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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q
(Mark One) For The Quarterly Period Ended September 30, 2010 OR Commission File Number: 814-00702 HERCULES
TECHNOLOGY GROWTH CAPITAL, INC. (Exact Name of Registrant as Specified in its Charter) 400 Hamilton Ave., Suite 310 Palo Alto, California 94301 (650)
289-3060 (Registrants 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. 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 4, 2010, there were 36,170,811 shares outstanding of the Registrants common stock, $0.001 par value.
HERCULES TECHNOLOGY
GROWTH CAPITAL, INC. Item 1. Consolidated Schedule of Investments as of September 30, 2010 (unaudited) Consolidated Schedule of Investments as of December 31, 2009 Item 2. Item 3. Item 4. Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6. 2
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. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES (Unauditeddollars in thousands, except per share data) Assets Investments: Non-affiliate investments (cost of $397,925 and $353,648, respectively) Affiliate investments (cost of $2,880 and $2,880, respectively) Control investments (cost of $26,992 and $23,823, respectively) Total investments, at value (cost of $427,796 and $380,351 respectively) Deferred loan origination revenue Cash and cash equivalents Interest receivable Other assets Total assets Liabilities Accounts payable and accrued liabilities Long-term SBA Debentures Total liabilities Net assets Net assets consist of: Common stock, par value Capital in excess of par value Unrealized appreciation (depreciation) on investments Accumulated realized gains (losses) on investments Distributions in excess of investment income Total net assets Shares of common stock outstanding ($0.001 par value, 60,000 authorized) Net asset value per share See Notes to Consolidated Financial Statements (unaudited) 3
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Acceleron Pharmaceuticals, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Acceleron Pharmaceuticals, Inc. Aveo Pharmaceuticals, Inc. Senior Debt Matures September 2013 Interest rate Prime + 7.15% or Floor rate of 11.9% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Total Aveo Pharmaceuticals, Inc. Dicerna Pharmaceuticals, Inc. Senior Debt Matures July 2012 Interest rate Prime + 9.20% or Floor rate of 12.95% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Dicerna Pharmaceuticals, Inc. Elixir Pharmaceuticals, Inc (8) Senior Debt Matures October 2011 Interest rate Prime + 9.25% or Floor rate of 12.5% Preferred Stock Warrants Total Elixir Pharmaceuticals, Inc. EpiCept Corporation Common Stock Warrants Total EpiCept Corporation Horizon Therapeutics, Inc. Total Horizon Therapeutics, Inc. Inotek Pharmaceuticals Corp. Total Inotek Pharmaceuticals Corp. Merrimack Pharmaceuticals, Inc. Preferred Stock Total Merrimack Pharmaceuticals, Inc. Paratek Pharmaceuticals, Inc. Preferred Stock Total Paratek Pharmaceuticals, Inc. See Notes to
Consolidated Financial Statements 4
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) PolyMedix, Inc. Senior Debt Matures September 2013 Interest rate Prime + 7.1% or Floor rate of 12.35% Preferred Stock Warrants Total PolyMedix, Inc. Portola Pharmaceuticals, Inc. Senior Debt Matures April 2011 Interest rate Prime + 2.16% Preferred Stock Warrants Total Portola Pharmaceuticals, Inc. Total Drug Discovery (15.17%)* Affinity Videonet, Inc (4) Senior Debt Matures June 2012 Interest rate Prime + 8.75% or Floor rate of 12.00% Senior Debt Matures June 2012 Interest rate Prime + 14.75% or Floor rate of 18.00% Revolving Line of Credit Matures June 2012 Interest rate Prime + 9.75% or Floor rate of 13.00% Preferred Stock Warrants Total Affinity Videonet, Inc. E-band Communications, Corp.(6) Total E-Band Communications, Corp. IKANO Communications, Inc. Senior Debt Matures August 2011 Interest rate 12.00% Preferred Stock Warrants Preferred Stock Warrants Total IKANO Communications, Inc. Intelepeer, Inc. Senior Debt Matures May 2013 Interest rate Prime + 8.125% Preferred Stock Warrants Total Intelepeer, Inc. Neonova Holding Company Preferred Stock Total Neonova Holding Company See Notes to
Consolidated Financial Statements 5
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Opsource, Inc.(4) Senior Debt Matures June 2013 Interest rate Prime + 7.75% or Floor rate of 11.00% Revolving Line of Credit Matures June 2011 Interest rate Prime + 5.25% or Floor rate of 8.50% Preferred Stock Warrants Total Opsource, Inc. PeerApp, Inc. Senior Debt Matures April 2013 Interest rate Prime + 7.5% or Floor rate of 11.50% Preferred Stock Warrants Total PeerApp, Inc. Peerless Network, Inc. Preferred Stock Total Peerless Network, Inc. Ping Identity Corporation Total Ping Identity Corporation Purcell Systems, Inc. Total Purcell Systems, Inc. Seven Networks, Inc. Total Seven Networks, Inc. Stoke, Inc(4) Senior Debt Matures May 2013 Interest rate Prime + 7.0% or Preferred Stock Warrants Preferred Stock Warrants Total Stoke, Inc. Tectura Corporation Senior Debt Matures March 2011 Interest rate 11% Revolving Line of Credit Matures July 2011 Interest rate 11% Preferred Stock Warrants Total Tectura Corporation Total Communications & Networking (14.74%)* See Notes to Consolidated Financial Statements 6
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Atrenta, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Atrenta, Inc. Blurb, Inc. Senior Debt Matures June 2011 Interest rate Prime + 3.50% or Floor rate of 8.5% Preferred Stock Warrants Preferred Stock Warrants Total Blurb, Inc. Braxton Technologies, LLC. Total Braxton Technologies, LLC. Bullhorn, Inc. Total Bullhorn, Inc. Clickfox, Inc. Matures July 2013 Interest rate Prime + 6.00% or Floor rate of 11.25% Revolving Line of Credit Matures July 2011 Interest rate Prime + 5.00% or Floor rate of 12.00% Preferred Stock Warrants Preferred Stock Warrants Total Clickfox, Inc. Forescout Technologies, Inc. Total Forescout Technologies, Inc. GameLogic, Inc. Total GameLogic, Inc. HighJump Acquisition, LLC. Senior Debt Matures May 2013 Interest rate Libor + 8.75% or Floor rate of 12.00% Total HighJump Acquisition, LLC. HighRoads, Inc. Total HighRoads, Inc. See Notes to
Consolidated Financial Statements 7
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Infologix, Inc (4) (7) Matures November 2013 Interest rate 12.00% Convertible Senior Debt Matures November 2014 Interest rate 12.00% Revolving Line of Credit Matures May 2011 Interest rate 12.00% Senior Debt Matures December 2010 Interest rate 18.00% Senior Debt Matures April 2013 Interest rate 8.00% Senior Debt Matures September 2011 Interest rate 10.00% Total Infologix, Inc. PSS Systems, Inc. Total PSS Systems, Inc. Rockyou, Inc. Total Rockyou, Inc. Sportvision, Inc. Total Sportvision, Inc. Unify Corporation Senior Debt Matures June 2015 Interest rate Libor + 8.25% or Floor rate of 10.25% Revolving Line of Credit Matures June 2015 Interest rate Libor + 7.25% or Floor rate of 9.25% Preferred Stock Warrants Total Unify Corporation WildTangent, Inc. Total WildTangent, Inc. Total Software (25.88%)* See Notes to Consolidated Financial Statements 8
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Luminus Devices, Inc. Senior Debt Matures December 2011 Interest rate 11.875% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Total Luminus Devices, Inc. Maxvision Holding, LLC. Senior Debt Matures October 2012 Interest rate Prime + 7.25% or Floor rate of 10.75% Senior Debt Matures April 2012 Interest rate Prime + 5.0% or Floor rate of 8.5% Revolving Line of Credit Matures April 2012 Interest rate Prime + 5.0% or Floor rate of 8.5% Common Stock Total Maxvision Holding, LLC Shocking Technologies, Inc. Total Shocking Technologies, Inc. Spatial Photonics, Inc.(8) Senior Debt Matures April 2011 Interest rate 10.07% Preferred Stock Warrants Preferred Stock Total Spatial Photonics, Inc. VeriWave, Inc. Preferred Stock Warrants Total VeriWave, Inc. Total Electronics & Computer Hardware (2.52%)* Aegerion Pharmaceuticals, Inc (4) Senior Debt Matures September 2011 Interest rate Prime + 2.50% or Floor rate of 11.00% Convertible Senior Debt Matures December 2011 Preferred Stock Warrants Preferred Stock Total Aegerion Pharmaceuticals, Inc. See Notes to
Consolidated Financial Statements 9
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of
Investment(1) Althea Technologies, Inc. Senior Debt Matures October 2013 Interest rate Prime + 7.70% or Floor rate of 10.95% Preferred Stock Warrants Total Althea Technologies, Inc. Chroma Therapeutics, Ltd.(5) Senior Debt Matures September 2013 Interest rate Prime + 7.75% or Floor rate of 12.00% Preferred Stock Warrants Total Chroma Therapeutics, Ltd. QuatRx Pharmaceuticals Company Senior Debt Matures October 2011 Interest rate Prime + 8.90% or Floor rate of 12.15% Convertible Senior Debt Matures March 2012 Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Quatrx Pharmaceuticals Company Total Specialty Pharmaceuticals (11.89%)* Annies, Inc. Consumer & Business Products Total Annies, Inc. IPA Holdings, LLC (4) Consumer & Business
Products Senior Debt Matures November 2012 Interest rate Prime + 7.75% or Floor rate of 12.0% Senior Debt Matures May 2013 Interest rate Prime + 10.75% or Floor rate of 15.0% Revolving Line of Credit Matures November 2012 Interest rate Prime + 7.25% or Floor rate of 11.50% Preferred Stock Warrants Common Stock Total IPA Holdings, LLC See Notes to
Consolidated Financial Statements 10
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of
Investment(1) Market Force Information, Inc. Preferred Stock Total Market Force Information, Inc. OnTech Operations, Inc. Preferred Stock Warrants Preferred Stock Total OnTech Operations, Inc. Trading Machines, Inc. Senior Debt Matures January 2014 Interest rate Prime + 10.25% or Floor rate of 13.50% Preferred Stock Warrants Preferred Stock Total Trading Machines, Inc. Velocity Technology Solutions, Inc. Senior Debt Matures February 2015 Interest rate LIBOR + 8% or Floor rate of 11.00% Senior Debt Matures February 2015 Interest rate LIBOR + 10% or Floor rate of 13.00% Total Velocity Technology Solutions, Inc. Wageworks, Inc. Preferred Stock Total Wageworks, Inc. Total Consumer & Business Products (15.61%)* Enpirion, Inc. Total Enpirion, Inc. iWatt, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total iWatt, Inc. See Notes to
Consolidated Financial Statements 11
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) NEXX Systems, Inc. Preferred Stock Total NEXX Systems, Inc. Quartics, Inc. Total Quartics, Inc. Solarflare Communications, Inc. Common Stock Total Solarflare Communications, Inc. Total Semiconductors (0.63%)* Alexza Pharmaceuticals, Inc. (4) Senior Debt Matures October 2013 Interest rate Prime + 6.5% or Floor rate of 10.75% Preferred Stock Warrants Total Alexza Pharmaceuticals, Inc. Labopharm USA, Inc. (5) Senior Debt Matures December 2012 Interest rate 10.95% Common Stock Warrants Total Labopharm USA, Inc. Transcept Pharmaceuticals, Inc. Common Stock Warrants Common Stock Total Transcept Pharmaceuticals, Inc. Total Drug Delivery (10.50%)* BARRX Medical, Inc. Senior Debt Mature December 2011 Interest rate 11.00% Revolving Line of Credit Matures May 2011 Interest rate 10.00% Preferred Stock Warrants Preferred Stock Total BARRX Medical, Inc. EKOS Corporation Senior Debt Matures November 2010 Interest rate Prime + 2.00% Preferred Stock Warrants Preferred Stock Warrants Total EKOS Corporation See Notes to
Consolidated Financial Statements 12
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment (1) Gelesis, Inc. (8) Senior Debt Matures May 2012 Interest rate Prime + 7.5% or Floor rate of 10.75% Preferred Stock Warrants Total Gelesis, Inc. Gynesonics, Inc. Preferred Stock Warrants Preferred Stock Total Gynesonics, Inc. Light Science Oncology, Inc. Preferred Stock Warrants Total Light Science Oncology, Inc. Novasys Medical, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Novasys Medical, Inc. Pacific Child & Family Associates, LLC Senior Debt Matures January 2015 Interest rate LIBOR + 8.0% or Floor rate of 10.50% Senior Debt Matures January 2015 Interest rate LIBOR + 10.50% or Floor rate of 13.0% Total Pacific Child & Family Associates, LLC Total Therapeutic (6.08%)* Cozi Group, Inc. Internet Consumer & Business Services Preferred Stock Warrants Preferred Stock Total Cozi Group, Inc. Invoke Solutions, Inc. Internet Consumer & Business Services Preferred Stock Warrants Preferred Stock Warrants Total Invoke Solutions, Inc. Prism Education Group, Inc. Internet Consumer & Business Services Preferred Stock Warrants Total Prism Education Group, Inc. RazorGator Interactive Group, Inc. (4) Internet Consumer &
Business Services Revolving Line of Credit Matures October 2011 Interest rate Prime + 9.50% or Floor rate of 14.00% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total RazorGator Interactive Group, Inc. Reply! Inc. (4) Internet Consumer &
Business Services Senior Debt Matures June 2013 Interest rate Prime + 6.5% or Floor rate of 9.75% Total Reply! Inc. See Notes to Consolidated Financial Statements 13
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment (1) Lilliputian Systems, Inc. Common Stock Warrants Total Lilliputian Systems, Inc. Total Energy (0.00%)* Box.net, Inc. Senior Debt Matures May 2011 Interest rate Prime + 1.50% or Floor rate of 7.50% Senior Debt Matures September 2011 Interest rate Prime + 0.50% or Floor rate of 6.50% Preferred Stock Warrants Preferred Stock Total Box.net, Inc. Buzznet, Inc. Preferred Stock Total Buzznet, Inc. XL Education Corp. Total XL Education Corp. hi5 Networks, Inc. Preferred Stock Total hi5 Networks, Inc. Jab Wireless, Inc. Total Jab Wireless, Inc. Solutionary, Inc. Preferred Stock Warrants Preferred Stock Total Solutionary, Inc. Intelligent Beauty, Inc. Senior Debt Matures March 2013 Interest rate Prime + 8.0% or Floor rate of 11.25% Total Intelligent Beauty, Inc. Good Technologies, Inc. Total Good Technologies, Inc. Coveroo, Inc. Total Coveroo, Inc. Zeta Interactive Corporation Preferred Stock Total Zeta Interactive Corporation Total Information Services (2.64%) Novadaq Technologies, Inc.(5) Total Novadaq Technologies, Inc. See Notes to Consolidated Financial Statements 14
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment (1) Optiscan Biomedical, Corp. Senior Debt Matures June 2011 Interest rate 10.25% Preferred Stock Warrants Preferred Stock Total Optiscan Biomedical, Corp. Total Diagnostic (2.51%)* Kamada, LTD.(5) Common Stock Total Kamada, LTD. Labcyte, Inc. Senior Debt Matures May 2013 Interest rate Prime + 8.6% or Floor rate of 11.85% Common Stock Warrants Total Labcyte, Inc. NuGEN Technologies, Inc. Preferred Stock Warrants Preferred Stock Total NuGEN Technologies, Inc. Solace Pharmaceuticals, Inc. (4) (8) Senior Debt Matures August 2012 Interest rate Prime + 4.25% or Floor rate of 9.85% Senior Debt Matures August 2012 Interest rate 8.0% Preferred Stock Warrants Preferred Stock Warrants Total Solace Pharmaceuticals, Inc. Total Biotechnology Tools (1.93%)* Crux Biomedical, Inc. Preferred Stock Total Crux Biomedical, Inc. Transmedics, Inc. (4) Senior Debt Matures February 2014 Interest rate Prime + 9.70% or Floor rate of 12.95% Preferred Stock Warrants Preferred Stock Total Transmedics, Inc. Total Surgical Devices (2.82%)* Glam Media, Inc. Total Glam Media, Inc. See Notes to Consolidated Financial Statements 15
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) September 30, 2010 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment (1) Waterfront Media, Inc. (Everyday Health) Preferred Stock Total Everyday Health Total Media/Content/Info (0.35%)* Calera, Inc. Senior Debt Matures July 2013 Interest rate Prime + 7.0% or Floor rate of 10.25% Preferred Stock Warrants Total Calera, Inc. Propel Biofuels, Inc. Senior Debt Matures September 2013 Interest rate 11.0% Preferred Stock Warrants Total Propel Biofuels, Inc. Solexel, Inc. Total Solexel, Inc. Trilliant, Inc. Senior Debt Matures May 2013 Interest rate Prime + 6.75% or Floor rate of 10.0% Preferred Stock Warrants Preferred Stock Warrants Total Trilliant, Inc. Total Clean Tech (4.53%)* Total Investments See Notes to Consolidated Financial Statements 16
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2009 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) Acceleron Pharmaceuticals, Inc. Preferred Stock Warrants Preferred Stock Total Acceleron Pharmaceuticals, Inc. Aveo Pharmaceuticals, Inc. Senior Debt Matures May 2012 Interest rate 11.13% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Total Aveo Pharmaceuticals, Inc. Dicerna Pharmaceuticals, Inc. Senior Debt Matures April 2012 Interest rate Prime + 9.20% or Floor rate of 12.95% Preferred Stock Warrants Preferred Stock Warrants Total Dicerna Pharmaceuticals, Inc. Elixir Pharmaceuticals, Inc. Senior Debt Matures October 2011 Interest rate Prime + 9.25% or Floor rate of 12.5% Preferred Stock Warrants Total Elixir Pharmaceuticals, Inc. EpiCept Corporation Common Stock Warrants Common Stock Warrants Total EpiCept Corporation Horizon Therapeutics, Inc. Senior Debt Matures July 2011 Interest rate Prime + 1.50% Preferred Stock Warrants Total Horizon Therapeutics, Inc. Inotek Pharmaceuticals Corp. Preferred Stock Total Inotek Pharmaceuticals Corp. Merrimack Pharmaceuticals, Inc. Preferred Stock Warrants Preferred Stock Total Merrimack Pharmaceuticals, Inc. Paratek Pharmaceuticals, Inc. Preferred Stock Warrants Preferred Stock Total Paratek Pharmaceuticals, Inc. See Notes to
Consolidated Financial Statements 17
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) Portola Pharmaceuticals, Inc. Senior Debt Matures April 2011 Interest rate Prime + 2.16% Total Portola Pharmaceuticals, Inc. Recoly, N.V. (5) Senior Debt Matures June
2012 Interest rate Prime + 4.25% Total Recoly, N.V. Total Drug Discovery (14.15%)* Affinity Videonet, Inc. (4) Senior Debt Matures June 2012 Interest rate Prime + 8.75% or Floor rate of 12.00% Senior Debt Matures June 2012 Interest rate Prime + 14.75% or Floor rate of 18.00% Revolving Line of Credit Matures June 2012 Interest rate Prime + 9.75% or Floor rate of 13.00% Total Affinity Videonet, Inc. E-Band Communications Corp. (6) Total E-Band Communications Corp. IKANO Communications, Inc. Senior Debt Matures August 2011 Interest rate 12.00% Total IKANO Communications, Inc. Neonova Holding Company Total Neonova Holding Company Peerless Network, Inc. Total Peerless Network, Inc. Ping Identity Corporation Total Ping Identity Corporation See Notes to
Consolidated Financial Statements 18
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) Purcell Systems, Inc. & Networking Total Purcell Systems, Inc. Rivulet Communications, Inc. (4) & Networking Senior Debt Matures March 2010 Interest rate Prime + 8.00% or Floor rate of 12% Total Rivulet Communications, Inc. Seven Networks, Inc. & Networking Total Seven Networks, Inc. Stoke, Inc. & Networking Total Stoke, Inc. Tectura Corporation & Networking Senior Debt Matures September 2010 Interest rate Prime + 10.75% or Floor rate of 14.00% Revolving Line of Credit Matures July 2011 Interest rate Prime + 10.75% or Floor rate of 14.00% Revolving Line of Credit Matures July 2011 Interest rate Prime + 10.75% or Floor rate of 14.00% Total Tectura Corporation Zayo Bandwidth, Inc. & Networking Senior Debt Matures November 2013 Interest rate Libor + 5.25% Total Zayo Bandwith, Inc. Total Communications & Networking (15.85%)* Atrenta, Inc. Total Atrenta, Inc. See Notes to
Consolidated Financial Statements 19
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) Blurb, Inc. Senior Debt Matures June 2011 Interest rate Prime + 3.50% or Floor rate of 8.5% Total Blurb, Inc. Braxton Technologies, LLC Total Braxton Technologies, LLC Bullhorn, Inc. Total Bullhorn, Inc. Clickfox, Inc. Senior Debt Matures September 2011 Interest rate Prime + 5.00% or Floor rate of 10.25% Revolving Line of Credit Matures July 2010 Interest rate Prime + 8.50% or Floor rate of 13.5% Total Clickfox, Inc. Forescout Technologies, Inc. Total Forescout Technologies, Inc. GameLogic, Inc. Total GameLogic, Inc. HighJump Acquisition, LLC Senior Debt Matures May 2013 Interest rate Libor + 8.75% or Floor rate of 12.00% Total HighJump Acquisition, LLC HighRoads, Inc. Total HighRoads, Inc. Infologix, Inc. (4)(7) Senior Debt Matures November 2013 Interest rate 12.00% Convertible Senior Debt Matures November 2014 Interest rate 12.00% Revolving Line of Credit Matures May 2011 Interest rate 12.00% Total Infologix, Inc. Intelliden, Inc. Total Intelliden, Inc. PSS Systems, Inc. Total PSS Systems, Inc. Rockyou, Inc. Total Rockyou, Inc. See Notes to
Consolidated Financial Statements 20
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (unaudited) (dollars in thousands) Portfolio Company Industry Type of Investment(1) Savvion, Inc. (4) Senior Debt Matures February 2011 Interest rate Prime + 7.75% or Floor rate of 11.00% Revolving Line of Credit Matures May 2010 Interest rate Prime + 6.75% or Floor rate of 10.00% Total Savvion, Inc. Sportvision, Inc. Total Sportvision, Inc. WildTangent, Inc. Total WildTangent, Inc. Total Software (16.82%)* Luminus Devices, Inc. Computer Hardware Senior Debt Matures December 2011 Interest rate 12.875% Total Luminus Devices, Inc. Maxvision Holding, LLC Senior Debt Matures October 2012 Interest rate Prime + 5.50% Senior Debt Matures April 2012 Interest rate Prime + 2.25% Revolving Line of Credit Matures April 2012 Interest rate Prime + 2.25% Total Maxvision Holding, LLC Shocking Technologies, Inc. Senior Debt Matures December 2010 Interest rate Prime + 2.50% Total Shocking Technologies, Inc. Spatial Photonics, Inc. Senior Debt Matures April 2011 Interest rate 10.066% Senior Debt Mature April 2011 Interest rate 9.217% Total Spatial Photonics, Inc. See Notes to
Consolidated Financial Statements 21
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Principal Cost
(2) Value(3) Computer Total VeriWave, Inc. Total Electronics & Computer Hardware (4.83%)* Pharmaceuticals Senior Debt Convertible Senior Debt Preferred Stock Warrants Preferred Stock Total Aegerion Pharmaceuticals, Inc. QuatRx Pharmaceuticals Company Senior Debt Convertible Senior Debt Total QuatRx Pharmaceuticals Company Total Specialty Pharmaceuticals (6.87%)* Annies, Inc. Senior Debt - Second Lien Total Annies, Inc. IPA Holdings, LLC (4) Senior Debt Senior Debt Revolving Line of Credit Total IPA Holding, LLC See Notes to
Consolidated Financial Statements 22
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of
Investment(1) Principal Cost
(2) Value(3) Market Force Information, Inc. Preferred Stock Warrants Preferred Stock Total Market Force Information, Inc. OnTech Operations, Inc.(8) Senior Debt Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total OnTech Operations, Inc. Wageworks, Inc. Preferred Stock Warrants Preferred Stock Total Wageworks, Inc. Total Consumer & Business Products (6.95%)* Custom One Design, Inc.(8) Senior Debt Common Stock Warrants Total Custom One Design, Inc. Enpirion, Inc. Senior Debt Preferred Stock Warrants Total Enpirion, Inc. iWatt, Inc. Preferred Stock Warrants Preferred Stock Total iWatt, Inc. NEXX Systems, Inc.(4) Senior Debt Revolving Line of Credit Revolving Line of Credit Preferred Stock Warrants Preferred Stock Total NEXX Systems, Inc. See Notes to
Consolidated Financial Statements 23
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Principal Cost
(2) Value(3) Quartics, Inc. Senior Debt Preferred Stock Warrants Total Quartics, Inc. Solarflare Communications, Inc. Senior Debt Preferred Stock Warrants Common Stock Total Solarflare Communications, Inc. Total Semiconductors (3.13%)* Labopharm USA, Inc.(5) Senior Debt Common Stock Warrants Total Labopharm USA, Inc. Transcept Pharmaceuticals, Inc. Common Stock Warrants Common Stock Warrants Common Stock Total Transcept Pharmaceuticals, Inc. Total Drug Delivery (5.86%)* BARRX Medical, Inc. Senior Debt Revolving Line of Credit Preferred Stock Warrants Preferred Stock Total BARRX Medical, Inc. EKOS Corporation Senior Debt Preferred Stock Warrants Preferred Stock Warrants Total EKOS Corporation Gelesis, Inc.(8) Senior Debt Preferred Stock Warrants Total Gelesis, Inc. Gynesonics, Inc. Preferred Stock Warrants Preferred Stock Total Gynesonics, Inc. See Notes to
Consolidated Financial Statements 24
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Principal Cost
(2) Value(3) Light Science Oncology, Inc. Preferred Stock Warrants Total Light Science Oncology, Inc. Novasys Medical, Inc.(4) Senior Debt Matures January 2010 Interest rate 9.70% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Novasys Medical, Inc. Total Therapeutic (3.68%)* Cozi Group, Inc. Business Services Preferred Stock Warrants Preferred Stock Total Cozi Group, Inc. Invoke Solutions, Inc. Business Services Preferred Stock Warrants Preferred Stock Warrants Total Invoke Solutions, Inc. Prism Education Group, Inc. Business Services Senior Debt Preferred Stock Warrants Total Prism Education Group, Inc. RazorGator Interactive Group, Inc.(4) Business Services Revolving Line of Credit Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total RazorGator Interactive Group, Inc. Spa Chakra, Inc.(8) Business Services Senior Debt Preferred Stock Warrants Total Spa Chakra, Inc. Total Internet Consumer & Business Services (5.55%) * Lilliputian Systems, Inc. Preferred Stock Warrants Common Stock Warrants Total Lilliputian Systems, Inc. Total Energy (0.03%)* See Notes to Consolidated Financial Statements 25
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of
Investment(1) Principal Cost (2) Value (3) Box.net, Inc. Senior Debt Senior Debt Preferred Stock Warrants Total Box.net, Inc. Buzznet, Inc. Preferred Stock Warrants Preferred Stock Total Buzznet, Inc. XL Education Corp. Common Stock Total XL Education Corp. hi5 Networks, Inc. Senior Debt Senior Debt Preferred Stock Warrants Total hi5 Networks, Inc. Jab Wireless, Inc. Senior Debt Revolving Line of Credit Preferred Stock Warrants Total Jab Wireless, Inc. Solutionary, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total Solutionary, Inc. Ancestry.com, Inc. Common Stock Total Ancestry.com, Inc. Good Technologies, Inc. Common Stock Total Good Technologies Inc. Coveroo, Inc. Preferred Stock Warrants Total Coveroo, Inc. See Notes to
Consolidated Financial Statements 26
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of Investment
(1) Principal Cost
(2) Value(3) Zeta Interactive Corporation Senior Debt Senior Debt Preferred Stock Warrants Preferred Stock Total Zeta Interactive Corporation Total Information Services (10.30%)* Novadaq Technologies, Inc.(5) Common Stock Total Novadaq Technologies, Inc. Optiscan Biomedical Corp. Senior Debt Preferred Stock Warrants Preferred Stock Total Optiscan Biomedical Corp. Total Diagnostic (3.11%)* Kamada, LTD.(5) Common Stock Warrants Common Stock Total Kamada, LTD. Labcyte, Inc. Senior Debt Common Stock Warrants Total Labcyte, Inc. NuGEN Technologies, Inc. Senior Debt Matures November 2010 Interest rate Prime + 3.45% or Floor rate of 6.75% Senior Debt Matures November 2010 Interest rate Prime + 1.70% or Floor rate of 6.75% Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Total NuGEN Technologies, Inc. Solace Pharmaceuticals, Inc.(4) Senior Debt Preferred Stock Warrants Preferred Stock Warrants Total Solace Pharmaceuticals, Inc. Total Biotechnology Tools (2.64%) * Crux Biomedical, Inc. Preferred Stock Warrants Preferred Stock Total Crux Biomedical, Inc. See Notes to
Consolidated Financial Statements 27
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued) December 31, 2009 (dollars in thousands) Portfolio Company Industry Type of Investment(1) Transmedics, Inc. (4)(8) Senior Debt Matures December 2011 Interest rate Prime + 5.25% or Floor rate of 10.50% Preferred Stock Warrants Total Transmedics, Inc. Total Surgical Devices (0.66%)* Glam Media, Inc. Total Glam Media, Inc. Waterfront Media Inc. Preferred Stock Total Waterfront Media Inc. Total Media/Content/Info (0.65%)* See Notes to Consolidated Financial Statements 28
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unauditeddollars in thousands, except per share data) Investment income: Interest income Non Control/Non Affiliate investments Affiliate investments Control investments Total interest Income Fees Non Control/Non Affiliate investments Affiliate investments Control investments Total fees Total investment income Operating expenses: Interest Loan fees General and administrative Employee compensation: Compensation and benefits Stock-based compensation Total employee compensation Total operating expenses Net investment income Net realized gain (loss) on investments Net increase (decrease) in unrealized appreciation on investments Net realized and unrealized gain (loss) Net increase (decrease) in net assets resulting from operations Net investment income before investment gains and losses per common share: Basic Change in net assets per common share: Basic Diluted Weighted average shares outstanding Basic Diluted See notes to Consolidated Financial Statements (unaudited) 29
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (unaudited) (dollars in thousands) Balance at December 31, 2008 Net increase in net assets resulting from operations Issuance of common stock Issuance of common stock under restricted stock plan Issuance of common stock as stock dividend Dividends declared Stock-based compensation Balance at September 30, 2009 Balance at December 31, 2009 Net increase in net assets resulting from operations Issuance of common stock Issuance of common stock under restricted stock plan Acquisition of common stock under repurchase plan Issuance of common stock as stock dividend Retired shares from net issuance Dividends declared Stock-based compensation Balance at September 30, 2010 See notes to Consolidated Financial Statements (unaudited). 30
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (dollars in thousands) Cash flows from operating activities: Net increase (decrease) in net assets resulting from operations Adjustments to reconcile net increase in net assets resulting from operations to net cash used in and provided by operating
activities: Purchase of investments Principal payments received on investments Proceeds from sale of investments Net unrealized depreciation on investments Net realized loss on investments Accretion of paid-in-kind principal Accretion of loan discounts Accretion of loan exit fees Depreciation Stock-based compensation Amortization of restricted stock grants Common stock issued in lieu of Director compensation Amortization of deferred loan origination revenue Change in operating assets and liabilities: Interest receivable Prepaid expenses and other assets Accounts payable Income tax payable Accrued liabilities Deferred loan origination revenue Net cash provided by (used in) operating activities Cash flows from investing activities: Purchases of capital equipment Other long-term assets Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of common stock, net Stock repurchase program Forfeiture of Stock due to Employee Option Exercises Dividends paid Borrowings of credit facilities Repayments of credit facilities Fees paid for credit facilities and debentures Net cash provided by (used in) financing activities Net increase (decrease) in cash Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See notes to Consolidated Financial Statements (unaudited). 31
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 lower middle market companies. The Company sources its investments through its principal office located in Silicon Valley, as well as through its additional offices in Boston, Massachusetts and Boulder, Colorado. 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 (SBIC) 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 manager and member of HT II and HT III and HTM is the general partner of
HT II and HT III (see Note 4). The Company also established wholly owned subsidiaries, all of which are structured as
Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). We currently qualify as a RIC for federal income tax purposes, which
allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. The purpose of establishing these entities is to satisfy the RIC tax requirement that at least 90% of our gross income for income tax
purposes is investment income. The consolidated financial statements include the accounts of the Company and its
subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under 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 periods 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, 2009. 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. 32
2. Valuation of Investments
The Companys investments are carried at fair value in accordance with the Investment Company Act of 1940 (the
1940 Act) and Accounting Standards Codification (ASC) topic 820 Fair Value Measurements and Disclosures. At September 30, 2010, approximately 80.8% of the Companys total assets represented investments in
portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and
(ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors in accordance with valuation procedures and the recommendation of the Valuation Committee of the Board of Directors. Since there is
typically no readily available market value for the a substantial portion of investments in the Companys portfolio, it values substantially all of its investments at fair value as determined in good faith by its Board of Directors pursuant to
a consistent valuation policy and a consistent valuation process 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 Companys investments determined in good faith by its Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments, and the differences could
be material. The Board of Directors may from time to time engage an independent valuation firm to provide us with valuation
assistance with respect to certain of the Companys portfolio investments. The Company intends to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio
investments. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Board of Directors is ultimately and solely responsible for determining the fair value of the Companys
investments in good faith. 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 doesnt expand the use of fair
value in any new circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In October 2008, the Financial Accounting Standards Board, or the FASB, issued ASC 820-10-35, formerly known as FSP SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of ASC 820 in a market that is not active. More specifically, this standard states that significant
judgment should be applied to determine if observable data in a dislocated market represents forced liquidations or distressed sales and are not representative of fair value in an orderly transaction. The standard also provides further guidance that
the use of a reporting entitys own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, the standard provides guidance on the level of
reliance of broker quotes or pricing services when measuring fair value in a non active market stating that less reliance should be placed on a quote that does not reflect actual market transactions and a quote that is not a binding offer.
Consistent with ASC 820, the Company determines fair value to be the amount for which an investment could be exchanged in a
current sale, which assumes an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Companys valuation policy considers the fact that no ready market exists for
substantially all of the securities in which it invests. In accordance with ASC 820, the Company has considered the principal
market, or the market in which it exits its portfolio investments with the greatest volume and level of activity. ASC 820 requires that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence
of a principal market, the most advantageous market. 33
Market participants are defined as
buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. The Company believes that the market participants for its investments are primarily other technology-related
companies. Such participants acquire the Companys investments in order to gain access to the underlying assets of the portfolio company. As such, the Company believes the estimated value of the collateral of the portfolio company, up to the
cost value of the investment, represents the fair value of the investment. There is no single standard for determining fair
value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, the Company is not permitted to provide a general reserve for anticipated
loan losses. Instead, the Company must determine the fair value of each individual investment on a quarterly basis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including
where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore,
that its investment has also appreciated in value. As a business development company, the Company invests primarily in
illiquid securities, including debt and equity-related securities of private companies. The Companys investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of
investments that the Company makes and the nature of its business, its valuation process requires an analysis of various factors that might be considered in a hypothetical secondary market. The Companys valuation methodology includes the
examination of, among other things, the underlying investment performance, the current portfolio companys financial condition and market changing events that impact valuation, estimated remaining life, and interest rate spreads of similar
securities as of the measurement date. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds
that would be received in a liquidation analysis. When originating a debt instrument, the Company generally receives warrants
or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair
value of the debt and warrants or other equity-related securities received. Any resulting discount on the loan from recordation of the warrant or other equity instruments is accreted into interest income over the life of the loan. At each reporting date, privately held debt and equity securities are valued based on an analysis of various factors including, but not
limited to, the portfolio companys operating performance and financial condition and general market conditions that could impact the valuation. When an external event occurs, such as a purchase transaction, public offering, or subsequent
equity sale, the pricing indicated by that external event is utilized to corroborate the Companys valuation of the debt and equity securities. The Company periodically reviews the valuation of its portfolio companies that have not been
involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. The Company may consider, but is not limited to, industry valuation
methods such as price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks in its evaluation of the fair value of its investment. We have a limited
number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date. Unrealized depreciation is recorded when an investment has decreased in value, including: where collection of a loan is doubtful, there
is an adverse change in the underlying collateral or operational performance, there is a change in the borrowers ability to pay, or there are other factors that lead to a determination of a lower valuation for the debt or equity security.
Conversely, unrealized appreciation is recorded when the investment has appreciated in value. 34
Securities that are traded in the
over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Board of Directors estimates the fair value of warrants and other equity-related securities in good faith using a BlackScholes pricing
model and consideration of the issuers earnings, sales to third parties of similar securities, the comparison to publicly traded securities, and other factors. 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 1Inputs 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
2Inputs (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 instruments anticipated life. Fair valued
assets that are generally included in this category are warrants held in a public company. Level 3Inputs
reflect managements 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. 35
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, 2010 (unaudited) and as of December 31, 2009: (in thousands) Description Senior secured debt Preferred stock Common stock Warrants (in thousands) Description Senior secured debt Senior debt-second lien Preferred stock Common stock Warrants 36
The table below
presents a reconciliation for all financial assets 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, 2010 (unaudited) and
for the year ended December 31, 2009. (in thousands) Senior Debt Senior Debt-Second Lien Preferred Stock Common Stock Warrants Total (in thousands) Senior Debt Senior Debt-Second Lien Preferred Stock Common Stock Warrants Total Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations.
Included in change
in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations. 37
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. At September 30, 2010, the Companys investment in InfoLogix, Inc. was classified as a Control Investment and categorized as a
Level 1 investment under ASC 820. Approximately $796,000 and $2.4 million in investment income was derived from our debt investment in this Software and Internet Consumer portfolio company during the three and nine month periods ended
September 30, 2010, respectively. Approximately $2.5 million of realized gains and $1.4 million of net unrealized depreciation was recognized on this control investment during the nine-month period ended September 30, 2010. On October 21, 2010, InfoLogix received notice that the NASDAQ Listing Qualifications Panel had determined to delist its common stock
from the NASDAQ Stock Market and suspended trading of its common stock effective with the open of trading on October 21, 2010, as a result of InfoLogixs non-compliance with the minimum $2.5 million stockholders equity requirement, set
forth in Nasdaq Listing Rule 5550(b)(2). The closing price of InfoLogixs common stock on October 20, 2010 was $4.28 compared to a closing price of $2.40 on October 21, 2010. In October, Hercules made $2.9 million of additional debt investments
in InfoLogix. Our Control Investment in Spa Chakra Acquisition Corporation, a company that was a Control Investment as of
July 1, 2010, was a realized loss during the third quarter. We recognized investment income during the nine-month period of approximately $285,000 from this portfolio company and a realized loss of approximately $18.9 million in the third
quarter of 2010. The elimination of this investment from our portfolio resulted in a reversal of unrealized depreciation in the third quarter of approximately $17.8 million. As of September 30, 2009, no portfolio companies were deemed to
be Control Investments. At September 30, 2010, the Company had an investment in one portfolio company deemed to be an
Affiliate. No income was derived from this investment as this is a non-income producing equity investment. At September 30, 2009, the Company had two portfolio companies deemed to be Affiliates. Income derived from the Companys
investments in these portfolio companies was less than $500,000 since these portfolio companies became Affiliates. One company that was an Affiliate as of September 30, 2009 performed a capital raise in 2009 which resulted in our ownership
percentage decreasing to less than 5% of the voting securities in the portfolio company. As a result, this portfolio company is no longer considered an Affiliate for reporting purposes. We recognized a realized loss of approximately $4.0 million in
the second quarter of 2009 in a portfolio company that was an Affiliate prior to the disposal of the investment. During the nine months ended September 30, 2010 and 2009, we recognized net unrealized appreciation of approximately $572,000 and
$7.3 million, respectively, related to Affiliates. 38
A summary of the
composition of the Companys investment portfolio as of September 30, 2010 (unaudited) and December 31, 2009 at fair value is shown as follows: Senior secured debt with warrants Senior secured debt Preferred stock Senior debt-second lien with warrants Common Stock A summary of the Companys investment portfolio, at value, by geographic location as of
September 30, 2010 (unaudited) and as of December 31, 2009 is shown as follows: United States Canada England Israel Netherlands 39
The following table
shows the fair value of our portfolio by industry sector (excluding unearned income) at September 30, 2010 (unaudited) and December 31, 2009: Software Consumer & Business Products Drug Discovery Communications & Networking Specialty Pharma Drug Delivery Therapeutic Clean Tech Surgical Devices Information Services Internet Consumer & Business Services Electronics & Computer Hardware Diagnostic Biotechnology Tools Semiconductors Media/Content/Info Energy 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. The Company funded equity investments, including restructured loans totaling approximately $187,000 and $18.0 million, respectively, in
the three and nine-month periods ended September 30, 2010. During the three and nine-month periods ended September 30, 2009, the Company funded investments in debt securities totaling approximately $8.2 million and $76.4 million,
respectively. The Company funded equity investments of approximately $444,000 and $816,000, respectively, in the three and nine-month periods ended September 30, 2009. 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 its 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. During the three and nine-month periods ended September 30, 2009, the Company recognized net realized gains of approximately $533,000 and $200,000, respectively, from the sale of common stock in
public companies, approximately $5,000 and $119,000 from mergers of private portfolio companies and realized losses of approximately $14.7 million and $19.8 million, respectively, from equity, loan and warrant investments in portfolio companies that
have been liquidated. 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 loans 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 $5.0 million and $2.4 million of unamortized fees at September 30, 2010 and December 31, 2009, respectively, and approximately $7.5 million and $6.6 million in exit fees receivable at September 30, 2010 and
December 31, 2009, 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 Companys 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 $552,000 and $1.7 million in PIK income in the three and nine-month periods ended September 30, 2010, respectively. The Company recorded approximately $836,000 and $2.1 million in the same periods ended September 30,
2009, respectively. 40
In some cases, the
Company collateralizes its investments by obtaining a first priority security interest in a portfolio companys assets, which may include their intellectual property. In other cases, the Company may obtain a negative pledge covering a
companys intellectual property. At September 30, 2010, approximately 69% of the Companys portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 27.5% of portfolio company
loans were prohibited from pledging or encumbering their intellectual property, 2.6% of portfolio company loans had a custom lien structure and 0.9% 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 SBIC debentures remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. 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 $175.5 million, compared to the carrying amount of $160.0 million as of September 30,
2010. See the accompanying Consolidated Schedule of Investments for the fair value of the Companys investments. The
methodology for the determination of the fair value of the Companys investment is discussed in Note 2. 4. Borrowings Credit Facility The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the Credit Facility) with Citigroup Global Markets Realty Corp.
(Citigroup) and Deutsche Bank Securities which expired under normal terms. During the first quarter of 2009, the Company paid off all remaining principal and interest owed under the Credit Facility. Citigroup has an equity participation
right through a warrant participation agreement on the pool of loans and warrants collateralized under the Credit Facility. Pursuant to the warrant participation agreement, 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 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 $335,000 as of September 30, 2010 and is included in accrued liabilities. There can be no assurances that the
unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company
has paid Citigroup approximately $1.1 million under the warrant participation agreement thereby reducing its realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum
Participation Limit is reached or the warrants expire. Long-term SBA Debentures 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, 2010, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million,
subject to periodic adjustments by the SBA. With the Companys net investment of $75.0 million in HT II as of September 30, 2010, HT II has fully drawn its capacity to issue a total of $150.0 million of SBA guaranteed debentures, as of
September 30, 2010. As of September 30, 2010, HT II has paid the SBA commitment fees of approximately $1.5 million. As of September 30, 2010, the Company held investments in HT II in 53 companies with a fair value of
approximately $167.8 million. HT IIs portfolio companies accounted for approximately 41.2% of the Companys total portfolio at September 30, 2010. 41
The American Recovery
and Reinvestment Act of 2009 (the Federal Stimulus Bill) includes a provision, which allows for existing SBIC entities to obtain a second license and gain access to additional leverage of up to $75.0 million, for a maximum of $225.0
million combined SBIC leverage (subject to additional required capitalization of its second wholly owned SBIC subsidiary). 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, 2010, HT III had
the potential to borrow up to $75.0 million of SBA-guaranteed debentures under the SBIC program. With the Companys net investment of $25.0 million in HT III as of September 30, 2010, HT III the capacity to issue a total of $ 50.0 million of
SBA guaranteed debentures, subject to SBA approval, of which $10.0 million had been issued as of September 30, 2010. As of September 30, 2010, HT III has paid the SBA commitment fees of approximately $750,000. In order to have access to the
remaining $25.0 million leverage, which would be subject to SBA approval and compliance with SBIC regulations, the Company would have to make an additional net investment of $12.5 million. There is no assurance that HT III will be able to draw up to
the maximum limit available under the SBIC program. As of September 30, 2010, the Company held investments in HT III in three companies with a fair value of approximately $22.8 million. HT IIIs portfolio accounted for approximately 5.6%
of the Companys total portfolio at September 30, 2010. 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 SBAs staff to determine their compliance with SBIC regulations. The rates of borrowings
under various draws from the SBA beginning in April 2007 and set semiannually in March and September range from 3.22% 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 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, 2010 for HT II was approximately $144.3 million with an average interest rate of
approximately 5.11%. The average amount of debentures outstanding for the quarter ended September 30, 2010 for HT III was approximately $5.2 million with an average interest rate of approximately 3.215%. 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. 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
million if additional lenders are added to the syndicate. The Wells Facility expires 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 requires the payment of a non-use fee of 0.3% annually. The Wells Facility
42
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 is being amortized through August
2011. There was no outstanding debt under the Wells Facility at September 30, 2010. The Wells Facility requires various
financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth of $250.0 million, contingent upon our total commitments under all lines of credit not exceeding $250 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, 2010. 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%. At September 30, 2010, there were no borrowings outstanding on this facility. The Union Bank Facility requires the payment of a non-use
fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in the Companys portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility
generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. At
September 30, 2010 (unaudited) and December 31, 2009, the Company had the following borrowing capacity and outstanding borrowings: Union Bank Facility Wells Facility SBA Debenture(1) Total The Company has
the ability to borrow $40.0 million in SBA debentures under HT III, subject to SBA approval. In order to have access to an additional $25.0 million, which would be subject to SBA approval and compliance with SBIC regulations, the Company would have
to make an additional net investment of $12.5 million in HT III. 5. Income taxes The Company intends to continue to operate so as to qualify to be taxed as a RIC under the Code and, as such, the Company is not subject
to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the
Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its annual investment company taxable income, as defined by the Code. The amount to be paid out as a dividend is determined by the
Board of Directors each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Companys earnings fall below the amount of dividends declared, however, a portion of the total amount of
the Companys dividends for the fiscal year may be deemed a return of capital for tax purposes to the Companys stockholders. Taxable income includes the Companys 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.
43
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. For the quarter ended September 30, 2010, the Company declared a distribution of $0.20 per share. The
determination of the tax attributes of the Companys distributions is made annually as of the end of the Companys 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 Companys distributions for a full year. If the Company had determined the tax attributes of its distributions year-to-date as of
September 30, 2010, approximately 95% would be from ordinary income and spill over earnings from 2009 and 5% 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 2010 distributions to shareholders will actually be. If the Company does not distribute at least 98% of
its annual taxable income in the year earned, the Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Companys annual taxable income exceeds the distributions from such taxable income during
the year earned. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on
estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income. 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 $11.1 million or approximately $0.32 per share. Taxable income for the nine-month period ended September 30, 2009 was approximately $30.8 million or $0.89 per share. Taxable net realized losses for the
same period were approximately $17.8 million or approximately $0.51 loss per share. In accordance with RIC distribution rules, the Company is required to declare current year dividends to be paid from carried over excess taxable income from 2009
before the Company files its 2009 tax return in September 2010, and the Company must pay such dividends by December 31, 2010. 6.
Shareholders Equity The Company is authorized to issue 60,000,000 shares of common stock with a par value of $0.001.
Each share of common stock entitles the holder to one vote. In February 2010, the Board of Directors authorized a stock
repurchase plan permitting the Company to repurchase up to $35.0 million of its common stock. During the three and nine-month periods ended September 30, 2010, the Company repurchased zero and 402,833 shares of its common stock at a total cost
of approximately $3.7 million. The Company has issued stock options and warrants subject to future issuance of common stock
for a total of 4,656,395 and 4,924,405 common shares at September 30, 2010 and December 31, 2009, respectively. 44
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. Unless terminated earlier by the Companys 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 Companys Board of Directors, the 2006 Plan will
terminate on May 29, 2016 and no additional awards may be made under the 2006 Plan after that date. The Company filed an exemptive relief request with the Securities and Exchange Commission (SEC) to allow options to be issued under
the 2006 Plan which was approved on October 10, 2007. On June 21, 2007, the shareholders approved amendments to the
2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Companys stock on the
effective date of the Plans plus 10% of the number of shares of stock issued or delivered by Hercules during the terms of the Plans. The proposed amendments further specify that no one person shall be granted awards of restricted stock relating to
more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Companys 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 Companys 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 Companys 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 and warrant activity under the Companys 2006 and 2004 Plans for the nine months ended September 30, 2010 and 2009 is as follows: 45
Outstanding at Beginning of Period Granted Exercised Cancelled Outstanding at End of Period Weighted-average exercise price 46
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, 2010, options for approximately 3.5 million shares were
exercisable at a weighted average exercise price of approximately $12.50 per share with a weighted average remaining contractual term of 3.05 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, 2010 and 2009 was approximately $652,000 and $486,000
respectively. During the three-month periods ended September 30, 2010 and 2009, approximately $182,000 and $233,000 of share-based cost due to stock option grants was expensed, respectively. During the nine-month periods ended
September 30, 2010 and 2009, approximately $538,000 and $752,000 of share-based cost due to stock option grants was expensed, respectively. As of September 30, 2010, there was approximately $921,000 of total unrecognized compensation costs
related to stock options. These costs are expected to be recognized over a weighted average period of 1.97 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, 2010 and 2009: Expected Volatility Expected Dividends Expected term (in years) Risk-free rate The following table
summarizes stock options outstanding and exercisable at September 30, 2010: (Dollars in thousands, except exercise price) Range of exercise prices $4.21 - $6.74 $8.49 - $12.84 $13.00 - $15.00 $4.21 - $15.00 During the nine months ended September 30, 2010 and 2009, the Company granted approximately 491,500 and
311,500 shares respectively, of restricted stock pursuant to the Plans. Each restricted stock award granted in 2009 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. The value of the restricted stock was determined to be the Companys closing prices on March 16, 2010
and March 24, 2010, the date of the grants. During the three-month periods ended September 30, 2010 and 2009, the Company expensed approximately $582,000 and $265,000 compensation expense related to restricted stock, respectively. During
the nine-month periods ended September 30, 2010, and 2009, the Company expensed approximately $1.5 million and $736,000 related to restricted stock. The Securities and Exchange Commission, 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 Companys 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 our 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. 47
(in thousands, except per share data) Numerator Net increase in net assets resulting from operations Less: Dividends declared-common and restricted shares Undistributed earnings Undistributed earnings-common shares Add: Dividend declared-common shares Numerator for basic and diluted change in net assets per common share Denominator Basic weighted average common shares outstanding Common shares issuable Weighted average common shares outstanding assuming dilution Change in net assets per common share Basic Diluted 48
The calculation of
change in net assets per common shareassuming dilution, excludes all anti-dilutive shares. For the three and nine-month periods ended September 30, 2010, the number of anti-dilutive shares, as calculated based on the weighted average closing
price of the Companys common stock for the periods, were approximately 4.0 million and 3.9 million shares, respectively. For the three and nine-month periods ended September 30, 2009, the number of anti-dilutive shares, as calculated based on
the weighted average closing price of the Companys common stock for the periods, were approximately 3.8 million and 4.0 million shares. For the three and nine-month periods ended September 30, 2010 approximately 672,000 and 742,000 shares were
anti-dilutive due to net assets decreasing during these periods as a result of operations. 9. Related-Party Transactions In connection with the Companys sales of public equity investments, during the nine-month period ended September 30, 2010, the
Company paid JMP Securities LLC approximately $34,600 in brokerage commissions. The Company paid JMP Securities LLC approximately $12,000 and $48,000 for the three and nine-month periods ended September 30, 2009. 49
10. Financial Highlights
Following is a schedule of financial highlights for the nine months ended September 30, 2010 (unaudited) and 2009:
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. FINANCIAL HIGHLIGHTS (Unaudited) (Dollar in thousands, except per share amounts) Per share data: Net asset value at beginning of period Net investment income Net realized gain (loss) on investments Net unrealized appreciation (depreciation) on investments Total from investment operations Net increase/(decrease) in net assets from capital share transactions Distributions Stock-based compensation expense included in investment income (1) Net asset value at end of period Ratios and supplemental data: Per share market value at end of period Total return Shares outstanding at end of period Weighted average number of common shares outstanding Net assets at end of period Ratio of operating expense to average net assets (annualized) Ratio of net investment income before investment gains and losses to average net assets (annualized) Average debt outstanding Weighted average debt per common share Portfolio turnover 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. 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. 50
11. Commitments and Contingencies
In the normal course of business, the Company is party to financial instruments with off-balance sheet risk. These
instruments consist primarily of unused commitments to extend credit, in the form of loans to the Companys portfolio companies. The balance of unfunded commitments to extend credit at September 30, 2010 totaled approximately $122.3
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 $70.1 million of non-binding term sheets
outstanding. Non-binding outstanding term sheets are subject to completion of the Companys due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all
non-binding term sheets are expected to close and do not necessarily represent future cash requirements. Certain premises are
leased under agreements which expire at various dates through December 2013. Total rent expense amounted to approximately $268,000 and $765,000 during the three and nine-month periods ended September 30, 2010, respectively. There was
approximately $224,000 and $728,000 of rent expenses recorded in the same periods ended September 30, 2009. Future
commitments under the credit facility and operating leases as of September 30, 2010 (unaudited) were as follows: Contractual
Obligations(1)(2) Borrowings (3) Operating Lease Obligations (4) Total Excludes commitments to extend credit to our portfolio companies. The Company also has a warrant participation obligation with Citigroup. See Note 4. Includes borrowings under the Wells Facility, the Union Bank Facility and the SBA debentures. There were no outstanding borrowings under the Wells
Facility or the Union Bank Facility at September 30, 2010. 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. 12. Recent Accounting Pronouncements In May 2009, the FASB issued SFAS 165Subsequent Events , which was subsequently included in ASC Topic 855 Subsequent
Events, or ASC 855. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, and specifically requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date. We adopted this guidance during the quarter ended June 30, 2009. In February 2010, the FASB issued ASU 2010-09 to amend ASC 855 to address certain implementation issues, including (1) eliminating the requirement for SEC filers to disclose the date through which it has
evaluated subsequent events, (2) clarifying the period through which conduit bond obligors must evaluate subsequent events, and (3) refining the scope of the disclosure requirements for reissued financial statements. The adoption of this
standard did not have a significant impact on our consolidated financial statements. In January 2010, the FASB issued ASU
No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash (ASU 2001-01), which addresses the accounting for a distribution to shareholders that offers them the ability to elect to receive
their entire distribution in cash or shares of equivalent value with a potential limitation on the total amount of cash that shareholders can receive in the aggregate. ASU 51
2010-01 clarifies that the stock portion of such a distribution is considered a share issuance reflected prospectively in earnings per share. ASU 2010-01 is effective for interim and annual
periods ending after December 15, 2009 and should be applied on a prospective basis. We adopted the requirements of ASU 2010-01 in the fourth quarter of 2009 and its adoption did not have a material effect on our consolidated financial
statements. In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASU
2010-06), which amends ASC 820 and requires additional disclosure related to recurring and 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. Management is currently evaluating the impact of the
Level 3 disclosure requirement on our consolidated financial statements of adopting ASU 2010-06. 13. Subsequent Events The Board of Directors declared a cash dividend of $0.20 per share that will be payable on December 17, 2010 to shareholders of
record as of November 10, 2010. This dividend would represent the Companys twenty-first consecutive dividend declaration since its initial public offering, and will bring the total cumulative dividend declared to date to $5.81 per share.
As of November 2, 2010, the Company has: 2010 Closed Commitments and Pending Commitments (in millions) 1st Half 2010 Closed Commitments(a) Q3-10 Closed Commitments(a) Year to Date, through Q3-10 Closed Commitments(a) Q4-10 Closed Commitments (as of 11-02-2010) Total 2010 Closed Commitments(b) Pending Commitments (as of 11-02-2010)(c) Total In October 2010, Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR) completed its IPO of 5,000,000 shares of its
common stock at $9.50 per share, before underwriting discounts and commissions. As of November 2, 2010 the Company has an unrealized gain of approximately $1.0 million based on the close price of $10.25, which is not reflected in the third quarter
and will change based on future market conditions. In October 2010, PSS Systems was acquired by IBM (NYSE: IBM) for an
undisclosed amount. The PSS investment generated a total internal rate of return of 13.5%. In October, 2010, Aveo
Pharmaceuticals announced the execution of a securities purchase agreement for a private placement, or PIPE, financing. Upon the closing of the PIPE financing, AVEO will receive gross proceeds of approximately $61 million resulting from
the sale of 4.5 million shares of common stock. On October 21, 2010, InfoLogix received notice that the NASDAQ Listing
Qualifications Panel had determined to delist its common stock from the NASDAQ Stock Market and suspended trading of its common stock effective with the open of trading on October 21, 2010, as a result of InfoLogixs non-compliance with the
minimum $2.5 million stockholders equity requirement, set forth in NASDAQ Listing Rule 5550(b)(2). The closing price of InfoLogixs common stock on October 20, 2010 was $4.28 compared to a closing price of $2.40 on October 21, 2010. The
closing price on September 30, 2010 was $4.22. Furthermore, the Company advanced an additional $2.9 million in October. Infologix continues to explore strategic options as previously disclosed by the company. 52
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 ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios.
In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements
contained in this report include statements as to: the impact of a protracted decline in the liquidity of the credit markets on our business; timing, form and amount of any dividend distributions; impact of fluctuation of interest rates on our business; valuation of our investments in portfolio companies; our ability to access the debt and equity markets; our future operating results; our business prospects and the prospects of our prospective portfolio companies; our ability to recover unrealized losses; the impact of investments that we expect to make; our informal relationships with third parties; the dependence of our future success on the general economy and its impact on the industries in which we invest; the ability of our portfolio companies to achieve their objectives; our expected financings and investments; our regulatory structure and tax status; our ability to operate as a business development company and a regulated investment company; the adequacy of our cash resources and working capital; and the timing of cash flows, if any, from the operations of our portfolio companies. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this report,
please see the discussion under Item 1ARisk Factors as well as Item 1ARisk Factors of our annual report of 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 53
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 1ARisk Factors, Item 1ARisk 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 lower middle market 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 additional offices in Boston and Boulder. Our goal is to be the leading structured debt financing provider
of choice for venture capital and private equity backed technology-related companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of companies active in the technology, clean
technology, and life science industries and to offer a full suite of growth capital products up and down the capital structure. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We
use the term structured debt with warrants to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred
stock. Our structured debt with warrants investments will typically be secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business
objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital and private equity backed technology-related companies with attractive current yields and
the potential for equity appreciation and realized gains. Our structured debt investments typically include warrants or other equity interests, giving us the potential to realize equity-like returns on a portion of our investments. Our equity
ownership in our portfolio companies may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we
provide directly to venture capital and private equity backed technology-related companies is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We are an internally
managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the 1940 Act. As a business development company, we are required to comply with certain regulatory requirements. For
instance, we generally have to invest at least 70% of our total assets in qualifying assets, including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature
in one year or less. From incorporation through December 31, 2005, we were taxed as a corporation under Subchapter C of
the Internal Revenue Code, or the Code. We are treated for federal income tax purposes as a regulated investment company, or a RIC, under Subchapter M of the Code as of January 1, 2006. 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. 54
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. Since 2007, our investing emphasis has been primarily on private companies following or in connection with a subsequent institutional round of equity financing, which we refer to as
expansion-stage companies and private companies in later rounds of financing and certain public companies, which we refer to as established-stage companies and lower middle market companies. We have also historically focused our investment
activities in private companies following or in connection with the first institutional round of financing, which we refer to as emerging-growth companies. Portfolio and Investment Activity The total value of our investment
portfolio was $407.5 million at September 30, 2010 as compared to $370.4 million at December 31, 2009. During the three and nine-month periods ended September 30, 2010 we made debt commitments totaling $82.7 million and $391.9 million
and funded approximately $55.7 million and $286.0 million, respectively. Debt commitments for the nine-month period ended September 30, 2010 included commitments of approximately $266.1 million to eighteen new portfolio companies and $125.8
million to nineteen existing companies. During the three and nine-month periods ended September 30, 2010 we made and funded equity commitments of approximately $187,000 and $18.0 million to six and eight companies, respectively. These
commitments further diversify our portfolio by stage and industry sector. During the three and nine-month periods ended September 30, 2009, we made debt commitments totaling $15.8 million and $150.6 million and funded approximately $8.2 million
and $76.4 million, respectively. During the three and nine-month periods ended September 30, 2009, we made an equity investment of approximately $444,000 in one existing portfolio company and approximately $816,000 in two existing portfolio
companies. At September 30, 2010, we had unfunded contractual commitments of $122.3 million to 22 portfolio companies.
Since these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In addition, we had approximately $70.1 million of non-binding term sheets outstanding to six new and existing
companies at September 30, 2010. 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, 2010 was approximately $349.1 million, compared to a fair value of approximately $369.5 million at September 30, 2009. The fair value of the equity portfolio at September 30, 2010 and 2009 was
approximately $39.4 million and $31.1 million, respectively. The fair value of our warrant portfolio at September 30, 2010 and 2009 was approximately $19.0 million and $14.2 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, 2010, we received normal principal
amortization repayments of $69.2 million, and early repayments and working line of credit pay-downs totaling $154.2 million. Total portfolio investment activity (exclusive of unearned income) as of the nine-month periods ended September 30,
2010 and 2009 is as follows: (in millions) Beginning Portfolio Purchase of debt investments Equity Investments Sale of Investments Principal payments received on investments Early pay-offs and recoveries Accretion of loan discounts and paid-in-kind principal Net change in unrealized depreciation in investments Ending Portfolio 55
The following table
shows the fair value of our portfolio of investments by asset class (excluding unearned income): Senior secured debt with warrants Senior secured debt Preferred stock Senior debt-second lien with warrants Common Stock A summary of our investment portfolio at value by geographic location is as follows: United States Canada England Israel Netherlands Our portfolio companies are primarily privately held expansion and established-stage companies in the
biopharmaceutical, clean technology, communications and networking, consumer and business products, electronics and computers, energy, information services, internet consumer and business services, medical devices, semiconductor and software
industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value is often vested in intangible assets and intellectual property. 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. 56
At September 30, 2010,
the Companys investment in InfoLogix, Inc. was classified as a Control Investment. Approximately $796,000 in investment income was derived from our debt investment in this Software and Internet Consumer portfolio company during the three month
period, and approximately $2.4 million during the nine-month period ended September 30, 2010. Approximately $2.5 million of realized gains and net unrealized depreciation of approximately $1.4 million on this control investment were recognized
during the nine-month period ended September 30, 2010. InfoLogix, Inc., a public company, is a provider of enterprise
mobility and radio frequency identification (RFID) solutions. Our investment in InfoLogix, Inc. represents 6.3% and 8.3% of our total investments at cost and value, respectively at September 30, 2010. We currently have a greater than 60% equity
interest in InfoLogix, Inc. and have representation on its board of directors. We also have a total debt investment of approximately $17.9 million at fair value in InfoLogix, Inc. On October 21, 2010, InfoLogix received notice that the NASDAQ
Listing Qualifications Panel had determined to delist its common stock from the NASDAQ Stock Market and suspended trading of its common stock effective with the open of trading on October 21, 2010, as a result of InfoLogixs non-compliance with
the minimum $2.5 million stockholders equity requirement, set forth in Nasdaq Listing Rule 5550(b)(2). The closing price of InfoLogixs common stock on October 20, 2010 was $4.28 compared to a closing price of $2.40 on October 21, 2010.
In October, Hercules made $2.9 million of additional debt investments in InfoLogix. InfoLogix continues to explore strategic options as previously disclosed by the company. Our financial results could be negatively affected if this company
encounters financial difficulty and fails to repay its obligations or to perform as expected. Our investments in Spa Chakra
Acquisition Corporation, a company that was a Control Investment as of July 1, 2010, was a realized loss during the quarter. We recognized investment income during the nine-month period of approximately $285,000 and a realized loss of
approximately $18.9 million in the third quarter of 2010 in this portfolio company prior to the disposal of the investment. The elimination of this investment from our portfolio resulted in a reversal of unrealized depreciation in the third quarter
of approximately $17.8 million. During the nine-month period ended September 30, 2009, no portfolio companies were deemed to be Control Investments. 57
At September 30,
2010 we had an investment in one portfolio company deemed to be an Affiliate. Income derived from this investment was zero, as this is a non-income producing equity investment. At September 30, 2009, we had investments in two portfolio
companies deemed to be affiliates. Income derived from our investments in these portfolio companies was less than $500,000 since these investments became affiliates. We recognized a realized loss of approximately $4.0 million during the three and
nine-month periods ended September 30, 2009 in a portfolio company that was an affiliate prior to the disposal of the investment. 58
The following table
shows the fair value of our portfolio by industry sector at September 30, 2010 and December 31, 2009 (excluding unearned income): Software Consumer & Business Products Drug Discovery Communications & Networking Specialty Pharma Drug Delivery Therapeutic Clean Tech Surgical Devices Information Services Internet Consumer & Business Services Electronics & Computer Hardware Diagnostic Biotechnology Tools Semiconductors Media/Content/Info Energy 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, 2010 and December 31, 2009. Investment Grading 1 2 3 4 5 As of September 30, 2010, our investments had a weighted average investment grading of 2.34 as compared
to 2.71 at December 31, 2009. 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, 2010, 6 portfolio 59
companies were graded 3, 2 portfolio companies were graded 4, and 4 portfolio companies were graded 5 as compared to 17 portfolio companies that were graded 3, 4 portfolio companies that were
graded 4 and 5 portfolio companies that were graded 5 at December 31, 2009. The improvement in investment grading for the period ended September 30, 2010 was driven in part by meaningful progress in the economy and among our portfolio
companies, many of which have experienced improved operating performance and greater access to the venture capital market as they secure new equity financings. 60
At September 30,
2010, there were four portfolio companies on non-accrual status with a fair value of approximately $368,000. There were five loans on non-accrual status as of December 31, 2009 with a fair value of approximately $10.5 million. The significant
decrease in this balance is related to the elimination of Spa Chakra Acquisition Corporation from our investment portfolio during the third quarter of 2010. The effective yield on our debt investments for the three month periods ended September 30, 2010 and 2009 was 16.2% and 15.1%, respectively. This yield was higher period over period due to higher
interest rate yield enhancers on new loans originated in 2010 relative to the loans that have been paid off or have amortized. The overall weighted average yield to maturity of our loan obligations was approximately 13.8% and 13.6% at September 30, 2010 and
December 31, 2009. 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 $30.0 million. Our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from PRIME to
18% as of September 30, 2010. In addition to the cash yields received on our loans, in some instances, our loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees, PIK provisions, prepayment fees, and
diligence fees, which may be required to be included in income prior to receipt. In most cases, we collateralize our investments by obtaining security interests in our portfolio companies assets, which may include their intellectual property.
In other cases, we may obtain a negative pledge covering a companys intellectual property. At September 30, 2010,
approximately 69.0% of the Companys portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 27.5% of portfolio company loans were prohibited from pledging or encumbering their
intellectual property, 2.6% of the portfolio loans had a custom lien structure and 0.9% of portfolio company loans were equipment only liens. Interest on debt securities is generally payable monthly, with amortization of principal typically
occurring over the term of the security for emerging-growth, expansion-stage and established-stage companies. In addition, certain loans may include an interest-only period ranging from three to eighteen months for emerging-growth and
expansion-stage companies and longer for established-stage companies. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities
and any accrued but unpaid interest become due at the maturity date. Our investments in 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, 2010, we held warrants in 91 technology and life science portfolio companies, with a fair value of approximately $19.0
million. These warrant holdings would require us to invest approximately $64.3 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. 61
Results of
Operations Comparison of the Three and Nine-month Periods Ended September 30, 2010 and 2009 Investment Income Interest income totaled approximately $14.1 and $38.1 million for the three and nine-month periods ended September 30, 2010, compared with $14.6 million and $48.4 million for the three and nine-month
periods ended September 30, 2009, respectively. Income from commitment, facility and loan related fees totaled approximately $1.5 million and $4.5 million for the three and nine-month periods ended September 30, 2010, compared with $3.1
million and $9.2 million for the same periods ended September 30, 2009, respectively. The decreases in interest income and income from commitment, facility and loan related fees are the result of a reduction in accelerated one-time and
restructuring fees, attributable to improvement in credit performance in the portfolio and due to a lower average interest earning investment portfolio. Operating Expenses Operating expenses, which are comprised of
interest and fees, general and administrative and employee compensation, totaled approximately $7.5 million and $7.3 million during the three month periods ended September 30, 2010 and 2009, respectively. Operating expenses totaled
approximately $22.0 million and $23.9 million for the nine-month periods ended September 30, 2010 and 2009, respectively. Interest and fees totaled approximately $2.5 million and $2.4 million during the three month periods ended September 30, 2010 and
2009 and $7.2 million and $8.9 million for the nine-month periods ended September 30, 2010 and 2009, respectively. This $1.7 million year over year decrease is primarily attributable to the interest expense and one time fees on the Citigroup
Credit Facility that was paid off in full in March of 2009. General and administrative expenses include legal, consulting and
accounting fees, insurance premiums, rent, workout and various other expenses. Expenses decreased to $1.7 million from $2.1 million for the three month periods ended September 30, 2010 and 2009, respectively, and expenses decreased to $5.2
million from $5.5 million for the nine-month periods ended September 30, 2010 and 2009, respectively, primarily due to lower workout related expenses. Employee compensation and benefits totaled approximately $2.6 million and $2.4 million during the three month periods ended September 30, 2010 and 2009, respectively. This increase is primarily due to an
increase in headcount as compared to the same period of 2009. Employee compensation and benefits totaled approximately $7.7 million and $8.1 million for the nine-month periods ended September 30, 2010 and 2009, respectively. This decrease is
primarily due to a lower bonus accrual during the nine-month period ended September 30, 2010 as compared to the same period of 2009. Stock-based compensation totaled approximately $752,000 and $470,000 during the three month periods ended September
30, 2010 and 2009, respectively, and $2.0 million and $1.4 million for the nine-month periods ended September 30, 2010 and 2009, respectively. These increases were due to the expense on restricted stock grants issued in the first quarter of 2010.
Net Investment Income Before Investment Gains and Losses Net investment income per share was $0.23 for the quarter ended September 30, 2010 compared to $0.30 per share in the quarter ended
September 30, 2009. Net investment income before investment gains and losses for the three and nine-month periods ended September 30, 2010 totaled $8.1 million and $20.6 million, respectively as compared to $10.3 million and $33.7 million
in the three and nine-month periods ended September 30, 2009, 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 nine months ended September 30, 2010, we recognized net realized gains of approximately $3.6 million from the sale of
common stock in our 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 including Spa Chakra Acquisition
Corporation. During the three and nine-month periods ended September 30, 2009, the Company recognized net realized gains
of approximately $533,000 and $200,000, respectively, from the sale of common stock in public companies, approximately $5,000 and $119,000 from mergers of private portfolio companies and realized losses of approximately $14.7 million and $19.8
million, respectively, from equity, loan and warrant investments in portfolio companies that have been liquidated. 62
A summary of realized
gains and losses for the three and nine-month periods ended September 30, 2010 and 2009 is as follows: Realized gains Realized losses Net realized gains (losses) During the three months period ended September 30, 2010 and September 30, 2009, net unrealized
appreciation totaled approximately $2.9 million and $17.5 million, respectively. During the nine-months period ended September 30, 2010 and September 30, 2009, net unrealized depreciation totaled approximately $12.2 million and $9.2
million, respectively. 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 depreciation was primarily comprised of decreases in the fair value of our portfolio companies due to company performance and market conditions. For the three month
period ended September 30, 2010 approximately $4.3 million and $2.7 million of the net unrealized depreciation recognized was attributable to debt and warrant investments based on company performance, respectively and $11.2 million of net unrealized
appreciation on our equity investments. Included in these amounts are unrealized appreciation of approximately $2.8 million and $15.0 million in debt and equity investments attributable to the reversal of prior period net unrealized depreciation
upon being realized as a loss. For the nine month period ended September 30, 2010 approximately $5.4 million, $3.1 million and $1.9 million of the net unrealized depreciation recognized was attributable to debt, warrant and equity investments,
respectively. As of September 30, 2010, the net unrealized appreciation recognized by the Company was increased by approximately $177,000 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 following
table itemizes the change in net unrealized depreciation of investments for the three and nine-month periods ended September 30, 2010 and 2009: Gross unrealized appreciation on portfolio investments Gross unrealized depreciation on portfolio investments Reversal of prior period net unrealized appreciation upon realization Reversal of prior period net unrealized depreciation upon realization Citigroup Warrant Participation Net unrealized appreciation (depreciation) on portfolio investments Gross unrealized appreciation on portfolio investments Gross unrealized depreciation on portfolio investments Reversal of prior period net unrealized appreciation upon realization Reversal of prior period net unrealized depreciation upon realization Citigroup Warrant Participation Net unrealized appreciation (depreciation) on portfolio investments 63
Income and
Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, Income Taxes, formerly known as
FAS 109, which requires that deferred income taxes be determined based upon the estimated future tax effects 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, 2010, the net decrease in net assets resulting from operations totaled approximately $7.8 million and $6.7 million, respectively. For the three and nine months ended September 30, 2009, the net increase in net assets
resulting from operations totaled approximately $13.7 million and $5.1 million, respectively. 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, 2010 was $(0.23) and ($0.20), respectively, as compared to basic and fully
diluted change in net assets per common share of $0.39 and $0.38 for the three month period and $0.14 for the nine-month period ended September 30, 2009, respectively. Financial Condition, Liquidity, and Capital Resources At
September 30, 2010, we had approximately $83.0 million in cash and cash equivalents and available borrowing capacity of approximately $50.0 million under the Wells Facility, $20.0 million under the Union Bank Facility and $65.0 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, 2010, net assets totaled $338.5 million, with a net asset value per share of $9.36. 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 2010 Annual Shareholder Meeting held on June 9, 2010, our shareholders authorized the Company, with the approval of its Board of Directors, to sell up to 20% of the
Companys outstanding common stock at a price below the Companys then current net asset value per share and to offer and issue debt with warrants or debt convertible into shares of its 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 in the near term given the credit constraints of the
banking and capital markets. As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of
senior securities. Our asset coverage as of September 30, 2010 was 0%, excluding SBA leverage, based on our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio. Total leverage when excluding
the SEC exemptive order is approximately 47.3% at September 30, 2010. 64
At September 30,
2010 and December 31, 2009, we had the following borrowing capacity and outstanding amounts: Union Bank Facility Wells Facility SBA Debenture(1) Total The Company has the ability to borrow $40.0 million in SBA debentures under HT III, subject to SBA approval. In order to have access to an additional
$25.0 million, which would be subject to SBA approval and compliance with SBIC regulations, the Company would have to make an additional net investment of $12.5 million in HT III. On September 27, 2006, HT II received a license and on May 26, 2010 HT III received a license to operate as a Small Business
Investment Company under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. 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 IIs or HT IIIs 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 our wholly owned subsidiaries. The portfolios of HT II and HT III accounted for approximately
46.8% of our total portfolio at September 30, 2010. With our net investment of $75.0 million in HT II as of
September 30, 2010, HT II has the current capacity to issue a total of $150.0 million of SBA guaranteed debentures, of which $150.0 million was outstanding. As of September 30, 2010, the maximum statutory limit on the dollar amount of
outstanding SBA guaranteed debentures 65
issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA. As of September 30, 2010, we hold investments in HT II in 53 companies with a fair value of
approximately $167.8 million. HT IIs portfolio accounted for approximately 41.2% of our total portfolio at September 30, 2010. As of September 30, 2010, 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, 2010, HT III had the potential to borrow up to $75.0 million of SBA-guaranteed debentures under the SBIC program. With our net investment of $25.0 million in HT III as of September 30, 2010, HT III has the capacity to issue a total of
$ 50.0 million of SBA guaranteed debentures, subject to SBA approval, of which $10.0 million was outstanding at September 30, 2010. As of September 30, 2010, HT III has paid the SBA commitment fees of approximately $750,000. As of
September 30, 2010, we hold investments in HT III in three companies with a fair value of approximately $22.8 million. HT IIIs portfolio accounted for approximately 5.6% of our total portfolio at September 30, 2010. Current Market Conditions The U.S. capital and credit markets have been experiencing disruption and volatility since the summer of 2008 as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the
financial services sector, the repricing of credit risk in the broadly syndicated credit market and the failure of many major financial institutions. These events have contributed to a severe economic contraction that is materially and adversely
impacting the broader financial and credit markets and reducing the availability of credit and equity capital for the markets as a whole and financial services firms in particular, including us. At the same time, the venture capital market for the technology-related companies in which we invest has been active but at reduced
investment activity levels. Therefore, to the extent we have capital available; we believe this is an opportune time to invest in the structured lending market for technology-related companies. While todays economy creates potentially new
attractive lending opportunities, our outlook remains cautious for the remainder of 2010 as the economic environment recovers from the recession of the past 21 months. Due to the economic slowdown and reduced venture capital investment activity in
2009, we determined that was prudent to substantially curtail new investment activity in 2009 in order to have working capital available to support our existing portfolio companies. These changes were made to manage our credit performance, maintain
adequate liquidity and manage our operating expenses in this extremely challenging and unprecedented credit environment. Despite the current capital market disruption and recession, we continue to see a steady pace of new investments by venture capitalists.
As a result of this favorable level of venture capital investment activities, we are experiencing an increase in new investment origination activities which commenced in the fourth quarter of 2009 and into 2010, and would expect it to continue to
the extent the venture capital community continues to accelerate its own pace of new investments. We are encouraged by signs of an improving economy, including improved valuations and higher levels of liquidity for our portfolio companies, increased
investment activity from venture capitalists and the opening of the IPO marketplace. As a result, we have once again commenced making investments in new and existing portfolio companies. To the extent that we are able, we intend to continue to seek
new investment opportunities; however, we remain cautious in our investment and credit management strategies as the pace of economic recovery continues to improve. 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. 66
Off Balance
Sheet Arrangements In the normal course of business, we are party to financial instruments with off-balance sheet
risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our origination activity
unfunded commitments may be significant from time to time. As of September 30, 2010, we had unfunded commitments of approximately $122.3 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 and typically only fund 70-80% of the
committed amount. We intend to use cashflow from normal and early principal repayments, SBA debentures and our Wells Facility and our Union Bank Facility to fund these commitments. However, there can be no assurance that we will have sufficient
capital available to fund these commitments as they come due. In addition, we had approximately $70.1 million of non-binding
term sheets outstanding, which generally convert to contractual commitments within approximately 45 to 60 days of signing. Non-binding outstanding term from prior release are subject to completion of the Companys 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, 2010: Contractual
Obligations(1)(2) Borrowings (3) Operating Lease Obligations (4) Total 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.
Borrowings The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the Credit Facility) with Citigroup Global Markets Realty Corp. which expired
under the normal terms. During the first quarter of 2009, the Company paid off all remaining principal and interest owed under the Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of
loans and warrants collateralized under the Credit Facility. Pursuant to the warrant participation agreement, 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 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 $335,000 as of September 30, 2010 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or
lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $1.1 million under the
warrant participation agreement thereby reducing its realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire.
Long-term SBA Debentures On September 27, 2006, HT II and 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 67
regulatory capital. Under the Small Business Investment Company Act and current SBA policy applicable to SBICs, an SBIC can have outstanding at any time SBA guaranteed debentures up to twice the
amount of its regulatory capital. As of September 30, 2010, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150 million, subject to periodic adjustments by the SBA. With our
net investment of $75.0 million in HT II as of September 30, 2010, HT II has the current capacity to issue up to a total of $150 million of SBA guaranteed debentures, of which $150.0 million was outstanding. Currently, HT II has paid commitment
fees of approximately $1.5 million. As of September 30, 2010, 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, 2010, HT III had the potential to borrow up to $75.0 million of SBA-guaranteed debentures under the SBIC program. With our net investment of $25.0 million in HT III as of September 30, 2010, HT III
has the capacity to issue a total of $50.0 million of SBA guaranteed debentures, subject to SBA approval, of which $10.0 million was outstanding at September 30, 2010. Currently, HT III has paid commitment fees of approximately
$750,000. 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. 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. HTII and HT III are periodically examined and audited by
the SBAs staff to determine its compliance with SBIC 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 IIs or HT IIIs
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 III are our wholly owned subsidiaries. As of September 30, 2010, HT III could draw up to $75.0 million of
additional leverage from SBA, as noted above. The rates of borrowings under various draws from the SBA beginning in April 2007 and set semiannually in March and September range from 3.22% 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 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, 2010 for HT II was
approximately $144.3 million with an average interest rate of approximately 5.11%. The average amount of debentures outstanding for the quarter ended September 30, 2010 for HT III was approximately $5.2 million with an average interest rate of
approximately 3.215%. 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. Wells Facility On August 25, 2008, the Company, through a special purpose wholly-owned subsidiary of the Company, Hercules Funding II, LLC, entered
into a two-year revolving senior secured credit facility with an optional one-year extension with total commitments of $50 million, with Wells Fargo 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 million if additional lenders are added to the syndicate. We continue to be in discussions with various other potential lenders to join the facility; however, there is no
assurance that additional lenders may join the facility. The Wells Facility expires in August 2011. 68
Borrowings under the
Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The Wells Facility requires the payment of a non-use fee of 0.3% annually. 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 is being amortized through August 2011. There was no outstanding debt under the Wells Facility at September 30, 2010.
The Wells Facility requires various financial and operating covenants. These covenants require us to maintain certain
financial ratios and a minimum tangible net worth of $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeds $250 million, the minimum tangible net worth
covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by
the Company. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at
September 30, 2010. 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. At September 30, 2010, there were no borrowings outstanding
on this facility. The Union Bank Facility requires the payment of a non-use fee of 0.25% annually. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans
placed in the collateral pool. The Union Bank generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. At September 30, 2010 and December 31, 2009, the Company had the following borrowing capacity and outstanding borrowings: Union Bank Facility Wells Facility SBA Debenture(1) Total The Company has the ability to borrow $40.0 million in SBA debentures under HT III, subject to SBA approval. In order to have access to an additional
$25.0 million, which would be subject to SBA approval and compliance with SBIC regulations, the Company would have to make an additional net investment of $12.5 million in HT III. 69
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 On November 4, 2010, the Board of Directors announced a cash dividend of $0.20 per share to be paid on December 17, 2010 to
shareholders on record as of November 10, 2010. This is the Companys twenty-first consecutive quarterly dividend declaration since its initial public offering, and will bring the total cumulative dividend declared to date to $5.81 per
share. During 2010 and as recently updated, 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. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent
of the stockholders tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon its taxable income for
the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. If we had determined the tax attributes of our
distributions year-to-date as of September 30, 2010, approximately 95% would be from ordinary income and spill over earnings from 2009 and approximately 5% would be a return of capital. However there can be no certainty to stockholders that
this determination is representative of what the tax attributes of our 2010 distributions to stockholders will actually be. 70
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. 71
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. At September 30, 2010 approximately 80.8% of our total assets represented investments in portfolio companies that are valued at fair
value by the Board of Directors. Value, as defined in Section 2(a) (41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets,
fair value is as determined in good faith by the Board of Directors in accordance with established valuation procedures and the recommendation of the Valuation Committee of the Board of Directors. Since there is typically no readily available market
value for the investments in our portfolio, we value substantially all of our investments at fair value as determined in good faith by our Board of Directors pursuant to a valuation policy and a consistent valuation process. Due to the inherent
uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have
been used had a ready market existed for such investments, and the differences could be material. Consistent with ASC 820,
the Company determines fair value to be the amount for which an investment could be exchanged in a current sale, which assumes an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation
sale. The Companys valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio
investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each individual investment on a quarterly basis. We will record unrealized depreciation on
investments when we believe that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate, we will record unrealized appreciation if we believe that
the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value. As a business development company, we invest primarily in illiquid securities including debt and equity related securities of private
companies. Our investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that we make and the nature of our business, our valuation process requires an
analysis of various factors. Our valuation methodology includes the examination of, among other things, the underlying investment performance, financial condition and market changing events that impact valuation, estimated remaining life, and
interest rate spreads of similar securities as of the measurement date. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors that a hypothetical market participant would use to estimate
fair value, including the proceeds that would be received in a liquidation analysis. With respect to private debt and equity
securities, each investment is valued using industry valuation benchmarks, and, where appropriate, the value is assigned a discount reflecting the illiquid nature of the investment, and our minority, non-control position. When a qualifying external
event such as a significant purchase transaction, public offering, or subsequent debt or equity sale occurs, the pricing indicated by the external event will be used to corroborate our private debt or equity valuation. We periodically review the
valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. We may consider,
but are not limited to, industry valuation methods such as price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks in our evaluation of the fair
value of our investment. Securities that are traded in the over-the-counter market or on a stock exchange will be valued at the prevailing bid price on the valuation date. 72
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. 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. No valuation assistance was provided during the third quarter of 2010. Income Recognition. Interest income is recorded on the accrual basis and is recognized as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected.
Original Issue Discount, (OID), initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield
enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and
cease recognizing interest income on that loan until all principal has been paid. 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, 2010, we had four portfolio companies on non-accrual status with a fair value of
approximately $368,000. There were four loans on non-accrual status with a fair value of approximately $2.4 million as of September 30, 2009. Paid-In-Kind and End of Term Income. Contractual paid-in-kind
(PIK) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be
collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or we do not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an
end-of-term payment that we amortize into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts
necessary to pay these dividends may come from available cash or the liquidation of certain investments. For the three-month periods ended September 30, 2010 and 2009, approximately $1.7 million and $2.2 million, respectively in PIK and end of
term income was recorded. There was approximately $5.2 million and $6.4 million in PIK and end of term income recorded for the nine-month periods ended September 30, 2010 and 2009, respectively. Fee Income. Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to
portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are
capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. Stock-Based Compensation. We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We
follow ASC 718, formally known as FAS 123 Share-Based Payments to account for stock options granted. Under ASC 718, compensation expense associated with stock-based compensation is measured at the grant date based on the fair
value of the award and is recognized. Federal Income Taxes. We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal
income tax on the portion of our taxable income and gains distributed to stockholders. To 73
qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code. We are subject to a non-deductible federal excise tax if we do not
distribute at least 98% of our taxable income and 98% of our capital gain net income for each one year period ending on October 31. At December 31, 2009, no excise tax was recorded. At December 31, 2008, we recorded a liability for
excise tax of approximately $203,000 on income and capital gains of approximately $5.0 million which was distributed in 2009. 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. Subsequent Events The Board of Directors declared a cash dividend of $0.20 per share that will be payable on December 17, 2010 to shareholders of
record as of November 10, 2010. This dividend would represent the Companys twenty-first consecutive dividend declaration since its initial public offering, and will bring the total cumulative dividend declared to date to $5.81 per share.
As of November 2, 2010, we have: 2010 Closed Commitments and Pending Commitments (in millions) 1st Half 2010 Closed Commitments(a) Q3-10 Closed Commitments(a) Year to Date, through Q3-10 Closed Commitments(a)
Q4-10 Closed Commitments (as of 11-02-2010) Total 2010 Closed Commitments(b) Pending Commitments (as of 11-02-2010)(c) Total In October 2010, Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR) completed its IPO of 5,000,000 shares of its
common stock at $9.50 per share, before underwriting discounts and commissions. As of November 2, 2010 we have an unrealized gain of approximately $1.0 million based on a close price of $10.25, which is not reflected in the third quarter and will
change based on future market conditions. In October 2010, PSS Systems was acquired by IBM (NYSE: IBM) for an undisclosed
amount. The PSS investment generated a total internal rate of return of 13.5%. In October, 2010, Aveo Pharmaceuticals
announced the execution of a securities purchase agreement for a private placement, or PIPE, financing. Upon the closing of the PIPE financing, AVEO will receive gross proceeds of approximately $61 million resulting from the sale of 4.5
million shares of common stock. On October 21, 2010, InfoLogix received notice that the NASDAQ Listing Qualifications Panel
had determined to delist its common stock from the NASDAQ Stock Market and suspended trading of its common stock effective with the open of trading on October 21, 2010, as a result of InfoLogixs non-compliance with the minimum $2.5 million
stockholders equity requirement, set forth in NASDAQ Listing Rule 5550(b)(2). The closing price of InfoLogixs common stock on October 20, 2010 was $4.28 compared to a closing price of $2.40 on October 21, 2010. The closing price on
September 30, 2010 was $4.22. Furthermore, we advanced an additional $2.9 million in October. Infologix continues to explore strategic options as previously disclosed by the company. 74
Table of Contents
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Maryland
743113410
(State or Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
94301
(Address of Principal Executive Offices)
(Zip Code)
Large Accelerated Filer
¨
Accelerated Filer
x
Non-Accelerated Filer
¨
Smaller Reporting Company
¨
Table of Contents
3
Consolidated Financial Statements
3
3
4
17
29
30
31
32
Managements Discussion and Analysis of Financial Condition and Results of Operations
53
Quantitative and Qualitative Disclosures About Market Risk
75
Controls and Procedures
77
78
Legal Proceedings
78
Risk Factors
78
Unregistered Sales of Equity Securities and Use of Proceeds
82
Defaults Upon Senior Securities
82
Reserved
82
Other Information
82
Exhibits
83
84
Table of Contents
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2010
(unaudited)
December 31,
2009
$
370,720
$
335,979
2,846
2,274
33,935
32,184
407,501
370,437
(5,033
)
(2,425
)
83,011
124,828
11,512
10,309
7,291
5,818
504,282
508,967
5,733
11,852
160,000
130,600
165,733
142,452
$
338,549
$
366,515
$
36
$
35
409,389
409,036
(22,247
)
(10,028
)
(43,273
)
(28,129
)
(5,356
)
(4,399
)
$
338,549
$
366,515
36,158
35,634
$
9.36
$
10.29
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Drug Discovery
Preferred Stock Warrants
$
69
$
920
35
181
39
95
1,341
2,316
1,484
3,512
Drug Discovery
$
25,000
24,517
24,517
190
426
104
103
24
37
288
398
288
398
25,411
25,879
Drug Discovery
$
5,355
5,259
5,259
206
164
31
29
28
22
503
503
6,027
5,977
Drug Discovery
$
6,531
6,531
217
6,748
Drug Discovery
Common Stock Warrants
4
42
40
4
44
46
Drug Discovery
Preferred Stock Warrants
231
231
Drug Discovery
Preferred Stock
1,500
1,500
Drug Discovery
Preferred Stock Warrants
155
113
2,000
1,470
2,155
1,583
Drug Discovery
Preferred Stock Warrants
137
122
1,000
999
1,137
1,121
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Drug Discovery
$
10,000
$
9,618
$
9,618
480
268
10,098
9,886
Drug Discovery
$
2,916
2,916
2,916
152
441
3,068
3,357
57,903
51,361
Communications & Networking
$
1,685
1,736
1,736
$
2,000
2,084
2,084
$
500
500
500
102
166
4,422
4,486
Communications & Networking
Preferred Stock
2,880
2,846
2,880
2,846
Communications & Networking
$
2,779
2,779
2,779
45
72
2,896
2,779
Communications & Networking
$
5,185
5,114
5,114
102
94
5,216
5,208
Communications & Networking
Preferred Stock Warrants
94
39
250
225
344
264
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Communications & Networking
$
5,000
$
4,811
$
4,811
$
1,500
1,500
1,500
222
208
6,533
6,519
Communications & Networking
$
3,000
2,951
2,951
61
56
3,012
3,007
Communications & Networking
Preferred Stock Warrants
95
134
1,000
1,930
1,095
2,064
Communications & Networking
Preferred Stock Warrants
52
4
52
4
Communications & Networking
Preferred Stock Warrants
123
327
123
327
Communications & Networking
Preferred Stock Warrants
174
34
174
34
Communications & Networking
$
4,000
3,947
3,947
53
71
65
61
4,065
4,079
Communications & Networking
$
833
833
833
$
16,517
17,456
17,456
51
3
18,340
18,292
49,152
49,909
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Software
Preferred Stock Warrants
$
102
$
36
34
12
95
15
250
136
481
199
Software
$
1,721
1,696
1,696
25
348
299
224
2,020
2,268
Software
Preferred Stock Warrants
188
188
Software
Preferred Stock Warrants
43
234
43
234
Software
Senior Debt
$
6,000
5,851
5,851
$
2,000
2,000
2,000
177
128
152
163
8,180
8,142
Software
Preferred Stock Warrants
99
10
99
10
Software
Preferred Stock Warrants
92
92
Software
$
15,000
15,000
15,000
15,000
15,000
Software
Preferred Stock Warrants
44
61
44
61
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Software
Senior Debt
$
5,500
$
5,500
$
5,500
707
723
$
7,617
7,617
7,617
$
2,202
2,202
2,202
$
1,350
1,350
1,350
$
500
500
500
Preferred Stock Warrants
725
2,740
Common Stock
5,000
5,680
Common Stock
3,391
7,623
26,992
33,935
Software
Preferred Stock Warrants
51
13
51
13
Software
Preferred Stock Warrants
117
183
117
183
Software
Preferred Stock Warrants
39
39
Software
$
24,000
22,746
22,746
$
3,250
3,250
3,250
1,435
1,567
27,431
27,563
Software
Preferred Stock Warrants
238
12
238
12
81,015
87,620
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Electronics & Computer Hardware
$
1,290
$
1,290
$
1,290
183
84
334
1,891
1,290
Electronics & Computer Hardware
$
5,000
5,318
318
$
3,659
3,659
3,659
$
3,100
3,180
3,180
82
12,239
7,157
Electronics & Computer Hardware
Preferred Stock Warrants
63
89
63
89
Electronics & Computer Hardware
$
722
722
130
500
1,352
Electronics & Computer Hardware
Preferred Stock Warrants
54
46
100
15,645
8,536
Specialty Pharmaceuticals
$
3,269
3,269
3,269
$
401
401
401
69
382
1,000
500
4,739
4,552
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Specialty Pharmaceuticals
$
12,000
$
11,711
$
11,711
309
245
12,020
11,956
Specialty Pharmaceuticals
$
10,000
9,610
9,610
490
366
10,100
9,976
Specialty Pharmaceuticals
$
10,972
10,921
10,921
$
1,888
1,888
2,861
220
307
750
14,086
13,782
40,945
40,266
Preferred Stock Warrants
321
99
321
99
$
8,625
8,919
8,919
$
6,500
6,873
6,873
$
856
856
856
275
500
17,423
16,648
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Consumer & Business Products
Preferred Stock Warrants
$
24
$
49
500
306
524
355
Consumer & Business Products
Preferred Stock Warrants
452
218
1,000
1,670
Consumer & Business Products
$
10,000
9,174
9,174
879
751
50
50
10,103
9,975
Consumer & Business Products
$
15,834
15,834
15,834
$
8,333
8,446
8,446
24,280
24,280
Consumer & Business Products
Preferred Stock Warrants
252
1,218
250
265
502
1,483
54,823
52,840
Semiconductors
Preferred Stock Warrants
157
157
Semiconductors
Preferred Stock Warrants
46
2
51
73
458
18
490
362
1,118
382
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Semiconductors
Preferred Stock Warrants
$
297
$
1,032
277
704
574
1,736
Semiconductors
Preferred Stock Warrants
53
53
Semiconductors
Preferred Stock Warrants
83
642
725
2,627
2,118
Drug Delivery
$
15,000
14,459
14,459
645
570
15,104
15,029
Drug Delivery
$
20,000
19,768
19,768
635
368
20,403
20,136
Drug Delivery
Common Stock Warrants
36
65
51
30
499
290
586
385
36,093
35,550
Therapeutic
$
3,573
3,570
3,570
76
66
1,500
1,890
5,146
5,526
Therapeutic
$
496
502
502
175
1
153
830
503
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Therapeutic
$
2,847
$
2,826
$
58
2,884
Therapeutic
18
5
532
377
550
382
Therapeutic
99
26
99
26
Therapeutic
71
1
54
8
1,000
1,359
1,125
1,368
Therapeutic
$
6,750
6,750
6,750
$
5,900
6,042
6,042
12,792
12,792
23,426
20,597
147
177
292
324
292
56
73
26
17
82
90
43
36
43
36
$
3,658
3,217
3,217
13
28
1,183
1,000
5,441
3,217
$
5,000
5,000
5,000
5,000
5,000
Total Internet Consumer & Business Services (2.55%)
10,890
8,635
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Energy
Preferred Stock Warrants
$
106
$
1
49
155
1
155
1
Information Services
$
332
329
329
$
168
168
168
73
182
500
500
1,070
1,179
Information Services
Preferred Stock Warrants
9
250
45
259
45
Information Services
Common Stock
880
880
880
880
Information Services
Preferred Stock Warrants
213
250
247
463
247
Information Services
Preferred Stock Warrants
265
102
265
102
Information Services
Preferred Stock Warrants
94
2
250
50
346
50
Information Services
$
6,000
6,000
6,000
6,000
6,000
Information Services
Common Stock
603
165
603
165
Information Services
Preferred Stock Warrants
7
7
Information Services
Preferred Stock Warrants
172
12
500
254
672
266
10,565
8,934
Diagnostic
Common Stock
1,415
670
1,415
670
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Diagnostic
$
5,136
$
5,083
$
5,083
760
3,656
2,759
9,499
7,842
10,914
8,512
Biotechnology Tools
Preferred Stock Warrants
159
108
752
1,382
911
1,490
Biotechnology Tools
$
4,000
3,876
3,876
192
4,068
3,876
Biotechnology Tools
Preferred Stock Warrants
45
284
33
19
500
500
578
803
Biotechnology Tools
$
813
810
367
$
250
250
42
54
1,156
367
6,713
6,536
Surgical Devices
Preferred Stock Warrants
37
5
250
14
287
19
Surgical Devices
$
8,375
8,295
8,295
225
146
1,100
1,100
9,620
9,541
9,907
9,560
Media/Content/ Info
Preferred Stock Warrants
482
283
482
283
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Media/Content/Info
Preferred Stock Warrants
$
60
$
188
1,000
713
1,060
901
1,542
1,184
Clean Tech
$
3,621
3,135
3,135
513
470
3,648
3,605
Clean Tech
$
1,030
863
863
211
172
1,074
1,035
Clean Tech
Preferred Stock Warrants
670
624
670
624
Clean Tech
$
10,000
9,927
9,927
89
83
73
68
10,089
10,078
15,481
15,342
427,796
407,501
*
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 and $16,329, $36,621 and $20,292
respectively. The tax cost of investments is $430,088.
(3)
Except for warrants in nine publicly traded companies and common stock in four publicly traded companies, all investments are restricted at September 30, 2010. 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 companys principal place of business is outside the United States.
(6)
Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities
of the company.
(7)
Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 25% or more of the voting securities of such
company or has greater than 50% representation on its board.
(8)
Debt is on non-accrual status at September 30, 2010, and is therefore considered non-income producing.
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Drug Discovery
Preferred Stock Warrants
$
69
$
1,157
35
215
1,243
2,508
1,347
3,880
Drug Discovery
$
14,564
14,509
14,509
190
725
104
219
24
76
14,827
15,529
Drug Discovery
$
6,603
6,434
6,434
206
128
31
22
6,671
6,584
Drug Discovery
$
8,067
8,067
8,067
217
8,284
8,067
Drug Discovery
8
38
40
201
48
239
Drug Discovery
$
4,699
4,638
4,638
231
4,869
4,638
Drug Discovery
1,500
353
1,500
353
Drug Discovery
155
269
2,000
1,699
2,155
1,968
Drug Discovery
137
55
1,000
1,000
1,137
1,055
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Drug Discovery
$
6,666
$
6,667
$
6,671
Preferred Stock Warrants
152
288
6,819
6,959
Drug Discovery
$
2,576
2,576
2,576
2,576
2,576
50,233
51,848
Communications
& Networking
$
2,318
2,326
2,326
$
2,000
2,052
2,052
$
500
500
500
Preferred Stock Warrants
102
83
4,980
4,961
Communications
& Networking
Preferred Stock
2,880
2,274
2,880
2,274
Communications
& Networking
$
6,472
6,472
6,472
Preferred Stock Warrants
45
Preferred Stock Warrants
72
6,589
6,472
Communications
& Networking
Preferred Stock Warrants
94
42
Preferred Stock
250
247
344
289
Communications
& Networking
Preferred Stock Warrants
95
Preferred Stock
1,000
800
1,095
800
Communications
& Networking
Preferred Stock Warrants
52
168
52
168
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Communications
Preferred Stock Warrants
$
123
$
386
123
386
Communications
$
1,063
1,060
1,060
Preferred Stock Warrants
146
Common Stock
250
1,456
1,060
Communications
Preferred Stock Warrants
174
11
174
11
Communications
Preferred Stock Warrants
53
81
53
81
Communications
$
1,875
1,875
1,875
$
9,908
10,238
10,238
$
5,000
5,156
5,156
Preferred Stock Warrants
51
17,320
17,269
Communications
$
24,750
24,750
24,317
24,750
24,317
59,816
58,088
Software
Preferred Stock Warrants
102
99
Preferred Stock Warrants
34
32
Preferred Stock Warrants
95
159
Preferred Stock
250
375
481
665
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Software
$
3,329
$
3,234
$
3,234
Preferred Stock Warrants
25
128
Preferred Stock Warrants
299
69
3,558
3,431
Software
Preferred Stock Warrants
188
116
188
116
Software
Preferred Stock Warrants
43
248
43
248
Software
$
3,754
3,683
3,683
$
2,000
2,003
2,003
Preferred Stock Warrants
177
143
5,863
5,829
Software
Preferred Stock Warrants
99
77
99
77
Software
Preferred Stock Warrants
92
1
92
1
Software
$
15,000
15,000
15,000
15,000
15,000
Software
Preferred Stock Warrants
44
13
44
13
Software
$
5,500
5,500
5,500
$
5,000
5,004
10,060
$
7,559
7,559
7,559
Common Stock Warrants
760
1,494
Common Stock
5,000
7,571
23,823
32,184
Software
Preferred Stock Warrants
18
18
Software
Preferred Stock Warrants
51
71
51
71
Software
Preferred Stock Warrants
117
140
117
140
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Software
$
2,117
$
2,065
$
2,065
$
1,500
1,500
1,500
Preferred Stock Warrants
52
183
3,617
3,748
Software
Preferred Stock Warrants
39
47
39
47
Software
Preferred Stock Warrants
238
77
238
77
53,272
61,647
Electronics &
$
1,062
1,062
1,062
Preferred Stock Warrants
183
Preferred Stock Warrants
84
Preferred Stock Warrants
334
1,663
1,062
Electronics &
Computer Hardware
$
5,000
5,220
5,220
$
4,409
4,409
4,409
$
2,500
2,580
2,580
Common Stock
81
170
12,290
12,379
Electronics &
Computer Hardware
$
1,867
1,858
1,858
Preferred Stock Warrants
63
119
1,921
1,977
Electronics &
Computer Hardware
$
1,980
1,957
1,957
$
197
197
197
Preferred Stock Warrants
129
Preferred Stock
500
129
2,783
2,283
Table of Contents
Amount
VeriWave, Inc.
Electronics &
Hardware
Preferred Stock Warrants
$
54
$
Preferred Stock Warrants
46
100
18,757
17,701
Aegerion Pharmaceuticals, Inc. (4)
Specialty
Matures September 2011
Interest rate Prime + 2.50% or
Floor rate of 11.00%
$
5,481
5,482
5,482
Matures December 2010
$
279
279
279
69
253
1,000
1,019
6,830
7,033
Specialty
Pharmaceuticals
Matures October 2011
Interest rate Prime + 8.90% or
Floor rate of 12.15%
$
15,417
15,299
15,299
Matures March 2010
$
1,888
1,888
2,861
Preferred Stock Warrants
220
Preferred Stock Warrants
307
Preferred Stock
750
18,464
18,160
25,294
25,193
Consumer &
Business
Products
Matures April 2011
Interest rate LIBOR + 6.50% or
Floor rate of 10.00%
$
6,000
6,060
6,060
Preferred Stock Warrants
321
113
6,381
6,173
Consumer &
Business
Products
Matures November 2012
Interest rate Prime + 8.25% or
Floor rate of 12.5%
$
9,500
9,633
9,633
Matures May 2013
Interest rate Prime + 11.25% or
Floor rate of 15.5%
$
6,500
6,625
6,625
Matures November 2012
Interest rate Prime + 7.75% or
Floor rate of 12.00%
$
856
856
856
Common Stock Warrants
275
Common Stock
500
120
17,889
17,234
Table of Contents
Amount
Consumer & Business
Products
$
24
$
500
267
524
267
Consumer & Business
Products
Matures June 2010
Interest rate 16.00%
$
106
106
452
218
1,000
1,776
Consumer & Business
Products
252
1,425
250
368
502
1,793
27,072
25,467
Semiconductors
Matures September 2010
Interest rate 11.50%
$
426
422
122
18
440
122
Semiconductors
Matures August 2011
Interest rate Prime + 2.00% or
Floor rate of 7.625%
$
5,094
5,055
5,053
157
2
5,212
5,055
Semiconductors
628
490
950
1,118
950
Semiconductors
Matures March 2010
Interest rate Prime + 3.50% or
Floor rate of 11.25%
$
565
423
423
Matures June 2010
Interest rate Prime + 8.00% or
Floor rate of 13.25%
$
3,000
3,000
3,000
Matures June 2010
Interest rate Prime + 8.00% or
Floor rate of 14.00%
$
500
500
500
562
784
6
332
4,491
5,039
Table of Contents
Amount
Semiconductors
Matures May 2010
Interest rate 10.00%
$
139
$
134
$
134
53
187
134
Semiconductors
Matures August 2010
Interest rate 11.75%
$
197
181
181
83
641
905
181
12,353
11,481
Drug Delivery
Matures June 2012
Interest rate 10.95%
$
20,000
19,718
19,718
687
1,307
20,405
21,025
Drug Delivery
36
94
51
91
500
283
587
468
20,992
21,493
Therapeutic
Mature December 2011
Interest rate 11.00%
$
5,481
5,473
5,473
Matures May 2010
Interest rate 10.00%
$
1,000
1,000
1,000
76
111
1,500
2,303
8,050
8,887
Therapeutic
Matures November 2010
Interest rate Prime + 2.00%
$
2,677
2,629
2,630
175
153
2,957
2,630
Therapeutic
Matures May 2012
Interest rate Prime + 7.5% or
Floor rate of 10.75%
$
2,847
2,814
58
2,872
Therapeutic
18
5
250
627
268
632
Table of Contents
Amount
Therapeutic
$
99
$
26
99
26
Therapeutic
$
295
295
295
71
54
1,000
1,000
1,420
1,295
15,665
13,470
Internet Consumer &
148
177
7
325
7
Internet Consumer &
$
56
129
26
29
82
158
Internet Consumer &
Matures December 2010
Interest rate 11.25%
$
801
789
790
43
104
832
894
Internet Consumer &
Matures May 2010
Interest rate Prime + 6.00% or
Floor rate of 12.00%
$
10,000
10,000
10,000
14
223
28
33
1,000
1,037
11,042
11,293
Internet Consumer &
Matures from December 2009 to October
2011
Interest rate from 16.45% to 17%
$
12,482
12,778
8,000
1
12,779
8,000
25,060
20,352
Energy
107
104
48
155
104
155
104
Table of Contents
Amount
Information Services
Matures May 2011
Interest rate Prime + 1.50%
$
676
$
658
$
658
Matures September 2011
Interest rate Prime + 0.50%
$
287
287
287
73
53
1,018
998
Information Services
9
250
74
259
74
Information Services
880
880
880
880
Information Services
Matures December 2010
Interest rate Prime + 2.5%
$
1,559
1,559
1,559
Matures June 2011
Interest rate Prime + 0.5%
$
3,401
3,356
3,356
213
5,128
4,915
Information Services
Matures November 2012
Interest rate Prime + 3.50% or
Floor rate of 9.5%
$
14,750
14,891
14,892
Matures October 2010
Interest rate Prime + 3.50% or
Floor rate of 9.5%
$
2,500
2,504
2,504
265
151
17,660
17,547
Information Services
94
2
250
83
346
83
Information Services
452
880
452
880
603
603
603
603
Information Services
7
7
Table of Contents
Amount
Information Services
Matures November 2012
Interest rate 9.50%
$
4,731
$
4,732
$
4,731
Matures November 2012
Interest rate 10.50%
6,719
6,719
$
6,484
172
500
310
12,123
11,760
38,476
37,740
Diagnostic
1,567
542
1,567
542
Diagnostic
Matures June 2011
Interest rate 10.25%
$
7,696
7,516
7,515
760
342
3,000
3,000
11,276
10,857
12,843
11,399
Biotechnology Tools
159
149
794
1,161
953
1,310
Biotechnology Tools
Matures November 2012
Interest rate Prime + 8.6% or
Floor rate of 11.85%
$
3,500
3,323
3,323
192
235
3,515
3,558
Biotechnology Tools
$
785
780
780
$
442
442
442
45
391
33
41
500
587
1,800
2,241
Biotechnology Tools
Matures August 2012
Interest rate Prime + 4.25% or
Floor rate of 9.85%
$
2,617
2,560
2,560
42
54
2,656
2,560
8,924
9,669
Surgical Devices
37
250
26
287
26
Table of Contents
Principal
Amount
Cost(2)
Value(3)
Surgical Devices
$
9,475
$
9,384
$
2,384
225
9,609
2,384
9,896
2,410
Media/Content/Info
Preferred Stock Warrants
482
283
482
283
Media/Content/Info
Preferred Stock Warrants
60
592
1,000
1,500
1,060
2,092
1,542
2,375
Total Investments (101.7%)*
$
380,351
$
370,437
*
Value as a percent of net assets
(1)
Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2)
Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $17,409, $30,495 and $13,086, respectively.
The tax cost of investments is $379,600.
(3)
Except for warrants in five publicly traded companies and common stock in five publicly traded companies, all investments are restricted at December 31, 2009. No
unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4)
Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5)
Non-U.S. company or the companys principal place of business is outside the United States.
(6)
Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities
of the company.
(7)
Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 25% or more of the voting securities of such
company or has greater than 50% representation on its board.
(8)
Debt is on non-accrual status at December 31, 2009, and is therefore considered non-income producing.
Table of Contents
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
$
13,356
$
13,008
$
35,649
$
43,945
153
766
1,605
2,487
4,347
14,122
14,613
38,136
$
48,445
1,524
2,218
4,285
7,923
19
850
246
1,224
1,524
3,068
4,531
9,166
15,646
17,681
42,667
57,611
2,139
2,050
6,237
7,315
333
308
936
1,583
1,680
2,105
5,220
5,455
2,594
2,401
7,691
8,113
752
470
1,959
1,418
3,346
2,871
9,650
9,531
7,498
7,334
22,043
23,884
8,148
10,347
20,624
33,727
(18,865
)
(14,173
)
(15,144
)
(19,506
)
2,894
17,516
(12,218
)
(9,108
)
(15,971
)
3,343
(27,362
)
(28,614
)
$
(7,823
)
$
13,690
$
(6,738
)
$
5,113
$
0.23
$
0.30
$
0.57
$
0.98
$
(0.23
)
$
0.39
$
(0.20
)
$
0.14
$
(0.23
)
$
0.38
$
(0.20
)
$
0.14
35,208
34,981
35,227
34,282
35,208
35,576
35,227
34,607
Table of Contents
Common Stock
Capital in
Unrealized
Accumulated
Realized
Distributions
in Excess of
Provision for
Income Taxes
Shares
Par Value
excess
of par
value
Appreciation
on
Investments
Gains(Losses)
on
Investments
Investment
Income
on Investment
Gains
Net
Assets
33,096
$
33
$
395,760
$
(11,297
)
$
3,906
$
(5,602
)
$
(342
)
$
382,458
(9,108
)
(19,506
)
33,727
5,113
5
36
36
307
2,138
2
11,449
11,451
(31,824
)
(31,824
)
1,488
1,488
35,546
$
35
$
408,733
$
(20,405
)
$
(15,600
)
$
(3,699
)
$
(342
)
$
368,722
35,634
$
35
$
409,036
$
(10,029
)
$
(28,129
)
$
(4,056
)
$
(342
)
$
366,515
(12,218
)
(15,144
)
20,624
(6,738
)
413
1,856
1,856
488
1
1
(403
)
(3,699
)
(3,699
)
140
1,332
1,332
(114
)
(1,160
)
(1,160
)
(21,582
)
(21,582
)
2,024
2,024
36,158
$
36
$
409,389
$
(22,247
)
$
(43,273
)
$
(5,014
)
$
(342
)
$
338,549
Table of Contents
Nine Months Ended September 30,
2010
2009
$
(6,738
)
$
5,113
(289,734
)
(77,719
)
223,383
218,317
7,295
3,841
12,218
9,108
15,144
19,506
(2,366
)
(2,066
)
(3,026
)
(4,385
)
(956
)
(2,359
)
298
274
553
1,488
1,471
36
(2,137
)
(3,894
)
(347
)
796
541
2,311
(103
)
(146
)
8
(196
)
(5,891
)
(3,439
)
4,745
229
(45,642
)
166,815
(218
)
(68
)
(137
)
(41
)
(355
)
(109
)
1,856
(3,699
)
(1,160
)
(20,250
)
(20,372
)
29,400
80,842
(167,024
)
(1,967
)
(147
)
4,180
(106,701
)
(41,817
)
60,005
124,828
17,242
$
83,011
$
77,247
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Investments at Fair Value as of September 30, 2010
9/30/2010
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
349,133
$
349,133
22,713
22,713
16,689
9,964
5,680
1,045
18,966
7,124
11,842
$
407,501
$
9,964
$
12,804
$
384,733
Investments at Fair Value as of December 31, 2009
12/31/2009
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
314,842
$
$
$
314,842
6,060
6,060
22,875
22,875
12,210
1,986
8,451
1,773
14,450
3,374
11,076
$
370,437
$
1,986
$
11,825
$
356,626
Table of Contents
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,
September 30, 2010
$
314,842
$
(3,363
)
$
(5,384
)
$
43,540
$
(502
)
$
349,133
6,060
(6,060
)
22,875
(3,870
)
3,206
502
22,713
1,773
(15,765
)
15,037
1,045
11,076
(514
)
2,893
(1,613
)
11,842
$
356,626
$
(3,877
)
$
(22,126
)
$
55,723
(1,613
)
$
384,733
Balance,
January 1, 2009
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, 2009
$
534,230
$
(27,192
)
$
4,698
$
(196,894
)
$
$
314,842
5,824
236
6,060
21,249
(3,000
)
4,373
661
(408
)
22,875
1,894
(105
)
(749
)
1,204
(471
)
1,773
14,952
(1,150
)
(4,116
)
1,390
11,076
$
578,149
$
(31,447
)
$
4,206
$
(193,403
)
$
(879
)
$
356,626
(1)
(2)
Table of Contents
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
302,870
74.3
%
$
229,454
61.9
%
65,229
16.0
%
99,725
26.9
%
22,713
5.6
%
22,875
6.2
%
0.0
%
6,173
1.7
%
16,689
4.1
%
12,210
3.3
%
$
407,501
100.0
%
$
370,437
100
%
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
375,231
92.1
%
$
344,984
93.1
%
20,805
5.1
%
21,567
5.8
%
9,976
2.4
%
0.0
%
1,489
0.4
%
1,310
0.4
%
0.0
%
2,576
0.7
%
$
407,501
100.0
%
$
370,437
100
%
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
87,620
21.5
%
$
61,647
16.6
%
52,840
13.0
%
25,467
6.9
%
51,360
12.6
%
51,848
14.0
%
49,909
12.2
%
58,088
15.7
%
40,265
9.9
%
25,193
6.8
%
35,550
8.7
%
21,493
5.8
%
20,597
5.1
%
13,470
3.6
%
15,343
3.8
%
0
0.0
%
9,560
2.3
%
2,410
0.7
%
8,934
2.2
%
37,740
10.2
%
8,635
2.1
%
20,352
5.5
%
8,536
2.1
%
17,701
4.8
%
8,512
2.1
%
11,399
3.1
%
6,536
1.6
%
9,669
2.6
%
2,118
0.5
%
11,481
3.1
%
1,185
0.3
%
2,375
0.6
%
1
0.0
%
104
0.0
%
$
407,501
100
%
$
370,437
100
%
Table of Contents
Table of Contents
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Facility Amount
Amount
Outstanding
Facility Amount
Amount
Outstanding
$
20,000
$
$
$
50,000
50,000
225,000
160,000
150,000
130,600
$
295,000
$
160,000
$
200,000
$
130,600
(1)
Table of Contents
Table of Contents
Table of Contents
For the Nine Month Period Ended September 30,
2010
2009
Common Stock
Options
Five-Year
Warrants
Common Stock
Options
Five-Year
Warrants
4,924,405
3,931,527
10,692
368,250
1,200,500
(413,337
)
(222,923
)
(306,620
)
(10,692
)
4,656,395
4,825,407
$
11.28
$
$
10.75
$
Table of Contents
For the Nine Months Ended September 30,
2010
2009
46.39
%
31.5% - 37.2
%
10
%
10
%
4.5
4.5
1.10% - 2.51
%
1.77% - 2.22
%
Options outstanding
Options exercisable
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
716,833
5.45
$
4,226
$
4.21
168,376
5.39
$
993
$
4.21
2,007,299
4.37
153
11.59
1,438,722
3.72
21
12.02
1,932,263
2.36
0
13.58
1,924,669
2.34
0
13.58
4,656,395
3.70
$
4,379
$
11.28
3,531,767
3.05
$
1,014
$
12.50
Table of Contents
Three months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
$
(7,823
)
$
13,690
$
(6,738
)
$
5,113
(7,197
)
10,635
(21,582
)
31,825
(15,020
)
3,055
(28,320
)
(26,712
)
(15,020
)
3,013
(28,320
)
(26,712
)
7,034
10,486
21,152
31,451
(7,986
)
13,499
(7,168
)
4,739
35,208
34,981
35,227
34,282
595
325
35,208
35,576
35,227
34,607
$
(0.23
)
$
0.39
$
(0.20
)
$
0.14
$
(0.23
)
$
0.38
$
(0.20
)
$
0.14
Table of Contents
Table of Contents
Nine Months Ended
September 30,
2010
2009
$
10.29
$
11.56
0.59
0.98
(0.43
)
(0.57
)
(0.35
)
(0.27
)
(0.19
)
0.14
(0.19
)
(0.45
)
(0.61
)
(0.92
)
0.06
0.04
$
9.36
$
10.37
$
10.11
$
9.82
(0.65
%)(2)
27.63
%
36,158
35,546
35,208
34,282
$
338,549
368,722
7.01
%
8.34
%
7.62
%
11.78
%
$
223,766
153,124
$
6.36
$
4.42
1.72
%
0.95
%
(1)
(2)
Table of Contents
Payments due by period
(in
thousands)
Total
Less than 1 year
1 - 3 years
3 - 5 years
After 5 years
$
160,000
$
$
$
$
160,000
3,641
1,192
2,363
85
$
163,641
$
1,192
$
2,363
$
85
$
160,000
(1)
(2)
(3)
(4)
Table of Contents
1.
Closed commitments of $44.0 million to new portfolio companies and funded approximately $26.4 million since the close of the third quarter.
2.
Pending commitments (signed term sheets) of over $103.0 million.
3.
The table below summarizes the Companys year-to-date closed and pending commitments as follows:
$
253.3
$
67.8
$
321.1
$
44.0
$
365.1
$
103.3
$
468.4
a.
Year to Date Closed Commitments excludes $74.2 million of existing credit restructures and renewals.
b.
Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close.
c.
Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future cash requirements.
Table of Contents
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of Contents
Table of Contents
Nine Months
Ended
September 30,
2010
Nine Months
Ended
September 30,
2009
$
370.4
$
581.3
286.8
76.7
3.0
1.0
(24.3
)
(23.3
)
(69.2
)
(68.7
)
(154.2
)
(149.6
)
5.4
6.5
(10.4
)
(9.1
)
$
407.5
$
414.8
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
302,870
74.3
%
$
229,454
61.9
%
65,229
16.0
%
99,725
26.9
%
22,713
5.6
%
22,875
6.2
%
0.0
%
6,173
1.7
%
16,689
4.1
%
12,210
3.3
%
$
407,501
100.0
%
$
370,437
100
%
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
375,231
92.1
%
$
344,984
93.1
%
20,805
5.1
%
21,567
5.8
%
9,976
2.4
%
0.0
%
1,489
0.4
%
1,310
0.4
%
0.0
%
2,576
0.7
%
$
407,501
100.0
%
$
370,437
100
%
Table of Contents
Table of Contents
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
87,620
21.5
%
$
61,647
16.6
%
52,840
13.0
%
25,467
6.9
%
51,360
12.6
%
51,848
14.0
%
49,909
12.2
%
58,088
15.7
%
40,265
9.9
%
25,193
6.8
%
35,550
8.7
%
21,493
5.8
%
20,597
5.1
%
13,470
3.6
%
15,343
3.8
%
0
0.0
%
9,560
2.3
%
2,410
0.7
%
8,934
2.2
%
37,740
10.2
%
8,635
2.1
%
20,352
5.5
%
8,536
2.1
%
17,701
4.8
%
8,512
2.1
%
11,399
3.1
%
6,536
1.6
%
9,669
2.6
%
2,118
0.5
%
11,481
3.1
%
1,185
0.3
%
2,375
0.6
%
1
0.0
%
104
0.0
%
$
407,501
100
%
$
370,437
100
%
September 30, 2010
December 31, 2009
(in thousands)
Investments at Fair
Value
Percentage of Total
Portfolio
Investments at Fair
Value
Percentage of Total
Portfolio
$
11,961
3.4
%
$
15,777
4.9
%
254,608
72.9
%
147,520
46.0
%
71,822
20.6
%
108,716
33.9
%
10,374
3.0
%
38,384
12.0
%
368
0.1
%
10,505
3.2
%
$
349,133
100.0
%
$
320,902
100.0
%
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
( in millions)
$
$
0.5
$
4.4
$
2.1
(18.9
)
$
(14.7
)
(19.5
)
$
(21.6
)
$
(18.9
)
$
(14.2
)
$
(15.1
)
$
(19.5
)
Three Months Ended September 30,
2010
2009
(in thousands)
Amount
Amount
$
4,565
$
16,387
(15,824
)
(13,326
)
(3,912
)
(500
)
17,888
15,051
177
(96
)
$
2,894
$
17,516
Nine Months Ended September 30,
2010
2009
(in thousands)
Amount
Amount
$
26,369
$
29,008
(52,867
)
(58,728
)
(3,902
)
(1,542
)
18,048
22,300
134
(146
)
$
(12,218
)
$
(9,108
)
Table of Contents
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Facility Amount
Amount
Outstanding
Facility Amount
Amount
Outstanding
$
20,000
$
$
$
50,000
50,000
225,000
160,000
150,000
130,600
$
295,000
$
160,000
$
200,000
$
130,600
(1)
Table of Contents
Table of Contents
Payments due by period (in thousands)
Total
Less than 1 year
1 - 3 years
3 - 5 years
After 5 years
$
160,000
$
$
$
$
160,000
3,641
1,192
2,363
85
$
163,641
$
1,192
$
2,363
$
85
$
160,000
(1)
Excludes commitments to extend credit to our portfolio companies.
(2)
The Company also has a warrant participation obligation with Citigroup. See Note 4.
(3)
Includes borrowings under the Wells Facility, the Union Bank Facility and the SBA debentures. There were no outstanding borrowings under the Wells Facility or the Union
Bank Facility at September 30, 2010.
(4)
Long-term facility leases.
Table of Contents
Table of Contents
September 30, 2010
December 31, 2009
(in thousands)
Facility Amount
Amount
Outstanding
Facility Amount
Amount
Outstanding
$
20,000
$
$
$
50,000
50,000
225,000
160,000
150,000
130,600
$
295,000
$
160,000
$
200,000
$
130,600
(1)
Table of Contents
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
$
5.805
*
Dividend paid in cash and stock.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
1.
Closed commitments of $44.0 million to new portfolio companies and funded approximately $26.4 million since the close of the third quarter.
2.
Pending commitments (signed term sheets) of over $103.0 million.
3.
The table below summarizes our year-to-date closed and pending commitments as follows:
$
253.3
$
67.8
$
321.1
$
44.0
$
365.1
$
103.3
$
468.4
a.
Year to Date Closed Commitments excludes $74.2 million of existing credit restructures and renewals.
b.
Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close.
c.
Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future cash requirements.
Table of Contents
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, 2010, approximately 84.8% of our portfolio loans were at floating rates or floating with a floor and 15.2% of our loans were at fixed rates. Over time additional investments may be at floating rates. 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.
75
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 nine-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 3.22% 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
76
the date that the leverage was drawn by the SBIC. The annual fee on HT II debentures that pooled on September 22, 2010 were 0.406% and 0.29%, depending upon the year the underlying commitment was closed in. The annual fees on other debentures have been set at 0.906%. Interest is payable semi-annually and there are no principal payments required on these issues prior to maturity. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017.
Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The Wells Facility requires the payment of a non-use fee of 0.5% annually, which reduces to 0.3% on the one year anniversary of the credit facility. The Wells Facility is collateralized by debt investment in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. There were no borrowings outstanding under this facility at September 30, 2010. The facility expires in August 2011.
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 requires the payment of a 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 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, 2010.
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 floating rate assets in our investment portfolio.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our chief executive and chief financial officers, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this quarterly report on Form 10-Q, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no other changes in our internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, that occurred during the Companys most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS |
At September 30, 2010, 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.
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 Companys Annual Report on Form 10-K for the year ended December 31, 2009.
We are currently in a period of capital markets disruption and recession and we cannot predict whether these conditions will improve in the near future.
Since late 2007, and particularly since mid-2008, the financial services industry and the securities markets generally have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a lack of liquidity. Initially, these market conditions were triggered by declines in home prices and the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. During this period of disruption, the global markets were characterized by substantially increased volatility, short-selling and an overall loss of investor confidence. While recent economic indicators have shown modest improvements in the capital markets, these indicators could worsen. In the event of renewed financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity and extreme volatility in fixed-income, credit, currency and equity markets. In addition, the risk remains that there could be a number of follow-on effects from the credit crisis on our business.
Despite the capital market disruption and recession, we continue to see a steady pace of new investments by venture capitalists. As a result of this favorable level of venture capital investment activities, we continue to experience an increase in new investment origination activities which commenced in the fourth quarter of 2009 and has continued throughout 2010, and we would expect it to continue as the venture capital community continues to accelerate its own pace of new investments. To the extent that we are able, we intend to continue to seek new investment opportunities; however, we remain cautious in our investment and credit management strategies as the pace of economic recovery continues to improve.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq Stock Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as say on pay and proxy access. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of managements time from other business activities.
Our equity ownership in a portfolio company may represent a Control Investment. Our ability to exit a debt or equity investment in a timely manner because we are in a control position or have access to inside information in the portfolio company could result in a realized loss on the investment.
If we obtain a Control Investment in a portfolio company our ability to divest ourselves from a debt or equity investment could be restricted due to illiquidity in a private stock, limited trading volume on a public companys stock, inside information on a companys performance, insider blackout periods, or other factors that could prohibit us from disposing of the investment as we would if it were not a Control Investment. Additionally, we may choose not to take certain actions to protect a debt investment in a Control Investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on the investment.
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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, 2010 that represent greater than 5% of net assets:
September 30, 2010 | ||||||||
(in thousands) | Fair Value | Percentage of Net Assets |
||||||
Infologix, Inc. |
33,935 | 10.02 | % | |||||
Unify Corporation |
27,563 | 8.14 | % | |||||
Aveo Pharmaceuticals, Inc. |
25,879 | 7.64 | % | |||||
Velocity Technology Solutions |
24,280 | 7.17 | % | |||||
Labopharm USA, Inc. |
20,135 | 5.95 | % | |||||
Tectura Corporation |
18,292 | 5.40 | % |
InfoLogix, Inc. is a provider of enterprise mobility and radio frequency identification (RFID) solutions. The Company provides these solutions to its customers by utilizing a combination of products and services, including consulting, business software applications, managed services, mobile workstations and devices, and wireless infrastructure. At September 30, 2010 we owned a controlling interest in this portfolio company. See Managements Discussion and Analysis of Financial Condition and Results of Operations Subsequent Events for more information regarding InfoLogix.
Unify Corporation is a global provider of application development, data management and migration solutions.
Aveo Pharmaceuticals, Inc. is a biopharmaceutical company dedicated to the discovery and development of new, targeted cancer therapeutics.
Velocity Technology Solutions manages, hosts, and provides systems integration services for companies that outsource enterprise software support.
Labopharm USA,Inc. is a specialty pharmaceutical company that, together with its subsidiaries, develops drugs using its proprietary controlled-release technologies.
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.
If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending and Investment Company Activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely.
As of September 30, 2010, we had no outstanding borrowings under the Wells Facility or the Union Bank Facility and $160.0 million of SBA guaranteed debentures under the SBA debenture program.
As of September 30, 2010, we have been unable to secure additional lenders under our Wells Facility. There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies.
The impact of recent financial reform legislation on us is uncertain.
In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration and regulators have increased their focus on the regulation of the financial services industry. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act institutes a wide range of reforms that will have an impact on all financial institutions. Many of these provisions are subject to rule making procedures and studies that will be conducted in the future. Accordingly, we cannot predict the effect the Act or its implementing regulations will have on our business, results of operations or financial condition.
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Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair market value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio companys debt and equity), the nature and realizable value of any collateral, the portfolio companys ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio companys securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation.
The continuing unprecedented declines in prices and liquidity in the capital markets have resulted in some net unrealized depreciation in our portfolio. As of September 30, 2010, conditions in the public and private debt and equity markets had continued to deteriorate and pricing levels continued to decline. While the U.S. government has acted to restore liquidity and stability to the financial system, there can be no assurance these regulatory programs and proposals will have a long-term beneficial impact. As a result, in the future, depending on market conditions, we could incur substantial realized losses and may suffer substantial unrealized depreciation in future periods, which could have a material adverse impact on our business, financial condition and results of operations.
If we conduct an offering of our common stock at a price below net asset value, investors are likely to incur immediate dilution upon the closing of the offering.
At our Annual Meeting of Stockholders on June 9, 2010, our stockholders approved a proposal authorizing us to sell up to 20% of our common stock at a price below the Companys net asset value per share, subject to Board approval of the offering. If we were to issue shares at a price below net asset value, such sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholders interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.
In addition, if we determined to conduct additional offerings in the future there may be even greater discounts if we determine to conduct such offerings at prices below net asset value. As a result, investors will experience further dilution and additional discounts to the price of our common stock.
Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our common stocks at a price below our net asset value during the nine months ended September 30, 2010.
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Current levels of market volatility are high. Our common stock price has been and continues to be volatile and may decrease substantially.
The capital and credit market have been experiencing volatility and disruption for more than 18 months. Although the U.S. government has acted to restore liquidity and stability to the financial system, there can be no assurance these regulatory programs and proposals will have a long-term beneficial impact. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers underlying financial strength. If current levels of market volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
In addition, the trading price of our common stock following an offering may fluctuate substantially. The price of the common stock that will prevail in the market after an offering may be higher or lower than the price you paid and the liquidity of our common stock may be limited, in each case depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
| price and volume fluctuations in the overall stock market from time to time; |
| significant volatility in the market price and trading volume of securities of RICs, business development companies or other financial services companies; |
| any inability to deploy or invest our capital; |
| fluctuations in interest rates; |
| any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| the financial performance of specific industries in which we invest in on a recurring basis; |
| announcement of strategic developments, acquisitions, and other material events by us or our competitors, or operating performance of companies comparable to us; |
| changes in regulatory policies or tax guidelines with respect to RICs or business development companies; |
| losing RIC status; |
| actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of securities analysts; |
| changes in the value of our portfolio of investments; |
| realized losses in investments in our portfolio companies; |
| general economic conditions and trends; |
| inability to access the capital markets; |
| loss of a major funded source; or |
| departures of key personnel. |
In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and could divert managements attention and resources from our business.
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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.
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ITEM 6. | EXHIBITS |
Exhibit |
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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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 4, 2010 | /S/ MANUEL A. HENRIQUEZ | |
Manuel A. Henriquez | ||
Chairman, President, and Chief Executive Officer | ||
Dated: November 4, 2010 | /S/ DAVID M. LUND | |
David M. Lund | ||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit |
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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Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
I, Manuel A. Henriquez certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hercules Technology Growth Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 4, 2010 |
By: | /S/ MANUEL A. HENRIQUEZ | ||
Manuel A. Henriquez | ||||
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
I, David M. Lund certify that:
1. I have reviewed this report on Form 10-Q of Hercules Technology Growth Capital, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 4, 2010 |
By: | /S/ DAVID M. LUND | ||
David M. Lund | ||||
Chief Financial Officer |
Exhibit 32.1
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (the Report) of Hercules Technology Growth Capital, Inc. (the Registrant), as filed with the Securities and Exchange Commission on the date hereof; I, Manuel A. Henriquez, the Chief Executive Officer of the Registrant, certify, to the best of my knowledge, that:
1) The Report fully complies with the requirements of the Section13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: November 4, 2010 |
By: | /S/ MANUEL A. HENRIQUEZ | ||
Manuel A. Henriquez | ||||
Chief Executive Officer |
Exhibit 32.2
AS ADOPTED PURSUANT TO
SECTION 960 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Form 10-Q for the quarter ended September 30, 2010 (the Report) of Hercules Technology Growth Capital, Inc. (the Registrant), as filed with the Securities and Exchange Commission on the date hereof; I, David Lund, the Chief Financial Officer of the Registrant, certify, to the best of my knowledge, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: November 4, 2010 |
By: | /S/ DAVID M. LUND | ||
David M. Lund | ||||
Chief Financial Officer |