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 September 30, 2011

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
(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 that 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨       Accelerated Filer   x
Non-Accelerated Filer   ¨       Smaller Reporting Company   ¨

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

On November 1, 2011, there were 43,811,939 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      3   

Item 1.

  

Consolidated Financial Statements

     3   
  

Consolidated Statement of Assets and Liabilities as of September 30, 2011 (unaudited) and December 31, 2010

     3   
  

Consolidated Schedule of Investments as of September 30, 2011 (unaudited)

     4   
  

Consolidated Schedule of Investments as of December 31, 2010

     19   
  

Consolidated Statement of Operations for the three and nine month period ended September 30, 2011 and 2010 (unaudited)

     32   
  

Consolidated Statement of Changes in Net Assets for the nine-month periods ended September 30, 2011 and 2010 (unaudited)

     33   
  

Consolidated Statement of Cash Flows for the nine-month periods ended September 30, 2011 and 2010 (unaudited)

     34   
  

Notes to Consolidated Financial Statements (unaudited)

     35   

Item 2.

  

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

     50   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     70   

Item 4.

  

Controls and Procedures

     71   
PART II. OTHER INFORMATION      73   

Item 1.

  

Legal Proceedings

     73   

Item 1A.

  

Risk Factors

     73   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     77   

Item 3.

  

Defaults Upon Senior Securities

     77   

Item 4.

  

Reserved

     77   

Item 5.

  

Other Information

     77   

Item 6.

  

Exhibits

     77   
SIGNATURES      78   

 

2


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 STATEMENT OF ASSETS AND LIABILITIES

(unaudited)

(dollars in thousands, except per share data)

 

     September 30,        
     2011     December 31,  
     (unaudited)     2010  

Assets

    

Investments:

    

Non-Control/Non-Affiliate investments (cost of $572,558 and $445,782, respectively)

   $ 573,494      $ 428,782   

Affiliate investments (cost of $3,236 and $2,880, respectively)

     —          3,069   

Control investments (cost of $11,611 and $31,743, respectively)

     2,983        40,181   
  

 

 

   

 

 

 

Total investments, at value (cost of $587,405 and $480,405, respectively)

     576,477        472,032   

Cash and cash equivalents

     96,309        107,014   

Interest receivable

     4,667        4,520   

Other assets

     11,184        7,681   
  

 

 

   

 

 

 

Total assets

   $ 688,637      $ 591,247   
  

 

 

   

 

 

 

Liabilities

    

Accounts payable and accrued liabilities

   $ 7,755      $ 8,716   

Long-term SBA Debentures

     188,750        170,000   

Long-term Liabilities (Convertible Debt)

     70,082        —     
  

 

 

   

 

 

 

Total liabilities

     266,587        178,716   

Net assets consist of:

    

Common stock, par value

     43        43   

Capital in excess of par value

     486,557        477,549   

Unrealized depreciation on investments

     (10,861     (8,038

Accumulated realized losses on investments

     (47,604     (51,033

Distributions in excess of investment income

     (6,085     (5,990
  

 

 

   

 

 

 

Total net assets

   $ 422,050      $ 412,531   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 688,637      $ 591,247   
  

 

 

   

 

 

 

Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized)

     43,908        43,444   

Net asset value per share

   $ 9.61      $ 9.50   

See notes to Consolidated Financial Statements (unaudited)

 

3


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

  

Principal
Amount

    

Cost(2)

    

Value(3)

 

Acceleron Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants       $ 69       $ 878   
     

Preferred Stock Warrants

        35         186   
     

Preferred Stock Warrants

        39         85   
     

Preferred Stock

        1,341         2,473   
           

 

 

    

 

 

 

Total Acceleron Pharmaceuticals, Inc.

              1,484         3,622   

Anthera Pharmaceuticals Inc.

   Drug Discovery   

Senior Debt

Matures September 2014

Interest rate Prime + 7.3% or

Floor rate of 10.55%

   $ 25,000         24,269         25,019   
     

Common Stock Warrants

        541         378   

Total Anthera Pharmaceuticals Inc.

      Common Stock Warrants         443         308   
           

 

 

    

 

 

 
              25,253         25,705   

Aveo Pharmaceuticals, Inc.

   Drug Discovery   

Senior Debt

Matures June 2014

Interest rate Prime + 7.15% or

Floor rate of 11.9%

   $ 25,000         26,554         27,304   
     

Common Stock

        842         2,583   
           

 

 

    

 

 

 

Total Aveo Pharmaceuticals, Inc.

              27,396         29,887   

Dicerna Pharmaceuticals, Inc.

   Drug Discovery   

Senior Debt

Matures January 2015

Interest rate Prime + 5.75% or

Floor rate of 10.15%

   $ 7,000         6,986         6,986   
      Preferred Stock Warrants         206         90   
     

Preferred Stock Warrants

        31         26   
     

Preferred Stock Warrants

        28         15   
     

Preferred Stock Warrants

        187         143   
     

Preferred Stock

        502         439   
           

 

 

    

 

 

 

Total Dicerna Pharmaceuticals, Inc.

              7,940         7,699   

EpiCept Corporation(5)

   Drug Discovery    Common Stock Warrants         4         13   
           

 

 

    

 

 

 

Total EpiCept Corporation

              4         13   

Horizon Therapeutics, Inc.

   Drug Discovery    Common Stock Warrants         231         1   
           

 

 

    

 

 

 

Total Horizon Therapeutics, Inc.

              231         1   

Inotek Pharmaceuticals Corp.

   Drug Discovery    Preferred Stock         1,500         —     
           

 

 

    

 

 

 

Total Inotek Pharmaceuticals Corp.

              1,500         —     

Merrimack Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants         155         1,115   
      Preferred Stock         2,000         3,825   
           

 

 

    

 

 

 

Total Merrimack Pharmaceuticals, Inc.

              2,155         4,940   

Paratek Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants         137         140   
     

Preferred Stock

        1,000         1,348   
           

 

 

    

 

 

 

Total Paratek Pharmaceuticals, Inc.

              1,137         1,488   

See notes to Consolidated Financial Statements (unaudited)

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

PolyMedix, Inc.

   Drug Discovery    Senior Debt         
     

Matures September 2013

Interest rate Prime + 7.1% or

Floor rate of 12.35%

   $ 7,611       $ 7,394       $ 7,546   
     

Common Stock Warrants

        480         78   
           

 

 

    

 

 

 

Total PolyMedix, Inc.

              7,874         7,624   

Portola Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants         152         285   
           

 

 

    

 

 

 

Total Portola Pharmaceuticals, Inc.

              152         285   
           

 

 

    

 

 

 

Total Drug Discovery (19.25%)*

              75,126         81,264   
           

 

 

    

 

 

 

Affinity Videonet, Inc.

   Communications
& Networking
   Preferred Stock Warrants         102         149   
           

 

 

    

 

 

 

Total Affinity Videonet, Inc.

              102         149   

E-band Communications, Corp.(6)

   Communications
& Networking
  

Convertible Senior Debt

Matures May 2013

Interest rate Fixed 6.00%

   $ 356         356         —     
     

Preferred Stock

        2,880         —     
           

 

 

    

 

 

 

Total E-Band Communications, Corp.

              3,236         —     

IKANO Communications, Inc.

   Communications
& Networking
   Preferred Stock Warrants         45         —     
     

Preferred Stock Warrants

        72         —     
           

 

 

    

 

 

 

Total IKANO Communications, Inc.

              117         —     

Intelepeer, Inc.

   Communications
& Networking
  

Senior Debt

Matures May 2013

Interest rate Prime + 8.12% or

Floor rate of 11.37%

   $ 6,524         6,509         6,640   
     

Senior Debt

Matures May 2012

Interest rate Prime + 4.25%

   $ 1,100         998         998   
     

Preferred Stock Warrants

        102         123   
           

 

 

    

 

 

 

Total Intelepeer, Inc.

              7,609         7,761   

Neonova Holding Company

   Communications
& Networking
   Preferred Stock Warrants         94         21   
     

Preferred Stock

        250         197   
           

 

 

    

 

 

 

Total Neonova Holding Company

              344         218   

Pac-West Telecomm, Inc.

   Communications
& Networking
  

Senior Debt

Matures October 2014

Interest rate Prime + 7.50% or

Floor rate of 12.00%

   $ 4,369         4,164         4,164   
     

Preferred Stock Warrants

        121         —     
           

 

 

    

 

 

 

Total Pac-West Telecomm, Inc.

              4,285         4,164   

PeerApp, Inc.

   Communications
& Networking
  

Senior Debt

Matures April 2013

Interest rate Prime + 7.5% or

Floor rate of 11.50%

   $ 2,072         2,091         2,112   
     

Preferred Stock Warrants

        61         91   
           

 

 

    

 

 

 

Total PeerApp, Inc.(5)

              2,152         2,203   

 

See notes to Consolidated Financial Statements (unaudited)

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Peerless Network, Inc.

   Communications
& Networking
   Preferred Stock Warrants       $ 95       $ 187   
     

Preferred Stock

        1,000         2,370   
           

 

 

    

 

 

 

Total Peerless Network, Inc.

              1,095         2,557   

Ping Identity Corporation

   Communications
& Networking
   Preferred Stock Warrants         52         410   
           

 

 

    

 

 

 

Total Ping Identity Corporation

              52         410   

PointOne, Inc.

   Communications
& Networking
  

Senior Debt

Matures April 2013

Interest rate Libor + 9.0% or

Floor rate of 11.50%

   $ 8,375         8,153         8,153   
   Communications
& Networking
   Common Stock Warrants         131         194   
           

 

 

    

 

 

 

Total PointOne, Inc.

              8,284         8,347   

Purcell Systems, Inc.

   Communications
& Networking
   Preferred Stock Warrants         123         89   
           

 

 

    

 

 

 

Total Purcell Systems, Inc.

              123         89   

Seven Networks, Inc.

   Communications
& Networking
   Preferred Stock Warrants         174         —     
           

 

 

    

 

 

 

Total Seven Networks, Inc.

              174         —     

Stoke, Inc(4)

   Communications
& Networking
  

Senior Debt

Matures May 2013

Interest rate Prime + 7.0% or

Floor rate of 10.25%

   $ 3,051         2,995         3,025   
      Preferred Stock Warrants         53         68   
      Preferred Stock Warrants         65         54   
      Preferred Stock         500         500   
           

 

 

    

 

 

 

Total Stoke, Inc.

              3,613         3,647   

Tectura Corporation

   Communications
& Networking
  

Senior Debt

Matures December 2012

Interest rate 11%

   $ 8,125         9,324         9,209   
     

Revolving Line of Credit

Matures July 2012

Interest rate 11%,

PIK interest 1.00%

   $ 17,207         17,332         17,332   
      Preferred Stock Warrants         51         33   
           

 

 

    

 

 

 

Total Tectura Corporation

              26,707         26,574   
           

 

 

    

 

 

 

Total Communications & Networking (13.30%)*

              57,893         56,119   
           

 

 

    

 

 

 

Atrenta, Inc.

   Software    Preferred Stock Warrants         102         368   
      Preferred Stock Warrants         34         121   
      Preferred Stock Warrants         95         174   
      Preferred Stock         250         375   
           

 

 

    

 

 

 

Total Atrenta, Inc.

              481         1,038   

Blurb, Inc.

   Software    Preferred Stock Warrants         25         403   
      Preferred Stock Warrants         298         400   
           

 

 

    

 

 

 

Total Blurb, Inc.

              323         803   

 

See notes to Consolidated Financial Statements (unaudited)

 

6


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Braxton Technologies, LLC.

   Software    Preferred Stock Warrants       $ 188       $ —     
           

 

 

    

 

 

 

Total Braxton Technologies, LLC.

              188         —     

Bullhorn, Inc.

   Software    Preferred Stock Warrants         43         188   
           

 

 

    

 

 

 

Total Bullhorn, Inc.

              43         188   

Central Desktop, Inc.

   Software   

Senior Debt

Matures April 2014

Interest rate Prime + 6.75% or

Floor rate of 10.50%

   $ 3,000         2,872         2,872   
     

Preferred Stock Warrants

        108         299   
           

 

 

    

 

 

 

Total Central Desktop, Inc.

              2,980         3,171   

Clickfox, Inc.

   Software    Senior Debt         
     

Matures July 2013

Interest rate Prime + 6.00% or

Floor rate of 11.25%

   $ 4,565         4,462         4,553   
      Preferred Stock Warrants         177         327   
      Preferred Stock Warrants         152         296   
           

 

 

    

 

 

 

Total Clickfox, Inc.

              4,791         5,176   

Forescout Technologies, Inc.

   Software    Preferred Stock Warrants         99         47   
           

 

 

    

 

 

 

Total Forescout Technologies, Inc.

              99         47   

GameLogic, Inc.

   Software    Preferred Stock Warrants         92         —     
           

 

 

    

 

 

 

Total GameLogic, Inc.

              92         —     

HighRoads, Inc.

   Software    Preferred Stock Warrants         44         7   
           

 

 

    

 

 

 

Total HighRoads, Inc.

              44         7   

Kxen, Inc.

   Software   

Senior Debt

Matures January 2015

Interest rate Prime + 5.08% or

Floor rate of 8.33%

   $ 3,000         2,938         2,938   
     

Preferred Stock Warrants

        47         29   
           

 

 

    

 

 

 

Total Kxen, Inc.

              2,985         2,967   

RichRelevance, Inc.

   Software   

Senior Debt

Matures January 2015

Interest rate Prime + 3.25% or

Floor rate of 7.50%

   $ 5,000         4,857         4,857   
     

Preferred Stock Warrants

        98         23   
           

 

 

    

 

 

 

Total RichRelevance, Inc.

              4,955         4,880   

Rockyou, Inc.

   Software    Preferred Stock Warrants         117         7   
           

 

 

    

 

 

 

Total Rockyou, Inc.

              117         7   

Sportvision, Inc.

   Software    Preferred Stock Warrants         39         —     
           

 

 

    

 

 

 

Total Sportvision, Inc.

              39         —     

SugarSync Inc.

   Software   

Senior Debt

Matures April 2015

Interest rate Prime + 4.50% or

Floor rate of 8.25%

   $ 2,000         1,946         1,946   
     

Preferred Stock Warrants

        78         77   
           

 

 

    

 

 

 

Total SugarSync Inc.

              2,024         2,023   

 

See notes to Consolidated Financial Statements (unaudited)

 

7


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Unify Corporation

   Software    Common Stock Warrants       $ 1,434       $ 332   
           

 

 

    

 

 

 

Total Unify Corporation

              1,434         332   

White Sky, Inc.

   Software   

Senior Debt

Matures June 2014

Interest rate Prime + 7.00% or

Floor rate of 10.25%

   $ 1,500         1,443         1,443   
   Software    Preferred Stock Warrants         54         1   
           

 

 

    

 

 

 

Total White Sky, Inc.

              1,497         1,444   

WildTangent, Inc.

   Software    Preferred Stock Warrants         238         11   
           

 

 

    

 

 

 

Total WildTangent, Inc.

              238         11   
           

 

 

    

 

 

 

Total Software (5.23%)*

              22,330         22,094   
           

 

 

    

 

 

 

Luminus Devices, Inc.

   Electronics &
Computer Hardware
   Preferred Stock Warrants         183         —     
     

Preferred Stock Warrants

        84         —     
     

Preferred Stock Warrants

        334         —     
           

 

 

    

 

 

 

Total Luminus Devices, Inc.

              601         —     

Maxvision Holding, LLC(7).

   Electronics &
Computer Hardware
  

Senior Debt

Matures December 2013

Interest rate Prime + 8.25% or

Floor rate of 12.00%,

PIK interest 5.00%

   $ 4,366         4,462         2,069   
     

Senior Debt

Matures December 2013

Interest rate Prime + 6.25% or

Floor rate of 10.00%, PIK interest 2.00%

   $ 2,681         2,653         —     
     

Revolving Line of Credit

Matures December 2013

Interest rate Prime + 6.25% or

Floor rate of 10.00%

   $ 923         914         914   
     

Common Stock

        3,581         —     
           

 

 

    

 

 

 

Total Maxvision Holding, LLC

              11,610         2,983   

Shocking Technologies, Inc.

   Electronics &
Computer Hardware
   Preferred Stock Warrants         63         57   
           

 

 

    

 

 

 

Total Shocking Technologies, Inc.

              63         57   

Spatial Photonics, Inc.(8)

   Electronics &
Computer Hardware
   Preferred Stock Warrants         130         —     
     

Preferred Stock

        768         —     
           

 

 

    

 

 

 

Total Spatial Photonics Inc.

              898         —     
           

 

 

    

 

 

 

Total Electronics & Computer Hardware (.72%)*

              13,172         3,040   
           

 

 

    

 

 

 

 

See notes to Consolidated Financial Statements (unaudited)

 

8


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Aegerion Pharmaceuticals, Inc.

   Specialty
Pharmaceuticals
  

Senior Debt

Matures September 2014

Interest rate Prime + 5.65% or

Floor rate of 10.40%

   $ 10,000       $ 10,138       $ 10,325   
     

Common Stock Warrants

        69         722   
     

Common Stock

        1,093         1,825   
           

 

 

    

 

 

 

Total Aegerion Pharmaceuticals, Inc.

              11,300         12,872   

Althea Technologies, Inc.

   Specialty
Pharmaceuticals
  

Senior Debt

Matures October 2013

Interest rate Prime + 7.70% or

Floor rate of 10.95%

   $ 10,990         10,844         11,135   
     

Preferred Stock Warrants

        309         362   
           

 

 

    

 

 

 

Total Althea Technologies, Inc.

              11,153         11,497   

Chroma Therapeutics, Ltd.(5)

   Specialty
Pharmaceuticals
  

Senior Debt

Matures September 2013

Interest rate Prime + 7.75% or

Floor rate of 12.00%

   $ 8,540         8,738         8,738   
     

Preferred Stock Warrants

        490         344   
           

 

 

    

 

 

 

Total Chroma Therapeutics, Ltd.

              9,228         9,082   

Pacira Pharmaceuticals, Inc.

   Specialty
Pharmaceuticals
  

Senior Debt

Matures August 2014

Interest rate Prime + 6.25% or

Floor rate of 10.25%

   $ 11,250         11,237         11,237   
     

Senior Debt

Matures August 2014

Interest rate Prime + 8.65% or

Floor rate of 12.65%

   $ 15,000         14,255         14,443   
     

Common Stock Warrants

        1,086         584   
           

 

 

    

 

 

 

Total Pacira Pharmaceuticals, Inc.

              26,578         26,264   

Quatrx Pharmaceuticals Company

   Specialty
Pharmaceuticals
  

Convertible Senior Debt

Matures March 2012

Interest rate 8.00%

   $ 1,888         1,888         1,888   
     

Preferred Stock Warrants

        220         —     
     

Preferred Stock Warrants

        307         —     
     

Preferred Stock

        750         —     
           

 

 

    

 

 

 
Total Quatrx Pharmaceuticals Company               3,165         1,888   
           

 

 

    

 

 

 
Total Specialty Pharmaceuticals (14.60%)*               61,424         61,603   
           

 

 

    

 

 

 
Annie’s, Inc.    Consumer & Business
Products
  

Preferred Stock Warrants

        321         96   
           

 

 

    

 

 

 
Total Annie’s, Inc.               321         96   
IPA Holdings, LLC    Consumer & Business
Products
  

Preferred Stock Warrants

        275         24   
     

Preferred Stock

        500         260   
           

 

 

    

 

 

 
Total IPA Holding, LLC               775         284   
Market Force Information, Inc.    Consumer & Business
Products
  

Preferred Stock Warrants

        24         105   
      Preferred Stock         500         481   
           

 

 

    

 

 

 
Total Market Force Information, Inc.               524         586   

 

See notes to Consolidated Financial Statements (unaudited)

 

9


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  
TV Guide, Inc.    Consumer & Business
Products
  

Revolving Line of Credit
Matures October 2011
Interest rate Prime + 11.00% or
Floor rate of 13.00%

   $ 500       $ 479       $ 479   
           

 

 

    

 

 

 
Total TV Guide, Inc.               479         479   
Wageworks, Inc.    Consumer & Business
Products
  

Preferred Stock Warrants

        252         2,510   
      Preferred Stock         250         390   
           

 

 

    

 

 

 
Total Wageworks, Inc.               502         2,900   
           

 

 

    

 

 

 
Total Consumer & Business Products (1.03%)*               2,601         4,345   
           

 

 

    

 

 

 
Achronix Semiconductor Corporation    Semiconductors   

Senior Debt
Matures January 2015
Interest rate Prime + 10.60% or
Floor rate of 13.85%

   $ 2,500         2,396         2,396   
      Preferred Stock Warrants         160         152   
           

 

 

    

 

 

 
Total Achronix Semiconductor Corporation               2,556         2,548   
Enpirion, Inc.    Semiconductors   

Preferred Stock Warrants

        157         —     
           

 

 

    

 

 

 
Total Enpirion, Inc.               157         —     
iWatt, Inc.    Semiconductors   

Preferred Stock Warrants

        46         3   
      Preferred Stock Warrants         51         1   
      Preferred Stock Warrants         73         2   
      Preferred Stock Warrants         458         7   
      Preferred Stock         490         983   
           

 

 

    

 

 

 
Total iWatt, Inc.               1,118         996   
Kovio Inc.    Semiconductors   

Senior Debt
Matures March 2015
Interest rate Prime + 5.50% or
Floor rate of 9.25%

   $ 1,250         1,213         1,213   
      Preferred Stock Warrants         27         27   
           

 

 

    

 

 

 
Total Kovio Inc.               1,240         1,240   
NEXX Systems, Inc.    Semiconductors    Preferred Stock Warrants         297         1,330   
      Preferred Stock         277         802   
           

 

 

    

 

 

 
Total NEXX Systems, Inc.               574         2,132   
Quartics, Inc.    Semiconductors    Preferred Stock Warrants         53         —     
           

 

 

    

 

 

 
Total Quartics, Inc.               53         —     

 

See notes to Consolidated Financial Statements (unaudited)

 

10


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  
Total Semiconductors (1.64%)*             $ 5,698       $ 6,916   
           

 

 

    

 

 

 
AcelRX Pharmaceuticals, Inc.    Drug
Delivery
  

Senior Debt

Matures December 2014

Interest rate Prime + 3.25% or

Floor rate of 8.50%

   $ 5,000         4,889         4,889   
     

Senior Debt

Matures December 2014

Interest rate Prime + 3.25% or

Floor rate of 8.50%

   $ 5,000         4,889         4,889   
      Common Stock Warrants         178         102   
      Common Stock Warrants         178         102   
           

 

 

    

 

 

 
Total AcelRX Pharmaceuticals, Inc.               10,134         9,982   
Alexza Pharmaceuticals, Inc.(4)    Drug
Delivery
  

Senior Debt

Matures October 2013

Interest rate Prime + 6.5% or

Floor rate of 10.75%

   $ 11,770         11,699         12,121   
      Preferred Stock Warrants         645         103   
           

 

 

    

 

 

 
Total Alexza Pharmaceuticals, Inc.               12,344         12,224   
BIND Biosciences, Inc.    Drug
Delivery
  

Senior Debt

Matures July 2014

Interest rate Prime + 7.45% or

Floor rate of 10.70%

   $ 5,000         4,655         4,805   
      Preferred Stock Warrants         53         75   
      Preferred Stock Warrants         50         76   
      Preferred Stock Warrants         188         312   
           

 

 

    

 

 

 
Total BIND Biosciences, Inc.               4,946         5,268   
Labopharm USA, Inc.(5)    Drug
Delivery
  

Senior Debt

Matures December 2012

Interest rate 10.95%

   $ 9,771         9,718         9,718   
     

Senior Debt

Matures December 2012

Interest rate Prime + 3.20% or

Floor rate of 10.95%

   $ 3,257         3,417         3,417   
           

 

 

    

 

 

 
Total Labopharm USA, Inc.               13,135         13,135   
Merrion Pharmaceuticals, Inc.(5)    Drug
Delivery
  

Senior Debt

Matures January 2015

Interest rate Prime + 9.20% or

Floor rate of 12.45%

   $ 5,000         4,735         3,870   
      Common Stock Warrants         213         23   
           

 

 

    

 

 

 
Total Merrion Pharmaceuticals, Inc.               4,948         3,893   
Transcept Pharmaceuticals, Inc.    Drug
Delivery
   Common Stock Warrants         36         57   
      Common Stock Warrants         51         86   
      Common Stock         500         275   
           

 

 

    

 

 

 
Total Transcept Pharmaceuticals, Inc.               587         418   
Revance Therapeutics, Inc.    Drug
Delivery
  

Senior Debt

Matures March 2015

Interest rate Prime + 6.60% or

Floor rate of 9.85%

   $ 22,000         21,257         21,257   
     

Preferred Stock Warrants

        557         557   
           

 

 

    

 

 

 

Total Revance Therapeutics, Inc.

              21,814         21,814   
           

 

 

    

 

 

 

Total Drug Delivery (15.81%)*

        67,908         66,734   
           

 

 

    

 

 

 

 

See notes to Consolidated Financial Statements (unaudited)

 

11


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

BARRX Medical, Inc.

   Therapeutic   

Senior Debt

Matures December 2011

Interest rate 11.00%

   $ 768       $ 1,295       $ 1,295   
     

Preferred Stock Warrants

        76         110   
     

Preferred Stock

        1,501         2,607   
           

 

 

    

 

 

 

Total BARRX Medical, Inc.

              2,872         4,012   

EKOS Corporation

   Therapeutic   

Preferred Stock Warrants

        175         —     
     

Preferred Stock Warrants

        153         —     
           

 

 

    

 

 

 

Total EKOS Corporation

              328         —     

Gelesis, Inc.(8)

   Therapeutic   

Senior Debt

Matures April 2013

Interest rate Prime + 4.65% or

Floor rate of 10.75%

   $ 2,771         2,820         —     
           

 

 

    

 

 

 

Total Gelesis, Inc.

              2,820         —     

Gynesonics, Inc.

   Therapeutic   

Senior Debt

Matures October 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

   $ 5,846         5,775         5,842   
     

Preferred Stock Warrants

        228         240   
     

Preferred Stock

        532         451   
           

 

 

    

 

 

 

Total Gynesonics, Inc.

              6,535         6,533   

Light Science Oncology, Inc.

   Therapeutic    Preferred Stock Warrants         99         176   
           

 

 

    

 

 

 

Total Light Science Oncology, Inc.

              99         176   

Novasys Medical, Inc.

   Therapeutic    Preferred Stock Warrants         71         —     
     

Preferred Stock Warrants

        54         1   
   Preferred Stock         1,000         1,001   
           

 

 

    

 

 

 

Total Novasys Medical, Inc.

              1,125         1,002   

Oraya Therapeutics, Inc.

   Therapeutic   

Senior Debt

Matures March 2015

Interest rate Prime + 4.75% or

Floor rate of 9.50%

   $ 7,500         7,317         7,317   
      Preferred Stock Warrants         232         232   
           

 

 

    

 

 

 

Total Oraya Therapeutics, Inc.

              7,549         7,549   

Pacific Child & Family Associates, LLC

   Therapeutic   

Senior Debt

Matures January 2015

Interest rate LIBOR + 8.0% or

Floor rate of 10.50%

   $ 5,685         5,592         5,592   
     

Revolving Line of Credit

Matures January 2015

Interest rate LIBOR + 6.5% or

Floor rate of 9.00%

   $ 1,500         1,483         1,396   
     

Senior Debt

Matures January 2015

Interest rate LIBOR + 10.50% or

Floor rate of 13.0%, PIK

interest 3.75%

   $ 5,900         6,185         6,302   
           

 

 

    

 

 

 

Total Pacific Child & Family Associates, LLC

              13,260         13,290   

Total Therapeutic (7.72%)*

              34,588         32,562   
           

 

 

    

 

 

 

 

See notes to Consolidated Financial Statements (unaudited)

 

12


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Cozi Group, Inc.

   Internet Consumer

& Business Services

  

Preferred Stock Warrants

      $ 147       $ —     
     

Preferred Stock

        177         48   
           

 

 

    

 

 

 

Total Cozi Group, Inc.

              324         48   

Invoke Solutions, Inc.

   Internet Consumer

& Business Services

  

Preferred Stock Warrants

        56         —     
     

Preferred Stock Warrants

        26         —     
           

 

 

    

 

 

 

Total Invoke Solutions, Inc.

              82         —     

InXpo, Inc.

   Internet Consumer

& Business Services

  

Senior Debt

Matures March 2014

Interest rate Prime + 7.5% or

Floor rate of 10.75%

   $ 3,500         3,403         3,403   
     

Preferred Stock Warrants

        98         82   
           

 

 

    

 

 

 

Total InXpo, Inc.

              3,501         3,485   

Prism Education Group, Inc.

   Internet Consumer

& Business Services

  

Preferred Stock Warrants

        43         109   
           

 

 

    

 

 

 

Total Prism Education Group, Inc.

              43         109   

RazorGator Interactive Group, Inc.

   Internet Consumer

& Business Services

  

Preferred Stock Warrants

        13         —     
     

Preferred Stock Warrants

        28         —     
     

Preferred Stock Warrants

        1,183         —     
     

Preferred Stock

        1,000         —     
           

 

 

    

 

 

 

Total RazorGator Interactive Group, Inc.

              2,224         —     

Reply! Inc.(4)

   Internet Consumer

& Business Services

  

Senior Debt

Matures June 2015

Interest rate Prime + 6.87% or

Floor rate of 10.12%

   $ 13,000         12,862         12,862   
     

Preferred Stock Warrants

        320         206   
           

 

 

    

 

 

 

Total Reply! Inc.

              13,182         13,068   

ScriptSave

(Medical Security Card Company, LLC)

   Internet Consumer

& Business Services

  

Senior Debt

Matures February 2016

Interest rate Prime + 8.75% or

Floor rate of 11.25%

   $ 20,158         19,786         20,391   
           

 

 

    

 

 

 

Total ScriptSave

              19,786         20,391   

Trulia, Inc.

   Internet Consumer

& Business Services

  

Senior Debt

Matures March 2015

Interest rate Prime + 2.75% or

Floor rate of 6.00%

   $ 5,000         4,856         4,856   
     

Senior Debt

Matures March 2015

Interest rate Prime + 5.50% or

Floor rate of 8.75%

   $ 5,000         4,857         4,857   
     

Preferred Stock Warrants

        188         187   
           

 

 

    

 

 

 

Total Trulia, Inc.

              9,901         9,900   

 

See notes to Consolidated Financial Statements (unaudited)

 

13


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Vaultlogix, Inc.

   Internet Consumer

& Business Services

  

Senior Debt

Matures September 2016

Interest rate Libor + 8.50% or

Floor rate of 10.00%,

PIK interest 2.50%

   $ 7,500       $ 7,382       $ 7,382   
     

Senior Debt

Matures September 2015

Interest rate Libor + 7.00% or

Floor rate of 8.50%

   $ 11,500         11,309         11,309   
     

Revolving Line of Credit

Matures September 2015

Interest rate Libor + 6.00% or

Floor rate of 7.50%

   $ 300         283         283   
           

 

 

    

 

 

 

Total Vaultlogix, Inc.

              18,974         18,974   
           

 

 

    

 

 

 

Total Internet Consumer & Business Services (15.63%)

           68,017         65,975   
           

 

 

    

 

 

 

Lilliputian Systems, Inc.

   Energy   

Preferred Stock Warrants

        106         —     
     

Common Stock Warrants

        48         —     
           

 

 

    

 

 

 

Total Lilliputian Systems, Inc.

              154         —     
           

 

 

    

 

 

 

Total Energy (0.00%)*

              154         —     
           

 

 

    

 

 

 

Box.net, Inc.

   Information Services   

Senior Debt

Matures March 2015

Interest rate Prime + 3.75% or

Floor rate of 7.50%

   $ 4,808         4,686         4,686   
     

Senior Debt

Matures July 2014

Interest rate Prime + 5.25% or

Floor rate of 8.50%

   $ 1,590         1,602         1,634   
     

Preferred Stock Warrants

        73         1,998   
     

Preferred Stock Warrants

        117         1,352   
     

Preferred Stock Warrants

        194         191   
     

Preferred Stock

        500         3,137   
     

Preferred Stock

        1,500         2,272   
           

 

 

    

 

 

 

Total Box.net, Inc.

              8,672         15,270   

Buzznet, Inc.

   Information Services    Preferred Stock Warrants         9         —     
     

Preferred Stock

        250         34   
           

 

 

    

 

 

 

Total Buzznet, Inc.

              259         34   

Cha Cha Search, Inc.

   Information Services   

Senior Debt

Matures February 2015

Interest rate Prime + 6.25% or

Floor rate of 9.50%

   $ 3,000         2,916         2,916   
     

Preferred Stock Warrants

        58         10   
           

 

 

    

 

 

 

Total Cha Cha Search, Inc.

              2,974         2,926   

XL Education Corp.

   Information Services    Common Stock         880         880   
           

 

 

    

 

 

 

Total XL Education Corp.

              880         880   

hi5 Networks, Inc.

   Information Services    Preferred Stock Warrants         213         —     
     

Preferred Stock

        250         741   
           

 

 

    

 

 

 

Total hi5 Networks, Inc.

              463         741   

Jab Wireless, Inc.

   Information Services   

Senior Debt

Matures August 2016

Interest rate Prime + 6.25% or

Floor rate of 6.75%

   $ 18,121         17,858         17,858   

Jab Wireless, Inc.

   Information Services    Preferred Stock Warrants         265         281   
           

 

 

    

 

 

 

Total Jab Wireless, Inc.

              18,123         18,139   

 

See notes to Consolidated Financial Statements (unaudited)

 

14


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Solutionary, Inc.

   Information Services    Preferred Stock Warrants       $ 94       $ —     
     

Preferred Stock Warrants

        2         —     
     

Preferred Stock

        250         42   
           

 

 

    

 

 

 

Total Solutionary, Inc.

              346         42   

Intelligent Beauty, Inc.

   Information Services    Preferred Stock Warrants         230         90   
           

 

 

    

 

 

 

Total Intelligent Beauty, Inc.

              230         90   

Good Technologies, Inc.

   Information Services    Common Stock         603         95   
           

 

 

    

 

 

 

Total Good Technologies, Inc.

              603         95   

Zeta Interactive Corporation

   Information Services    Preferred Stock Warrants         172         110   
     

Preferred Stock

        501         485   
           

 

 

    

 

 

 

Total Zeta Interactive Corporation

              673         595   
           

 

 

    

 

 

 
Total Information Services (9.20%)               33,223         38,812   

Novadaq Technologies, Inc.(5)

   Diagnostic    Common Stock         1,415         808   
           

 

 

    

 

 

 

Total Novadaq Technologies, Inc.(5)

              1,415         808   

Optiscan Biomedical, Corp.

   Diagnostic   

Senior Debt

Matures December 2013

Interest rate Prime + 8.20% or

Floor rate of 11.45%

   $ 10,750         10,792         11,162   
     

Preferred Stock Warrants

        1,069         668   
     

Preferred Stock

        3,656         2,251   
           

 

 

    

 

 

 

Total Optiscan Biomedical, Corp.

              15,517         14,081   
           

 

 

    

 

 

 

Total Diagnostic (3.53%)*

              16,932         14,889   
           

 

 

    

 

 

 

deCODE genetics ehf.

   Biotechnology Tools   

Senior Debt

Matures September 2014

Interest rate Prime + 10.25% or

Floor rate of 13.50%,

PIK interest 2.00%

   $ 5,000         4,740         4,740   
     

Preferred Stock Warrants

        305         358   
           

 

 

    

 

 

 

Total deCODE genetics ehf.

              5,045         5,098   

Kamada, LTD.

   Biotechnology Tools    Common Stock         427         398   
           

 

 

    

 

 

 

Total Kamada, LTD.

              427         398   

Labcyte, Inc.

   Biotechnology Tools   

Senior Debt

Matures May 2013

Interest rate Prime + 8.6% or

Floor rate of 11.85%

   $ 2,800         2,774         2,849   
     

Common Stock Warrants

        192         190   
     

Common Stock Warrants

        5         5   
           

 

 

    

 

 

 

Total Labcyte, Inc.

              2,971         3,044   

NeurogesX, Inc.

   Drug Discovery   

Senior Debt

Matures February 2015

Interest rate Prime + 6.25% or

Floor rate of 9.50%

   $ 15,000         14,433         14,433   
     

Common Stock Warrants

        503         132   
           

 

 

    

 

 

 

Total NeurogesX, Inc.

              14,936         14,565   

 

See notes to Consolidated Financial Statements (unaudited)

 

15


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

NuGEN Technologies, Inc.

   Biotechnology Tools    Preferred Stock Warrants       $ 45       $ 203   
     

Preferred Stock Warrants

        33         15   
     

Preferred Stock

        500         473   
           

 

 

    

 

 

 

Total NuGEN Technologies, Inc.

              578         691   
           

 

 

    

 

 

 

Total Biotechnology Tools (5.64%)*

              23,957         23,796   
           

 

 

    

 

 

 

Entrigue Surgical, Inc.

   Surgical Devices   

Senior Debt

Matures December 2014

Interest rate Prime + 5.90% or

Floor rate of 9.65%

   $ 3,000         2,863         2,863   
     

Preferred Stock Warrants

        87         87   
           

 

 

    

 

 

 

Total Entrigue Surgical, Inc.

              2,950         2,950   

Transmedics, Inc.(4)

   Surgical Devices   

Senior Debt

Matures February 2014

Interest rate Prime + 9.70% or

Floor rate of 12.95%

   $ 8,375         9,115         4,733   
     

Preferred Stock Warrants

        225         —     
     

Preferred Stock

        1,169         —     
           

 

 

    

 

 

 

Total Transmedics, Inc.

              10,509         4,733   
           

 

 

    

 

 

 

Total Surgical Devices (1.82%)*

              13,459         7,683   
           

 

 

    

 

 

 

Glam Media, Inc.

   Media/Content/Info    Preferred Stock Warrants         482         138   
           

 

 

    

 

 

 

Total Glam Media, Inc.

              482         138   

Everyday Health, Inc. (Waterfront Media, Inc.)

   Media/Content/Info    Preferred Stock Warrants         60         364   
      Preferred Stock         1,000         945   
           

 

 

    

 

 

 

Total Everyday Health

              1,060         1,309   

Women’s Marketing, Inc.

   Media/Content/Info   

Senior Debt

Matures May 2016

Interest rate Libor + 9.50% or

Floor rate of 12.00%,

PIK interest 3.00%

   $ 10,000         9,866         9,866   
     

Senior Debt

Matures November 2015

Interest rate Libor + 7.50% or

Floor rate of 10.0%

   $ 9,875         9,648         9,648   
     

Senior Debt

Matures November 2015

Interest rate Libor + 7.50% or

Floor rate of 10.0%

   $ 10,125         9,891         9,891   
           

 

 

    

 

 

 

Total Women’s Marketing, Inc.

              29,405         29,405   
           

 

 

    

 

 

 

Total Media/Content/Info (7.31%)*

              30,947         30,852   
           

 

 

    

 

 

 

 

See notes to Consolidated Financial Statements (unaudited)

 

16


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

BrightSource Energy, Inc.(4)

   Clean Tech   

Senior Debt

Matures December 2011

Interest rate Prime + 7.75% or

Floor rate of 11.0%

   $ 11,250       $ 11,096       $ 11,096   
     

Senior Debt

Matures December 2012

Interest rate Prime + 9.55% or

Floor rate of 12.8%

   $ 13,750         13,542         13,542   
     

Preferred Stock Warrants

        675         623   
           

 

 

    

 

 

 

Total BrightSource Energy, Inc.

              25,313         25,261   

Calera, Inc.

   Clean Tech    Preferred Stock Warrants         513         660   
           

 

 

    

 

 

 

Total Calera, Inc.

              513         660   

EcoMotors, Inc.

   Clean Tech   

Senior Debt

Matures February 2014

Interest rate Prime + 6.1% or

Floor rate of 9.35%

   $ 5,383         5,260         5,421   
     

Preferred Stock Warrants

        154         451   
     

Common Stock Warrants

        154         451   
           

 

 

    

 

 

 

Total EcoMotors, Inc.

              5,568         6,323   

Enphase Energy, Inc.

   Clean Tech   

Senior Debt

Matures June 2014

Interest rate Prime + 5.75% or

Floor rate of 9.0%

   $ 4,248         4,135         4,135   
     

Preferred Stock Warrants

        102         17   
           

 

 

    

 

 

 

Total Enphase Energy, Inc.

              4,237         4,152   

GreatPoint Energy, Inc.

   Clean Tech    Preferred Stock Warrants         548         203   
           

 

 

    

 

 

 

Total GreatPoint Energy, Inc.

              548         203   

NanoSolar, Inc.

   Clean Tech   

Senior Debt

Matures September 2014

Interest rate Prime + 7.75% or

Floor rate of 11.0%

   $ 10,000         9,515         9,515   
     

Preferred Stock Warrants

 

        355         355   

Total NanoSolar, Inc.

              9,870         9,870   

Propel Biofuels, Inc.

   Clean Tech   

Senior Debt

Matures September 2013

Interest rate 11.0%

   $ 1,540         1,562         1,570   
     

 

Preferred Stock Warrants

        211         195   
           

 

 

    

 

 

 

Total Propel Biofuels, Inc.

              1,773         1,765   

Scientific Conservation, Inc.

   Clean Tech   

Senior Debt

Matures October 2014

Interest rate 6.25%

   $ 202         196         196   
      Preferred Stock Warrants         8         2   
           

 

 

    

 

 

 

Total Scientific Conservation, Inc.

              204         198   

 

See notes to Consolidated Financial Statements (unaudited)

 

17


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

September 30, 2011

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Solexel, Inc.

   Clean Tech   

Senior Debt

Matures June 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

   $ 1,031       $ 966       $ 966   
     

Senior Debt

Matures June 2013

Interest rate Prime + 7.25% or

Floor rate of 10.50%

   $ 8,927         9,660         9,660   
      Preferred Stock Warrants         335         11   
      Preferred Stock Warrants         259         71   
      Preferred Stock Warrants         142         142   
      Preferred Stock Warrants         426         427   
           

 

 

    

 

 

 

Total Solexel, Inc.

              11,788         11,277   

Trilliant, Inc.

   Clean Tech    Preferred Stock Warrants         89         46   
      Preferred Stock Warrants         73         38   
           

 

 

    

 

 

 

Total Trilliant, Inc.

              162         84   
           

 

 

    

 

 

 

Total Clean Tech (14.17%)*

              59,976         59,793   
           

 

 

    

 

 

 

Total Investments

            $ 587,405       $ 576,477   
           

 

 

    

 

 

 

 

* Value as a percent of net assets
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $28,443, $40,649 and $12,205 respectively. The tax cost of investments is $588,807.
(3) Except for warrants in twelve publicly traded companies and common stock in five publicly traded companies, all investments are restricted at September 30, 2011. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company.
(7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 25% of the voting securities of the company, or has greater than 50% representation on its board.
(8) Debt is on non-accrual status at September 30, 2011, and is therefore considered non-income producing.

 

See notes to Consolidated Financial Statements (unaudited)

 

18


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2010

(dollars in thousands)

 

Portfolio Company

   Industry   

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Acceleron Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants       $ 69       $ 922   
      Preferred Stock Warrants         35         189   
      Preferred Stock Warrants         39         99   
      Preferred Stock         1,341         2,316   
           

 

 

    

 

 

 

Total Acceleron Pharmaceuticals, Inc.

              1,484         3,526   

Aveo Pharmaceuticals, Inc.

   Drug Discovery   

Senior Debt

Matures September 2013

Interest rate Prime + 7.15% or

Floor rate of 11.9%

   $ 25,000         26,108         26,108   
      Preferred Stock Warrants         190         686   
      Preferred Stock Warrants         104         165   
      Preferred Stock Warrants         24         58   
      Preferred Stock Warrants         288         770   
      Preferred Stock Warrants         236         630   
           

 

 

    

 

 

 

Total Aveo Pharmaceuticals, Inc.

              26,950         28,417   

Dicerna Pharmaceuticals, Inc.

   Drug Discovery   

Senior Debt

Matures July 2012

Interest rate Prime + 9.20% or

Floor rate of 12.95%

   $ 4,699         4,678         4,706   
      Preferred Stock Warrants         205         182   
      Preferred Stock Warrants         30         33   
      Preferred Stock Warrants         28         25   
      Preferred Stock         503         503   
           

 

 

    

 

 

 

Total Dicerna Pharmaceuticals, Inc.

              5,444         5,449   

EpiCept Corporation

   Drug Discovery    Common Stock Warrants         4         112   
      Common Stock Warrants         40         10   
           

 

 

    

 

 

 

Total EpiCept Corporation

              44         122   

Horizon Therapeutics, Inc.

   Drug Discovery    Preferred Stock Warrants         231         —     
           

 

 

    

 

 

 

Total Horizon Therapeutics, Inc.

              231         —     

Inotek Pharmaceuticals Corp.

   Drug Discovery    Preferred Stock         1,500         —     
           

 

 

    

 

 

 

Total Inotek Pharmaceuticals Corp.

              1,500         —     

Merrimack Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants         155         170   
      Preferred Stock         2,000         1,547   
           

 

 

    

 

 

 

Total Merrimack Pharmaceuticals, Inc.

              2,155         1,717   

Paratek Pharmaceuticals, Inc.

   Drug Discovery    Preferred Stock Warrants         137         155   
      Preferred Stock         1,000         999   
           

 

 

    

 

 

 

Total Paratek Pharmaceuticals, Inc.

              1,137         1,154   

PolyMedix, Inc.

   Drug Discovery   

Senior Debt

Matures September 2013

Interest rate Prime + 7.1% or

Floor rate of 12.35%

   $ 10,000         9,605         9,605   
      Preferred Stock Warrants         480         248   
           

 

 

    

 

 

 

Total PolyMedix, Inc.

              10,085         9,853   

See notes to consolidated financial statements.

 

19


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Portola Pharmaceuticals, Inc.

   Drug Discovery   

Senior Debt
Matures April 2011
Interest rate Prime + 2.16%

   $ 1,666       $ 2,033       $ 2,033   
     

Preferred Stock Warrants

        152         506   
           

 

 

    

 

 

 

Total Portola Pharmaceuticals, Inc.

              2,185         2,539   
           

 

 

    

 

 

 

Total Drug Discovery (12.79%)*

  

     51,215         52,777   
           

 

 

    

 

 

 

Affinity Videonet, Inc.

  

Communications

& Networking

   Preferred Stock Warrants         102         180   
           

 

 

    

 

 

 

Total Affinity Videonet, Inc.

  

     102         180   

E-band Communications, Corp.(6)

   Communications & Networking    Preferred Stock         2,880         3,069   
           

 

 

    

 

 

 

Total E-Band Communications, Corp.

  

     2,880         3,069   

IKANO Communications, Inc.

   Communications & Networking   

Senior Debt
Matures August 2011
Interest rate 12.00%

   $ 1,654         1,953         1,953   
     

Preferred Stock Warrants

        45      
     

Preferred Stock Warrants

        72      
           

 

 

    

Total IKANO Communications, Inc.

  

     2,070         1,953   

Intelepeer, Inc.

   Communications & Networking   

Senior Debt
Matures May 2013
Interest rate Prime + 8.125%

   $ 7,624         7,468         7,459   
     

Preferred Stock Warrants

        102         111   
           

 

 

    

 

 

 

Total Intelepeer, Inc.

  

     7,570         7,570   

Neonova Holding Company

   Communications & Networking    Preferred Stock Warrants         94         12   
     

Preferred Stock

        250         140   
           

 

 

    

 

 

 

Total Neonova Holding Company

  

     344         152   

Opsource, Inc.(4)

   Communications & Networking   

Senior Debt
Matures June 2013
Interest rate Prime + 7.75% or
Floor rate of 11.00%

   $ 5,000         4,888         4,888   
     

Senior Debt
Matures October 2013
Interest rate Prime + 7.25%
or Floor rate of 10.50%

   $ 2,000         1,944         1,905   
     

Revolving Line of Credit
Matures June 2011
Interest rate Prime + 5.25% or
Floor rate of 8.50%

   $ 1,500         1,458         1,458   
     

Preferred Stock Warrants

        223         105   
           

 

 

    

 

 

 

Total Opsource, Inc.

  

     8,513         8,356   

 

See notes to consolidated financial statements.

 

20


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Pac-West Telecomm, Inc.

  

Communications

& Networking

  

Senior Debt

Matures April 2014

Interest rate Prime + 7.5% or

Floor rate of 12.0%

   $ 10,000       $ 9,634       $ 9,634   
     

Preferred Stock Warrants

        121         147   
           

 

 

    

 

 

 

Total Pac-West Telecomm, Inc.

              9,755         9,781   

PeerApp, Inc.

  

Communications

& Networking

  

Senior Debt

Matures April 2013

Interest rate Prime + 7.5% or

Floor rate of 11.50%

   $ 2,911         2,855         2,792   
     

Preferred Stock Warrants

        61         65   
           

 

 

    

 

 

 

Total PeerApp, Inc.

              2,916         2,857   

Peerless Network, Inc.

  

Communications

& Networking

  

Preferred Stock Warrants

        95         138   
     

Preferred Stock

        1,000         1,930   
           

 

 

    

 

 

 

Total Peerless Network, Inc.

              1,095         2,068   

Ping Identity Corporation

  

Communications

& Networking

  

Preferred Stock Warrants

        52         6   
           

 

 

    

 

 

 

Total Ping Identity Corporation

              52         6   

Purcell Systems, Inc.

  

Communications

& Networking

  

Preferred Stock Warrants

        123         330   
           

 

 

    

 

 

 

Total Purcell Systems, Inc.

              123         330   

Seven Networks, Inc.

  

Communications

& Networking

  

Preferred Stock Warrants

        174         40   
           

 

 

    

 

 

 

Total Seven Networks, Inc.

              174         40   

Stoke, Inc.(4)

  

Communications

& Networking

  

Senior Debt

Matures May 2013

Interest rate Prime + 7.0% or

Floor rate of 10.25%

   $ 4,000         3,883         3,883   
     

Preferred Stock Warrants

        53         210   
     

Preferred Stock Warrants

        65         133   
     

Preferred Stock

        500         500   
           

 

 

    

 

 

 

Total Stoke, Inc.

              4,501         4,726   

Tectura Corporation

  

Communications

& Networking

  

Senior Debt

Matures December 2012

Interest rate 11%

   $ 5,625         5,512         5,512   
     

Revolving Line of Credit

Matures July 2011

Interest rate 11%

   $ 17,477         18,488         18,488   
     

Preferred Stock Warrants

        50         10   
           

 

 

    

 

 

 

Total Tectura Corporation

              24,050         24,010   
           

 

 

    

 

 

 

Total Communications & Networking (15.78%)*

              64,145         65,098   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

21


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Atrenta, Inc.

   Software    Preferred Stock Warrants       $ 102       $ 46   
      Preferred Stock Warrants         34         15   
      Preferred Stock Warrants         95         22   
      Preferred Stock         250         143   
           

 

 

    

 

 

 

Total Atrenta, Inc.

  

     481         226   

Blurb, Inc.

   Software   

Senior Debt

Matures June 2011

Interest rate Prime + 3.50% or

Floor rate of 8.5%

   $ 1,162         1,392         1,392   
     

Preferred Stock Warrants

        25         349   
     

Preferred Stock Warrants

        299         228   
           

 

 

    

 

 

 

Total Blurb, Inc.

  

     1,716         1,969   

Braxton Technologies, LLC.

   Software    Preferred Stock Warrants         188      
           

 

 

    

Total Braxton Technologies, LLC.

  

     188      

Bullhorn, Inc.

   Software    Preferred Stock Warrants         43         234   
           

 

 

    

 

 

 

Total Bullhorn, Inc.

  

     43         234   

Clickfox, Inc.

   Software   

Senior Debt

Matures July 2013

Interest rate Prime + 6.00% or

Floor rate of 11.25%

   $ 6,000         5,801         5,801   
     

Revolving Line of Credit

Matures July 2011

Interest rate Prime + 5.00% or

Floor rate of 12.00%

   $ 2,000         1,997         1,996   
     

Preferred Stock Warrants

        177         643   
     

Preferred Stock Warrants

        152         643   
           

 

 

    

 

 

 

Total Clickfox, Inc.

  

     8,127         9,083   

Forescout Technologies, Inc.

   Software    Preferred Stock Warrants         99         14   
           

 

 

    

 

 

 

Total Forescout Technologies, Inc.

  

     99         14   

GameLogic, Inc.

   Software    Preferred Stock Warrants         92      
           

 

 

    

Total GameLogic, Inc.

  

     92      

HighJump Acquisition, LLC.

   Software   

Senior Debt

Matures May 2013

Interest rate Libor + 9.25% or

Floor rate of 12.50%

   $ 17,500         17,386         17,386   
           

 

 

    

 

 

 

Total HighJump Acquisition, LLC.

  

     17,386         17,386   

HighRoads, Inc.

   Software    Preferred Stock Warrants         44         65   
           

 

 

    

 

 

 

Total HighRoads, Inc.

  

     44         65   

 

See notes to consolidated financial statements.

 

22


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  
Infologix, Inc.(7)    Software   

Senior Debt
Matures November 2013
Interest rate 18.00%

   $ 5,500       $ 5,162       $ 5,162   
     

Convertible Senior
Debt Matures November 2014
Interest rate 12.00%

        1,111         1,127   
     

Revolving Line of Credit
Matures May 2011
Interest rate 12.00%

   $ 12,317         12,317         12,317   
     

Senior Debt
Matures December 2010
Interest rate 18.00%

   $ 2,178         2,178         2,178   
     

Senior Debt
Matures April 2013
Interest rate 8.00%

   $ 1,350         1,350         1,350   
     

Senior Debt
Matures September 2011
Interest rate 10.00%

   $ 500         509         509   
     

Preferred Stock Warrants

        725         1,394   
     

Common Stock

        5,000         9,620   
     

Common Stock

        36         69   
     

Common Stock

        3,355         6,455   
           

 

 

    

 

 

 
Total Infologix, Inc.               31,743         40,181   
PSS Systems, Inc.    Software   

Preferred Stock Warrants

        51         17   
           

 

 

    

 

 

 
Total PSS Systems, Inc.               51         17   
Rockyou, Inc.    Software   

Preferred Stock Warrants

        117         186   
           

 

 

    

 

 

 
Total Rockyou, Inc.               117         186   
Sportvision, Inc.    Software   

Preferred Stock Warrants

        39      
           

 

 

    
Total Sportvision, Inc.               39      
Unify Corporation    Software   

Senior Debt
Matures June 2015
Interest rate Libor + 8.50% or
Floor rate of 10.50%

   $ 24,000         22,248         22,968   
     

Revolving Line of Credit
Matures June 2015
Interest rate Libor + 7.50% or
Floor rate of 9.50%

   $ 3,750         3,731         3,476   
     

Preferred Stock Warrants

        1,434         693   
           

 

 

    

 

 

 
Total Unify Corporation               27,413         27,137   
WildTangent, Inc.    Software   

Preferred Stock Warrants

        238         10   
           

 

 

    

 

 

 
Total WildTangent, Inc.               238         10   
           

 

 

    

 

 

 
Total Software (23.39%)*               87,777         96,508   
           

 

 

    

 

 

 
Luminus Devices, Inc.   

Electronics &

Computer Hardware

  

Senior Debt
Matures December 2011
Interest rate 11.875%

   $ 540         540         540   
     

Preferred Stock Warrants

        183      
     

Preferred Stock Warrants

        84      
     

Preferred Stock Warrants

        334      
           

 

 

    
Total Luminus Devices, Inc.               1,141         540   

 

See notes to consolidated financial statements.

 

23


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Maxvision Holding, LLC.

  

Electronics &

Computer Hardware

  

Senior Debt

Matures October 2012

Interest rate Prime + 7.25% or

Floor rate of 10.75%

   $ 5,000       $ 5,377       $ 377   
     

Senior Debt

Matures April 2012

Interest rate Prime + 5.0% or

Floor rate of 8.5%

   $ 3,409         3,382         3,382   
     

Revolving Line of Credit

Matures April 2012

Interest rate Prime + 5.0% or

Floor rate of 8.5%

   $ 3,100         3,163         3,163   
     

Common Stock

        81      
           

 

 

    

Total Maxvision Holding, LLC.

  

     12,003         6,922   

Shocking Technologies, Inc.

  

Electronics &

Computer Hardware

  

Preferred Stock Warrants

        63         90   
           

 

 

    

 

 

 

Total Shocking Technologies, Inc.

  

     63         90   

Spatial Photonics, Inc.

  

Electronics &

Computer Hardware

  

Preferred Stock Warrants

        129         —     
     

Preferred Stock

        767         267   
           

 

 

    

 

 

 

Total Spatial Photonics, Inc.

  

     896         267   

VeriWave, Inc.

  

Electronics &

Computer Hardware

  

Preferred Stock Warrants

        54      
     

Preferred Stock Warrants

        46      
           

 

 

    

Total VeriWave, Inc.

  

     100      
           

 

 

    

Total Electronics & Computer Hardware (1.90%)*

  

     14,203         7,819   
           

 

 

    

 

 

 

Aegerion Pharmaceuticals, Inc.

  

Specialty

Pharmaceuticals

  

Preferred Stock Warrants

        69         761   
     

Preferred Stock

        1,475         2,206   
           

 

 

    

 

 

 

Total Aegerion Pharmaceuticals, Inc.

  

     1,544         2,967   

Althea Technologies, Inc.

  

Specialty

Pharmaceuticals

  

Senior Debt

Matures October 2013

Interest rate Prime + 7.70% or

Floor rate of 10.95%

   $ 12,000         11,661         11,661   
     

Preferred Stock Warrants

        309         276   
           

 

 

    

 

 

 

Total Althea Technologies, Inc.

  

     11,970         11,937   

Chroma Therapeutics, Ltd.(5)

  

Specialty

Pharmaceuticals

  

Senior Debt

Matures September 2013

Interest rate Prime + 7.75% or

Floor rate of 12.00%

   $ 10,000         9,797         10,021   
     

Preferred Stock Warrants

        490         632   
           

 

 

    

 

 

 

Total Chroma Therapeutics, Ltd.

  

     10,287         10,653   

 

See notes to consolidated financial statements.

 

24


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Pacira Pharmaceuticals, Inc.(4)

  

Specialty

Pharmaceuticals

  

Senior Debt

Matures May 2014

Interest rate Prime + 6.25% or

Floor rate of 10.25%

   $ 11,250       $ 11,105       $ 11,105   
     

Senior Debt

Matures May 2014

Interest rate Prime + 8.65% or

Floor rate of 12.65%

   $ 15,000         13,749         13,749   
     

Preferred Stock Warrants

        1,086         1,255   
           

 

 

    

 

 

 

Total Pacira Pharmaceuticals, Inc.

  

     25,940         26,109   

QuatRx Pharmaceuticals Company

  

Specialty

Pharmaceuticals

  

Senior Debt

Matures October 2011

Interest rate Prime + 8.90% or

Floor rate of 12.15%

   $ 9,306         9,474         9,474   
     

Convertible Senior Debt

Interest Rate of 8.0%

Matures March 2012

   $ 1,888         1,888         2,467   
     

Preferred Stock Warrants

        220      
     

Preferred Stock Warrants

        307      
     

Preferred Stock

        751      
           

 

 

    

Total QuatRx Pharmaceuticals Company

  

     12,640         11,941   
           

 

 

    

 

 

 

Total Specialty Pharmaceuticals (15.42%)*

  

     62,381         63,607   
           

 

 

    

 

 

 

Annie’s, Inc.

  

Consumer &

Business Products

   Preferred Stock Warrants         321         75   
           

 

 

    

 

 

 

Total Annie’s, Inc.

  

     321         75   

IPA Holdings, LLC.(4)

  

Consumer &

Business Products

  

Senior Debt

Matures November 2012

Interest rate Prime + 6.75% or

Floor rate of 11.0%

   $ 8,250         8,505         8,160   
     

Senior Debt

Matures May 2013

Interest rate Prime + 9.75% or

Floor rate of 14.0%

   $ 6,500         7,019         6,995   
     

Revolving Line of Credit

Matures November 2012

Interest rate Prime + 6.25% or

Floor rate of 10.50%

   $ 856         761         761   
     

Preferred Stock Warrants

        275      
     

Common Stock

        500      
           

 

 

    

Total IPA Holdings, LLC.

  

     17,060         15,916   

Market Force Information, Inc.

  

Consumer &

Business Products

   Preferred Stock Warrants         24         60   
     

Preferred Stock

        500         439   
           

 

 

    

 

 

 

Total Market Force Information, Inc.

  

     524         499   

Trading Machines, Inc.(8)

  

Consumer &

Business Products

  

Senior Debt

Matures January 2014

Interest rate Prime + 10.25% or

Floor rate of 13.50%

   $ 9,812         8,644         4,000   
     

Preferred Stock Warrants

        878      
     

Preferred Stock

        50      
           

 

 

    

Total Trading Machines, Inc.

  

     9,572         4,000   

 

See notes to consolidated financial statements.

 

25


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Velocity Technology Solutions, Inc.

  

Consumer &

Business Products

  

Senior Debt

Matures February 2015

Interest rate LIBOR + 8% or

Floor rate of 11.00%

   $ 15,417       $ 15,072       $ 14,574   
     

Senior Debt

Matures February 2015

Interest rate LIBOR + 10% or

Floor rate of 13.00%

   $ 8,333         8,317         8,526   
           

 

 

    

 

 

 

Total Velocity Technology Solutions, Inc.

              23,389         23,100   

Wageworks, Inc.

  

Consumer &

Business Products

  

Preferred Stock Warrants

        253         1,443   
     

Preferred Stock

        250         283   

Total Wageworks, Inc.

              503         1,726   
           

 

 

    

 

 

 

Total Consumer & Business Products (10.98%)*

              51,369         45,316   
           

 

 

    

 

 

 

Enpirion, Inc.

  

Semiconductors

  

Preferred Stock Warrants

        157         1   
           

 

 

    

 

 

 

Total Enpirion, Inc.

              157         1   

iWatt, Inc.

  

Semiconductors

  

Preferred Stock Warrants

        46         1   
     

Preferred Stock Warrants

        51         33   
     

Preferred Stock Warrants

        73         44   
     

Preferred Stock Warrants

        458         391   
     

Preferred Stock

        490         940   
           

 

 

    

 

 

 

Total iWatt, Inc.

              1,118         1,409   

NEXX Systems, Inc.

  

Semiconductors

  

Preferred Stock Warrants

        297         1,113   
     

Preferred Stock

        277         704   
           

 

 

    

 

 

 

Total NEXX Systems, Inc.

              574         1,817   

Quartics, Inc.

  

Semiconductors

  

Preferred Stock Warrants

        53      

Total Quartics, Inc.

              53      

Solarflare Communications, Inc.

  

Semiconductors

  

Preferred Stock Warrants

        83      
     

Common Stock

        642      
           

 

 

    

Total Solarflare Communications, Inc.

              725      

Total Semiconductors (0.78%)*

              2,627         3,227   
           

 

 

    

 

 

 

Alexza Pharmaceuticals, Inc.(4)

  

Drug Delivery

  

Senior Debt

Matures October 2013

Interest rate Prime + 6.5% or

Floor rate of 10.75%

   $ 15,000         14,526         14,472   
     

Preferred Stock Warrants

        645         193   
           

 

 

    

 

 

 

Total Alexza Pharmaceuticals, Inc.

              15,171         14,665   

Labopharm USA, Inc.(5)

  

Drug Delivery

  

Senior Debt

Matures December 2012

Interest rate 10.95%

   $ 20,000         19,872         19,872   
     

Common Stock Warrants

        635         329   
           

 

 

    

 

 

 

Total Labopharm USA, Inc.

              20,507         20,201   

 

See notes to consolidated financial statements.

 

26


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Transcept Pharmaceuticals, Inc.

  

Drug Delivery

  

Common Stock Warrants

      $ 36       $ 60   
     

Common Stock Warrants

        51         16   
     

Common Stock

        500         308   
           

 

 

    

 

 

 

Total Transcept Pharmaceuticals, Inc.

  

     587         384   
           

 

 

    

 

 

 

Total Drug Delivery (8.54%)*

  

     36,265         35,250   
           

 

 

    

 

 

 

BARRX Medical, Inc.

  

Therapeutic

  

Senior Debt

Mature December 2011

Interest rate 11.00%

   $ 2,901         3,350         3,350   
     

Preferred Stock Warrants

        76         70   
     

Preferred Stock

        1,500         1,890   
           

 

 

    

 

 

 

Total BARRX Medical, Inc.

  

     4,926         5,310   

EKOS Corporation

  

Therapeutic

  

Preferred Stock Warrants

        174      
     

Preferred Stock Warrants

        153      
           

 

 

    

Total EKOS Corporation

  

     327      

Gelesis, Inc.(8)

  

Therapeutic

  

Senior Debt

Matures May 2012

Interest rate Prime + 7.5% or

Floor rate of 10.75%

   $ 2,771         2,800         45   
           

 

 

    

 

 

 

Total Gelesis, Inc.

  

     2,800         45   

Gynesonics, Inc.

  

Therapeutic

  

Senior Debt

Mature October 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

   $ 6,500         6,277         6,277   
     

Preferred Stock Warrants

        228         221   
     

Preferred Stock

        532         456   
           

 

 

    

 

 

 

Total Gynesonics, Inc.

  

     7,037         6,954   

Light Science Oncology, Inc.

  

Therapeutic

  

Preferred Stock Warrants

        99         26   
           

 

 

    

 

 

 

Total Light Science Oncology, Inc.

  

     99         26   

Novasys Medical, Inc.

  

Therapeutic

  

Preferred Stock Warrants

        71         1   
     

Preferred Stock Warrants

        54         7   
     

Preferred Stock

        1,000         1,159   
           

 

 

    

 

 

 

Total Novasys Medical, Inc.

  

     1,125         1,167   

Pacific Child & Family Associates, LLC.

  

Therapeutic

  

Senior Debt

Matures January 2015

Interest rate LIBOR + 8.0% or

Floor rate of 10.50%

   $ 6,539         6,392         5,802   
     

Senior Debt

Matures January 2015

Interest rate LIBOR + 10.50% or

Floor rate of 13.0%

   $ 5,900         5,996         5,996   
           

 

 

    

 

 

 

Total Pacific Child & Family Associates, LLC.

  

     12,388         11,798   
           

 

 

    

 

 

 

Total Therapeutic (6.13%)*

  

     28,702         25,300   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

27


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

Portfolio Company

   Industry   

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Cozi Group, Inc.

   Internet Consumer &

Business Services

  

Preferred Stock Warrants

      $ 147       $ —     
     

Preferred Stock

        177         292   
           

 

 

    

 

 

 

Total Cozi Group, Inc.

  

     324         292   

Invoke Solutions, Inc.

   Internet Consumer &
Business Services
  

Preferred Stock Warrants

        56         74   
     

Preferred Stock Warrants

        26         18   
           

 

 

    

 

 

 

Total Invoke Solutions, Inc.

  

     82         92   

Prism Education Group, Inc.

   Internet Consumer &
Business Services
  

Preferred Stock Warrants

        43         50   
           

 

 

    

 

 

 

Total Prism Education Group, Inc.

  

     43         50   

RazorGator Interactive Group, Inc.(4)

   Internet Consumer &
Business Services
  

Revolving Line of Credit

Matures October 2011

Interest rate Prime + 9.50% or

Floor rate of 14.00%

   $ 2,108         1,855         1,855   
     

Preferred Stock Warrants

        13      
     

Preferred Stock Warrants

        28      
     

Preferred Stock Warrants

        1,183      
     

Preferred Stock

        1,000      
           

 

 

    

Total RazorGator Interactive Group, Inc.

              4,079         1,855   

Reply! Inc.(4)

   Internet Consumer &
Business Services
  

Senior Debt

Matures June 2013

Interest rate Prime + 6.5% or

Floor rate of 9.75%

   $ 5,000         4,646         4,646   
     

Preferred Stock Warrants

        320         320   
           

 

 

    

 

 

 

Total Reply! Inc.

  

     4,966         4,966   
           

 

 

    

 

 

 

Total Internet Consumer & Business Services (1.76%)*

  

     9,494         7,255   
           

 

 

    

 

 

 

Lilliputian Systems, Inc.

   Energy   

Preferred Stock Warrants

        106         3   
     

Common Stock Warrants

        49         —     
           

 

 

    

Total Lilliputian Systems, Inc.

  

     155         3   
           

 

 

    

 

 

 

Total Energy (0.00%)*

  

     155         3   
           

 

 

    

 

 

 

Box.net, Inc.

   Information Services   

Senior Debt

Matures May 2011

Interest rate Prime + 1.50% or

Floor rate of 7.50%

   $ 213         270         270   
     

Senior Debt

Matures September 2011

Interest rate Prime + 0.50% or

Floor rate of 6.50%

   $ 127         139         139   
     

Preferred Stock Warrants

        73         184   
     

Preferred Stock Warrants

        117         117   
     

Preferred Stock

        500         500   
           

 

 

    

 

 

 

Total Box.net, Inc.

  

     1,099         1,210   

 

 

See notes to consolidated financial statements.

 

28


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Buzznet, Inc.

   Information Services   

Preferred Stock Warrants

      $ 9       $ —     
     

Preferred Stock

        250         37   
           

 

 

    

 

 

 

Total Buzznet, Inc.

  

     259         37   

XL Education Corp.

   Information Services   

Common Stock

        880         880   
           

 

 

    

 

 

 

Total XL Education Corp.

  

     880         880   

hi5 Networks, Inc.

   Information Services   

Preferred Stock Warrants

        213      
     

Preferred Stock

        250         247   
           

 

 

    

 

 

 

Total hi5 Networks, Inc.

  

     463         247   

Jab Wireless, Inc.

   Information Services   

Preferred Stock Warrants

        265         122   
           

 

 

    

 

 

 

Total Jab Wireless, Inc.

  

     265         122   

Solutionary, Inc.

   Information Services   

Preferred Stock Warrants

        94      
     

Preferred Stock Warrants

        2      
     

Preferred Stock

        250         50   
           

 

 

    

 

 

 

Total Solutionary, Inc.

  

     346         50   

Intelligent Beauty, Inc.

   Information Services   

Senior Debt

Matures March 2013

Interest rate Prime + 8.0% or

Floor rate of 11.25%

   $ 5,812         5,563         5,557   
     

Senior Debt

Matures October 2013

Interest rate Prime + 8.0% or

Floor rate of 11.25%

   $ 2,000         1,942         1,942   
     

Preferred Stock Warrants

        230         230   
           

 

 

    

 

 

 

Total Intelligent Beauty, Inc.

  

     7,735         7,729   

Good Technologies, Inc.

   Information Services   

Common Stock

        603         150   
           

 

 

    

 

 

 

Total Good Technologies, Inc.

  

     603         150   

Coveroo, Inc.

   Information Services   

Preferred Stock Warrants

        7         —     
           

 

 

    

Total Coveroo, Inc.

  

     7      

Zeta Interactive Corporation

   Information Services   

Preferred Stock Warrants

        172         57   
     

Preferred Stock

        500         375   
           

 

 

    

 

 

 

Total Zeta Interactive Corporation

  

     672         432   
           

 

 

    

 

 

 

Total Information Services (2.63%)*

  

     12,329         10,857   
           

 

 

    

 

 

 

Novadaq Technologies, Inc.(5)

   Diagnostic   

Common Stock

        1,415         675   
           

 

 

    

 

 

 

Total Novadaq Technologies, Inc.

  

     1,415         675   

 

See notes to consolidated financial statements.

 

29


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

Optiscan Biomedical Corp.

  

Diagnostic

  

Senior Debt

Matures December 2013

Interest rate Prime + 7.0% or

Floor rate of 10.25%

   $ 10,750       $ 10,392       $ 10,392   
     

Preferred Stock Warrants

        1,069         637   
     

Preferred Stock

        3,656         3,207   
           

 

 

    

 

 

 

Total Optiscan Biomedical Corp.

  

     15,117         14,236   
           

 

 

    

 

 

 

Total Diagnostic (3.61%)*

  

     16,532         14,911   
           

 

 

    

 

 

 

Kamada, LTD.(5)

  

Biotechnology Tools

  

Preferred Stock Warrants

        159         164   
     

Common Stock

        752         1,754   
           

 

 

    

 

 

 

Total Kamada, LTD.

  

     911         1,918   

Labcyte, Inc.

  

Biotechnology Tools

  

Senior Debt

Matures May 2013

Interest rate Prime + 8.6% or

Floor rate of 11.85%

   $ 3,885         3,761         3,821   
     

Common Stock Warrants

        192      
           

 

 

    

Total Labcyte, Inc.

  

     3,953         3,821   

NuGEN Technologies, Inc.

  

Biotechnology Tools

  

Preferred Stock Warrants

        45         44   
     

Preferred Stock Warrants

        33         1   
     

Preferred Stock

        500         203   
           

 

 

    

 

 

 

Total NuGEN Technologies, Inc.

  

     578         248   
           

 

 

    

 

 

 

Total Biotechnology Tools (1.45%)*

  

     5,442         5,987   
           

 

 

    

 

 

 

Crux Biomedical, Inc.

  

Surgical Devices

  

Preferred Stock Warrants

        37      
     

Preferred Stock

        250      
           

 

 

    

Total Crux Biomedical, Inc.

  

     287      

Transmedics, Inc.(4)

  

Surgical Devices

  

Senior Debt

Matures February 2014

Interest rate Prime + 9.70% or

Floor rate of 12.95%

   $ 8,375         8,913         8,913   
     

Preferred Stock Warrants

        224         159   
     

Preferred Stock

        1,100         1,100   
           

 

 

    

 

 

 

Total Transmedics, Inc.

  

     10,237         10,172   
           

 

 

    

 

 

 

Total Surgical Devices (2.47%)*

  

     10,524         10,172   
           

 

 

    

 

 

 

Glam Media, Inc.

  

Media/Content/ Info

  

Preferred Stock Warrants

        482         283   
           

 

 

    

 

 

 

Total Glam Media, Inc.

  

     482         283   

Everyday Health, Inc.

  

Media/Content/ Info

  

Preferred Stock Warrants

        60         630   
     

Preferred Stock

        1,000         1,310   
           

 

 

    

 

 

 

Total Everyday Health, Inc.

  

     1,060         1,940   
           

 

 

    

 

 

 

Total Media/Content/Info (0.54%)*

  

     1,542         2,223   
           

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

30


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2010

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
     Cost(2)      Value(3)  

BrightSource Energy, Inc.(4)

  

Clean Tech

  

Senior Debt

Matures December 2011

Interest rate Prime + 7.75% or

Floor rate of 11.0%

   $ 3,750       $ 3,265       $ 3,265   
     

Senior Debt

Matures June 2012

Interest rate Prime + 9.55% or

Floor rate of 12.80%

   $ 4,583         4,156         4,156   
      Preferred Stock Warrants         675         674   
           

 

 

    

 

 

 

Total BrightSource Energy, Inc.

  

     8,096         8,095   

Calera, Inc.

  

Clean Tech

  

Senior Debt

Matures July 2013

Interest rate Prime + 7.0% or

Floor rate of 10.25%

   $ 3,621         3,109         3,109   
      Preferred Stock Warrants         513         527   
           

 

 

    

 

 

 

Total Calera, Inc.

  

     3,622         3,636   

GreatPoint Energy, Inc.

  

Clean Tech

  

Senior Debt

Matures October 2013

Interest rate Prime + 8.2% or

Floor rate of 11.45%

   $ 5,000         4,322         4,322   
     

Preferred Stock Warrants

        548         627   
           

 

 

    

 

 

 

Total GreatPoint Energy, Inc.

  

     4,870         4,949   

Propel Biofuels, Inc.

  

Clean Tech

  

Senior Debt

Matures September 2013

Interest rate 11.0%

   $ 2,118         1,880         1,850   
     

Preferred Stock Warrants

        211         192   
           

 

 

    

 

 

 

Total Propel Biofuels, Inc.

  

     2,091         2,042   

Solexel, Inc.

  

Clean Tech

  

Senior Debt

Matures June 2013

Interest rate Prime + 8.25% or

Floor rate of 11.50%

   $ 1,109         1,010         1,010   
     

Senior Debt

Matures June 2013

Interest rate Prime + 7.25% or

Floor rate of 10.50%

   $ 6,000         5,519         5,519   
     

Preferred Stock Warrants

        335         292   
           

 

 

    

 

 

 

Total Solexel, Inc.

  

     6,864         6,821   

Trilliant, Inc.

  

Clean Tech

  

Preferred Stock Warrants

        88         99   
     

Preferred Stock Warrants

        72         80   
           

 

 

    

 

 

 

Total Trilliant, Inc.

  

     160         179   
           

 

 

    

 

 

 

Total Clean Tech (6.24%)*

  

     25,703         25,722   
           

 

 

    

 

 

 

Total Investments

  

   $ 480,405       $ 472,032   
           

 

 

    

 

 

 

 

* Value as a percent of net assets
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $22,458, $32,232 and $9,774 respectively. The tax cost of investments is $481,432.
(3) Except for warrants in ten publicly traded companies and common stock in five publicly traded companies, all investments are restricted at December 31, 2010 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company.
(7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 25% of the voting securities of the company, or has greater than 50% representation on its board.
(8) Debt is on non-accrual status at December 31, 2010, and is therefore considered non-income producing.

 

See notes to consolidated financial statements.

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Investment income:

        

Interest Income

        

Non Control/Non Affiliate investments

   $ 16,405      $ 13,356      $ 50,146      $ 35,649   

Affiliate investments

     5        —          9        —     

Control investments

     —          766        777        2,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 16,410      $ 14,122      $ 50,932      $ 38,136   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fees

        

Non Control/Non Affiliate investments

     2,264        1,524        7,639        4,285   

Control investments

     10        —          84        246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fees

     2,274        1,524        7,723        4,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     18,684        15,646        58,655        42,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Interest

     3,408        2,139        8,803        6,237   

Loan fees

     881        333        2,493        936   

General and administrative

     1,659        1,680        6,196        5,220   

Employee Compensation:

        

Compensation and benefits

     3,273        2,594        9,888        7,691   

Stock-based compensation

     870        752        2,518        1,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     4,143        3,346        12,406        9,650   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,091        7,498        29,898        22,043   

Net investment income

     8,593        8,148        28,757        20,624   

Net realized gain (loss) on investments

     (1,601     (18,865     3,429        (15,144

Net increase (decrease) in unrealized appreciation on investments

     (769     2,894        (2,823     (12,218
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     (2,370     (15,971     606        (27,362
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 6,223      $ (7,823   $ 29,363      $ (6,738
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before investment gains and losses per common share:

        

Basic

   $ 0.20      $ 0.23      $ 0.67      $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net assets per common share:

        

Basic

   $ 0.14      $ (0.23   $ 0.67      $ (0.20
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.14      $ (0.23   $ 0.67      $ (0.20
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     43,071        35,208        42,920        35,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     43,337        35,208        43,251        35,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(unaudited)

(dollars and shares in thousands)

 

    Common Stock     Capital in
excess
of par value
    Unrealized
Appreciation
on Investments
    Accumulated
Realized
Gains(Losses)

on Investments
    Distributions
in Excess of
Investment
Income
    Provision for
Income Taxes
on Investment
Gains
    Net
Assets
 
    Shares     Par Value              

Balance at December 31, 2009

    35,634      $ 35      $ 409,036      $ (10,029   $ (28,129   $ (4,056   $ (342   $ 366,515   

Net increase in net assets resulting from operations

    —          —          —          (12,218     (15,144     20,624        —          (6,738

Issuance of common stock

    413        —          1,856        —          —          —          —          1,856   

Issuance of common stock under restricted stock plan

    488        1        —          —          —          —          —          1   

Acquisition of common stock under repurchase plan

    (403     —          (3,699     —          —          —          —          (3,699

Issuance of common stock as stock dividend

    140        —          1,332        —          —          —          —          1,332   

Retired shares from net issuance

    (114     —          (1,160     —          —          —          —          (1,160

Dividends declared

    —          —          —          —          —          (21,582     —          (21,582

Stock-based compensation

    —          —          2,024        —          —          —          —          2,024   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

    36,158      $ 36      $ 409,389      $ (22,247   $ (43,273   $ (5,014   $ (342   $ 338,549   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    43,444      $ 43      $ 477,549      $ (8,038   $ (51,033   $ (5,647   $ (342   $ 412,532   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

    —        $ —        $ —        $ (2,823   $ 3,429      $ 28,757      $ —        $ 29,363   

Issuance of common stock

    167        —          893        —          —          —          —          893   

Issuance of common stock under restricted stock plan

    253        —          —          —          —          —          —          —     

Issuance of common stock as stock dividend

    123        —          1,245        —          —          —          —          1,245   

Retired shares from net issuance

    (79     —          (887     —          —          —          —          (887

Issuance of the Convertible Senior Notes (see Note 4)

    —          —          5,190        —          —          —          —          5,190   

Dividends declared

    —          —          —          —          —          (28,853     —          (28,853

Stock-based compensation

    —          —          2,567        —          —          —          —          2,567   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    43,908      $ 43      $ 486,557      $ (10,861   $ (47,604   $ (5,743   $ (342   $ 422,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

(dollars in thousands)

 

     Nine Months Ended
September 30,
 
   2011     2010  

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 29,363      $ (6,738

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in and provided by

    

Purchase of investments

     (337,631     (242,360

Principal payments received on investments

     223,193        180,754   

Proceeds from sale of investments

     17,053        7,295   

Net unrealized appreciation (depreciation) on investments

     2,823        12,218   

Net realized (gain) loss on investments

     (3,429     15,144   

Accretion of paid-in-kind principal

     (1,651     (2,366

Accretion of loan discounts

     (5,752     (3,026

Accretion of loan discount on Convertible Senior Notes

     496        —     

Accretion of loan exit fees

     —          (956

Depreciation

     268        298   

Stock-based compensation

     480        553   

Amortization of restricted stock grants

     2,088        1,471   

Amortization of deferred loan origination revenue

     (1,755     (2,137

Change in operating assets and liabilities:

    

Interest receivable

     (147     (347

Prepaid expenses and other assets

     3,279        541   

Accounts payable

     (810     (103

Income tax payable

     —          8   

Accrued liabilities

     (429     (5,891
  

 

 

   

 

 

 

Net cash used in by operating activities

     (72,561     (45,642

Cash flows from investing activities:

    

Purchases of capital equipment

     (122     (218

Other long-term assets

     —          (137
  

 

 

   

 

 

 

Net cash used in investing activities

     (122     (355

Cash flows from financing activities:

    

Proceeds from issuance of common stock, net

     6        1,856   

Stock repurchase program

     —          (3,699

Forfeiture of Stock due to Employee Option Exercises

     —          (1,160

Dividends paid

     (27,607     (20,250

Borrowings of credit facilities

     43,750        29,400   

Repayments of credit facilities

     (25,000     —     

Issuance of Convertible Senior Notes

     75,000        —     

Cash paid for issuance costs for Convertible Senior Notes

     (3,110  

Fees paid for credit facilities and debentures

     (1,061     (1,967
  

 

 

   

 

 

 

Net cash provided by financing activities

     61,978        4,180   
  

 

 

   

 

 

 

Net decrease in cash

     (10,705     (41,817

Cash and cash equivalents at beginning of period

     107,014        124,828   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 96,309      $ 83,011   
  

 

 

   

 

 

 

See notes to Consolidated Financial Statements (unaudited).

 

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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 companies at various stages of development, from seed and emerging growth to expansion and established stages of development, which include select publicly listed companies and select lower middle market technology companies. The Company sources its investments through its principal office located in Silicon Valley, as well as through its additional offices in Boston, Massachusetts, Boulder, Colorado and McLean, Virginia. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003.

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

The Company formed Hercules Technology II, L.P. (“HT II”), which was licensed on September 27, 2006, and Hercules Technology III, L.P. (“HT III”), which was licensed on May 26, 2010 to operate as small business investment companies (“SBICs”) under the authority of the Small Business Administration (“SBA”). As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. The Company also formed Hercules Technology SBIC Management, LLC (“HTM”), a limited liability company. HTM is a wholly-owned subsidiary of the Company. The Company is the sole limited partner of HT II and HT III and HTM is the general partner of HT II and HT III (see Note 4).

In aggregate, HT II and HT III hold approximately $334.9 million in assets and accounted for approximately 35.5% of our total assets prior to consolidation at September 30, 2011.

The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). The Company currently qualifies as a RIC for federal income tax purposes, which allows the Company to avoid paying corporate income taxes on any income or gains that the Company distributes to our stockholders. The purpose of establishing these entities is to satisfy the RIC tax requirement that at least 90% of the Company’s gross income for income tax purposes is investment income.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and the Securities and Exchange Act of 1934, the Company does not consolidate portfolio company investments. 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 under the Securities Act of 1933 and the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, all adjustments consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim periods 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, 2010. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 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.

Certain prior period information has been reclassified to conform to the current period presentation.

 

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Table of Contents

2. Valuation of Investments

The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification (“ASC”) topic 820 Fair Value Measurements and Disclosures, (formerly known as SFAS No. 157, Fair Value Measurements). At September 30, 2011, 83.7% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s debt securities are primarily invested in equity sponsored technology-related companies including life science, clean technology and select lower middle market technology companies. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.

Our Board of Directors may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain of the Company’s portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below:

(1) the Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and discussed with the Company’s investment committee;

(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment committee and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments, if any; and

(4) the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the valuation committee.

The Company adopted ASC 820 on January 1, 2008. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company.

 

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Table of Contents

Debt Investments

The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in equity sponsored technology, life science and clean technology companies. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged.

The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company uses pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.

The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis.

The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or if under the in exchange premise when the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or if under the in exchange premise the value of a debt security were to be greater than amortized cost.

When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan.

Equity-Related Securities and Warrants

Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date.

The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity related. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date.

 

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Table of Contents

Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of September 30, 2011 (unaudited) and as of December 31, 2010:

 

            Investments at Fair Value as of September 30, 2011  

(in thousands)

Description

   9/30/2011      Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Senior secured debt

   $ 513,367       $ —         $ —         $ 513,367   

Preferred stock

     28,928         —           —           28,928   

Common stock

     6,864         5,889         —           975   

Warrants

     27,318         —           3,023         24,295   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 576,477       $ 5,889       $ 3,023       $  567,565   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Investments at Fair Value as of December 31, 2010  

(in thousands)

Description

   12/31/2010      Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Senior secured debt

   $ 394,198       $ —         $ —         $ 394,198   

Subordinated debt

     7,420         —           —           7,420   

Preferred stock

     24,607         —           —           24,607   

Common stock

     22,117         4,943         16,144         1,030   

Warrants

     23,690         —           6,289         17,401   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 472,032       $ 4,943       $  22,433       $ 444,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents reconciliation for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011 (unaudited) and for the year ended December 31, 2010.

 

(in thousands)

  Balance,
January 1,  2011
    Net Realized  Gains
(losses)(1)
    Net change in
unrealized
appreciation or
depreciation(2)
    Purchases       Sales       Repayments       Exit       Gross
Transfers
into
Level  3(3)
    Gross
Transfers
out of
Level 3(3)
    Balances,
September 30, 2011
 

Senior Debt

  $  394,198      $  (4,302   $  3,404      $  362,866      $ —        $ (239,299 )$      —        $ —        $ (3,500   $ 513,367   

Subordinated Debt

    7,420        —          —          —          —          (7,420     —          —          —          —     

Preferred Stock

    24,607        (941     193        1,569        —          —          —          3,500        —          28,928   

Common Stock

    1,030        —          (55     —          —          —          —          —          —          975   

Warrants

    17,401        (978     5,034        4,505        —          —          (402     —          (1,265     24,295   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 444,656      $ (6,221   $ 8,576      $ 368,940      $ —        $ (246,719   $ (402 )      $ 3,500      $ (4,765   $ 567,565   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(in thousands)

   Balance,
January 1,
2010
     Net
Realized
Gains
(losses)(1)
    Net change in
unrealized
appreciation or
depreciation(2)
    Purchases,
sales,
repayments,
and exit, net
    Transfer in
& out of
Level 3
    Balances,
December 31, 2010
 

Senior Debt

   $ 319,129       $ (12,835   $ (3,076   $ 98,058      $ (7,078   $ 394,198   

Subordinated Debt

     —           —          —          7,420        —          7,420   

Senior Debt-Second Lien

     6,005         —          —          (6,005     —          —     

Preferred Stock

     22,875         (1,250     (995     2,603        1,374        24,607   

Common Stock

     1,773         (15,037     (743     15,037        —          1,030   

Warrants

     11,076         (1,225     568        8,650        (1,668     17,401   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 360,858       $ (30,347   $ (4,246   $ 125,763      $ (7,372   $ 444,656   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations.

(2) 

Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations.

(3) 

Transfers in/out of Level 3 relate to the conversion of MaxVision Holding, LLC. debt to equity during the second quarter and the initial public offering of Pacira Pharmaceuticals, Inc.

 

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For the nine months ended September 30, 2011, approximately $3.4 million and $3.8 million in unrealized appreciation was recorded for debt and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $747,000 in unrealized depreciation was recorded for equity Level 3 investments relating to assets still held at the reporting date.

For the year ended December 31, 2010, approximately $3.1 million, $3.0 million and $461,000 in unrealized depreciation was recorded for debt, equity and warrant Level 3 investments, respectively, relating to assets still held at the reporting date.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “Control”. Generally, under the 1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, which are not Control Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are investments that are neither Control Investments nor Affiliate Investments.

The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the three and nine months ended September 30, 2011 and September 30, 2010:

 

(in thousands)   Three months ended September 30, 2011     Nine months ended September 30, 2011  
Portfolio Company   Type   Fair Value at
September 30,
2011
    Investment
Income
    Unrealized
(Depreciation  )

/Appreciation
    Realized
Gain

/(Loss)
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Reversal of
Unrealized
(Depreciation)

/Appreciation
    Realized
Gain/
(Loss)
 

MaxVision Holding, LLC.

  Control   $ 2,983      $ 10      $ 14      $ —        $ 861      $ (3,546     —        $ —     

E-Band Communiations, Corp.

  Non-Controlled
Affiliate
    —          5        (53     —          9        (3,425     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 2,983      $ 15      $ (39   $ —        $ 870      $ (6,971   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(in thousands)

  Three months ended September 30, 2010     Nine months ended September 30, 2010  
Portfolio Company   Type   Fair Value at
September 30,
2011
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Realized
Gain

/(Loss)
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Reversal of
Unrealized
(Depreciation)

/Appreciation
    Realized
Gain

/(Loss)
 

InfoLogix, Inc.

  Control   $ 33,935      $ 796      $ (4,266   $ —        $ 2,448      $ (1,419   $ 128      $ 2,491   

E-Band Communiations, Corp.

  Non-Controlled
Affiliate
    2,846        —          (371     —          —          572        —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 36,781      $ 796      $ (4,637   $ —        $ 2,448      $ (847   $ 128      $ 2,491   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s investment in InfoLogix, Inc., a company that was a Control Investment as of December 31, 2010, was sold to Stanley Black & Decker (NYSE:SWK) in January 2011. Approximately $8.3 million of realized gains and $8.4 million of net change in unrealized depreciation was recognized on this control investment during the three-month period ended March 31, 2011.

A summary of the composition of the Company’s investment portfolio as of September 30, 2011 (unaudited) and December 31, 2010 at fair value is shown as follows:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 414,723         71.9   $ 357,963         75.8

Senior secured debt

     125,962         21.9     59,251         12.6

Preferred stock

     28,928         5.0     26,813         5.7

Subordinated Debt

     —           0.0     8,094         1.7

Common Stock

     6,864         1.2     19,911         4.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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A summary of the Company’s investment portfolio, at value, by geographic location as of September 30, 2011 (unaudited) and as of December 31, 2010 is shown as follows:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 562,296         97.5   $ 438,585         92.9

Canada

     808         0.1     20,876         4.4

England

     9,082         1.6     10,653         2.3

Ireland

     3,893         0.7     —           0.0

Israel

     398         0.1     1,918         0.4
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the fair value of our portfolio by industry sector at September 30, 2011 (unaudited) and December 31, 2010:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments
at Fair Value
     Percentage of
Total Portfolio
    Investments
at Fair Value
     Percentage of
Total Portfolio
 

Drug Discovery

   $ 81,264         14.1   $ 52,777         11.2

Drug Delivery

     66,734         11.6     35,250         7.5

Internet Consumer & Business Services

     65,975         11.4     7,255         1.5

Specialty Pharmaceuticals

     61,603         10.7     63,607         13.5

Clean Tech

     59,793         10.4     25,722         5.4

Communications & Networking

     56,119         9.7     65,098         13.8

Information Services

     38,812         6.7     10,857         2.3

Therapeutic

     32,562         5.7     25,300         5.4

Media/Content/Info

     30,852         5.4     2,223         0.5

Biotechnology Tools

     23,796         4.1     5,987         1.3

Software

     22,094         3.8     96,508         20.4

Diagnostic

     14,889         2.6     14,911         3.2

Surgical Devices

     7,683         1.3     10,172         2.1

Semiconductors

     6,916         1.2     3,227         0.7

Consumer & Business Products

     4,345         0.8     45,316         9.6

Electronics & Computer Hardware

     3,040         0.5     7,819         1.6

Energy

     —           0.0     3         0.0
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

During the three and nine-month periods ended September 30, 2011 the Company made investments in debt securities, including restructured loans, totaling approximately $146.1 million and $351.3 million, respectively. During the three and nine-month periods ended September 30, 2011 the Company funded equity investments of approximately $1.1 million and $1.6 million, respectively. During the three and nine-month periods ended September 30, 2010, the Company made investments in debt securities, including restructured loans, totaling approximately $55.7 million and $286.0 million, respectively, and funded equity investments, including restructured loans, of approximately $187,000 and $18.0 million for the three and nine-month periods ended September 30, 2010.

During the three-months ended September 30, 2011, the Company recognized no realized gains or losses and for the nine-months ended September 30, 2011 the Company recognized net realized gains of approximately $10.1 million from the sale of common stock in its public portfolio companies. During the three and nine-months ended September 30, 2011, the Company recognized realized losses of approximately $1.6 million and $6.7 million from equity, loan, and warrant investments in portfolio companies that have been liquidated. During the nine months ended September 30, 2010, we recognized net realized gains of approximately $3.6 million from the sale of common stock in public portfolio companies, approximately $465,000 from mergers of private portfolio companies and realized losses of approximately $19.2 million from equity and warrant investments in portfolio companies that have been liquidated. During the three months ended September 30, 2010 we recognized realized losses of approximately $18.9 million from equity and loan investments in portfolio companies that have been liquidated.

 

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Table of Contents

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 interest income over the contractual life of the loan. The Company had approximately $9.8 million and $6.6 million of unamortized fees at September 30, 2011 and December 31, 2010, respectively, and approximately $7.2 million and $5.1 million in exit fees receivable at September 30, 2011 and December 31, 2010, respectively.

The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $285,000 and $1.4 million in PIK income in the three and nine-month periods ended September 30, 2011, respectively. The Company recorded approximately $552,000 and $1.7 million in PIK income in the same periods ended September 30, 2010, respectively.

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment transaction closes. The Company had no income from advisory services in the three and nine-month periods ended September 30, 2011.

In some cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include their intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At September 30, 2011, approximately 60.9% of the Company’s portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 38.3% of the loans were to porfolio companies that were prohibited from pledging or encumbering their intellectual property and 0.8% of portfolio company loans had an equipment only lien.

3. Fair Value of Financial Instruments

Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate the fair values of such items due to the short maturity of such instruments. The Convertible Senior Notes and the SBIC debentures as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. Based on market quotations on or around September 30, 2011 the Convertible Senior Notes were trading for $0.875 per dollar at par value. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of its SBIC debentures would be approximately $211.6 million, compared to the carrying amount of $188.8 million as of September 30, 2011.

See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in Note 1.

4. Borrowings

Long-term SBA Debentures

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. As of September 30, 2011, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. The Company’s net investment of $75.0 million in HT II as of September 30, 2011 fully funds the required regulatory capital for HT II. HT II has a total of $125.0 million of SBA guaranteed debentures outstanding as of September 30, 2011 and has paid the SBA commitment fees of approximately $1.5 million. As of September 30, 2011, the Company held investments in HT II in 84 companies with a fair value of approximately $180.8 million, accounting for approximately 31.4% of the Company’s total portfolio.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $50.0 million in HT III as of September 30, 2011, HT III has the capacity to issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $63.75 million was outstanding as of September 30, 2011. As of September 30, 2011, HT III has paid commitment fees of approximately $750,000. As of September 30, 2011, the Company held investments in HT III in 20 companies with a fair value of approximately $92.4 million, accounting for approximately 16.0% of the Company’s total portfolio. See Note 12.

 

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Table of Contents

There is no assurance that HT II or HT III will be able to draw to the maximum limit available under the SBIC program.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of September 30, 2011 as a result of having sufficient capital as defined under the SBA regulations. As of September 30, 2011, HT III could draw up to $36.25 million of additional leverage from SBA.

The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.88% to 5.73%. Interest payments on SBA debentures are payable semi-annually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment was closed in. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the quarter ended September 30, 2011 for HT II was approximately $125.0 million with an average interest rate of approximately 5.0%. The average amount of debentures outstanding for the quarter ended September 30, 2011 for HT III was approximately $63.75 million with an average interest rate of approximately 3.5%.

In aggregate, HT II and HT III hold approximately $334.9 million in assets, and accounted for approximately 35.5% of our total assets prior to consolidation at September 30, 2011.

The Company reported the following SBA debentures outstanding on its Consolidated Balance Sheet as of September 30, 2011 (unaudited) and December 31, 2010:

 

(in thousands)

Issuance/Pooling Date

   Maturity Date    Interest  Rate(1)     September 30,
2011
     December 31,
2010
 

SBA Debentures:

          

September 26, 2007

   September 1, 2017      6.43   $ 12,000       $ 12,000   

March 26, 2008

   March 1, 2018      6.38   $ 58,050       $ 58,050   

September 24, 2008

   September 1, 2018      6.63   $ 13,750       $ 38,750   

March 25, 2009

   March 1, 2019      5.53   $ 18,400       $ 18,400   

September 23, 2009

   September 1, 2019      4.64   $ 3,400       $ 3,400   

September 22, 2010

   September 1, 2020      3.62   $ 6,500       $ 6,500   

September 22, 2010

   September 1, 2020      3.50   $ 22,900       $ 32,900   

March 29, 2011

   March 1, 2021      4.37   $ 28,750       $ —     

September 21, 2011

   September 1, 2021      3.16   $ 25,000       $ —     
       

 

 

    

 

 

 

Total SBA Debentures

        $ 188,750       $ 170,000   
       

 

 

    

 

 

 

 

(1) 

Interest rate includes annual charge

 

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Table of Contents

At September 30, 2011 (unaudited) and December 31, 2010, the Company had the following borrowing capacity and outstanding borrowings:

 

     September 30, 2011      December 31, 2010  
     Total
Available
     Carrying
Value(1)
     Total
Available
     Carrying
Value(1)
 

Union Bank Facility

   $ 20,000       $ —         $ 20,000       $ —     

Wells Facility

     75,000         —           50,000         —     

Convertible Senior Notes(2)

     75,000         70,082         —           —     

SBA Debenture(3)

     225,000         188,750         225,000         170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 395,000       $ 258,832       $ 295,000       $ 170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.

(2) 

Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $4,918 at September 30, 2011.

(3) 

The Company has the ability to borrow an additional $36.3 million subject to SBA approval and compliance with SBIC regulations for which they have received commitment.

Wells Facility

On August 25, 2008, the Company, through a special purpose wholly-owned subsidiary of the Company, Hercules Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total commitments of $50.0 million, with Wells Fargo Capital Finance as a lender and as an arranger and administrative agent (the “Wells Facility”). The Wells Facility has the capacity to increase to $300.0 million if additional lenders are added to the syndicate. The Wells Facility expired in August 2011. Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The Wells Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. The Company has paid a total of approximately $1.1 million in structuring fees in connection with the Wells Facility which has been amortized through August 2011.

The Wells Facility requires various financial and operating covenants. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth of $250.0 million, contingent upon the Company’s total commitments under all lines of credit not exceeding $250.0 million. To the extent our total commitment exceeds $250.0 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at September 30, 2011.

On June 20, 2011, we renewed the Wells Facility. Under this three-year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. Borrowings under the facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 5.00% and an advance rate of 50% against eligible loans. The facility will be secured by loans in the borrowing base. The Wells Facility requires various financial and operating covenants. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding Subordinated Indebtedness, that is in excess of $314.0 million plus 90% of the cumulative amount of equity raised after March 31, 2011. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each payment date on or before September 1, 2011. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.75%. From September 1, 2011 through September 30, 2011, this non-use fee was 0.75%. The facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. This new arrangement replaced the previous $300.0 million Wells Facility under which Wells Fargo Capital Finance had committed $50.0 million in capital. On June 20, 2011, we paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through August 2014. There was no outstanding debt under the Wells Facility at September 30, 2011.

 

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Union Bank Facility

On February 10, 2010, the Company entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and secured by loans in the borrowing base. The Union Bank Facility required the payment of a non-use fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in the Company’s portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. In February 2011, the maturity date of the facility was extended from May 1, 2011 to July 31, 2011. Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at September 30, 2011.

On June 7, 2011, the Company entered into an amendment to the Union Bank Facility which extended the borrowing termination date to September 30, 2011. The amendment to the Union Bank Facility also amends the maturity date of Union Bank’s $20.0 million commitment to mean the earliest of: (a) December 31, 2011; (b) the date on which Union Bank’s obligation to make loans is terminated and the obligations are declared to be due and payable or the commitment is terminated; or (c) the date of prepayment in full by the Company. There was no outstanding debt under the Union Bank Facility at September 30, 2011.

On November 2, 2011, the Company renewed and amended the Union Bank Facility. Union Bank and RBC Capital Markets have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility requires various financial and operating covenants. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding Subordinated Indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions.

Citibank Credit Facility

The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. During the first quarter of 2009, the Company paid off all remaining principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility was terminated until the Maximum Participation Limit has been reached. The value of their participation right on unrealized gains in the related equity investments was approximately $727,000 as of September 30, 2011 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants. Since inception of the agreement, the Company has paid Citigroup approximately $1.1 million under the warrant participation agreement thereby reducing its realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire.

Convertible Senior Notes

In April 2011, the Company issued $75.0 million in aggregate principal amount of 6.00% convertible senior notes (the “Convertible Senior Notes”) due 2016.

The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities.

        Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of its common stock or a combination of cash and shares of its common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders.

 

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The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the accompanying consolidated balance sheet. As a result, the Company records interest expense comprised of both stated interest expense as well as accretion of the original issue discount. Additionally, the issuance costs associated with the Convertible Senior Notes were allocated to the debt and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. At the time of issuance, the debt issuance costs and equity issuance costs were approximately $2.9 million and $224,000, respectively. At the time of issuance and as of September 30, 2011, the equity component, net of issuance costs, as recorded in the “capital in excess of par value” in the balance sheet was approximately $4.9 million.

As of September 30, 2011, the components of the carrying value of the Convertible Senior Notes were as follows:

 

(in thousands)    As of September 30, 2011  

Principal amount of debt

   $ 75,000   

Original issue discount, net of accretion

     (4,918
  

 

 

 

Carrying value of debt

   $ 70,082   
  

 

 

 

For the three and nine months ended September 30, 2011, the components of interest expense and cash paid for interest expense for the Convertible Senior Notes were as follows:

 

(in thousands)    Three Months Ended
September 30,

2011
     Nine Months Ended
September 30,

2011
 

Stated interest expense

   $ 1,125       $ 2,062   

Accretion of original issue discount

     270         496   

Amortization of debt issuance cost

     144         264   
  

 

 

    

 

 

 

Total interest expense

   $ 1,539       $ 2,822   
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —         $ —     

 

The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 7.9% for the three and nine months ended September 30, 2011.

5. Income taxes

The Company has elected to be taxed as a RIC under Subchapter M of the Code and intends to continue operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.

To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as defined by the Code. 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 year may be deemed a return of capital for tax purposes to the Company’s stockholders.

Taxable income includes the Company’s taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized.

 

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Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

During the quarter ended September 30, 2011, the Company declared a distribution of $0.22 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. As a result, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. If the Company had determined the tax attributes of its distributions year-to-date as of September 30, 2011, approximately 97% would be from ordinary income and spill over earnings from 2010 and approximately 3% would be a return of capital. However there can be no certainty to shareholders that this determination is representative of what the tax attributes of its 2011 distributions to shareholders will actually be.

As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (the “Excise Tax Avoidance Requirements”). The Company will not be subject to excise taxes on amounts on which the Company is required to pay corporate income tax (such as retained net capital gains). Depending on the level of taxable income earned in a tax year, the Company may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital.

Taxable income for the nine-month period ended September 30, 2011 was approximately $27.1 million or $0.63 per share. Taxable net realized gains for the same period were $8.6 million or approximately $0.20 per share. Taxable income for the nine-month period ended September 30, 2010 was approximately $19.3 million or $0.55 per share. Taxable net realized losses for the same period were approximately $17.8 million or approximately $0.51 loss per share.

6. Shareholders’ Equity

At September 30, 2011, the Company was authorized to issue 100 million shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote.

On August 2, 2011, the Company approved the extension of the stock repurchase plan as previously approved on February 8, 2010 under the same terms and conditions that allows the Company to repurchase up to $35.0 million of its common stock set to expire on February 11, 2011 for an additional twelve month period with a new expiration date of February 26, 2012. During the nine month period ended September 30, 2011, the Company did not repurchase any common stock.

The Company has issued stock options for common stock subject to future issuance, of which 4,366,535 and 4,729,849 were outstanding at September 30, 2011 and December 31, 2010, respectively.

7. Equity Incentive Plan

The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7,000,000 shares of common stock. On June 1, 2011, stockholders approved an increase of 1,000,000 shares, authorizing the Company to issue 8,000,000 shares of common stock under the 2004 Plan. Unless terminated earlier by the Company’s Board of Directors, the 2004 Plan will terminate on June 9, 2014, and no additional awards may be made under the 2004 Plan after that date.

The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1,000,000 shares of common stock. Unless terminated earlier by the Company’s Board of Directors, the 2006 Plan will terminate on May 29, 2016 and no additional awards may be made under the 2006 Plan after that date. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007.

 

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On June 21, 2007, the shareholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock issued or delivered by Hercules during the terms of the Plans. The amendments further specify that no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants, options and rights issued to Hercules directors, officers and employees, together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities.

In conjunction with the amendment and in accordance with the exemptive order, on June 21, 2007 the Company made an automatic grant of shares of restricted common stock to Messrs. Badavas, Chow and Woodward, the independent members of its Board of Directors, in the amounts of 1,667, 1,667 and 3,334 shares, respectively. In May 2008, the Company issued restricted shares to Messrs. Badavas and Chow in the amount of 5,000 shares each. In June 2009, the Company issued 5,000 restricted stock shares to Mr. Woodward. The shares were issued pursuant to the 2006 Plan and vest 33% on an annual basis from the date of grant and deferred compensation cost will be recognized ratably over the three year vesting period.

A summary of common stock options activity under the Company’s 2006 and 2004 Plans for the nine months ended September 30, 2011 and 2010 (unaudited) is as follows:

 

     For Nine Months Ended September 30,  
     2011     2010  
     Common  Stock
Options
    Common  Stock
Options
 

Outstanding at Beginning of Period

     4,729,849        4,924,405   

Granted

     526,700        368,250   

Exercised

     (156,994     (413,337

Cancelled

     (733,020     (222,923
  

 

 

   

 

 

 

Outstanding at End of Period

     4,366,535        4,656,395   
  

 

 

   

 

 

 

Weighted-average exercise price

   $ 11.39      $ 11.28   
  

 

 

   

 

 

 

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 September 30, 2011, options for approximately 3.5 million shares were exercisable at a weighted average exercise price of approximately $11.92 per share with a weighted average remaining contractual term of 2.45 years.

The Company determined that the fair value of options granted under the 2006 and 2004 Plans during the nine-month periods ended September 30, 2011 and 2010 was approximately $1.2 million and $652,000 million respectively. During the three month periods ended September 30, 2011 and 2010, approximately $126,000 and $182,000 of share-based cost due to stock option grants was expensed, respectively. During the nine-month periods ended September 30, 2011 and 2010, approximately $480,000 and $538,000 of share-based cost due to stock option grants was expensed, respectively. As of September 30, 2011, there was approximately $1.1 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.23 years. The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table for each of the nine-month periods ended September 30, 2011 and 2010 (unaudited):

 

     For Nine Months Ended September  
     2011     2010  

Expected Volatility

     46.39     46.39

Expected Dividends

     10     10

Expected term (in years)

     4.5        4.5   

Risk-free rate

     0.79% - 1.98     1.10% - 2.51

 

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The following table summarizes stock options outstanding and exercisable at September 30, 2011 (unaudited):

 

(Dollars in thousands, except exercise price)

   Options outstanding      Options exercisable  

Range of exercise prices

   Number  of
shares
     Weighted
average
remaining
contractual
life
     Aggregate
intrinsic
value
     Weighted
average
exercise
price
     Number  of
shares
     Weighted
average
remaining
contractual
life
     Aggregate
intrinsic
value
     Weighted
average
exercise
price
 

$4.21 - $6.74

     488,559         4.46       $ 2,105       $ 4.21         323,411       $ 4.46       $ 1,393       $ 4.21   

$8.49 - $12.84

     2,232,726         4.16         1         11.43         1,516,925         3.08         —           11.90   

$13.00 - $15.00

     1,645,250         1.47         —           13.46         1,645,250         1.47         —           13.46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,366,535         3.18       $ 2,106       $ 11.39         3,485,586       $ 2.45       $ 1,393       $ 11.92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2011 and 2010, respectively, the Company granted approximately 306,600 and 491,500 shares of restricted stock pursuant to the Plans. Each restricted stock award granted in 2011 and 2010 is subject to lapse as to 25% of the award one year after the date of grant and ratably over the succeeding 36 months subject to a four year forfeiture schedule. The restricted stock awarded in 2008 vests 25% annually on the anniversary date of the award. Share based compensation cost will be recognized ratably over the four year vesting period. No restricted stock was granted pursuant to the 2004 Plan prior to 2008. The Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the nine-month periods ended September 30, 2011 and 2010, was approximately $3.4 million and $5.1 million, respectively. During the three month periods ended September 30, 2011 and 2010, the Company expensed approximately $762,000 and $582,000 of compensation expense related to restricted stock, respectively. During the nine-month periods ended September 30, 2011 and 2010, the Company expensed approximately $2.1 million and $1.5 million of compensation expense related to restricted stock, respectively. As of September 30, 2011, there was approximately $6.8 million of total unrecognized compensation costs related to restricted stock. These costs are expected to be recognized over a weighted average period of 2.77 years.

The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make, and does not preclude the participant from electing to make, a cash payment at the time of option exercise or to pay taxes on restricted stock.

8. Earnings Per Share

In 2008, the FASB issued ASC 260, Earnings Per Share formerly known as FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under this standard, unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents, such as the Company’s restricted stock issued under the Plans, are considered participating securities for purposes of calculating change in net assets per share. Under the two-class method a portion of net increase in net assets resulting from operations is allocated to these participating securities and therefore is excluded from the calculation of change in net assets per share allocated to common stock, as shown in the table below. The standard was effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted this standard beginning with financial statements ended March 31, 2009. The adoption of this standard did not result in a change to the previously reported basic change in net assets per share and diluted change in net assets per share.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(in thousands, except per share data)

   2011     2010     2011     2010  

Numerator

        

Net increase in net assets resulting from operations

   $ 6,223      $ (7,823   $ 29,363      $ (6,738

Less: Dividends declared-common and restricted shares

     (9,648     (7,197     (28,853     (21,582
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

     (3,425     (15,020     510        (28,320
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings-common shares

     (3,425     (15,020     510        (28,320

Add: Dividend declared-common shares

     9,473        7,034        28,329        21,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic and diluted change in net assets per common share

   $ 6,048      $ (7,986   $ 28,839      $ (7,168
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Basic weighted average common shares outstanding

     43,071        35,208        42,920        35,227   

Common shares issuable

     265        —          331        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding assuming dilution

     43,336        35,208        43,251        35,227   

Change in net assets per common share

        

Basic

   $ 0.14      $ (0.23   $ 0.67      $ (0.20

Diluted

   $ 0.14      $ (0.23   $ 0.67      $ (0.20

 

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The calculation of change in net assets per common share—assuming dilution, excludes all anti-dilutive shares. For the three and nine-month periods ended September 30, 2011 and 2010, the number of anti-dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, were approximately 2.5 million and 3.9 million shares, respectively.

9. Financial Highlights

Following is a schedule of financial highlights for the nine months ended September 30, 2011 and 2010:

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

FINANCIAL HIGHLIGHTS

(unaudited)

(dollars in thousands, except per share amounts)

 

     Nine Months  Ended
September 30,
 
   2011     2010  

Per share data:

    

Net asset value at beginning of period

   $ 9.50      $ 10.29   

Net investment income

     0.67        0.59   

Net realized gain (loss) on investments

     0.08        (0.43

Net unrealized appreciation (depreciation) on investments

     (0.07     (0.35
  

 

 

   

 

 

 

Total from investment operations

     0.68        (0.19

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

     0.04        (0.19

Distributions

     (0.67     (0.61

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

     0.06        0.06   
  

 

 

   

 

 

 

Net asset value at end of period

   $ 9.61      $ 9.36   
  

 

 

   

 

 

 

Ratios and supplemental data:

    

Per share market value at end of period

   $ 8.52      $ 10.11   

Total return(2)

     (-12.62 %)      (-0.65 %) 

Shares outstanding at end of period

     43,908        36,158   

Weighted average number of common shares outstanding

     42,920        35,208   

Net assets at end of period

   $ 422,050      $ 338,549   

Ratio of operating expense to average net assets

     9.53     7.01

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

     9.17     7.62

Average debt outstanding

   $ 220,664      $ 223,766   

Weighted average debt per common share

   $ 5.14      $ 6.36   

Portfolio turnover

     4.17     1.72

 

(1) 

Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment loss includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital. 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.

(2) 

The total return equals the increase or decrease of ending market value over beginning market value, plus distributions, dividend by the beginning market value, assuming dividend reinvestment prices obtained under the Company’s dividend reinvestment plan.

10. Commitments and Contingencies

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk. These instruments consist primarily of unused commitments to extend credit, in the form of loans to the Company’s portfolio companies. The balance of unfunded commitments to extend credit at September 30, 2011 totaled approximately $148.2 million. Since a portion of these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In addition, the Company had approximately $136.0 million of non-binding term sheets outstanding at September 30, 2011. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.

 

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Certain premises are leased under agreements which expire at various dates through December 2013. Total rent expense amounted to approximately $278,000 and $832,000 during the three and nine month periods ended September 30, 2011 respectively. There was approximately $268,000 and $765,000 recorded in the same periods ended September 30, 2010.

Future commitments under operating leases as of September 30, 2011 (unaudited) were as follows:

 

     Payments due by  period
(in thousands)
 

Contractual Obligations

   Total      Less
than 1
year
     1 - 3
years
     3 - 5
years
     After
5
years
 

Operating Lease Obligations(1)

   $ 2,488       $ 1,242       $ 1,245       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,488       $ 1,242       $ 1,245       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Long-term facility leases.

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.

11. Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”), which amends ASC 820 and requires additional disclosure related to recurring and nonrecurring fair value measurements with respect to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies existing disclosure requirements related to the level of disaggregation and disclosure about inputs and valuation techniques. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009 except for disclosures related to activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the requirements of ASU-2010-06 in the fourth quarter of 2009 and its adoption did not have a material effect on our consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04—Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes the application of some requirements for measuring fair value and requires additional disclosure for fair value measurements. The highest and best use valuation premise is only applicable to non-financial assets. In addition, the disclosure requirements are expanded to include for fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement; (2) a description of the valuation processes in place; and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, for public entities. We are evaluating the impact that our adoption of this update may have on our financial position or results of operations.

12. Subsequent Events

Portfolio Company Developments

In October 2011, Hercules’ portfolio company LaboPharm, Inc. was acquired by Paladin Labs resulting in the full repayment of Hercules’ debt of approximately $12.0 million and the cancellation of the remaining warrants.

Company Developments

In October 2011, Hercules announced the opening of its new office in McLean, Virginia, thereby expanding to the Mid-Atlantic and South-Atlantic regions.

On November 2, 2011, Hercules renewed and amended the Union Bank Facility. Union Bank and RBC Capital Markets have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility will mature on November 2, 2014, revolving through the first 24 months with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate.

 

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

Forward-Looking Statements

The matters discussed in this report, as well as in future oral and written statements by management of Hercules Technology Growth Capital, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our prospective portfolio companies;

 

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the impact of investments that we expect to make;

 

   

the impact of a protracted decline in the liquidity of the credit markets on our business;

 

   

our informal relationships with third parties including the venture capital industry;

 

   

the expected market for venture capital investments and our addressable market;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

   

our ability to access the debt and equity markets;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

our regulatory structure and tax status;

 

   

our ability to operate as a business development company, a small business investment company and a regulated investment company;

 

   

the adequacy of our cash resources and working capital;

 

   

the timing of cash flows, if any, from the operations of our portfolio companies.

 

   

the timing, form and amount of any dividend distributions;

 

   

the impact of fluctuation of interest rates on our business;

 

   

the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and

 

   

our ability to recover unrealized losses.

For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this report, please see the discussion under Item 1A—“Risk Factors” of Part II of this quarterly report on Form 10-Q as well as Item 1A—“Risk Factors” of our annual report on Form 10-K. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this report.

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A—“Risk Factors” of Part II of this quarterly report on Form 10-Q, Item 1A—“Risk Factors” of our annual report on Form 10-K, and “Forward-Looking Statements” of this Item 2.

Overview

We are a specialty finance company that provides debt and equity growth capital to technology-related companies at various stages of development from seed and emerging growth to expansion and established stages of development, which include select publicly listed companies and select lower middle market technology companies. We primarily finance privately-held companies backed by leading venture capital and private equity firms, and also may finance certain publicly-traded companies that lack access to public capital or are sensitive to equity ownership dilution. We source our investments through our principal office located in Silicon Valley, as well as through additional offices in Boston, Massachusetts, Boulder, Colorado, and McLean, Virginia.

Our goal is to be the leading structured debt financing provider of choice for venture capital and private equity backed technology-related companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related companies including clean technology, life sciences and select lower middle market technology companies and to offer a full suite of growth capital products up and down the capital structure. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our structured debt with warrants investments will typically be secured by some or all of the assets of the portfolio company.

Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital and private equity

 

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backed technology-related companies with attractive current yields and the potential for equity appreciation and realized gains. Our structured debt investments typically include warrants or other equity interests, giving us the potential to realize equity-like returns on a portion of our investments. Our equity ownership in our portfolio companies may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide directly to venture capital and private equity backed technology-related companies is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations.

We are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

From incorporation through December 31, 2005, we were taxed as a corporation under Subchapter C of the Internal Revenue Code, or the Code. As of January 1, 2006, we have elected to be treated for federal income tax purposes as a regulated investment company, or a RIC, under Subchapter M of the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, such an election and qualification to be treated as a RIC requires that we comply with certain requirements contained in Subchapter M of the Code. For example, a RIC must meet certain requirements, including source-of income, asset diversification and income distribution requirements. The income source requirement mandates that we receive 90% or more of our income from qualified earnings, typically referred to as “good income.” Qualified earnings may exclude such income as management fees received in connection with our SBIC or other potential outside managed funds and certain other fees.

Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology-related companies at various stages of their development. Consistent with regulatory requirements, we invest primarily in United States based companies and to a lesser extent in foreign companies. Our investing emphasis has been primarily on private companies following or in connection with a subsequent institutional round of equity financing, which we refer to as expansion-stage companies and private companies in later rounds of financing and certain public companies, which we refer to as established-stage companies and select lower middle market companies. We have focused our investment activities in private companies following or in connection with the first institutional round of financing, which we refer to as emerging-growth companies.

Portfolio and Investment Activity

The total value of our investment portfolio was $576.5 million at September 30, 2011 as compared to $472.0 million at December 31, 2010.

Debt commitments for the nine-month period ended September 30, 2011 included commitments of approximately $298.3 million to twenty-five new portfolio companies and $164.8 million to fourteen existing companies. During the three and nine month periods ended September 30, 2011 we made debt commitments to new and existing portfolio companies, including restructured loans, totaling $214.7 million and $463.1 million and funded approximately $147.2 million and $356.4 million, respectively, of debt and equity investments. During the three and nine-month periods ended September 30, 2011 we made and funded equity commitments of $1.1 million to two existing companies and $1.6 to three existing companies.

At September 30, 2011, we had unfunded contractual commitments of approximately $148.2 million to twenty-six portfolio companies. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In addition, we have approximately $136.0 million of non-binding term sheets outstanding to nine new and existing companies at September 30, 2011. Non-binding outstanding term sheets are subject to completion of our due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.

The fair value of the loan portfolio at September 30, 2011 was approximately $513.4 million, compared to a fair value of approximately $352.0 million at September 30, 2010. The fair value of the equity portfolio at September 30, 2011 and 2010 was approximately $35.8 million and $39.4 million, respectively. The fair value of our warrant portfolio at September 30, 2011 and 2010 was approximately $27.3 million and $19.0 million, respectively.

We receive payments in our loan portfolio based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our loans prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. During the nine-month period ended September 30, 2011, we received normal principal amortization repayments of approximately $51.0 million, and early repayments and working line of credit pay-downs of approximately $172.2 million. During the nine-month period ended September 30, 2011, we restructured the debt for three portfolio companies for approximately $8.1 million, $4.7 million and $3.3 million, converted $3.5 million of debt to equity, and received approximately $23.8 million in early repayments associated with the sale of Infologix, Inc.

 

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Total portfolio investment activity as of September 30, 2011 (unaudited) and for the year ended December 31, 2010 is as follows:

 

(in millions)    September 30, 2011     December 31, 2010  

Beginning Portfolio

   $ 472.0      $ 374.7   

Purchase of debt investments

     332.3        320.4   

Equity Investments

     6.3        2.3   

Sale of Investments

     (17.5     (34.2

Principal payments received on investments

     (54.4     (81.6

Early pay-offs and recoveries

     (168.8     (114.5

Accretion of loan discounts and paid-in-kind principal

     9.2        3.3   

Net change in unrealized depreciation in investments

     (2.6     1.6   

Restructure fundings

     16.1        78.4   

Restructure payoffs

     (16.1)        (78.4)   
  

 

 

   

 

 

 

Ending Portfolio

   $ 576.5      $ 472.0   
  

 

 

   

 

 

 

The following table shows the fair value of our portfolio of investments by asset class:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at Fair
Value
     Percentage of Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 414,723         71.9   $ 357,963         75.8

Senior secured debt

     125,962         21.9     59,251         12.6

Preferred stock

     28,928         5.0     26,813         5.7

Subordinated Debt

     —           0.0     8,094         1.7

Common Stock

     6,864         1.2     19,911         4.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

A summary of our investment portfolio at value by geographic location is as follows:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at Fair
Value
     Percentage of  Total
Portfolio
    Investments at Fair
Value
     Percentage of Total
Portfolio
 

United States

   $ 562,296         97.5   $ 438,585         92.9

Canada

     808         0.1     20,876         4.4

England

     9,082         1.6     10,653         2.3

Ireland

     3,893         0.7     —           0.0

Israel

     398         0.1     1,918         0.4
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our portfolio companies are primarily privately-held expansion and established-stage companies in the biotechnology, drug discovery, drug delivery, specialty pharmaceuticals, therapeutics, clean technology, communications and networking, consumer and business products, electronics and computers, information services, internet consumer and business services and products, medical devices, semiconductor and software industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value is often vested in intangible assets and intellectual property.

As of September 30, 2011, over 99.2% of our debt investments were in a senior secured position, and more than 91.1% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime or LIBOR based interest rate floor. Our investments in senior secured debt with warrants have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price equal to the most recent equity financing round. As of September 30, 2011, we held warrants in 104 portfolio companies, with a fair value of approximately $27.3 million. These warrant holdings would require us to invest approximately $70.7 million to exercise such warrants. However, these warrants may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrant interests. The value of our senior secured debt (without warrants) at September 30, 2011 was approximately $126.0 million compared to approximately $59.3 million at December 31, 2010. The increase was primarily attributable to two new investments in lower middle market technology companies in the nine month period ended September 30, 2011, which typically do not have equity enhancement features.

As required by the 1940 Act, the Company classifies its investments by level of control. “Control Investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “Control”. Generally, under the 1940 Act, the Company is deemed to “Control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, which are not Control Investments. The Company is deemed to be an “Affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are investments that are neither Control Investments nor Affiliate Investments.

 

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The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the three and nine months ended September 30, 2011 and September 30, 2010:

 

(in thousands)   Three months ended September 30, 2011     Nine months ended September 30, 2011  
Portfolio Company   Type   Fair Value at
September 30,
2011
    Investment
Income
    Unrealized
(Depreciation  )

/Appreciation
    Realized
Gain

/(Loss)
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Reversal of
Unrealized
(Depreciation)

/Appreciation
    Realized
Gain/
(Loss)
 

MaxVision Holding, LLC.

  Control   $ 2,983      $ 10      $ 14      $ —        $ 861      $ (3,546     —        $ —     

E-Band Communiations, Corp.

  Non-Controlled
Affiliate
    —          5        (53     —          9        (3,425     —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 2,983      $ 15      $ (39   $ —        $ 870      $ (6,971   $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(in thousands)

  Three months ended September 30, 2010     Nine months ended September 30, 2010  
Portfolio Company   Type   Fair Value at
September 30,
2011
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Realized
Gain

/(Loss)
    Investment
Income
    Unrealized
(Depreciation)

/Appreciation
    Reversal of
Unrealized
(Depreciation)

/Appreciation
    Realized
Gain

/(Loss)
 

InfoLogix, Inc.

  Control   $ 33,935      $ 796      $ (4,266   $ —        $ 2,488      $ (1,419   $ 128      $ 2,500   

E-Band Communiations, Corp.

  Non-Controlled
Affiliate
    2,846        —          (371     —          —          572        —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 36,781      $ 796      $ (4,637   $ —        $ 2,488      $ (847   $ 128      $ 2,500   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s investment in InfoLogix, Inc., a company that was a Control Investment as of December 31, 2010, was sold to Stanley Black & Decker (NYSE:SWK) in January 2011. Approximately $8.3 million of realized gains and $8.4 million of net change in unrealized depreciation was recognized on this control investment during the three-month period ended March 31, 2011.

The following table shows the fair value of our portfolio by industry sector at September 30, 2011 and December 31, 2010:

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at
Fair Value
     Percentage of Total
Portfolio
    Investments at
Fair Value
     Percentage of Total
Portfolio
 

Drug Discovery

   $ 81,264         14.1   $ 52,777         11.2

Drug Delivery

     66,734         11.6     35,250         7.5

Internet Consumer & Business Services

     65,975         11.4     7,255         1.5

Specialty Phamaceuticals

     61,603         10.7     63,607         13.5

Clean Tech

     59,793         10.4     25,722         5.4

Communications & Networking

     56,119         9.7     65,098         13.8

Information Services

     38,812         6.7     10,857         2.3

Therapeutic

     32,562         5.7     25,300         5.4

Media/Content/Info

     30,852         5.4     2,223         0.5

Biotechnology Tools

     23,796         4.1     5,987         1.3

Software

     22,094         3.8     96,508         20.4

Diagnostic

     14,889         2.6     14,911         3.2

Surgical Devices

     7,683         1.3     10,172         2.1

Semiconductors

     6,916         1.2     3,227         0.7

Consumer & Business Products

     4,345         0.8     45,316         9.6

Electronics & Computer Hardware

     3,040         0.5     7,819         1.6

Energy

     —           0.0     3         0.0
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 576,477         100.0   $ 472,032         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our expected level of 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 September 30, 2011 and December 31, 2010.

 

     September 30, 2011     December 31, 2010  
(in thousands)    Investments at
Fair Value
     Percentage of  Total
Portfolio
    Investments at
Fair Value
     Percentage of Total
Portfolio
 

Investment Grading

          

1

   $ 108,038         21.0   $ 65,345         16.3

2

     368,878         71.9     232,713         57.9

3

     24,866         4.8     90,739         22.6

4

     8,602         1.7     8,777         2.2

5

     2,983         0.6     4,045         1.0
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 513,367         100.0   $ 401,619         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2011, our investments had a weighted average investment grading of 1.96 as compared to 2.21 at December 31, 2010. The improvement in investment grading is primarily attributable to one new investment rated 1 and the improvements from rated 2 to rated 1 of two investments, approximately 27 new investments to the portfolio rated 2, and the improvement from level 3 to level 2 of four investments. Our policy is to lower the grading on our portfolio companies as they approach the point in time when they will require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our financing criteria and their respective business plans. Various companies in our portfolio will require additional funding in the near term or have not met their business plans and have therefore been downgraded until their funding is complete or their operations improve. At September 30, 2011, four portfolio companies were graded 3, three portfolio companies were graded 4, and two portfolio companies were graded 5 as compared to eight portfolio companies that were graded 3, two portfolio companies that were graded 4 and two portfolio companies that were graded 5 at December 31, 2010.

At September 30, 2011, there was one portfolio company on non-accrual status with a fair value of zero. There were two loans on non-accrual status as of December 31, 2010 with a fair value of approximately $4.0 million. During the three months ended March 31, 2011 we wrote off our warrant, equity and debt investments in one of these portfolio companies for a realized loss of approximately $5.2 million.

The effective yield on our debt investments for the nine month periods ended September 30, 2011 and 2010 was 17.8% and 16.2%, respectively. This yield was higher period over period due to unearned income accelerations attributed to early payoffs. The effective yield on our debt investments for the nine month periods ended September 30, 2011 and 2010 excluding payoffs was 11.5% and 11.3%, respectively.

The overall weighted average yield to maturity of our loan obligations was approximately 13.0% and 13.9% at September 30, 2011 and December 31, 2010. The weighted average yield to maturity is computed using the interest rates in effect at the inception of each of the loans, and includes amortization of the loan facility fees, commitment fees and market premiums or discounts over the expected life of the debt investments, weighted by their respective costs when averaged and based on the assumption that all contractual loan commitments have been fully funded and held to maturity.

We generate revenue in the form of interest income, primarily from our investments in debt securities, and commitment and facility fees. Fees generated in connection with our debt investments are recognized over the life of the loan or, in some cases, recognized as earned. In addition, we generate revenue in the form of capital gains, if any, on warrants or other equity-related securities that we acquire from our portfolio companies. Our investments generally range from $1.0 million to $25.0 million. Our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from PRIME to 14% as of September 30, 2011. In addition to the cash yields received on our loans, in some instances, our loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees, PIK provisions, prepayment fees, and diligence fees, which may be required to be included in income prior to receipt.

Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. We had approximately $9.8 million and $6.6 million of unamortized fees at September 30, 2011 and December 31, 2010, respectively, and approximately $7.2 million and $5.1 million in exit fees receivable at September 30, 2011 and December 31, 2010, respectively.

We have loans in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $1.4 million and $1.7 million in PIK income in the nine month periods ended September 30, 2011 and 2010.

 

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In some cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include their intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property.

At September 30, 2011, approximately 60.9% of our portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 38.3% of the loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property and 0.8% of portfolio company loans had an equipment only lien.

Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the security for emerging-growth, expansion-stage and established-stage companies. In addition, certain loans may include an interest-only period ranging from three to eighteen months for emerging-growth and expansion-stage companies and longer for established-stage companies. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities and any accrued but unpaid interest become due at the maturity date.

Results of Operations

Comparison of the three and nine-month periods ended September 30, 2011 and 2010

Investment Income

Interest income totaled approximately $16.4 and $50.9 million for the three and nine-month periods ended September 30, 2011, compared to $14.1 and $38.1 million for the three and nine-month periods ended September 30, 2010. Income from commitment, facility and loan related fees totaled approximately $2.3 and $7.7 million for the three and nine-month period ended September 30, 2011, compared with $1.5 and $4.5 million for the same periods ended September 30, 2010, respectively. The increase in interest income is attributable to a higher average interest earning investment portfolio and income from early repayments. Income from commitment, facility and loan related fees are primarily the result of an increase in facilities fees of approximately $1.4 million during the period ended September 30, 2011 compared to the same period ended September 30, 2010.

PIK Income

The following table shows the PIK-related activity for the nine months ended September 30, 2011 and 2010, at cost:

 

     Nine months ended
September 30,
 

(in thousands)

   2011     2010  

Beginning PIK loan balance

   $ 3,955      $ 2,315   

PIK interest capitalized during the period

     1,801        2,366   

Payments received from PIK loans

     (3,567     (1,087

PIK converted to other securities

     (440     —     

Realized Loss

     —          (327
  

 

 

   

 

 

 

Ending PIK loan balance

   $ 1,749      $ 3,267   
  

 

 

   

 

 

 

The increase in payments received from PIK loans during the nine months September 30, 2011 includes $1.5 million of PIK collected in conjunction with the sale of our investment in Infologix, Inc. in the first quarter of 2011.

Operating Expenses

Operating expenses, which are comprised of interest and fees, general and administrative and employee compensation, totaled approximately $10.1 million and $7.5 million during the three month periods ended September 30, 2011 and 2010, respectively. Operating expenses totaled approximately $29.9 million and $22.0 million during the nine month periods ended September 30, 2011 and 2010, respectively.

Interest and fees totaled approximately $4.3 million and approximately $11.3 million during the three and nine month periods ended September 30, 2011, respectively, and approximately $2.5 million and $7.2 million during the three and nine month periods ended September 30, 2010. The increase is primarily attributed to $1.3 million and $2.3 million of interest and fee expenses during the three and nine month periods ended September 30, 2011, respectively, related to the $75.0 million of Convertible Senior Notes issued on April 15, 2011. Additionally, the Company incurred approximately $271,000 and $496,000 of non cash interest expense during the three and nine month periods ended September 30, 2011, respectively, attributed to the accretion of the fair value of the conversion feature on the Convertible Senior Notes. The Company had a weighted average cost of debt comprised of interest and fees of approximately 6.5% at September 30, 2011, as compared to 6.2% during the third quarter of 2010. The increase was primarily attributed to the weighted average cost of debt on the senior convertible notes of 8.2% offset by a lower weighted average cost of debt on outstanding SBA debentures at 5.2% in the third quarter of 2011 versus 6.1% in the third quarter of 2010.

 

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General and administrative expenses include legal, consulting and accounting fees, insurance premiums, rent, workout and various other expenses. Expenses remained relatively flat at approximately $1.7 million for the three month periods ended September 30, 2011 and 2010 and increased to $6.2 million from $5.2 million for the nine month periods ended September 30, 2011 and 2010, respectively, primarily due to increased recruiting, accounting and legal expenses.

Employee compensation and benefits totaled approximately $3.3 million and approximately $9.9 million during the three and nine-month periods ended September 30, 2011, respectively. Employee compensation and benefits totaled approximately $2.6 million and approximately $7.7 million during the three and nine-month periods ended September 30, 2010, respectively. This increase is primarily due to an increase in employee headcount and increased salary and executive severance costs as compared to the same period of 2010. We expect to continue to hire to meet our portfolio growth. Stock-based compensation totaled approximately $870,000 and approximately $2.5 million during the three and nine month periods ended September 30, 2011 respectively and approximately $752,000 and approximately $2.0 million during the three and nine month periods ended September 30, 2010. These increases were due primarily to the expense on restricted stock grants issued in the first quarter of 2011. See “Financial Condition, Liquidity, and Capital Resources” for disclosure of additional expenses.

Net Investment Income Before Investment Gains and Losses

Net investment income per share was $0.20 for the quarter ended September 30, 2011 compared to $0.23 per share in the quarter ended September 30, 2010. Net investment income before investment gains and losses for the three and nine month periods ended September 30, 2011 totaled $8.6 million and $28.8 million, respectively as compared to $8.1 million and $20.6 million in the three and nine month periods ended June 30, 2010, respectively. The changes are made up of the items described above under “Investment Income” and “Operating Expenses.”

Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

During the three and nine-months ended September 30, 2011 the Company recognized total net realized gains of approximately $10.1 million from the sale of common stock in its public portfolio companies and realized losses of approximately $1.6 million and approximately $6.7 million from equity, loan, and warrant investments in portfolio companies that have been liquidated. The loss is primarily attributed to the termination of warrants in LaboPharm, Inc. of $0.6 million and the write-off of equity in Solarflare, Inc. of $0.6 million. During the three and nine-month period ended September 30, 2010 the Company recognized net realized losses of approximately $18.9 million and approximately $19.2 million from equity, loan and warrant investments in portfolio companies that have been liquidated and realized gains of approximately $3.6 million from the sale of common stock in public companies and approximately $465,000 from the mergers of private portfolio companies.

A summary of realized gains and losses for the three and nine month periods ended September 30, 2011 and 2010 is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
(in millions)                         

Realized gains

   $ 0.3      $ —        $ 10.6      $ 4.4   

Realized losses

     (1.9     (18.9     (7.2     (19.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses)

   $ (1.6   $ (18.9   $ 3.4      $ (15.1
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three month period ended September 30, 2011 net change in unrealized depreciation totaled approximately $769,000 from loan, warrant and equity investments. Approximately $5.9 million was due to net unrealized appreciation on equity and loans, primarily attributed to the exercise of our warrants in Aveo Pharmaceuticals, Inc. to common shares. Approximately $6.6 million was due to unrealized depreciation on warrant investments, primarily attributable to the exercise of our warrants and the decrease in fair market value for public company holdings.

During the nine month period ended September 30, 2011 net change in unrealized depreciation totaled approximately $2.8 from loan, warrant and equity investments. Approximately $4.0 million was due to net unrealized appreciation on debt and warrants, primarily attributable to the increase in fair market value for public company holdings. Approximately $6.8 million was due to unrealized depreciation on equity investments, primarily attributable to the sale of InfoLogix, Inc. in the first quarter of 2011. Approximately $8.3 million of realized gains and $8.4 million of net change in unrealized depreciation was recognized on this control investment during the three-month period ended March 31, 2011.

During the same periods ending September 30, 2010 net unrealized appreciation totaled approximately $2.9 million and net unrealized depreciation totaled approximately $12.2 million, respectively.

 

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For the three month period ended September 30, 2011 approximately $2.2 million and $3.7 million of the net unrealized appreciation recognized was attributable to debt and equity investments, respectively, and approximately $6.6 million of net unrealized depreciation on our warrant investments. Included in this amount is unrealized appreciation of approximately $1.5 million attributable to the reversal of prior period net unrealized depreciation upon being realized as a loss and approximately $2.9 million in unrealized depreciation attributable to the exercise of warrants to equity. For the nine month period ended September 30, 2011 approximately $3.4 million and $616,000 of the net unrealized appreciation was attributable to debt and warrant investments, respectively, and approximately $6.8 million of depreciation was attributable to equity investments. As of September 30, 2011, the net unrealized depreciation recognized by the Company was increased by approximately $229,000 due to the warrant participation agreement with Citigroup. For a more detailed discussion of the warrant participation agreement, see the discussion set forth under Note 4 to the Consolidated Financial Statements.

The net unrealized appreciation and depreciation of our investments is based on fair value of each investment determined in good faith by our Board of Directors. This net unrealized appreciation was primarily comprised of increases in the fair value of our portfolio companies due to positive company performance and market conditions.

The following table itemizes the change in net unrealized appreciation/depreciation of investments for the three and nine-month periods ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30,
 

(in thousands)

   2011     2010  

Gross unrealized appreciation on portfolio investments

   $ 11,928      $ 4,565   

Gross unrealized depreciation on portfolio investments

     (11,423     (15,824

Reversal of prior period net unrealized appreciation upon realization

     (3,323     (3,912

Reversal of prior period net unrealized depreciation upon realization

     1,913        17,888   

Citigroup Warrant Participation

     136        177   
  

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on portfolio investments

   $ (769   $ 2,894   
  

 

 

   

 

 

 
     Nine Months Ended
September 30,
 

(in thousands)

   2011     2010  

Gross unrealized appreciation on portfolio investments

   $ 41,945      $ 26,369   

Gross unrealized depreciation on portfolio investments

     (38,833     (52,867

Reversal of prior period net unrealized appreciation upon realization

     (13,225     (3,902

Reversal of prior period net unrealized depreciation upon realization

     7,519        18,048   

Citigroup Warrant Participation

     (229     134   
  

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on portfolio investments

   $ (2,823   $ (12,218
  

 

 

   

 

 

 

Income and Excise Taxes

We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized.

Net Increase in Net Assets Resulting from Operations and Change in Net Assets per Share

For the three and nine months ended September 30, 2011, the net increase in net assets resulting from operations totaled approximately $6.2 million and $29.4 million, respectively. For the three and nine months ended September 30, 2010, the net decrease in net assets resulting from operations totaled approximately $7.8 million and $6.7 million. These changes are made up of the items previously described.

Basic and fully diluted net change in net assets per common share for the three and nine-month periods ended September 30, 2011 was $0.14 and $0.67, respectively, as compared to basic and fully diluted change in net assets per common share of $(0.23) and $(0.20) for the three and nine-month periods ended September 30, 2010, respectively.

 

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Financial Condition, Liquidity, and Capital Resources

At September 30, 2011, we had approximately $96.3 million in cash and cash equivalents and available borrowing capacity of approximately $75.0 million under the Wells Facility, $20.0 million under the Union Bank Facility and $36.25 million under the SBA program, subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts.

As of September 30, 2011, net assets totaled $422.1 million, with a net asset value per share of $9.61. We intend to generate additional cash primarily from cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less as well as from future borrowings as required to meet our lending activities. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. Additionally, we expect to raise additional capital to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act. To the extent we determine to raise additional equity through an offering of our common stock at a price below net asset value, existing investors will experience dilution. During our 2011 Annual Shareholder Meeting held on June 1, 2011, our shareholders authorized us, with the approval of our Board of Directors, to sell up to 20% of our outstanding common stock at a price below our then current net asset value per share and to offer and issue debt with warrants or debt convertible into shares of our common stock at an exercise or conversion price that will not be less than the fair market value per share but may be below the then current net asset value per share. However, there can be no assurance that these capital resources will be available given the credit constraints of the banking and capital markets.

As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of September 30, 2011 our asset coverage ratio under our regulatory requirements as a business development company was 971.5%, excluding our SBIC debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio. Total leverage when including our SBIC debentures was 263.1% at September 30, 2011.

During the nine months ended September 30, 2011, our operating activities used $72.5 million of cash and cash equivalents, compared to $45.6 million used during the nine months ended September 30, 2010. The $26.9 million increase in cash used in operating activities resulted primarily from increased investing activity. During the nine months ended September 30, 2011, our financing activities provided $62.0 million of cash, compared to $4.2 million during the nine months ended September 30, 2010. This $57.9 million increase in cash provided by financing activities was due primarily due to the issuance of $75.0 million of Convertible Senior Notes in April 2011.

At September 30, 2011 and December 31, 2010, we had the following borrowing capacity and outstanding amounts:

 

     September 30, 2011      December 31, 2010  
     Total
Available
     Carrying
Value(1)
     Total
Available
     Carrying
Value(1)
 

Union Bank Facility

   $ 20,000       $ —         $ 20,000       $ —     

Wells Facility

     75,000         —           50,000         —     

Convertible Senior Notes(2)

     75,000         70,082         —           —     

SBA Debenture(3)

     225,000         188,750         225,000         170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 395,000       $ 258,832       $ 295,000       $ 170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding.

(2)

Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the Convertible Senior Notes was $4,918 at September 30, 2011.

(3)

The Company has the ability to borrow an additional $36.3 million subject to SBA approval and compliance with SBIC regulations.

 

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On September 27, 2006, HT II received a license and on May 26, 2010 HT III received a license to operate as SBICs under the SBIC program and are able to borrow funds from the SBA against eligible investments. As of September 30, 2011, all required contributed capital from the Company has been invested into HT II and HT III. The Company is the sole limited partner of HT II and HT III and HTM is the general partner. HTM is a wholly-owned subsidiary of the Company. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of September 30, 2011 as a result of having sufficient capital as defined under the SBA regulations. In aggregate, HT II and HT III hold approximately $334.9 million in assets, and accounted for approximately 35.5% of our total assets prior to consolidation at September 30, 2011.

With our net investment of $75.0 million in HT II as of September 30, 2011, HT II has the capacity to issue a total of $125.0 million of SBA guaranteed debentures, of which $125.0 million was outstanding at September 30, 2011. As of September 30, 2011, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. As of September 30, 2011, we held investments in HT II in 84 companies with a fair value of approximately $180.8 million, accounting for approximately 31.4% of our total portfolio at September 30, 2011.

As of September 30, 2011, the maximum statutory limit on the dollar amount of combined outstanding SBA guaranteed debentures is $225.0 million, subject to periodic adjustments by the SBA. As of September 30, 2011, HT III had the potential to borrow up to $100.0 million of SBA-guaranteed debentures under the SBIC program. With our net investment of $50.0 million in HT III as of September 30, 2011, HT III has the capacity to issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $63.75 million was outstanding at September 30, 2011. As of September 30, 2011, HT III has paid the SBA commitment fees of approximately $750,000. As of September 30, 2011, we held investments in HT III in 20 companies with a fair value of approximately $92.4 million accounting for approximately 16.0% of our total portfolio at September 30, 2011.

 

                          

(in thousands)

Issuance/Pooling Date

   Maturity Date    Interest  Rate(1)     September 30,
2011
     December 31,
2010
 

SBA Debentures:

          

September 26, 2007

   September 1, 2017      6.43   $ 12,000       $ 12,000   

March 26, 2008

   March 1, 2018      6.38   $ 58,050       $ 58,050   

September 24, 2008

   September 1, 2018      6.63   $ 13,750       $ 38,750   

March 25, 2009

   March 1, 2019      5.53   $ 18,400       $ 18,400   

September 23, 2009

   September 1, 2019      4.64   $ 3,400       $ 3,400   

September 22, 2010

   September 1, 2020      3.62   $ 6,500       $ 6,500   

September 22, 2010

   September 1, 2020      3.50   $ 22,900       $ 32,900   

March 29, 2011

   March 1, 2021      4.37   $ 28,750       $ —     

September 21, 2011

   September 1, 2021      3.16   $ 25,000       $ —     
       

 

 

    

 

 

 

Total SBA Debentures

        $ 188,750       $ 170,000   
       

 

 

    

 

 

 

 

(1) 

Interest rate includes annual charge

Current Market Conditions

Beginning in the fall of 2008, the global economy entered a financial crisis and recession. Volatile capital and credit markets, declining business and consumer confidence and increased unemployment precipitated a continuing economic slowdown. Although there have been signs of recovery in many regions, economic weakness could continue or worsen. For example, the current U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States from “AAA” to “AA+” on August 5, 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely effect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. We anticipate that there may be yield compression as 2011 comes to an end, however, given our level of liquidity and pipeline, we believe that we are well positioned despite the uncertainty in the market. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

        We may acquire a portfolio of investments or sell a portion of our portfolio on an opportunistic basis. We, from time to time, engage in discussions with counterparties in respect of various potential transactions. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to completion of due diligence finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our Board of Directors and required third party consents and, in certain cases, the approval of our stockholders. Accordingly, there can be no assurance that any such transaction would be consummated.

We periodically review and assess investment portfolio acquisition opportunities of target companies that would be accretive to us. In the future, we may determine to acquire such portfolios which could affect our liquidity position and necessitate our need to raise additional capital to fund our growth.

 

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Commitments

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our origination activity unfunded commitments may be significant from time to time. As of September 30, 2011, we had unfunded commitments of approximately $148.2 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Closed commitments generally fund 70-80% of the committed amount in aggregate over the life of the commitment. We intend to use cash flow from normal and early principal repayments, SBA debentures, our Wells Facility, our Union Bank Facility and proceeds from Senior Secured Notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due.

In addition, we had approximately $136.0 million of non-binding term sheets outstanding with nine companies, which generally convert to contractual commitments within approximately 45 to 60 days of signing. Non-binding outstanding term from prior release are subject to completion of 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.

Contractual Obligations

The following table shows our contractual obligations as of September 30, 2011:

 

     Payments due by period
(in thousands)
 

Contractual Obligations(1)(2)

   Total      Less than
1 year
     1 - 3
years
     3 - 5
years(3)
     After 5
years(4)
 

Borrowings

   $ 258,832       $ —         $ —         $ 70,082       $ 188,750   

Operating Lease Obligations(5)

     2,488         1,242         1,245         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 261,320       $ 1,242       $ 1,245       $ 70,082       $ 188,750   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes commitments to extend credit to our portfolio companies.
(2) We also have warrant participation obligation with Citigroup. See “Borrowings.”
(3) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the Convertible Senior Notes was $4,918 at September 30, 2011.
(4) Borrowings under the SBA debentures
(5) Long-term facility leases

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

Borrowings

Long-term SBA Debentures

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, a SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. As of September 30, 2011, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. HT II has a total of $125.0 million of SBA guaranteed debentures outstanding as of September 30, 2011 and has paid the SBA commitment fees of approximately $1.5 million. As of September 30, 2011, the Company held investments in HT II in 84 companies with a fair value of approximately $180.8 million, accounting for approximately 31.4% of our total portfolio at September 30, 2011.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $50.0 million in HT III as of September 30, 2011, HT III has the capacity to issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $63.75 million was outstanding as of September 30, 2011. As of September 30, 2011, HT III has paid commitment fees of approximately $750,000. As of September 30, 2011, the Company held investments in HT III in 20 companies with a fair value of approximately $92.4 million accounting for approximately 16.0% of our total portfolio at September 30, 2011.

There is no assurance that HT II or HT III will be able to draw up to the maximum limit available under the SBIC program.

 

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SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of September 30, 2011 as a result of having sufficient capital as defined under the SBA regulations. As of September 30, 2011, HT III could draw up to $36.25 million, respectively, of additional leverage from SBA.

The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.88% to 5.73%. Interest payments on SBA debentures are payable semi-annually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment was closed in. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the quarter ended September 30, 2011 for HT II was approximately $125.0 million with an average interest rate of approximately 5.0%. The average amount of debentures outstanding for the quarter ended September 30, 2011 for HT III was approximately $63.75 million with an average interest rate of approximately 3.5%.

Wells Facility

On August 25, 2008, Hercules, through a special purpose wholly-owned subsidiary, Hercules Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total commitments of $50.0 million, with Wells Fargo Capital Finance as a lender and as an arranger and administrative agent (the “Wells Facility”). The Wells Facility has the capacity to increase to $300.0 million if additional lenders are added to the syndicate. The Wells Facility expired in August 2011.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The Wells Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. We have paid a total of $1.1 million in structuring fees in connection with the Wells Facility which has been amortized through August 2011.

The Wells Facility includes various financial and operating covenants applicable to the Company and its subsidiaries, in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding Subordinated Indebtedness, that is in excess of $314.0 million plus 90% of the cumulative amount of equity raised after March 31, 2011. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at September 30, 2011.

 

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On June 20, 2011, we renewed the Wells Facility. Under this three-year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. Borrowings under the facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 5.00% and an advance rate of 50% against eligible loans. The facility will be secured by loans in the borrowing base. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each payment date on or before September 1, 2011. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.75%. From September 1, 2011 through September 30, 2011, this non-use fee was 0.75%. The facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the new credit facility. This new arrangement replaced the previous $300.0 million Wells Facility under which Wells Fargo Capital Finance had committed $50.0 million in capital. On June 20, 2011 we paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through June 2014. There was no outstanding debt under the Wells Facility at September 30, 2011.

We anticipate incurring a non-use fee expense of approximately $200,000 or $0.005 per share per quarter until we borrow under the Wells Facility. In total, we expect the expense from the Convertible Senior Notes and facility fees to negatively impact earnings in the near term by approximately $1.5 million or $0.04 per quarter until any of the capital is deployed.

Union Bank Facility

On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and secured by loans in the borrowing base. The Union Bank Facility required the payment of a non-use fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. In February 2011, the maturity date of the facility was extended from May 1, 2011 to July 31, 2011. Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at September 30, 2011.

On June 7, 2011, we entered into an amendment to the Union Bank Facility which extended the borrowing termination date to September 30, 2011. The amendment to the Union Bank Facility also amends the maturity date of Union Bank’s $20.0 million commitment to mean the earliest of: (a) December 31, 2011; (b) the date on which Union Bank’s obligation to make loans is terminated and the obligations are declared to be due and payable or the commitment is terminated; or (c) the date of prepayment in full by the Company. There was no outstanding debt under the Union Bank Facility at September 30, 2011.

On November 2, 2011, we renewed and amended the Union Bank Facility. Union Bank and RBC Capital Markets have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding Subordinated Indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions.

Convertible Senior Notes

In April 2011, we issued $75.0 million in aggregate principle amount of 6.00% convertible senior notes (the “Convertible Senior Notes”) due 2016. As of September 30, 2011, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $70.1 million.

        The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.

Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver, as the case may be, at our election, cash, shares of its common stock or a combination of cash and shares of its common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders.

 

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We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date.

In accounting for the Convertible Senior Notes, we estimated that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes has initially be recorded in “capital in excess of par value” in the consolidated statement of assets and liabilities. As a result, we record interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 7.9%.

As of September 30, 2011, the components of the carrying value of the Convertible Senior Notes were as follows:

 

(in thousands)    As of September 30, 2011  

Principal amount of debt

   $ 75,000   

Original issue discount, net of accretion

     (4,918
  

 

 

 

Carrying value of debt

   $ 70,082   
  

 

 

 

For the three and nine months ended September 30, 2011, the components of interest expense and cash paid for interest expense for the Convertible Senior Notes were as follows:

 

     Three Months Ended
September 30,

2011
     Nine Months Ended
September 30,

2011
 
(in thousands)              

Stated interest expense

   $ 1,125       $ 2,062   

Accretion of original issue discount

     270         496   

Amortization of debt issuance cost

     144         264   
  

 

 

    

 

 

 

Total interest expense

   $ 1,539       $ 2,822   
  

 

 

    

 

 

 

Cash paid for interest expense

   $ —         $ —     

As of September 30, 2011, we are in compliance with the terms of the indentures governing the Convertible Senior Notes. See Note 4 to our consolidated financial statements for the three and nine months ended September 30, 2011 for more detail on the Convertible Senior Notes.

Citibank Credit Facility

We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. During the first quarter of 2009, we paid off all remaining principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. The value of their participation right on unrealized gains in the related equity investments was approximately $727,000 as of September 30, 2011 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid Citigroup approximately $1.1 million under the warrant participation agreement thereby reducing its realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire.

 

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Outstanding Borrowings

At September 30, 2011 and December 31, 2010, we had the following borrowing capacity and outstanding borrowings:

 

     September 30, 2011      December 31, 2010  
     Total
Available
     Carrying
Value(1)
     Total
Available
     Carrying
Value(1)
 

Union Bank Facility

   $ 20,000       $ —         $ 20,000       $ —     

Wells Facility

     75,000         —           50,000         —     

Convertible Senior Notes(2)

     75,000         70,082         —           —     

SBA Debenture(3)

     225,000         188,750         225,000         170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 395,000       $ 258,832       $ 295,000       $ 170,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Except for the Convertible Senior Notes (as defined above), all carrying values are the same as the principal amount outstanding.

(2)

Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined above) less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the Convertible Senior Notes was $4,918 at September 30, 2011.

(3)

The Company has the ability to borrow an additional $36.3 million subject to SBA approval and compliance with SBIC regulations for which they have received a commitment.

Dividends

The following table summarizes our dividends declared and paid or to be paid on all shares, including restricted stock, to date:

 

Date Declared

  

Record Date

  

Payment Date

  

Amount Per Share

 

October 27, 2005

   November 1, 2005    November 17, 2005    $ 0.025   

December 9, 2005

   January 6, 2006    January 27, 2006      0.300   

April 3, 2006

   April 10, 2006    May 5, 2006      0.300   

July 19, 2006

   July 31, 2006    August 28, 2006      0.300   

October 16, 2006

   November 6, 2006    December 1, 2006      0.300   

February 7, 2007

   February 19, 2007    March 19, 2007      0.300   

May 3, 2007

   May 16, 2007    June 18, 2007      0.300   

August 2, 2007

   August 16, 2007    September 17, 2007      0.300   

November 1, 2007

   November 16, 2007    December 17, 2007      0.300   

February 7, 2008

   February 15, 2008    March 17, 2008      0.300   

May 8, 2008

   May 16, 2008    June 16, 2008      0.340   

August 7, 2008

   August 15, 2008    September 19, 2008      0.340   

November 6, 2008

   November 14, 2008    December 15, 2008      0.340   

February 12, 2009

   February 23, 2009    March 30, 2009      0.320

May 7, 2009

   May 15, 2009    June 15, 2009      0.300   

August 6, 2009

   August 14, 2009    September 14, 2009      0.300   

October 15, 2009

   October 20, 2009    November 23, 2009      0.300   

December 16, 2009

   December 24, 2009    December 30, 2009      0.040   

February 11, 2010

   February 19, 2010    March 19, 2010      0.200   

May 3, 2010

   May 12, 2010    June 18, 2010      0.200   

August 2, 2010

   August 12, 2010    September 17, 2010      0.200   

November 4, 2010

   November 10, 2010    December 17, 2010      0.200   

March 1, 2011

   March 10, 2011    March 24, 2011      0.220   

May 5, 2011

   May 11, 2011    June 23, 2011      0.220   

August 4, 2011

   August 15, 2011    September 15, 2011      0.220   

November 3, 2011

   November 14, 2011    November 29, 2011      0.220   
        

 

 

 
         $ 6.685   
        

 

 

 

 

* Dividend paid in cash and stock.

On November 3, 2011, the Board of Directors announced a cash dividend of $0.22 per share to be paid on November 29, 2011 to shareholders of record as of November 14, 2011. This dividend is the Company’s twenty-fifth consecutive quarterly dividend declaration since its initial public offering, and will bring the total cumulative dividend declared to date to $6.69 per share.

 

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Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90 - 100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income.

Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the tax attributes of our 2011 distributions to stockholders. If we had determined the tax attributes of our distributions year-to-date as of September 30, 2011, approximately 97% would be from ordinary income and spillover earnings from 2010, and 3% would be a return of capital.

We intend to distribute quarterly dividends to our stockholders. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ending on October 31 of the calendar year, and (3) any ordinary income and net capital gains for the preceding year that were not distributed during such year. We will not be subject to excise taxes on amounts on which we are required to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable to RICs, we will be required to distribute to our stockholders with respect to each taxable year at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses.

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Regulation.”

We maintain an “opt-out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, cash dividends will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan and chooses to receive cash dividends. See “Dividend Reinvestment Plan.”

Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.

Valuation of Portfolio Investments. The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.

Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification (“ASC”) topic 820 Fair Value Measurements and Disclosures, (formerly known as SFAS No. 157, Fair Value Measurements). At September 30, 2011, approximately 83.7% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Our debt securities are primarily invested in equity sponsored technology-related companies including life science, clean technology and select lower middle market technology companies. Given the nature of lending to these types of businesses, our investments in these portfolio companies are generally considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, it values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material.

 

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Our Board of Directors may from time to time engage an independent valuation firm to provide us with valuation assistance with respect to certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below:

(1) our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and discussed with our investment committee;

(3) the valuation committee of the Board of Directors reviews the preliminary valuation of the investment committee and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments, if any, and

(4) the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the valuation committee.

We adopted ASC 820 on January 1, 2008. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We have categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company.

Debt Investments

We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. Our debt securities are primarily invested in equity sponsored technology, life science and clean technology companies. Given the nature of lending to these types of businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged.

We apply a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. We use pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. We consider each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date.

 

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Our process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.

We record unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or if under the in exchange premise when the value of a debt security were to be less than amortized cost of the investment. Conversely, where appropriate, we record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value or if under the in exchange premise the value of a debt security were to be greater than amortized cost.

When originating a debt instrument, we generally receive warrants or other equity-related securities from the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan.

Equity-Related Securities and Warrants

Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date.

We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate our valuation of the warrant and equity related. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date.

Income Recognition.

We record interest income on the accrual basis and we recognize it as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. As of September 30, 2011, we had one portfolio company on non-accrual status with a fair value of zero. There were two loans on non-accrual status with a fair value of approximately $4.0 million as of December 31, 2010. During the three months ended March 31, 2011 we wrote off our warrant, equity and debt investments in one of these portfolio companies for a realized loss of approximately $5.2 million.

Paid-In-Kind and End of Term Income.

Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an end-of-term payment that we amortize into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $285,000 and $1.4 million in PIK income in the three and nine-month periods ended September 30, 2011, respectively. The Company recorded approximately $552,000 and $1.7 million in the same periods ended September 30, 2010, respectively.

 

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Fee Income.

Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees.

We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding.

Equity Offering Expenses

Our offering costs, excluding underwriters’ fees, are charged against the proceeds from equity offerings when received.

Debt Issuance Costs

Debt issuance costs are being amortized over the life of the related debt instrument using the straight line method, which closely approximates the effective yield method.

Stock-Based Compensation.

We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We follow ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock options granted. Under ASC 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the award and is recognized.

Federal Income Taxes.

We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code. We are subject to a non-deductible federal excise tax if we do not distribute at least 98% of our taxable income and 98.2% of our capital gain net income for each one year period ending on October 31. At December 31, 2010 and 2009, no excise tax was recorded. At December 31, 2008, we recorded a liability for excise tax of approximately $203,000 on income and capital gains of approximately $5.0 million which was distributed in 2009. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Recent Accounting Pronouncement

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”), which amends ASC 820 and requires additional disclosure related to recurring and nonrecurring fair value measurements with respect to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. The update also clarifies existing disclosure requirements related to the level of disaggregation and disclosure about inputs and valuation techniques. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009 except for disclosures related to activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the requirements of ASU-2010-06 in the fourth quarter of 2009 and its adoption did not have a material effect on our consolidated financial statements.

 

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In May 2011, the FASB issued Accounting Standards Update No. 2011-04—Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, or ASU 2011-04. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes the application of some requirements for measuring fair value and requires additional disclosure for fair value measurements. The highest and best use valuation premise is only applicable to non-financial assets. In addition, the disclosure requirements are expanded to include for fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement; (2) a description of the valuation processes in place; and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, for public entities. We are evaluating the impact that our adoption of this update may have on our financial position or results of operations.

Subsequent Events

Closed and Pending Commitments

As of November 3, 2011, we have closed commitments of approximately $45.0 million to new and existing portfolio companies, and funded approximately $30.0 million since the close of the third quarter. In addition, we have pending commitments (signed term sheets) of approximately $129.0 million.

The table below summarizes our year-to-date closed and pending commitments as follows:

 

2011 Closed Commitments and Pending Commitments (in millions)

  

January 1 – September 30 Closed Commitments

   $ 465.0   

Q4-11 Closed Commitments (as of November 3, 2011)

   $ 45.0   
  

 

 

 

Total year to date 2011 Closed Commitments(a)

   $ 510.0   

Pending Commitments (as November 3, 2011)(b)

   $ 129.0   
  

 

 

 

Total year to date

   $ 639.0   
  

 

 

 

 

A. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close.
B. Not all Pending Commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future cash requirements.

Portfolio Company Developments

In October 2011, Hercules’ portfolio company LaboPharm, Inc. was acquired by Paladin Labs resulting in the full repayment of Hercules’ debt of approximately $12.0 million and the cancellation of the remaining warrants.

Company Developments

In October 2011, Hercules announced the opening of its new office in McLean, Virginia, thereby expanding to the Mid-Atlantic and South-Atlantic regions where the Company was previously under represented.

On November 2, 2011, the Company renewed and amended the Union Bank Facility. The Union Bank Facility will mature on November 2, 2014, revolving through the first 24 months with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net investment income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio.

        As of September 30, 2011, approximately 91.1% of our portfolio loans were at variable rates or variable rates with a floor and 8.9% of our loans were at fixed rates. Over time additional investments may be at variable rates. We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. Interest rates on our borrowings are based primarily on LIBOR. Borrowings under our SBA program are fixed at the ten year treasury rate every March and September for borrowings of the preceding six months. Borrowings under the program are charged interest based on ten year treasury rates plus a spread and the rates are generally set for a pool of debentures issued by the SBA in six-month periods. The rates of borrowings under the various draws from the SBA beginning in April 2007 and set semiannually in March and September range from 2.88% to 5.73%. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fee related to HT III debentures that pooled on September 21, 2011 was 0.285%. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year the underlying commitment was closed in. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the quarter ended September 30, 2011 for HT II was approximately $125.0 million with an average interest rate of approximately 5.0%, and for HT III was approximately $63.75 million with an average interest rate of approximately 3.5%. Interest is payable semiannually and there are no principal payments required on these issues prior to maturity. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50% with a floor of 5.0%. The Wells Facility is collateralized by debt investment in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. The Wells Facility requires the monthly payment of a non-use fee of 0.3% for each payment date on or before September 1, 2011. From September 1, 2011 through September 30, 2011, this non-use fee was 0.75%. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.75%. All outstanding principal is due upon maturity. There were no borrowings outstanding under this facility at September 30, 2011. The facility expires in June 2014.

Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%. The Union Bank Facility required the payment of an unused fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. There were no outstanding borrowings under this facility at September 30, 2011. In June 2011, the maturity date under the credit facility was extended from July 31, 2011 to December 31, 2011, subject to the same terms and conditions. On November 2, 2011, we renewed and amended the Union Bank Facility. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate. The Union Bank Facility will mature on November 2, 2014, revolving through the first 24 months with a term out provision for the remaining 12 months.

 

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Borrowings under the Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to the our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded our current disclosure controls and procedures were not effective in timely alerting them of material information relating to the Company that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 as of September 30, 2011 because of the continuing remediation efforts discussed below.

Changes in Internal Control Over Financial Reporting

As described in Item 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2011, management identified remedial steps that were implemented with respect to disclosed material weaknesses. In light of these material weaknesses, the Company refined its procedures to ensure its financial statements were prepared in accordance with generally accepted accounting principles. The status of the remediation efforts, as discussed below, was regularly reviewed with management and the Company’s Audit Committee of the Board of Directors. The Audit Committee was advised of issues encountered and key decisions reached by management relating to the remediation efforts. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

During the three month period ended December 31, 2010, and in connection with the year-end audit process, the Company corrected the valuation process to refine its application of ASC 820. The Company applied a new procedure that assumes a sale of an investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under the new process, the Company has continued to evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. The Company uses pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company has completed its evaluation and testing of these additional processes. During the three months ended March 31, 2011, management evaluated the remedial action, assessed the operating effectiveness of the remediated controls and concluded that it has remediated the material weakness described above.

 

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In connection with the preparation of the Company’s Consolidated Financial Statements for the three-month period ended March 31, 2011, the Company identified a material weakness in its internal control over financial reporting. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. In particular, management became aware of matters where existing controls did not operate effectively to detect manual input errors in calculations used to derive the fair value of some investment portfolio holdings as of the measurement date, thereby impacting reported amounts with respect to investments and net increase (decrease) in unrealized appreciation on investments. This control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Because of this material weakness, management concluded that the Company did not maintain effective control over financial reporting as of March 31, 2011. The Company designed and implemented its remediation efforts, as outlined below, to address the material weakness identified as of March 31, 2011 and to strengthen its internal control over financial reporting. Beginning in the second quarter of 2011, the Company has implemented the following remediation steps to address the material weakness as it relates to manual input errors in calculations used and to improve its internal control over financial reporting:

 

   

adding additional layers of review to ensure accuracy, existence and completeness of the number of equity security holdings as of the measurement date;

 

   

adding additional review steps, particularly surrounding any manually input data, in the calculations used to support the fair value of investments as of the measurement date; and

 

   

seeking to recruit additional experienced professionals to augment and upgrade its financial staff to address issues of timeliness and completeness in financial reporting.

As of September 30, 2011, management believes it has placed in operation controls to address the material weakness, however given the timing of certain remediation activities there was not sufficient evidence to conclude upon their sustained effectiveness. As a result, during 2011, management will continue to monitor and test the controls that have been implemented to ensure sustained effectiveness and will further remediate should any evidence of ineffectiveness be found.

The Audit Committee has directed management to monitor and test the controls implemented and develop additional controls should any of these new controls require further enhancement. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that will be implemented as necessary will remediate the control deficiencies the Company has identified and strengthen its internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address control deficiencies or to determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

At September 30, 2011, we were not a party to any legal proceedings. However, from time to time, we may be party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations and cash flows.

 

ITEM 1A. RISK FACTORS

In addition to the risks discussed below, important risk factors that could cause results or events to differ from current expectations are described in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

We have identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we have not adequately addressed the weakness.

As a result of our evaluation of our internal control over financial reporting for the year ended December 31, 2010, management identified a material weakness related to our valuation process specifically involving debt investments. We have corrected the valuation process to refine our application of ASC 820 and believe that our audited consolidated financial statements for the year ended December 31, 2010 reflect the fair value of our debt investments in accordance with ASC 820 using the new valuation procedure. During the year ended December 31, 2010, we recognized additional unrealized depreciation of $803,000, which is not material to the 2010 consolidated financial statements. Management has evaluated the remedial action, assessed the operating effectiveness of the remediated controls and concluded that it has remediated the material weakness described above.

In connection with the preparation of our Consolidated Financial Statements for the three-month period ended March 31, 2011, we identified a material weakness in our internal control over financial reporting related to manual input errors in calculations used to derive the fair value of some investment portfolio holdings as of the measurement date, thereby impacting reported amounts with respect to investments and net increase (decrease) in unrealized appreciation on investments. Our consolidated financial statements for the quarter ended March 31, 2011 reflect the fair value of our investments and continue to take remediation steps to enhance the internal control procedures in order to effectively remediate the deficiencies in our internal control processes related to such errors.

If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock and the Convertible Senior Notes could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed. See Item 4—Controls and Procedures.

It is likely that the terms of any long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business.

On August 25, 2008, we, through a special purpose wholly-owned subsidiary, entered into a two-year revolving senior secured credit facility with an optional one-year extension with initial commitments of $50.0 million at closing with Wells Fargo Capital Finance (the “Wells Facility”). The Wells Facility has the capacity to increase to $300.0 million if additional lenders are added to the lending syndicate. As of September 30, 2011, we had zero outstanding borrowings under the Wells Facility.

On June 20, 2011, we renewed the Wells Facility. The revolving credit facility will expire on June 20, 2014. The new facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. There can be no assurances that additional lenders will join the new credit facility. This new arrangement replaced the previous $300.0 million Wells Facility, under which Wells Fargo Capital Finance had committed $50.0 million in capital. Under the new three-year senior secured facility,

 

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Wells Fargo Capital Finance has a commitment of $75.0 million. Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50% with a floor of 5.00%. The Wells Facility requires the payment of a monthly non-use fee and has an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity.

On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%, an advance rate of 50% against eligible loans, and secured by loans in the borrowing base. The Union Bank Facility required the payment of a non-use fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. In February 2011, the maturity date of the facility was extended from May 1, 2011 to July 31, 2011. Union Bank Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at September 30, 2011.

On June 7, 2011, we entered into an amendment to the Union Bank Facility which extended the borrowing termination date to September 30, 2011. The amendment to the Union Bank Facility also amends the maturity date of Union Bank’s $20.0 million commitment to mean the earliest of: (a) December 31, 2011; (b) the date on which Union Bank’s obligation to make loans is terminated and the obligations are declared to be due and payable or the commitment is terminated; or (c) the date of prepayment in full by the Company. There was no outstanding debt under the Union Bank Facility at September 30, 2011.

On November 2, 2011, we renewed and amended the Union Bank Facility. Union Bank and RBC Capital Markets have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding Subordinated Indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. The Union Bank Facility will mature on November 2, 2014, approximately three years from the date of issuance, revolving through the first 24 months with a term out provision for the remaining 12 months. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. The other terms of the Union Bank Facility generally remain unchanged, including the stated interest rate. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions.

The current lenders under the Wells Facility and the Union Bank Facility have, and any future lender or lenders will have, fixed dollar claims on our assets that are senior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to our assets in the collateral pool. In addition, we may grant a security interest in our assets in connection with any such borrowing. These facilities contain customary default provisions such as a minimum net worth amount, a profitability test, and a restriction on changing our business and loan quality standards. In addition, such facilities require or are expected to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially, the business of our portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other things, in termination of the availability of further funds under that facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under our facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC.

The terms of future available financing may place limits on our financial and operating flexibility. If we are unable to obtain sufficient capital in the future, we may:

 

   

be forced to reduce or discontinue our operations;

 

   

not be able to expand or acquire complementary businesses; and

 

   

not be able to develop new services or otherwise respond to changing business conditions or competitive pressures.

There is no assurance that HT II or HT III will be able to draw up to the maximum limit available under the SBIC program.

On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. As of September 30, 2011, HT II had the potential to borrow up to $125.0 million of SBA-guaranteed debentures under the SBIC program. With our net investment of $75.0 million in HT II as of September 30, 2011, HT II has the capacity to issue a total of $125.0 million of SBA guaranteed debentures, subject to SBA approval, of which $125.0 million is outstanding as of September 30, 2011.

On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. As of September 30, 2011, HT III had the potential to borrow up to $100.0 million of SBA-guaranteed debentures under the SBIC program. With our net investment of $50.0 million in HT III as of September 30, 2011, HT III has the capacity to issue a total of $100.0 million of SBA guaranteed debentures, subject to SBA approval, of which $63.75 million was outstanding as of September 30, 2011.

As of September 30, 2011, there was $188.75 million principal amount of indebtedness outstanding incurred by our SBIC subsidiaries. Access to the remaining leverage is subject to SBA approval and compliance with SBA regulations.

There is no assurance that HT II or HT III will be able to draw up to the maximum limit available under the SBIC program.

 

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Our investments in the life science industry are subject to extensive government regulation and certain other risks particular to that industry.

We have invested and plan to continue investing in companies in the life science industry that are subject to extensive regulation by the Food and Drug Administration and to a lesser extent, other federal and state agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, new laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us.

Our investments in the clean technology industry are subject to many risks, including volatility, intense competition, shortened product life cycles and periodic downturns.

Our investments in clean technology companies are subject to substantial operational risks, such as failed drilling or well development, unscheduled outages, underestimated cost projections, unanticipated operation and maintenance expenses, failure to obtain the necessary permits to operate and failure of third-party contractors (e.g., energy producers and shippers) to perform their contractual obligations. In addition, energy companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for wind, solar and other renewable energies may be dependent upon adequate wind, sunlight, or biogas production, which can vary from period to period, resulting in volatility in production levels and profitability. In addition, any clean technology have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses) and valuations of clean technology companies can and often do fluctuate suddenly and dramatically and the markets in which clean technology companies operate are generally characterized by abrupt business cycles and intense competition. Demand for clean technology and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases. A change in prices in these energy products could reduce demand for alternative energy. There is particular uncertainty about whether agreements providing incentives for reductions in greenhouse gas emissions, such as the Kyoto Protocol, will continue and whether countries around the world will enact or maintain legislation that provides incentives for reductions in greenhouse gas emissions, without which such investments in clean technology dependent portfolio companies may not be economical or financing for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the risk that favorable regulatory regimes expire or are adversely modified. This could, in turn, materially adversely affect our business, financial condition and results of operations.

Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the

loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at September 30, 2011 that represent greater than 5% of net assets:

 

     September 30, 2011  
(in thousands)    Fair Value      Percentage of
Net Assets
 

Aveo Pharmaceuticals, Inc.

   $ 29,887         7.1

Women’s Marketing, Inc.

   $ 29,405         7.0

Tectura Corporation

   $ 26,574         6.3

Pacira Pharmaceuticals, Inc

   $ 26,264         6.2

Anthera Pharmaceuticals, Inc

   $ 25,705         6.1

Brightsource Energy, Inc

   $ 25,261         6.0

Revance Therapeutics, Inc

   $ 21,814         5.2

 

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Aveo Pharmaceuticals, Inc. is a biopharmaceutical company dedicated to the discovery and development of new, targeted cancer therapeutics.

Women’s Marketing, Inc. is a media solutions company, delivering premium media at value pricing across all platforms.

Tectura Corporation is an IT services firm that specializes in Microsoft Business Solutions applications.

Pacira Pharmaceuticals, Inc. is an emerging specialty pharmaceutical company focused on the development, commercialization and manufacture of new pharmaceutical products.

Anthera Pharmaceuticals, Inc. is a biopharmaceutical company focused on developing and commercializing products to treat serious diseases, including cardiovascular and autoimmune diseases.

Brightsource Energy, Inc. designs, develops and sells solar thermal power systems that deliver reliable, clean energy to utilities and industrial companies.

Revance Therapeutics, Inc. is a privately held biopharmaceutical company developing products that will change the way that drugs are delivered by carrying active levels of drug across the skin to deliver at specific and targeted depths.

Tectura Corporation is an IT services firm that specializes in Microsoft Business Solutions applications.

Our financial results could be negatively affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected.

Economic downturns or recessions could impair the value of the collateral for our loans to our portfolio companies increase our funding costs, limit our access to the credit and capital markets, impair the ability of a portfolio company to satisfy covenants imposed by its lenders and consequently increase the possibility of an adverse effect on our business, financial condition and results of operations.

Many of our portfolio companies are susceptible to economic recessions and may be unable to repay our loans during such periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments. In particular, intellectual property owned or controlled by our portfolio companies may constitute an important portion of the value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be impaired by such events.

Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

Beginning in the fall of 2008, the global economy entered a financial crisis and recession. Volatile capital and credit markets, declining business and consumer confidence and increased unemployment precipitated a continuing economic slowdown. Although there have been signs of recovery in many regions, economic weakness could continue or worsen. For example, the current U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States from “AAA” to “AA+” on August 5, 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely effect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

 

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

ITEM 4. RESERVED

 

ITEM 5. OTHER INFORMATION

Not Applicable

 

ITEM 6. EXHIBITS

 

Exhibit
Number

  

Description

31.1    Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

(Registrant)

Dated: November 3, 2011    

/S/    MANUEL A. HENRIQUEZ        

    Manuel A. Henriquez
    Chairman, President, and Chief Executive Officer
Dated: November 3, 2011    

/S/    JESSICA BARON        

    Jessica Baron
    Interim Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description

31.1    Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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