paid

     (6,112,969 )     (2,940,591 )

Borrowings of credit facilities

     87,000,000       10,000,000  

Repayments of credit facilities

     (15,000,000 )     —    
                

Net cash provided by financing activities

     79,446,831       12,059,409  
                

Net increase in cash

     25,084,114       16,192,034  

Cash and cash equivalents at beginning of period

     16,404,214       15,362,447  
                

Cash and cash equivalents at end of period

   $ 41,488,328     $ 31,554,481  
                

Supplemental Disclosure:

    

Interest paid

   $ 387,031     $ 1,410,121  

Income taxes paid

   $ —       $ 1,775,000  

Stock issued in lieu of cash dividends

   $ 782,908     $ —    

See notes to consolidated financial statements (unaudited).

 

22


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business and Unaudited Interim Consolidated Financial Statements Basis of Presentation

Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company that provides debt and equity growth capital to technology-related and life-science companies at all stages of development. The Company sources its investments through its principal office located in Silicon Valley, as well as through its additional offices in the Boston, Massachusetts, Boulder, Colorado, Chicago, Illinois and Columbus, Ohio areas. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The Company commenced operations on February 2, 2004 and commenced investment activities in September 2004.

The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 5).

In January 2005, the Company formed Hercules Technology II, L.P. (“HT II”) and Hercules Technology SBIC Management, LLC (HTM). On September 27, 2006, HTII became licensed as a Small Business Investment Company (“SBIC”). HTII is able to borrow funds from the Small Business Administration (the “SBA”) against eligible investments and additional contributions to regulatory capital. HTM is a wholly-owned subsidiary of the Company. The Company is the sole limited partner of HTII and HTM is the general partner.

In July 2005, the Company formed Hercules Funding I LLC and Hercules Funding Trust I, an affiliated statutory trust, and executed a securitized credit facility with Citigroup Global Markets Realty Corp. (see Note 4).

In December 2006, The Company established Hydra Management LLC and Hydra Management Co. Inc., a general partner and investment management group, respectively, should it determine in the future to pursue a relationship with an externally managed fund.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying consolidated interim financial statements are presented in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments, apart from the reclassification described in Note 2, consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim period, have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2006. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

 

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2. Reclassification

Certain prior period information has been reclassified to conform to current year presentation. When the Company exits an investment and realizes a gain or loss, the Company makes an accounting entry to reverse any unrealized appreciation or depreciation, respectively, that the Company previously recorded to reflect the appreciated or depreciated value of the investment. The Company recorded a reversal of $3.3 million from unrealized depreciation and recorded a realized loss of $3.3 million for the nine months ended September 30, 2006. During the fourth quarter of 2005, the Company recorded an unrealized depreciation of approximately $3.3 million in one portfolio company. As disclosed in Footnote 16 — Subsequent Events to the financial statements filed on Form 10-K for the year ended December 31, 2005, the assets of the portfolio company were sold in January 2006, and a realized loss was incurred. The difference between the unrealized depreciation as recorded in 2005 and the actual realized loss was not material. The Company did not reverse the loss from an unrealized depreciation to a realized loss in the first quarter of 2006, instead only recording the reversal in the third quarter of 2006. The accompanying comparative consolidated financial statements for the first quarter reflect the reversal with the previously recorded net unrealized appreciation of approximately $674,000 resulting in an unrealized appreciation of $3.3 million and the previously realized gain of $1.5 million resulting in a net realized loss of $1.7 million. This reversal does not affect the reported Net Investment Income, Net Income, Earnings per Share, Net Asset Value or Net Asset Value per Share for the first quarter of 2006.

3. Valuation of Investments

Value is defined in Section 2(a)(41) of the 1940 Act, as (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. Because the Company invests primarily in structured mezzanine debt investments (“debt”) and equity growth capital (“equity”) of privately-held technology-related and life-science companies backed by leading venture capital and private equity firms, the Company values substantially all of its investments at fair value, as determined in good faith by the Board of Directors in accordance with established valuation policies and consistently applied procedures and the recommendations of the Valuation Committee of the Board of Directors. At March 31, 2007, approximately 89% of the Company’s total assets represented investments in portfolio companies of which greater than 99% are valued at fair value by the Board of Directors.

Estimating fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. Fair value is the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. Due to the inherent uncertainty in the valuation of debt and equity investments that do not have a readily available market value, the fair value established in good faith by the Board of Directors may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

When originating a debt instrument, the Company expects to receive warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received.

At each reporting date, privately held debt and equity securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions that could impact the valuation. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the debt and equity securities. An unrealized loss is recorded when an investment has decreased in value, including: where collection of a loan is doubtful, there is an adverse change in

 

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the underlying collateral or operational performance, there is a change in the borrower’s ability to pay, or there are other factors that lead to a determination of a lower valuation for the debt or equity security. Conversely, an unrealized appreciation is recorded when the investment has appreciated in value. Securities that are traded in the over the counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Board of Directors estimated the fair value of warrants and other equity-related securities in good faith using a Black-Scholes pricing model and consideration of the issuer’s earnings, sales to third parties of similar securities, the comparison to publicly traded securities, and other factors. 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.

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 1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, which are not Control Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments. At March 31, 2007 and December 31, 2006, all of the Company’s investments were in Non-Control/Non-Affiliate companies.

Security transactions are recorded on the trade-date basis.

A summary of the composition of the Company’s investment portfolio as of March 31, 2007 and December 31, 2006 at fair value is shown as follows:

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

Senior debt with warrants

   $ 321.8    94.0 %   $ 273.2    96.5 %

Subordinated debt

     11.4    3.3 %     1.9    0.7 %

Preferred stock

     9.3    2.7 %     8.1    2.8 %
                          
   $ 342.5    100.0 %   $ 283.2    100.0 %
                          

A Summary of the Company’s investment portfolio, at value, by geographic location is as follows:

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

United States

   $ 329.0    96.1 %   $ 269.0    95.0 %

Canada

     9.4    2.7 %     10.5    3.7 %

Israel

     4.1    1.2 %     3.7    1.3 %
                          
   $ 342.5    100.0 %   $ 283.2    100.0 %
                          

 

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The following table shows the fair value of our portfolio by industry sector at March 31, 2007 and December 31, 2006 (excluding unearned income):

 

    March 31, 2007     December 31, 2006  
($ in millions)   Investments at Fair
Value
  Percentage of Total
Portfolio
    Investments at Fair
Value
  Percentage of Total
Portfolio
 
       

Drug discovery

  $ 83.9   24.5 %   $ 75.0   26.5 %

Communications & networking

    53.8   15.7 %     19.5   6.9 %

Software

    41.1   12.0 %     40.4   14.3 %

Electronics & computer hardware

    29.0   8.5 %     30.6   10.8 %

Specialty pharmaceuticals

    27.6   8.1 %     18.0   6.4 %

Consumer & business products

    21.4   6.3 %     21.9   7.7 %

Semiconductors

    18.2   5.3 %     15.9   5.6 %

Drug delivery

    15.9   4.6 %     16.6   5.9 %

Therapeutic

    11.8   3.4 %     13.4   4.7 %

Internet consumer & business services

    10.7   3.1 %     11.7   4.1 %

Energy

    8.5   2.5 %     8.5   3.0 %

Information services

    7.1   2.1 %     —     0.0 %

Diagnostic

    5.6   1.6 %     5.9   2.1 %

Biotechnology tools

    4.9   1.4 %     5.8   2.0 %

Media/content/info

    3.0   0.9 %     —     0.0 %
                       
  $ 342.5   100.0 %   $ 283.2   100.0 %
                       

During the three-month period ended March 31, 2007, the Company made investments in debt securities totaling $78.4 million and made investments in equity securities of approximately $1.8 million.

Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. Loan exit fees to be paid at the termination of the loan are accreted into fee income over the contractual life of the loan. Original discount fees are reflected as adjustment to the loan yield. The Company had approximately $4.3 million and $3.5 million of unamortized fees at March 31, 2007 and December 31, 2006, respectively, and approximately $1.3 million and $1.0 million in exit fees receivable at March 31, 2007 and December 31, 2006, respectively.

4. Securitization Agreement

On August 1, 2005, the Company, through Hercules Funding Trust I, an affiliated statutory trust, executed a $100 million securitized credit facility (the “Citigroup Facility”) with Citigroup Global Markets Realty Corp. (“Citigroup”). Interest on borrowings under the Citigroup Facility are paid monthly and were charged at one-month LIBOR plus a spread of 1.65%. The Company paid a loan origination fee equal to 0.25% of the Citigroup Facility. On March 6, 2006, the Company amended the Citigroup facility with an agreement that increased the borrowing capacity under the facility to $125.0 million, increased the eligible loans and increased the eligible capacity for loans by geographic region and allowed for an interest rate of LIBOR plus 2.5% on amounts borrowed in excess of $100.0 million. The company paid a reconstructing fee of $150,000 that was expensed ratably through initial maturity on July 31, 2006. On December 6, 2006, the Company amended the Citigroup Facility with an agreement that increased the borrowing capacity under the facility to $150.0 million. On March 30, 2007, this increase was extended to the Facility expiration date, July 31, 2007, and the interest on all borrowings was reduced to LIBOR plus a spread of 1.20%. See Note 13 — Subsequent Events.

The Company’s ability to make draws on the Citigroup Facility was to expire on July 31, 2006, however, it was extended for an additional 364-day period with the lender’s consent on July 28, 2006. Prior to its July 31,

 

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2007 expiration date, the Citigroup Facility may be extended for an additional 364-day period with the lenders’ consent. If the Citigroup Facility is not extended, any principal amounts then outstanding will be amortized over a six-month period through a termination date in January 2008. The Company paid an extension fee equal to 0.25% of the Citigroup Facility borrowing capacity which will be expensed ratably through maturity.

The Citigroup Facility is collateralized by loans from the Company’s portfolio companies, and includes an advance rate of approximately 55% of eligible loans. The Citigroup Facility contains covenants that, among other things, require the Company to maintain a minimum net worth and to restrict the loans securing the Citigroup Facility to certain dollar amounts, to concentrations in certain geographic regions and industries, to certain loan grade classifications, to certain security interests, and to certain interest payment terms. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citigroup facility. Pursuant to the warrant participation agreement, the Company 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 the warrants until the realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The Obligations under the warrant participation agreement continue even after the Citigroup facility is terminated until the Maximum Participation Limit has been reached. During the three months ended March 31, 2007, the Company reduced its realized gain by approximately $16,000 for Citigroup’s participation in the gain on sale of an equity security and recorded an additional liability and reduced its unrealized gains by approximately $55,000 for Citigroup’s participation in unrealized gains in the warrant portfolio. The value of their participation right on unrealized gains in the related equity investments since inception of the agreement was approximately $432,000 at March 31, 2007 and is included in accrued liabilities and reduces the unrealized gain recognized by the Company at March 31, 2007. Since inception of the agreement, the Company has paid Citigroup approximately $292,000 under the warrant participation agreement thereby reducing its realized gains.

At March 31, 2007, the Company, through its special purpose entity (SPE), had transferred pools of loans and warrants with a fair value of approximately $244.3 million to Hercules Funding Trust I and had drawn $113.0 million under the Citigroup Facility. Transfers of loans have not met the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for sales treatment and are, therefore, treated as secured borrowings, with the transferred loans remaining in investment and the related liability recorded in borrowings. The average debt outstanding under the Citigroup Facility for the quarter ended March 31, 2007 and the year ended 2006 was approximately $38.2 and $70.6 million, respectively, and the average interest rates were approximately 6.96% and 6.74% respectively.

At March 31, 2007 and December 31, 2006, the Company had the following debt:

 

     March 31, 2007    December 31, 2006
($ in thousands)    Facility
Amount
   Amount
Outstanding
   Facility
Amount
   Amount
Outstanding

Citigroup Facility

   $ 150,000    $ 113,000    $ 150,000    $ 41,000
                           

Total

   $ 150,000    $ 113,000    $ 150,000    $ 41,000
                           

5. Income taxes

The Company intends to continue to operate so as to qualify to be taxed as a RIC under the Code and, as such, the Company would not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required, among other requirements, to distribute at least 90% of its annual investment company taxable income, as defined by the Code. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Company’s earnings fall below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal

 

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year may be deemed a return of capital for tax purposes to the Company’s stockholders. On March 19, 2007, the Company paid a dividend of $0.30 per share.

For the fiscal year ended December 31, 2006 a portion of the distributions to the Company’s shareholders was deemed a return of capital. For the quarter ended March 31, 2007, the Company declared a distribution of $0.30 per share. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. If the Company determined the tax attributes of its distributions year-to-date as of March 31, 2007, 80.1% would be from ordinary income and 19.9% would be a return of capital for stockholders, however there can be no certainty to shareholders that this determination is representative of what the tax attributes of its 2007 distributions to shareholders will actually be.

As of March 31, 2006, as a C corporation, the Company accrued income tax expense on a quarterly basis. Income tax expense recorded during the first quarter of 2006 was approximately $1.8 million.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As required, we have adopted FIN 48 as of January 1, 2007. We conducted a review of all open tax year’s income recognition and expense deduction filing positions and income tax returns filed (federal and state) for determination of any uncertain tax positions that may require recognition of a tax liability. This review encompassed an analysis of all book/tax difference adjustments as well as the timing of income and expense recognition for all tax years still open under the statute of limitations. As a result, we determined that it is more likely than not that each tax position taken on a previously filed return or to be taken on current tax returns will be sustained on examination based on the technical merits of the positions and therefore, no recognition of a tax liability on an uncertain tax position for FIN 48 purposes is anticipated.

6. Stockholders’ Equity

The Company is authorized to issue 60,000,000 shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote.

In January 2005 the Company notified its shareholders of its intent to elect to be regulated as a BDC. In conjunction with the Company’s decision to elect to be regulated as a BDC, approximately 55% of the 5 Year Warrants were subject to mandatory cancellation under the terms of the Warrant Agreement with the warrant holder receiving one share of common stock for every two warrants cancelled and the exercise price of all warrants was adjusted to the then current net asset value of the common stock, subject to certain adjustments described in the Warrant Agreement. In addition, the 1 Year Warrants became subject to expiration immediately prior to the Company’s election to become a BDC, unless exercised. Concurrent with the announcement of the BDC election, the Company reduced the exercise price of all remaining 1 and 5 Year Warrants from $15.00 to $10.57. On February 22, 2005, the Company cancelled 47% of all outstanding 5 Year Warrants and issued 298,598 shares of common stock to holders of warrants upon exercise. In addition, the majority of shareholders owning 1 Year Warrants exercised them, and purchased 1,175,963 of common shares at $10.57 per share, for total consideration to the Company of $12,429,920. All unexercised 1 Year Warrants were then cancelled. The outstanding 5 Year Warrants will expire in June 2009.

 

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A summary of activity in the 5 Year Warrants initially attached to units issued for the three months ended March 31, 2007 is as follows:

 

    

Five-Year

Warrants

 

Warrants outstanding at December 31, 2006

   616,672  

Warrants issued

   —    

Warrants cancelled

   —    

Warrants exercised

   (223,008 )
      

Warrants outstanding at March 31, 2007

   393,664  
      

The Company received net proceeds of approximately $2.7 million from the exercise of the 5-Year Warrants in the period ended March 31, 2007.

On March 7, 2006, the Company issued 432,900 shares of common stock for approximately $5.0 million in private placement. The shares of common stock are subject to a registration rights agreement between the Company and the purchasers. The shares were registered pursuant to a registration statement that was declared effective on June 7, 2006.

On April 21, 2006, the Company raised approximately $33.8 million, net of issuance costs, from a rights offering of 3,411,992 shares of its common stock. The shares were sold at $10.55 per share which was equivalent to 95% of the volume weighted average prices of shares traded during the ten days immediately prior to the expiration date of the offering.

On October 20, 2006, the Company raised approximately $30.0 million, net of estimated issuance costs, in a public offering of 2.5 million shares of its common stock.

On December 12, 2006, the Company raised approximately $74.1 million, net of estimated issuance costs, in a public offering of 5.7 million shares of its common stock.

On January 3, 2007, in connection with the December 12, 2006 common stock issuance, the underwriters exercised their over-allotment option and purchased an additional 840,000 shares of common stock for additional net proceeds of approximately $10.9 million.

7. Earnings per Share

Shares used in the computation of the Company’s basic and diluted earnings (loss) per share are as follows:

 

     Three months ended
March 31,
     2007    2006

Net increase (decrease) in net assets resulting from operations

   $ 6,331,082    $ 2,504,996

Weighted average common shares outstanding

     22,871,000      9,912,595

Change net assets per common share - basic

   $ 0.28    $ 0.25

Net increase (decrease) in net assets resulting from operations

   $ 6,331,082    $ 2,504,996

Weighted average common shares outstanding

     22,871,000      9,912,595

Dilutive effect of warrants and stock options

     249,000      46,266
             

Weighted average common shares outstanding, assuming dilution

     23,120,000      9,958,861

Change net assets per common share - assuming dilution

   $ 0.27    $ 0.25

Weighted average common shares outstanding, assuming dilution, includes the incremental effect of shares that would be issued upon the assumed exercise of options and warrants. The Company has included approximately 2,173,000 and 673,223 outstanding warrants and stock options in the calculation of diluted net income per share that are exercisable at a price lower than the Company’s quarterly average trading price for the earnings per share presented

 

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for the three months ended March 31, 2007 and 2006, respectively. Common share equivalents excluded from this calculation could be dilutive in the future. Options for approximately 988,000 and 1,341,000 shares of common stock have been excluded for the three months ended March 31, 2007 and 2006, respectively.

8. Related-Party Transactions

In conjunction with the Company’s rights offering completed on April 21, 2006, the Company agreed to pay JMP Securities LLC a fee of approximately $700,000 as co-manager of the offering.

In conjunction with the Company’s public offering completed on December 7, 2006, the Company agreed to pay JMP Securities LLC a fee of approximately $1.2 million as co-manager of the offering.

During February 2007, Farallon Capital Management, L.L.C and its related affiliates and Manuel Henriquez, the Company’s CEO, exercised warrants to purchase 132,480 and 75,075 shares of the Company’s common stock, respectively. The exercise price of the warrants was $10.57 per share resulting in net proceeds to the company of approximately $2.2 million.

9. Equity Incentive Plan

The Company and its stockholders have authorized and adopted an equity incentive plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7,000,000 shares of common stock. Unless terminated earlier by the Company’s Board of Directors, the 2004 Plan will terminate on June 9, 2014, and no additional awards may be made under the 2004 Plan after that date.

The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1,000,000 shares of common stock. Unless terminated earlier by the Company’s Board of Directors, the 2006 Plan will terminate on May 29, 2016 and no additional awards may be made under the 2006 Plan after that date. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on February 15, 2007. No shares were issued under the 2006 Plan as of March 31, 2007.

In 2004, each employee stock option to purchase two shares of common stock was accompanied by a warrant to purchase one share of common stock within one year and a warrant to purchase one share of common stock within five years. Both options and warrants had an exercise price of $15.00 per share on date of grant. On January 14, 2005, the Company notified all shareholders of its intent to elect to be regulated as a BDC and reduced the exercise price of all remaining 1 and 5 Year Warrants from $15.00 to $10.57 but did not reduce the strike price of the options (see Note 7). The unexercised one-year warrants expired and 55% of the five-year warrants were cancelled immediately prior to the Company’s election to become a BDC.

A summary of common stock options and warrant activity under the Company’s 2004 Plan for the three months ended March 31 is as follows:

 

     Common
Stock
Options
  

Five-

Year
Warrants

 

Outstanding at December 31, 2006

     1,881,013      56,551  

Granted

     863,000      —    

Exercised

     —        (33,120 )

Cancelled

     —        —    
               

Outstanding at March 31, 2007

     2,744,013      23,431  
               

Weighted-average exercise price at March 31, 2007

   $ 13.23    $ 10.57  
               

 

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All of the options granted in 2004 are 100% vested on the date of grant, except for options granted to directors to acquire 30,000 shares which were cancelled in 2005 and options to acquire 16,000 shares granted to employees in December 2004. 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 March 31, 2007 options for approximately 841,000 shares were exercisable at a weighted average exercise price of approximately $13.50 per share with a weighted average exercise term of 4.5 years. The outstanding five year warrants have an expected life of five years.

The Company determined that the fair value of options granted during the three month periods ended March 31, 2007 and 2006 was approximately $1.3 million and approximately $4,000, respectively. During the three month periods ended March 31, 2007 and 2006, approximately $254,000 and $123,000 of share-based cost was expensed, respectively. As of March 31, 2007, there was $2.4 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.0 years. The fair value of options granted in 2007 and 2006 was based upon a Black-Scholes option pricing model using the assumptions in the following table for each of the three month periods ended March 31, 2007:

 

     2007           2006        

Expected Volatility

   24 %   24 %

Expected Dividends

   8 %   8 %

Expected term (in years)

   4.5     4.5  

Risk-free rate

   4.47 - 4.88 %   4.80 %

10. Financial Highlights

Following is a schedule of financial highlights for the three months ended March 31, 2007 and 2006:

 

    Three Months Ended March 31,  
    2007     2006  

Per share data:

   

Net asset value at beginning of period

  $ 11.65     $ 11.67  

Net investment income

    0.23       0.03  

Net realized gain on investments

    0.01       0.15  

Net unrealized appreciation on investments

    0.04       0.07  
               

Total from investment operations

    0.28       0.25  

Net increase/(decrease) in net assets from capital share transactions

    0.04       —    

Distributions from ordinary income

    (0.30 )     (0.30 )

Stock-based compensation expense included in investment income (1)

    0.01       0.01  
               

Net asset value at end of period

  $ 11.68     $ 11.63  
               

Ratios and supplemental data:

   

Per share market value at end of period

  $ 13.70       11.35  

Total return (2)

    -1.74 %     -2.84 %

Shares outstanding at end of period

    23,090,751       10,234,865  

Weighted average number of common shares outstanding

    22,871,000       9,912,595  

Net assets at end of period

  $ 269,610,740     $ 119,039,735  

Ratio of operating expense to average net assets (annualized)

    6.70 %     15.39 %

Ratio of net investment income before provision for income tax expense and investment gains and losses to average net assets (annualized)

    7.87 %     7.09 %

Average debt outstanding

  $ 38,211,000     $ 82,666,667  

Weighted average debt per common share

  $ 1.67     $ 8.34  

Portfolio turnover

    0.29 %     0.66 %

(1) Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to Financial Accounting Standards No. 123R, net investment loss includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.

 

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(2) The total return 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.

11. Commitments and Contingencies

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk. These instruments consist primarily of unused commitments to extend credit, in the form of loans, to the Company’s portfolio companies. The balance of unused commitments to extend credit at March 31, 2007 totaled approximately $74.7 million. Since this commitment may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Certain premises are leased under agreements which expire at various date through December 2013. Total rent expense amounted to approximately $151,000 and $60,000 during the three-month periods ended March 31, 2007 and 2006, respectively.

The following table shows our contractual obligations as of March 31, 2007:

 

    

Payments due by period

(dollars in thousands)

Contractual Obligations (1)

   Total   

Less than

1 year

   1-3 years    3-5 years   

After

5 years

Borrowings (2)(3)

   $ 113,000    $ 113,000    $ —      $  —      $  —  

Operating Lease Obligations

     3,132      457      1,384      993      298
                                  

Total

   $ 116,132    $ 113,457    $ 1,384    $ 993    $ 298
                                  

(1) Excludes commitments to extend credit to our portfolio companies.
(2) Borrowings under our Citigroup Credit Facility are listed based on the contractual maturity of the credit facility. Actual repayments could differ significantly due to prepayments by our existing portfolio companies, modifications of our current agreements with our existing portfolio companies and modification of the credit facility.
(3) We also have a warrant participation agreement with Citigroup. See Note 4.

The Company and its executives and directors are covered by Directors and Officers Insurance, with the directors and officers being indemnified by the Company to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.

12. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 (“FAS 157”), “Fair Value Measurements.” Among other requirements, FAS 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. FAS 157 is effective for the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of FAS 157 on its financial position and results of operations. As of March 31, 2007, the Company does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

13. Subsequent Events

On April 5, 2007, Hercules and its subsidiary, Hercules Technology II, L.P., received an exemptive order from the Securities and Exchange Commission allowing Hercules to exclude debt securities issued by its subsidiary, Hercules Technology II, L.P. from the asset coverage requirements applicable to Hercules. Hercules Technology Growth Capital, Inc. is the sole limited partner of Hercules Technology II, L.P.

 

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Through its subsidiary, Hercules Technology II, L.P., Hercules Technology Growth Capital, Inc. intends to seek up to $124.0 million in leverage in various tranches over the next two years if it satisfies certain regulatory requirements, which is the maximum amount currently available under regulations of the SBA. Hercules Technology II, L.P. is currently approved to draw up to $50.0 million and on April 26, 2007, it borrowed $12.0 million under the SBA program.

On May 1, 2007 the Board of Directors declared a dividend of $0.30 per share for the first quarter, payable on June 18, 2007 to shareholders of record as of May 16, 2007.

On May 2, 2007, the Company amended the Citigroup Facility to extend the expiration date to May 1, 2008, increased the borrowing capacity under the facility to $250 million and included Deutsche Bank Securities Inc. as a participant along with Citigroup Markets Realty Corp. The credit facility is a one year facility and is renewable on May 1, 2008 with an interest rate of LIBOR plus a spread of 1.20%.

On May 3, 2007, Novadaq Pharmaceuticals, a publicly traded Canadian corporation, acquired certain assets of Xillix Technologies for cash and common stock. Of the purchase price, Hercules will receive approximately CDN $810,000 and approximately 225,000 shares of Novadaq Pharmaceuticals’ common stock.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The information set forth in this report includes “forward-looking statements.” Such forward-looking statements are subject to the safe harbor created by that section. Such statements may include, but are not limited to: projections of revenues, income or loss, capital expenditures, plans for product development and cooperative arrangements, future operations, financing needs, or plans of Hercules, as well as assumptions relating to the foregoing. The terms “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negatives of these terms, or other similar expressions generally identify forward-looking statements.

The forward-looking statements made in these this Form 10-Q speak only to events as of the date on which the statements are made. You should not place undue reliance on such forward-looking statements, as substantial risks and uncertainties could cause actual results to differ materially from those projected in or implied by these forward-looking statements due to a number of risks and uncertainties affecting its business. The forward-looking statements contained in this Form 10-Q are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events.

Overview

We are a specialty finance company that provides debt and equity growth capital to technology-related 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. We source our investments through our principal office located in Silicon Valley, as well as our additional offices in the Boston, Boulder, Chicago and Columbus areas. Our goal is to be the leading structured mezzanine capital provider of choice for venture capital and private equity backed technology-related and life science companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of ventures active in the technology and life science industries and to offer a full suite of growth capital products up and down the capital structure. We invest primarily in structured mezzanine debt and, to a lesser extent, in senior debt and equity investments. We use the term “structured mezzanine debt investment” 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 mezzanine debt investments will typically be secured by some or all of the assets of the portfolio company.

Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity-related investments. We are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year of less.

Asset Management

We may engage in the asset management business by providing investment advisory services to externally managed funds that may be formed in the future. We may, from time to time, serve as the investment manager of such funds and may receive management and other fees for such services. Such funds may have overlapping investment objectives and may invest in asset classes similar to those targeted by us.

 

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Portfolio and Investment Activity

The total value of our investment portfolio was $342.4 million at March 31, 2007 as compared to $283.2 million at December 31, 2006. The weighted average value of our investment portfolio during the quarter ended March 31, 2007 was approximately $290.0 million. The weighted average value of the portfolio during the quarter reflects the affect of the timing of fundings occurring late in the quarter when compared to the ending portfolio value. During the three months ended March 31, 2007, we made debt commitments to 14 portfolio companies totaling $106.5 million and funded $78.4 million to 16 companies. During the quarter, we also received normal principal repayments of approximately $11.1 million, two companies made early repayments of $1.8 million, and we received pay downs of $9.1 million on working capital lines of credit. We also made equity investments in four existing portfolio companies totaling $1.8 million and sold one equity investment with a fair value of $500,000. At March 31, 2007, our equity investments have a fair value of approximately $9.3 million. At March 31, 2007, we had unfunded contractual commitments of $74.7 million to 22 portfolio companies. In addition, as of March 31, 2007, we executed non-binding term sheets with 15 prospective portfolio companies, representing approximately $142.3 million. These proposed investments 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.

Total portfolio investment activity (exclusive of unearned income) as of and for the period ended March 31, 2007 was as follows:

 

($ in millions)    March 31,
2007
 

Beginning Portfolio

   $ 283.2  

Purchase of investments

     78.4  

Equity Investments

     1.8  

Sale of Equity Investments

     (0.5 )

Principal payments received on investments

     (11.1 )

Early pay-offs and recoveries

     (10.9 )

Accretion of loan discounts

     0.6  

Net realized and unrealized change in investments

     1.0  
        

Ending Portfolio

   $ 342.5  
        

The following table shows the fair value of our portfolio of investments by asset class as of March 31, 2007 and December 31, 2006 (excluding unearned income):

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

Senior debt with warrants

   $ 321.8    94.0 %   $ 273.2    96.5 %

Subordinated debt

     11.4    3.3 %     1.9    0.7 %

Preferred stock

     9.3    2.7 %     8.1    2.8 %
                          
   $ 342.5    100.0 %   $ 283.2    100.0 %
                          

 

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A Summary of the company’s investment portfolio at value by geographic location is as follows.

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

United States

   $ 329.0    96.1 %   $ 269.0    95.0 %

Canada

     9.4    2.7 %     10.5    3.7 %

Israel

     4.1    1.2 %     3.7    1.3 %
                          
   $ 342.5    100.0 %   $ 283.2    100.0 %
                          

The following table shows the fair value of our portfolio by industry sector at March 31, 2007 and March 31, 2006 (excluding unearned income):

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

Drug discovery

   $ 83.9    24.5 %   $ 75.0    26.5 %

Communications & networking

     53.8    15.7 %     19.5    6.9 %

Software

     41.1    12.0 %     40.4    14.3 %

Electronics & computer hardware

     29.0    8.5 %     30.6    10.8 %

Specialty pharmaceuticals

     27.6    8.1 %     18.0    6.4 %

Consumer & business products

     21.4    6.3 %     21.9    7.7 %

Semiconductors

     18.2    5.3 %     15.9    5.6 %

Drug delivery

     15.9    4.6 %     16.6    5.9 %

Therapeutic

     11.8    3.4 %     13.4    4.7 %

Internet consumer & business services

     10.7    3.1 %     11.7    4.1 %

Energy

     8.5    2.5 %     8.5    3.0 %

Information services

     7.1    2.1 %     —      0.0 %

Diagnostic

     5.6    1.6 %     5.9    2.1 %

Biotechnology tools

     4.9    1.4 %     5.8    2.0 %

Media/content/info

     3.0    0.9 %     —      0.0 %
                          
   $ 342.5    100.0 %   $ 283.2    100.0 %
                          

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. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of March 31, 2007 and December 31, 2006:

 

     March 31, 2007     December 31, 2006  
($ in millions)      Investments at Fair  
Value
     Percentage of Total  
Portfolio
      Investments at Fair  
Value
     Percentage of Total  
Portfolio
 

Investment Grading