Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For The Quarterly Period Ended March 31, 2009

OR

 

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

Commission File Number: 814-00702

 

 

HERCULES TECHNOLOGY GROWTH

CAPITAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   743113410

(State or Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

400 Hamilton Ave., Suite 310 Palo Alto, California 94301   94301
(Address of Principal Executive Offices)   (Zip Code)

(650) 289-3060

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

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

On May 8, 2009, there were 35,326,894 shares outstanding of the Registrant’s common stock, $0.001 par value.

 

 

 


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I.     FINANCIAL INFORMATION

   3

Item 1.

   Consolidated Financial Statements    3
   Consolidated Statement of Assets and Liabilities as of March 31, 2009 (unaudited) and December 31, 2008    3
   Consolidated Schedule of Investments as of March 31, 2009 (unaudited)    4
   Consolidated Schedule of Investments as of December 31, 2008    21
   Consolidated Statement of Operations for the three-month periods ended March 31, 2009 and 2008 (unaudited)    35
   Consolidated Statement of Changes in Net Assets for the three-month periods ended March 31, 2009 and 2008 (unaudited)    36
   Consolidated Statement of Cash Flows for the three-month periods ended March 31, 2009 and 2008 (unaudited)    37
   Notes to Consolidated Financial Statements (unaudited)    38

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    51

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    65

Item 4.

   Controls and Procedures    66

PART II.  OTHER INFORMATION

   66

Item 1.

   Legal Proceedings    67

Item 1A.

   Risk Factors    67

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    68

Item 3.

   Defaults Upon Senior Securities    68

Item 4.

   Submission of Matters to a Vote of Security Holders    68

Item 5.

   Other Information    68

Item 6.

   Exhibits    69

SIGNATURES

   70

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

In this Quarterly Report, the “Company,” “Hercules,” “we,” “us” and “our” refer to Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise requires.

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(in thousands, except per share data)

 

     March 31,
2009
(unaudited)
    December 31,
2008
 

Assets

    

Investments:

    

Non-affiliate investments (cost of $542,464 and $583,592)

   $ 531,027     $ 579,079  

Affiliate investments (cost of $7,421 and $8,756)

     1,754       2,222  
                

Total investments, at value (cost of $549,885 and $592,348 respectively)

     532,781       581,301  

Deferred loan origination revenue

     (5,396 )     (6,871 )

Cash and cash equivalents

     7,884       17,242  

Interest receivable

     7,961       8,803  

Other assets

     7,042       8,197  
                

Total assets

     550,272       608,672  

Liabilities

    

Accounts payable and accrued liabilities

     3,975       9,432  

Short-term credit facility

     —         89,582  

Long-term credit facility

     32,751       —    

Long-term SBA Debentures

     127,200       127,200  
                

Total liabilities

     163,926       226,214  
                

Net assets

   $ 386,346     $ 382,458  
                

Net assets consist of:

    

Common stock, par value

   $ 35     $ 33  

Capital in excess of par value

     405,755       395,760  

Unrealized appreciation (depreciation) on investments

     (17,227 )     (11,297 )

Accumulated realized gains on investments

     2,760       3,906  

Distributions in excess of investment income

     (4,977 )     (5,944 )
                

Total net assets

   $ 386,346     $ 382,458  
                

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

     35,325       33,096  
                

Net asset value per share

   $ 10.94     $ 11.56  
                

See notes to consolidated financial statements (unaudited).

 

3


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Acceleron Pharmaceuticals, Inc. (0.54%)*

  

Drug Discovery

  

Senior Debt

Matures January 2011

Interest rate 10.25%

   $ 1,385    $ 1,367    $ 1,367
     

Preferred Stock Warrants

        69      600
     

Preferred Stock Warrants

        35      113

Acceleron Pharmaceuticals, Inc. (0.44%)

     

Preferred Stock

        1,243      1,691
                      

Total Acceleron Pharmaceuticals, Inc.

              2,714      3,771

Aveo Pharmaceuticals, Inc. (4.13%)

  

Drug Discovery

  

Senior Debt

Matures November 2011

Interest rate 11.13%

   $ 15,000      14,918      14,918
     

Preferred Stock Warrants

        190      752
     

Preferred Stock Warrants

        104      223
     

Preferred Stock Warrants

        24      76
                      

Total Aveo Pharmaceuticals, Inc.

              15,236      15,969

Dicerna Pharmaceuticals, Inc. (0.51%)

  

Drug Discovery

  

Senior Debt

Matures April 2012

Interest rate Prime + 9.20%

   $ 2,000      1,836      1,836
     

Preferred Stock Warrants

        164      153
                      

Total Dicerna Pharmaceuticals, Inc.

              2,000      1,989

Elixir Pharmaceuticals, Inc. (2.86%)

  

Drug Discovery

  

Senior Debt

Matures January 2012

Interest rate Prime + 9.25%

   $ 11,000      11,000      11,000
     

Preferred Stock Warrants

        217      66
                      

Total Elixir Pharmaceuticals, Inc.

              11,217      11,066

EpiCept Corporation (0.10%)

  

Drug Discovery

  

Common Stock Warrants

        31      163
     

Common Stock Warrants

        40      210

Epicept Corporation (0.04%)

     

Common Stock

        22      143
                      

Total EpiCept Corporation

              93      516

Horizon Therapeutics, Inc. (1.76%)

  

Drug Discovery

  

Senior Debt

Matures July 2011

Interest rate Prime + 1.50%

   $ 6,755      6,625      6,625
     

Preferred Stock Warrants

        231      204
                      

Total Horizon Therapeutics, Inc.

              6,856      6,829

Inotek Pharmaceuticals Corp. (0.31%)

  

Drug Discovery

  

Preferred Stock

        1,500      1,211
                      

Total Inotek Pharmaceuticals Corp.

              1,500      1,211

 

4


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Merrimack Pharmaceuticals, Inc. (0.16%)

  

Drug Discovery

  

Preferred Stock Warrants

      $ 155    $ 599

Merrimack Pharmaceuticals, Inc. (0.68%)

     

Preferred Stock

        2,000      2,610
                      

Total Merrimack Pharmaceuticals, Inc.

              2,155      3,209

Paratek Pharmaceuticals, Inc. (0.03%)

  

Drug Discovery

  

Preferred Stock Warrants

        137      98

Paratek Pharmaceuticals, Inc. (0.15%)

     

Preferred Stock

        1,000      585
                      

Total Paratek Pharmaceuticals, Inc.

              1,137      683

Portola Pharmaceuticals, Inc. (2.77%)

  

Drug Discovery

  

Senior Debt

Matures April 2011

Interest rate Prime + 2.16%

   $ 10,417      10,417      10,417
     

Preferred Stock Warrants

        152      290
                      

Total Portola Pharmaceuticals, Inc.

              10,569      10,707

Recoly, N.V. (0.78%)(5)

  

Drug Discovery

  

Senior Debt

Matures May 2012

Interest rate Prime + 4.25%

   $ 3,000      3,000      3,000
                      

Total Recoly, N.V.

              3,000      3,000
                      

Total Drug Discovery (15.26%)

              56,477      58,950
                      

Affinity Videonet, Inc. (1.63%)(4)

  

Communications &

Networking

  

Senior Debt

Matures June 2012

Interest rate Prime + 4.50%

   $ 3,761      3,742      3,742
     

Senior Debt

Matures June 2012

Interest rate Prime + 5.50%

   $ 2,000      2,000      2,000
     

Revolving Line of Credit

Matures June 2012

Interest rate Prime + 3.50%

   $ 500      500      500
     

Preferred Stock Warrants

        74      45
                      

Total Affinity Videonet, Inc.

              6,316      6,287

E-band Communications, Inc. (0.23%)(6)

  

Communications &

Networking

  

Preferred Stock

        2,000      904
                      

Total E-Band Communications, Inc.

              2,000      904

 

5


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

IKANO Communications, Inc. (2.85%)

  

Communications &

Networking

  

Senior Debt

Matures January 2011

Interest rate 12.00%

   $ 10,625    $ 10,625    $ 10,625
     

Preferred Stock Warrants

        45      148
     

Preferred Stock Warrants

        73      231
                      

Total IKANO Communications, Inc.

              10,743      11,004

Kadoink, Inc. (0.19%)

  

Communications &

Networking

  

Senior Debt

Matures April 2011

Interest rate Prime + 2.00%

   $ 1,695      1,657      753
     

Preferred Stock Warrants

        73      —  

Kadoink, Inc. (0.00%)

     

Preferred Stock

        250      —  
                      

Total Kadoink, Inc.

              1,980      753

Neonova Holding Company (2.31%)

  

Communications &

Networking

  

Senior Debt

Matures September 2012

Interest rate Prime + 3.25%

   $ 8,888      8,826      8,826
     

Preferred Stock Warrants

        94      93

Neonova Holding Company (0.06%)

     

Preferred Stock

        250      239
                      

Total Neonova Holding Company

              9,170      9,158

Peerless Network, Inc. (0.13%)(6)

  

Communications &

Networking

  

Preferred Stock Warrants

        95      —  

Peerless Network, Inc. (0.00%)

     

Preferred Stock

        1,000      500
                      

Total Peerless Network, Inc.

              1,095      500

Ping Identity Corporation (0.05%)

  

Communications &

Networking

  

Preferred Stock Warrants

        52      178
                      

Total Ping Identity Corporation

              52      178

Purcell Systems, Inc. (1.69%)

  

Communications &

Networking

  

Revolving Line of Credit

Matures July 2009

Interest rate Prime + 2.75%

   $ 6,000      6,000      6,000
     

Preferred Stock Warrants

        123      569
                      

Total Purcell Systems, Inc.

              6,123      6,569

Rivulet Communications, Inc. (0.49%)(4)

  

Communications &

Networking

  

Senior Debt

Matures March 2010

Interest rate Prime + 8.00%

   $ 1,867      1,771      1,771
     

Preferred Stock Warrants

        146      107

Rivulet Communications, Inc. (0.02%)

     

Preferred Stock

        250      58
                      

Total Rivulet Communications, Inc.

              2,167      1,936

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Seven Networks, Inc. (2.39%)

  

Communications &

Networking

  

Senior Debt

Matures April 2010

Interest rate Prime + 6.00%

   $ 5,716    $ 5,664    $ 5,664
     

Revolving Line of Credit

Matures September 2009

Interest rate Prime + 5.00%

   $ 3,000      3,000      3,000
     

Preferred Stock Warrants

        174      575
                      

Total Seven Networks, Inc.

              8,838      9,239

Stoke, Inc. (0.61%)

  

Communications &

Networking

  

Senior Debt

Matures August 2010

Interest rate 10.55%

   $ 493      469      469
     

Senior Debt

Matures August 2010

Interest rate 10.05%

   $ 984      984      984
     

Senior Debt

Matures August 2010

Interest rate 7.30%

   $ 812      812      812
     

Preferred Stock Warrants

        53      84
                      

Total Stoke, Inc.

              2,318      2,349

Tectura Corporation (6.36%)

  

Communications &

Networking

  

Senior Debt

Matures June 2011

Interest rate LIBOR + 10.75%

   $ 6,784      7,022      7,022
     

Revolving Line of Credit

Matures April 2010

Interest rate LIBOR + 10.75%

   $ 17,507      17,507      17,507
     

Preferred Stock Warrants

        51      61
                      

Total Tectura Corporation

              24,580      24,590

Wireless Channels, Inc. (2.40%)(4)

  

Communications &

Networking

  

Senior Debt

Matures April 2010

Interest rate Prime + 4.25%

   $ 10,000      10,462      8,462
     

Senior Debt

Matures April 2010

Interest rate Prime + 0.50%%

   $ 665      665      665
     

Preferred Stock Warrants

        155      155
                      

Total Wireless Channels, Inc.

              11,282      9,282

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Zayo Bandwidth, Inc. (6.37%)

  

Communications &

Networking

  

Senior Debt

Matures November 2013

Interest rate Libor + 5.25%

   $ 25,000    $ 25,000    $ 24,563
                      

Total Zayo Bandwith, Inc.

              25,000      24,563
                      

Total Communications & Networking (27.78%)

              111,664      107,312
                      

Atrenta, Inc. (2.22%)(4)

  

Software

  

Senior Debt

Matures January 2010

Interest rate 11.50%

   $ 2,345      2,322      2,322
     

Revolving Line of Credit

Matures October 2009

Interest rate Prime + 2.00%

   $ 6,000      6,000      6,000
     

Preferred Stock Warrants

        102      167
     

Preferred Stock Warrants

        34      55
     

Preferred Stock Warrants

        95      61

Atrenta, Inc. (0.04%)

     

Preferred Stock

        250      164
                      

Total Atrenta, Inc.

              8,803      8,769

Blurb, Inc. (1.58%)

  

Software

  

Senior Debt

Matures December 2009

Interest rate 9.55%

   $ 1,100      1,094      1,094
     

Senior Debt

Matures June 2011

Interest rate Prime + 3.50%

   $ 4,836      4,631      4,631
     

Preferred Stock Warrants

        25      237
     

Preferred Stock Warrants

        299      136
                      

Total Blurb, Inc.

              6,049      6,098

Braxton Technologies, LLC. (1.85%)(4)

  

Software

  

Senior Debt

Matures July 2012

Interest rate 13.00%

   $ 6,996      6,972      6,972
     

Preferred Stock Warrants

        188      160
                      

Total Braxton Technologies, LLC.

              7,160      7,132

Bullhorn, Inc. (0.06%)

  

Software

  

Preferred Stock Warrants

        43      215
                      

Total Bullhorn, Inc.

              43      215

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Cittio, Inc. (0.16%)

  

Software

  

Senior Debt

Matures May 2010

Interest rate 11.00%

   $ 610    $ 604    $ 604
     

Preferred Stock Warrants

        53      —  
                      

Total Cittio, Inc.

              657      604

Clickfox, Inc. (1.16%)

  

Software

  

Senior Debt

Matures September 2011

Interest rate Prime + 5.00%

   $ 2,500      2,379      2,379
     

Revolving Line of Credit

Matures July 2009

Interest rate Prime + 4.00%

   $ 2,000      2,000      2,000
     

Preferred Stock Warrants

        163      105
                      

Total Clickfox, Inc.

              4,542      4,484

Forescout Technologies, Inc. (0.32%)

  

Software

  

Senior Debt

Matures August 2009

Interest rate 11.15%

   $ 612      605      605
     

Revolving Line of Credit

Matures April 2009

Interest rate Prime + 2.25%

   $ 500      500      500
     

Preferred Stock Warrants

        99      117
                      

Total Forescout Technologies, Inc.

              1,204      1,222

GameLogic, Inc. (0.00%)

  

Software

  

Preferred Stock Warrants

        92      1
                      

Total GameLogic, Inc.

              92      1

Gomez, Inc. (0.09%)

  

Software

  

Preferred Stock Warrants

        35      331
                      

Total Gomez, Inc.

              35      331

HighJump Acquisition, LLC. (3.88%)

  

Software

  

Senior Debt

Matures May 2013

Interest rate Libor + 8.75%

   $ 15,000      15,000      15,000
                      

Total HighJump Acquisition, LLC.

              15,000      15,000

HighRoads, Inc. (0.01%)

  

Software

  

Preferred Stock Warrants

        44      45
                      

Total HighRoads, Inc.

              44      45

Infologix, Inc. (5.37%)(4)

  

Software

  

Senior Debt

Matures May 2012

Interest rate Prime + 9.75%

   $ 11,700      11,759      11,759
     

Revolving Line of Credit

Matures November 2009

Interest rate Prime + 7.75%

   $ 9,000      9,000      9,000
                      

Total Infologix, Inc.

              20,759      20,759

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Intelliden, Inc. (0.30%)

  

Software

  

Senior Debt

Matures March 2010

Interest rate 13.20%

   $ 1,138    $ 1,133    $ 1,133
     

Preferred Stock Warrants

        18      32
                      

Total Intelliden, Inc.

              1,151      1,165

Proficiency, Inc. (0.09%)(5)(6)(7)

  

Software

  

Senior Debt

Matures August 2012

Interest rate 8.00%

   $ 1,480      1,480      350
     

Preferred Stock Warrants

        96      —  

Proficiency, Inc. (0.00%)

     

Preferred Stock

        2,750      —  
                      

Total Proficiency, Inc.

              4,326      350

PSS Systems, Inc. (0.53%)

  

Software

  

Senior Debt

Matures May 2010

Interest rate 11.48%

   $ 1,996      1,981      1,981
     

Preferred Stock Warrants

        51      79
                      

Total PSS Systems, Inc.

              2,032      2,060

Rockyou, Inc. (0.65%)

  

Software

  

Senior Debt

Matures May 2011

Interest rate Prime + 2.50%

   $ 2,495      2,433    $ 2,433
     

Preferred Stock Warrants

        117      94
                      

Total Rockyou, Inc.

              2,550      2,527

Savvion, Inc. (1.29%)(4)

  

Software

  

Senior Debt

Matures February 2011

Interest rate Prime + 7.75%

   $ 3,349      3,297      3,297
     

Revolving Line of Credit

Matures May 2010

Interest rate Prime + 6.75%

   $ 1,500      1,500      1,500
     

Preferred Stock Warrants

        52      169
                      

Total Savvion, Inc.

              4,849      4,966

Sportvision, Inc. (0.02%)

  

Software

  

Preferred Stock Warrants

        39      76
                      

Total Sportvision, Inc.

              39      76

WildTangent, Inc. (0.01%)

  

Software

  

Preferred Stock Warrants

        238      48
                      

Total WildTangent, Inc.

              238      48
                      

Total Software (19.63%)

              79,573      75,852
                      

 

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Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Luminus Devices, Inc. (3.08%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures June 2011

Interest rate 12.875%

   $ 11,796    $ 11,810    $ 11,810
     

Preferred Stock Warrants

        183      16
     

Preferred Stock Warrants

        84      8
     

Preferred Stock Warrants

        333      62
                      

Total Luminus Devices, Inc.

              12,410      11,896

Maxvision Holding, LLC. (2.65%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures October 2012

Interest rate Prime + 5.50%

   $ 5,000      5,000      5,000
     

Senior Debt

Matures April 2012

Interest rate Prime + 2.25%

   $ 5,042      5,264      5,264

Maxvision Holding, LLC. (0.07%) (4)

     

Common Stock

        81      283
                      

Total Maxvision Holding, LLC

              10,345      10,547

Shocking Technologies, Inc. (0.83%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures December 2010

Interest rate 9.75%

   $ 199      174      174
     

Senior Debt

Matures December 2010

Interest rate 7.50%

   $ 2,971      2,971      2,971
     

Preferred Stock Warrants

        63      50
                      

Total Shocking Technologies, Inc.

              3,208      3,195

SiCortex, Inc. (0.63%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures December 2010

Interest rate Prime + 2.70%

   $ 6,525      6,447      2,422
     

Preferred Stock Warrants

        165      —  
                      

Total SiCortex, Inc.

              6,612      2,422

Spatial Photonics, Inc. (0.86%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures April 2011

Interest rate 10.066%

   $ 2,918      2,861      2,861
     

Senior Debt

Mature April 2011

Interest rate 9.217%

   $ 291      291      291
     

Preferred Stock Warrants

        131      175

Spatial Photonics, Inc. (0.08%)

     

Preferred Stock

        500      292
                      

Total Spatial Photonics Inc.

              3,783      3,620

 

11


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

VeriWave, Inc. (0.58%)

  

Electronics & Computer

Hardware

  

Senior Debt

Matures May 2010

Interest rate 10.75%

   $ 2,127    $ 2,108    $ 2,108
     

Preferred Stock Warrants

        54      107
     

Preferred Stock Warrants

        46      36
                      

Total VeriWave, Inc.

              2,208      2,251
                      

Total Electronics & Computer Hardware (8.78%)

              38,566      33,931
                      

Aegerion Pharmaceuticals, Inc. (2.05%)(4)

  

Specialty Pharmaceuticals

  

Senior Debt

Matures September 2011

Interest rate Prime + 2.50%

   $ 7,525      7,525      7,525
     

Covertible Senior Debt

Matures December 2009

Interest rate Prime + 2.50%

   $ 178      178      178
     

Preferred Stock Warrants

        69      215

Aegerion Pharmaceuticals, Inc. (0.26%)(4)

     

Preferred Stock

        1,000      1,000
                      

Total Aegerion Pharmaceuticals, Inc.

              8,772      8,918

Panacos Pharmaceuticals, Inc. (0.00%)

  

Specialty Pharmaceuticals

  

Common Stock Warrants

        876      5

Panacos Pharmaceuticals, Inc. (0.00%)

     

Common Stock

        410      6
                      

Total Panacos Pharmaceuticals, Inc.

              1,286      11

Quatrx Pharmaceuticals Company (5.20%)

  

Specialty Pharmaceuticals

  

Senior Debt

Matures October 2011

Interest rate Prime + 8.90%

   $ 20,000      19,795      19,795
     

Covertible Senior Debt

Matures May 2009

Interest rate Prime + 2.50%

   $ 82      82      82
     

Preferred Stock Warrants

        220      109
     

Preferred Stock Warrants

        308      94

Quatrx Pharmaceuticals Company (0.19%)

     

Preferred Stock

        750      750
                      

Total Quatrx Pharmaceuticals Company

              21,155      20,829
                      

Total Specialty Pharmaceuticals (7.7%)

              31,213      29,759
                      

 

12


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Annie’s, Inc. (1.57%)

  

Consumer & Business

Products

  

Senior Debt - Second Lien

Matures April 2011

Interest rate LIBOR + 6.50%

   $ 6,000    $ 5,882    $ 5,882
     

Preferred Stock Warrants

        321      194
                      

Total Annie’s, Inc.

              6,203      6,076

IPA Holdings, LLC. (4.47%)(4)

  

Consumer & Business

Products

  

Senior Debt

Matures November 2012

Interest rate Prime + 3.50%

   $ 10,000      10,000      10,000
     

Senior Debt

Matures May 2013

Interest rate Prime + 6.00%

   $ 6,500      6,632      6,632
     

Revolving Line of Credit

Matures November 2012

Interest rate Prime + 2.50%

   $ 600      600      600

IPA Holding, LLC.(0.12%)

     

Common Stock

        500      447
                      

Total IPA Holding, LLC.

              17,732      17,679

Market Force Information, Inc. (0.02%)

  

Consumer & Business

Products

  

Preferred Stock Warrants

        24      94

Market Force Information, Inc. (0.1%)

     

Preferred Stock

        500      411
                      

Total Market Force Information, Inc.

              524      505

OnTech Operations, Inc. (0.00%)

  

Consumer & Business

Products

  

Senior Debt

Matures December 2009

Interest rate 16.00%

   $ 106      106      —  
     

Preferred Stock Warrants

        452      —  
     

Preferred Stock Warrants

        218      —  

OnTech Operations, Inc. (0.00%)

     

Preferred Stock

        1,000      —  
                      

Total OnTech Operations, Inc.

              1,776      —  

Wageworks, Inc. (0.24%)

   Consumer & Business Products   

Preferred Stock Warrants

        252      911

Wageworks, Inc. (0.07%)

     

Preferred Stock

        250      289
                      

Total Wageworks, Inc.

              502      1,200
                      

Total Consumer & Business Products (6.59%)

              26,737      25,460
                      

Custom One Design, Inc. (0.17%)

   Semiconductors   

Senior Debt

Matures September 2010

Interest rate 11.50%

   $ 660      665      665
     

Common Stock Warrants

        18      —  
                      

Total Custom One Design, Inc.

              683      665

 

13


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Enpirion, Inc. (1.86%)

  

Semiconductors

  

Senior Debt

Matures August 2011

Interest rate Prime + 2.00%

   $ 7,263    $ 7,179    $ 7,179
     

Preferred Stock Warrants

        157      8
                      

Total Enpirion, Inc.

              7,336      7,187

iWatt Inc. (0.09%)

  

Semiconductors

  

Preferred Stock Warrants

        46      38
     

Preferred Stock Warrants

        51      17
     

Preferred Stock Warrants

        73      20
     

Preferred Stock Warrants

        459      278

iWatt Inc. (0.24%)

     

Preferred Stock

        490      865
                      

Total iWatt Inc.

              1,119      1,218

NEXX Systems, Inc. (1.66%)(4)

  

Semiconductors

  

Senior Debt

Matures March 2010

Interest rate Prime + 3.50%

   $ 2,157      2,105      2,105
     

Revolving Line of Credit

Matures December 2009

Interest rate Prime + 3.00%

   $ 4,150      4,150      4,150
     

Preferred Stock Warrants

        165      172
                      

Total NEXX Systems, Inc.

              6,420      6,427

Quartics, Inc. (0.07%)(7)

  

Semiconductors

  

Senior Debt

Matures August 2010

Interest rate 8.80%

   $ 613      589      275
     

Preferred Stock Warrants

        53      —  
                      

Total Quartics, Inc.

              642      275

Solarflare Communications, Inc. (0.09%)

  

Semiconductors

  

Senior Debt

Matures August 2010

Interest rate 11.75%

   $ 400      363      363
     

Common Stock Warrants

        83      —  

Solarflare Communications, Inc. (0.00%)

     

Common Stock

        641      3
                      

Total Solarflare Communications, Inc.

              1,087      366
                      

Total Semiconductors (4.18%)

              17,287      16,138
                      

Labopharm USA, Inc. (5.37%)(5)

  

Drug Delivery

  

Senior Debt

Matures December 2011

Interest rate 10.95%

   $ 20,000      19,640      19,640
     

Common Stock Warrants

        458      803
     

Common Stock Warrants

        143      287
                      

Total Labopharm USA, Inc.

              20,241      20,730

 

14


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Transcept Pharmaceuticals, Inc. (0.00%)(4)

  

Drug Delivery

  

Common Stock Warrants

      $ 36    $ 2
     

Common Stock Warrants

        51      7

Transcept Pharmaceuticals, Inc. (0.03%)(4)

     

Common Stock

        500      125
                      

Total Transcept Pharmaceuticals, Inc.

              587      134
                      

Total Drug Delivery (5.40%)

              20,828      20,864
                      

BARRX Medical, Inc.(0.86%)

  

Therapeutic

  

Senior Debt

Mature December 2011

Interest rate 11.00%

   $ 3,333      3,288      3,288
     

Preferred Stock Warrants

        63      42

BARRX Medical, Inc. (0.36%)

     

Preferred Stock

        1,500      1,388
                      

Total BARRX Medical, Inc.

              4,851      4,718

EKOS Corporation (1.22%)

  

Therapeutic

  

Senior Debt

Matures November 2010

Interest rate Prime + 2.00%

   $ 4,771      4,650      4,650
     

Preferred Stock Warrants

        174      41
     

Preferred Stock Warrants

        153      20
                      

Total EKOS Corporation

              4,977      4,711

Gelesis, Inc. (0.39%)

  

Therapeutic

  

Senior Debt

Matures May 2012

Interest rate Prime + 5.65%

   $ 1,500      1,480      1,480
     

Preferred Stock Warrants

        26      28
                      

Total Gelesis, Inc.

              1,506      1,508

Gynesonics, Inc. (0.03%)

  

Therapeutic

  

Preferred Stock Warrants

        18      118

Gynesonics, Inc. (0.09%)

     

Preferred Stock

        250      359
                      

Total Gynesonics, Inc.

              268      477

Light Science Oncology, Inc. (0.01%)

  

Therapeutic

  

Preferred Stock Warrants

        99      28
                      

Total Light Science Oncology, Inc.

              99      28

Novasys Medical, Inc. (0.74%)(4)

  

Therapeutic

  

Senior Debt

Matures February 2010

Interest rate 9.70%

   $ 2,808      2,795      2,795
     

Preferred Stock Warrants

        71      54
     

Preferred Stock Warrants

        54      25

Novasys Medical, Inc.(0.12%)

     

Preferred Stock

        556      444
                      

Total Novasys Medical, Inc.

              3,476      3,318

Power Medical Interventions, Inc. (0.00%)

  

Therapeutic

  

Common Stock Warrants

        21      1
                      

Total Power Medical Interventions, Inc.

              21      1
                      

Total Therapeutic (3.82%)

              15,198      14,761
                      

 

15


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Cozi Group, Inc. (0.05%)

  

Internet Consumer &

Business Services

  

Preferred Stock Warrants

      $ 147    $ 185

Cozi Group, Inc. (0.06%)

     

Preferred Stock

        177      226
                      

Total Cozi Group, Inc.

              324      411

Invoke Solutions, Inc. (0.22%)

  

Internet Consumer &

Business Services

  

Senior Debt

Matures November 2009

Interest rate Prime + 3.75%

   $ 661      671      671
     

Preferred Stock Warrants

        56      143
     

Preferred Stock Warrants

        27      33
                      

Total Invoke Solutions, Inc.

              754      847

Prism Education Group Inc. (0.38%)

  

Internet Consumer &

Business Services

  

Senior Debt

Matures December 2010

Interest rate 11.25%

   $ 1,344      1,323      1,323
     

Preferred Stock Warrants

        43      117
                      

Total Prism Education Group Inc.

              1,366      1,440

RazorGator Interactive Group, Inc. (0.97%)(4)

  

Internet Consumer &

Business Services

  

Revolving Line of Credit

Matures May 2010

Interest rate Prime + 6.00%

   $ 3,000      3,000      3,000
     

Preferred Stock Warrants

        13      696
     

Preferred Stock Warrants

        29      83

RazorGator Interactive Group, Inc. (0.45%)

     

Preferred Stock

        1,000      1,742
                      

Total RazorGator Interactive Group, Inc.

              4,042      5,521

Serious USA, Inc. (0.23%) (7)

  

Internet Consumer &

Business Services

  

Senior Debt

Matures Februrary 2011

Interest rate 14%

   $ 2,454      2,407      907
     

Preferred Stock Warrants

        93      —  
                      

Total Serious USA, Inc.

              2,500      907

 

16


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Spa Chakra, Inc. (2.59%)

  

Internet Consumer &

Business Services

  

Senior Debt

Matures June 2010

Interest rate 14.45%

   $ 10,000    $ 10,001    $ 10,001
                      

Total Spa Chakra, Inc.

              10,001      10,001
                      

Total Internet Consumer & Business Services (4.95%)

              18,987      19,127
                      

Lilliputian Systems, Inc. (1.14%)

  

Energy

  

Senior Debt

Matures April 2010

Interest rate Prime + 6.00%

   $ 4,324      4,259      4,259
     

Preferred Stock Warrants

        106      133
     

Common Stock Warrants

        48      0
                      

Total Lilliputian Systems, Inc.

              4,413      4,392
                      

Total Energy (1.14%)

              4,413      4,392
                      

Active Response Group, Inc. (2.55%)

  

Information Services

  

Senior Debt

Matures July 2011

Interest rate LIBOR + 6.55%

   $ 6,355      6,321      6,321
     

Revolving Line of Credit

Matures December 2009

Interest rate Prime + 14.00%

   $ 3,500      3,500      3,500
     

Common Stock Warrants

        92      10
     

Preferred Stock Warrants

        46      9

Active Response Group, Inc. (0.03%)

     

Common Stock

        105      105
                      

Total Active Response Group, Inc.

              10,064      9,945

Box.net, Inc. (0.36%)

  

Information Services

  

Senior Debt

Matures May 2011

Interest rate Prime + 1.50%

   $ 1,000      959      959
     

Senior Debt

Matures September 2011

Interest rate Prime + 0.50%

   $ 400      400      400
     

Preferred Stock Warrants

        73      54
                      

Total Box.net, Inc.

              1,432      1,413

Buzznet, Inc. (0.00%)

  

Information Services

  

Preferred Stock Warrants

        9      0

Buzznet, Inc. (0.02%)

     

Preferred Stock

        250      74
                      

Total Buzznet, Inc.

              259      74

hi5 Networkss, Inc. (1.95%)

  

Information Services

  

Senior Debt

Matures December 2010

Interest rate Prime + 2.5%

   $ 2,658      2,658      2,658
     

Senior Debt

Matures June 2011

Interest rate Prime + 0.5%

   $ 4,983      4,888      4,888
     

Preferred Stock Warrants

        213      —  
                      

Total hi5 Networks, Inc.

              7,759      7,546

 

17


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Jab Wireless, Inc. (3.90%)

  

Information Services

  

Senior Debt

Matures November 2012

Interest rate Prime + 3.50%

   $ 15,000    $ 14,860    $ 14,860
     

Preferred Stock Warrants

        265      207
                      

Total Jab Wireless, Inc.

              15,125      15,067

Solutionary, Inc. (1.49%)

  

Information Services

  

Senior Debt

Matures June 2010

Interest rate LIBOR + 5.50%

   $ 3,880      4,144      4,144
     

Revolving Line of Credit

Matures June 2010

Interest rate LIBOR + 5.00%

   $ 1,500      1,500      1,500
     

Preferred Stock Warrants

        94      121
     

Preferred Stock Warrants

        2      4

Solutionary, Inc. (0.04%)

     

Preferred Stock

        250      173
                      

Total Solutionary, Inc.

              5,990      5,942

The Generation Networks, Inc. (1.48%)

  

Information Services

  

Senior Debt

Matures December 2012

Interest rate 7.42%

   $ 5,814      5,814      5,713

The Generation Networks, Inc. (0.13%)

     

Common Stock

        500      498
                      

Total The Generation Networks, Inc.

              6,314      6,211

Visto Corporation

  

Information Services

  

Common Stock

        603      603
                      

Total Visto Corporation (0.16%)

              603      603

Coveroo, Inc. (0.03%)

  

Information Services

  

Senior Debt

Matures April 2010

Interest rate Prime + 9.75%

   $ 110      108      108
     

Preferred Stock Warrants

        7      —  
                      

Total Coveroo, Inc.

              115      108

Zeta Interactive Corporation (3.55%)

  

Information Services

  

Senior Debt

Matures November 2012

Interest rate 9.50%

   $ 5,781      5,693      5,693
     

Senior Debt

Matures November 2012

Interest rate 10.50%

   $ 7,836      7,836      7,836
     

Preferred Stock Warrants

        172      187

Zeta Interactive Corporation (0.13%)

     

Preferred Stock

        500      500
                      

Total Zeta Interactive Corporation

              14,201      14,216
                      

Total Information Services (15.82%)

              61,862      61,125
                      

 

18


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Novadaq Technologies, Inc. (0.09%)

  

Diagnostic

  

Common Stock

        1,626      351
                      

Total Novadaq Technologies, Inc.

              1,626      351

Optiscan Biomedical, Corp. (2.62%)

  

Diagnostic

  

Senior Debt

Matures June 2011

Interest rate 10.25%

   $ 10,000    $ 9,598    $ 9,598
     

Preferred Stock Warrants

        760      521

Optiscan Biomedical, Corp. (0.78%)

     

Preferred Stock

        3,000      3,000
                      

Total Optiscan Biomedical, Corp.

              13,358      13,119
                      

Total Diagnostic (3.49%)

              14,984      13,470
                      

Kamada, LTD. (5.16%)(5)

  

Biotechnology Tools

  

Senior Debt

Matures February 2012

Interest rate Prime + 2.9%

   $ 20,000      19,610      19,610
     

Common Stock Warrants

        551      312
                      

Total Kamada, LTD.

              20,161      19,922

NuGEN Technologies, Inc. (0.59%)

  

Biotechnology Tools

  

Senior Debt

Matures November 2010

Interest rate Prime + 3.45%

   $ 1,365      1,341      1,341
     

Senior Debt

Matures November 2010

Interest rate Prime + 1.70%

   $ 782      782      782
     

Preferred Stock Warrants

        45      159
     

Preferred Stock Warrants

        33      13

NuGEN Technologies, Inc. (0.08%)

     

Preferred Stock

        500      305
                      

Total NuGEN Technologies, Inc.

              2,701      2,600

Solace Pharmaceuticals, Inc.(1.29%)(4)

  

Biotechnology Tools

  

Senior Debt

Matures August 2012

Interest rate Prime + 4.25%

   $ 5,000      4,911      4,911
     

Preferred Stock Warrants

        42      44
     

Preferred Stock Warrants

        54      46
                      

Total Solace Pharmaceuticals, Inc.

              5,007      5,001
                      

Total Biotechnology Tools (7.12%)

              27,869      27,523
                      

Crux Biomedical, Inc. (0.00%)

  

Surgical Devices

  

Preferred Stock Warrants

        37      —  

Crux Biomedical, Inc. (0.01%)

     

Preferred Stock

        250      26
                      

Total Crux Biomedical, Inc.

              287      26

 

19


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2009

(unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Type of Investment(1)

   Principal
Amount
   Cost(2)    Value(3)

Transmedics, Inc. (2.59%)(4)

  

Surgical Devices

  

Senior Debt

Matures December 2011

Interest rate Prime + 5.25%

   $ 10,000    $ 9,846    $ 9,846
     

Preferred Stock Warrants

        225      176
                      

Total Transmedics, Inc.

              10,071      10,022
                      

Total Surgical Devices (2.60%)

              10,358      10,048
                      

Glam Media, Inc. (1.41%)

  

Media/Content/ Info

  

Revolving Line of Credit

Matures April 2009

Interest rate Prime + 1.50%

   $ 5,160      5,146      5,146
     

Preferred Stock Warrants

        482      283
                      

Total Glam Media, Inc.

              5,628      5,429

Waterfront Media Inc. (1.94%)(4)

  

Media/Content/ Info

  

Senior Debt

Matures September 2010

Interest rate Prime + 3.00%

   $ 2,199      2,181      2,181
     

Revolving Line of Credit

Matures October 2009

Interest rate Prime + 3.75%

   $ 5,000      5,000      5,000
     

Preferred Stock Warrants

        60      327

Waterfront Media Inc. (0.29%)

     

Preferred Stock

        1,000      1,132
                      

Total Waterfront Media Inc.

              8,241      8,640
                      

Total Media/Content/Info (3.64%)

              13,869      14,069
                      

Total Investments (137.90%)

            $ 549,885    $ 532,781
                      

 

* Value as a percent of net assets
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $8,289, $27,537 and $19,248, respectively. The tax cost of investments is $552,029.
(3) Except for warrants in five publicly traded companies and common stock in four publicly traded companies, all investments are restricted at March 31, 2009 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(5) Non-U.S. company or the company’s principal place of business is outside the United States.
(6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities of the company. All other investments are less than 5% owned.
(7) Debt is on non-accrual status at March 31, 2009, and is therefore considered non-income producing.

 

20


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Acceleron Pharmaceuticals, Inc. (0.64%)*(4)

  Drug Discovery  

Senior Debt
Matures January 2010
Interest rate 10.25%

  $ 1,753   $ 1,728   $ 1,728
   

Preferred Stock Warrants

      69     596
   

Preferred Stock Warrants

      35     116

Acceleron Pharmaceuticals, Inc. (0.35%)

   

Preferred Stock

      1,243     1,354
                 

Total Acceleron Pharmaceuticals, Inc.

    3,075     3,794

Aveo Pharmaceuticals, Inc. (3.99%)(4)

  Drug Discovery  

Senior Debt
Matures November 2011
Interest rate 11.13%

  $ 15,000     14,904     14,904
   

Preferred Stock Warrants

      190     257
   

Preferred Stock Warrants

      104     83
   

Preferred Stock Warrants

      24     28
                 

Total Aveo Pharmaceuticals, Inc.

    15,222     15,272

Elixir Pharmaceuticals, Inc. (2.91%)(4)

  Drug Discovery  

Senior Debt
Matures December 2010 Interest rate Prime + 4.50%

  $ 11,000     11,000     11,000
   

Preferred Stock Warrants

      217     116
                 

Total Elixir Pharmaceuticals, Inc.

    11,217     11,116

EpiCept Corporation (0.33%)(4)

  Drug Discovery  

Senior Debt
Matures April 2009
Interest rate 15.00%

  $ 8     8     8
   

Common Stock Warrants

      161     992
   

Common Stock Warrants

      40     250
                 

Total EpiCept Corporation

    209     1,250

Horizon Therapeutics, Inc. (1.92%)(4)

  Drug Discovery  

Senior Debt
Matures July 2011
Interest rate Prime + 1.50%

  $ 7,200     7,042     7,042
   

Preferred Stock Warrants

      231     281
                 

Total Horizon Therapeutics, Inc.

    7,273     7,323

Inotek Pharmaceuticals Corp. (0.30%)

  Drug Discovery  

Preferred Stock

      1,500     1,144
                 

Total Inotek Pharmaceuticals Corp.

    1,500     1,144

Memory Pharmaceuticals Corp. (2.87%)(4)

  Drug Discovery  

Senior Debt
Matures December 2010
Interest rate 11.45%

  $ 11,879     10,979     10,979
   

Common Stock Warrants

      1,751     —  
                 

Total Memory Pharmaceuticals Corp.

    12,730     10,979

Merrimack Pharmaceuticals, Inc. (0.19%)(4)

  Drug Discovery  

Preferred Stock Warrants

      155     743

Merrimack Pharmaceuticals, Inc. (0.68%)

   

Preferred Stock

      2,000     2,610
                 

Total Merrimack Pharmaceuticals, Inc.

    2,155     3,353

Paratek Pharmaceuticals, Inc. (0.04%)(4)

  Drug Discovery  

Preferred Stock Warrants

      137     164

Paratek Pharmaceuticals, Inc. (0.24%)

   

Preferred Stock

      1,000     926
                 

Total Paratek Pharmaceuticals, Inc.

    1,137     1,090

Portola Pharmaceuticals, Inc. (3.14%)(4)

  Drug Discovery  

Senior Debt
Matures September 2011
Interest rate Prime + 2.16%

  $ 11,668     11,600     11,600
   

Preferred Stock Warrants

      152     399
                 

Total Portola Pharmaceuticals, Inc.

    11,752     11,999

See notes to consolidated financial statements.

 

21


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Recoly, N.V. (0.79%)(6)

  Drug Discovery  

Senior Debt
Matures May 2012
Interest rate Prime + 4.25%

  $ 3,000   $ 3,000   $ 3,000
                 

Total Recoly, N.V.

    3,000     3,000
                 

Total Drug Discovery (18.39%)

    69,270     70,320
                 

Affinity Videonet, Inc. (1.70%)(4)

  Communications & Networking  

Senior Debt
Matures June 2012
Interest rate Prime + 4.50%

  $ 4,000     3,942     3,942
   

Senior Debt
Matures June 2012
Interest rate Prime + 5.50%

  $ 2,000     2,000     2,000
   

Revolving Line of Credit
Matures June 2012
Interest rate Prime + 3.50%

  $ 500     500     500
   

Preferred Stock Warrants

      75     57
                 

Total Affinity Videonet, Inc.

    6,517     6,499

E-Band Communications, Inc. (0.24%)(7)

  Communications & Networking  

Preferred Stock

      2,000     904
                 

Total E-Band Communications, Inc.

    2,000     904

IKANO Communications, Inc. (3.22%)(4)

  Communications & Networking  

Senior Debt
Matures April 2011
Interest rate 11.00%

  $ 11,946     11,946     11,946
   

Preferred Stock Warrants

      45     147
   

Preferred Stock Warrants

      73     221
                 

Total IKANO Communications, Inc.

    12,064     12,314

Kadoink, Inc. (0.50%)(4)

  Communications & Networking  

Senior Debt
Matures April 2011
Interest rate Prime + 2.00%

  $ 1,879     1,832     1,832
   

Preferred Stock Warrants

      73     72

Kadoink, Inc. (0.07%)

   

Preferred Stock

      250     250
                 

Total Kadoink, Inc.

    2,155     2,154

Neonova Holding Company (2.35%)

  Communications & Networking  

Senior Debt
Matures September 2012
Interest rate Prime + 3.25%

  $ 9,000     8,931     8,931
   

Preferred Stock Warrants

      94     66

Neonova Holding Company (0.06%)

   

Preferred Stock

      250     224
                 

Total Neonova Holding Company

    9,275     9,221

Peerless Network, Inc. (0.34%)(5)(7)

  Communications & Networking  

Senior Debt
Matures June 2011
Interest rate Prime + 3.25%

  $ 1,378     1,318     1,318
   

Preferred Stock Warrants

      95     —  

Peerless Network, Inc. (0.00%)

   

Preferred Stock

      1,000     —  
                 

Total Peerless Network, Inc.

    2,413     1,318

Ping Identity Corporation (0.00%)(4)

  Communications & Networking  

Preferred Stock Warrants

      52     2
                 

Total Ping Identity Corporation

    52     2

 

See notes to consolidated financial statements.

 

22


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Purcell Systems, Inc. (2.55%)

  Communications & Networking  

Senior Debt
Matures June 2010
Interest rate Prime + 3.50%

  $ 1,659   $ 1,601   $ 1,601
   

Revolving Line of Credit
Matures July 2009
Interest rate Prime + 2.75%

  $ 6,000     6,000     6,000
   

Senior Debt
Matures July 2011
Interest rate Prime + 3.50%

  $ 1,600     1,600     1,600
   

Preferred Stock Warrants

      123     538
                 

Total Purcell Systems, Inc.

    9,324     9,739

Rivulet Communications, Inc. (0.51%)(5)

  Communications & Networking  

Senior Debt
Matures April 2010
Interest rate 10.50%

  $ 1,982     1,960     1,960
   

Preferred Stock Warrants

      50     —  

Rivulet Communications, Inc. (0.00%)

   

Preferred Stock

      250     4
                 

Total Rivulet Communications, Inc.

    2,260     1,964

Seven Networks, Inc. (2.64%)(4)

  Communications & Networking  

Senior Debt
Matures April 2010
Interest rate Prime + 6.00%

  $ 6,941     6,875     6,875
   

Revolving Line of Credit
Matures September 2009
Interest rate Prime + 5.00%

  $ 3,000     3,000     3,000
   

Preferred Stock Warrants

      174     208
                 

Total Seven Networks, Inc.

    10,049     10,083

Stoke, Inc. (0.71%)

  Communications & Networking  

Senior Debt
Matures August 2010
Interest rate 10.55%

  $ 574     545     545
   

Senior Debt
Matures August 2010
Interest rate 10.05%

  $ 1,144     1,144     1,144
   

Senior Debt
Matures August 2010
Interest rate 7.30%

  $ 946     946     946
   

Preferred Stock Warrants

      53     91
                 

Total Stoke, Inc.

    2,688     2,726

Tectura Corporation (6.54%)(4)

  Communications & Networking  

Senior Debt
Matures April 2012
Interest rate LIBOR + 6.90%

  $ 7,232     7,439     7,439
   

Revolving Line of Credit
Matures April 2009
Interest rate LIBOR + 6.35%

  $ 12,000     12,000     12,000
   

Revolving Line of Credit
Matures March 2009
Interest rate LIBOR + 7.50%

  $ 5,507     5,507     5,507
   

Preferred Stock Warrants

      51     77
                 

Total Tectura Corporation

    24,997     25,023

 

See notes to consolidated financial statements.

 

23


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Wireless Channels, Inc. (3.04%)(4)

  Communications & Networking  

Senior Debt
Matures April 2010
Interest rate Prime + 4.25%

  $ 10,000   $ 10,384   $ 10,384
   

Senior Debt
Matures August 2010
Interest rate Prime + 0.50%

  $ 895     895     895
   

Preferred Stock Warrants

      155     344
                 

Total Wireless Channels, Inc.

    11,434     11,623

Zayo Bandwidth, Inc. (6.42%)

  Communications & Networking  

Senior Debt
Matures November 2013
Interest rate Libor + 5.25%

  $ 25,000     25,000     24,563
                 

Total Zayo Bandwith, Inc.

    25,000     24,563
                 

Total Communications & Networking (30.89%)

    120,228     118,133
                 

Atrenta, Inc. (2.36%)(5)

 

Software

 

Senior Debt
Matures January 2010
Interest rate 11.50%

  $ 2,789     2,742     2,742
   

Revolving Line of Credit
Matures October 2009
Interest rate Prime + 2.00%

  $ 6,000     6,000     6,000
   

Preferred Stock Warrants

      103     176
   

Preferred Stock Warrants

      34     58
   

Preferred Stock Warrants

      71     43

Atrenta, Inc. (0.05%)

   

Preferred Stock

      250     197
                 

Total Atrenta, Inc.

    9,200     9,216

Blurb, Inc. (1.76%)

 

Software

 

Senior Debt
Matures December 2009
Interest rate 9.55%

  $ 1,414     1,405     1,405
   

Senior Debt
Matures June 2011
Interest rate Prime + 3.50%

  $ 5,000     4,701     4,701
   

Preferred Stock Warrants

      25     350
   

Preferred Stock Warrants

      299     276
                 

Total Blurb, Inc.

    6,430     6,732

Braxton Technologies, LLC. (2.64%)(5)

 

Software

 

Senior Debt
Matures July 2012
Interest rate Libor + 7.25%

  $ 10,000     9,916     9,916
   

Preferred Stock Warrants

      188     172
                 

Total Braxton Technologies, LLC.

    10,104     10,088

Bullhorn, Inc. (0.26%)

 

Software

 

Senior Debt
Matures November 2010
Interest rate Prime + 3.75%

  $ 782     760     760
   

Preferred Stock Warrants

      43     222
                 

Total Bullhorn, Inc.

    803     982

Cittio, Inc. (0.19%)

 

Software

 

Senior Debt
Matures May 2010
Interest rate 11.00%

  $ 731     720     720
   

Preferred Stock Warrants

      53     —  
                 

Total Cittio, Inc.

    773     720

 

See notes to consolidated financial statements.

 

24


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Clickfox, Inc. (0.65%)

 

Software

 

Senior Debt
Matures September 2011
Interest rate 10.25%

  $ 2,500   $ 2,357   $ 2,357
   

Preferred Stock Warrants

      163     131
                 

Total Clickfox, Inc.

    2,520     2,488

Forescout Technologies, Inc. (0.40%)(4)

 

Software

 

Senior Debt
Matures August 2009
Interest rate 11.15%

  $ 906     892     892
   

Revolving Line of Credit
Matures March 2009
Interest rate Prime + 2.25%

  $ 500     500     500
   

Preferred Stock Warrants

      99     130
                 

Total Forescout Technologies, Inc.

    1,491     1,522

GameLogic, Inc. (0.00%)(4)

 

Software

 

Preferred Stock Warrants

      92     3
                 

Total GameLogic, Inc.

    92     3

Gomez, Inc. (0.22%)(4)

 

Software

 

Preferred Stock Warrants

      35     833
                 

Total Gomez, Inc.

    35     833

HighJump Acquisition, LLC. (3.92%)(4)

 

Software

 

Senior Debt
Matures May 2013
Interest rate Prime + 7.50%

  $ 15,000     15,000     15,000
                 

Total HighJump Acquisition, LLC.

    15,000     15,000

HighRoads, Inc. (0.02%)(4)

 

Software

 

Preferred Stock Warrants

      44     59
                 

Total HighRoads, Inc.

    44     59

Infologix, Inc. (5.49%)(4)

 

Software

 

Senior Debt
Matures May 2012
Interest rate Prime + 8.75%

  $ 12,000     12,007     12,007
   

Revolving Line of Credit
Matures November 2009
Interest rate Prime + 6.75%

  $ 9,000     9,000     9,000
                 

Total Infologix, Inc.

    21,007     21,007

Intelliden, Inc. (0.37%)

 

Software

 

Senior Debt
Matures February 2010
Interest rate 13.20%

  $ 1,399     1,394     1,394
   

Preferred Stock Warrants

      18     38
                 

Total Intelliden, Inc.

    1,412     1,432

Oatsystems, Inc. (0.00%)(4)

 

Software

 

Preferred Stock Warrants

      67     —  
                 

Total Oatsystems, Inc.

    67     —  

Proficiency, Inc. (0.00%)(6)(7)(8)

 

Software

 

Senior Debt
Matures August 2012
Interest rate 8.00%

  $ 1,500     1,497     —  
   

Preferred Stock Warrants

      97     —  

Proficiency, Inc. (0.00%)

   

Preferred Stock

      2,750     —  
                 

Total Proficiency, Inc.

    4,344     —  

 

See notes to consolidated financial statements.

 

25


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

PSS Systems, Inc. (0.65%)(4)

 

Software

 

Senior Debt
Matures May 2010
Interest rate 11.48%

  $ 2,423   $ 2,403   $ 2,403
   

Preferred Stock Warrants

      51     96
                 

Total PSS Systems, Inc.

    2,454     2,499

Rockyou, Inc. (0.72%)(4)

 

Software

 

Senior Debt
Matures May 2011
Interest rate Prime + 2.50%

  $ 2,750     2,674     2,674
   

Preferred Stock Warrants

      117     66
                 

Total Rockyou, Inc.

    2,791     2,740

Savvion, Inc. (1.42%)(4)

 

Software

 

Senior Debt
Matures April 2009
Interest rate Prime + 3.45%

  $ 331     279     279
   

Revolving Line of Credit
Matures March 2009
Interest rate Prime + 4.45%

  $ 3,366     3,366     3,366
   

Revolving Line of Credit
Matures March 2009
Interest rate Prime + 3.00%

  $ 1,619     1,619     1,619
   

Preferred Stock Warrants

      53     168
                 

Total Savvion, Inc.

    5,317     5,432

Sportvision, Inc. (0.02%)(4)

 

Software

 

Preferred Stock Warrants

      39     91
                 

Total Sportvision, Inc.

    39     91

WildTangent, Inc. (0.01%)

  Software  

Preferred Stock Warrants

      238     41
                 

Total WildTangent, Inc.

    238     41
                 

Total Software (21.15%)

    84,161     80,885
                 

Luminus Devices, Inc. (3.08%)(4)

  Electronics & Computer Hardware  

Senior Debt
Matures December 2010
Interest rate 12.875%

  $ 11,792     11,514     11,514
   

Preferred Stock Warrants

      183     50
   

Preferred Stock Warrants

      84     25
   

Preferred Stock Warrants

      334     189
                 

Total Luminus Devices, Inc.

    12,115     11,778

Maxvision Holding, LLC. (2.71%)(4)

  Electronics & Computer Hardware  

Senior Debt
Matures October 2012
Interest rate Prime + 5.50%

  $ 5,000     5,000     5,000
   

Senior Debt
Matures April 2012
Interest rate Prime + 2.25%

  $ 5,167     5,363     5,363

Maxvision Holding, LLC. (0.07%)(4)

    Common Stock       81     268
                 

Total Maxvision Holding, LLC

    10,444     10,631

Shocking Technologies, Inc. (0.94%)

  Electronics & Computer Hardware  

Senior Debt
Matures December 2010
Interest rate 9.75%

  $ 225     192     192
   

Senior Debt
Matures December 2010
Interest rate 7.50%

  $ 3,365     3,365     3,365
   

Preferred Stock Warrants

      63     55
                 

Total Shocking Technologies, Inc.

    3,620     3,612

 

See notes to consolidated financial statements.

 

26


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

SiCortex, Inc. (1.83%)

  Electronics & Computer Hardware  

Senior Debt
Matures December 2010
Interest rate 10.95%

  $ 7,364   $ 7,274   $ 6,774
   

Preferred Stock Warrants

      164     216
                 

Total SiCortex, Inc.

    7,438     6,990

Spatial Photonics, Inc. (0.97%)(4)

  Electronics & Computer Hardware  

Senior Debt
Matures April 2011
Interest rate 10.066%

  $ 3,216     3,146     3,146
   

Senior Debt
Mature April 2011
Interest rate 9.217%

  $ 321     321     321
   

Preferred Stock Warrants

      131     251

Spatial Photonics, Inc. (0.13%)

    Preferred Stock       500     500
                 

Total Spatial Photonics Inc.

    4,098     4,218

VeriWave, Inc. (0.85%)

 

Electronics &

Computer

Hardware

 

Senior Debt
Matures May 2010
Interest rate 10.75%

  $ 2,549     2,507     2,507
   

Revolving Line of Credit
Matures September 2009
Interest rate Prime + 4.50%

  $ 630     630     630
   

Preferred Stock Warrants

      54     76
   

Preferred Stock Warrants

      46     38
                 

Total VeriWave, Inc.

    3,237     3,251
                 

Total Electronics & Computer Hardware (10.58%)

    40,952     40,480
                 

Aegerion Pharmaceuticals, Inc. (2.08%)(5)

 

Specialty

Pharmaceuticals

 

Senior Debt
Matures September 2011
Interest rate Prime + 2.50%

  $ 7,525     7,525     7,525
   

Covertible Senior Debt Matures December 2009 Interest rate Prime + 2.50%

  $ 178     178     178
   

Preferred Stock Warrants

      69     272

Aegerion Pharmaceuticals, Inc. (0.26%)(4)

   

Preferred Stock

      1,000     1,000
                 

Total Aegerion Pharmaceuticals, Inc.

    8,772     8,975

Panacos Pharmaceuticals, Inc. (0.00%)(4)

 

Specialty

Pharmaceuticals

 

Common Stock Warrants

      877     11

Panacos Pharmaceuticals, Inc. (0.01%)

   

Common Stock

      410     28
                 

Total Panacos Pharmaceuticals, Inc.

    1,287     39

Quatrx Pharmaceuticals Company (5.26%)(4)

 

Specialty

Pharmaceuticals

 

Senior Debt
Matures October 2011
Interest rate Prime +4.85%

  $ 20,000     19,761     19,761
   

Covertible Senior Debt Matures May 2009 Interest rate Prime + 2.50%

  $ 82     82     82
   

Preferred Stock Warrants

      220     143
   

Preferred Stock Warrants

      308     120

Quatrx Pharmaceuticals Company (0.20%)

   

Preferred Stock

      750     750
                 

Total Quatrx Pharmaceuticals Company

    21,121     20,856
                 

Total Specialty Pharmaceuticals (7.81%)

    31,180     29,870
                 

 

See notes to consolidated financial statements.

 

27


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Annie’s, Inc. (1.59%)

 

Consumer &

Business

Products

 

Senior Debt - Second Lien
Matures April 2011
Interest rate LIBOR + 6.50%

  $ 6,000   $ 5,824   $ 5,824
   

Preferred Stock Warrants

      321     273
                 

Total Annie’s, Inc.

    6,145     6,097

IPA Holdings, LLC. (4.50%)(4)

 

Consumer &

Business

Products

 

Senior Debt
Matures November 2012
Interest rate Prime + 3.50%

  $ 10,000     10,000     10,000
   

Senior Debt
Matures May 2013
Interest rate Prime + 6.00%

  $ 6,500     6,590     6,590
   

Revolving Line of Credit
Matures November 2012
Interest rate Prime + 2.50%

  $ 600     600     600

IPA Holding, LLC.(0.12%)

   

Common Stock

      500     447
                 

Total IPA Holding, LLC.

    17,690     17,637

Market Force Information, Inc. (0.01%)(4)

 

Consumer &

Business

Products

 

Preferred Stock Warrants

      24     40

Market Force Information, Inc. (0.07%)

   

Preferred Stock

      500     274
                 

Total Market Force Information, Inc.

    524     314

OnTech Operations, Inc. (0.01%)(8)

 

Consumer &

Business

Products

 

Revolving Line of Credit
Matures June 2009
Interest rate Prime + 5.625%

  $ 54     54     54
   

Preferred Stock Warrants

      453     —  
   

Preferred Stock Warrants

      218     —  

OnTech Operations, Inc. (0.00%)

   

Preferred Stock

      1,000     —  
                 

Total OnTech Operations, Inc.

    1,725     54

Wageworks, Inc. (0.23%)(4)

 

Consumer &

Business

Products

 

Preferred Stock Warrants

      252     881

Wageworks, Inc. (0.07%)

   

Preferred Stock

      250     266
                 

Total Wageworks, Inc.

    502     1,147
                 

Total Consumer & Business Products (6.60%)

    26,586     25,249
                 

Custom One Design, Inc. (0.14%)(8)

 

Semiconductors

 

Senior Debt
Matures September 2010
Interest rate 11.50%

  $ 775     765     523
   

Common Stock Warrants

      18     —  
                 

Total Custom One Design, Inc.

    783     523

Enpirion, Inc. (1.97%)

 

Semiconductors

 

Senior Debt
Matures August 2011
Interest rate Prime + 4.00%

  $ 7,500     7,389     7,389
   

Preferred Stock Warrants

      157     136
                 

Total Enpirion, Inc.

    7,546     7,525

iWatt Inc. (0.07%)(4)

 

Semiconductors

 

Preferred Stock Warrants

      46     28
   

Preferred Stock Warrants

      51     13
   

Preferred Stock Warrants

      73     13
   

Preferred Stock Warrants

      458     222

iWatt Inc. (0.25%)

   

Preferred Stock

      490     961
                 

Total iWatt Inc.

    1,118     1,237

 

See notes to consolidated financial statements.

 

28


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

NEXX Systems, Inc. (2.03%)(4)

 

Semiconductors

 

Senior Debt
Matures March 2010
Interest rate Prime + 3.50%

  $ 2,659   $ 2,593   $ 2,593
   

Revolving Line of Credit
Matures December 2009
Interest rate Prime + 3.00%

  $ 4,605     4,605     4,605
   

Revolving Line of Credit
Matures December 2009
Interest rate Prime + 5.00%

  $ 395     395     395
   

Preferred Stock Warrants

      165     182
                 

Total NEXX Systems, Inc.

    7,758     7,775

Quartics, Inc. (0.08%)(4)(8)

 

Semiconductors

 

Senior Debt
Matures August 2010
Interest rate 8.80%

  $ 629     601     286
   

Preferred Stock Warrants

      53     —  
                 

Total Quartics, Inc.

    654     286

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

 

Semiconductors

 

Senior Debt
Matures August 2010
Interest rate 11.75%

  $ 464     420     420
   

Preferred Stock Warrants

      83     —  

Solarflare Communications, Inc. (0.00%)

   

Preferred Stock

      641     —  
                 

Total Solarflare Communications, Inc.

    1,144     420
                 

Total Semiconductors (4.65%)

    19,003     17,766
                 

Labopharm, Inc. (5.55%)(4)(6)

 

Drug Delivery

 

Senior Debt
Matures December 2011
Interest rate 10.95%

  $ 20,000     19,582     19,582
   

Common Stock Warrants

      458     1,206
   

Common Stock Warrants

      143     422
                 

Total Labopharm USA, Inc.

    20,183     21,210

Transcept Pharmaceuticals, Inc. (0.90%)(5)

 

Drug Delivery

 

Senior Debt
Matures October 2009
Interest rate 10.69%

  $ 3,353     3,334     3,334
   

Preferred Stock Warrants

      35     46
   

Preferred Stock Warrants

      51     75

Transcept Pharmaceuticals, Inc. (0.07%)(4)

   

Preferred Stock

      500     287
                 

Total Transcept Pharmaceuticals, Inc.

    3,920     3,742
                 

Total Drug Delivery (6.52%)

    24,103     24,952
                 

BARRX Medical, Inc.(0.86%)(4)

 

Therapeutic

 

Senior Debt
Mature December 2011
Interest rate 11.00%

  $ 3,333     3,270     3,270
   

Preferred Stock Warrants

      63     41

BARRX Medical, Inc. (0.36%)

   

Preferred Stock

      1,500     1,388
                 

Total BARRX Medical, Inc.

    4,833     4,699

 

See notes to consolidated financial statements.

 

29


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

EKOS Corporation (1.29%)

 

Therapeutic

 

Senior Debt
Matures November 2010
Interest rate Prime + 2.00%

  $ 5,000   $ 4,846   $ 4,846
   

Preferred Stock Warrants

      175     51
   

Preferred Stock Warrants

      153     25
                 

Total EKOS Corporation

    5,174     4,922

Gelesis, Inc. (0.39%)

 

Therapeutic

 

Senior Debt
Matures May 2012
Interest rate Prime + 5.65%

  $ 1,500     1,477     1,477
   

Preferred Stock Warrants

      27     27
                 

Total Gelesis, Inc.

    1,504     1,504

Gynesonics, Inc. (0.02%)(4)

 

Therapeutic

 

Preferred Stock Warrants

      18     92

Gynesonics, Inc. (0.08%)

   

Preferred Stock

      250     304
                 

Total Gynesonics, Inc.

    268     396

Light Science Oncology, Inc. (0.01%)

 

Therapeutic

 

Preferred Stock Warrants

      98     26
                 

Total Light Science Oncology, Inc.

    98     26

Novasys Medical, Inc. (0.96%)(4)

 

Therapeutic

 

Senior Debt
Matures February 2010
Interest rate 9.70%

  $ 3,607     3,588     3,588
   

Preferred Stock Warrants

      71     56
   

Preferred Stock Warrants

      54     25

Novasys Medical, Inc.(0.12%)

   

Preferred Stock

      555     444
                 

Total Novasys Medical, Inc.

    4,268     4,113

Power Medical Interventions, Inc. (0.00%)

 

Therapeutic

 

Common Stock Warrants

      21     1
                 

Total Power Medical Interventions, Inc.

    21     1
                 

Total Therapeutic (4.09%)

    16,166     15,661
                 

Cozi Group, Inc. (0.04%)

 

Internet Consumer

& Business

Services

 

Preferred Stock Warrants

      147     150

Cozi Group, Inc. (0.06%)

   

Preferred Stock

      177     225
                 

Total Cozi Group, Inc.

    324     375

Invoke Solutions, Inc. (0.29%)(4)

 

Internet Consumer

& Business

Services

 

Senior Debt
Matures November 2009
Interest rate Prime + 3.75%

  $ 983     990     990
   

Preferred Stock Warrants

      56     101
   

Preferred Stock Warrants

      26     23
                 

Total Invoke Solutions, Inc.

    1,072     1,114

Prism Education Group Inc. (0.42%)

 

Internet Consumer

& Business

Services

 

Senior Debt
Matures December 2010
Interest rate 11.25%

  $ 1,516     1,492     1,492
   

Preferred Stock Warrants

      43     115
                 

Total Prism Education Group Inc.

    1,535     1,607

 

See notes to consolidated financial statements.

 

30


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

RazorGator Interactive Group, Inc. (0.94%)(5)

 

Internet Consumer

& Business

Services

 

Revolving Line of Credit
Matures January 2009
Interest rate Prime + 1.80%

  $ 3,000   $ 3,000   $ 3,000
   

Preferred Stock Warrants

      13     562
   

Preferred Stock Warrants

      29     42

RazorGator Interactive Group, Inc. (0.45%)

   

Preferred Stock

      1,000     1,708
                 

Total RazorGator Interactive Group, Inc.

    4,042     5,312

Serious USA, Inc. (0.36%)

 

Internet Consumer

& Business

Services

 

Senior Debt
Matures February 2011
Interest rate Prime + 7.00%

  $ 2,906     2,851     1,351
   

Preferred Stock Warrants

      93     —  
                 

Total Serious USA, Inc.

    2,944     1,351

Spa Chakra, Inc. (2.61%)

 

Internet Consumer

& Business

Services

 

Senior Debt
Matures June 2010
Interest rate 14.45%%

  $ 10,000     10,000     10,000
                 

Total Spa Chakra, Inc.

    10,000     10,000
                 

Total Internet Consumer & Business Services (5.17%)

    19,917     19,759
                 

Lilliputian Systems, Inc. (1.15%)(4)

 

Energy

 

Senior Debt
Matures March 2010
Interest rate Prime + 6.00%

  $ 4,324     4,204     4,204
   

Preferred Stock Warrants

      155     190
                 

Total Lilliputian Systems, Inc.

    4,359     4,394
                 

Total Energy (1.15%)

    4,359     4,394
                 

Active Response Group, Inc. (2.58%)(4)

 

Information

Services

 

Senior Debt
Matures March 2012
Interest rate LIBOR + 6.55%

  $ 6,905     6,863     6,863
   

Revolving Line of Credit
Matures December 2009
Interest rate Prime + 14.00%

  $ 3,000     3,000     3,000
   

Common Stock Warrants

      92     11
   

Preferred Stock Warrants

      46     11

Active Response Group, Inc. (0.03%)(4)

   

Common Stock

      105     105
                 

Total Active Response Group, Inc.

    10,106     9,990

Box.net, Inc. (0.37%)

 

Information

Services

 

Senior Debt
Matures June 2011
Interest rate Prime + 1.50%

  $ 1,000     950     950
   

Senior Debt
Matures September 2011
Interest rate Prime + 0.50%

  $ 400     400     400
   

Preferred Stock Warrants

      73     48
                 

Total Box.net, Inc.

    1,423     1,398

Buzznet, Inc. (0.00%)

 

Information

Services

 

Preferred Stock Warrants

      9     —  

Buzznet, Inc. (0.06%)

   

Preferred Stock

      250     224
                 

Total Buzznet, Inc.

    259     224

 

See notes to consolidated financial statements.

 

31


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

hi5 Networkss, Inc. (2.21%)

 

Information

Services

 

Senior Debt
Matures December 2010
Interest rate Prime + 2.5%

  $ 3,000   $ 3,000   $ 3,000
   

Senior Debt
Matures June 2011
Interest rate Prime + 0.5%

  $ 5,496     5,363     5,363
   

Preferred Stock Warrants

      213     75
                 

Total hi5 Networks, Inc.

    8,576     8,438

Jab Wireless, Inc. (3.94%)(4)

 

Information

Services

 

Senior Debt
Matures November 2012
Interest rate Prime + 6.50%

  $ 15,000     14,822     14,822
   

Preferred Stock Warrants

      264     246
                 

Total Jab Wireless, Inc.

    15,086     15,068

Solutionary, Inc. (1.68%)(4)

 

Information

Services

 

Senior Debt
Matures June 2010
Interest rate LIBOR + 5.50%

  $ 4,599     4,809     4,809
   

Revolving Line of Credit
Matures June 2010
Interest rate LIBOR + 5.00%

  $ 1,500     1,500     1,500
   

Preferred Stock Warrants

      94     125
   

Preferred Stock Warrants

      2     3

Solutionary, Inc. (0.04%)

   

Preferred Stock

      250     162
                 

Total Solutionary, Inc.

    6,655     6,599

The Generation Networks, Inc. (1.52%)(4)

 

Information

Services

 

Senior Debt
Matures December 2012
Interest rate 7.42%

  $ 5,930     5,930     5,826

The Generation Networks, Inc. (0.12%)

   

Common stock

      500     471
                 

Total The Generation Networks, Inc.

    6,430     6,297

Visto Corporation

   

Common Stock

      603     603
                 

Total Visto Corporation (0.16%)

    603     603

Wallop Technologies, Inc. (0.03%)

 

Information

Services

 

Senior Debt
Matures April 2010
Interest rate 10.00%

  $ 134     131     131
   

Preferred Stock Warrants

      7     —  
                 

Total Wallop Technologies, Inc.

    138     131

Zeta Interactive Corporation (3.74%)(4)

 

Information

Services

 

Senior Debt
Matures November 2011
Interest rate Prime +2.00%

  $ 6,164     6,063     6,063
   

Senior Debt
Matures November 2011
Interest rate Prime +3.00%

  $ 8,000     8,000     8,000
   

Preferred Stock Warrants

      172     222

Zeta Interactive Corporation (0.13%)

   

Preferred Stock

      500     500
                 

Total Zeta Interactive Corporation

    14,735     14,785
                 

Total Information Services (16.61%)

    64,011     63,533
                 

Novadaq Technologies, Inc. (0.05%)

  Diagnostic  

Common Stock

      1,626     193
                 

Total Novadaq Technologies, Inc.

    1,626     193

 

See notes to consolidated financial statements.

 

32


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Optiscan Biomedical, Corp. (2.69%)(4)

 

Diagnostic

 

Senior Debt
Matures June 2011
Interest rate 10.25%

  $ 10,000   $ 9,518   $ 9,518
   

Preferred Stock Warrants

      760     783

Optiscan Biomedical, Corp. (0.79%)

   

Preferred Stock

      3,000     3,000
                 

Total Optiscan Biomedical, Corp.

    13,278     13,301
                 

Total Diagnostic (3.53%)

    14,904     13,494
                 

Guava Technologies, Inc. (1.28%)

 

Biotechnology Tools

 

Senior Debt
Matures May 2011
Interest rate Prime + 10.50%

  $ 2,800     2,797     2,797
   

Convertible Debt

  $ 250     250     250
   

Revolving Line of Credit
Matures December 2009
Interest rate Prime + 9.50%

  $ 1,840     1,840     1,840
   

Preferred Stock Warrants

      106     —  
   

Preferred Stock Warrants

      68     —  
                 

Total Guava Technologies, Inc.

    5,061     4,887

Kamada, LTD. (5.13%)(6)

 

Biotechnology Tools

 

Senior Debt
Matures February 2012
Interest rate 10.60%

  $ 20,000     19,572     19,572
   

Common Stock Warrants

      531     41
   

Common Stock Warrants

      20     8
                 

Total Kamada, LTD.

    20,123     19,621

NuGEN Technologies, Inc. (0.67%)

 

Biotechnology Tools

 

Senior Debt
Matures November 2010
Interest rate Prime + 3.45%

  $ 1,548     1,520     1,520
   

Senior Debt
Matures November 2010
Interest rate Prime + 1.70%

  $ 892     892     892
   

Preferred Stock Warrants

      45     161
   

Preferred Stock Warrants

      33     18

NuGEN Technologies, Inc. (0.07%)

   

Preferred Stock

      500     265
                 

Total NuGEN Technologies, Inc.

    2,990     2,856

Solace Pharmaceuticals, Inc.(0.46%)(5)

 

Biotechnology Tools

 

Senior Debt
Matures August 2012
Interest rate Prime + 4.25%

  $ 1,750     1,711     1,711
   

Preferred Stock Warrants

      42     49
                 

Total Solace Pharmaceuticals, Inc.

    1,753     1,760
                 

Total Biotechnology Tools (7.61%)

    29,927     29,124
                 

Crux Biomedical, Inc. (0.00%)

 

Surgical Devices

 

Preferred Stock Warrants

      37     —  

Crux Biomedical, Inc. (0.01%)

   

Preferred Stock

      250     26
                 

Total Crux Biomedical, Inc.

    287     26

 

See notes to consolidated financial statements.

 

33


Table of Contents

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2008

(dollars in thousands)

 

Portfolio Company

 

Industry

 

Type of Investment(1)

  Principal
Amount
  Cost(2)   Value(3)

Transmedics, Inc. (2.61%)(5)

 

Surgical Devices

 

Senior Debt
Matures December 2011
Interest rate Prime + 5.25%

  $ 10,000   $ 9,814   $ 9,814
   

Preferred Stock Warrants

      224     173
                 

Total Transmedics, Inc.

    10,038     9,987
                 

Total Surgical Devices (2.62%)

    10,325     10,013
                 

Glam Media, Inc. (2.18%)

 

Media/Content/Info

 

Revolving Line of Credit
Matures April 2009
Interest rate Prime + 1.50%

  $ 8,285     8,139     8,139
   

Preferred Stock Warrants

      483     209
                 

Total Glam Media, Inc.

    8,622     8,348

Waterfront Media Inc. (2.08%)(5)

 

Media/Content/Info

 

Senior Debt
Matures September 2010
Interest rate Prime + 3.00%

  $ 2,597     2,574     2,574
   

Revolving Line of Credit
Matures October 2009
Interest rate Prime + 1.25%

  $ 5,000     5,000     5,000
   

Preferred Stock Warrants

      60     393

Waterfront Media Inc. (0.36%)

   

Preferred Stock

      1,000     1,353
                 

Total Waterfront Media Inc.

    8,634     9,320
                 

Total Media/Content/Info (4.62%)

    17,256     17,668
                 

Total Investments (151.99%)

  $ 592,348   $ 581,301
                 

 

* Value as a percent of net assets
(1) Preferred and common stock, warrants, and equity interests are generally non-income producing.
(2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $7,976, $22,551 and $14,575, respectively. The tax cost of investments is $595,876.
(3) Except for warrants in six publicly traded companies and common stock in three publicly traded companies, all investments are restricted at December 31, 2008 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies.
(4) Debt and warrant investments of this portfolio company have been pledged as collateral under the Credit Facility. Citigroup has an equity participation right on loans collateralized under the Credit Facility. The value of their participation right on unrealized gains in the related equity investments was approximately $498,000 at December 31, 2008 and is included in accrued liabilities and reduced the cumulative unrealized gain recognized by the Company at December 31, 2008.
(5) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility.
(6) Non-U.S. company or the company’s principal place of business is outside the United States.
(7) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns as least 5% but not more than 25% of the voting securities of the company. All other investments are less than 5% owned.
(8) Debt is on non-accrual status at December 31, 2008, and is therefore considered non-income producing.

 

See notes to consolidated financial statements.

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

 

     Three Months Ended March 31,  
     2009     2008  
     (Unaudited)     (Unaudited)  

Investment income:

    

Interest

   $ 17,976     $ 14,239  

Fees

     2,474       1,361  
                

Total investment income

     20,450       15,600  

Operating expenses:

    

Interest

     3,159       1,851  

Loan fees

     946       382  

General and administrative

     1,471       1,176  

Employee Compensation:

    

Compensation and benefits

     2,884       2,799  

Stock-based compensation

     432       392  
                

Total employee compensation

     3,316       3,191  
                

Total operating expenses

     8,892       6,600  

Net investment income before investment gains and losses

     11,558       9,000  

Net realized gain (loss) on investments

     (1,146 )     2,958  

Net increase (decrease) in unrealized appreciation on investments

     (5,930 )     (921 )
                

Net realized and unrealized gain (loss)

     (7,076 )     2,037  
                

Net increase in net assets resulting from operations

   $ 4,482     $ 11,037  
                

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

    

Basic

   $ 0.35     $ 0.28  
                

Diluted

   $ 0.35     $ 0.28  
                

Change in net assets per common share:

    

Basic

   $ 0.14     $ 0.34  
                

Diluted

   $ 0.14     $ 0.34  
                

Weighted average shares outstanding

    

Basic

     32,775       32,629  
                

Diluted

     32,798       32,639  
                

See notes to consolidated financial statements (unaudited).

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

STATEMENT OF CHANGES IN NET ASSETS

(in thousands, except per share data)

 

     Common
Stock
   Capital in excess
of par value
   Unrealized
Accumulated
(Depreciation)

on Investments
    Accumulated
Realized Gains
(Losses) on
Investments
    Distributions in
Excess of
Investment Income
    Provision for
Income Taxes
on Investment
Gains
    Net
Assets
 
     Shares    Par
Value
             

Balance at December 31, 2007

   32,541    $ 33    $ 393,452    $ 10,129     $ 819     $ (3,557 )   $ (139 )   $ 400,737  

Net increase (decrease) in net assets resulting from operations

   —        —        —        (921 )     2,958       9,000       —         11,037  

Issuance of common stock

   2      —        21      —         —         —         —         21  

Issuance of common stock under restricted stock plan

   225      —           —         —         —         —         —    

Dividends declared

   —        —        —        —         —         (9,763 )     —         (9,763 )

Stock-based compensation

   —        —        402      —         —         —         —         402  
                                                           

Balance at March 31, 2008

   32,768    $ 33    $ 396,623    $ 9,208     $ 3,777     $ (4,320 )   $ (139 )   $ 402,434  
                                                           

Balance at December 31, 2008

   33,096    $ 33    $ 395,760    $ (11,297 )   $ 3,906     $ (5,602 )   $ (342 )   $ 382,458  

Net increase (decrease) in net assets resulting from operations

   —        —        —        (5,930 )     (1,146 )     11,558       —         4,482  

Issuance of common stock

   2      —        13      —         —         —         —         13  

Issuance of common stock under restricted stock plan

   306      —        —        —         —         —         —         —    

Issuance of common stock dividend

   1,921      2      9,530      —         —         —         —         9,532  

Dividends declared

   —        —        —        —           (10,591 )     —         (10,591 )

Stock-based compensation

   —        —        452      —         —         —         —         452  
                                                           

Balance at March 31, 2009

   35,325    $ 35    $ 405,755    $ (17,227 )   $ 2,760     $ (4,635 )   $ (342 )   $ 386,346  
                                                           

See notes to consolidated financial statements (unaudited).

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

STATEMENT OF CASH FLOWS

(in thousands, except per share data)

 

     Three Months Ended March 31,  
     2009     2008  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 4,482     $ 11,037  

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

    

Purchase of investments

     (48,648 )     (49,791 )

Principal payments received on investments

     91,690       48,875  

Proceeds from sale of investments

     1,239       3,757  

Net unrealized appreciation (depreciation) on investments

     5,930       921  

Net realized gain on investments

     1,146       (2,958 )

Accretion of paid-in-kind principal

     (411 )     (184 )

Accretion of loan discounts

     (2,445 )     (1,012 )

Accretion of loan exit fees

     (225 )     (3 )

Depreciation

     91       60  

Stock-based compensation

     452       401  

Common stock issued in lieu of Director compensation

     13       21  

Amortization of deferred loan origination revenue

     (1,647 )     (1,042 )

Change in operating assets and liabilities:

    

Interest receivable

     1,081       (443 )

Prepaid expenses and other assets

     1,036       117  

Accounts payable

     (330 )     (174 )

Income tax payable

     (192 )     (132 )

Accrued liabilities

     (4,915 )     (3,489 )

Deferred loan origination revenue

     172       1,418  
                

Net cash provided by operating activities

     48,519       7,379  

Cash flows from investing activities:

    

Purchases of capital equipment

     (13 )     (247 )

Other long-term assets

     25       —    
                

Net cash provided by (used in) investing activities

     12       (247 )

Cash flows from financing activities:

    

Dividends paid

     (1,060 )     (9,763 )

Borrowings of credit facilities

     53,858       33,700  

Repayments of credit facilities

     (110,687 )     (25,000 )

Fees paid for credit facilities and debentures

     —         (121 )
                

Net cash provided by (used in) financing activities

     (57,889 )     (1,184 )
                

Net increase (decrease) in cash

     (9,358 )     5,948  

Cash and cash equivalents at beginning of period

     17,242       7,856  
                

Cash and cash equivalents at end of period

   $ 7,884     $ 13,804  
                

See notes to consolidated financial statements (unaudited).

 

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HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Hercules Technology Growth Capital, Inc. (the “Company”) is a specialty finance company that provides debt and equity growth capital to technology-related companies at all stages of development from seed and emerging growth to expansion and established stages of development. We primarily finance privately-held companies backed by leading venture capital and private equity firms, and may also finance select publicly listed companies and lower middle market companies. The Company sources its investments through its principal office located in Silicon Valley, as well as through its additional offices in the Boston, Massachusetts, Boulder, Colorado and Chicago, Illinois. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The Company commenced operations on February 2, 2004 and commenced investment activities in September 2004.

The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). From incorporation through December 31, 2005, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2006, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 4).

The Company formed Hercules Technology II, L.P. (“HT II”), which was licensed on September 27, 2006, to operate as a Small Business Investment Company (“SBIC”) under the authority of the Small Business Administration (“SBA”). As an SBIC, the Fund is subject to a variety of regulations concerning, among other things, the size and nature of the companies in which it may invest and the structure of those investments. The Company also formed Hercules Technology SBIC Management, LLC (“HTM”), a limited liability company. HTM is a wholly-owned subsidiary of the Company. The Company is the sole limited partner of HT II and HTM is the general partner (see Note 3).

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 coporate income taxes on any income or gains that we distributed to our stock holders. 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 period, have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the interim unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2008. 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.

2. Valuation of Investments

Our investments are carried at fair value in accordance of 1940 Act and the Statement of Financial Accounting Standards (“SFAS”) No.157, Fair Value Measurements (“FAS No. 157”). FAS 157 defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

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In October 2008, the Financial Accounting Standards Board, or the FASB, issued FASB Staff Position (“FSP”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active. More specifically, FSP No. 157-3 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. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 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 FAS 157, the Company determines fair value to be the amount for which an investment could be exchanged in a current sale, which assumes an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests.

In accordance with FAS 157, 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. FAS 157 requires that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. The Company believes that the market participants for its investments are primarily other technology-related companies. Such participants acquire the Company’s investments in order to gain access to the underlying assets of the portfolio company. As such, the Company believes the estimated value of the collateral of the portfolio company, up to the initial cost of the investment, represents the fair value of the investment.

Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment, although the Company’s valuation policy is intended to provide a consistent basis for determining the fair value of portfolio investments. Unlike banks, the Company is not permitted to provide a general reserve for anticipated loan losses. Instead, the Company must determine the fair value of each individual investment on a quarterly basis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value.

 

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As a business development company providing debt and equity capital primarily to technology-related companies, the Company invests primarily in illiquid securities including debt and equity-related securities of private companies. The Company’s investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that the Company makes and the nature of its business, its valuation process requires an analysis of various factors that might be considered in a hypothetical secondary market. The Company’s valuation methodology includes the examination of criteria similar to those used in its original investment decision, including, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life. 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.

At March 31, 2009, approximately 97% of the Company’s total assets represented investments in portfolio companies of which greater than 99% are valued at fair value by the Board of Directors. Value, as defined in Section 2(a) (41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in the Company’s portfolio, it values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of FAS 157 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a ready market existed for such investments, and the differences could be material.

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

At each reporting date, privately held debt and equity securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions that could impact the valuation. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the debt and equity securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. The Company may consider, but is not limited to, industry valuation methods such as price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks in its evaluation of the fair value of its investment. The Company has a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date.

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

The Company has categorized all investments recorded at fair value in accordance with FAS 157 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by FAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

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

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

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

 

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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:

 

    Assets at Fair Value as of March 31, 2009   Assets at Fair Value as of December 31, 2008

(in thousands)

Description

  Quoted Prices In
Active Markets For
Idendtial Assets
(Level 1)
  Significant
Other
Observable

Inputs
(Level 2)
  Significant
UnobservableInputs
(Level 3)
  Total   Quoted Prices In
Active Markets For
Idendtial Assets
(Level 1)
  Significant
Other
Observable

Inputs
(Level 2)
  Significant
UnobservableInputs
(Level 3)
  Total

Senior secured debt

  $ —     $ —     $ 487,546   $ 487,546   $ —     $ —     $ 534,230   $ 534,230

Senior debt-second lien

    —       —       5,882     5,882     —       —       5,824     5,824

Preferred stock

    —       —       20,937     20,937     —       —       21,249     21,249

Common stock

    624     —       1,941     2,565     221     —       1,894     2,115

Warrants

    —       1,791     14,060     15,851     —       2,931     14,952     17,883
                                               
  $ 624   $ 1,791   $ 530,366   $ 532,781   $ 221   $ 2,931   $ 578,149   $ 581,301
                                               

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 quarter ended March 31, 2009 and 2008:

 

Fair Value Measurements Using Significant Unobservable Inputs

   Three months Ended
March 31, 2009
 
(in thousands)       

Balance at January 1, 2009

   $ 578,149  

Total gains or losses

  

Net realized gains/(losses)(1)

     (20 )

Net change in unrealized appreciation or depreciation(2)

     (5,125 )

Purchases, repayments, and exits, net

     (42,351 )

Transfer in and/or out of level 3

     (287 )
        

Balance at March 31, 2009

   $ 530,366  
        

Net unrealized appreciation (depreciation) during the period relating to assets still held at the reporting date(3)

   $ (5,125 )

 

Fair Value Measurements Using Significant Unobservable Inputs

   Three Months Ended
March 31, 2008
 
(in thousands)       

Balance at January 1, 2008

   $ 522,740  

Total gains or losses

  

Net realized gains/(losses)(1)

     (167 )

Net change in unrealized appreciation or depreciation(2)

     1,659  

Purchases, repayments, and exits, net

     1,532  

Transfer in and/or out of level 3

     —    
        

Balance at March 31, 2008

   $ 525,764  
        

Net unrealized appreciation (depreciation) during the period relating to assets still held at the reporting date(3)

   $ 1,659  

 

(1) Includes net realized gains /(losses) recorded as realized gains or losses in the accompanying consolidated statements of operations.
(2) Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations.
(3) Net change in unrealized appreciation or depreciation includes net unrealized appreciation (depreciation) resulting from changes in portfolio investment values during the reporting period and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

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

At March 31, 2009 and December 31, 2008, the Company had investments in three portfolio companies deemed to be Affiliates. Income derived from these investments was less than $500,000 since these investments became Affiliates.

Security transactions are recorded on the trade-date basis.

 

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A summary of the composition of the Company’s investment portfolio as of March 31, 2009 and December 31, 2008 at fair value is shown as follows:

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 398,652    74.9 %   $ 445,574    76.6 %

Senior secured debt

     104,551    19.6       106,266    18.2  

Preferred stock

     20,937    3.9       21,249    3.8  

Senior debt-second lien with warrants

     6,076    1.1       6,097    1.0  

Common Stock

     2,565    0.5       2,115    0.4  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

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

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

United States

   $ 488,779    91.7 %   $ 537,470    92.5 %

Canada

     20,730    3.9       21,210    3.6  

Israel

     20,272    3.8       19,621    3.4  

Netherlands

     3,000    0.6       3,000    0.5  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

 

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The following table shows the fair value of our portfolio by industry sector at March 31, 2009 and December 31, 2008 (excluding unearned income):

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

Communications & networking

   $ 107,312    20.1 %   $ 118,133    20.3 %

Software

     75,854    14.2       80,885    13.9  

Information services

     61,125    11.5       63,533    10.9  

Drug discovery

     58,949    11.1       70,320    12.1  

Electronics & computer hardware

     33,931    6.4       40,481    7.0  

Specialty pharmaceuticals

     29,759    5.6       29,870    5.1  

Biotechnology tools

     27,524    5.2       29,124    5.0  

Consumer & business products

     25,460    4.8       25,250    4.3  

Drug delivery

     20,863    3.9       24,952    4.3  

Internet consumer & business services

     19,127    3.6       19,759    3.4  

Semiconductors

     16,138    3.0       17,766    3.1  

Therapeutic

     14,761    2.8       15,661    2.7  

Media/Content/Info

     14,069    2.6       17,667    3.1  

Diagnostic

     13,470    2.5       13,494    2.3  

Surgical Devices

     10,048    1.9       10,013    1.7  

Energy

     4,391    0.8       4,393    0.8  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

During the three-month periods ended March 31, 2009 and 2008, the Company made investments in debt securities totaling approximately $48.6 million and $49.1 million, respectively. The Company did not fund any equity investment for the three months ended March 31, 2009. For the three months ended March 31, 2008, the Company made equity investments of approximately $700,000.

During the three-month periods ended March 31, 2009, the Company recognized realized gains of approximately $700,000 primarily from the sale of common stock of one biotech company and sale of preferred stock in one medical device company . The Company recognized realized losses on warrants in the first quarter of 2009 of approximately $1.8 million from the sale of one drug discovery company, one software company and one medical device company. We received full payment on all of our debt investments with these portfolio companies. In the same period of 2008, the Company recognized realized gains of approximately $3.1 million and realized losses of approximately $566,000.

Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. These fees are reflected as adjustments to the loan yield in accordance with Statement of Financial Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring loans and Initial Direct Costs of Leases (“FAS 91”). The Company had approximately $5.4 million and $6.9 million of unamortized fees at March 31, 2009 and December 31, 2008, respectively, and approximately $3.8 million and $3.6 million in exit fees receivable at March 31, 2009 and December 31, 2008, respectively. The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $477,000 and $186,000 in PIK income in the three-month period ended March 31, 2009 and 2008, respectively.

In some cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include their intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At March 31, 2009, approximately 73% of our portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 26% of portfolio company loans were prohibited from pledging or encumbering their intellectual property and 1% of portfolio company loan had a second lien facility. See “Part II—Item 1A—Risk Factors.”

3. Borrowings

Credit Facility

The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Credit Facility”) with Citigroup Global Markets Realty Corp. and Deutsche Bank Securities Inc. At the beginning of the quarter $ 89.6 million was outstanding under the Credit Facility. During the quarter, we paid off all remaining principal and interest owed under the Credit Facility using approximately $10.4 million from our regular principal and interest collection, approximately $36.7 million borrowing from Wells Facility and approximately $42.5 million from early payoffs. The initial Credit Facility was a one year facility with an interest rate of LIBOR plus a spread of 1.20% and a borrowing capacity of $250.0 million.

 

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On May 7, 2008, the Company amended and renewed its Credit Facility with Citigroup and Deutsche Bank providing for a borrowing capacity of $134.9 million and extending the expiration date to October 31, 2008. Under the terms of the amended agreement, the Company paid a renewal fee of approximately $1.3 million, interest on all borrowings was set at LIBOR plus a spread of 5.0%, and a fee of 2.50% was charged on any unused portion of the facility. The Credit Facility was collateralized by loans from the Company’s investment in portfolio companies, and included an advance rate of approximately 45% of eligible loans. The Credit Facility contained covenants that, among other things, required the Company to maintain a minimum net worth and to restrict the loans securing the Credit Facility to certain dollar amounts, to concentrations in certain geographic regions and industries, to certain loan grade classifications, to certain security interests, and to certain interest payment terms. On October 31, 2008, the Company’s Credit Facility expired under the normal terms. All subsequent payments secured from the portfolio companies whose debt was included in the Credit Facility collateral pool were to be applied against interest and principal outstanding under the Credit Facility until April 30, 2009, when all outstanding interest and principal were due and payable. During the amortization period, the Company no longer paid a non-use fee on the Credit Facility, although borrowings under the Credit Facility bore interest at a rate per annum equal to LIBOR plus 6.50% during the amortization period. On March 25, 2009, the Company paid off the entire remaining outstanding principal and interest on the Credit Facility in advance of the maturity date.

Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants are included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Credit Facility is terminated until the Maximum Participation Limit has been reached. During the quarter ended March 31, 2009, the Company recorded a reduction of the derivative liability related to this obligation and decreased its unrealized losses by approximately $20,000 for Citigroup’s participation in unrealized gains in the warrant portfolio. The value of their participation right on unrealized gains in the related equity investments was approximately $478,000 at March 31, 2009 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $920,000 under the warrant participation agreement thereby reducing its realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached.

Long-term SBA Debentures

In January 2005, the Company formed HT II and HTM. HT II is licensed as a SBIC. HT II borrows funds from the SBA against eligible investments and additional deposits to regulatory capital. Under the Small Business Investment Act and current SBA policy applicable to SBICs, an SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. As of March 31, 2009, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued to a single SBIC is $137.1 million. The maximum statutory limit is subject to periodic adjustments by the SBA. In February 2009, the Company invested $3.25 million in regulatory capital, which increased HT II regulatory capital to $68.55 million and submitted a commitment request to issue debentures up to $137.1 million, subject to the payment of a 1% commitment fee to the SBA on the amount of the commitment. The Company’s request is currently pending. Currently, HT II has paid commitment fees of approximately $1.3 million and has a commitment from the SBA to issue a total of $130.6 million of SBA guaranteed debentures, of which approximately $127.2 million was outstanding as of March 31, 2009. There is no assurance that HT II will be able to draw up to the maximum limit available under the SBIC program.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 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% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiary HT II, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II is periodically examined and audited by the SBA’s staff to determine its compliance with SBIC regulations. Borrowings under the program are charged interest based on ten year treasury rates plus a spread and the rates are generally set for a pool of debentures issued by the SBA in six month periods. The rate for the $12 million of borrowings originated from March 13, 2007 to September 10, 2007 was set

 

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by the SBA on September 26, 2007 at 5.528%. The rate for the $58.1 million borrowings made after September 10, 2007 through March 13, 2008 was set by the SBA on March 26, 2008 at 5.471%. The rate for the $38.8 million borrowings made after March 13, 2008 through September 10, 2008 was set by the SBA on September 24, 2008 at 5.725% and the additional $18.4 million of borrowings made after September 13, 2008 through March 10, 2009 was set by the SBA on March 25 at 4.62%. 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 2008 and 2007 annual fee has 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.

Wells Facility

On August 25, 2008, the Company, through a special purpose wholly-owned subsidiary of the Company, Hercules Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total commitments of $50 million, with Wells Fargo Foothill as a lender and as an arranger and administrative agent (the “Wells Facility”). The Wells Facility has the capacity to increase to $300 million if additional lenders are added to the syndicate. The Wells Facility expires on August 25, 2010, unless the option to extend the facility is exercised by the parties to the agreement.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to Libor plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The 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 investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity, which includes the extension if exercised. We paid a one time $750,000 structuring fee in connection with the Wells Facility which is being amortized over a 2 year period. The outstanding debt under the Wells Facility at March 31, 2009 was approximately $32.8 million.

The Wells Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth of $360 million. The Wells Facility was amended, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. As of March 31, 2008 combined commitments from the Wells Fargo syndicate and the SBA totaled $180.6 million. 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 March 31, 2009.

At March 31, 2009 and December 31, 2008, the Company had the following borrowing capacity and outstanding borrowings:

 

     March 31, 2009    December 31, 2008
(in thousands)    Facility Amount    Amount
Outstanding
   Facility Amount    Amount
Outstanding

Credit Facility

   $ —      $ —      $ 89,582    $ 89,582

Wells Facility

     50,000      32,751      50,000      —  

SBA Debenture

     130,600      127,200      130,600      127,200
                           

Total

   $ 180,600    $ 159,951    $ 270,182    $ 216,782
                           

4. 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, among other requirements, to distribute at least 90% of its annual investment company taxable income, as defined by the Code. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Company’s earnings fall below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.

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

 

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included in taxable income as a result of the Company’s election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense.

For the quarter ended March 31, 2009, the Company declared a distribution of $0.32 per share. The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income for the full year and distributions paid for the full year, therefore a determination made on a quarterly basis may not be representative of the actual tax attributes of its distributions for a full year. If the Company had determined the tax attributes of its distributions year-to-date as of March 31, 2009, approximately 100% would be from ordinary income and spilt over earnings from 2008, however there can be no certainty to shareholders that this determination is representative of what the tax attributes of its 2009 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 Company’s 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.

At December 31, 2008, the Company recorded a provision for excise tax of approximately $203,000 on excess taxable income of approximately $5.0 million available for distribution to shareholders in 2009. Excess taxable income for 2008 represents ordinary income and capital gains.

Taxable income for three months ended March 31, 2009 was approximately $10.0 million or $0.30 per share including approximately $ 270,000 or approximately $ 0.01 per share from taxable net realized losses.

Taxable income for three months ended March 31, 2008 was approximately $9.6 million or $0.29 per share, excluding approximately $3.0 million or approximately $0.09 per share from net realized gains due to the sale of securities during the quarter.

In accordance with regulated investment company distribution rules, the Company is required to declare current year dividends to be paid from carried over excess taxable income from 2008 before the Company files its 2008 tax return in September, 2009, and the Company must pay such dividends by December 31, 2009.

5. 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 conjuction with a June 2004 private placement, the Company issued warrants to purchase one share of common stock within five years (the “Five year Warrants”). The exercise price of these warrants is $10.57, and the warrants will expire in June 2009.

A summary of activity in the Five Year Warrants initially attached to units issued for the three months ended March 31, 2009 and 2008 is as follows:

 

     2009    2008

Outstanding at January 1

   283,614    371,937

Warrants issued

   —      —  

Warrants cancelled

   —      —  

Warrants exercised

   —      —  
         

Outstanding at March 31

   283,614    371,937
         

Common stock subject to future issuance is as follows:

 

     March 31, 2009    March 31, 2008

Stock options and warrants

   4,964,818    3,963,041

Warrants issued in June 2004

   283,614    371,937
         

Common stock reserved

   5,248,432    4,334,978
         

 

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On February 12, 2009, the Board of Directors announced a dividend of $0.32 per share to shareholders of record as of February 23, 2008. In accordance with the Internal Revenue Procedure released in January 2009, our Board of Directors determined that 90% of the dividend would be paid in newly issued shares of common stock and no more than 10% of the dividend would be paid in cash. On March 30, 2009, we paid dividend approximately $1.1 million in cash and issued approximately 1.9 million common shares as a stock dividend in satisfaction of the dividend declared on February 12, 2009. The market value per share of common stock used to compute the stock dividend (the “Dividend Share Value”) is the volume weighted average price per share of HTGC’s common stock for the three business day period of March 23, March 24 and March 25, 2009.

6. Equity Incentive Plan

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

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

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

During the three months ended March 31, 2009, there were no stock options granted or restricted stock awarded under the 2006 plan.

 

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In conjunction with stock options issued in 2004, the Company issued warrants to purchase one share of common stock within five years. The warrants expire in June 2009.

A summary of common stock options and warrant activity under the Company’s 2006 and 2004 Plans for the three months ended March 31, 2009 and 2008 is as follows:

 

     2009    2008
     Common Stock
Options
   Five-Year
Warrants
   Common Stock
Options
   Five-Year
Warrants

Outstanding at January 1

     3,931,527      10,692      2,920,513      10,692

Granted

     1,163,000      —        1,031,836      —  

Exercised

     —        —        —        —  

Cancelled

     140,401      —        —        —  
                           

Outstanding at March 31

     4,954,126      10,692      3,952,349      10,692
                           

Weighted-average exercise price at March 31

   $ 10.75    $ 10.57    $ 13.17    $ 10.57
                           

Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be exercised for a period ending seven years after the date of grant. At March 31, 2009, options for approximately 2.6 million shares were exercisable at a weighted average exercise price of approximately $13.06 per share with a weighted average exercise term of 4.5 years. The outstanding five year warrants expire in June 2009.

The Company determined that the fair value of options granted under the 2004 Plan during the three-month periods ended March 31, 2009 and 2008 was approximately $447,000 and $1.0 million, respectively. During the three-month periods ended March 31, 2009 and 2008, approximately $251,000 and $327,000 of share-based cost was expensed, respectively. As of March 31, 2009, there was approximately $1.5 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.7 years. The fair value of options granted is based upon a Black-Scholes option pricing model using the assumptions in the following table for each of the three-month periods ended March 31, 2009 and 2008:

 

     2009     2008  

Expected Volatility

   32 %   24 %

Expected Dividends

   10 %   8 %

Expected term (in years)

   4.5     4.5  

Risk-free rate

   1.86 %   2.27% - 2.69 %

During the three months ended March 31, 2009, the Company granted approximately 306,500 shares of restricted stock pursuant to the 2004 Plan. Each restricted stock award 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 stocks awarded in prior years are subject to a different vesting schedule whereby each restricted stock vests 25% of each year for four years annually. The value of the restricted stock was determined to be the Company’s closing price on March 17, 2009, the date of the grant. During the three months ended March 31, 2009 and March 31, 2008, the Company recognized compensation expense related to restricted stock of approximately $201,000 and $74,000.

 

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7. Change in Net Assets per Share

In 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, and it became effective for us beginning January 1, 2009. Under this FSP, unvested awards of share-based payments with nonforfeitable rights to receive dividends or dividend equivalents, such as our restricted stock issued under the 2004 Equity Plan and 2006 Equity Plan, are considered participating securities for purposes of calculating change in net assets per share. Under the two-class method required by EITF 03-6-1, a portion of net increase in net assets resulting from operations is allocated to these participating securities and therefore is excluded from the calculation of change in net assets per share allocated to common stock, as shown in the table below. This FSP requires retrospective application for periods prior to the effective date and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these provisions. The adoption of this FSP 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 for the three months ended March 31, 2008.

Computation and reconciliation of change in net assets per common share are as follows:

 

     For Three Months ended March 31, 2009    For Three Months ended March 31, 2008

(in thousands, except per share data)

   Income    Shares    Change in
net assets
per share
   Income    Shares    Change in
net assets
per share

Basic Change in Net Assets per share

                 

Net increase in net assets resulting from operations

   $ 4,482          $ 11,037      

Less increase in net assets resulting from operations allocated to participating securities

     28            4      
                                 

Net increase in net assets resulting from operations allocated to common stock for change in net assets per share calculation

   $ 4,454    32,775    $ 0.14    $ 11,033    32,629    $ 0.34
                                 

Adjust shares for Dilutives:

                 

Stock-based compensation plans

      23          10   

Diluted Change in Net Assets per share:

                 

Net increase in net assets resulting from operations

   $ 4,482          $ 11,037      

Less increase in net assets resulting from operations allocated to participating securities

     28            4      
                                     

Net increase in net assets resulting from operations allocated to common stock for change in net assets per share calculation

   $ 4,454    32,798    $ 0.14    $ 11,033    32,639    $ 0.34
                                     

Options to purchase 3.7 million and 3.9 million shares of common stock that were outstanding during the first quarter of 2009 and 2008, respectively, were not included in the computation of diluted change in net assets per share because the effect would be anti-dilutive.

8. Related-Party Transactions

In connection with the sale of public equity investments, the Company paid JMP Securities LLC approximately $15,000 and $3,300 in brokerage commissions for the three months ended March 31, 2009 and 2008.

 

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9. Financial Highlights

Following is a schedule of financial highlights for the three months ended March 31, 2009 and 2008:

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

FINANCIAL HIGHLIGHTS

(Unaudited)

 

     Three Months Ended March 31,  
(in thousands, except per share data)    2009     2008  

Per share data:

    

Net asset value at beginning of period

   $ 11.56     $ 12.31  

Net investment income

     0.35       0.28  

Net realized gain (loss) on investments

     (0.03 )     0.09  

Net unrealized appreciation (depreciation) on investments

     (0.18 )     (0.03 )
                

Total from investment operations

     0.14       0.34  

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

     (0.45 )     (0.08 )

Distributions

     (0.32 )     (0.30 )

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

     0.01       0.01  
                

Net asset value at end of period

   $ 10.94     $ 12.28  
                

Ratios and supplemental data:

    

Per share market value at end of period

   $ 5.00     $ 10.86  

Total return

     (34.08 )%(2)     (5.26 )%(2)

Shares outstanding at end of period

     35,325       32,768  

Weighted average number of common shares outstanding

     32,775       32,629  

Net assets at end of period

   $ 386,346     $ 402,434  

Ratio of operating expense to average net assets (annualized)

     9.20 %     6.53 %

Ratio of net investment income before investment gains and losses to average net assets (annualized)

     11.96 %     8.91 %

Average debt outstanding

   $ 194,282     $ 139,337  

Weighted average debt per common share

   $ 5.89     $ 4.27  

Portfolio turnover

     0.22 %     0.70 %

 

(1) Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to Financial Accounting Standards No. 123R, net investment loss includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital.
(2) The total return equals the change in the ending market value over the beginning of period price per share plus dividends paid per share during the period, divided by the beginning price.

10. Commitments and Contingencies

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk. These instruments consist primarily of unused commitments to extend credit, in the form of loans to the Company’s portfolio companies. The balance of unused commitments to extend credit at March 31, 2009 totaled approximately $56.8 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 no non-binding term sheets outstanding. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.

Certain premises are leased under agreements which expire at various dates through December 2013. Total rent expense amounted to approximately $251,000 and $218,000 during the three-month periods ended March 31, 2009 and 2008, respectively.

 

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The following table shows our contractual obligations as of March 31, 2009:

 

     Payments due by period
     (in thousands)

Contractual Obligations(1)(2)

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

Borrowings (3)

   $ 159,951    $ —        32,751    $ —      $ 127,200

Operating Lease Obligations (4)

     4,312      1,006      1,950      1,356      —  
                                  

Total

   $ 164,263    $ 1,006    $ 34,701    $ 1,356    $ 127,200
                                  

 

(1) Excludes commitments to extend credit to our portfolio companies.
(2) The Company also has a warrant participation obligation with Citigroup. See Note 3.
(3) Includes borrowings under the Wells Facility and the SBA debentures.
(4) Long-term facility leases.

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

11. Recent Accounting Pronouncements

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP FAS 157-4 provides additional guidance to companies for determining fair values of financial instruments for which there is no active market or quoted prices may represent distressed transactions. The guidance includes a reaffirmation of the need to use judgment in certain circumstances.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” . FAS 115-2 and FAS 124-2 amend the existing guidance regarding impairments for investments in debt securities. Specifically, it changes how companies determine if an impairment is considered to be other-than-temporary and the related accounting. This standard also provides for increased disclosures. FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March, 15, 2009, provided both FSPs are adopted concurrently. The Company will adopt both FSPs for the interim period ending on June 30, 2009. The Company is currently reviewing the FSPs and has not yet determined the effect of the adoption of these FSPs will have on the Company’s condensed consolidated financial statements.

12. Subsequent Events

The Wells Facility was amended, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. As of March 31, 2009, combined commitments from the Wells Facility and the SBA totaled $180.6 million.

On May 7, 2009, approximately $2.5 million was outstanding under the Wells Facility. The Company reduced the balance from $32.8 million outstanding as of the end of the first quarter with $20.7 million of early payoffs and $9.5 million of interest, fee and normal principal amortization collections.

On May 5, 2009, Hercules’ Board of Directors approved a $15 million share repurchase program. Hercules may repurchase up to $15 million of its common stock in the open market including through block purchases, at prices that are below the net asset value as reported in its then most recently published financial statements. Shares repurchased under this program will be made from time to time depending upon market conditions, and in accordance with applicable regulatory requirements. Hercules anticipates that the manner, timing and amount of any share purchases will be determined by company management based upon the evaluation of market conditions, stock price and additional factors. The repurchase program does not require Hercules to acquire any specific number of shares and may be extended, modified, or discontinued at any time. Hercules expects that the share repurchase program will be in effect through November 7, 2009 or until the approved dollar amount has been used to repurchase shares.

 

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

Forward-Looking Statements

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

 

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

Overview

We are a specialty finance company that provides debt and equity growth capital to technology-related and life-science companies at all stages of development from seed and emerging growth to expansion and established stages of development. We primarily finance privately-held companies backed by leading venture capital and private equity firms, and may also finance select publicly listed companies and lower middle market companies. Our principal office is located in the Silicon Valley and we have additional offices in Boston, Boulder and Chicago. Our goal is to be the leading structured debt financing provider of choice for venture capital and private equity backed technology-related companies requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of companies active in the technology and life science industries and to offer a full suite of growth capital products up and down the capital structure. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our structured debt with warrants investments will typically be secured by all assets of the portfolio company or a portion thereof.

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

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

Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology-related companies at various stages of development. Consistent with regulatory requirements, we invest primarily in United States based companies and to a lesser extent in foreign companies. During 2008, 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. Early in 2008, we announced our “slow and steady” investment strategy and the shift in our investment focus to established-stage, or lower middle market 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.

The U.S. capital and credit markets have been experiencing extreme disruption for more than 12 months, as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing of credit risk in the broadly syndicated credit market and the failure of many major financial institutions. These events have contributed to a continuing severe economic recession that is materially and adversely impacting the broader financial and credit markets and reducing the availability of credit and equity capital for the markets as a whole and financial services firms in particular, including us. Like many other companies, we have also begun engaging in activities to deleverage our balance sheet and strengthen cash resources available to us.

 

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Portfolio and Investment Activity

The total value of our investment portfolio was $532.8 million at March 31, 2009 as compared to $581.3 million at December 31, 2008. During the three months ended March 31, 2009, we made debt commitments to eight portfolio companies totaling $61.0 million and funded approximately $48.6 million to nine companies. Debt commitments included commitments of approximately $ 7.0 million to one new portfolio company, $33.0 million in refinancings through our SBIC, renewal of approximately $15.0 million of working capital lines, and restructurings of approximately $ 6.0 million in existing loans. No equity investment was made during the three-month period ended March 31, 2009. During the three months ended March 31, 2008, we made debt commitments to five portfolio companies totaling $65.0 million and funded approximately by $48.6 million to 12 companies. We also made an equity commitment of $250,000 to one company and funded equity investments in two portfolio companies totaling $700,000. At March 31, 2009, we had unfunded contractual commitments of $56.8 million to 20 portfolio companies. Since these commitments may expire without being drawn, unfunded commitments do not necessarily represent future cash requirements. In addition, the Company had no non-binding term sheets outstanding. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements.

The fair value of the loan portfolio at March 31, 2009 was $493.4 million, compared to a fair value of $479.9 million at March 31, 2008. The fair value of the equity portfolio at March 31, 2009 and March 31, 2008 was approximately $ 23.5 million and $26.5 million, respectively. The fair value of our warrant portfolio at March 31, 2009 and March 31, 2008 was approximately $15.9 million and $24.4 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 three-month period ended March 31, 2009, we received normal principal amortization repayments of $36.9 million, and early repayments and working line of credit paydowns totaling $54.8 million. Total portfolio investment activity (exclusive of unearned income) as of the three-month periods ended March 31, 2009 is as follows:

 

(in millions)    March 31,
2009
 

Beginning Portfolio

   $ 581.3  

Purchase of debt investments

     48.6  

Equity Investments

     —    

Sale of Investments

     (2.4 )

Principal payments received on investments

     (36.9 )

Early pay-offs and recoveries

     (54.8 )

Accretion of loan discounts and paid-in-kind principal

     2.9  

Net change in unrealized depreciation in investments

     (5.9 )
        

Ending Portfolio

   $ 532.8  
        

The following table shows the fair value of our portfolio of investments by asset class (excluding unearned income):

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

Senior secured debt with warrants

   $ 398,652    74.9 %   $ 445,574    76.6 %

Senior secured debt

     104,551    19.6       106,266    18.2  

Preferred stock

     20,937    3.9       21,249    3.8  

Senior debt-second lien with warrants

     6,076    1.1       6,097    1.0  

Common Stock

     2,565    0.5       2,115    0.4  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

 

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

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

United States

   $ 488,779    91.7 %   $ 537,470    92.5 %

Canada

     20,730    3.9       21,210    3.6  

Israel

     20,272    3.8       19,621    3.4  

Netherlands

     3,000    0.6       3,000    0.5  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

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

At March 31, 2009, we had investments in three portfolio companies deemed to be Affiliates. Income derived from these investments was less than $500,000 since these investments became Affiliates. No realized gains or losses related to Affiliates were recognized during the three-month periods ended March 31, 2009 and 2008.

The following table shows the fair value of our portfolio by industry sector at March 31, 2009 and December 31, 2008 (excluding unearned income):

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

Communications & networking

   $ 107,312    20.1 %   $ 118,133    20.3 %

Software

     75,854    14.2       80,885    13.9  

Information services

     61,125    11.5       63,533    10.9  

Drug discovery

     58,949    11.1       70,320    12.1  

Electronics & computer hardware

     33,931    6.4       40,481    7.0  

Specialty pharmaceuticals

     29,759    5.6       29,870    5.1  

Biotechnology tools

     27,524    5.2       29,124    5.0  

Consumer & business products

     25,460    4.8       25,250    4.3  

Drug delivery

     20,863    3.9       24,952    4.3  

Internet consumer & business services

     19,127    3.6       19,759    3.4  

Semiconductors

     16,138    3.0       17,766    3.1  

Therapeutic

     14,761    2.8       15,661    2.7  

Media/Content/Info

     14,069    2.6       17,667    3.1  

Diagnostic

     13,470    2.5       13,494    2.3  

Surgical Devices

     10,048    1.9       10,013    1.7  

Energy

     4,391    0.8       4,393    0.8  
                          
   $ 532,781    100.0 %   $ 581,301    100.0 %
                          

 

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We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality. The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of March 31, 2009 and December 31, 2008:

 

     March 31, 2009     December 31, 2008  
(in thousands)    Investments at Fair
Value
   Percentage of Total
Portfolio
    Investments at Fair
Value
   Percentage of Total
Portfolio
 

Investment Grading

          

1

   $ 34,864    7.1 %   $ 22,293    4.1 %

2

     257,318    52.1       326,106    60.4  

3

     176,087    35.7       159,980    29.6  

4

     22,874    4.6       29,460    5.5  

5

     2,284    0.5       2,215    0.4  
                          
   $ 493,427    100.00 %   $ 540,054    100.00 %
                          

As of March 31, 2009, our investments had a weighted average investment grading of 2.43 as compared to 2.39 at December 31, 2008. We intend for our shift in focus to expansion and established-stage companies to assist us in maintaining our portfolio credit quality despite current market quality. However, there is no guarantee that this strategy will be successful. Our policy is to lower the grading on our portfolio companies as they approach the point in time when they will require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our financing criteria and their respective business plans. Various companies in our portfolio will require additional funding in the near term or have not met their business plans and have therefore been downgraded until their funding is complete or their operations improve. At March 31, 2009, 18 portfolio companies were graded 3 and 7 portfolio companies were graded 4, as compared to 19 portfolio companies that were graded 3 and 5 portfolio companies that were graded 4 at December 31, 2008. At both March 31, 2009 and December 31, 2008, 5 portfolio companies that were graded 5.

The effective yield on our debt investments during the first quarter of 2009 was 15.6% which was higher than the effective yield of 14.9% in the preceding quarter due to one time fees and fee accelerations attributed to the $54.8 million of early payoffs received in the quarter. The overall weighted average yield to maturity of our loan obligations was approximately 12.89% at March 31, 2009 as compared to 12.87 as of December 31, 2008, attributed to higher interest rates on new loans and loans refinanced in the first quarter of 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 $25.0 million. Our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from Prime to 17% as of March 31, 2009. In addition to the cash yields received on our loans, in some instances, our loans may also include any of the following: end-of-term payments, exit fees, balloon payment fees, PIK provisions, prepayment fees, and diligence fees, which may be required to be included in income prior to receipt. In most cases, we collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases, we may obtain a negative pledge covering a company’s intellectual property. At March 31, 2009, approximately 73% of our portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 26% of our portfolio company loans were prohibited from pledging or encumbering their intellectual property and 1% of our portfolio company loan had a second lien facility. Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the security for emerging-growth, expansion-stage and established-stage companies. In addition, certain loans may include an interest-only period ranging from three to eighteen months for emerging-growth and expansion-stage companies and longer for established-stage companies. In limited instances in which we choose to defer amortization of the loan for a period of time from the date of the initial investment, the principal amount of the debt securities and any accrued but unpaid interest become due at the maturity date.

Our investments in structured debt with warrants also generally have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. As of March 31, 2009, we have received warrants in connection with the majority of our debt investments in each portfolio company. During the three-month period ended March 31, 2009, we realized gains of approximately $700,000 from the sale of common stock of one biotech company and preferred stock of medical device company offset by $1.8 million in realized losses relating to warrants from the sale of one drug discovery company, one software company and one medical device company warrants. 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. We currently hold warrants in 90 portfolio companies, with a fair value of approximately $15.9 million included in the investment portfolio of $532.8 million. These warrant holdings would require us to invest approximately $53.0 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.

 

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Results of Operations

Comparison of the Three Months Ended March 31, 2009 and 2008

Operating Income

Interest income totaled approximately $18.0 million for the three months ended March 31, 2009, compared with $14.2 million for the three months ended March 31, 2008. Income from commitment, facility and loan related fees totaled approximately $2.5 million and $1.4 million for the three months ended March 31, 2009 and 2008, respectively. The increases in interest income and income from commitment, facility and loan related fees are the result of higher average loan balances outstanding due to the growth of our debt portfolio year-over-year combined with early debt repayment fees, restructuring charges and default interest on certain debt investments. At March 31, 2009, we had approximately $5.4 million of deferred revenue related to commitment and facility fees, as compared to approximately $7.0 million as of March 31, 2008.

Operating Expenses

Operating expenses totaled approximately $8.9 million and $6.6 million during the three months ended March 31, 2009 and 2008, respectively. Operating expenses for the three months ended March 31, 2009 and 2008 included interest expense, loan fees and unused commitment fees of approximately $4.1 million and $2.2 million, respectively. The 86.4% increase in these expenses relates to a higher cost of capital and higher average outstanding debt balance of $194.3 million in the first quarter of 2009 as compared to $139.3 million in the first quarter of 2008. The higher cost of capital is primarily due to the Citibank/Deutsche Bank credit facility entering the amortization period during which borrowings under the facility bearing interest at Libor + 650Bps, as compared to the prior year when the facility interest rate was at Libor + 120Bps. The Citibank/Deutsche Bank credit facility was paid off on March 25, 2009.

Employee compensation and benefits were approximately $2.9 million and $2.8 million during the three months ended March 31, 2009 and 2008, respectively. The small increase is mostly attributed to higher benefits expenses. General and administrative expenses which include legal, consulting and accounting fees, insurance premiums, rent and various other expenses increased to $1.5 million compared to $1.2 million during the three-months ended March 31, 2008. The increase was primarily attributable to higher legal expenses, workout expenses, employee compensation and facility expenses. In addition, we incurred approximately $452,000 of stock-based compensation expense in the first quarter of 2009 as compared to $401,000 in the first quarter of 2008. The increase was due to additional option grants made in 2008, which increased the basis of the total stock based compensation expenses during the first quarter of 2009.

Net Investment Income Before Investment Gains and Losses

Net investment income per share was $0.35 for the first quarter of 2009, compared to $0.28 per share in the first quarter of 2008.

Net investment income before investment gains and losses for the three months ended March 31, 2009 totaled $11.6 million as compared to $ 9.0 million in the first quarter of 2008. The changes are made up of the items described above under “Operating Income” and “Operating Expenses.”

Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation

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

For the three months ended March 31, 2009, we generated realized gains totaling approximately $700,000 from the sale of common stock of one biotech company and sale of preferred stock of one medical device company. We recognized realized losses on warrants in the first quarter of 2009 of approximately $1.8 million from the sale of one drug delivery company, one software company and one medical device company. We received full payment on all of our debt investments with these portfolio companies. For the three months ended March 31, 2008, we generated a net realized gain totaling approximately $3.0 million due to the sale of equity and warrants in three portfolio companies. A summary of realized gains and losses and unrealized appreciation and depreciation for the three-month periods ended March 31, 2009 and 2008 is as follows:

 

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( in millions)    March 31,
2009
    March 31,
2008
 

Realized gains

   $ 0.7     $ 3.6  

Realized losses

     (1.8 )     (0.6 )
                

Net realized gains (losses)

   $ (1.1 )   $ 3.0  
                

For the three months ended March 31, 2009 and 2008, net unrealized depreciation totaled approximately $5.9 million as compared to approximately $921,000, respectively. The net unrealized appreciation and depreciation of investments is based on portfolio asset valuations determined in good faith by our Board of Directors. This net unrealized depreciation was comprised of decrease in the carrying value of our portfolio companies due to credit performance and market conditions. Approximately $ 5.8 million of the depreciation recognized was attributable to debt investments in those companies. The remaining depreciation was attributable to depreciation of approximately $228,000 in warrants held in our portfolio companies offset slightly by appreciation of approximately $117,000 in our equity investments. As of March 31, 2009, the net unrealized depreciation recognized by The Company were reduced by approximately $20,000 for the warrant participation agreement with Citigroup. For a more detailed discussion of the warrant participation agreement, see the discussion set forth under Note 3 to the consolidated financial statements. The following table itemizes the change in net unrealized appreciation (depreciation) of investments for the three-month periods ended March 31, 2009 and 2008:

     March 31, 2009     March 31, 2008  
(in thousands)    Companies    Amount     Companies    Amount  

Gross unrealized appreciation on portfolio investments

   37    $ 4,175     56    $ 5,378  

Gross unrealized depreciation on portfolio investments

   47      (11,417 )   26      (3,798 )

Reversal of prior period net unrealized appreciation upon realization

        (700 )        (2,150 )

Reversal of prior period net unrealized depreciation upon realization

        1,992          (351 )

Citigroup warrant participation

        20       
                      

Net unrealized appreciation (depreciation) on portfolio investments

      $ (5,930 )      $ (921 )
                      

Income and Excise Taxes

We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires that deferred income taxes be determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax law. Valuation allowances are used to reduce deferred tax assets to the amount likely to be realized.

We elected to be treated as a RIC under Subchapter M of the Code with the filing of our 2006 federal income tax return. Such election and qualification to be treated as a RIC requires that we comply with certain requirements contained in Subchapter M of the Code. Provided we continue to qualify as a RIC, our income generally will not be subject to federal income or excise taxes to the extent we make the requisite distributions to stockholders.

If we do not distribute at least 98% of our annual taxable income in the year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual taxable income exceeds the distributions from such taxable income during the year earned. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue 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.

At December 31, 2008, we recorded a provision for excise tax of approximately $203,000 on excess taxable income of $5.0 million, available for distribution to shareholders in 2009. Excess taxable income for 2008 represents ordinary income and capital gains.

In accordance with regulated investment company distribution rules, we are required to declare current year dividends to be paid from carried over excess taxable income from 2008 before we file our 2008 tax return in September, 2009, and we must pay such dividends by December 31, 2009.

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

For the three months ended March 31, 2009, net increase in net assets resulting from operations totaled approximately $4.5 million compared to approximately $11.0 million for the three months ended March 31, 2008. These changes are made up of the items previously described.

Basic and fully diluted change in net assets per share was $0.14 for the three months ended March 31, 2009 as compared to $0.34 per share, for the same period ended March 31, 2008.

Financial Condition, Liquidity, and Capital Resources

At March 31, 2009, we had approximately $7.9 million in cash and cash equivalents and available borrowing capacity of approximately $17.2 million under the Wells Facility and approximately $3.4 million available under the SBA program, subject to existing terms and advance rates. We primarily invest cash on hand in interest bearing deposit accounts.

 

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For the quarter ended March 31, 2009, net cash provided by operating activities totaled approximately $48.5 million as compared to net cash provided by operating activities of approximately $7.4 million for the quarter ended March 31, 2008. This change was primarily due to an increase of approximately $37.0 million in early payoffs on loan investments and an increase of $6.0 million in principal payments offset by an approximate $1.0 million decrease in the purchase of investments and a $2.5 million decrease in proceeds received from sales of investments. Cash provided from investing activities for the quarter ended March 31, 2009 was approximately $12,000 as compared to approximately $270,000 used in investing activities in first quarter, 2008. Net cash used in financing activities totaled $57.9 million for the quarter ended March 31, 2009 and was primarily comprised of net repayments of $56.8 million and by a cash dividend payment of $1.1 million. In the quarter ended March 31, 2008, we had net borrowings approximately $8.7 million offset by distributions of $9.8 million in cash dividend.

As of March 31, 2009, net assets totaled $386.3 million, with a net asset value per share of $10.94. We intend to generate additional cash primarily from future borrowings as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. After we have used our current capital resources, we expect to raise additional capital to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act. To the extent we determine to raise additional equity through an offering of our common stock at a price below net asset value, existing investors will experience dilution. We currently have shareholder approval to issue shares below net asset value until our 2009 Annual Meeting of Stockholder, at which we are seeking shareholder approval to issue shares at a price below net asset value until the earlier of June 3, 2010 or our 2010 Annual Meeting of Stockholders. 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 March 31, 2009 was approximately 1,668%, excluding SBA leverage.

At March 31, 2009 and December 31, 2008, we had the following borrowing capacity and outstandings:

 

     March 31, 2009    December 31, 2008
(in thousands)    Facility Amount    Amount
Outstanding
   Facility Amount    Amount
Outstanding

Credit Facility

   $ —      $ —      $ 89,582    $ 89,582

Wells Facility

     50,000      32,751      50,000      —  

SBA Debenture

     130,600      127,200      130,600      127,200
                           

Total

   $ 180,600    $ 159,951    $ 270,182    $ 216,782
                           

On September 27, 2006, HT II received a license to operate as a Small Business Investment Company under the SBIC program and is able to borrow funds from the SBA against eligible previously approved investments and additional contributions to regulatory capital. At March 31, 2009, we had a commitment from the SBA permitting us to draw up to $130.6 million from the SBA. The maximum borrowing available from the SBA could be increased to $137.1 million based on the total regulatory capital investment by us at March 31, 2009, subject to SBA approval. We submitted a commitment request in February 2009 to increase the commitment to issue debentures up to $137.1 million, subject to certain regulatory requirements. The request is currently pending. At March 31, 2009, we had a net investment of $68.55 million in HT II, and there are investments in 46 companies with a fair value of approximately $187.7 million. HT II’s portfolio accounted for approximately 25.7% of our total portfolio at March 31, 2009. The Company is the sole limited partner of HT II and HTM is the general partner. HTM is a wholly-owned subsidiary of the Company. If HT II fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II from making new investments. Such actions by the SBA would, in turn, negatively affect us because HT II is our wholly owned subsidiary.

In February 2009, the American Recovery and Reinvestment Act of 2009 included a provision increasing the current maximum SBA borrowing limit to $150.0 million, an increase of approximately $13.0 million from the previous $137.1 million limit as of December 31, 2008, subject to periodic adjustments by the SBA. The limit may be increased to $225.0 million with the approval of a second SBIC lender license and the additional investment of $37.5 million of regulatory capital. We intend to submit an application to increase HT II’s borrowing limit to $150.0 million and for a second license, although there is no assurance that such application will be approved. In addition, there is no assurance that we will be able to draw up to the maximum limit available under the SBIC program.

Current Market Conditions

The U.S. capital and credit markets have been experiencing extreme disruption and volatility for more than 12 months as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing of credit risk in the broadly syndicated credit market and the failure of many major financial institutions. These events have contributed to a continuing severe economic recession that is materially and adversely impacting the broader financial and credit markets and reducing the availability of credit and equity capital for the markets as a whole and financial services firms in particular, including us.

 

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At the same time, the venture capital market for the technology-related companies in which we invest has been active, but is continuing to show signs of stress and contraction. Therefore, to the extent we have capital available; we believe this is an opportune time to invest on a limited basis in the structured lending market for technology-related companies. While today’s economy creates potentially new attractive lending opportunities, our outlook remains cautious for at least the next two quarters as the economic environment may cause additional portfolio stress. Early in 2008, we announced our “slow and steady” investment strategy and the shift in our investment focus to established-stage, or lower middle market, companies. These changes were made to manage our credit performance, maintain adequate liquidity and manage our operating expenses in this extremely challenging and unprecedented credit environment.

Like many other companies, we have continued to engage in activities to deleverage our balance sheet and strengthen cash resources available to us. As discussed herein, on March 25, 2009, we paid off all outstanding borrowings under the Credit Facility. In addition, to strengthen our liquidity position and preserve cash, in March 2009, 90% of our first quarter 2009 dividend was paid with approximately 1.9 million newly issued shares of common stock and 10% or approximately $1.1 million, was paid in cash.

We experienced an approximate $3.9 million increase in our net worth during the three months ended March 31, 2009, primarily resulting from payment of all interest and principal due under the Credit Facility on March 25, 2009, which had an outstanding balance of $89.6 million at December 31, 2008. Our Wells Facility requires, among other covenants, that we maintain a minimal tangible net worth of $360 million. As of March 31, 2009, we had a net worth of approximately $386.3 million and were in compliance with all covenants under the Wells Facility. To minimize disruptions in our business as a result of current market conditions, we entered into an amendment with Wells Fargo Foothill, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company.

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 will not be reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of March 31, 2009, we had unfunded commitments of approximately $56.8 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to use primarily cash flow from normal and early principal repayments and our Wells Facility to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due.

Contractual Obligations

The following table shows our contractual obligations as of March 31, 2009:

 

     Payments due by period
(in thousands)
Contractual Obligations(1)(2)    Total    Less than 1 year    1-3 years    3-5 years    After 5 years

Borrowings (3)

   $ 159,951    $ —        32,751    $ —      $ 127,200

Operating Lease Obligations (4)

     4,312      1,006      1,950      1,356      —  
                                  

Total

   $ 164,263    $ 1,006    $ 34,701    $ 1,356    $ 127,200
                                  

 

(1) Excludes commitments to extend credit to our portfolio companies.
(2) We also have warrant participation obligation with Citigroup. See “Borrowings.”
(3) Includes borrowings under the Wells Facility and the SBA debentures.
(4) Long-term facility leases.

Borrowings

Through Hercules Funding Trust I, an affiliated statutory trust, we had a securitized credit facility (the “Credit Facility”) with Citigroup Global Markets Realty Corp. and Deutsche Bank Securities Inc. The initial Credit Facility was a one year facility with an interest rate of LIBOR plus a spread of 1.20% and a borrowing capacity of $250.0 million. At the beginning of the quarter $ 89.6 million was outstanding under the Credit Facility. During the quarter, we paid off all remaining principal and interest owed under the Credit Facility using approximately $10.4 million from our regular principal and interest collection, approximately $36.7 million borrowing from wells facility and approximately $42.5 million from early payoffs.

 

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On May 7, 2008, we amended and renewed its Credit Facility with Citigroup and Deutsche Bank providing for a borrowing capacity of $134.9 million and extending the expiration date to October 31, 2008. Under the terms of the amended agreement, we paid a renewal fee of approximately $1.3 million, interest on all borrowings was set at LIBOR plus a spread of 5.0%, and a fee of 2.50% was charged on any unused portion of the facility. The Credit Facility was collateralized by loans from our investment in portfolio companies, and includes an advance rate of approximately 45% of eligible loans. The Credit Facility contained covenants that, among other things, required us to maintain a minimum net worth and to restrict the loans securing the Credit Facility to certain dollar amounts, to concentrations in certain geographic regions and industries, to certain loan grade classifications, to certain security interests, and to certain interest payment terms. On October 31, 2008, the Company’s Credit Facility expired under the normal terms. All subsequent payments secured from the portfolio companies whose debt was included in the Credit Facility collateral pool were to be applied against interest and principal outstanding under the Credit Facility until April 30, 2009. During the amortization period, we no longer paid a non-use fee on the Credit Facility, although borrowings under the Credit Facility bore interest at a rate per annum equal to Libor plus 6.5% during the amortization. We paid off the Credit Facility on March 25, 2009, more than one month prior to the April 30, 2009 maturity date.

Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Credit Facility. Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants are included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement 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. During the quarter ended March 31, 2009 we recorded a reduction of the derivative liability related to this obligation and decreased its unrealized appreciation by approximately $20,000 for Citigroup’s participation in unrealized gains in the warrant portfolio. The value of their participation right on unrealized appreciation in the related equity investments was approximately $478,000 at March 31, 2009 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid Citigroup approximately $920,000 under the warrant participation agreement thereby reducing our realized gains by this amount.

Long-term SBA Debentures

In January 2005, the Company formed HT II and HTM. HT II is licensed as a SBIC. HT II borrows funds from the SBA against eligible investments and additional deposits to regulatory capital. Under the Small Business Investment Act and current SBA policy applicable to SBICs, an SBIC can have outstanding at any time SBA guaranteed debentures up to twice the amount of its regulatory capital. As of March 31, 2009, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued to a single SBIC is $137.1 million. The maximum statutory limit is subject to periodic adjustments by the SBA. In February 2009, we invested $3.25 million in regulatory capital, which increased HT II regulatory capital to $68.55 million and submitted a commitment request to issue debentures up to $137.1 million, subject to the payment of a 1% commitment fee to the SBA on the amount of the commitment. Our request is currently pending. Currently, HT II has paid commitment fees of approximately $1.3 million and has a commitment from the SBA to issue a total of $130.6 million of SBA guaranteed debentures, of which approximately $127.2 million was outstanding as of March 31, 2009. There is no assurance that HT II will be able to draw up to the maximum limit available under the SBIC program.

In February 2009, the American Recovery and Reinvestment Act of 2009 included a provision increasing the current SBA borrowing limit to $150.0 million, an increase of approximately $13.0 million from the previous $137.1 million limit as of December 31, 2008, subject to periodic adjustments by the SBA. The limit may be increased to $225.0 million with the approval of a second SBIC lender license and the additional investment of $37.5 million of regulatory capital. We intend to submit an application to increase HT II’s borrowing limit to $150.0 million and for a second license, although there is no assurance that such applications will be granted. In addition, there is no assurance that we will be able to draw up to the maximum limit available under the SBIC program.

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% 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 our wholly-owned subsidiary HT II, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments.

HT II is periodically examined and audited by the SBA’s staff to determine its compliance with SBIC regulations. As of March 31, 2009, HT II could draw up to $130.6 million of leverage from the SBA as noted above. Borrowings under the program are charged interest based on ten year treasury rates plus a spread and the rates are generally set for a pool of debentures issued by the SBA in six month periods. The rate for the $12 million of borrowings originated from March 13, 2007 to September 10, 2007 was set by the SBA on September 26, 2007 at 5.528%. The rate for the $58.1 million borrowings made after September 10, 2007 through March 13, 2008 was set by the SBA on March 26, 2008 at 5.471%. The rate for the $38.8 million borrowings made after March 13, 2008 through September 10, 2008 was set by the SBA on September 24, 2008 at 5.725% and the rate for additional $18.4 million of

 

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borrowings made after September 13, 2008 through March 10, 2009 was set by SBA on March 25, 2009 at 4.62%. 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 2009, 2008 and 2007 annual fee has 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.

Wells Facility

On August 25, 2008, we, through a special purpose wholly-owned subsidiary, Hercules Funding II, LLC, entered into a two-year revolving senior secured credit facility with an optional one-year extension with total commitments of $50 million, with Wells Fargo Foothill as a lender and as an arranger and administrative agent (the “Wells Facility”). The Wells Facility has the capacity to increase to $300 million if additional lenders are added to the syndicate. The Wells Facility expires on August 25, 2010, unless the option to extend the facility is exercised by the parties to the agreement.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to Libor plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The 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 investments in our portfolio companies, and includes an advance rate equal to 50% of eligible loans placed in the collateral pool. The Wells Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity, which includes the extension if exercised. We paid a one time $750,000 structuring fee in connection with the Wells Facility which is being amortized over a 2 year period. The outstanding debt under the Wells Facility at March 31, 2009 was approximately $32.8 million. The Wells Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios. The Wells Facility was amended, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. As of March 31, 2008 combined commitments from the Wells Fargo syndicate and the SBA totaled $180.6 million. 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 March 31, 2009.

 

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At March 31, 2009 and December 31, 2008, the Company had the following borrowing capacity and outstandings:

 

     March 31, 2009    December 31, 2008
(in thousands)    Facility Amount    Amount
Outstanding
   Facility Amount    Amount
Outstanding

Credit Facility

   $ —      $ —      $ 89,582    $ 89,582

Wells Facility

     50,000      32,751      50,000      —  

SBA Debenture

     130,600      127,200      130,600      127,200
                           

Total

   $ 180,600    $ 159,951    $ 270,182    $ 216,782
                           

Dividends

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

 

Date Declared

   Record Date    Payment Date    Amount Per Share

October 27, 2005

   November 1, 2005    November 17, 2005    $ 0.025

December 9, 2005

   January 6, 2006    January 27, 2006      0.300

April 3, 2006

   April 10, 2006    May 5, 2006      0.300

July 19, 2006

   July 31, 2006    August 28, 2006      0.300

October 16, 2006

   November 6, 2006    December 1, 2006      0.300

February 7, 2007

   February 19, 2007    March 19, 2007      0.300

May 3, 2007

   May 16, 2007    June 18, 2007      0.300

August 2, 2007

   August 16, 2007    September 17, 2007      0.300

November 1, 2007

   November 16, 2007    December 17, 2007      0.300

February 7, 2008

   February 15, 2008    March 17, 2008      0.300

May 8, 2008

   May 16, 2008    June 16, 2008      0.340

August 7, 2008

   August 15, 2008    September 19, 2008      0.340

November 6, 2008

   November 14, 2008    December 15, 2008      0.340

February 12, 2009

   February 23, 2009    March 30, 2009      0.320
            
         $ 4.065
            

Effective in 2009, our Board of Directors adopted a policy to distribute four quarterly distributions in an amount that approximates 90 to 95% of our taxable income. In addition, at the end of the year we may also pay an additional special dividend, such that we may distribute approximately 98% of our annual taxable income in the year it was earned, instead of spilling over our excess taxable income.

On February 12, 2009, the Board of Directors announced a dividend of $0.32 per share to shareholders of record as of February 23, 2008. In accordance with the Internal Revenue Procedure released in January 2009, our Board of Directors determined to pay 90% of the dividend in newly issued shares of common stock and 10% of the dividend in cash. On March 30, 2009, we paid a cash dividend of approximately $1.1 million and issued approximately 1.9 million shares of common stock as stock dividend in satisfaction of the dividend declared on February 12, 2009. The market value per share of common stock used to compute the stock dividend (the “Dividend Share Value”) is the volume weighted average price per share of HTGC’s common stock for the three business day period of March 23, March 24 and March 25, 2009.

On May 7, 2009, the Board of Directors announced a cash dividend of $0.30 per share that will be payable on June 15, 2009 to shareholders of record as May 15, 2009. This is the Company’s fifteenth consecutive dividend declaration since its initial public offering, and will bring the total cumulative dividend declared to date to $4.37 per share.

Critical Accounting Policies

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

 

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

Our investments are carried at fair value in accordance of 1940 Act and the Statement of Financial Accounting Standards (“SFAS”) No.157, Fair Value Measurements (“FAS No. 157”).

FAS 157 defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. FAS 157 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 FASB Staff Position (“FSP”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active. More specifically, FSP No. 157-3 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. FSP No. 157-3 also provides further guidance that the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. In addition, FSP No. 157-3 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 FAS 157, we 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. Our valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests.

In accordance with FAS 157, we have considered the principal market, or the market in which it exits its portfolio investments with the greatest volume and level of activity. FAS 157 requires that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. We believe that the market participants for our investments are primarily other technology-related companies. Such participants acquire the portfolio company’s investments in order to gain access to the underlying assets of the portfolio company. As such, we believe the estimated value of the collateral of the portfolio company, up to the initial cost of the investment, represents the fair value of the investment.

Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment, although the our valuation policy is intended to provide a constant basis for determining the fair value of portfolio investments. 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 record 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, we record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value.

As a business development company providing debt and equity capital primarily to technology-related companies, 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 require an analysis of various factors that might be considered in a hypothetical secondary market. Our valuation methodology includes the examination of criteria similar to those used in its original investment decision, including, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life. If there is a significant deterioration of the credit quality of a debt investment, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.

 

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At March 31, 2009, approximately 97% of our total assets represented investments in portfolio companies of which greater than 99% are valued at fair value by the Board of Directors. Value, as defined in Section 2(a) (41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Since there is typically no readily available market value for the investments in our portfolio, we value substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of FAS 157 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by the Board of Directos 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.

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

At each reporting date, privately held debt and equity securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions that could impact the valuation. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the our valuation of the debt and equity securities. We periodically review 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. 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 its investment. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date.

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

We have categorized all investments recorded at fair value in accordance with FAS 157 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by FAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

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

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

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

Income Recognition. Interest income is recorded on the accrual basis and is recognized as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Original Issue Discount, “OID,” initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. However, We may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. As of March 31, 2009, we had three loans on non-accrual status with a fair value of approximately $1.5 million. There was only one loan on non-accrual status as of March 31, 2008 with fair value at approximately $2.6 million.

 

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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 period ended March 31, 2009 and 2008, approximately $477,000 and $186,000 in PIK income was recorded respectively.

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

Stock-Based Compensation. We have issued and may, from time to time, issue additional stock options and restricted stocks to employees and non-employee directors under our 2004 and 2006 Equity Incentive Plan. We follow Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (“FAS 123R”), to account for stock options granted and restricted shares awarded. Under FAS 123R, compensation expense associated with stock-based compensation is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period.

Federal Income Taxes. We intend to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income, as defined by the Code. We are subject to a non-deductible federal excise tax if we do not distribute at least 98% of our taxable income and 98% of our capital gain net income for each 1 year period ending on October 31.

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. As of March 31, 2009, approximately 34% of our portfolio loans were at fixed rates and 66% of our loans were at variable rates. Over time additional investments may be at variable 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.

Borrowings under our SBA program are fixed at the ten-year treasury rate every March and September for borrowings of the preceding six months. Borrowings under the program are charged interest based on ten year treasury rates plus a spread and the rates are generally set for a pool of debentures issued by the SBA in six month periods. The rate for the $12 million of borrowings originated from March 13, 2007 to September 10, 2007 was set by the SBA on September 26, 2007 at 5.528%. The rate for the $58.1 million borrowings made after September 10, 2007 through March 13, 2008 was set by the SBA on March 26, 2008 at 5.471%. The rate for the $38.8 million borrowings made after March 13, 2008 through September 10, 2008 was set by the SBA on September 24, 2008 at 5.725% and the additional $18.4 million of borrowings made after September 13, 2008 through March 10, 2009 was set by the SBA on March 25, 2009 at 4.62%. In addition, the SBA charges an annual 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 2008 and 2007 annual fee has been set at 0.906%. Interest payments are payable semi-annually and there are no principal payments required on these issues prior to maturity.

Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to Libor plus 3.25% or PRIME plus 2.0%, but not less than 5.0%. The Wells Facility requires the payment of a non-use fee of 0.5% annually, which reduces to 0.3% on the one year anniversary of the credit facility.

 

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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 company’s 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 Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

At March 31, 2009, we were not a party to any legal proceedings. However, from time to time, we may be party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The collateral securing a loan may not be sufficient to protect us from a partial or complete loss if we have not properly obtained or perfected a lien on such collateral or if the loan becomes non-performing, and we are required to foreclose.

While most of our loans are secured by collateral, there is no assurance that we have obtained or properly perfected our liens, or that the value of the collateral securing any particular loan will protect us from suffering a partial or complete loss if the loan becomes non-performing and we move to foreclose on the collateral.

Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans.

Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with loans representing approximately 7.4 % of the aggregate outstanding balance of our portfolio as of March 31, 2009. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and preferred securities had been satisfied.

 

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We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.

In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets.

In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to equitable subordination. See the risk factor “Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans” above. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses.

If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.

We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us.

After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment in a successful situation, for example, the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decision we make not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us to increase our participation in a successful operation and may dilute our equity interest or otherwise reduce the expected yield on our investment.

 

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

During the three months ended March 31, 2009, one of our Directors elected to take part of his compensation in the form of common stock in lieu of cash. We issued a total of 1,667 shares of common stock to the Director with an aggregate price for the shares of common stock of approximately $13,000.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

 

ITEM 5. OTHER INFORMATION

The information set forth under this Item 5 is furnished in lieu of disclosure on Form 8-K under Item 1.01, “Entry into a Material Definitive Agreement.”

The Wells Facility was amended, effective April 30, 2009, to decrease the minimum tangible net worth covenant from $360 million to $250 million, contingent upon our total commitments under all lines of credit not exceeding $250 million. To the extent our total commitments exceeding $250 million, the minimum tangible net worth covenant will increase on a pro rata basis commensurate with our net worth on a dollar for dollar basis. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital subsequently raised by the Company. As of May 7, 2009, we had total outstanding borrowings of approximately $2.5 million under the Wells Facility.

 

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ITEM 6. EXHIBITS

 

Exhibit

Number

 

Description

10 (hh)   First Amendment to Loan & Security Agreement by and among Hercules Funding II LLC and Well Fargo Foothill, LLC effective April 30, 2009
31.1   Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

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

 

    HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
(Registrant)
Dated: May 11, 2009  

/S/ MANUEL A. HENRIQUEZ

  Manuel A. Henriquez
  Chairman, President, and Chief Executive Officer
Dated: May 11, 2009  

/S/ DAVID M. LUND

 

David M. Lund

Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

 

Description

10 (hh)   First Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC effective April 30, 2009
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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