As filed with the Securities and Exchange Commission on
October 17, 2006
Registration
No. 333-136918
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form N-2
(Check appropriate box or
boxes)
o
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
þ
Pre-Effective
Amendment No. 1
o
Post-Effective
Amendment No.
HERCULES TECHNOLOGY GROWTH
CAPITAL, INC.
(Exact Name of Registrant as
Specified in Charter)
525 University Avenue, Suite 700
Palo Alto, CA 94301
(650) 289-3060
(Address and Telephone Number of
Principal Executive Offices)
Manuel A. Henriquez
Chairman of the Board, President and Chief Executive
Officer
Hercules Technology Growth Capital, Inc.
525 University Avenue, Suite 700
Palo Alto, California 94301
(Name and Address of Agent for
Service)
Copy to:
Steven B. Boehm, Esq.
Cynthia M. Krus, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N. W.
Washington, D.
C. 20004-2415
Telephone: (202) 383-0100
Facsimile: (202) 637-3593
Approximate date of proposed public
offering:
As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered
on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered
in connection with a dividend reinvestment plan, check the
following box
þ
If appropriate, check the following box:
o
This amendment
designates a new effective date for a previously filed
registration statement.
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This Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
and the Securities Act registration number of the earlier
effective registration statement for the same offering
is .
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CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Securities
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Amount
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Offering
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Aggregate
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Registration
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to be Registered
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to be
Registered
(1)(4)
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Price per
Share
(2)
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Offering
Price
(2)
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Fee
(5)
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Common Stock, par value $.001
per share
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8,444,150 shares
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$11.85
(3)
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$100,063,177
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$10,158*
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(1)
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Pursuant to Rule 416, this
registration statement also covers such additional shares of our
common stock as may be issued by reason of stock splits, stock
dividends or similar transactions.
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(2)
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Estimated solely for purposes of
calculating the registration fee pursuant to Rule 457(c)
under the Securities Act of 1933, as amended.
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(3)
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Estimated solely for purposes of
calculating the amount of the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended,
based upon the average of the high and low prices of our common
stock as reported on the NASDAQ Global Market on August 18,
2006.
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(4)
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In reliance upon Rule 429
under the Securities Act of 1933, this amount is in addition to
the securities previously registered by the Registrant under a
registration statement on
Form N-2
(File No.
333-133739).
All securities unsold under the prospectus contained in such
prior Registration Statement (a total of 432,900 shares of
common stock) are carried forward into this Registration
Statement, and the prospectus contained as a part of this
Registration Statement shall be deemed to be combined with the
prospectus contained in the above-referenced registration
statement, which has previously been filed.
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(5)
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In reliance upon Rule 429
under the Securities Act of 1933, all securities unsold under a
registration statement on
Form N-2
(File No.
333-133739)
(a total of 432,900 shares of common stock) are carried
forward into this Registration Statement. A registration fee of
$519 has been paid previously with respect to such securities.
The registration fee of $10,158 relates solely to the
registration of 8,011,250 shares of common stock not
previously registered.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the SEC, acting
pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED October 17, 2006
8,444,150 Shares Common
Stock
This prospectus relates to the offer, from time to time, of
8,000,000 shares of our common stock, par value $0.001 per
share by us and the resale of up to 444,150 shares of our
common stock by certain current stockholders.
We may offer, from time to time, up to 8,000,000 shares of
our common stock in one or more offerings. The shares of common
stock may be offered at prices and terms to be described in one
or more supplements to this prospectus. The offering price per
share of our common stock less any underwriting commissions or
discounts will not be less than the net asset value per share of
our common stock at the time we make the offering.
The shares of our common stock which is offered for resale by
this prospectus is offered for the accounts of the current
holders of such common stock, whom we refer to as the selling
holders. We will not receive any of the proceeds from the shares
of common stock sold by the selling holders. We have agreed to
bear specific expenses in connection with the registration and
sale of the common stock being offered by the selling holders.
We are a specialty finance company that provides debt and equity
growth capital to technology-related and life sciences companies
at all stages of development. We primarily finance
privately-held companies backed by leading venture capital and
private equity firms and also may finance certain
publicly-traded companies that lack access to public capital or
are sensitive to equity ownership dilution. We source our
investments through our principal office located in Silicon
Valley, as well as additional offices in the Boston, Boulder and
Chicago areas. Our goal is to be the leading structured
mezzanine capital provider of choice for venture capital and
private equity backed technology-related and life sciences
companies requiring sophisticated and customized financing
solutions. We invest primarily in structured mezzanine debt and,
to a lesser extent, in senior debt and equity.
Our investment objective is to maximize our portfolios
total return by generating current income from our debt
investments and capital appreciation from our equity-related
investments. We are an internally-managed, non-diversified
closed-end investment company that has elected to be treated as
a business development company under the Investment Company Act
of 1940.
Our common stock is traded on the Nasdaq Global Market under the
symbol HTGC. On October 9, 2006, the last
reported sale price of a share of our common stock on the Nasdaq
Global Market was $13.39.
An investment in our common stock involves risks and involves
a heightened risk of total loss of investment. In addition, the
companies in which we invest are subject to special risks. See
Risk Factors beginning on page 10 to read about
risks that you should consider before investing in our common
stock, including the risk of leverage.
This prospectus contains important information you should know
before investing in our common stock. Please read it before
making an investment decision and keep it for future reference.
Shares of closed-end investment companies have in the past
frequently traded at a discount to their net asset value. If our
shares trade at a discount to net asset value, it may increase
the risk of loss for purchasers in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We file annual, quarterly and current reports, proxy statements
and other information about us with the Securities and Exchange
Commission. The information is available free of charge by
contacting us at 525 University Avenue, Suite 700, Palo
Alto, California 94301 or by telephone calling collect at
(650) 289-3060
or on our website at www.herculestech.com. The SEC also
maintains a website at www.sec.gov that contains such
information.
The date of this prospectus
is ,
2006
You should rely only on the information contained in this
prospectus. We have not authorized any dealer, salesperson or
other person to provide you with different information or to
make representations as to matters not stated in this
prospectus. If anyone provides you with different or
inconsistent information, you should not rely on it. This
prospectus is not an offer to sell, or a solicitation of an
offer to buy, any shares of common stock by any person in any
jurisdiction where it is unlawful for that person to make such
an offer or solicitation or to any person in any jurisdiction to
whom it is unlawful to make such an offer or solicitation. The
information in this prospectus is accurate only as of its date,
and under no circumstances should the delivery of this
prospectus or the sale of any common stock imply that the
information in this prospectus is accurate as of any later date
or that the affairs of Hercules Technology Growth Capital, Inc.
have not changed since the date hereof.
TABLE OF
CONTENTS
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Page
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1
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6
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8
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10
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26
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27
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28
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30
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44
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55
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65
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65
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67
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77
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79
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81
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88
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92
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93
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101
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101
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102
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103
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103
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103
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104
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104
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F-1
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Hercules Technology Growth Capital, Inc., our logo and other
trademarks of Hercules Technology Growth Capital, Inc. mentioned
in this prospectus are the property of Hercules Technology
Growth Capital, Inc. All other trademarks or trade names
referred to in this prospectus are the property of their
respective owners.
SUMMARY
This summary highlights some of the information in this
prospectus and may not contain all of the information that is
important to you. You should read carefully the more detailed
information set forth under Risk Factors and the
other information included in this prospectus. The following
summary is qualified in its entirety by reference to the more
detailed information and financial statements appearing
elsewhere in this prospectus. In this prospectus, unless the
context otherwise requires, the Company,
Hercules Technology Growth Capital, we,
us and our refer to Hercules Technology
Growth Capital, Inc. and our wholly-owned subsidiaries Hercules
Technology II, L.P. and Hercules Technology SBIC
Management, LLC.
Our
Company
We are a specialty finance company that provides debt and equity
growth capital to technology-related and life sciences companies
at all stages of development. We primarily finance
privately-held companies backed by leading venture capital and
private equity firms and also may invest in select
publicly-traded companies that lack access to public capital or
are sensitive to equity ownership dilution. We source our
investments through our principal office located in Silicon
Valley, as well as our additional offices in the Boston,
Boulder, Chicago and Columbus areas. Our goal is to be the
leading structured mezzanine capital provider of choice for
venture capital and private equity backed technology-related and
life sciences companies requiring sophisticated and customized
financing solutions. Our strategy is to evaluate and invest in a
broad range of ventures active in the technology and life
science industries and to offer a full suite of capital products
up and down the capital structure. We invest primarily in
structured mezzanine debt and, to a lesser extent, in senior
debt and equity. We use the term structured mezzanine debt
investment to refer to any debt investment, such as a
senior or subordinated secured loan, that is coupled with an
equity component, including warrants, options or rights to
purchase common or preferred stock. Our structured mezzanine
debt investments will typically be secured by some or all of the
assets of the portfolio company.
We focus our investments in companies active in technology
industry sub-sectors characterized by products or services that
require advanced technologies, including computer software and
hardware, networking systems, semiconductors, semiconductor
capital equipment, information technology infrastructure or
services, Internet consumer and business services,
telecommunications, telecommunications equipment, media and life
sciences. Within the life sciences sub-sector, we focus on
medical devices, bio-pharmaceutical, health care services and
information systems companies. We refer to all of these
companies as technology-related companies and
intend, under normal circumstances, to invest at least 80% of
the value of our assets in such businesses.
Our investment objective is to maximize our portfolios
total return by generating current income from our debt
investments and capital appreciation from our equity-related
investments. We are an internally-managed, non-diversified
closed-end investment company that has elected to be treated as
a business development company under the Investment Company Act
of 1940.
Our primary business objectives are to increase our net income,
net operating income and net asset value by investing in
structured mezzanine debt and equity of venture capital and
private equity backed technology-related companies with
attractive current yields and the potential for equity
appreciation and realized gains. Our structured debt investments
typically include warrants or other equity interests, giving us
the potential to realize equity-like returns on a portion of our
investment. In some cases, we receive the right to make
additional equity investments in our portfolio companies in
connection with future equity financing rounds. Capital that we
provide directly to venture capital and private equity backed
technology-related companies is generally used for growth, and
in select cases for acquisitions or recapitalizations.
Our portfolio is comprised of, and we anticipate that our
portfolio will continue to be comprised of, investments in
technology-related companies at various stages of their
development. Our emphasis is on private companies following or
in connection with their first institutional round of equity
financing, which we refer to as emerging-growth companies, and
private companies in later rounds of financing, which we refer
to as expansion-stage companies. To a lesser extent, we make
investments in established companies comprised of private
companies in one of their final rounds of equity financing prior
to a liquidity event or select publicly-traded companies that
lack access to public capital or are sensitive to equity
ownership dilution.
1
Our management team, which includes Manuel A. Henriquez, our
co-founder, Chairman, President and Chief Executive Officer, is
currently comprised of 15 professionals who have, on average,
more than 15 years of experience in venture capital,
structured finance, commercial lending or acquisition finance
with the types of technology-related companies that we are
targeting. We believe that we can leverage the experience and
relationships of our management team to successfully identify
attractive investment opportunities, underwrite prospective
portfolio companies and structure customized financing solutions.
From July 1, 2006 through September 29, 2006, we
entered into binding agreements to invest approximately
$81.5 million in structured mezzanine debt in nine new
portfolio companies and one existing portfolio company and made
a $250,000 equity investment in one existing portfolio company.
During this same period, we funded the following debt
investments totalling $67.2 million in nine new portfolio
companies and five existing portfolio companies and made two
equity investments, one in a new portfolio company and one in an
existing portfolio company.
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Company
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Principal Business
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Funded Investment
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Affinity Express, Inc.
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Senior Debt
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Consumer and Business Services
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$
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296,298
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Agami Systems, Inc.
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Senior Debt
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Electronics and Computer Hardware
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7,000,000
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Atrenta, Inc.
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Equity
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Software
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250,000
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Aveo Pharmaceuticals
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Senior Debt
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Biopharmaceuticals
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7,500,000
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BabyUniverse, Inc.
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Senior Debt
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Consumer and Business Products
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5,000,000
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BARRX Medical, Inc.
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Equity
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Medical Devices and Equipment
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1,500,000
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EpiCept Corporation
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Senior Debt
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Biopharmaceuticals
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10,000,000
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ForeScout Technologies, Inc.
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Senior Debt
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Software
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1,000,000
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Gynesonics, Inc.
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Senior Debt
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Medical Devices and Equipment
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2,000,000
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Hedgestreet, Inc.
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Senior Debt
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Consumer and Business Services
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3,000,000
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Intelliden, Inc.
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Senior Debt
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Software
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3,000,000
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iWatt, Inc.
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Senior Debt
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Semiconductors
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2,000,000
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Luminuous Devices, Inc.
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Senior Debt
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Electronics and Computer Hardware
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10,000,000
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Novasys Medical, Inc.
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Senior Debt
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Medical Devices and Equipment
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6,000,000
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Oatsystems, Inc.
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Senior Debt
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Software
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3,000,000
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Portola Pharmaceuticals, Inc.
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Senior Debt
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Biopharmaceuticals
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5,625,000
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Total investments
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$
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67,171,298
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In addition, at September 29, 2006, we had unfunded
commitments totaling approximately $95.7 million. These
commitments will be subject to the same underwriting and ongoing
portfolio maintenance as are the 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. In addition, we had extended
non-binding term sheets to six prospective new portfolio
companies representing approximately $58.5 million of
structured mezzanine debt investments. These investments are
subject to finalization of our due diligence and approval
process as well as negotiation of definitive agreements with the
prospective portfolio company and, as a result, may not result
in completed investments.
As of September 29, 2006, we had $91.0 million
outstanding under our securitization credit facility.
During September 2006, we sold the assets of Optovia Corporation
for approximately $2.6 million. We will record a realized
loss on this investment in the third quarter which is estimated
to be approximately $2.7 million, which includes
approximately $380,000 of legal expenses and incentive fees paid
to a third party and members of Optovias management.
On October 16, 2006, we announced the declaration of a
dividend of $0.30 per share payable on December 1, 2006 to
stockholders of record as of November 6, 2006.
2
Our
Market Opportunity
We believe that technology-related companies compete in one of
the largest and most rapidly growing sectors of the
U.S. economy and that continued growth is supported by
ongoing innovation and performance improvements in technology
products as well as the adoption of technology across virtually
all industries in response to competitive pressures. We believe
that an attractive market opportunity exists for a specialty
finance company focused primarily on structured mezzanine
investments in technology-related and life-science companies for
the following reasons:
Technology-Related Companies Underserved by Traditional
Lenders.
We believe many viable
technology-related companies backed by financial sponsors have
been unable to obtain sufficient growth financing from
traditional lenders, including financial services companies such
as commercial banks and finance companies, in part because
traditional lenders have continued to consolidate and have
adopted a more
risk-averse
approach to lending that has resulted in tightened credit
standards in recent years. More importantly, we believe
traditional lenders are typically unable to underwrite the risk
associated with financial sponsor-backed emerging-growth or
expansion-stage companies effectively.
Unfulfilled Demand for Structured Debt Financing by
Technology-Related Companies.
Private debt
capital from specialty finance companies continues to be an
important source of funding for technology-related companies. We
believe that this demand is currently unfulfilled, in part
because historically the largest capital providers to
technology-related companies have exited the market, while at
the same time lending requirements of traditional lenders have
become more stringent. We therefore believe we entered the
structured lending market at an opportune time.
Structured Mezzanine Debt Products Complement Equity
Financing from Venture Capital and Private Equity
Funds.
We believe that our structured mezzanine
debt products will provide an additional source of growth
capital for technology-related companies that may otherwise only
be able to obtain equity financing through incremental
investments by their existing investors. Generally, we believe
emerging-growth and expansion-stage companies target a portion
of their capital to be debt in an attempt to achieve a higher
valuation through internal growth prior to subsequent equity
financing rounds or liquidity events.
Lower Valuations for Private Technology-Related
Companies.
During the downturn in
technology-related industries that began in 2000, the markets
saw sharp and broad declines in valuations of venture capital
and private equity-backed technology-related companies. We
believe that the valuations currently assigned to these
companies in private financing rounds will allow us to build a
portfolio of equity-related securities at attractive valuation
levels.
Our
Business Strategy
Our strategy to achieve our investment objective includes the
following key elements:
Leverage the Experience and Industry Relationships of Our
Management Team.
We have assembled a team of
senior investment professionals with extensive experience as
venture capitalists, commercial lenders and originators of
structured debt and equity investments in technology-related
companies. Members of our management team also have operational,
research and development and finance experience with
technology-related companies. We have established contacts with
leading venture capital and private equity fund sponsors, public
and private companies, research institutions and other industry
participants, which should enable us to identify and attract
well-positioned prospective portfolio companies.
Mitigate Risk of Principal Loss and Build a Portfolio of
Equity-Related Securities.
We expect that our
investments will have the potential to produce attractive
risk-adjusted returns through current income as well as capital
appreciation from our equity-related investments. We believe
that we can mitigate the risk of loss on our debt investments
through the combination of principal amortization, cash interest
payments, relatively short maturities, taking security interests
in the assets of our portfolio companies, requiring prospective
portfolio companies to have certain amounts of available cash at
the time of our investment and the continued support from a
venture capital or
3
private equity firm at the time we make our investment. Our debt
investments typically include warrants or other equity
interests, giving us the potential to realize equity-like
returns on a portion of our investment.
Provide Customized Financing Complementary to Financial
Sponsors Capital.
We offer a broad range of
investment structures and have the flexibility to structure our
investments to suit the particular needs of our portfolio
companies. We believe that our debt investments will be viewed
as an attractive source of capital and that many venture capital
and private equity fund sponsors encourage their portfolio
companies to use debt financing as a means of potentially
enhancing equity returns, minimizing equity dilution and
increasing valuations prior to a subsequent equity financing
round or a liquidity event.
Invest at Various Stages of Development.
We
provide growth capital to technology-related companies at all
stages of development, which we believe provides us with a
broader range of potential investment opportunities than those
available to many of our competitors, who generally choose to
make investments during a particular stage in a companys
development.
Benefit from Our Efficient Organizational
Structure.
We believe that the perpetual nature
of our corporate structure enables us to be a long-term partner
for our portfolio companies in contrast to traditional mezzanine
and investment funds, which typically have a limited life. In
addition, because of our access to the equity markets, we
believe that we may benefit from a lower cost of capital than
that available to private investment funds.
Deal Sourcing Through Our Proprietary
Database.
We have developed a proprietary and
comprehensive structured query language-based (SQL) database
system to track various aspects of our investment process,
including sourcing, originations, transaction monitoring and
post-investment performance. As of June 30, 2006, our
proprietary SQL-based database system included over 8,900
technology-related companies and over 1,900 venture capital
private equity sponsor/investors, as well as various other
industry contacts.
Dividend
Reinvestment Plan
We have adopted an opt-out dividend reinvestment plan through
which distributions are paid to stockholders in the form of
additional shares of our common stock, unless a stockholder
elects to receive cash. See Dividend Reinvestment
Plan. Those stockholders whose shares are held by a broker
or other financial intermediary may receive distributions in
cash by notifying their broker or other financial intermediary
of their election.
Taxation
From incorporation through December 31, 2005, we were taxed
as a corporation under Subchapter C of the Internal Revenue Code
of 1986, as amended, which we refer to in this prospectus as the
Code. We currently intend to elect to be treated for federal
income tax purposes as a regulated investment company (a
RIC) under Subchapter M of the Code with the filing
of our federal corporate income tax return for 2006, which
election, when actually made, would be effective as of
January 1, 2006. As a RIC, we generally will not pay
corporate-level federal income taxes on any ordinary income or
capital gains that we distribute to our stockholders as
dividends. We may be required, however, to pay corporate-level
federal income taxes on gains built into our assets as of the
effective date of our RIC election. See Certain United
States Federal Income Tax Considerations Conversion
to Regulated Investment Company Status. To obtain and
maintain the federal income tax benefits of RIC status, we must
meet specified
source-of-income
and asset diversification requirements and distribute annually
an amount equal to at least 90% of the sum of our net ordinary
income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any, out of assets
legally available for distribution. See
Distributions. There is no assurance that we will
meet these tests and be eligible to make a RIC election. If we
do not qualify or do not make a RIC election, we would continue
to be taxed as a C corporation.
Use of
Proceeds
We intend to use the net proceeds from selling shares of common
stock for general corporate purposes, which includes investing
in debt and equity securities, repayment of indebtedness and
other general corporate purposes. The supplement to this
prospectus relating to an offering will more fully identify the
use of proceeds from such offering. We will not receive any
proceeds from the sale of the common stock by the selling
holders.
4
Leverage
We borrow funds to make additional investments, and we have
granted, and may in the future grant, a security interest in our
assets to a lender in connection with any such borrowings,
including any borrowings by any of our subsidiaries. We use this
practice, which is known as leverage, to attempt to
increase returns to our common stockholders. However, leverage
involves significant risks. See Risk Factors. With
certain limited exceptions, we are only allowed to borrow
amounts such that our asset coverage, as defined in the 1940
Act, equals at least 200% after such borrowing. Our asset
coverage as of June 30, 2006 was approximately 351%. The
amount of leverage that we employ will depend on our assessment
of market and other factors at the time of any proposed
borrowing. As of June 30, 2006, we had outstanding
$61.0 million drawn under our securitization credit
facility. See Managements Discussion & Analysis
of Financial Condition Borrowings. Our
subsidiary received final approval to be licensed under the
Small Business Investment Act of 1958 on September 27,
2006; as such, we intend to borrow money from the Small Business
Administration.
Distributions
We intend to continue to distribute quarterly dividends to our
stockholders, whether or not we elect to be treated as a RIC.
The amount of our quarterly distributions will be determined by
our Board of Directors out of assets legally available for
distribution. We intend to elect to be treated as a RIC when we
file our 2006 federal income tax return, and as such, to
distribute with respect to 2006 (and annually thereafter) to our
stockholders at least 90% of the sum of our net ordinary income
and realized net short-term capital gains in excess of realized
net long-term capital losses, if any. In addition, prior to the
end of our first tax year as a RIC, we will be required to make
a distribution to our stockholders equal to the amount of any
undistributed earnings and profits from the period prior to our
RIC election. Currently, we intend to retain some or all of our
realized net long-term capital gains in order to build our per
share net asset value. As a result, we will elect as a RIC to
make deemed distributions of such amounts to our stockholders.
We may, in the future, make actual distributions to our
stockholders of some or all of our realized net long-term
capital gains. See Distributions.
Principal
Risk Factors
Investing in us involves certain risks relating to our structure
and our investment objective that you should consider before
deciding whether to invest. In addition, we expect that our
portfolio will continue to consist primarily of securities
issued by privately-held technology-related companies, which
generally require additional capital to become profitable. These
investments may involve a high degree of business and financial
risk, and they are generally illiquid. Our portfolio companies
typically will require additional outside capital beyond our
investment in order to succeed or to fully repay the amounts
owed to us. A large number of entities compete for the same kind
of investment opportunities as we seek.
We borrow funds to make our investments in portfolio companies.
As a result, we are exposed to the risks of leverage, which may
be considered a speculative investment technique. Borrowings
magnify the potential for gain and loss on amounts invested and,
therefore increase the risks associated with investing in our
common stock. Also, we are subject to certain risks associated
with valuing our portfolio, changing interest rates, accessing
additional capital, fluctuating quarterly results, and operating
in a regulated environment. See Risk Factors
beginning on page 9 for a discussion of factors you should
carefully consider before deciding whether to invest in our
common stock.
Certain
Anti-Takeover Provisions
Our charter and bylaws, as well as certain statutes and
regulations, contain provisions that may have the effect of
discouraging a third party from making an acquisition proposal
for our company. This could delay or prevent a transaction that
could give our stockholders the opportunity to realize a premium
over the price for their securities.
5
General
Information
Our principal executive offices are located at 525 University
Avenue, Suite 700, Palo Alto, California 94301, and our
telephone number is
(650) 289-3060.
We also have offices in Waltham, Massachusetts; Boston,
Massachusetts; Boulder, Colorado; and the Chicago, Illinois
area. We maintain a website on the Internet at
www.herculestech.com. Information contained in our website is
not incorporated by reference into this prospectus, and you
should not consider that information to be part of this
prospectus.
We file annual, quarterly and current periodic reports, proxy
statements and other information with the SEC under the
Securities Exchange Act of 1934, which we refer to as the
Exchange Act. This information is available at the SECs
public reference room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information about
the operation of the SECs public reference room by calling
the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet website, at
www.sec.gov, that contains reports, proxy and information
statements, and other information regarding issuers, including
us, who file documents electronically with the SEC.
Fees and
Expenses
The following table is intended to assist you in understanding
the various costs and expenses that an investor in our common
stock will bear directly or indirectly. However, we caution you
that some of the percentages indicated in the table below are
estimates and may vary. Except where the context suggests
otherwise, whenever this prospectus contains a reference to fees
or expenses paid by you or us or that
we will pay fees or expenses, stockholders will
indirectly bear such fees or expenses as investors in Hercules
Technology Growth Capital.
|
|
|
|
|
Stockholder Transaction
Expenses (as a percentage of the public offering
price):
|
|
|
|
|
Sales load (as a percentage of
offering
price)
(1)
|
|
|
|
%
|
Offering expenses
|
|
|
|
%
(2)
|
Dividend reinvestment plan fees
|
|
|
|
%
(3)
|
|
|
|
|
|
Total stockholder transaction
expenses (as a percentage of the public offering price)
|
|
|
0.1
|
%
|
|
|
|
|
|
Annual Expenses (as a
percentage of net assets attributable to common
stock):(4)
|
|
|
|
|
Operating expenses
|
|
|
7.1
|
%
(5)(6)
|
Interest payments on borrowed funds
|
|
|
3.8
|
%
(7)
|
Fees paid in connection with
borrowed funds
|
|
|
0.7
|
%
(8)
|
|
|
|
|
|
Total annual expenses
|
|
|
11.6
|
%
(9)
|
|
|
|
|
|
|
|
|
(1)
|
|
In the event that the shares of
common stock to which this prospectus relates are sold to or
through underwriters, a corresponding prospectus supplement will
disclose the applicable sales load. We will not pay any
underwriting discount or commission, and we will not receive any
of the proceeds from shares sold by the selling stockholders.
|
|
(2)
|
|
The percentage reflects estimated
offering expenses of approximately $100,000.
|
|
(3)
|
|
The expenses associated with the
administration of our dividend reinvestment plan are included in
Operating expenses. We pay all brokerage commissions
incurred with respect to open market purchases, if any, made by
the administrator under the plan. For more details about the
plan, see Dividend Reinvestment Plan.
|
|
(4)
|
|
Average net assets
attributable to common stock equals estimated weighted
average net assets for 2006 which is approximately
$153.0 million.
|
|
(5)
|
|
Operating expenses
represent our estimated expenses for the year ending
December 31, 2006. This percentage for the year ended
December 31, 2005, was approximately 7.9%.
|
|
(6)
|
|
We do not have an investment
adviser and are internally managed by our executive officers
under the supervision of our Board of Directors. As a result, we
do not pay investment advisory fees, but instead we pay the
operating costs associated with employing investment management
professionals.
|
|
|
|
(7)
|
|
Interest payments on borrowed
funds represents estimated annualized interest payments on
borrowed funds for 2006. Citigroup has an equity participation
right through a warrant participation agreement on the pool of
loans and warrants and shares underlying the warrants
collateralized under the Citigroup facility. Pursuant to the
warrant participation agreement, we granted to Citigroup a 10%
participation in all warrants held as collateral. As a result,
Citigroup is entitled to 10% of the realized gains on the
warrants until the realized gains paid to Citigroup pursuant to
the agreement equals $3,750,000 (the Maximum Participation
Limit). The obligations under the warrant
|
6
|
|
|
|
|
participation agreement continue
even after the Citigroup facility is terminated until the
Maximum Participation Limit has been reached. Since inception of
the agreement, we have paid Citigroup approximately $195,000
under the warrant participation agreement thereby reducing our
realized gains. During 2005, we recorded a liability and reduced
our unrealized gain by approximately $342,000 for unrealized
gains in our warrant and equity investments due Citigroup under
our warrant participation agreement. In addition, we recorded a
liability and reduced our realized gain by approximately $59,000
for amounts due to Citigroup from the sale of equity securities
in 2005. During the six months ended June 30, 2006, we
reduced our realized gain by approximately $136,000 for
Citigroups participation in the gain on sale of an equity
security and we recorded an additional liability and reduced our
unrealized gain by approximately $172,000 for Citigroups
participation in unrealized gains in the warrant portfolio.
Based on our estimated average borrowings for the year ending
December 31, 2006 and the annualized amount of the
reduction we recorded for our unrealized gains for the six
months ended June 30, 2006, the additional cost of our
borrowings as a result of the warrant participation agreement
could be approximately 0.4%. There can be no assurances that the
unrealized gains on the warrants will not be higher or lower at
the end of the year due to fluctuations in the value of the
warrants, thereby increasing or reducing the effect on the cost
of borrowing. The value of their participation right on
unrealized gains in the related equity investments since
inception of the agreement was approximately $378,000 at
June 30, 2006 and is included in accrued liabilities and
reduces the unrealized gain recognized by the us at
June 30, 2006.
|
|
|
|
(8)
|
|
Fees paid in connection with
borrowed funds represents estimated fees paid in
connection with borrowed funds for 2006.
|
|
(9)
|
|
Total annual expenses
is the sum of operating expenses, interest
payments on borrowed funds and fees paid in
connection with borrowed funds.
|
Example
The following example demonstrates the projected dollar amount
of total cumulative expenses that would be incurred over various
periods with respect to a hypothetical investment in our common
stock. These amounts are based upon our payment of annual
operating expenses at the levels set forth in the table above
and assume no additional leverage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
You would pay the following
expenses on a $1,000 investment, assuming a 5% annual return
|
|
$
|
157.03
|
|
|
$
|
350.88
|
|
|
$
|
520.62
|
|
|
$
|
858.22
|
|
The example and the expenses in the tables above should not be
considered a representation of our future expenses, and actual
expenses may be greater or lesser than those shown. Moreover,
while the example assumes, as required by the applicable rules
of the SEC, a 5% annual return, our performance will vary and
may result in a return greater or lesser than 5%. In addition,
while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in our dividend
reinvestment plan may receive shares valued at the market price
in effect at that time. This price may be at, above or below net
asset value. See Dividend Reinvestment Plan for
additional information regarding our dividend reinvestment plan.
7
Selected
Consolidated Financial Data
The selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations on
page 29 and the consolidated financial statements and
related notes included elsewhere herein. The selected balance
sheet data as of the end of fiscal 2005 and 2004 presented
below, and the selected income statement data for fiscal 2005
and the period from February 2, 2004 through the end of
fiscal 2004, have been derived from our audited financial
statements included elsewhere herein, which have been audited by
Ernst & Young LLP, an independent registered public
accounting firm. The selected balance sheet data as of
June 30, 2006 presented below and the selected income
statement data for the fiscal quarter then ended have been
derived from our unaudited financial statements included
elsewhere herein. In the opinion of management, the quarterly
financial information derived from unaudited financial
information, reflects all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the
results for the interim period. The historical data are not
necessarily indicative of results to be expected for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
Period from
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
February 2, 2004
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2006
|
|
|
2005
(1)
|
|
|
2004
(1)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
11,810,370
|
|
|
$
|
9,791,214
|
|
|
$
|
214,100
|
|
Fees
|
|
|
1,464,674
|
|
|
|
875,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
13,275,044
|
|
|
|
10,666,643
|
|
|
|
214,100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
3,034,875
|
|
|
|
1,800,536
|
|
|
|
|
|
Loan fees
|
|
|
537,481
|
|
|
|
1,098,507
|
|
|
|
|
|
Compensation and benefits
|
|
|
2,332,320
|
|
|
|
3,705,784
|
|
|
|
1,164,504
|
|
General and administrative
|
|
|
2,603,977
|
|
|
|
2,285,038
|
|
|
|
411,418
|
|
Stock-based
compensation
(2)
|
|
|
253,000
|
|
|
|
252,000
|
|
|
|
680,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,761,653
|
|
|
|
9,141,865
|
|
|
|
2,255,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
before provision for income tax expense and investment gains and
losses
|
|
|
4,513,391
|
|
|
|
1,524,778
|
|
|
|
(2,041,822
|
)
|
Income tax expense
|
|
|
988,177
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
3,525,214
|
|
|
|
1,269,778
|
|
|
|
(2,041,822
|
)
|
Net realized gain on equity
investment
|
|
|
3,144,443
|
|
|
|
481,694
|
|
|
|
|
|
Net increase (decrease) in
unrealized appreciation on investments
|
|
|
(798,292
|
)
|
|
|
353,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on investments
|
|
|
2,346,151
|
|
|
|
834,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets resulting from operations
|
|
$
|
5,871,365
|
|
|
$
|
2,104,565
|
|
|
$
|
(2,041,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
June 30, 2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at value
|
|
$
|
193,571,348
|
|
|
$
|
176,673,226
|
|
|
$
|
16,700,000
|
|
Cash and cash equivalents
|
|
$
|
23,211,755
|
|
|
|
15,362,447
|
|
|
|
8,678,329
|
|
Total assets
|
|
$
|
217,239,108
|
|
|
|
193,647,879
|
|
|
|
25,232,672
|
|
Total
liabilities
(3)
|
|
$
|
63,910,022
|
|
|
|
79,295,549
|
|
|
|
154,539
|
|
Total net assets
|
|
$
|
153,329,086
|
|
|
$
|
114,352,330
|
|
|
$
|
25,078,133
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt investments, at value
|
|
$
|
188,113,175
|
|
|
$
|
171,805,963
|
|
|
$
|
16,700,000
|
|
Total equity investments, at value
|
|
$
|
5,458,173
|
|
|
|
4,867,263
|
|
|
|
|
|
Unfunded commitments
|
|
$
|
85,200,000
|
|
|
|
30,200,000
|
|
|
|
5,000,000
|
|
Net asset value per
share
(4)
|
|
$
|
11.24
|
|
|
$
|
11.67
|
|
|
$
|
12.18
|
|
|
|
|
(1)
|
|
We commenced operations on
February 2, 2004 but did not commence investment operations
until September 2004 and as a result, there is no period with
which to compare our results of operations for the year ended
December 31, 2005 or the period from February 2, 2004
to December 31, 2004.
|
|
(2)
|
|
Non-cash expense under
FAS 123R relates to options and warrants granted to
employees.
|
|
(3)
|
|
See the Senior Securities
information on page 62.
|
|
(4)
|
|
Based on common shares outstanding
at period-end.
|
9
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
Before you invest in shares of our common stock, you should be
aware of various risks, including those described below. You
should carefully consider these risks, together with all of the
other information included in this prospectus, before you decide
whether to make an investment in our common stock. The risks set
forth below are not the only risks we face. If any of the
following risks occur, our business, financial condition and
results of operations could be materially adversely affected. In
such case, our net asset value and the trading price of our
common stock could decline, and you may lose all or part of your
investment.
Risks
Related to our Business and Structure
We
have a limited operating history as a business development
company, which may affect our ability to manage our business and
may impair your ability to assess our prospects.
We were incorporated in December 2003 and commenced investment
operations in September 2004. We are subject to all of the
business risks and uncertainties associated with any new
business enterprise, including the risk that we will not achieve
our investment objective and that the value of our common stock
could decline substantially. We have limited operating history
as a business development company and have not yet been able to
elect to be treated as a RIC for tax purposes. As a result, we
have limited operating results under these regulatory frameworks
that can demonstrate to you either their effect on the business
or our ability to manage the business within these frameworks.
See Regulation and Certain United States
Federal Income Tax Considerations. If we fail to maintain
our status as a business development company or fail to qualify
as a RIC, our operating flexibility and results of operations
would be significantly affected.
We are
dependent upon key management personnel for our future success,
particularly Manuel A. Henriquez, and if we are not able to hire
and retain qualified personnel, or if we lose any member of our
senior management team, our ability to implement our business
strategy could be significantly harmed.
We depend upon the members of our senior management,
particularly Mr. Henriquez, as well as other key personnel
for the identification, final selection, structuring, closing
and monitoring of our investments. These employees have critical
industry experience and relationships on which we rely to
implement our business plan. If we lose the services of
Mr. Henriquez, or of any other senior management members,
we may not be able to operate the business as we expect, and our
ability to compete could be harmed, which could cause our
operating results to suffer. We believe our future success will
depend, in part, on our ability to identify, attract and retain
sufficient numbers of highly skilled employees. If we do not
succeed in identifying, attracting and retaining such personnel,
we may not be able to operate our business as we expect.
Our
business model depends to a significant extent upon strong
referral relationships with venture capital and private equity
fund sponsors, and our inability to develop or maintain these
relationships, or the failure of these relationships to generate
investment opportunities, could adversely affect our
business.
We expect that members of our management team will maintain
their relationships with venture capital and private equity
firms, and we will rely to a significant extent upon these
relationships to provide us with our deal flow. If we fail to
maintain our existing relationships or to develop new
relationships with other firms or sources of investment
opportunities, then we will not be able to grow our investment
portfolio. In addition, persons with whom members of our
management team have relationships are not obligated to provide
us with investment opportunities and, therefore, there is no
assurance that such relationships will lead to the origination
of debt or other investments.
We
operate in a highly competitive market for investment
opportunities, and we may not be able to compete
effectively.
A large number of entities compete with us to make the types of
investments that we plan to make in prospective portfolio
companies. We compete with a large number of venture capital and
private equity firms, as well as with other investment funds,
investment banks and other sources of financing, including
traditional financial services companies such as commercial
banks and finance companies. Many of our competitors are
substantially
10
larger and have considerably greater financial, technical,
marketing and other resources than we do. For example, some
competitors may have a lower cost of funds
and/or
access to funding sources that are not available to us. This may
enable some competitors to make commercial loans with interest
rates that are comparable to or lower than the rates that we
typically offer. We may lose prospective portfolio companies if
we do not match competitors pricing, terms and structure.
If we do match competitors pricing, terms or structure, we
may experience decreased net interest income and increased risk
of credit losses. In addition, some of our competitors may have
higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments,
establish more relationships and build their market shares.
Furthermore, many potential competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on us as a
business development company or that the Code would impose on us
as a RIC. If we are not able to compete effectively, our
business, financial condition, and results of operations will be
adversely affected. As a result of this competition, there can
be no assurance that we will be able to identify and take
advantage of attractive investment opportunities that we
identify, or that we will be able to fully invest our available
capital.
Because
we intend to distribute substantially all of our income to our
stockholders if we are treated as a RIC, we will continue to
need additional capital to finance our growth. If additional
funds are unavailable or not available on favorable terms, our
ability to grow will be impaired.
In order to satisfy the tax requirements applicable to a RIC, to
avoid payment of excise taxes and to minimize or avoid payment
of income taxes, we intend as a RIC to distribute to our
stockholders substantially all of our ordinary income and
realized net capital gains except for certain realized net
long-term capital gains, which we currently intend to retain,
pay applicable income taxes with respect thereto and elect to
treat as deemed distributions to our stockholders. As a business
development company, we generally are required to meet a
coverage ratio of total assets to total borrowings and other
senior securities, which includes all of our borrowings and any
preferred stock that we may issue in the future, of at least
200%. This requirement limits the amount that we may borrow.
Because we will continue to need capital to grow our loan and
investment portfolio, this limitation may prevent us from
incurring debt and require us to raise additional equity at a
time when it may be disadvantageous to do so. While we expect to
be able to borrow and to issue additional debt and equity
securities, we cannot assure you that debt and equity financing
will be available to us on favorable terms, or at all, and debt
financings may be restricted by the terms of any of our
outstanding borrowings. In addition, as a business development
company, we generally are not permitted to issue equity
securities priced below net asset value without stockholder
approval and approval of our independent directors. If
additional funds are not available to us, we could be forced to
curtail or cease new lending and investment activities, and our
net asset value could decline.
Because
we borrow money, there could be increased risk in investing in
our company.
Lenders have fixed dollar claims on our assets that are superior
to the claims of stockholders, and we have granted, and may in
the future grant, lenders a security interest in our assets in
connection with borrowings. In the case of a liquidation event,
those lenders would receive proceeds before our stockholders. In
addition, borrowings, also known as leverage, magnify the
potential for gain or loss on amounts invested and, therefore,
increase the risks associated with investing in our securities.
Leverage is generally considered a speculative investment
technique. If the value of our assets increases, then leveraging
would cause the net asset value attributable to our common stock
to increase more than it otherwise would have had we not
leveraged. Conversely, if the value of our assets decreases,
leveraging would cause the net asset value attributable to our
common stock to decline more than it otherwise would have had we
not leveraged. Similarly, any increase in our revenue in excess
of interest expense on our borrowed funds would cause our net
income to increase more than it would without the leverage. Any
decrease in our revenue would cause our net income to decline
more than it would have had we not borrowed funds and could
negatively affect our ability to make distributions on common
stock. Our ability to service any debt that we incur will depend
largely on our financial performance and will be subject to
prevailing economic conditions and competitive pressures. We
and, indirectly our stockholders will bear the cost associated
with our leverage activity. Our securitized credit facility with
Citigroup Global Markets Realty Corp. and which we refer to as
the Citigroup facility contains financial and operating
covenants that could restrict our business activities, including
our ability to declare dividends if we default under certain
provisions.
11
As of June 30, 2006, we had outstanding indebtedness of
$61 million pursuant to our securitized credit facility
with Citigroup Global Market Realty Corp., and which we refer to
as the Citigroup Facility. We expect, in the future, to borrow
from, and issue senior debt securities to, banks, insurance
companies and other lenders, including additional borrowings
pursuant to the Citigroup Facility. See Managements
Discussion and Analysis of Financial Condition
Borrowings. In addition, we expect to continue to pursue
financing from the Small Business Administration under its Small
Business Investment Company program. See
Regulation Small Business Administration
Regulations.
As a business development company, we generally are required to
meet a coverage ratio of total assets to total borrowings and
other senior securities, which include all of our borrowings and
any preferred stock that we may issue in the future, of at least
200%. If this ratio declines below 200%, we may not be able to
incur additional debt and may need to sell a portion of our
investments to repay some debt when it is disadvantageous to do
so, and we may not be able to make distributions.
Illustration.
The following table illustrates
the effect of leverage on returns from an investment in our
common stock assuming various annual returns, net of expenses.
The calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing in the table
below.
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Assumed Return on Our Portfolio
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(Net of Expenses)
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(10)%
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(5)%
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0%
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5%
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10%
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Corresponding return to
stockholder
(1)
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(22.72
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)%
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(13.23
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)%
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(3.73
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)%
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5.76
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%
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15.25
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%
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(1)
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Assumes $243.0 million in
total assets, $61.0 million in debt outstanding,
$153.3 million in stockholders equity, and an average
cost of funds of 7.0%, which is the approximate cost of funds of
the warehouse facility. Actual interest payments may be
different.
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Because
most of our investments typically are not in publicly-traded
securities, there is uncertainty regarding the value of our
investments, which could adversely affect the determination of
our net asset value.
At June 30, 2006, portfolio investments, 99% of which are
valued at fair value by the Board of Directors were
approximately 89% of our total assets. We expect our investments
to continue to consist primarily of securities issued by
privately-held companies, the fair value of which is not readily
determinable. In addition, we are not permitted to maintain a
general reserve for anticipated loan losses. Instead, we are
required by the 1940 Act to specifically value each investment
and record an unrealized gain or loss for any asset that we
believe has increased or decreased in value. There is no single
standard for determining fair value in good faith. We value
these securities at fair value as determined in good faith by
our Board of Directors, based on the recommendations of our
Board of Directors Valuation Committee. The Valuation
Committee utilizes its best judgment in arriving at the fair
value of these securities. As a result, determining fair value
requires that judgment be applied to the specific facts and
circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of
investments we make. However, the Board of Directors retains
ultimate authority as to the appropriate valuation of each
investment. Because such valuations are inherently uncertain and
may be based on estimates, our determinations of fair value may
differ materially from the values that would be assessed if a
ready market for these securities existed. We adjust quarterly
the valuation of our portfolio to reflect the Board of
Directors determination of the fair value of each
investment in our portfolio. Any changes in fair value are
recorded in our statement of operations as net change in
unrealized appreciation or depreciation. Our net asset value
could be adversely affected if our determinations regarding the
fair value of our investments were materially higher than the
values that we ultimately realize upon the disposal of such
securities.
Our
financial results could be negatively affected if a significant
portfolio investment fails to perform as expected.
Our total investment in companies may be significant
individually or in the aggregate. As a result, if a significant
investment in one or more companies fails to perform as
expected, our financial results could be more negatively
affected and the magnitude of the loss could be more significant
than if we had made smaller investments in more companies. At
June 30, 2006, our largest investment at value was in
Wageworks, Inc. and represented
12
8.1% of our total assets and 8.0% of our total
investment income for the six months ended June 30, 2006.
Our financial results could be negatively affected if this
portfolio company or any of our other significant portfolio
companies encounter financial difficulty and fail to repay their
obligations or to perform as expected.
Regulations
governing our operations as a business development company
affect our ability to, and the manner in which, we raise
additional capital, which may expose us to risks.
Our business will require a substantial amount of capital. We
may acquire additional capital from the issuance of senior
securities, including borrowings, securitization transactions or
other indebtedness, or the issuance of additional shares of our
common stock. However, we may not be able to raise additional
capital in the future on favorable terms or at all. We may issue
debt securities, other evidences of indebtedness or preferred
stock, and we may borrow money from banks or other financial
institutions, which we refer to collectively as senior
securities, up to the maximum amount permitted by the 1940
Act. The 1940 Act permits us to issue senior securities in
amounts such that our asset coverage, as defined in the 1940
Act, equals at least 200% after each issuance of senior
securities. Our ability to pay dividends or issue additional
senior securities would be restricted if our asset coverage
ratio were not at least 200%. If the value of our assets
declines, we may be unable to satisfy this test. If that
happens, we may be required to liquidate a portion of our
investments and repay a portion of our indebtedness at a time
when such sales may be disadvantageous. As a result of issuing
senior securities, we would also be exposed to typical risks
associated with leverage, including an increased risk of loss.
If we issue preferred stock, the preferred stock would rank
senior to common stock in our capital structure,
preferred stockholders would have separate voting rights and
might have rights, preferences, or privileges more favorable
than those of our common stockholders and the issuance of
preferred stock could have the effect of delaying, deferring, or
preventing a transaction or a change of control that might
involve a premium price for holders of our common stock or
otherwise be in your best interest.
To the extent that we are constrained in our ability to issue
debt or other senior securities, we will depend on issuances of
common stock to finance operations. Other than in certain
limited situations such as rights offerings, as a business
development company, we are generally not able to issue our
common stock at a price below net asset value without first
obtaining required approvals from our stockholders and our
independent directors. If we raise additional funds by issuing
more common stock or senior securities convertible into, or
exchangeable for, our common stock, then the percentage
ownership of our stockholders at that time will decrease, and
you might experience dilution. In addition to issuing securities
to raise capital as described above, we anticipate that, in the
future, we may securitize our loans to generate cash for funding
new investments. An inability to successfully securitize our
loan portfolio could limit our ability to grow our business and
fully execute our business strategy.
Our
ability to invest in certain private and public companies may be
limited in certain circumstances.
As a business development company, we must not acquire any
assets other than qualifying assets unless, at the
time of and after giving effect to such acquisition, at least
70% of our total assets are qualifying assets. We expect that
substantially all of our assets will be qualifying
assets, although we may decide to make other investments
that are not qualifying assets to the extent
permitted by the 1940 Act.
Currently, if we acquire debt or equity securities from an
issuer that has outstanding marginable securities at the time
that we make an investment, these acquired assets cannot be
treated as qualifying assets. This result is dictated by the
definition of eligible portfolio company under the
1940 Act, which in part looks to whether a company has
outstanding marginable securities. For a more detailed
discussion of the definition of an eligible portfolio
company and the marginable securities requirement, see the
section entitled Regulation Qualifying
Assets.
Amendments promulgated in 1998 by the Federal Reserve expanded
the definition of a marginable security under the Federal
Reserves margin rules to include any non-equity security.
Thus, any debt securities issued by any entity are marginable
securities under the Federal Reserves current margin
rules. As a result, the staff of the SEC has raised the question
to the business development company industry as to whether a
private company that has outstanding debt securities would
qualify as an eligible portfolio company under the
1940 Act.
13
In November 2004, the SEC issued proposed rules to correct the
unintended consequence of the Federal Reserves 1998 margin
rule amendments of apparently limiting the investment
opportunities of business development companies.
In general, the SECs proposed rules would define an
eligible portfolio company as any company that does not have
securities listed on a national securities exchange or
association. We are currently in the process of reviewing the
SECs proposed rules and assessing their impact, to the
extent that such proposed rules are subsequently approved by the
SEC, on our investment activities.
Until the SEC or its staff has taken a final public position
with respect to the issue discussed above, we will continue to
monitor this issue closely, and we may be required to adjust our
investment focus to comply with any future administrative
position or action taken by the SEC.
We may
have difficulty paying our required distributions if we
recognize income before or without receiving cash representing
such income.
In accordance with generally accepted accounting principles and
tax requirements, we include in income certain amounts that we
have not yet received in cash, such as contracted
payment-in-kind
interest, which represents contractual interest added to a loan
balance and due at the end of such loans term. In addition
to the cash yields received on our loans, in some instances,
certain loans may also include any of the following:
end-of-term
payments, exit fees, balloon payment fees or prepayment fees.
The increases in loan balances as a result of contracted
payment-in-kind
arrangements are included in income for the period in which such
payment-in-kind
interest was received, which is often in advance of receiving
cash payment, and are separately identified on our statements of
cash flows. We also may be required to include in income certain
other amounts that we will not receive in cash.
Any warrants that we receive in connection with our debt
investments will generally be valued as part of the negotiation
process with the particular portfolio company. As a result, a
portion of the aggregate purchase price for the debt investments
and warrants will be allocated to the warrants that we receive.
This will generally result in original issue
discount for tax purposes, which we must recognize as
ordinary income, increasing the amount that we are required to
distribute to qualify for the federal income tax benefits
applicable to RICs. Because these warrants would not produce
distributable cash for us at the same time as we are required to
make distributions in respect of the related original issue
discount, we would need to obtain cash from other sources to
satisfy such distribution requirements. If we are unable to
obtain cash from other sources to satisfy such distribution
requirements, we may fail to qualify for the federal income tax
benefits allowable to RICs and, thus, become subject to a
corporate-level income tax on all our income.
Other features of the debt instruments that we hold may also
cause such instruments to generate an original issue discount,
resulting in a dividend distribution requirement in excess of
current cash interest received. Since in certain cases we may
recognize income before or without receiving cash representing
such income, we may have difficulty meeting the RIC tax
requirement to distribute at least 90% of our net ordinary
income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any. If we are unable
to meet these distribution requirements, we will not qualify for
the federal income tax benefits allowable to a RIC. Accordingly,
we may have to sell some of our assets, raise additional debt or
equity capital or reduce new investment originations to meet
these distribution requirements. See Certain United States
Federal Income Tax Considerations Taxation as a
Regulated Investment Company.
There
is a risk that you may not receive distributions or that our
distributions may not grow over time.
We intend to make distributions on a quarterly basis to our
stockholders. We cannot assure you that we will achieve
investment results that will allow us to make a specified level
of cash distributions or
year-to-year
increases in cash distributions. In addition, due to the asset
coverage test applicable to us as a business development
company, we may be limited in our ability to make distributions.
Also, our credit facility limits our ability to declare
dividends if we default under certain provisions.
14
If we
are unable to manage our future growth effectively, we may be
unable to achieve our investment objective, which could
adversely affect our financial condition and results of
operations and cause the value of your investment to
decline.
Our ability to achieve our investment objective will depend on
our ability to sustain growth. Sustaining growth will depend, in
turn, on our senior management teams ability to identify,
evaluate, finance and invest in suitable companies that meet our
investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of our marketing
capabilities, our management of the investment process, our
ability to provide efficient services and our access to
financing sources on acceptable terms. Failure to manage our
future growth effectively could have a material adverse effect
on our business, financial condition and results of operations.
Our
quarterly and annual operating results are subject to
fluctuation as a result of the nature of our business, and if we
fail to achieve our investment objective, the net asset value of
our common stock may decline.
We could experience fluctuations in our quarterly and annual
operating results due to a number of factors, some of which are
beyond our control, including, but not limited to, the interest
rate payable on the debt securities that we acquire, the default
rate on such securities, the level of our expenses, variations
in and the timing of the recognition of realized and unrealized
gains or losses, the degree to which we encounter competition in
our markets and general economic conditions. As a result of
these factors, results for any period should not be relied upon
as being indicative of performance in future periods.
In addition, any of these factors could negatively impact our
ability to achieve our investment objectives, which may cause
our net asset value of our common stock to decline.
Fluctuations
in interest rates may adversely affect our
profitability.
A portion of our income will depend upon the difference between
the rate at which we borrow funds and the interest rate on the
debt securities in which we invest. Because we will borrow money
to make investments, our net investment income is dependent upon
the difference between the rate at which we borrow funds and the
rate at which we invest these funds. Typically, we anticipate
that our interest-earning investments will accrue and pay
interest at fixed rates, and that our interest-bearing
liabilities will accrue interest at variable rates. As a result,
there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on our
net investment income. We anticipate using a combination of
equity and long-term and short-term borrowings to finance our
investment activities.
A significant increase in market interest rates could harm our
ability to attract new portfolio companies and originate new
loans and investments. We expect that most of our initial
investments in debt securities will be at fixed rates. However,
in the event that we make investments in debt securities at
variable rates, a significant increase in market interest rates
could also result in an increase in our non-performing assets
and a decrease in the value of our portfolio because our
floating-rate loan portfolio companies may be unable to meet
higher payment obligations. In periods of rising interest rates,
our cost of funds would increase, resulting in a decrease in our
net investment income. In addition, a decrease in interest rates
may reduce net income, because new investments may be made at
lower rates despite the increased demand for our capital that
the decrease in interest rates may produce. We may, but will not
be required to, hedge against the risk of adverse movement in
interest rates in our short-term and long-term borrowings
relative to our portfolio of assets. If we engage in hedging
activities, it may limit our ability to participate in the
benefits of lower interest rates with respect to the hedged
portfolio. Adverse developments resulting from changes in
interest rates or hedging transactions could have a material
adverse effect on our business, financial condition, and results
of operations.
If we
are unable to continue to borrow money in order to leverage our
equity capital, then our ability to make new investments and to
execute our business plan will be impaired.
As of June 30, 2006, we had outstanding borrowings of
$61.0 million pursuant to the Citigroup Facility. We expect
to incur additional indebtedness under our subsidiarys
small business investment company license from the Small
Business Administration. There can be no assurance that we will
be successful in obtaining any additional
15
debt capital on terms acceptable to us or at all. If we are
unable to obtain debt capital, then our equity investors will
not benefit from the potential for increased returns on equity
resulting from leverage to the extent that our investment
strategy is successful.
In addition, the terms of available financing may place limits
on our financial and operating flexibility. If we are unable to
obtain sufficient capital in the future, we may:
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be forced to reduce our operations;
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not be able to expand or acquire complementary businesses; and
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not be able to develop new services or otherwise respond to
changing business conditions or competitive pressures.
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It is
likely that the terms of any long-term or revolving credit or
warehouse facility we may enter into in the future could
constrain our ability to grow our business.
As of June 30, 2006, the Company, through Hercules Funding
Trust I, an affiliated statutory trust, has a
$125 million securitized credit facility with Citigroup. We
expect to enter into additional revolving credit or warehouse
facilities in the future. While there can be no assurance that
we will be able to borrow from banks or other financial
institutions, we expect that we will, at some time in the
future, obtain a long-term or revolving credit facility or a
warehouse facility. The current lenders have, and any future
lender or lenders will have fixed dollar claims on our assets
that are senior to the claims of our stockholders and, thus,
will have a preference over our stockholders with respect to our
assets. In addition, we may grant a security interest in our
assets in connection with any such borrowing. We expect such a
facility to contain customary default provisions such as a
minimum net worth amount, a profitability test, and a
restriction on changing our business and loan quality standards.
An event of default under any credit facility would likely
result, among other things, in termination of the availability
of further funds under that facility and an accelerated maturity
date for all amounts outstanding under the facility, which would
likely disrupt our business and, potentially, the business of
the portfolio companies whose loans that we financed through the
facility. This could reduce our revenues and, by delaying any
cash payment allowed to us under our facility until the lender
has been paid in full, reduce our liquidity and cash flow and
impair our ability to grow our business and maintain our status
as a RIC.
Our
cost of borrowing is increased by the warrant participation
agreement we have with one of our lenders. In addition, our
realized gains are reduced by amounts paid pursuant to the
warrant participation agreement.
Citigroup has an equity participation right through a warrant
participation agreement on the pool of loans and warrants
collateralized under the Citigroup facility. Pursuant to the
warrant participation agreement, we granted to Citigroup a 10%
participation in all warrants held as collateral. As a result,
Citigroup is entitled to 10% of the realized gains on the
warrants until the realized gains paid to Citigroup pursuant to
the agreement equals $3,750,000 (the Maximum Participation
Limit). The obligations under the warrant participation
agreement continue even after the Citigroup facility is
terminated until the Maximum Participation Limit has been
reached.
During the six months ended June 30, 2006, we reduced our
realized gain by approximately $136,000 for Citigroups
participation in the gain on sale of an equity security and we
recorded an additional liability and reduced our unrealized gain
by approximately $172,000 for Citigroups participation in
unrealized gains in the warrant portfolio. Since inception of
the agreement, we have paid Citigroup approximately $195,000
under the warrant participation agreement thereby reducing our
realized gains. In addition, our realized gains will be reduced
by the amounts owed to Citigroup under the warrant participation
agreement. The value of Citigroups participation right on
unrealized gains in the related equity investments since
inception of the agreement was approximately $378,000 at
June 30, 2006 and is included in accrued liabilities and
reduces the unrealized gain recognized by us at June 30,
2006. Citigroups rights under the warrant participation
agreement increase our cost of borrowing and reduce our realized
gains.
16
If we
are unable to satisfy Code requirements for qualification as a
RIC, then we will be subject to corporate-level income tax,
which would adversely affect our results of operations and
financial condition.
We intend to elect to be treated as a RIC for federal income tax
purposes with the filing of our federal corporate income tax
return for 2006, which election when actually made, would be
effective as of January 1, 2006. After we make this
election, and if we qualify, to be treated as a RIC, we can
generally avoid corporate-level federal income taxes on income
distributed to our stockholders as dividends. As a RIC, we could
be subject to tax on any unrealized net built-in gains in the
assets held by us during the period in which we were not (or in
which we failed to qualify as) a RIC that are recognized within
the following 10 years, unless we make a special election
to pay corporate-level tax on such built-in gain at the time of
our RIC election or an exception applies. See Certain
United States Federal Income Tax Considerations
Conversion to Regulated Investment Company Status. We will
not qualify for the tax treatment allowable to RICs if we are
unable to comply with the source of income, diversification and
distribution requirements contained in Subchapter M of the Code,
or if we fail to maintain our election to be regulated as a
business development company under the 1940 Act. If we fail to
qualify for the federal income tax benefits allowable to RICs
for any reason and remain or become subject to a corporate-level
income tax, the resulting taxes could substantially reduce our
net assets, the amount of income available for distribution to
our stockholders and the actual amount of our distributions.
Such a failure would have a material adverse effect on us, the
net asset value of our common stock and the total return, if
any, obtainable from your investment in our common stock. For
additional information regarding our regulatory requirements,
see Regulation and Certain United States
Federal Income Tax Considerations. Any net operating
losses that we incur in periods during which we qualify as a RIC
will not offset net capital gains (i.e., net realized long-term
capital gains in excess of net realized short-term capital
losses) that we are otherwise required to distribute, and we
cannot pass such net operating losses through to our
stockholders. In addition, net operating losses that we carry
over to a taxable year in which we qualify as a RIC normally
cannot offset ordinary income or capital gains.
Interpretations
of the staff of the Securities and Exchange Commission regarding
the appropriateness of the consolidation of certain of our
subsidiaries may have an impact on our financial
statements.
The staff of the Securities and Exchange Commission (the
Staff) is reviewing the appropriateness of the
consolidation of certain types of subsidiaries on an
industry-wide basis under generally accepted accounting
principles (GAAP) and
Rule 6-03
of
Regulation S-X.
In connection with such review, the Staff is in the process of
reviewing the appropriateness of our consolidation of certain of
our subsidiaries (the Subsidiaries). In the event
that the Staff disagrees with our position with respect to the
appropriateness of consolidation of any of the Subsidiaries,
then we will make such additional disclosures and prospective
changes in accounting methods as the Staff requires on a
prospective basis which will be discussed and reviewed with us.
Although we believe that our consolidation of the Subsidiaries
conforms with GAAP, there can be no assurance that the Staff
will ultimately concur with our position. Such events could have
a material impact on our future reported results.
Changes
in laws or regulations governing our business could negatively
affect the profitability of our operations.
Changes in the laws or regulations, or the interpretations of
the laws and regulations, which govern business development
companies, small business investment companies, RICs or
non-depository commercial lenders could significantly affect our
operations and our cost of doing business. We are subject to
federal, state and local laws and regulations and are subject to
judicial and administrative decisions that affect our
operations, including our loan originations, maximum interest
rates, fees and other charges, disclosures to portfolio
companies, the terms of secured transactions, collection and
foreclosure procedures, and other trade practices. If these
laws, regulations or decisions change, or if we expand our
business into jurisdictions that have adopted more stringent
requirements than those in which we currently conduct business,
then we may have to incur significant expenses in order to
comply or we may have to restrict our operations. In addition,
if we do not comply with applicable laws, regulations and
decisions, then we may lose licenses needed for the conduct of
our business and be subject to civil fines and criminal
penalties, any of which could have a material adverse effect
upon our business results of operations or financial condition.
17
We are
exposed to increased costs and risks associated with complying
with regulations of corporate governance and disclosure
standards.
Section 404 of the Sarbanes-Oxley Act of 2002 requires
managements annual review and evaluation of our internal
control systems and attestations of the effectiveness of these
systems by our independent auditors. We are commencing
evaluation, documentation and testing of our internal control
systems and procedures and considering improvements that may be
necessary in order for us to comply with the requirements of
Section 404 by the end of 2006. This process has required
us to hire outside advisory services and will result in
additional accounting and legal expenses. We may encounter
problems or delays in completing the review and evaluation, the
implementation of improvements and the receipt of a positive
attestation by our independent auditors. While we believe that
we currently have adequate internal controls over financial
reporting, in the event that our chief executive officer,
principal financial and accounting officer or independent
auditors determine that our controls over financial reporting
are not effective as defined under Section 404, investor
perceptions of our company may be adversely affected and could
cause a decline in the market price of our stock.
Risks
Related to Our Investments
Our
investments are concentrated in a limited number of
technology-related companies, which subjects us to the risk of
significant loss if any of these companies default on their
obligations under any of their debt securities that we hold, or
if any of the technology-related industry sectors experience a
downturn.
We have invested and intend to continue investing in a limited
number of technology-related companies. A consequence of this
limited number of investments is that the aggregate returns we
realize may be significantly adversely affected if a small
number of investments perform poorly or if we need to write down
the value of any one investment. Beyond the asset
diversification requirements to which we will be subject as a
RIC, we do not have fixed guidelines for diversification or
limitations on the size of our investments in any one portfolio
company and our investments could be concentrated in relatively
few issuers. In addition, we have invested in and intend to
continue investing, under normal circumstances, at least 80% of
the value of our total assets (including the amount of any
borrowings for investment purposes) in technology-related and
life-science companies. As a result, a downturn in
technology-related and life-science industry sectors could
materially adversely affect us.
Our
investments may be concentrated in emerging-growth or
expansion-stage portfolio companies, which may have limited
operating histories and financial resources.
We expect that our portfolio will continue to consist primarily
of investments in emerging-growth and expansion-stage
privately-owned businesses, which may have relatively limited
operating histories. Compared to larger established or
publicly-owned firms, these companies may be particularly
vulnerable to economic downturns, may have more limited access
to capital and higher funding costs, may have a weaker financial
position and may need more capital to expand or compete. These
businesses also may experience substantial variations in
operating results. They may face intense competition, including
from companies with greater financial, technical and marketing
resources. Furthermore, some of these companies do business in
regulated industries and could be affected by changes in
government regulation. Accordingly, these factors could impair
their cash flow or result in other events, such as bankruptcy,
which could limit their ability to repay their obligations to
us, and may adversely affect the return on, or the recovery of,
our investment in these companies. We cannot assure you that any
of our investments in our portfolio companies will be
successful. Our portfolio companies compete with larger,
established companies with greater access to, and resources for,
further development in these new technologies. We may lose our
entire investment in any or all of our portfolio companies.
Our
investment strategy focuses on technology-related and
life-science companies, which are subject to many risks,
including volatility, intense competition, shortened product
life cycles and periodic downturns, and you could lose all or
part of your investment.
We have invested and will continue investing primarily in
technology-related and life-science companies, many of which may
have narrow product lines and small market shares, which tend to
render them more vulnerable to competitors actions and
market conditions, as well as to general economic downturns. The
revenues, income (or
18
losses), and valuations of technology-related and life-science
companies can and often do fluctuate suddenly and dramatically.
In addition, technology- related markets are generally
characterized by abrupt business cycles and intense competition.
Beginning in mid-2000, there was substantial excess production
capacity and a significant slowdown in many technology-related
industries. This overcapacity, together with a cyclical economic
downturn, resulted in substantial decreases in the market
capitalization of many technology-related and life-science
companies. While such valuations have recovered to some extent,
such decreases in market capitalization may occur again, and any
future decreases in technology-related and life-science company
valuations may be substantial and may not be temporary in
nature. Therefore, our portfolio companies may face considerably
more risk of loss than do companies in other industry sectors.
Because of rapid technological change, the average selling
prices of products and some services provided by
technology-related and life-science companies have historically
decreased over their productive lives. As a result, the average
selling prices of products and services offered by
technology-related and life-science companies may decrease over
time, which could adversely affect their operating results,
their ability to meet obligations under their debt securities
and the value of their equity securities. This could, in turn,
materially adversely affect our business, financial condition
and results of operations.
We
have invested in and may continue investing in
technology-related and life-science companies that do not have
venture capital or private equity firms as equity investors, and
these companies may entail a higher risk of loss than do
companies with institutional equity investors, which could
increase the risk of loss of your investment.
Our portfolio companies will often require substantial
additional equity financing to satisfy their continuing working
capital and other cash requirements and, in most instances, to
service the interest and principal payments on our investment.
Portfolio companies that do not have venture capital or private
equity investors may be unable to raise any additional capital
to satisfy their obligations or to raise sufficient additional
capital to reach the next stage of development. Portfolio
companies that do not have venture capital or private equity
investors may be less financially sophisticated and may not have
access to independent members to serve on their boards, which
means that they may be less successful than portfolio companies
sponsored by venture capital or private equity firms.
Accordingly, financing these types of companies may entail a
higher risk of loss than would financing companies that are
sponsored by venture capital or private equity firms.
Economic
recessions or downturns could impair the ability of our
portfolio companies to repay loans, which, in turn, could
increase our non-performing assets, decrease the value of our
portfolio, reduce our volume of new loans and harm our operating
results, which might have an adverse effect on our results of
operations.
Many of our portfolio companies may be susceptible to economic
slowdowns or recessions and may be unable to repay our loans
during such periods. Therefore, our non-performing assets are
likely to increase and the value of our portfolio is likely to
decrease during such periods. Adverse economic conditions also
may decrease the value of collateral securing some of our loans
and the value of our equity investments. Economic slowdowns or
recessions could lead to financial losses in our portfolio and a
decrease in revenues, net income and assets. Unfavorable
economic conditions also could increase our funding costs, limit
our access to the capital markets or result in a decision by
lenders not to extend credit to us.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of the portfolio
companys loans and foreclosure on its secured assets,
which could trigger cross-defaults under other agreements and
jeopardize the portfolio companys ability to meet its
obligations under the debt securities that we hold. We may incur
expenses to the extent necessary to seek recovery upon default
or to negotiate new terms with a defaulting portfolio company.
In addition, if a portfolio company goes bankrupt, even though
we may have structured our investment as senior debt or secured
debt, depending on the facts and circumstances, including the
extent to which we actually provided significant
managerial assistance, if any, to that portfolio
company, a bankruptcy court might re-characterize our debt
holding and subordinate all or a portion of our claim to that of
other creditors. These events could harm our financial condition
and operating results.
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We do not control our portfolio companies. These portfolio
companies may face intense competition, including competition
from companies with greater financial resources, more extensive
research and development, manufacturing, marketing and service
capabilities and greater number of qualified and experienced
managerial and technical personnel. They may need additional
financing which they are unable to secure and which we are
unable or unwilling to provide, or they may be subject to
adverse developments unrelated to the technologies they acquire.
We
currently invest in businesses with significant operations
located in the Middle East, including Israel, and as a result,
we may encounter risks specific to one or more countries in
which we operate.
We invest in businesses and may make additional investments in
businesses located in or having some relationship to Israel. As
a result, our investee companies are subject to political,
economic and military conditions in that country. The State of
Israel experiences continued civil unrest primarily in the areas
that have been under its control since 1967 and has also
recently been engaged in escalated conflict with Hezbollah
groups near the border with Lebanon. No prediction can be made
as to whether these problems will be resolved. These investments
could be adversely affected if major hostilities involving
Israel should occur or if trade between Israel and its current
trading partners were interrupted or curtailed. In addition, in
such event, if the peace process in the Middle East were
interrupted or discontinued, these investments may be materially
adversely affected.
In addition, we are exposed to risks that could negatively
affect our future results of operations. The additional risks we
are exposed to in these cases include but are not limited to:
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tariffs and trade barriers;
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tax issues, such as tax law changes and variations in tax laws
as compared to the United States;
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cultural and language differences;
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foreign exchange controls;
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crime, strikes, riots, civil disturbances, terrorist attacks and
wars; and
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deterioration of political relations with the United States.
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The
inability of our portfolio companies to commercialize their
technologies or create or develop commercially viable products
or businesses would have a negative impact on our investment
returns.
The possibility that our portfolio companies will not be able to
commercialize their technology, products or business concepts
presents significant risks to the value of our investment.
Additionally, although some of our portfolio companies may
already have a commercially successful product or product line
when we invest, technology-related and life-science products and
services often have a more limited market- or life -span than
have products in other industries. Thus, the ultimate success of
these companies often depends on their ability to continually
innovate, or raise additional capital, in increasingly
competitive markets. Their inability to do so could affect our
investment return. In addition, the intellectual property held
by our portfolio companies often represents a substantial
portion of the collateral, if any, securing our investments. We
cannot assure you that any of our portfolio companies will
successfully acquire or develop any new technologies, or that
the intellectual property the companies currently hold will
remain viable. Even if our portfolio companies are able to
develop commercially viable products, the market for new
products and services is highly competitive and rapidly
changing. Neither our portfolio companies nor we have any
control over the pace of technology development. Commercial
success is difficult to predict, and the marketing efforts of
our portfolio companies may not be successful.
An
investment strategy focused primarily on privately-held
companies presents certain challenges, including the lack of
available information about these companies, a dependence on the
talents and efforts of only a few key portfolio company
personnel and a greater vulnerability to economic
downturns.
We invest primarily in privately-held companies. Generally, very
little public information exists about these companies, and we
are required to rely on the ability of our management team to
obtain adequate information to evaluate the potential returns
from investing in these companies. If we are unable to uncover
all material information about these companies, then we may not
make a fully informed investment decision, and we may not
receive the expected return on our investment or lose some or
all of the money invested in these companies. Also,
privately-held companies frequently
20
have less diverse product lines and a smaller market presence
than do larger competitors. Privately-held companies are, thus,
generally more vulnerable to economic downturns and may
experience more substantial variations in operating results than
do larger competitors. These factors could affect our investment
returns.
In addition, our success depends, in large part, upon the
abilities of the key management personnel of our portfolio
companies, who are responsible for the
day-to-day
operations of our portfolio companies. Competition for qualified
personnel is intense at any stage of a companys
development, and high turnover of personnel is common in
technology-related companies. The loss of one or more key
managers can hinder or delay a companys implementation of
its business plan and harm its financial condition. Our
portfolio companies may not be able to attract and retain
qualified managers and personnel. Any inability to do so may
negatively impact our investment returns.
If our
portfolio companies are unable to protect their intellectual
property rights, then our business and prospects could be
harmed. If our portfolio companies are required to devote
significant resources to protecting their intellectual property
rights, then the value of our investment could be
reduced.
Our future success and competitive position depend in part upon
the ability of our portfolio companies to obtain and maintain
proprietary technology used in their products and services,
which will often represent a significant portion of the
collateral, if any, securing our investment. The portfolio
companies will rely, in part, on patent, trade secret and
trademark law to protect that technology, but competitors may
misappropriate their intellectual property, and disputes as to
ownership of intellectual property may arise. Portfolio
companies may, from time to time, be required to institute
litigation in order to enforce their patents, copyrights or
other intellectual property rights, to protect their trade
secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement.
Such litigation could result in substantial costs and diversion
of resources. Similarly, if a portfolio company is found to
infringe upon or misappropriate a third partys patent or
other proprietary rights, that portfolio company could be
required to pay damages to such third party, alter its own
products or processes, obtain a license from the third party
and/or
cease
activities utilizing such proprietary rights, including making
or selling products utilizing such proprietary rights. Any of
the foregoing events could negatively affect both the portfolio
companys ability to service our debt investment and the
value of any related debt and equity securities that we own, as
well as any collateral securing our investment.
Some
of our portfolio companies may need additional capital, which
may not be readily available.
Our portfolio companies will often require substantial
additional equity financing to satisfy their continuing working
capital and other requirements, and in most instances to service
the interest and principal payments on our investment. Each
round of venture financing is typically intended to provide a
company with only enough capital to reach the next stage of
development. We cannot predict the circumstances or market
conditions under which our portfolio companies will seek
additional capital. It is possible that one or more of our
portfolio companies will not be able to raise additional
financing or may be able to do so only at a price or on terms
unfavorable to us, either of which would negatively impact our
investment returns. Some of these companies may be unable to
obtain sufficient financing from private investors, public
capital markets or traditional lenders. Accordingly, financing
these types of companies may entail a higher risk of loss than
would financing companies that are able to utilize traditional
credit sources.
We may
be unable or decide not to make additional cash investments in
our portfolio companies which could result in our losing our
initial investment if the portfolio company fails.
We may have to make additional cash investments in our portfolio
companies to protect our overall investment value in the
particular company. We retain the discretion to make any
additional investments as our management determines. The failure
to make such additional investments may jeopardize the continued
viability of a portfolio company, and our initial (and
subsequent) investments. Moreover, additional investments may
limit the number of companies in which we can make initial
investments. In determining whether to make an additional
investment our management will exercise its business judgment
and apply criteria similar to those used when making the initial
investment. We cannot assure you that we will have sufficient
funds to make any necessary additional investments, which could
adversely affect our success and result in the loss of a
substantial portion or all of our investment in a portfolio
company.
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If our
investments do not meet our performance expectations, you may
not receive distributions.
We intend to make distributions on a quarterly basis to our
stockholders. We may not be able to achieve operating results
that will allow us to make distributions at a specific level or
to increase the amount of these distributions from time to time.
In addition, due to the asset coverage test applicable to us as
a business development company, we may be limited in our ability
to make distributions. See Regulation. Also,
restrictions and provisions in any future credit facilities may
limit our ability to make distributions. If and when we qualify
to be treated as a RIC, if we do not distribute a certain
percentage of our income annually, we will suffer adverse tax
consequences, including failure to obtain, or possible loss of,
the federal income tax benefits allowable to RICs. See
Certain United States Federal Income Tax
Considerations Taxation as a Regulated Investment
Company. We cannot assure you that you will receive
distributions at a particular level or at all.
Any
unrealized depreciation that we experience on our loan portfolio
may be an indication of future realized losses, which could
reduce our income available for distribution.
As a business development company, we are required to carry our
investments at market value or, if no market value is
ascertainable, at the fair value as determined in good faith by
our Board of Directors in accordance with procedures approved by
our Board of Directors. Decreases in the market values or fair
values of our investments will be recorded as unrealized
depreciation. Any unrealized depreciation in our loan portfolio
could be an indication of a portfolio companys inability
to meet its repayment obligations to us with respect to the
affected loans. This could result in realized losses in the
future and ultimately in reductions of our income available for
distribution in future periods.
The
lack of liquidity in our investments may adversely affect our
business and, if we need to sell any of our investments, we may
not be able to do so at a favorable price. As a result, we may
suffer losses.
We generally invest in debt securities with terms of up to seven
years and hold such investments until maturity, and we do not
expect that our related holdings of equity securities will
provide us with liquidity opportunities in the near-term. We
invest and expect to continue investing in companies whose
securities have no established trading market and whose
securities are and will be subject to legal and other
restrictions on resale or whose securities are and will be less
liquid than are publicly-traded securities. The illiquidity of
these investments may make it difficult for us to sell these
investments when desired. In addition, if we are required to
liquidate all or a portion of our portfolio quickly, we may
realize significantly less than the value at which we had
previously recorded these investments. As a result, we do not
expect to achieve liquidity in our investments in the near-term.
However, to maintain our qualification as a business development
company and as a RIC, we may have to dispose of investments if
we do not satisfy one or more of the applicable criteria under
the respective regulatory frameworks. Our investments are
usually subject to contractual or legal restrictions on resale,
or are otherwise illiquid, because there is usually no
established trading market for such investments. The illiquidity
of most of our investments may make it difficult for us to
dispose of the investments at a favorable price and, as a
result, we may suffer losses.
If the
assets securing the loans that we make decrease in value, then
we may lack sufficient collateral to cover losses.
We believe that our portfolio companies generally will be able
to repay our loans from their available capital, from future
capital-raising transactions, or from cash flow from operations.
However, to attempt to mitigate credit risks, we will typically
take a security interest in the available assets of these
portfolio companies, including the equity interests of their
subsidiaries and, in some cases, the equity interests of our
portfolio companies held by their stockholders. In many cases,
our loans will include a period of interest-only payments. There
is a risk that the collateral securing our loans may decrease in
value over time, may be difficult to sell in a timely manner,
may be difficult to appraise and may fluctuate in value based
upon the success of the business and market conditions,
including as a result of the inability of a portfolio company to
raise additional capital. In some circumstances, our lien could
be subordinated to claims of other creditors. Additionally, a
deterioration in a portfolio companys financial condition
and prospects, including its inability to raise additional
capital, may be accompanied by a deterioration in the value of
the collateral for the loan. Moreover, in the case of some of
our structured mezzanine debt, we may not have a first lien
position on the collateral. Consequently, the fact that a loan
is secured does not guarantee that we will receive principal and
interest payments according to the loans terms, or that we
will be able to collect on the loan should we be forced to
enforce our remedies. In addition, because we invest in
technology-related companies, a substantial portion of the
22
assets securing our investment may be in the form of
intellectual property, if any, inventory and equipment and, to a
lesser extent, cash and accounts receivable. Intellectual
property, if any, that is securing our loan could lose value if,
among other things, the companys rights to the
intellectual property are challenged or if the companys
license to the intellectual property is revoked or expires.
Inventory may not be adequate to secure our loan if our
valuation of the inventory at the time that we made the loan was
not accurate or if there is a reduction in the demand for the
inventory. Similarly, any equipment securing our loan may not
provide us with the anticipated security if there are changes in
technology or advances in new equipment that render the
particular equipment obsolete or of limited value, or if the
company fails to adequately maintain or repair the equipment.
Any one or more of the preceding factors could materially impair
our ability to recover principal in a foreclosure.
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
We invest primarily in debt securities issued by our portfolio
companies. In some cases, portfolio companies will be permitted
to have other debt that ranks equally with, or senior to, the
debt securities in which we invest. Such debt instruments may
provide that the holders thereof are entitled to receive payment
of interest or principal on or before the dates on which we are
entitled to receive payments in respect of the debt securities
in which we invest. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of a
portfolio company, holders of debt instruments ranking senior to
our investment in that portfolio company would typically be
entitled to receive payment in full before we receive any
distribution in respect of our investment. After repaying such
senior creditors, such portfolio company might not have any
remaining assets to use for repaying its obligation to us. In
the case of debt ranking equally with debt securities in which
we invest, we would have to share on a pari passu basis any
distributions with other creditors holding such debt in the
event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy. In addition, we would not be in a position to
control any portfolio company by investing in its debt
securities. As a result, we are subject to the risk that a
portfolio company in which we invest may make business decisions
with which we disagree and the management of such companies, as
representatives of the holders of their common equity, may take
risks or otherwise act in ways that do not best serve our
interests as debt investors.
Our
equity investments are highly speculative, and we may not
realize gains from these investments. If our equity investments
do not generate gains, then the return on our invested capital
will be lower than it would otherwise be, which could result in
a decline in the value of shares of our common
stock.
When we invest in debt securities, we generally expect to
acquire warrants or other equity securities as well. Our goal is
ultimately to dispose of these equity interests and realize
gains upon disposition of such interests. Over time, the gains
that we realize on these equity interests may offset, to some
extent, losses that we experience on defaults under debt
securities that we hold. However, the equity interests that we
receive may not appreciate in value and, in fact, may decline in
value. Accordingly, we may not be able to realize gains from our
equity interests, and any gains that we do realize on the
disposition of any equity interests may not be sufficient to
offset any other losses that we experience.
We do
not control any of our portfolio companies and therefore our
portfolio companies may make decisions with which we
disagree.
We do not control any of our portfolio companies, even though we
may have board observation rights and our debt agreements may
contain certain restrictive covenants. As a result, we are
subject to the risk that a portfolio company in which we invest
may make business decisions with which we disagree and the
management of such company, as representatives of the holders of
their common equity, may take risks or otherwise act in ways
that do not serve our interests as debt investors.
Prepayments
of our debt investments by our portfolio companies could
adversely impact our results of operations and reduce our return
on equity.
We are subject to the risk that the investments we make in our
portfolio companies may be repaid prior to maturity. When this
occurs, we will generally reinvest these proceeds in temporary
investments, pending their future investment in new portfolio
companies. These temporary investments will typically have
substantially lower yields than the debt being prepaid and we
could experience significant delays in reinvesting these
amounts. Any future
23
investment in a new portfolio company may also be at lower
yields than the debt that was repaid. As a result, our results
of operations could be materially adversely affected if one or
more of our portfolio companies elects to prepay amounts owed to
us. Additionally, prepayments could negatively impact our return
on equity, which could result in a decline in the market price
of our common stock.
We may
not realize gains from our equity investments.
When we invest in debt securities, we generally expect to
acquire warrants or other equity securities as well. However,
the equity interests we receive may not appreciate in value and,
in fact, may decline in value. Accordingly, we may not be able
to realize gains from our equity interests, and any gains that
we do realize on the disposition of any equity interests may not
be sufficient to offset any other losses we experience.
Risks
Related to an Offering of Our Shares
Our
common stock price may be volatile and may decrease
substantially.
The trading price of our common stock following an offering may
fluctuate substantially. The price of the common stock that will
prevail in the market after an offering may be higher or lower
than the price you paid and the liquidity of our common stock
may be limited, in each case depending on many factors, some of
which are beyond our control and may not be directly related to
our operating performance. These factors include, but are not
limited to, the following:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
securities of RICs, business development companies or other
financial services companies;
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any inability to deploy or invest our capital;
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fluctuations in interest rates;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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operating performance of companies comparable to us;
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changes in regulatory policies or tax guidelines with respect to
RICs or business development companies;
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our not electing or losing RIC status;
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actual or anticipated changes in our earnings or fluctuations in
our operating results, or changes in the expectations of
securities analysts;
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changes in the value of our portfolio of investments;
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realized losses in investments in our portfolio companies;
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general economic conditions and trends;
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loss of a major funded source; or
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departures of key personnel.
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In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Due to
the potential volatility of our stock price, we may be the
target of securities litigation in the future. Securities
litigation could result in substantial costs and could divert
managements attention and resources from our business.
We may
be unable to invest the net proceeds raised from an offering on
acceptable terms, which would harm our financial condition and
operating results.
Until we identify investments for our portfolio, we intend to
invest the net proceeds from an offering in cash, cash
equivalents, U.S. government securities or high-quality debt
securities. We cannot assure you that we will be able to
complete investments that meet our investment criteria or that
any investment we complete using the proceeds from an offering
will produce a sufficient return. Moreover, because we may not
have identified all investments at the time of an offering, we
will have broad authority to invest the net proceeds of an
offering. We will not receive any proceeds from an offering by
the selling holders.
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Investing
in shares of our common stock may involve an above average
degree of risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk, volatility or
loss of principal than alternative investment options. Our
investments in portfolio companies may be highly speculative and
aggressive, and therefore, an investment in our common stock may
not be suitable for investors with lower risk tolerance.
We
cannot assure you that the market price of our common stock will
not decline.
We cannot predict the price at which our common stock will
trade. Shares of closed-end investment companies have in the
past frequently traded at discounts to their net asset values
and our stock may also be discounted in the market. This
characteristic of closed-end investment companies is separate
and distinct from the risk that our net asset value per share
may decline. We cannot predict whether shares of our common
stock will trade above, at or below our net asset value. The
risk of loss associated with this characteristic of closed-end
investment companies may be greater for investors expecting to
sell shares of common stock purchased in this offer soon after
the offer. In addition, if our common stock trades below its net
asset value, we will generally not be able to issue additional
shares of our common stock at its market price without first
obtaining the approval for such issuance from our stockholders
and our independent directors.
Provisions
of the Maryland General Corporation Law, and of our charter and
bylaws, could deter takeover attempts and have an adverse impact
on the price of our common stock.
The Maryland General Corporation Law and our charter and bylaws
contain provisions that may have the effect of discouraging,
delaying, or making difficult a change in control of our company
or the removal of our incumbent directors. We will be covered by
the Business Combination Act of the Maryland General Corporation
Law to the extent that such statute is not superseded by
applicable requirements of the 1940 Act. However, our Board of
Directors has adopted a resolution exempting from the Business
Combination Act any business combination between us and any
person to the extent that such business combination receives the
prior approval of our board, including a majority of our
directors who are not interested persons as defined in the 1940
Act. Our Board of Directors has already adopted a resolution
exempting from the Business Combination Act any business
combination between us and certain investment funds managed by
JMP Asset Management, LLC and certain investment funds managed
by Farallon Capital Management, L.L.C., and we have agreed with
such investment funds that we will not alter or repeal such
board resolution prior to the date that is two years after such
investment funds cease to own at least 10% of our outstanding
common stock in a manner that would make the Business
Combination Act applicable to acquisitions of our stock by such
investment funds without the written consent of such investment
funds. In addition, our bylaws contain a provision exempting
from the Control Share Acquisition Act any and all acquisitions
by any person of shares of our stock. We have agreed with
certain investment funds managed by JMP Asset Management, LLC
and certain investment funds managed by Farallon Capital
Management, L.L.C. that we will not repeal or amend such
provision of our bylaws in a manner that would make the Control
Share Acquisition Act applicable to acquisitions of our stock by
such investment funds without the written consent of such
investment funds prior to the date that is two years after such
investment funds cease to own at least 10% of our outstanding
common stock. If the applicable board resolution is repealed
following such period of time or if our board does not otherwise
approve a business combination, the Business Combination Act and
the Control Share Acquisition Act (if we amend our bylaws to be
subject to that Act) may discourage others from trying to
acquire control of us and increase the difficulty of
consummating any offer.
Under our charter, our Board of Directors is divided into three
classes serving staggered terms, which will make it more
difficult for a hostile bidder to acquire control of us. In
addition, our Board of Directors may, without stockholder
action, authorize the issuance of shares of stock in one or more
classes or series, including preferred stock. See
Description of Capital Stock. Subject to compliance
with the 1940 Act, our Board of Directors may, without
stockholder action, amend our charter to increase the number of
shares of stock of any class or series that we have authority to
issue. The existence of these provisions, among others, may have
a negative impact on the price of our common stock and may
discourage third party bids for ownership of our company. These
provisions may prevent any premiums being offered to you for
shares of our common stock.
25
FORWARD-LOOKING
STATEMENTS; MARKET DATA
The matters discussed in this prospectus, as well as in future
oral and written statements by management of Hercules Technology
Growth Capital, that are forward-looking statements are based on
current management expectations that involve substantial risks
and uncertainties which could cause actual results to differ
materially from the results expressed in, or implied by, these
forward-looking statements. Forward-looking statements relate to
future events or our future financial performance. We generally
identify forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
could, intends, target,
projects, contemplates,
believes, estimates,
predicts, potential or
continue or the negative of these terms or other
similar words. Important assumptions include our ability to
originate new investments, achieve certain margins and levels of
profitability, the availability of additional capital, and the
ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this prospectus should not be
regarded as a representation by us that our plans or objectives
will be achieved. The forward-looking statements contained in
this prospectus include statements as to:
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our future operating results;
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our business prospects and the prospects of our prospective
portfolio companies;
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the impact of investments that we expect to make;
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our informal relationships with third parties;
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the dependence of our future success on the general economy and
its impact on the industries in which we invest;
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the ability of our portfolio companies to achieve their
objectives;
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our expected financings and investments;
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our regulatory structure and tax status;
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our ability to operate as a business development company and a
regulated investment company;
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the adequacy of our cash resources and working capital; and
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the timing of cash flows, if any, from the operations of our
portfolio companies.
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For a discussion of factors that could cause our actual results
to differ from forward-looking statements contained in this
prospectus, please see the discussion under Risk
Factors. You should not place undue reliance on these
forward-looking statements. The forward-looking statements made
in this prospectus relate only to events as of the date on which
the statements are made. We undertake no obligation to update
any forward-looking statement to reflect events or circumstances
occurring after the date of this prospectus.
This prospectus contains third-party estimates and data
regarding valuations of venture capital-backed companies. These
data were reported by Dow Jones, VentureOne, an independent
venture capital industry research company which we refer to as
VentureOne, in releases entitled 4Q 03 Venture
Capital Investment Increases, dated January 26, 2004,
Venture-Backed Valuations Decline in 4Q 03,
dated March 1, 2004, Equity Financings for
U.S. Venture-Backed Companies by Industry Group
(1998-Q42004),
dated January 21, 2005, Venture Capital Market Q4
04 dated March 18, 2005 and 1Q 05
Financing Preview dated April 25, 2005, along with
attached data tables. VentureOne is commonly relied upon as an
information source in the venture capital industry. Although we
have not independently verified any such data, we believe that
the industry information contained in such releases and data
tables and included in this prospectus is reliable.
Certain industry estimates presented in this prospectus have
been compiled by us from internally generated information and
data, which, while believed by us to be reliable, have not been
verified by any independent sources. These estimates are based
on a number of assumptions, including increasing investment in
venture capital and private equity-backed companies. Actual
results may differ from projections and estimates, and this
market may not grow at the rates projected, or at all. The
failure of this market to grow at projected rates could have a
material adverse effect on our business and the market price of
our common stock.
26
USE OF
PROCEEDS
We intend to use the net proceeds from selling shares of common
stock for general corporate purposes, which include investing in
debt and equity securities, repayment of indebtedness and other
general corporate purposes. The supplement to this prospectus
relating to an offering will more fully identify the use of
proceeds from such offering. We will not receive any proceeds
from the sale of the common stock by the selling holders.
We anticipate that substantially all of the net proceeds from
any offering of our shares of common stock will be used as
described above within twelve months, but in no event longer
than two years. Pending such uses and investments, we will
invest the net proceeds primarily in cash, cash equivalents,
U.S. government securities or high-quality debt securities
maturing in one year or less from the time of investment.
27
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the Nasdaq Global Market under the
symbol HTGC. We completed the initial public offer
of our common stock in June 2005 at a price of $13.00 per
share. Prior to such date, there was no public market for our
common stock.
The following table sets forth the range of high and low sales
prices of our common stock as reported on the Nasdaq Global
Market and the dividends declared by us for each fiscal quarter
since our initial public offer. The stock quotations are
interdealer quotations and do not include markups, markdowns or
commissions.
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Premium/
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Premium/
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Discount
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Discount
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Cash
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Price Range
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of High Sales
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of Low Sales
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Dividend
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NAV
(1)
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High
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Low
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Price to NAV
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Price to NAV
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per
Share
(2)
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2005
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Second quarter (June 9, 2005
through June 30, 2005)
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$
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11.55
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$
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13.19
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$
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12.45
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114.2
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%
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107.8
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%
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Third quarter
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$
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11.71
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$
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14.41
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$
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11.90
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123.1
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%
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101.6
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%
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$
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0.025
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Fourth quarter
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$
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11.67
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$
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12.68
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$
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9.71
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108.7
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%
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83.2
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%
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$
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0.300
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2006
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First quarter
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$
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11.63
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$
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11.99
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$
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10.50
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103.1
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%
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90.3
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%
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$
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0.300
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Second quarter
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$
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11.24
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$
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12.53
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$
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10.88
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111.5
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%
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96.8
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%
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$
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0.300
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Third quarter
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*
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12.90
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11.11
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*
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*
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Fourth quarter (through October 9,
2006)
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*
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13.54
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12.59
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*
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*
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(1)
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Net asset value per share is
generally determined as of the last day in the relevant quarter
and therefore may not reflect the net asset value per share on
the date of the high and low sales prices. The net asset values
shown are based on outstanding shares at the end of each period.
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(2)
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Represents the dividend declared in
the specified quarter. As of the date of this prospectus, no
dividend has been declared for the third quarter of 2006.
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*
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Net asset value has not yet been
calculated for this period.
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The last reported price for our common stock on October 9,
2006 was $13.39 per share.
Shares of business development companies may trade at a market
price that is less than the value of the net assets attributable
to those shares. The possibility that our shares of common stock
will trade at a discount from net asset value or at premiums
that are unsustainable over the long term are separate and
distinct from the risk that our net asset value will decrease.
At times, our shares of common stock have traded at a premium to
net asset value and at times our shares of common stock have
traded at a discount to the net assets attributable to those
shares. It is not possible to predict whether the shares offered
hereby will trade at, above, or below net asset value.
Dividends
On July 19, 2006, we declared a dividend of $0.30 per
common share for holders of record on July 31, 2006. This
dividend totaled approximately $4.1 million and was
distributed on August 28, 2006.
The following table summarizes our dividends declared and paid
on all shares, including restricted stock, to date:
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Date Declared
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Record Date
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Payment Date
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Amount Per Share
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October 27, 2005
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November 1, 2005
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November 17, 2005
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$
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0.025
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December 9, 2005
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January 6, 2006
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January 27, 2006
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0.300
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April 3, 2006
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April 10, 2006
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May 5, 2006
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0.300
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July 19, 2006
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July 31, 2006
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August 28, 2006
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0.300
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$
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0.925
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28
During the second quarter ended June 30, 2006, we
determined that it is more likely than not that we will be able
to qualify as a RIC for tax reporting purposes for the year
ended December 31, 2006. If we qualify and elect to be a
RIC, we intend to distribute quarterly dividends to our
stockholders following the effective date of such election. In
order to avoid certain excise taxes imposed on RICs, we
currently intend to distribute during each calendar year an
amount at least equal to the sum of (1) 98% of our ordinary
income for the calendar year, (2) 98% of our capital gains
in excess of capital losses for the one year period ending on
October 31 of the calendar year, and (3) any ordinary
income and net capital gains for the preceding year that were
not distributed during such year. We will not be subject to
excise taxes on amounts on which we are required to pay
corporate income tax (such as retained net capital gains). In
order to obtain the tax benefits applicable to RICs, we will be
required to distribute to our stockholders with respect to each
taxable year at least 90% of our ordinary income and realized
net short-term capital gains in excess of realized net long-term
capital losses. We currently intend to retain for investment
realized net long-term capital gains in excess of realized net
short-term capital losses.
Once we elect to be a RIC, we generally intend as a RIC to make
deemed distributions to our stockholders of any retained net
capital gains. If this happens, you will be treated as if you
received an actual distribution of the capital gains we retain
and then reinvested the net after-tax proceeds in our common
stock. You also may be eligible to claim a tax credit (or, in
certain circumstances, a tax refund) equal to your allocable
share of the tax we paid on the capital gains deemed distributed
to you. Please refer to Certain United States Federal
Income Tax Considerations for further information
regarding the consequences of our retention of net capital
gains. We may, in the future, make actual distributions to our
stockholders of some or all realized net long-term capital gains
in excess of realized net short-term capital losses. We can
offer no assurance that we will achieve results that will permit
the payment of any cash distributions and, if we issue senior
securities, we will be prohibited from making distributions if
doing so causes us to fail to maintain the asset coverage ratios
stipulated by the 1940 Act or if distributions are limited by
the terms of any of our borrowings. See Regulation.
We maintain an opt-out dividend reinvestment plan
for our common stockholders. As a result, if we declare a
dividend, cash dividends will be automatically reinvested in
additional shares of our common stock unless the stockholder
specifically opts out of the dividend reinvestment
plan and chooses to receive cash dividends. See Dividend
Reinvestment Plan.
Our ability to make distributions will be limited by the asset
coverage requirements under the 1940 Act. For a more detailed
discussion, see Regulation.
29
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
our consolidated financial statements and related notes and
other financial information appearing elsewhere in this report.
In addition to historical information, the following discussion
and other parts of this report contain forward-looking
information that involves risks and uncertainties. Our actual
results could differ materially from those anticipated by such
forward-looking information due to the factors discussed under
Risk Factors, Forward-Looking Statements;
Market Data appearing elsewhere herein.
Overview
We are a specialty finance company that provides debt and equity
growth capital to technology-related companies at all stages of
development. We primarily finance privately-held companies
backed by leading venture capital and private equity firms and
also may finance certain publicly-traded companies. We originate
our investments through our principal office located in Silicon
Valley, as well as our additional offices in the Boston, Boulder
and Chicago areas. Our goal is to be the leading structured
mezzanine capital provider of choice for venture capital and
private equity backed technology-related companies requiring
sophisticated and customized financing solutions. We invest
primarily in structured mezzanine debt and, to a lesser extent,
in senior debt and equity investments. We use the term
structured mezzanine debt investment to refer to any
debt investment, such as a senior or subordinated secured loan,
that is coupled with an equity component, including warrants,
options or rights to purchase common or preferred stock. Our
structured mezzanine debt investments will typically be secured
by some or all of the assets of the portfolio company.
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 intend to seek to be 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.
Portfolio
and Investment Activity
We commenced investment operations in September 2004 and entered
into our first debt investment in November 2004. The total value
of our investment portfolio was $193.6 million at
June 30, 2006 as compared to $176.7 million at
December 31, 2005. During the six months ended
June 30, 2006, we made debt commitments to 17 new portfolio
companies totaling $113.1 million and funded
$64.6 million to 20 companies. We also made equity
investments in three portfolio companies totaling
$1.3 million during the six months ended June 30,
2006, bringing total equity investments at fair value to
approximately $5.5 million at June 30, 2006. At
June 30, 2006, we had unfunded contractual commitments of
$85.2 million to 18 portfolio companies.
During the six months ended June 30, 2006, we received
normal principal repayments of $15.4 million, a total of
five companies made early repayments totaling
$29.7 million, and we received pay downs of
$3.7 million on one
30
working line of credit. Total portfolio investment activity
(exclusive of unearned income) as of and for the six month
period ended June 30, 2006 was as follows:
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|
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Beginning Portfolio
|
|
$
|
176.7
|
|
Purchase of investments
|
|
|
64.6
|
|
Equity investments
|
|
|
1.3
|
|
Principal payments received on
investments
|
|
|
(19.3
|
)
|
Early pay-offs
|
|
|
(29.7
|
)
|
Accretion of loan discounts
|
|
|
0.7
|
|
Net Unrealized appreciation on
investments
|
|
|
(0.7
|
)
|
|
|
|
|
|
Ending Portfolio
|
|
$
|
193.6
|
|
|
|
|
|
|
The following table shows the fair value of our portfolio of
investments by asset class as of June 30, 2006 and
December 31, 2005 (excluding unearned income):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Senior debt with warrants
|
|
$
|
180.4
|
|
|
|
93.2
|
%
|
|
$
|
163.4
|
|
|
|
92.4
|
%
|
Subordinated debt
|
|
|
7.7
|
|
|
|
4.0
|
%
|
|
|
8.4
|
|
|
|
4.8
|
%
|
Preferred stock
|
|
|
5.5
|
|
|
|
2.8
|
%
|
|
|
3.5
|
|
|
|
2.0
|
%
|
Common stock
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1.4
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the companys investment portfolio at value by
geographic location is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
United States
|
|
$
|
176.8
|
|
|
|
91.3
|
%
|
|
$
|
155.9
|
|
|
|
88.2
|
%
|
Canada
|
|
|
13.8
|
|
|
|
7.1
|
%
|
|
|
16.8
|
|
|
|
9.5
|
%
|
Israel
|
|
|
3.0
|
|
|
|
1.6
|
%
|
|
|
4.0
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The following table shows the fair value of our portfolio by
industry sector at June 30, 2006 and December 31, 2005
(excluding unearned income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Biopharmaceuticals
|
|
$
|
61.2
|
|
|
|
31.6
|
%
|
|
$
|
43.6
|
|
|
|
24.7
|
%
|
Software
|
|
|
35.3
|
|
|
|
18.2
|
%
|
|
|
29.0
|
|
|
|
16.4
|
%
|
Communications &
networking
|
|
|
25.5
|
|
|
|
13.2
|
%
|
|
|
32.5
|
|
|
|
18.4
|
%
|
Consumer & business
products
|
|
|
19.6
|
|
|
|
10.1
|
%
|
|
|
19.8
|
|
|
|
11.2
|
%
|
Electronics & computer
hardware
|
|
|
14.1
|
|
|
|
7.3
|
%
|
|
|
17.8
|
|
|
|
10.1
|
%
|
Medical devices
|
|
|
13.3
|
|
|
|
6.9
|
%
|
|
|
14.8
|
|
|
|
8.4
|
%
|
Internet consumer &
business services
|
|
|
12.6
|
|
|
|
6.5
|
%
|
|
|
8.7
|
|
|
|
4.9
|
%
|
Semiconductors
|
|
|
10.5
|
|
|
|
5.4
|
%
|
|
|
10.5
|
|
|
|
5.9
|
%
|
Energy
|
|
|
1.5
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use an investment grading system, which grades each
investment on a scale of 1 to 5, to characterize and
monitor our expected level of returns on the debt investments in
our portfolio with 1 being the highest quality. See
Business Investment Process Loan
and Compliance Administration. The following table shows
the distribution of our outstanding debt investments on the 1 to
5 investment grading scale at fair value as of June 30,
2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Investment Grading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
11.9
|
|
|
|
6.5
|
%
|
|
$
|
9.9
|
|
|
|
5.8
|
%
|
2
|
|
|
132.5
|
|
|
|
73.1
|
|
|
|
150.3
|
|
|
|
87.5
|
|
3
|
|
|
25.2
|
|
|
|
13.9
|
|
|
|
5.8
|
|
|
|
3.4
|
|
4
|
|
|
11.7
|
|
|
|
6.5
|
|
|
|
4.5
|
|
|
|
2.6
|
|
5
|
|
|
|
|
|
|
|
|
|
|
1.3
|
(1)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181.3
|
|
|
|
100.0
|
%
|
|
$
|
171.8
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the value of the assets of
this portfolio company that were sold in January 2006 for which
we received approximately $1.3 million in cash
distributions. We received an additional contingent payment of
approximately $469,000 in the first quarter of 2006, and
approximately $361,000 in the second quarter of 2006. We may
receive future distributions related to this sale but such
distributions are contingent on future deliverables.
|
As of June 30, 2006, our investments had a weighted average
investment grading of 2.21 as compared to 2.05 at
December 31, 2005. Our policy is to reduce 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 the funding is complete
or their operations improve. At June 30, 2006, nine
portfolio companies have been graded at 3 and three portfolio
companies have been graded 4 as compared to four and one
portfolio companies, respectively, at December 31, 2005.
At June 30, 2006, the weighted average yield to maturity of
our loan obligations was approximately 12.80% as compared to
12.87% at December 31, 2005. Yields to maturity are
computed using interest rates as of June 30, 2006 and
December 31, 2005 and include amortization of loan facility
fees, commitment fees and market premiums or
32
discounts over the expected life of the debt investments,
weighted by their respective costs when averaged and are based
on the assumption that all contractual loan commitments have
been fully funded.
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 $20.0 million, with an average initial
principal balance of between $3.0 million and
$7.0 million. Our debt investments have a term of between
two and seven years and typically bear interest at a rate
ranging from 8.0% to 14.0% (based on current interest rate
conditions). 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, or prepayment fees,
and diligence fees, which may be required to be included in
income prior to receipt. In some cases, we collateralize our
investments by obtaining security interests in our portfolio
companies assets, which may include their intellectual
property. In other cases, we may obtain a negative pledge
covering a companys intellectual property. Interest on
debt securities is generally payable monthly, with amortization
of principal typically occurring over the term of the security
for emerging-growth and expansion-stage companies. In addition,
certain loans may include an interest-only period ranging from
three to six months. 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 mezzanine debt investments 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.
Results
of Operations
Comparison
of the Six Months Ended June 30, 2006 and 2005
Operating
Income
Interest income totaled approximately $11.8 million for the
six-month period ended June 30, 2006, compared with
$2.4 million for the six-month period ended June 30,
2005. Income from commitment and facility fees totaled
approximately $1.5 million for the six-month period ended
June 30, 2006, as compared with $271,000 for the six-month
period ended June 30, 2005. The increases in investment
income and income from commitment and facility fees for both
periods presented are the result of higher average loan balances
outstanding due to origination activity and yield from the
related investments. At June 30, 2006, we had approximately
$3.2 million of deferred revenue related to commitment and
facility fees, as compared to approximately $1.7 million as
of June 30, 2005. We expect to generate additional interest
income and loan fees as we continue to originate additional
investments.
Operating
Expenses
Operating expenses totaled approximately $8.8 million
during the six-month period ended June 30, 2006, compared
with $3.0 million during the six-month period ended
June 30, 2005. Operating expenses for the six-month period
ended June 30, 2006 included interest expense, loan fees
and unused commitment fees under our Bridge Loan Credit Facility
and the Citigroup Facility of approximately $3.6 million
compared with $878,000 for the six-month period ended
June 30, 2005. The increase in interest expense and loan
fees was due to the additional debt outstanding under the
Citigroup Facility that was not outstanding in the first half of
2005.
Employee compensation and benefits were approximately
$2.3 million for the six-month period ended June 30,
2006, compared with $1.4 million during the six-month
period ended June 30, 2005. The increase in compensation
expense was directly related to increasing our headcount from 13
employees at June 30, 2005 to 19 employees at June 30,
2006.
General and administrative expenses increased to
$2.6 million for the six-month period ended June 30,
2006, up from $645,000 during the six-month period ended
June 30, 2005. The increase was primarily due to increased
Board of Director expenses, legal expenses, professional service
costs related to our status as a public company and
33
the creation of our SBIC subsidiaries, higher business insurance
expense as a public company as well as increased business
development expenses.
In addition, we incurred approximately $253,000 of stock-based
compensation expense in the six-month period ended June 30,
2006, as compared to $80,000 in 2005. The increase in
stock-based compensation expense was the result of the options
outstanding for the entire period in 2006 as compared to a
partial period in 2005.
We anticipate that operating expenses will increase over the
next twelve months as we continue to incur higher interest
expense on higher average outstanding debt balances, increase
the number of our employees to support our growth and incur
additional expenses related to being a public company, including
expenses related to the implementation of the requirements under
the Sarbanes-Oxley Act.
Net
Investment Income (Loss) Before Income Tax Expense and
Investment Gains and Losses
Net investment income before provision for income tax expense
for the six-months ended June 30, 2006 totaled
$4.5 million as compared with net investment loss before
provision for income tax expense of approximately $301,000 for
the six-months ended June 30, 2005. These changes are made
up of the items described above.
Net
Investment Gains
During the six-months ended June 30, 2006, we generated a
net realized gain totaling approximately $3.1 million from
the sale of common stock of two biopharmaceutical portfolio
companies, and we recognized a gain of approximately $830,000
from additional recoveries on one portfolio company that was
sold during the first quarter of 2006. There were no realized
gains during the six-months period ended June 30, 2005. Our
realized gains are reduced by a warrant participation agreement
with Citigroup. Since inception of the agreement, we have paid
Citigroup approximately $195,000 thereby reducing our realized
gains. During the six-months ended June 30, 2006, we reduced our
realized gain by approximately $136,000 for Citigroups
participation in the gain on sale of an equity security.
For the six-months ended June 30, 2006, the net decrease in
unrealized investment appreciation totaled approximately
$798,000, compared with a net increase in unrealized investment
appreciation of $1.0 million for the six-month period ended
June 30, 2005. The net unrealized appreciation and
depreciation of investments is based on portfolio asset
valuations determined in good faith by our Board of Directors.
At June 30, 2006, cumulative gross unrealized appreciation
totaled approximately $4.5 million in 15 of our portfolio
investment companies and approximately $1.3 million of
gross unrealized depreciation on 26 of our portfolio investment
companies. At June 30, 2005, the cumulative gross
unrealized appreciation totaled approximately $1.1 million
in 10 of our portfolio companies and approximately $38,000 of
gross unrealized depreciation on nine of our portfolio
investment companies. The net decrease in unrealized
appreciation totaling approximately $798,000 for the six-months
ended June 30, 2006 was the result of the conversion of an
unrealized gain on a warrant in two portfolio companies to a
realized gain upon the exercise and sale of the portfolio
companys common stock offset by unrealized gains in our
warrant and equity portfolios.
Income
Taxes
During the second quarter ended June 30, 2006, we
determined that it is more likely than not that we will be able
to qualify as a RIC for tax reporting purposes for the year
ended December 31, 2006. We intend to elect to be regulated
as a RIC for 2006. The election will be submitted with the
filing of our 2006 tax return and would be effective as of
January 1, 2006. If we meet the required qualification
tests of a RIC, any income timely distributed to our
shareholders will not be subject to corporate level federal
income or excise taxes in those years that we qualify as a RIC.
At December 31, 2005, we had a deferred tax asset of
approximately $1.5 million. During the first quarter,
approximately $1.3 million of the deferred tax asset was
charged to expense. During the second quarter, a full valuation
reserve of approximately $181,000 was recorded against the
remaining deferred tax asset in anticipation that we would not
have a future federal tax expense to offset the asset. In
addition, during the first quarter of 2006, we recorded a tax
expense that was reversed in the second quarter as we would not
be subject to federal income or excise taxes in 2006. As a
result, we recorded a tax expense of approximately $988,000 in
the second quarter.
34
Net
Increase in Net Assets Resulting from Operations and Earnings
Per Share
For the six-months ended June 30, 2006, net income totaled
approximately $5.9 million, compared to net income of
approximately $742,000 for the six-months ended June 30,
2005. These changes are made up of the items previously
described.
Basic and diluted net income per share for the six-months ended
June 30, 2006 was $0.52 and $0.51, as compared to a basic
and diluted income per share of $0.19 and $0.18 for the
six-months ended June 30, 2005.
Comparison
of periods ended December 31, 2005 and 2004
Operating
Income
Interest income totaled approximately $9.8 million and
$214,000 for 2005 and 2004, respectively. In 2005, interest
income included approximately $351,000 of revenue from accrued
exit fees. Income from commitment and facility fees totaled
approximately $875,000 and $0 for 2005 and 2004, respectively.
The increases are the result of origination activity and yield
from investments. At December 31, 2005, we had
approximately $2.7 million of deferred revenue related to
commitment and facility fees. We expect to generate additional
interest income and loan commitment fees as we continue to
originate additional investments.
Operating
Expenses
Operating expenses totaled approximately $9.1 million and
$2.3 million during 2005 and 2004, respectively. Operating
expenses for 2005 included interest expense, loan fees and
unused commitment fees under our Bridge Loan Credit Facility and
the Citigroup Facility of approximately $2.9 million. There
were no interest or loan fees in 2004. Employee compensation and
benefits were approximately $3.7 million and
$1.2 million during 2005 and 2004, respectively. The
increase in employee compensation and benefits is due to
increased number of employees from 11 to 19 and bonuses of
approximately $1.3 million paid in 2005. General and
administrative expenses increased to $2.3 million from
$411,000 in 2004 primarily due to increased legal expenses,
professional service costs related to our status as a public
company and the creation of our SBIC subsidiaries as well as
increased business development expenses. In addition, we
incurred approximately $252,000 of stock-based compensation
expense in 2005 as compared to $680,000 in 2004. The decrease in
stock-based compensation expense was due to the immediate
vesting of certain options granted in 2004. We anticipate that
operating expenses will increase over the next twelve months as
we continue to incur higher interest expense on higher average
outstanding debt balances, increase the number of our employees
to support our growth and incur additional expenses related to
being a public company, including expenses related to the
implementation of the requirements under Sarbanes-Oxley Act.
Net
Investment Income (Loss) Before Income Tax Expense and
Investment Gains and Losses
Net investment income before income tax expense for the year
ended December 31, 2005 totaled $1.5 million as
compared with a net investment loss before income tax expense in
2004 of approximately $2.0 million. This change is made up
of the items described above.
Net
Investment Gains
For the period ended December 31, 2005, net unrealized
investment appreciation totaled approximately $353,000. The net
unrealized appreciation and depreciation of investments is based
on portfolio asset valuations determined in good faith by our
Board of Directors, based on the recommendations of the
Valuation Committee of our Board of Directors. For the year
ended December 31, 2005, we recognized approximately
$4.1 million of gross unrealized appreciation on 14 of our
portfolio investment companies and approximately
$3.4 million of gross unrealized depreciation on 15 of our
portfolio investment companies. Approximately $3.3 million
of the unrealized depreciation was due to a reduction in the
fair value of one portfolio company. The net unrealized
investment gains recognized by the company were reduced by
approximately $342,000 for a warrant participation agreement
with Citigroup. We generated a net realized gain totaling
approximately $482,000 from the sale of common stock of one
biopharmaceutical portfolio company. We did not recognize any
realized or unrealized gains or losses during the period ended
December 31, 2004.
35
Income
Taxes
We are taxed under Subchapter C of the Internal Revenue Code and
therefore are subject to corporate-level federal and state
income tax.
We account for income taxes in accordance with the provisions 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 intend to seek to be treated as a RIC under Subchapter M of
the Code for 2006. 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.
See Certain United States Federal Tax
Considerations Taxation as a Regulated Investment
Company.
As such, we have elected to report our financial position and
results of operations under Subchapter C of the Code until such
time as we can reasonably ascertain that we will meet the
required qualifications as a RIC. As a C corporation, we
will accrue income tax expense on a quarterly basis until we are
able to reasonably determine that we will qualify as a RIC under
requirements contained in Subchapter M of the Code. If and when,
during 2006, we are able to reasonably determine that we can
qualify as a RIC, we would reverse any income tax expense
recorded during 2006 and charge to income tax expense the
$1.4 million deferred tax asset on the our balance sheet at
December 31, 2005. If we had been able to make the
determination as of December 31, 2005, the impact of
charging the deferred tax to operations would have reduced our
NAV by approximately $0.15 per share.
Net
Increase in Net Assets Resulting from Operations and Earnings
Per Share
For the year ended December 31, 2005 net income
totaled approximately $2.1 million compared to a net loss
of approximately $2.0 million for the period ended
December 31, 2004. These changes are made up of the items
previously described.
Basic and diluted net income per share for the year ended
December 31, 2005 was $0.30 as compared to a basic loss per
share of $1.72 and diluted loss per share of $1.58 for the
period ended December 31, 2004. The net income per share
for 2005 was affected by an increase in the number of average
shares outstanding in 2005 as compared to 2004 of approximately
5.9 million shares and 5.7 million shares on a basic
and diluted basis, respectively.
Financial
Condition, Liquidity and Capital Resources
We were initially capitalized with approximately
$2.6 million in proceeds from the sale of preferred stock
in February 2004. In June 2004, we completed an additional
private placement offering of 904,635 units at a price of
approximately $30.00 per unit. Each unit consisted of two
shares of our common stock and two warrants to purchase one
share of our common stock at a price of $15.00 per share.
All of our then outstanding preferred stock was exchanged for
units concurrent with the closing of our private offering in
June 2004. We received approximately $23.9 million in total
net proceeds from the June 2004 private offering, net of
placement fees and other offering-related costs. In February
2005, warrants to purchase 1,175,963 shares of our common
stock were exercised, generating proceeds to us of approximately
$12.4 million.
In June 2005, we completed our initial public offering of
6,000,000 shares of our common stock at a price of
$13.00 per share resulting in net proceeds to us of
approximately $70.9 million after deducting offering costs.
On September 7, 2005, we registered 3,801,905 shares
of common stock and 673,223
5-year
warrants pursuant to its obligations under a registration rights
agreement between Hercules and certain shareholders. Prior to
36
registration, these shares of common stock and warrants were
restricted within the meaning of the Securities Act of 1933. We
did not receive any proceeds from the registration of these
securities.
On January 20, 2006, we registered the issuance of
3,275,000 transferable rights to our stockholders as of
March 24, 2006, and 3,275,000 shares of our common
stock. The number of rights and shares of our common stock
registered was subsequently increased to 3,420,000,
respectively. The rights entitled any holders of rights, or
rights holders, to subscribe for an aggregate of approximately
3,420,000 shares of our common stock. The rights entitled
the holders to purchase one new share of common stock for every
right held. We sold 3,411,992 shares of common stock and
received approximately $34.0 million in net proceeds from
the rights offering.
On May 2, 2006, we registered 432,900 shares of common
stock pursuant to our obligation under a registration rights
agreement between us and certain shareholders. Prior to
registration, these shares of common stock were restricted
within the meaning of the Securities Act of 1933, as amended. We
did not receive any proceeds from the registration of these
securities.
For
the Six Months Ended June 30, 2006
Financial
Condition, Liquidity, and Capital Resources
At June 30, 2006 and December 31, 2005, we had
approximately $23.3 million and $15.4 million in cash
and cash equivalents, respectively. In addition, at
June 30, 2006 and December 31, 2005, we had
approximately $64.0 million and $49.0 million,
respectively, in available borrowing capacity under our
Citigroup Facility, subject to existing terms and advance rates.
We primarily invest cash on hand in interest bearing deposit
accounts.
On April 21, 2006, we raised approximately
$34.0 million, net of issuance costs, from a rights
offering of 3,411,992 shares of common stock. The shares
were sold at $10.55 per share which was equivalent to 95% of the
volume weighted average price of shares traded during the ten
days immediately prior to the expiration date of the offering.
Funds raised in the offering were partially used to pay off the
remaining $15.0 million outstanding under the Bridge Loan
Credit Facility and to pay down $10.0 million under our
Citigroup Facility.
For the six-months ended June 30, 2006, net cash used in
operating activities totaled approximately $12.2 million.
This use of cash was due primarily due to $65.9 million
used for investments in our portfolio companies offset by
proceeds of $48.8 million in principal repayments, a
$2.3 million realized gain on the sale of stock of two
portfolio companies and the reverse of $1.7 million of
income tax payable. Cash provided by investing activities for
the six-months ended June 30, 2006 totaled
$2.2 million and was primarily due to proceeds from the
sale of common stock in two portfolio companies. Net cash
provided by financing activities totaled $17.9 million for
the six-months ended June 30, 2006. In March and April, we
received $5.0 and $33.9 million in proceeds from the sale
of common stock, respectively, offset by a paydown of
$15 million under our credit facility, and a dividend
payment of $6.0 million. During the six-months ended
June 30, 2006, we borrowed and repaid $10.0 million
under our Citigroup Facility.
As of June 30, 2006, net assets totaled
$153.3 million, with a net asset value per share of $11.24,
and we had approximately $23.2 million in cash and cash
equivalents. 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.
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 June 30, 2006 was approximately 351%.
We anticipate that we will continue to fund our investment
activities through a combination of debt and additional equity
capital over the next year. As of June 30, 2006, based on
eligible loans in the investment portfolio and existing advance
rates, we had approximately $25.0 million of borrowing
capacity available under our existing $125.0 million
securitized credit facility from Citigroup and
$136.4 million of loans outstanding under the facility.
37
As additional new loans are originated and funded, we will be
able to increase our borrowing capacity under the Citigroup
Facility beyond the current $25.0 million. Advances under
the facility bear interest at one-month LIBOR plus 165 basis
points. We anticipate that portfolio fundings entered into in
succeeding periods will allow us to utilize the full borrowing
capacity of the Citigroup Facility.
On April 21, 2006, we raised approximately
$34.0 million, net of estimated issuance costs, from a
rights offering of 3,411,992 shares of our common stock.
The shares were sold at $10.55 per share which was equivalent to
95% of the volume weighted average price of shares traded during
the ten days immediately prior to the expiration date of the
offering. We believe these funding sources combined with cash on
hand at June 30, 2006, cash provided from operations and
financing activities will allow us to continue investing
activities for six to nine months.
For
the Year Ended December 31, 2005
For 2005, net cash used in operating activities totaled
$156.7 million as compared to $17.7 million in 2004.
This increase was due primarily to $177.8 million used for
investments in our portfolio companys, offset by
approximately $18.8 million in principal repayments, as
compared to $16.7 million of investments in our portfolio
companys in 2004. Cash provided by investing activities in
2005 totaled $447,000 and was primarily due to proceeds of
approximately $531,000 from the sale of common stock in one
portfolio company offset by purchases of capital assets and
other long-term assets of $84,000. We used $43,000 of cash in
investing activities in 2004 that was primarily related to
purchases of capital equipment. Net cash provided by financing
activities totaled $162.9 million in 2005 as compared to
$26.4 million in 2004. In 2005, we received
$87.2 million in proceeds from the sale of common stock and
$76.0 million from borrowings under our credit facilities,
offset by a dividend payment of $245,000. In 2004 we received
approximately $26.4 million from the sale of preferred and
common stock.
As of December 31, 2005, net assets totaled
$114.4 million, with a net asset value per share of $11.67,
and we had approximately $15.4 million in cash and cash
equivalents. 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.
As defined under the 1940 Act, our asset coverage must be at
least 200% after each issuance of senior securities. Our asset
coverage as of December 31, 2005 was approximately 250%.
We anticipate that we will continue to fund our investment
activities through a combination of debt and additional equity
capital over the next year. As of December 31, 2005, based
on eligible loans in the investment portfolio and existing
advance rates, we had approximately $19.0 million of
borrowing capacity available under our existing
$100 million securitized credit facility from Citigroup and
$51.0 million of loans outstanding under the facility. As
additional new loans are originated and funded, we will be able
to increase our borrowing capacity under the Citigroup Facility
beyond the current $19.0 million. Advances under the
facility bear interest at one-month LIBOR plus 165 basis points.
There was $51 million outstanding under the Citigroup
Facility as of December 31, 2005. In addition, Citigroup
has an equity participation right of 10% of the realized gains
on warrants collateralized under the Citigroup facility. We
anticipate that portfolio fundings entered into in succeeding
periods will allow us to utilize the full borrowing capacity of
the Citigroup Facility. We expect to issue additional equity or
debt securities within the next two quarters to continue to fund
our investing activities.
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 June 30, 2006, we had unfunded
commitments of approximately $85.2 million. These
commitments will be subject to the same underwriting and ongoing
portfolio
38
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.
Contractual
Obligations
The following table shows our contractual obligations as of
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
Contractual
Obligations
(1)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
Borrowings
(2)(3)
|
|
$
|
61,000
|
|
|
$
|
61,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating Lease Obligations
|
|
|
4,004
|
|
|
|
619
|
|
|
|
1,647
|
|
|
|
1,098
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,004
|
|
|
$
|
61,619
|
|
|
$
|
1,647
|
|
|
$
|
1,098
|
|
|
$
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes commitments to extend
credit to our portfolio companies.
|
|
(2)
|
|
Borrowings under our Citigroup
credit facility are listed based on the contractual maturity of
the credit facility. Actual repayments could differ
significantly due to prepayments by our existing portfolio
companies, modifications of our current agreements with our
existing portfolio companies and modification of the credit
facility.
|
|
|
|
(3)
|
|
We also have a warrant
participation agreement with Citigroup as discussed below.
|
Borrowings
In April 2005, we entered into a bridge loan credit facility
with Alcmene, a special purpose vehicle that is an affiliate of
Farallon Capital Management, L.L.C., a shareholder of Hercules,
which we refer to as the Bridge Loan Credit Facility. The Bridge
Loan Credit Facility was a $25 million secured term loan,
which provided for $25 million of available borrowings, all
of which was drawn down on April 12, 2005. The Bridge Loan
Credit Facility allows for up to an additional $25 million
of discretionary supplemental senior secured loans. All amounts
outstanding under this credit facility were initially due and
payable on October 12, 2005.
On August 1, 2005, we amended our Bridge Loan Credit
Facility with Alcmene Funding, LLC. The amended agreement
extended the term of the loan to April 12, 2006, eliminated
the loan extension fee, revised the interest rate effective
August 1, 2005 to LIBOR plus 5.6% through December 31,
2005 and thereafter to 13.5% per annum, and amended certain
collateral rights and financial covenants. At December 31,
2005, the interest rate under the Bridge Loan Credit Facility
was 9.76% per year. We had $25.0 million of outstanding
borrowings under the Bridge Loan Credit Facility at
December 31, 2005. On March 6, 2006, we repaid
$10 million of the Bridge Loan Credit Facility, and the
interest rate was reduced to 10.86%. On May 10, 2006, we
repaid the remaining $15.0 million of the Bridge Loan
Credit Facility and paid a $500,000 loan fee due on maturity and
all accrued and unpaid interest through the date of repayment.
On August 1, 2005, we, through Hercules Funding
Trust I, our affiliated statutory trust, executed a
$100 million securitized credit facility with Citigroup
Global Markets Realty Corp., which we refer to as the Citigroup
Facility. Our ability to make draws on the Citigroup Facility
expires on July 31, 2006 unless extended prior to such date
for an additional
364-day
period with the lenders consent. On July 28, 2006, we
extended the Citigroup Facility for an additional one year
period under the existing terms and conditions. The Citigroup
Facility is collateralized by loans from our portfolio
companies, and includes an advance rate of approximately 55% of
eligible loans. Interest on borrowings under the Citigroup
Facility will be paid monthly and will be charged at one-month
LIBOR plus a spread of 1.65%. We also paid a loan origination
fee equal to 0.25% of the Citigroup Facility and will be subject
to an unused commitment fee of 0.25%. The Citigroup Facility
contains covenants that, among other things, require us to
maintain a minimum net worth and to restrict the loans securing
the Citigroup Facility to certain dollar amounts, to
concentrations in certain geographic regions and industries, to
certain loan grade classifications, to certain security
interests and to certain interest payment terms. Citigroup has
an equity participation right through a warrant participation
agreement on the pool of loans and warrants collateralized under
the Citigroup facility. Pursuant to the warrant participation
agreement, we granted to Citigroup a 10% participation in all
warrants held as collateral. As a result, Citigroup is entitled
to 10% of the realized gains on the warrants until the realized
gains paid to Citigroup pursuant to the agreement equals
$3,750,000 (the Maximum Participation Limit). The
obligations under the
39
warrant participation agreement continue even after the
Citigroup facility is terminated until the Maximum Participation
Limit has been reached. During the six months ended
June 30, 2006, we reduced our realized gain by
approximately $136,000 for Citigroups participation in the
gain on sale of an equity security and we recorded an additional
liability and reduced our unrealized gain by approximately
$172,000 for Citigroups participation in unrealized gains
in the warrant portfolio. The value of their participation right
on unrealized gains in the related equity investments since
inception of the agreement was approximately $378,000 at
June 30, 2006 and is included in accrued liabilities and
reduces the unrealized gain recognized by us at June 30,
2006. Since inception of the agreement, we have paid Citigroup
approximately $195,000 under the warrant participation agreement
thereby reducing our realized gains. There was
$61.0 million of outstanding borrowings under the Citigroup
Facility at June 30, 2006.
In addition, we expect to pursue additional debt financing from
the Small Business Administration under its Small Business
Investment Company program. We may also seek to enter into an
additional securitization facility.
Dividends
On July 19, 2006, we declared a dividend of $0.30 per
common share for holders of record on July 31, 2006. This
dividend totaled approximately $4.1 million and was
distributed on August 28, 2006.
The following table summarizes our dividends declared and paid
on all shares, including restricted stock, to date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.925
|
|
|
|
|
|
|
|
|
|
|
RIC
Election
During the second quarter ended June 30, 2006, we
determined that it was more likely than not that we will be able
to qualify as a RIC for tax reporting purposes for the year
ended December 31, 2006. If we meet the required
qualification tests of a RIC, any income timely distributed to
our shareholders will not be subject to corporate level federal
income or excise taxes in those years that we qualify as a RIC.
We intend to elect to be regulated as a RIC for 2006. The
election will be submitted with the filing of our 2006 tax
return and would be effective as of January 1, 2006. At
March 31, 2006, we had a deferred tax asset of
approximately $181,000. During the second quarter, a full
valuation reserve was recorded against this asset in
anticipation that we would not have a future federal tax expense
to offset the deferred tax asset. In addition, during the first
quarter of 2006, we recorded a tax expense in the amount of
approximately $1.8 million that was reversed in the second
quarter as we would not be subject to federal income or excise
taxes in 2006. As a result, we recorded a tax benefit of
approximately $800,000 million in the second quarter.
As long as we qualify as a RIC, we will not be taxed on our
investment company taxable income or realized net
capital gains, to the extent that such taxable income and gains
are distributed to stockholders on a timely basis. We may be
required, however, to pay federal income taxes on any unrealized
net built-in gains in the assets held by us during the period in
which we were not (or in which we failed to qualify as) a RIC
that are recognized within the following 10 years, unless
we make a special election to pay corporate-level tax on such
built-in gains at the time of our RIC election or an exception
applies. Annual tax distributions generally will differ from net
income for the fiscal year due to temporary and permanent timing
differences in the recognition of income and expenses, returns
of capital and net unrealized appreciation or depreciation,
which are not included in taxable income.
In order to qualify as a RIC under Subchapter M of the Code, and
to avoid corporate level tax on any distributed income, we must,
in general, for each taxable year: (1) have in effect at
all times during the taxable year an election to be treated as a
business development company, (2) derive at least 90% of
our gross income from dividends,
40
interest, gains from the sale of securities and other specified
types of income, (3) meet asset diversification
requirements as defined in the Code, and (4) distribute to
stockholders at least 90% of our investment company taxable
income as set forth in the Code. In addition, prior to the end
of our first taxable year as a RIC, we must distribute to our
stockholders all earnings and profits from periods prior to our
qualification as a RIC.
If we qualify and elect for tax treatment as a RIC, we intend to
take the steps necessary to qualify for the federal tax benefits
allowable to RICs, including distributing annually to our
stockholders at least 90% of our ordinary income and realized
net short-term capital gains in excess of realized net long-term
capital losses. Unless a stockholder elects otherwise, these
distributions will be reinvested in additional shares of our
common stock through our dividend reinvestment plan. While we
are a RIC, we generally intend to retain any realized net
long-term capital gains in excess of realized net short-term
capital losses and to elect to treat such net capital gain as
deemed distributions to our stockholders. We may, in the future,
make actual distributions to our stockholders of some or all of
such net capital gains. There can be no assurance that we will
qualify for treatment as a RIC in 2006 or in any future years.
We may not be able to achieve operating results that will allow
us to make distributions at a specific level or to increase the
amount of these distributions from time to time. In addition, we
may be limited in our ability to make distributions due to
(i) the asset coverage test for borrowings applicable to us
as a business development company under the 1940 Act and
(ii) provisions in our future credit facilities, if any. If
we do not distribute a certain percentage of our income
annually, we will suffer adverse tax consequences, including
possible loss of the federal income tax benefits allowable to a
RIC. We cannot assure stockholders that they will receive any
distributions or distributions at any particular level.
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 disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and
revenues and expenses during the period reported. On an ongoing
basis, our management evaluates its estimates and assumptions,
which are based on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. Actual results could differ from those estimates.
Changes in our estimates and assumptions could materially impact
our results of operations and financial condition.
Valuation of Portfolio Investments.
The most
significant estimate inherent in the preparation of our
consolidated financial statements is the valuation of
investments and the related amounts of unrealized appreciation
and depreciation of investments recorded.
As a BDC, we invest primarily in illiquid securities, including
debt and equity-related securities of private companies. Our
investments are generally subject to some restrictions on resale
and generally have no established trading market. Because of the
type of investments that we make and the nature of our business,
our valuation process requires an analysis of various factors.
Our valuation methodology includes the examination of, among
other things, the underlying investment performance, financial
condition and market changing events that impact valuation.
At June 30, 2006, approximately 89% 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 our investments at fair
value as determined in good faith by our board pursuant to a
valuation policy and a consistent valuation process. Due to the
inherent uncertainty in determining the fair value of
investments that do not have a readily available market value,
the fair value of our investments determined in good faith by
our board 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.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses. Instead,
we must determine the fair value of each
41
individual investment on a quarterly basis. We will record
unrealized depreciation on investments when we believe that an
investment has decreased in value, including where collection of
a loan or realization of an equity security is doubtful.
Conversely, where appropriate, we will record unrealized
appreciation if we believe that the underlying portfolio company
has appreciated in value and, therefore, that our investment has
also appreciated in value.
With respect to private debt and equity securities, each
investment is valued using industry valuation benchmarks, and,
where appropriate, the value is assigned a discount reflecting
the illiquid nature of the investment, and our minority,
non-control position. When a qualifying external event such as a
significant purchase transaction, public offering, or subsequent
debt or equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private debt or
equity valuation.
Interest Income.
Interest income is recorded
on the accrual basis to the extent that such amounts are
expected to be collected. Loan facility fees, original issue
discount, commitment fees, and market premium or discount are
deferred and amortized into interest income as adjustments to
the related loans yield over the contractual life of the
loan. The Company stops accruing interest on its investments
when it is determined that interest is no longer collectible.
Fee Income.
Fee income includes 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. These fees are generally
recognized as income when the services are rendered.
Stock-Based Compensation.
We have issued and
may, from time to time, issue additional stock options to
employees under our 2004 Equity Incentive Plan. We follow
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payments
(FAS 123R), to
account for stock options granted. 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 over the vesting period.
Recent
Developments
From July 1, 2006 through September 29, 2006, we
entered into binding agreements to invest approximately
$81.5 million in structured mezzanine debt in nine new
portfolio companies and one existing portfolio company and made
a $250,000 equity investment in one existing portfolio company.
During this same period, we funded the following debt
investments totalling $67.2 million in nine new portfolio
companies and five existing portfolio companies and made two
equity investments, one in a new portfolio company and one in an
existing portfolio company.
42
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
Principal Business
|
|
Funded Investment
|
|
|
Affinity Express, Inc.
|
|
Senior Debt
|
|
Consumer and Business Services
|
|
$
|
296,298
|
|
Agami Systems, Inc.
|
|
Senior Debt
|
|
Electronics and Computer Hardware
|
|
|
7,000,000
|
|
Atrenta, Inc.
|
|
Equity
|
|
Software
|
|
|
250,000
|
|
Aveo Pharmaceuticals
|
|
Senior Debt
|
|
Biopharmaceuticals
|
|
|
7,500,000
|
|
BabyUniverse, Inc.
|
|
Senior Debt
|
|
Consumer and Business Products
|
|
|
5,000,000
|
|
BARRX Medical, Inc.
|
|
Equity
|
|
Medical Devices and Equipment
|
|
|
1,500,000
|
|
EpiCept Corporation
|
|
Senior Debt
|
|
Biopharmaceuticals
|
|
|
10,000,000
|
|
ForeScout Technologies, Inc.
|
|
Senior Debt
|
|
Software
|
|
|
1,000,000
|
|
Gynesonics, Inc
|
|
Senior Debt
|
|
Medical Devices and Equipment
|
|
|
2,000,000
|
|
Hedgestreet, Inc.
|
|
Senior Debt
|
|
Consumer and Business Services
|
|
|
3,000,000
|
|
Intelliden, Inc.
|
|
Senior Debt
|
|
Software
|
|
|
3,000,000
|
|
iWatt, Inc.
|
|
Senior Debt
|
|
Semiconductors
|
|
|
2,000,000
|
|
Luminuous Devices, Inc.
|
|
Senior Debt
|
|
Electronics and Computer Hardware
|
|
|
10,000,000
|
|
Novasys Medical, Inc.
|
|
Senior Debt
|
|
Medical Devices and Equipment
|
|
|
6,000,000
|
|
Oatsystems, Inc.
|
|
Senior Debt
|
|
Software
|
|
|
3,000,000
|
|
Portola Pharmaceuticals, Inc.
|
|
Senior Debt
|
|
Biopharmaceuticals
|
|
|
5,625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
67,171,298
|
|
|
|
|
|
|
|
|
|
|
In addition, at September 29, 2006, we had unfunded
commitments totaling approximately $95.7 million. These
commitments will be subject to the same underwriting and ongoing
portfolio maintenance as are the 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. In addition, we had extended
non-binding term sheets to six prospective new portfolio
companies representing approximately $58.5 million of
structured mezzanine debt investments. These investments are
subject to finalization of our due diligence and approval
process as well as negotiation of definitive agreements with the
prospective portfolio company and, as a result, may not result
in completed investments.
As of September 30, 2006, we had $91.0 million
outstanding under our securitization credit facility.
During September 2006, we sold the assets of Optovia Corporation
for approximately $2.6 million. We will record a realized
loss on this investment in the third quarter which is estimated
to be approximately $2.7 million, which includes
approximately $380,000 of legal expenses and incentive fees paid
to a third party and members of Optovias management.
On October 16, 2006, we announced the declaration of a
dividend of $0.30 per share payable on December 1, 2006 to
stockholders of record as of November 6, 2006.
43
BUSINESS
General
We are a specialty finance company that provides debt and equity
growth capital to technology-related and life-sciences companies
at all stages of development. We primarily finance
privately-held companies backed by leading venture capital and
private equity firms and also may finance certain select
publicly-traded companies that lack access to public capital or
are sensitive to equity ownership dilution. We source our
investments through our principal office located in Silicon
Valley, as well as our additional offices in the Boston, Boulder
and Chicago areas. Our goal is to be the leading structured
mezzanine capital provider of choice for venture capital and
private equity-backed technology-related and life sciences
companies requiring sophisticated and customized financing
solutions. Our strategy is to evaluate and invest in a broad
range of ventures active in the technology and life science
industries and to offer a full suite of growth capital products
up and down the capital structure. We invest primarily in
structured mezzanine debt and, to a lesser extent, in senior
debt and equity. We use the term structured mezzanine debt
investment to refer to any debt investment, such as a
senior or subordinated secured loan, that is coupled with an
equity component, including warrants, options or rights to
purchase common or preferred stock. Our structured mezzanine
debt investments will typically be secured by some or all of the
assets of the portfolio company.
We focus our investments in companies active in the technology
industry sub-sectors characterized by products or services that
require advanced technologies, including computer software and
hardware, networking systems, semiconductors, semiconductor
capital equipment, information technology infrastructure or
services, Internet consumer and business services,
telecommunications, telecommunications equipment, media and life
sciences. Within the life sciences sub-sector, we focus on
medical devices, bio-pharmaceutical, health care services and
information systems companies. We refer to all of these
companies as technology-related companies and
intend, under normal circumstances, to invest at least 80% of
the value of our assets in such businesses.
Our investment objective is to maximize our portfolios
total return by generating current income from our debt
investments and capital appreciation from our equity-related
investments. We are an internally-managed, non-diversified
closed-end investment company that has elected to be treated as
a business development company under the Investment Company Act
of 1940.
Our primary business objectives are to increase our net income,
net operating income and net asset value by investing in
structured mezzanine debt and equity of venture capital and
private equity backed technology-related companies with
attractive current yields and the potential for equity
appreciation and realized gains. Our structured debt investments
typically include warrants or other equity interests, giving us
the potential to realize equity-like returns on a portion of our
investment. In some cases, we receive the right to make
additional equity investments in our portfolio companies in
connection with future equity financing rounds. Capital that we
provide directly to venture capital and private equity backed
technology-related companies is generally used for growth, and
in select cases for acquisitions or recapitalizations.
Our portfolio is comprised of, and we anticipate that our
portfolio will continue to be comprised of, investments in
technology-related companies at various stages of their
development. Our emphasis is on private companies following or
in connection with their first institutional round of equity
financing, which we refer to as emerging-growth companies, and
private companies in later rounds of financing, which we refer
to as expansion-stage companies. To a lesser extent, we make
investments in established companies comprised of private
companies in one of their final rounds of equity financing prior
to a liquidity event or select publicly-traded companies that
lack access to public capital or are sensitive to equity
ownership dilution.
From incorporation through December 31, 2005, we were taxed
as a corporation under Subchapter C of the Code. We currently
intend to elect to be treated for federal income tax purposes as
a RIC under Subchapter M of the Code with the filing of our
federal corporate income tax return for 2006, which election,
when actually made, would be effective as of January 1,
2006. As a RIC, we generally will not pay corporate-level
federal income taxes on any ordinary income or capital gains
that we distribute to our stockholders as dividends. We may be
required, however, to pay corporate-level federal income taxes
on gains built into our assets as of the effective date of our
RIC election. See Certain United States Federal Income Tax
Considerations Conversion to Regulated Investment
Company Status. To obtain and maintain the federal income
tax benefits of RIC status, we must meet specified
44
source-of-income
and asset diversification requirements and distribute annually
an amount equal to at least 90% of the sum of our net ordinary
income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any, out of assets
legally available for distribution. See
Distributions. There is no assurance that we will
meet these tests and be eligible to make a RIC election. As of
the date of this prospectus, we cannot determine the probability
that during 2006 we will qualify as a RIC when we file our 2006
tax return. If we do not qualify or elect to make a RIC
election, we would continue to be taxed as a C corporation.
We commenced investment operations in September 2004. At
June 30, 2006, we had outstanding structured mezzanine debt
investments in 48 portfolio companies representing approximately
$188.1 million and equity investments of $5.5 million
for a total investment portfolio at fair value of
$193.6 million. In addition, at June 30, 2006, we had
unfunded contractual commitments of $85.2 million.
At June 30, 2006, the weighted average yield to maturity of
our loan obligations was approximately 12.8%. Yields to maturity
are computed using interest rates as of June 30, 2006 and
include amortization of loan facility fees, original issue
discounts, commitment fees and market premiums or discounts over
the expected life of the debt investments, weighted by their
respective costs when averaged and are based on the assumption
that all contractual loan commitments have been fully funded.
Corporate
History and Offices
We were founded by Mr. Henriquez, our Chief Executive
Officer, and Mr. Harvey, our Chief Legal Officer, in
December 2003, and we were incorporated in Maryland on
December 18, 2003. We were initially capitalized with
approximately $2.6 million in net proceeds from the sale of
our preferred stock in February 2004.
In June 2004, we completed a private offering of units, each
unit consisting of two shares of our common stock and two
warrants to purchase one share of our common stock. We received
approximately $23.9 million in total net proceeds from this
private offering, net of placement fees and before other
offering and organizational expenses. All of the
then-outstanding preferred stock was exchanged for units
immediately prior to the closing of our June 2004 private
offering.
In June 2005, we completed a public offering of
6,000,000 shares of our common stock at a price of
$13.00 per share resulting in net proceeds to the company
of approximately $70.9 million after deducting the offering
costs.
On April 21, 2006, the Company raised approximately
$34.0 million, net of estimated issuance costs, from a
rights offering of 3,411,992 shares of its common stock.
The shares were sold at $10.55 per share which was
equivalent to 95% of the volume weighted average price of shares
traded during the ten days immediately prior to the closing.
Our
Market Opportunity
We believe that technology-related companies compete in one of
the largest and most rapidly growing sectors of the
U.S. economy and that continued growth is supported by
ongoing innovation and performance improvements in technology
products as well as the adoption of technology across virtually
all industries in response to competitive pressures. We believe
that an attractive market opportunity exists for a specialty
finance company focused primarily on structured mezzanine
investments in technology-related companies for the following
reasons:
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Technology-related companies are underserved by traditional
lending sources;
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Unfulfilled demand exists for structured debt financing by
technology-related companies;
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Structured mezzanine debt products are less dilutive and
complement equity financing from venture capital and private
equity funds; and
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Average valuations for private technology-related companies are
lower than in recent years.
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Technology-Related Companies Underserved by Traditional
Lenders.
We believe many viable
technology-related companies backed by financial sponsors have
been unable to obtain sufficient growth financing from
traditional lenders, including financial services companies such
as commercial banks and finance companies, in part because
traditional lenders have continued to consolidate and have
adopted a more risk-averse approach to
45
lending that has resulted in tightened credit standards in
recent years. More importantly, we believe traditional lenders
are typically unable to underwrite the risk associated with
financial sponsor-backed emerging-growth or expansion-stage
companies effectively.
The unique cash flow characteristics of many technology-related
companies as a result of significant research and development
expenditures and high projected revenue growth often render them
difficult to evaluate from a credit perspective. The balance
sheets of emerging-growth and expansion-stage companies often
include a disproportionately large amount of intellectual
property assets, which makes the process of valuing that
collateral more difficult. Finally, the speed of innovation in
technology and rapid shifts in consumer demand and market share
require an in-depth understanding of technology products and
markets. These attributes can make it difficult for lenders to
analyze technology-related companies using traditional
underwriting methods.
We believe traditional lenders are generally refraining from
entering the structured mezzanine debt marketplace for
emerging-growth and expansion-stage companies, instead
preferring the risk-reward profile of senior debt. Traditional
lenders generally do not have flexible product offerings that
meet the needs of technology-related companies. The financing
products offered by traditional lenders typically impose on
borrowers many restrictive covenants and conditions, including
limiting cash flows and requiring a significant depository
relationship to facilitate rapid liquidation.
Unfulfilled Demand for Structured Debt Financing by
Technology-Related Companies.
Private debt
capital from specialty finance companies continues to be an
important source of funding for technology-related companies. We
believe that the level of demand for debt financing to
emerging-growth and expansion-stage companies is a function of
the level of annual venture equity investment activity. In 2005,
venture capital-backed companies received, in approximately
2,200 transactions, equity financing in an aggregate amount of
approximately $22.1 billion, as reported by Dow Jones
VentureOne. According to Dow Jones VentureOne, as of
December 31, 2005, there were a total of approximately
5,400 private companies that had received aggregate venture
capital equity investments of approximately $132 billion
over the prior six years. We believe a range of $20 billion
to $25 billion in annual equity investments to
venture-backed companies will be sustainable for future years.
We believe that demand for structured debt financing is
currently unfulfilled, in part because historically the largest
capital providers to technology-related companies have exited
the market while at the same time lending requirements of
traditional lenders have become more stringent. We therefore
believe we entered the structured lending market for
technology-related companies at an opportune time.
Structured Mezzanine Debt Products Complement Equity
Financing From Venture Capital and Private Equity
Funds.
We believe that structured debt securities
will continue to be viewed as an attractive source of capital
that will augment the capital provided by venture capital and
private equity funds. We believe that our structured mezzanine
debt products provide access to growth capital for
technology-related companies that may not otherwise be able to
obtain financing other than through incremental investments by
their existing equity investors. As such, we provide portfolio
companies and their financial sponsors with an opportunity to
complement and diversify their capital sources. Generally, we
believe emerging-growth and expansion-stage companies target a
portion of their capital to be debt in an attempt to enable
those companies to achieve a higher valuation through internal
growth. In addition, because financial-sponsor backed companies
have recently been more mature prior to reaching a liquidity
event, our investments could provide the debt capital needed to
grow or recapitalize during the extended period prior to
liquidity events.
Lower Valuations for Private Technology-Related
Companies.
During the downturn in technology
industries that began in 2000, the markets saw sharp and broad
declines in valuations of venture capital and private
equity-backed technology-related companies. According to Dow
Jones VentureOne, as of December 31, 2005 median pre-money
valuations for venture capital-backed companies in 2005 was
$15.2 million, which compares to $25.0 million in 2000
and $16.0 million in 2001. We believe that the valuations
currently assigned to venture capital and private equity-backed
technology-related companies in private financing rounds will
allow us to build a portfolio of equity-related securities at
attractive valuation levels.
46
Our
Business Strategy
Our strategy to achieve our investment objective includes the
following key elements:
Leverage the Experience and Industry Relationships of Our
Management Team.
We have assembled a team of
senior investment professionals with extensive experience as
venture capitalists, commercial lenders, and originators of
structured debt and equity investments in technology-related
companies. Members of our management team also have operational,
research and development and finance experience with
technology-related companies. We have established contacts with
leading venture capital and private equity fund sponsors, public
and private companies, research institutions and other industry
participants, which should enable us to identify and attract
well-positioned prospective portfolio companies.
We will concentrate our investing activities in industries in
which our investment professionals have extensive investment
experience. Our investment professionals have, on average, more
than 15 years of experience as equity investors in,
and/or
lenders to, technology-related companies. In addition, our team
members have originated structured mezzanine investments in over
200 technology-related companies, representing over
$1 billion in investments, and have developed a network of
industry contacts with investors and other participants within
the venture capital and private equity communities. We believe
that our focus on financing technology-related companies will
enable us to leverage our expertise in structuring prospective
investments to assess the value of both tangible and intangible
assets, to evaluate the business prospects and operating
characteristics of technology-related companies, and to identify
and originate potentially attractive investments with these
types of companies.
Mitigate Risk of Principal Loss and Build a Portfolio of
Equity-Related Securities.
We expect that our
investments will have the potential to produce attractive risk
adjusted returns through current income, in the form of interest
and fee income, as well as capital appreciation from our
equity-related investments. We believe that we can mitigate the
risk of loss on our debt investments through the combination of
loan principal amortization, cash interest payments, relatively
short maturities for our debt instruments, taking security
interests in the assets of our portfolio companies, as well as
requiring prospective portfolio companies to have certain
amounts of available cash at the time of our investment and the
continued support from a venture capital or private equity firm
at the time we make our investment.
Our structured debt investments typically include warrants or
other equity interests, giving us the potential to realize
equity-like returns on a portion of our investment. In addition,
we expect, in some cases, to receive the right to make
additional equity investments in our portfolio companies in
connection with future equity financing rounds. We believe that
the valuations currently assigned to technology-related
companies in private financing rounds as a result of the recent
downturn in technology-related industries will allow us to build
a portfolio of equity-related securities at attractive valuation
levels, which we believe will create the potential for
meaningful long-term capital gains in connection with the future
liquidity events of these technology-related companies.
Provide Customized Financing Complementary to Financial
Sponsors Capital.
We offer a broad range of
investment structures and possess expertise and experience to
effectively structure and price investments in
technology-related companies. Unlike many of our competitors
that structure their products to fit a specific set of
investment parameters, we have the flexibility to structure our
investments to suit the particular needs of our portfolio
companies. We offer customized financing solutions ranging from
senior debt to equity capital, with a focus on structured
mezzanine debt.
We use our strong relationships in the financial sponsor
community to originate investment opportunities. Because venture
capital and private equity funds typically invest solely in the
equity securities of their portfolio companies, we believe that
our debt investments will be viewed as an attractive source of
capital, both by the portfolio company and by the portfolio
companys financial sponsor. In addition, we believe that
many venture capital and private equity fund sponsors encourage
their portfolio companies to use debt financing for a portion of
their capital needs as a means of potentially enhancing equity
returns, minimizing equity dilution and increasing valuations
prior to a subsequent equity financing round or a liquidity
event.
47
Invest at Various Stages of Development.
We
provide growth capital to technology-related companies at all
stages of development, from emerging-growth companies, to
expansion-stage companies to established companies. We believe
that this provides us with a broader range of potential
investment opportunities than those available to many of our
competitors, who generally choose to make investments during a
particular stage in a companys development. Because of the
flexible structure of our investments and the extensive
experience of our investment professionals, we believe we are
well positioned to take advantage of these investment
opportunities at all stages of prospective portfolio
companies development.
Benefit from Our Efficient Organizational
Structure.
We believe that the perpetual nature
of our corporate structure enables us to be a long-term partner
for our portfolio companies in contrast to traditional mezzanine
and investment funds, which typically have a limited life. In
addition, because of our access to the equity markets, we
believe that we may benefit from a lower cost of capital than
that available to private investment funds. We are not subject
to requirements to return invested capital to investors nor do
we have a finite investment horizon. Capital providers that are
subject to such limitations are often required to seek a
liquidity event more quickly than they otherwise might, which
can result in a lower overall return on an investment.
Deal Sourcing Through Our Proprietary
Database.
We have developed a proprietary and
comprehensive structured query language-based (SQL) database
system to track various aspects of our investment process
including sourcing, originations, transaction monitoring and
post-investment performance. As of June 30, 2006, our
proprietary SQL-based database system included over 8,900
technology-related companies and over 1,900 venture capital
private equity sponsors/investors, as well as various other
industry contacts. This proprietary SQL system allows us to
maintain, cultivate and grow our industry relationships while
providing us with comprehensive details on companies in the
technology-related industries and their financial sponsors.
Our
Investments and Operations
We invest in debt securities and, to a lesser extent, equity
securities, with a particular emphasis on structured mezzanine
debt.
We generally seek to invest in companies that have been
operating for at least six to 12 months prior to the date
of our investment. We expect that such entities will, at the
time of investment, be generating revenues or will have a
business plan that anticipates generation of revenues within
24 months. Further, we anticipate that on the date of our
investment we will obtain a lien on available assets, which may
or may not include intellectual property (other than any
tangible assets specifically financed with senior debt), and
these companies will have sufficient cash on their balance sheet
to amortize their debt for at least nine to 18 months
following our investment. We generally require that a
prospective portfolio company, in addition to having sufficient
capital to support leverage, demonstrate an operating plan
capable of generating cash flows or raising the additional
capital necessary to cover its operating expenses and service
its debt.
We expect that our investments will generally range from
$1.0 million to $20.0 million. Our debt investments
generally have an average initial principal balance of between
$3.0 million and $7.0 million and have maturities of
two to seven years, with an expected average term of three
years. We typically structure our debt securities to provide for
amortization of principal over the life of the loan, but may
include an interest-only period, and our loans will be
collateralized by a security interest in the borrowers
assets, although we may not have the first claim on these assets
and the assets may not include intellectual property. Our debt
investments carry fixed or variable contractual interest rates
typically ranging from 8% to 14%. In addition to the cash yields
received on our loans, in some instances, certain loans may also
include any of the following: end of term payments, exit fees,
balloon payment fees or prepayment fees, which we may be
required to include in income prior to receipt. We also generate
revenue in the form of commitment and facility fees, and to a
lesser extent, due diligence fees. In addition, our structured
mezzanine debt investments will 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. We generally expect that
the warrants typically will be immediately exercisable upon
issuance and will remain exercisable for the lesser of seven
years or three years after an initial public offering. The
exercise prices for the warrants varies from
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nominal exercise prices to exercise prices that are at or above
the current fair market value of the equity for which we receive
warrants. We may structure warrants to provide minority rights
provisions and put rights upon the occurrence of certain events.
We generally target a total annualized return (including
interest, fees and value of warrants) of 12% to 25% for our debt
investments.
Typically, our debt and equity investments take one of the
following forms:
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Structured Mezzanine Debt.
We seek to invest a
majority of our assets in structured mezzanine debt of
prospective portfolio companies. Traditional
mezzanine debt is a layer of high-coupon financing
between debt and equity that most commonly takes the form of
subordinated debt coupled with warrants, combining the cash flow
and risk characteristics of both senior debt and equity.
However, our structured mezzanine investments may be the only
debt capital on the balance sheet of our portfolio companies,
and in many cases we have a first lien security interest in all
of our portfolio companys assets (other than any tangible
assets specifically financed with senior debt). Our structured
mezzanine debt investments typically have maturities of between
two and seven years, with full amortization for emerging-growth
or expansion-stage companies and little or no amortization for
select established companies. Our structured mezzanine debt
investments carry a contractual interest rate between 8% and 14%
and may include an additional
end-of-term
payment, are in an amount between $3 million and
$20 million with an average initial principal balance of
between $3 million and $7 million (although this
investment size may vary proportionately as the size of our
capital base changes) and have an average term of three years.
In some cases we collateralize our investments by obtaining
security interests in our portfolio companies assets,
which may include their intellectual property. In other cases we
may obtain a negative pledge covering a companys
intellectual property. We may structure our mezzanine debt
investments with restrictive affirmative and negative covenants,
default penalties, lien protection, equity calls, take control
provisions and board observation rights.
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Senior Debt.
We seek to invest a limited
portion of our assets in senior debt of prospective portfolio
companies. Senior debt has a senior position with respect to a
borrowers scheduled interest and principal payments and
holds a first priority security interest in the assets pledged
as collateral. Senior debt also may impose covenants on a
borrower with regard to cash flows and changes in capital
structure, among other items. Our senior debt investments carry
a contractual interest rate between 8% and 12%, are in an amount
between $1 million and $5 million with an average
initial principal balance of $2 million, and have an
average term of under three years. In some cases we
collateralize our investments by obtaining security interests in
our portfolio companies assets, which may include their
intellectual property. In other cases we may obtain a negative
pledge covering a companys intellectual property. Our
senior loans, in certain instances, may be tied to the financing
of specific assets. In connection with a senior debt investment,
we may also provide the borrower with a working capital
line-of-credit
that will carry an interest rate ranging from the prime rate to
12%, generally maturing in one year, and will be secured by
accounts receivable and / or inventory.
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Equity-Related Securities.
The equity-related
securities we hold consist primarily of warrants or other equity
interests obtained in connection with our structured mezzanine
debt investments. In addition to the warrants received as a part
of a structured mezzanine debt financing, we typically receive
the right to make equity investments in a portfolio company in
connection with the next equity financing round for that
company. This right will provide us with the opportunity to
further enhance our returns over time through opportunistic
equity investments in our portfolio companies. Equity-related
investments are typically in the form of preferred or common
equity and may be structured with a dividend yield, providing us
with a current return, and with customary anti-dilution
protection and preemptive rights. In the future, we may achieve
liquidity through a merger or acquisition of a portfolio
company, a public offering of a portfolio companys stock
or by exercising our right, if any, to require a portfolio
company to buy back the equity-related securities we hold.
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A comparison of the typical features of our various investment
alternatives is set forth in the chart below.
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Senior Debt
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Structured Mezzanine Debt
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Equity Securities
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Typical Structure
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Term or revolving debt
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Term debt with warrants
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Preferred stock or common stock
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Investment Horizon
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Usually under 3 years
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Long term, ranging from 2 to
7 years, with an average of 3 years
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Long term
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Ranking/Security
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Senior/First lien
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Senior or junior lien
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None/unsecured
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Covenants
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Generally comprehensive
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Less restrictive; Mostly
financial; Maintenance-based
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None
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Risk Tolerance
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Low
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Medium
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High
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Coupon/Dividend
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Cash pay Floating or
fixed rate
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Cash Pay fixed rate;
Payment-in-kind
in limited cases
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Payment-in kind in limited cases
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Customization or
Flexibility
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Standard
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More flexible
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Flexible
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Equity Dilution
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None to low
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Low
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High
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Investment
Criteria
We have identified several criteria that we believe will prove
important in achieving our investment objective with respect to
prospective portfolio companies. These criteria provide general
guidelines for our investment decisions.
Portfolio Composition.
While we focus our
investments in venture capital and private equity backed
technology-related companies, we seek to diversify across
various financial sponsors as well as across various stages of
companies development and various technology industry
sub-sectors and geographies.
Continuing Support from One or More Financial
Sponsors.
We generally invest in companies in
which one or more established financial sponsors have previously
invested and continue to make a contribution to the management
of the business. We believe that having established financial
sponsors that have meaningful commitments to the business is a
key characteristic of a prospective portfolio company. In
addition, we look for representatives of one or more financial
sponsors to maintain seats on the Board of Directors of a
prospective portfolio company as an indication of such
commitment.
Company Stage of Development.
While we invest
in companies at various stages of development, we generally
require that prospective portfolio companies be beyond the seed
stage of development and generally have received or have
commitments for their first institutional round of equity
financing. We expect a prospective portfolio company to
demonstrate its ability to increase its revenues and operating
cash flow over time. The anticipated growth rate of a
prospective portfolio company is a key factor in determining the
value that we ascribe to any warrants or other equity securities
that we may acquire in connection with an investment in debt
securities.
Operating Plan.
We generally require that a
prospective portfolio company, in addition to having sufficient
access to capital to support leverage, demonstrate an operating
plan capable of generating cash flows or the ability to raise
the additional capital necessary to cover its operating expenses
and service its debt. Specifically, we require that a
prospective portfolio company demonstrate at the time of our
proposed investment that it has cash on its balance sheet, or is
in the process of completing a financing so that it will have
cash on its balance sheet, sufficient to support its operations
for a minimum of 9 to 18 months.
Security Interest.
In many instances we
generally seek a first priority security interest in all of the
portfolio companys tangible and intangible assets as
collateral for our debt investment, subject in some cases to
permitted exceptions. In some cases we may only obtain a
negative pledge covering a companys intellectual property.
Although we do not intend to operate as an asset-based lender,
the estimated liquidation value of the assets, if any,
collateralizing the debt securities that we hold is an important
factor in our credit analysis. We evaluate both
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tangible assets, such as accounts receivable, inventory and
equipment, and intangible assets, such as intellectual property,
customer lists, networks and databases.
Covenants.
Our investments typically include
cross-default and material adverse change provisions, require
the portfolio company to provide periodic financial reports and
operating metrics and will typically limit the portfolio
companys ability to incur additional debt, sell assets,
engage in transactions with affiliates and consummate an
extraordinary transaction, such as a merger or recapitalization
without our consent. In addition, we may require other
performance or financial based covenants, as we deem appropriate.
Exit Strategy.
Prior to making a debt
investment that is accompanied by an equity-related security in
a prospective portfolio company, we analyze the potential for
that company to increase the liquidity of its equity through a
future event that would enable us to realize appreciation in the
value of our equity interest. Liquidity events may include an
initial public offering, a private sale of our equity interest
to a third party, a merger or an acquisition of the company or a
purchase of our equity position by the company or one of its
stockholders.
Investment
Process
We have organized our management team around the four key
elements of our investment process:
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Origination;
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Underwriting;
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Documentation; and
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Loan and Compliance Administration.
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Our investment process is summarized in the following chart:
Origination
The origination process for our investments includes sourcing,
screening, preliminary due diligence and deal structuring and
negotiation, all leading to an executed non-binding term sheet.
Our investment origination team, which consists of 15
professionals headed by our Chief Executive Officer,
Mr. Henriquez, will be responsible for
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sourcing potential investment opportunities. The origination
team utilizes their extensive relationships with various leading
financial sponsors, management contacts within
technology-related companies, trade sources, technology
conferences and various publications to source prospective
portfolio companies.
In addition, we have developed a proprietary and comprehensive
SQL-based database system to track various aspects of our
investment process including sourcing, originations, transaction
monitoring and post-investment performance. As of June 30,
2006, our proprietary SQL-based database system included over
8,900 technology-related companies and over 1,900 venture
capital private equity sponsors/investors, as well as various
other industry contacts. This proprietary SQL system allows our
origination team to maintain, cultivate and grow our industry
relationships while providing our origination team with
comprehensive details on companies in the technology-related
industries and their financial sponsors.
If a prospective portfolio company generally meets certain
underwriting criteria, we perform preliminary due diligence,
which may include high level company and technology assessments,
evaluation of its financial sponsors support, market
analysis, competitive analysis, evaluation of select management,
risk analysis and transaction size, pricing, return analysis and
structure analysis. If the preliminary due diligence is
satisfactory, and the origination team recommends moving
forward, we then structure, negotiate and execute a non-binding
term sheet with the potential portfolio company. Upon execution
of a term sheet, the investment opportunity moves to the
underwriting process to complete formal due diligence review and
approval.
Underwriting
The underwriting review includes formal due diligence and
approval of the proposed investment in the portfolio company.
Due Diligence.
Our due diligence on a
prospective investment is typically completed by two or more
investment professionals which we define as the underwriting
team. The underwriting team for a proposed investment consists
of the deal sponsor who possesses specific industry knowledge
and is responsible for originating and managing the transaction,
other investment professional(s) who perform due diligence,
credit and corporate financial analyses and, as needed, our
Chief Legal Officer. To ensure consistent underwriting, we use
our standardized due diligence methodologies, which include due
diligence on financial performance and credit risk as well as an
analysis of the operations, accounting policies and the legal
and regulatory framework of a prospective portfolio company. The
members of the underwriting team work together to conduct due
diligence and understand the relationships among the prospective
portfolio companys business plan, operations and financial
performance.
As part of our evaluation of a proposed investment, the
underwriting team prepares an investment memorandum for
presentation to the investment committee. In preparing the
investment memorandum, the underwriting team typically meets
with key management of the company and selects its financial
sponsors and assembles information critical to the investment
decision. If and when appropriate, the investment professionals
may also contact industry experts and customers, vendors or, in
some cases, competitors of the company.
Approval Process.
The sponsoring managing
director or principal presents the investment memorandum to our
investment committee for consideration. The unanimous approval
of our investment committee is required before we proceed with
any investment. The members of our investment committee are our
Chief Executive Officer, our Chief Legal Officer and our Chief
Financial Officer. The investment committee generally meets
weekly and more frequently on an as-needed basis.
Documentation
Our documentation group, headed by our Chief Legal Officer,
administers the front-end documentation process for our loans.
This group is responsible for documenting the term sheet
approved by the investment committee to memorialize the
transaction with a portfolio company. This group negotiates loan
documentation and, subject to the approval of the Chief Legal
Officer, final documents are prepared for execution by all
parties. The documentation group generally uses the services of
external law firms to complete the necessary documentation.
52
Loan and
Compliance Administration
Our loan and compliance administration group, headed by our
Chief Financial Officer, administers loans and tracks covenant
compliance on our investments and oversees periodic reviews of
our critical functions to ensure adherence with our internal
policies and procedures. After funding of a loan in accordance
with the investment committees approval, the loan is
recorded in our SQL-based database system. The loan and
compliance administration group is also responsible for ensuring
timely interest and principal payments and collateral management
and advises the investment committee on the financial
performance and trends of each portfolio company, including any
covenant violations that occur, to aid us in assessing the
appropriate course of action for each portfolio company and
evaluating overall portfolio quality. In addition, the loan and
compliance administration group advises the Valuation Committee
of the board regarding the credit and investment grading for
each portfolio company as well as changes in the value of
collateral that may occur.
The loan and compliance administration group monitors our
portfolio companies in order to determine whether the companies
are meeting our financing criteria and their respective business
plans and also monitors the financial trends of each portfolio
company from its monthly or quarterly financial statements to
assess the appropriate course of action for each company and to
evaluate overall portfolio quality. In addition, our management
team closely monitors the status and performance of each
individual company through our SQL-based database system and
periodic contact with our portfolio companies management
teams and their respective financial sponsors.
Credit and Investment Grading System.
Our loan
and compliance administration group uses an investment grading
system to characterize and monitor our expected level of returns
on both the debt investments and the related warrants or equity
positions for each investment in our portfolio. Our loan and
compliance administration group monitors and, when appropriate,
recommends changes to investment grading. Our investment
committee reviews the recommendations
and/or
changes to the investment grading, which are submitted on a
quarterly basis to the Valuation Committee and our Board of
Directors for approval. We use the following investment grading
system as amended January 2006 and approved by our Board of
Directors:
1. Loans involve the least amount of risk in our portfolio.
The borrower is performing above expectations, and the trends
and risk profile is generally favorable.
2. The borrower is performing as expected and the risk
profile is neutral to favorable. All new loans are initially
graded 2.
3. The borrower may be performing below expectations, and
the loans risk has increased materially since origination.
We increase procedures to monitor a borrower that may have
limited amounts of cash remaining on the balance sheet, is
approaching its next equity capital raise within the next three
to six months, or if the estimated fair value of the enterprise
may be lower than when the loan was originated. We will
generally lower the loan grade to a level 3 even if the
company is performing in accordance to plan as it approaches the
need to raise additional cash to fund its operations. Once the
borrower closes its new equity capital raise, we may increase
the loan grade back to grade 2.
4. The borrower is performing materially below
expectations, and the loan risk has substantially increased
since origination. Loans graded 4 may experience some partial
loss or full return of principal but are expected to realize
some loss of interest which is not anticipated to be repaid in
full, which, to the extent not already reflected, may require
the fair value of the loan to be reduced to the amount we
anticipate will be recovered. Grade 4 investments are closely
being monitored.
5. The borrower is in workout, materially performing below
expectations and significant risk of principal loss is probable.
Loans graded 5 will experience some partial principal loss or
full loss of remaining principal outstanding is expected. Grade
5 loans will require the fair value of the loans be reduced to
the amount we anticipate, if any, will be recovered.
As of June 30, 2006, our investments had a weighted average
investment grading of 2.21.
53
Managerial
Assistance
As a business development company, we offer, and provide upon
request, managerial assistance to our portfolio companies. This
assistance could involve, among other things, monitoring the
operations of our portfolio companies, participating in board
and management meetings, consulting with and advising officers
of portfolio companies and providing other organizational and
financial guidance. We may receive fees for these services.
Competition
Our primary competitors provide financing to prospective
portfolio companies and include financial institutions, venture
capital funds, private equity funds, investment funds and
investment banks. Many of these entities have greater financial
and managerial resources than we have, and the 1940 Act imposes
certain regulatory restrictions on us as a business development
company to which many of our competitors are not subject.
However, we believe that few of our competitors possess the
expertise to properly structure and price debt investments to
venture capital and private equity backed technology-related
companies. We believe that our specialization in financing
technology-related companies will enable us to assess the value
of intellectual property assets, evaluate the business prospects
and operating characteristics of prospective portfolio companies
and, as a result, identify investment opportunities that produce
attractive risk-adjusted returns. For additional information
concerning the competitive risks we face, see Risk
Factors Risks Related to our Business and
Structure We operate in a highly competitive market
for investment opportunities, and we may not be able to compete
effectively.
Corporate
Structure
We are a Maryland corporation and an internally-managed,
non-diversified closed-end investment company that has elected
to be regulated as a business development company under the 1940
Act. Hercules Technology II, L.P., our wholly-owned
subsidiary, is licensed under the Small Business Investment Act
of 1958 as a Small Business Investment Company. See
Regulation for further information about small
business investment company regulation. Hercules Technology SBIC
Management, LLC, another wholly-owned subsidiary, functions as
the general partner of our subsidiary Hercules
Technology II, L.P. Hercules Funding I LLC, our wholly
owned subsidiary, and Hercules Funding Trust I function as
vehicles to collateralize loans under our securitized credit
facility with Citigroup Global Markets Realty Corp.
Our principal executive offices are located at 525 University
Avenue, Suite 700, Palo Alto, California 94301. We also
have offices in Boston, Massachusetts, Boulder, Colorado,
Chicago, Illinois and Columbus, Ohio.
Employees
As of September 29, 2006, we had 25 employees, including 15
investment and portfolio management professionals, operations
professionals and legal counsel and chief compliance officer,
all of whom have extensive prior experience working on financing
transactions for technology-related companies. We intend to hire
additional professionals with business lending experience as
well as additional administrative personnel, and we expect to
expand our management team and hire additional Managing
Directors.
Legal
Proceedings
Hercules Technology Growth Capital, Inc. is not a party to any
pending legal proceedings. From time to time, we may become
party to certain legal proceedings incidental to the normal
course of business, including the enforcement of our rights
under contracts with portfolio companies. While the outcome of
these legal proceedings cannot at this time be predicted with
any certainty, we do not expect that these proceedings will have
a material effect on our financial conditions or results of
operations.
54
PORTFOLIO
COMPANIES
The following tables set forth certain information as of
June 30, 2006 regarding each portfolio company in which we
had a debt or equity investment. The general terms of our loans
and other investments are described in
Business Our Investments. We offer to
make available significant managerial assistance to our
portfolio companies. In addition, we may receive rights to
observe the Board of Directors meetings of our portfolio
companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Class Held
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Acceleron Pharmaceuticals,
Inc.(2.62%)*
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
24 Emily St.
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambridge, MA 02139
|
|
|
|
Interest rate 10.25%
|
|
|
|
|
|
$
|
3,942,412
|
|
|
$
|
3,942,412
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
69,106
|
|
|
|
67,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acceleron Pharmaceuticals,
Inc.
|
|
|
4,011,518
|
|
|
|
4,010,247
|
|
Aveo Pharmaceuticals, Inc.
(4.89%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
75 Sidney St.,
4
th
Floor
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambridge, MA 02139
|
|
|
|
Interest rate 10.50%
|
|
|
|
|
|
|
7,500,000
|
|
|
|
7,500,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Aveo Pharmaceuticals,
Inc.
|
|
|
7,500,000
|
|
|
|
7,500,000
|
|
Guava Technologies, Inc. (2.95%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
25801 Industrial Blvd.
|
|
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Hayward, CA 94545
|
|
|
|
Interest rate Prime +
3.25%
|
|
|
|
|
|
|
4,412,168
|
|
|
|
4,412,168
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
105,399
|
|
|
|
103,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guava Technologies, Inc.
|
|
|
4,517,567
|
|
|
|
4,515,669
|
|
Labopharm USA, Inc.
(5.50%)
(4)(6)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
53 State St.
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, MA 02109
|
|
|
|
Interest rate 11.95%
|
|
|
|
|
|
|
8,428,130
|
|
|
|
8,428,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Labopharm USA, Inc.
|
|
|
8,428,130
|
|
|
|
8,428,130
|
|
Merrimack Pharmaceuticals,
Inc.(5.15%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
101 Binney St.
|
|
|
|
Matures October 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambridge, MA 02142
|
|
|
|
Interest rate 11.15%
|
|
|
|
|
|
|
7,461,010
|
|
|
|
7,461,010
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
155,456
|
|
|
|
438,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merrimack Pharmaceuticals,
Inc.
|
|
|
7,616,466
|
|
|
|
7,899,533
|
|
Omrix Biopharmaceuticals, Inc.
(0.17)%
|
|
Biopharmaceuticals
|
|
Common Stock Warrants
|
|
|
100
|
%
|
|
|
11,370
|
|
|
|
266,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDA Blood Center Tel Hashmar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Tel Aviv, Israel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Omrix Biopharmaceuticals,
Inc.
|
|
|
11,370
|
|
|
|
266,493
|
|
Paratek Pharmaceuticals, Inc.
(5.59%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
75 Kneeland St.
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, MA 02111
|
|
|
|
Interest rate 10.60%
|
|
|
|
|
|
|
8,430,349
|
|
|
|
8,430,349
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
137,396
|
|
|
|
138,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paratek Pharmaceuticals,
Inc.
|
|
|
8,567,745
|
|
|
|
8,569,316
|
|
Quatrx Pharmaceuticals Company
(3.93%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
777 East Eisenhower Pkwy., Suite 100
|
|
|
|
Matures January 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Ann Arbor, MI 48108
|
|
|
|
Interest rate Prime +
3.00%
|
|
|
|
|
|
|
5,807,190
|
|
|
|
5,807,190
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
220,354
|
|
|
|
220,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Quatrx Pharmaceuticals Company
|
|
|
6,027,544
|
|
|
|
6,027,893
|
|
Sirtris Pharmaceuticals, Inc.
(6.52%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
790 Memorial Drive
|
|
|
|
Matures April 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambridge, MA, 02139
|
|
|
|
Interest rate 10.60%
|
|
|
|
|
|
$
|
9,915,612
|
|
|
$
|
9,915,612
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
88,829
|
|
|
|
86,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sirtris Pharmaceuticals,
Inc.
|
|
|
10,004,441
|
|
|
|
10,002,026
|
|
TransOral Pharmaceuticals, Inc.
(2.61%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1003 W. Cutting Blvd, Suite 110
|
|
|
|
Matures October 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Point Richmond, CA 94804
|
|
|
|
Interest rate 10.69%
|
|
|
|
|
|
|
3,966,152
|
|
|
|
3,966,152
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
35,630
|
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TransOral Pharmaceuticals,
Inc.
|
|
|
4,001,782
|
|
|
|
4,000,581
|
|
|
|
|
|
|
|
|
|
|
Total Biopharmaceuticals
(39.93%)
|
|
|
60,686,563
|
|
|
|
61,219,888
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Class Held
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Atrenta, Inc.
(3.28%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
2001 Gateway Place, Suite 440W
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
San Jose, CA 95710
|
|
|
|
Interest rate 11.50%
|
|
|
|
|
|
|
4,900,603
|
|
|
|
4,900,603
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
102,396
|
|
|
|
102,633
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
33,760
|
|
|
|
33,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Atrenta, Inc.
|
|
|
5,036,759
|
|
|
|
5,036,913
|
|
Compete, Inc.
(2.61%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Four Copley Place, Suite 700
|
|
|
|
Matures March 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, MA 02116
|
|
|
|
Interest rate Prime +
3.50%
|
|
|
|
|
|
|
3,944,643
|
|
|
|
3,944,643
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
62,067
|
|
|
|
60,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compete, Inc.
|
|
|
4,006,710
|
|
|
|
4,004,848
|
|
Concuity, Inc. (2.40%)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
22320 Foothill Blvd., Suite 500
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Hayward, CA 94541
|
|
|
|
Interest rate 9.95%
|
|
|
|
|
|
|
3,676,498
|
|
|
|
3,676,498
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Concuity, Inc.
|
|
|
3,679,998
|
|
|
|
3,676,498
|
|
GameLogic, Inc. (1.96%)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
880 Winter Street,
Suite 350
|
|
|
|
Matures December 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 02451
|
|
|
|
Interest rate Prime+
4.125%
|
|
|
|
|
|
|
2,949,901
|
|
|
|
2,949,901
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
52,604
|
|
|
|
50,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GameLogic, Inc.
|
|
|
3,002,505
|
|
|
|
3,000,758
|
|
Gomez, Inc.
(1.13%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
610 Lincoln St.
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 02451
|
|
|
|
Interest rate 12.25%
|
|
|
|
|
|
|
1,703,345
|
|
|
|
1,703,345
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
35,000
|
|
|
|
28,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gomez, Inc.
|
|
|
1,738,345
|
|
|
|
1,731,504
|
|
HighRoads, Inc. (1.54%)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1601 Trepelo Rd., Suite 328
|
|
|
|
Matures February 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 01930
|
|
|
|
Interest rate 11.65%
|
|
|
|
|
|
$
|
2,311,555
|
|
|
$
|
2,311,555
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
44,466
|
|
|
|
43,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HighRoads, Inc.
|
|
|
2,356,021
|
|
|
|
2,355,041
|
|
Inxight Software, Inc.
(3.07%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
500 Macara Ave.
|
|
|
|
Matures February 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Sunnyvale, CA 94085
|
|
|
|
Interest rate 10.00%
|
|
|
|
|
|
|
4,666,262
|
|
|
|
4,666,262
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
55,963
|
|
|
|
41,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inxight Software, Inc.
|
|
|
4,722,225
|
|
|
|
4,708,214
|
|
Oatsystems, Inc. (1.96%)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
265 Winter Street
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 02451
|
|
|
|
Interest rate Prime +
3.00%
|
|
|
|
|
|
|
2,967,945
|
|
|
|
2,967,945
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
33,742
|
|
|
|
32,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oatsystems, Inc.
|
|
|
3,001,687
|
|
|
|
3,000,626
|
|
Proficiency, Inc. (1.97%)(6)
|
|
Software
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
880 Winter St., Suite 230
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 02415
|
|
|
|
Interest rate 12.00%
|
|
|
|
|
|
|
3,934,808
|
|
|
|
3,026,687
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
96,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proficiency, Inc.
|
|
|
4,031,178
|
|
|
|
3,026,687
|
|
Savvion, Inc.
(1.31%)
(4)
|
|
Software
|
|
Revolving Line of Credit
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
6704 Old Ironsides Dr., Suite 205
|
|
|
|
Matures March 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Clara, CA 95054
|
|
|
|
Interest rate Prime +
2.00%
|
|
|
|
|
|
|
1,965,243
|
|
|
|
1,965,243
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
52,135
|
|
|
|
50,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Savvion, Inc.
|
|
|
2,017,378
|
|
|
|
2,016,173
|
|
Sportvision, Inc. (0.02%)
|
|
Software
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
39,339
|
|
|
|
37,531
|
|
4619 Raverswood Rd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago, IL 60640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sportvision, Inc.
|
|
|
39,339
|
|
|
|
37,531
|
|
Talisma Corp.
(1.75%)
(4)
|
|
Software
|
|
Subordinated Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
10900 NE 4th St., Suite 1610
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellevue, WA 98004
|
|
|
|
Interest rate 11.25%
|
|
|
|
|
|
|
2,640,498
|
|
|
|
2,640,498
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
49,000
|
|
|
|
37,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Talisma Corp.
|
|
|
2,689,498
|
|
|
|
2,678,196
|
|
|
|
|
|
|
|
|
|
|
Total Software
(23.00%)
|
|
|
36,321,643
|
|
|
|
35,272,989
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Class Held
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Market Force Information, Inc.
(1.31%)
(4)
|
|
Consumer & Business
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1877 Broadway, Suite 200
|
|
Products
|
|
Matures May 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Boulder, CO 80302
|
|
|
|
Interest rate 10.45%
|
|
|
|
|
|
|
1,978,685
|
|
|
|
1,978,685
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
23,823
|
|
|
|
23,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Market Force Information,
Inc.
|
|
|
2,002,508
|
|
|
|
2,002,140
|
|
Wageworks, Inc.
(11.34%)
(4)
|
|
Consumer & Business
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Two Waters Park Drive, Suite 250
|
|
Products
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
San Mateo, CA 94403
|
|
|
|
Interest rate Prime +
4.00%
|
|
|
|
|
|
$
|
16,197,859
|
|
|
$
|
16,197,859
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
251,964
|
|
|
|
1,191,671
|
|
Wageworks, Inc. (0.16%)
|
|
|
|
Preferred Stock
|
|
|
100
|
%
|
|
|
249,995
|
|
|
|
249,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wageworks, Inc.
|
|
|
16,699,818
|
|
|
|
17,639,525
|
|
|
|
|
|
|
|
|
|
|
Total Consumer &
Business Products (12.81%)
|
|
|
18,702,326
|
|
|
|
19,641,665
|
|
|
|
|
|
|
|
|
|
|
IKANO Communications, Inc. (0.07%)
|
|
Communications &
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
45,460
|
|
|
|
42,452
|
|
265 East 100 South, Suite 245
|
|
Networking
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
72,344
|
|
|
|
69,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salt Lake City, UT 84111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IKANO Communications,
Inc.
|
|
|
117,804
|
|
|
|
112,112
|
|
Interwise, Inc.
(1.61%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
25 First St.
|
|
Networking
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambridge, MA 02141
|
|
|
|
Interest rate 17.50%
|
|
|
|
|
|
|
2,467,438
|
|
|
|
2,467,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interwise, Inc.
|
|
|
2,467,438
|
|
|
|
2,467,438
|
|
Optovia Corporation
(3.26%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
100 Nagog Park
|
|
Networking
|
|
Matures September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Acton, MA 01720
|
|
|
|
Interest rate Prime +
7.25%
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optovia Corporation
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Pathfire, Inc.
(3.27%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
245 Hembree Park Dr.
|
|
Networking
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Roswell, GA 30076
|
|
|
|
Interest rate Prime +
3.65%
|
|
|
|
|
|
|
4,949,028
|
|
|
|
4,949,028
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
63,276
|
|
|
|
63,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pathfire, Inc.
|
|
|
5,012,304
|
|
|
|
5,012,997
|
|
Ping Identity Corporation
(1.96%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1099
18
th
St., Suite 2950
|
|
Networking
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver, CO 80202
|
|
|
|
Interest rate 11.50%
|
|
|
|
|
|
|
2,953,652
|
|
|
|
2,953,652
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
51,801
|
|
|
|
50,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ping Identity Corporation
|
|
|
3,005,453
|
|
|
|
3,003,748
|
|
Rivulet Communications, Inc. (2.29%)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
75 Rochester Avenue
|
|
Networking
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Portsmouth, NH 03801
|
|
|
|
Interest rate Prime +
2.75%
|
|
|
|
|
|
|
3,451,959
|
|
|
|
3,451,959
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
50,710
|
|
|
|
49,026
|
|
Rivulet Communications, Inc. (0.16%)
|
|
|
|
Preferred Stock
|
|
|
25
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rivulet Communications,
Inc.
|
|
|
3,752,669
|
|
|
|
3,750,985
|
|
Simpler Networks Corp. (3.68%)
|
|
Communications &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
90 Washington Valley Road
|
|
Networking
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedminster, NJ 07921
|
|
|
|
Interest rate 11.75%
|
|
|
|
|
|
$
|
4,863,209
|
|
|
$
|
4,863,209
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
160,241
|
|
|
|
772,809
|
|
Simpler Networks Corp.
(0.33%)
(4)
|
|
|
|
Preferred Stock
|
|
|
100
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Simpler Networks Corp.
|
|
|
5,523,450
|
|
|
|
6,136,018
|
|
|
|
|
|
|
|
|
|
|
Total Communications &
Networking (16.63%)
|
|
|
24,879,118
|
|
|
|
25,483,298
|
|
|
|
|
|
|
|
|
|
|
Adiana, Inc.
(1.09%)
(4)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
2684 Middlefield Rd.
|
|
Equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood City, CA 94063
|
|
|
|
Interest rate Prime +
6.00%
|
|
|
|
|
|
|
1,607,292
|
|
|
|
1,607,292
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
67,225
|
|
|
|
65,439
|
|
Adiana, Inc. (0.33%)
|
|
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adiana, Inc.
|
|
|
2,174,517
|
|
|
|
2,172,731
|
|
Gynesonics, Inc. (0.01%)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
604 Fifth Ave., Suite D
|
|
Equipment
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood City, CA 94063
|
|
|
|
Interest rate Prime +
1.25%
|
|
|
|
|
|
|
1,254
|
|
|
|
1,254
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
17,552
|
|
|
|
17,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gynesonics, Inc.
|
|
|
18,806
|
|
|
|
18,322
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Class Held
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Optiscan Biomedical, Corp.
(0.94%)
(4)
|
|
Medical Devices &
|
|
Senior Convertible Term Loan
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1105 Atlantic Ave., Suite 101
|
|
Equipment
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Alameda, CA 94501
|
|
|
|
Interest rate 15.00%
|
|
|
|
|
|
|
1,368,646
|
|
|
|
1,368,646
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
80,486
|
|
|
|
80,230
|
|
Optiscan Biomedical, Corp. (0.65%)
|
|
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optiscan Biomedical,
Corp.
|
|
|
2,449,132
|
|
|
|
2,448,876
|
|
Power Medical Interventions, Inc.
(2.17%)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
2021 Labot Blvd.
|
|
Equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
West Langham, PA 19047
|
|
|
|
Interest rate 10.71%
|
|
|
|
|
|
|
3,258,997
|
|
|
|
3,258,997
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
%
|
|
|
39,195
|
|
|
|
55,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Power Medical Interventions,
Inc.
|
|
|
3,298,192
|
|
|
|
3,314,491
|
|
Xillix Technologies Corp.
(3.49%)
(4)(6)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
#100 13775
Commerce Pkwy.
|
|
Equipment
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond, British Columbia
|
|
|
|
Interest rate 12.40%
|
|
|
|
|
|
|
5,247,774
|
|
|
|
5,247,774
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
313,108
|
|
|
|
103,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Xillix Technologies
Corp.
|
|
|
5,560,882
|
|
|
|
5,351,652
|
|
|
|
|
|
|
|
|
|
|
Total Medical Devices &
Equipment (8.68%)
|
|
|
13,501,529
|
|
|
|
13,306,072
|
|
|
|
|
|
|
|
|
|
|
Affinity Express, Inc. (1.01%)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
630 Tollgate Rd., Suite E
|
|
Business Services
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Elgin, IL 60123
|
|
|
|
Interest rate 13.50%
|
|
|
|
|
|
$
|
1,301,761
|
|
|
$
|
1,301,761
|
|
|
|
|
|
Common Stock Warrants
|
|
|
100
|
%
|
|
|
17,000
|
|
|
|
185,369
|
|
|
|
|
|
Common Stock Warrants
|
|
|
100
|
%
|
|
|
15,000
|
|
|
|
55,941
|
|
Affinity Express, Inc.
(0.16%)
(4)
|
|
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affinity Express, Inc.
|
|
|
1,583,761
|
|
|
|
1,793,071
|
|
Hedgestreet, Inc. (1.31%)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
P.O. Box 5861
|
|
Business Services
|
|
Matures March 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
San Mateo, CA 94402
|
|
|
|
Interest rate Prime +
3.25%
|
|
|
|
|
|
|
1,953,956
|
|
|
|
1,953,956
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
54,956
|
|
|
|
55,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hedgestreet, Inc.
|
|
|
2,008,912
|
|
|
|
2,009,001
|
|
Invoke Solutions, Inc.
(1.96%)
(4)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
375 Totten Pond Rd., Suite 400
|
|
Business Services
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Waltham, MA 02451
|
|
|
|
Interest rate 11.25%
|
|
|
|
|
|
|
2,964,696
|
|
|
|
2,964,696
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
43,826
|
|
|
|
44,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Invoke Solutions, Inc.
|
|
|
3,008,522
|
|
|
|
3,008,738
|
|
RazorGator Interactive Group, Inc.
(2.63%)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
9464 Wilshire Blvd.
|
|
Business Services
|
|
Matures January 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverly Hills, CA 90212
|
|
|
|
Interest rate 9.95%
|
|
|
|
|
|
|
3,440,097
|
|
|
|
3,440,097
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
13,050
|
|
|
|
588,025
|
|
RazorGator Interactive Group, Inc.
(1.11%)
(4)
|
|
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
1,000,000
|
|
|
|
1,708,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RazorGator Interactive Group,
Inc.
|
|
|
4,453,147
|
|
|
|
5,736,300
|
|
|
|
|
|
|
|
|
|
|
Total Internet
Consumer & Business Services (8.18%)
|
|
|
11,054,342
|
|
|
|
12,547,110
|
|
|
|
|
|
|
|
|
|
|
Cornice, Inc.
(7.93%)
(4)
|
|
Electronics &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1951 S. Fordham St., Bldg. 105
|
|
Computer Hardware
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Longmont, CO 80503
|
|
|
|
Interest rate Prime+
4.50%
|
|
|
|
|
|
|
4,286,994
|
|
|
|
4,286,994
|
|
|
|
|
|
Revolving Line of Credit
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
|
|
|
|
|
7,612,523
|
|
|
|
7,612,523
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
101,597
|
|
|
|
98,945
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
35,353
|
|
|
|
34,060
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
135,403
|
|
|
|
131,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornice, Inc.
|
|
|
12,171,870
|
|
|
|
12,164,391
|
|
Sling Media, Inc. (0.94%)
|
|
Electronics &
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
38,968
|
|
|
|
944,475
|
|
1840 Gateway Dr., Suite 224
|
|
Computer Hardware
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
San Mateo, CA 94494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sling Media, Inc.
|
|
|
538,968
|
|
|
|
1,444,475
|
|
ViDeOnline Communications, Inc.
(0.33%)
|
|
Electronics &
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
656 Bair Island Road
|
|
Computer Hardware
|
|
Matures May 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Suite 108
|
|
|
|
Interest rate 15.00%
|
|
|
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Redwood City, CA 94063
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ViDeOnline Communications,
Inc.
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electronics &
Computer Hardware (9.20%)
|
|
|
13,210,838
|
|
|
|
14,108,866
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Class Held
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Ageia Technologies
(5.23%)
(4)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
82 Pioneer Way
|
|
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Mountain View, CA 94041
|
|
|
|
Interest rate 10.25%
|
|
|
|
|
|
|
7,931,118
|
|
|
|
7,931,118
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
99,190
|
|
|
|
92,020
|
|
Ageia Technologies (0.33%)
|
|
|
|
Preferred Stock
|
|
|
<5
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ageia Technologies
|
|
|
8,530,308
|
|
|
|
8,523,138
|
|
Cradle Technologies (1.28%)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
1197 Borregas Ave.
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Sunnyvale, CA 94089
|
|
|
|
Interest rate Prime +
4.70%
|
|
|
|
|
|
|
1,883,883
|
|
|
|
1,883,883
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
79,150
|
|
|
|
78,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cradle Technologies
|
|
|
|
|
|
|
|
|
|
|
1,963,033
|
|
|
|
1,962,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Semiconductors
(6.84%)
|
|
|
10,493,341
|
|
|
|
10,485,501
|
|
|
|
|
|
|
|
|
|
|
Lilliputian Systems, Inc.
(0.98%)
(4)
|
|
Energy
|
|
Senior Debt
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
36 Jonspin Rd.
|
|
|
|
Matures March 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilmington, MA 01887
|
|
|
|
Interest rate 9.75%
|
|
|
|
|
|
|
1,457,355
|
|
|
|
1,457,355
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
100
|
%
|
|
|
48,460
|
|
|
|
48,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lilliputian Systems,
Inc.
|
|
|
1,505,815
|
|
|
|
1,505,959
|
|
|
|
|
|
|
|
|
|
|
Total Energy (0.98%)
|
|
|
1,505,815
|
|
|
|
1,505,959
|
|
|
|
|
|
|
|
|
|
|
Total Investments (126.25%)
|
|
$
|
190,355,515
|
|
|
$
|
193,571,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Value as a percent of net assets
|
|
(1)
|
|
All debt investments are income
producing. Preferred and common stock and all warrants are
non-income producing.
|
|
(2)
|
|
Tax cost at June 30, 2006
equals book cost. Gross unrealized appreciation, gross
unrealized depreciation, and net appreciation totaled
$4,507,950, $1,292,117 and $3,215,833, respectively.
|
|
(3)
|
|
Except for a warrant in one
publicly traded company, all investments are restricted at
June 30, 2006 and were valued at fair value as determined
in good faith by the Board of Directors. No unrestricted
securities of the same issuer are outstanding. The Company uses
the Standard Industrial Code for classifying the industry
grouping of its portfolio companies.
|
|
|
|
(4)
|
|
Debt and warrant investments of
this portfolio company have been pledged as collateral under the
Citigroup facility. Citigroup has an equity participation right
on loans collateralized under the Citigroup facility. The value
of their participation right on unrealized gains in the related
equity investments was approximately $378,347 at June 30,
2006 and is included in accrued liabilities and reduces the
unrealized gain recognized by the Company at June 30, 2006.
|
|
|
|
(5)
|
|
All investments are less than 5%
owned.
|
|
(6)
|
|
Non-U.S. company
or the companys principal place of business is outside of
the United States.
|
Portfolio
Company Descriptions
Acceleron
Pharmaceuticals, Inc.
Acceleron Pharmaceuticals focuses on developing therapeutics for
metabolic and musculoskeletal diseases.
Adiana,
Inc.
Adiana is developing a non-invasive, permanent form of female
sterilization.
Affinity
Express, Inc.
Affinity Express is a business process outsourcing company that
provides digital asset management services and electronic
document creation services to client firms.
Ageia
Technologies
Ageia Technologies is a developer of technology to enhance
interactive media playback. The company develops chips for
processing three dimensional visual data for applications such
as computer simulation, gaming, and security.
59
Atrenta,
Inc.
Atrenta Inc. is a provider of development solutions that seek to
turn chip, system and software development into more predictable
and controllable processes for the electronic systems industry.
Aveo
Pharmaceuticals, Inc.
AVEO is a biopharmaceutical company focused on the discovery and
development of novel cancer therapeutics.
Compete,
Inc.
Compete extends online market research to seek to transform the
way consumers and brands communicate. By combining permission
marketing, predictive analytics and a consumer behavior
database, Compete helps marketers identify and reach their
target consumers.
Concuity,
Inc.
Concuity provides an Internet-based technology service solution
for healthcare providers to help such providers negotiate,
control and collect under contracts with third-party payers.
Cornice,
Inc.
Cornice seeks to provide compact, low-cost, high-capacity
storage for a variety of pocket-able consumer electronic
devices, including mobile phones, MP3 players, personal video
recorders, GPS devices and portable storage products.
Cradle
Technologies
Cradle Technologies is a semiconductor company developing
specialized digital signal processing technology for multimedia
applications.
GameLogic,
Inc.
GameLogic is a provider of next generation games, gaming
systems, and platforms for casinos and lotteries. The company
provides large-scale interactive games and game technology for
distribution on a variety of digital media.
Gomez,
Inc.
Gomez supplies enterprise solutions that help companies achieve
and maintain the performance of their mission-critical Internet
applications. Gomez provides performance measurement,
benchmarking and competitive analysis to companies across all
industry segments, including financial services,
e-commerce,
information technology and travel.
Guava
Technologies, Inc.
Guava Technologies is a biotechnology company that develops,
manufactures and markets cellular analysis systems for the life
science research marketplace.
Gynesonics,
Inc.
Gynesonics is a development stage company focusing on minimally
invasive devices for womens health.
HedgeStreet,
Inc.
HedgeStreet is an Internet-based, government regulated market
where traders can hedge against or speculate on economic events
and price movements.
60
High
Roads, Inc.
HighRoads provides technology-based solutions and services to
provide visibility and enable collaboration throughout the
design, procurement, management and communication of employee
benefits plans.
Ikano
Communications, Inc.
Ikano Communications partners with Internet Service Providers to
help such providers in reducing operating costs, increasing
revenues and expanding geographic reach and product offerings.
Interwise,
Inc.
Interwise, Inc. is a provider of an integrated data, video, and
voice conferencing solution for delivering realtime multimedia
communications across the extended enterprise. The solution
combines voice, rich interactive content, and streaming video in
a single platform to support a customers
e-learning.
Invoke
Solutions, Inc.
Invoke Solutions develops and provides real-time research
technologies that seek to help businesses gain instant insight
into the opinions, views, and dynamics of their customers,
employees, and other constituents.
Inxight
Software, Inc.
Inxight is a provider of software solutions that enables
customers to discover, retrieve, and collect information
contained in unstructured data sources in a number of languages.
Labopharm
USA, Inc.
Labopharm seeks to develop improved formulations of currently
marketed drugs using its advanced, proprietary
controlled-release drug delivery technologies. Labopharm seeks
to develop and commercialize new value-added formulations of
existing products that address the markets preference for
drugs that offer simplified dosing regimens, improved efficacy
or a reduced side effect profile.
Lilliputian
Systems, Inc.
Lilliputian Systems, Inc. is developing a next generation micro
fuel cell system for portable electronics and wireless
applications.
Market
Force Information, Inc.
Market Force is an emerging provider of store-level, customer
experience information for retailers, restaurants, consumer
packaged goods companies and the financial and hospitality
communities.
Merrimack
Pharmaceuticals, Inc.
Merrimack Pharmaceuticals is a drug discovery and clinical
development company that has developed a proprietary drug
discovery platform. Its clinical programs are focused on
developing drugs in the fields of autoimmune disease and cancer.
OATSystems,
Inc.
OATSystems is a developer of radio-frequency identification
(RFID) framework software and services that provide solutions to
centrally manage and control RFID for retail, consumer packaged
goods and pharmaceutical companies.
61
Omrix
Biopharmaceuticals, Inc.
Omrix Biopharmaceuticals is a biotechnology company that
develops and markets a unique surgical sealant, as well as a
suite of immunology and hemophilia products.
OptiScan
Biomedical Corporation
OptiScan Biomedical Corporation is developing a non-invasive
blood glucose monitor utilizing proprietary infrared technology.
Optovia
Corporation
Optovia Corporation develops optical transport subsystems for
telecommunications carriers, cable provider networks, and
corporate enterprise applications.
Paratek
Pharmaceuticals, Inc.
Paratek is developing new therapeutics for the infectious
disease market to combat the problem of antibiotic resistance.
Pathfire,
Inc.
Pathfire provides digital content distribution and management
solutions for the broadcast, media and entertainment industries
and seeks to supply innovative digital solutions, from
distribution to air, for broadcasters, news organizations,
television networks, Hollywood studios and other media companies.
Ping
Identity Corporation
Ping Identity Corporation provides federated identity solutions
for web single sign-on and identity-enabled web services.
Pings software seek to allow organizations to securely
share identity information across security boundaries.
Power
Medical Interventions, Inc.
Power Medical seeks to combine computer-mediated technology with
minimally invasive surgical techniques to create next-generation
surgical staplers.
Proficiency,
Inc.
Proficiency is delivering technology and products that make
design intelligence portable and that increase the efficiency of
product development processes. Proficiency supplies
feature-based design interoperability and feature-based design
data exchange solutions.
QuatRx
Pharmaceuticals Company
QuatRx Pharmaceuticals Company is a pharmaceutical company
focused on discovering, licensing, developing and
commercializing compounds in the endocrine, metabolic and
cardiovascular therapeutic areas.
RazorGator,
Inc.
RazorGator is an Internet-based ticket sales company focusing on
sold-out or
hard-to-find
tickets for sporting events, concerts and theatrical
productions. RazorGator also operates an electronic broker
trading and clearing platform for the resale of tickets.
62
Rivulet
Communications, Inc.
Rivulet develops technology that enables IP networks to carry
all kinds of real-time and other delivery-critical traffic.
Rivulets sophisticated suite of algorithms guarantee
real-time delivery of packets with zero packet loss due to
router queue overflow.
Savvion,
Inc.
Savvion develops software focused on helping businesses control
and improve operations performed by their people and software
systems.
Simpler
Networks Corp
Simpler Networks seeks to engineer network solutions for local
service providers to help them reduce their operational costs by
automating labor-intensive processes at the distribution frame.
Sirtris
Pharmaceuticals, Inc.
Sirtris is a biopharmaceutical company developing and
commercializing novel therapeutics that modulate sirtuins, a
recently discovered family of enzymes that promotes the
bodys natural defense against disease. Also known as class
III histone deacetylases (HDACs), sirtuins are attractive drug
targets for diseases of aging, including metabolic and
neurological diseases.
Sling
Media, Inc.
Sling Media is a provider of consumer electronics for the
digital media consumers. The companys solutions aim to
enhance existing products and standards with hardware and
software that will improve consumers usage experience. The
first member of the Sling Media family is the
Slingbox
tm
,
a device that allows consumers to access their living room
television experience at any time, from any location.
Sportvision,
Inc.
Sportvision is an interactive sports marketing and technology
company developing products to enrich fans interaction
with sports via its unique broadcast and interactive solutions
and helping create new value for sports properties, marketers
and media companies. Sportvisions technologies have been
utilized in broadcasts of all of the major sports including the
NFL, NBA, NASCAR, NHL, PGA Tour, LPGA Tour, Major League
Baseball, NCAA football and basketball, WTA, Arena Football
League, XTERRA, Ironman Triathlon and other sporting events
on-air and online.
Talisma
Corporation
Talisma Corporation is a provider of multi-channel Customer
Resource Management (CRM) software. The software integrates
email, chat, real-time collaboration, and telephony applications
with a multi-channel interaction management platform. In
addition, the software offers comprehensive analytics and a
fully integrated system-wide knowledgebase and customer database.
Transoral
Pharmaceuticals, Inc.
TransOral is a specialty pharmaceutical company developing novel
formulations of proven active agents to provide meaningful new
patient benefits. The Companys initial proprietary
technology is being employed to accelerate efficacy and reduce
drug dose in the development of therapeutics for the treatment
of migraine and insomnia.
ViDeOnline
Communications, Ltd.
ViDeOnline develops an end to end secure network specifically
designed to address the secure distribution and delivery of
personal entertainment media.
63
Wageworks,
Inc.
WageWorks provides employer-sponsored, tax-advantaged spending
solutions, including medical and family-care reimbursement and
transit passes.
Xillix
Technologies Corp.
Xillix Technologies Corp. develops fluorescence endoscopy
technology for improved cancer detection. Xillixs latest
device incorporates fluorescence and white-light endoscopy in a
single device that has been developed for the detection and
localization of lung and gastrointestinal (GI) cancers.
64
SENIOR
SECURITIES
Information about our senior securities is shown in the
following table for the periods ended June 30, 2006, and
December 31, 2005 and 2004. The information has been
derived from our financial statements which have been audited by
Ernst & Young LLP for the periods ending
December 31, 2005 and 2004. The June 30, 2006
information has been derived from the unaudited financial
statements. See Managements Discussion and
Analysis Borrowings for updated senior
securities information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Average
|
|
|
|
Exclusive of
|
|
|
|
|
|
Market
|
|
|
|
Treasury
|
|
|
Asset Coverage
|
|
|
Value
|
|
Class and Year
|
|
Securities
|
|
|
per
Unit
(1)
|
|
|
per Unit
|
|
|
Bridge Loan Credit Facility
with Alcmene Funding L.L.C.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
December 31, 2005
|
|
$
|
25,000,000
|
|
|
$
|
2,505
|
|
|
|
N/A
|
|
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Securitized Credit Facility with
Citigroup Global Markets Realty Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
December 31, 2005
|
|
$
|
51,000,000
|
|
|
$
|
2,505
|
|
|
|
N/A
|
|
June 30, 2006
|
|
$
|
61,000,000
|
|
|
$
|
3,514
|
|
|
|
N/A
|
|
|
|
|
(1)
|
|
The asset coverage ratio for a
class of senior securities representing indebtedness is
calculated as our consolidated total assets, less all
liabilities and indebtedness not represented by senior
securities, divided by senior securities representing
indebtedness. This asset coverage ratio is multiplied by $1,000
to determine the Asset Coverage per Unit.
|
DETERMINATION
OF NET ASSET VALUE
We determine the net asset value per share of our common stock
quarterly. The net asset value per share is equal to the value
of our total assets minus liabilities and any preferred stock
outstanding divided by the total number of shares of common
stock outstanding. As of the date of this prospectus, we do not
have any preferred stock outstanding.
At June 30, 2006, approximately 89% of our total assets
represented investments in portfolio companies of which 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 in accordance with established
valuation procedures and the recommendation of the Valuation
Committee of the Board of Directors. Since there is typically no
readily available market value for the investments in our
portfolio, we value substantially all of our investments at fair
value as determined in good faith by our management pursuant to
a valuation policy and a consistent valuation process. Due to
the inherent uncertainty in determining the fair value of
investments that do not have a readily available market value,
the fair value of our investments determined in good faith by
our management 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.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses. Instead,
we must determine the fair value of each individual investment
on a quarterly basis. We will record unrealized depreciation on
investments when we believe that an investment has decreased in
value, including where collection of a loan or realization of an
equity security is doubtful. Conversely, we will record
unrealized appreciation if we believe that the underlying
portfolio company has appreciated in value and, therefore, our
investment has also appreciated in value, where appropriate.
As a business development company, we invest primarily in
illiquid securities including debt and equity-related securities
of private companies. Our investments are generally subject to
some restrictions on resale and generally have no established
trading market. Because of the type of investments that we make
and the nature of our
65
business, our valuation process requires an analysis of various
factors. Our valuation methodology includes the examination of,
among other things, the underlying investment performance,
financial condition and market changing events that impact
valuation.
With respect to private debt and equity-related securities, each
investment is valued using industry valuation benchmarks and,
where appropriate, equity values are assigned a discount
reflecting the illiquid nature of the investment, and our
minority, non-control position. When a qualifying external event
such as a significant purchase transaction, public offer, or
subsequent debt or equity sale occurs, the pricing indicated by
the external event will be used to corroborate our private debt
or equity valuation. Securities that are traded in the
over-the-counter
market or on a stock exchange generally will be valued at the
prevailing bid price on the valuation date. However, restricted
or thinly traded public securities may be valued at discounts
from the public market value due to the restrictions on sale.
Determinations
In Connection With Offerings
In connection with each offering of shares of our common stock,
the Board of Directors or a committee thereof is required to
make the determination that we are not selling shares of our
common stock at a price below our then current net asset value
at the time at which the sale is made. The Board of Directors
considers the following factors, among others, in making such
determination:
|
|
|
|
|
the net asset value of our common stock disclosed in the most
recent periodic report we filed with the SEC;
|
|
|
|
our managements assessment of whether any material change
in the net asset value has occurred (including through the
realization of net gains on the sale of our portfolio
investments) from the period beginning on the date of the most
recently disclosed net asset value to the period ending two days
prior to the date of the sale of our common stock; and
|
|
|
|
the magnitude of the difference between the net asset value
disclosed in the most recent periodic report we filed with the
SEC and our managements assessment of any material change
in the net asset value since the date of the most recently
disclosed net asset value, and the offering price of the shares
of our common stock in the proposed offering.
|
Importantly, this determination does not require that we
calculate net asset value in connection with each offering of
shares of our common stock, but instead it involves the
determination by the Board of Directors or a committee thereof
that we are not selling shares of our common stock at a price
below the then current net asset value at the time at which the
sale is made.
Moreover, to the extent that there is even a remote possibility
that we may (i) issue shares of our common stock at a price
below the then current net asset value of our common stock at
the time at which the sale is made or (ii) trigger the
undertaking (which we provided to the SEC in the registration
statement to which this prospectus is a part) to suspend the
offering of shares of our common stock pursuant to this
prospectus if the net asset value fluctuates by certain amounts
in certain circumstances until the prospectus is amended, the
Board of Directors or a committee thereof will elect, in the
case of clause (i) above, either to postpone the offering
until such time that there is no longer the possibility of the
occurrence of such event or to undertake to determine net asset
value within two days prior to any such sale to ensure that such
sale will not be below our then current net asset value, and, in
the case of clause (ii) above, to comply with such
undertaking or to undertake to determine net asset value to
ensure that such undertaking has not been triggered.
These processes and procedures are part of our compliance
policies and procedures. Records will be made contemporaneously
with all determinations described in this section and these
records will be maintained with other records we are required to
maintain under the 1940 Act.
66
MANAGEMENT
Our business and affairs are managed under the direction of our
Board of Directors. Our Board of Directors elects our officers
who serve at the discretion of the Board of Directors. Our Board
of Directors currently consists of four members, one who is an
interested person of Hercules Technology Growth
Capital as defined in Section 2(a)(19) of the 1940 Act and
three who are not interested persons and who we refer to as our
independent directors.
Directors,
Executive Officers and Key Employees
Our executive officers, directors and key employees and their
positions are set forth below. The address for each executive
officer, director and key employee is c/o Hercules
Technology Growth Capital, Inc., 525 University Avenue,
Suite 700, Palo Alto, California 94301.
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|
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Name
|
|
Age
|
|
Positions
|
|
Interested
Director:
(1)
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|
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Manuel A. Henriquez
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|
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43
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|
|
Chairman of the Board of
Directors, President and Chief Executive Officer
|
Independent
Directors:
|
|
|
|
|
|
|
Robert P.
Badavas
(2)(3)(4)
|
|
|
53
|
|
|
Director
|
Joseph W.
Chow
(2)(3)(4)(5)
|
|
|
53
|
|
|
Director
|
Allyn C.
Woodward, Jr.
(2)(3)(4)(5)
|
|
|
65
|
|
|
Director
|
Executive
Officers:
|
|
|
|
|
|
|
Manuel A. Henriquez
|
|
|
43
|
|
|
Chairman of the Board of
Directors, President and Chief Executive Officer
|
H. Scott Harvey
|
|
|
52
|
|
|
Chief Legal Officer and Chief
Compliance Officer
|
David M. Lund
|
|
|
52
|
|
|
Chief Financial Officer
|
Shane A. Stettenbenz
|
|
|
35
|
|
|
Chief Technology Officer
|
Key Employees:
|
|
|
|
|
|
|
Samir Bhaumik
|
|
|
43
|
|
|
Senior Managing Director
|
Kathleen Conte
|
|
|
59
|
|
|
Managing Director
|
Mark S. Denomme
|
|
|
40
|
|
|
Managing Director
|
Kevin L. Grossman
|
|
|
38
|
|
|
Managing Director
|
John Hershey
|
|
|
44
|
|
|
Managing Director
|
Roy Y. Liu
|
|
|
45
|
|
|
Managing Director
|
Edward M. Messman
|
|
|
36
|
|
|
Managing Director
|
Parag I. Shah
|
|
|
34
|
|
|
Senior Managing Director
|
|
|
|
(1)
|
|
Mr. Henriquez is an interested
person, as defined in section 2(a)(19) of the 1940 Act, of
the Company due to his position as an officer of the Company.
|
|
(2)
|
|
Member of the Audit Committee.
|
|
(3)
|
|
Member of the Valuation Committee.
|
|
(4)
|
|
Member of the Compensation
Committee.
|
|
(5)
|
|
Member of the Nominating and
Corporate Governance Committee.
|
Interested
Director
Manuel A. Henriquez
is a co-founder of the company and
has been our Chairman and Chief Executive Officer since December
2003 and our President since April 2005. Prior to co-founding
our company, Mr. Henriquez was a Partner at VantagePoint
Venture Partners from August 2000 through July 2003. Prior to
VantagePoint Venture Partners, Mr. Henriquez was the
President and Chief Investment Officer of Comdisco Ventures, a
division of
67
Comdisco, Inc., a leading technology and financial services
company, from November 1999 to March 2000. Prior to that, from
March 1997 to November 1999, Mr. Henriquez was a Managing
Director of Comdisco Ventures. Mr. Henriquez was a senior
member of the investment team at Comdisco Ventures that
originated over $2.0 billion of equipment lease, debt and
equity transactions from 1997 to 2000. Mr. Henriquez
received a B.S. in Business Administration from Northeastern
University.
Independent
Directors
Robert P. Badavas
has served as a director since March
2006. Mr. Badavas is the President and Chief Executive
Officer of TAC Worldwide Companies, a contingent workforce
company owned by Crystal Group Limited of Japan. From November
2003 until becoming president and CEO in December 2005, he was
the Executive Vice President and Chief Financial Officer of TAC
Worldwide. Prior to joining TAC Worldwide, Mr. Badavas was
Senior Principal and Chief Operating Officer of Atlas Venture, a
venture capital firm, from September 2001 to September 2003.
Prior to joining Atlas Venture, he was Senior Corporate Adviser
to the Office of the Chairman of Aether Systems, Inc., a
provider of wireless data products and services, from September
2000 to June 2001. Prior to that, he was Chief Executive Officer
of Cerulean Technology, Inc., a provider of mobile information
systems applications, from December 1995 until Aether Systems,
Inc. acquired the company in September 2000. From 1986 to
October 1995, Mr. Badavas was Senior Vice President and
Chief Financial Officer, among other capacities, of Chipcom
Corporation, a manufacturer of computer networking intelligent
switching systems. Mr. Badavas is currently a board member
and Chairman of the Audit Committee for RSA Security, Inc.
(NASDAQ:RSAS). He was previously a director and Chairman of the
Audit Committee of ON Technology (NASDAQ:ONTC), until ON
Technology was acquired by Symantec, Inc. in 2004 and is a
former director of Renaissance Worldwide (NASDAQ:REGI), until
its acquisition by a privately-held company in 2001.
Mr. Badavas is a Trustee of both Bentley College in
Waltham, MA and Hellenic College/Holy Cross School of Theology
in Brookline, MA. He is also Chairman of the Board of the
Learning Center for Deaf Children, Framingham, MA.
Mr. Badavas is a graduate of Bentley College with a BS in
Accounting and Finance.
Joseph W. Chow
has served as a director since February
2004. Mr. Chow is Executive Vice President and Chief Risk
and Corporate Administration Officer at State Street
Corporation, having retired from the company in August 2003 and
rejoined it in July 2004. Prior to August 2003, Mr. Chow
was Executive Vice President and Head of Credit and Risk Policy
at State Street. Before joining State Street in 1990,
Mr. Chow worked at Bank of Boston in various international
and corporate banking roles and specialized in the financing of
emerging-stage high technology companies from 1983 to 1989.
Mr. Chow is a graduate of Brandeis University with a B.A.
in Economics. He also received an M.C.P. from the Massachusetts
Institute of Technology and an M.S. in Management (Finance) from
the MIT Sloan School of Management.
Allyn C. Woodward, Jr.
has served as a director
since February 2004. Mr. Woodward was Vice Chairman of
Adams Harkness Financial Group (AHFG-formerly Adams,
Harkness & Hill) from April, 2001 until January, 2006
when AHFG was sold to Canaccord, Inc. He previously served as
President from
1995-2001.
AHFG was an independent institutional research, brokerage and
investment banking firm headquartered in Boston, MA. Prior to
joining AHFG, Mr. Woodward worked for Silicon Valley Bank
from April, 1990 to April 1995, initially as Executive Vice
President and Co-founder of the Wellesley MA office and more
recently as Senior Executive Vice President and Chief Operating
Officer of the parent bank in California. Silicon Valley Bank is
a commercial bank, headquartered in Santa Clara, CA whose
principal lending focus is directed toward the technology,
healthcare and venture capital industries. Prior to joining
Silicon Valley Bank, Mr. Woodward was Senior Vice President
and Group Manager of the Technology group at Bank of New
England, Boston, MA where he was employed from
1963-1990.
Mr. Woodward is currently a Director, Chairman of the
Compensation Committee and a member of the Audit Committee of
Lecroy Corporation (NASDAQ:LCRY). He is also a former Director
of Viewlogic (NASDAQ:VIEW) and Cayenne Software, Inc
(NASDAQ:CAYN). Mr. Woodward serves on the Board of
Directors of three private companies and is on the Board of
Advisors of several venture capital firms. Mr. Woodward is
on the Board of Overseers and a member of the Finance Committee
of Newton Wellesley Hospital, a 250 bed hospital located in
Newton, MA. Mr. Woodward is on the Board of Overseers and
the Investment Committee and the Finance Committee of Babson
College in Babson Park, MA. Mr. Woodward graduated from
Babson College with a degree in finance and accounting. He also
graduated from the Stonier Graduate School of Banking at Rutgers
University.
68
Executive
Officers who are not Directors
H. Scott Harvey
is a co-founder of the company and
has been our Chief Legal Officer since December 2003.
Mr. Harvey has over 20 years of legal and business
experience with leveraged finance and financing public and
private technology-related companies. Since July 2002, and prior
to joining us, Mr. Harvey was in a diversified private
practice. Previously, Mr. Harvey was Deputy General Counsel
of Comdisco, Inc., a leading technology and financial services
company, from January 1997 to July 2002. From 1991 to 1997,
Mr. Harvey served as Vice President of Marketing,
Administration & Alliances with Comdisco, Inc. and was
Corporate Counsel from 1983 to 1991. Mr. Harvey received a
B.S. in Agricultural Economics from the University of Missouri,
a J.D. and LLM in taxation from The John Marshall Law School and
an M.B.A. from Illinois Institute of Technology.
David M. Lund
joined us in July 2005 as Vice President of
Finance and Corporate Controller, and was promoted to Chief
Financial Officer on October 2, 2006. Mr. Lund is our
principal financial and accounting officer. He has over
20 years of experience in finance and accounting serving
companies in the technology sector. Prior to joining Hercules,
Mr. Lund served in senior financial positions for publicly
traded companies: InterTrust Technologies, Centillium
Communications and Rainmaker Systems, and in private companies:
Urban Media, Scion Photonics and APT Technology. Mr. Lund
also served in public accounting with Ernst & Young LLP
and Grant Thornton LLP. He received a B.S. degree in Business
Administration with an emphasis in Accounting from San Jose
State University and a B.S. degree in Business Administration
with an emphasis in Marketing from California State University,
Chico. Mr. Lund is a Certified Public Accountant in the
State of California.
Shane A. Stettenbenz
joined the company in February 2004
as Vice President Information Systems and has served
as Chief Technology Officer since December 2004.
Mr. Stettenbenz previously served as an IT Director for
VantagePoint Venture Partners from May 2001 to June 2003. Prior
to that, Mr. Stettenbenz was an IT Manager for Comdisco
Ventures, a division of Comdisco, Inc. from May 1997 to May
2001. Mr. Stettenbenz attended San Jose State
University from 1991 to 1995 while majoring in Management
Information Systems.
Key
Employees
Samir Bhaumik
joined the company in November 2004 as a
Managing Director and was promoted to Senior Managing Director
in September 2006. Mr. Bhaumik previously served as Vice
President Western Region of the New York Stock
Exchange from March 2003 to October 2004. Prior to working for
the New York Stock Exchange, Mr. Bhaumik was Senior Vice
President of Comerica Bank, previously Imperial Bank, from April
1993 to February 2003. Mr. Bhaumik received a B.A. from
San Jose State University and an M.B.A from
Santa Clara University. He serves on the advisory boards of
Santa Clara University Leavey School of Business, Junior
Achievement of Silicon Valley and the American Electronics
Association-Bay Area council.
Kathleen Conte
joined the company as a Managing Director
of Life Sciences in November 2004. From December 2003 to
November 2004, she worked as an independent consultant. From
1993 to December 2003, she served as Senior Vice President at
Comerica Bank running its West Coast Life Sciences Group.
Ms. Conte was at Prudential Capital Corporation from 1987
to 1993 originating structured private placements. Prior to that
she spent 13 years at Wells Fargo Bank in various lending
positions. Ms. Conte holds a B.A. degree and an M.B.A. from
the University of Delaware.
Mark S. Denomme
joined the company as a Managing
Director in September 2006. Mr. Denomme has over
18 years of experience in financial services. Prior to
joining the company, Mr. Denomme was a Senior Vice
President at Brown Brothers Harriman & Co., focusing on
investments in middle market healthcare companies. From 2000 to
2006, Mr. Denomme was a Managing Director and co-founder of
Consilium Partners, an investment banking firm focused on
sell-side and buy-side engagements for middle market companies.
From 1997 to 2000, Mr. Denomme was a Director in the
Leveraged Finance group of BancBoston Robertson Stephens,
focusing on originating loan syndication and high yield debt
opportunities for the firms technology and media clients.
From 1988 to 1997, Mr. Denomme was a commercial lender with Bank
of Boston focused on structured debt opportunities with
technology and media-related companies. Mr. Denomme holds a BBA
degree from the University of Michigan and his series 7, 63 and
24 NASD licenses.
69
John D. Hershey
joined the company in September 2005 as a
Managing Director. From July 2004 to August 2005, he worked as
an independent consultant. From October 2000 to June 2004,
Mr. Hershey served as a Managing Director at Infinity
Capital, an early stage venture capital firm where he co-managed
the firms software and services investing group. Prior to
Infinity Capital, Mr. Hershey worked as a Managing Director
at Banc of America Securities from May 1995 to September 2000.
At Banc of America Securities, Mr. Hershey managed the
firms Internet Investment Banking group and served on the
firms Fairness Opinion Commitment Committee. From July
1990 to November 2003, Mr. Hershey was an Associate at
James D. Wolfensohn, Inc., where he helped manage Wolfensohn
Associates L.P., an all stage venture capital fund.
Mr. Hershey received a B.A. degree in Economics from
University of California, Davis and an M.B.A from the University
of Chicago.
Kevin Grossman
joined the company in September 2006 as a
Managing Director. Mr. Grossman previously served as a
Senior Relationship Manager and Senior Vice President in Silicon
Valley Banks Colorado office from July 1999 to August 2006
servicing technology and life sciences companies throughout
Arizona, New Mexico, Utah, and Colorado. From December 1998
through July 1999, Mr. Grossman was with Fremont Financial
in a Business Development capacity providing Asset Based Lending
facilities. Prior to that he served from January 1996 through
February 1998 at the National Bank of Canada providing Asset
Based Lending deals with Portfolio Management responsibilities.
From June 1993 through December 1995 he opened two offices for
an asset based lending company in the Pacific Northwest
providing services to highly leveraged entities and companies
experiencing financial stress. Mr. Grossman earned a
Bachelors degree in Business Economics at the University
of California at Santa Barbara and a Masters degree
in Business Administration from Northern Arizona University.
Mr. Grossman is a member of the Board of Advisors for
Agility Leasing, and a member of Association for Corporate
Growth, Rockies Venture Club, and the Colorado Venture Capital
Association. He is also on the Board of Directors of the Denver
Metro YMCA and serves as Program Chairman for the Duncan Family
Branch.
Roy Y. Liu
joined the company as a Managing Director in
April 2004. Mr. Liu has over 20 years experience in
operations and finance of technology companies. Formerly,
Mr. Liu was a Vice President at GrandBanks Capital, an
early-stage, information technology-focused venture capital
firm. From 2000 to 2002, Mr. Liu was a founding principal
of VantagePoint Structured Investments, a debt fund affiliated
with VantagePoint Venture Partners. Prior to joining
VantagePoint, Mr. Liu was VP Finance and Chief Financial
Officer for toysmart.com, Inc. Prior to joining toysmart.com, he
was a First Vice President and co-founded Imperial Banks
Emerging Growth Industries Boston office in 1997, where he
focused specifically on debt financing for venture-backed
companies. Prior to co-founding Imperial Banks Emerging
Growth Industries Boston office, Mr. Liu was the Chief
Financial Officer of Microwave Bypass Systems, Inc. Prior to
joining Microwave Bypass, Mr. Liu was Vice President and
head of the High Tech Lending group for State Street
Bank & Trust Co. Mr. Liu started his finance
career in the Acquisition Finance Division of the Bank of
Boston. Prior to his career in finance, Mr. Liu worked four
years at IBM in research and product development. He holds a
B.S. degree in Electrical Engineering and an M.B.A. from the
University of Michigan.
Edward M. Messman
joined the company in July 2005 as a
Managing Director. From June 2004 to July 2005, Mr. Messman
served as the Southwest Regional Market Manager of the
Structured Finance Group of Silicon Valley Bank. Prior to
Silicon Valley Bank, Mr. Messman worked as an independent
consultant from December 2003 to June 2004. From October 1998 to
December 2003, Mr. Messman was Vice President of Comerica
Bank, previously Imperial Bank, where he formed and managed the
Technology and Life Sciences group in Denver, Colorado covering
the Rocky Mountain region. Mr. Messman received a B.S.
degree in International Business from Grand Canyon University
and an M.B.A from the University of Colorado.
Parag I. Shah
joined the company in November 2004 as
Managing Director of Life Sciences and was promoted to Senior
Managing Director in September 2006. From April 2000 to April
2004, Mr. Shah served as a Senior Vice President in
Imperial Banks Life Sciences Group, which was acquired by
Comerica Bank in early 2001. Prior to working at Comerica Bank,
Mr. Shah was an Assistant Vice President at Bank Boston
from January 1997 to March 2000. Bank Boston was acquired by
Fleet Bank in 1999. Mr. Shah completed his Masters degrees
in Technology, Management and Policy as well as his Bachelors
degree in Molecular Biology at the Massachusetts Institute of
Technology (MIT). During his tenure at MIT, Mr. Shah
conducted research at the Whitehead Institute for Biomedical
Research and was chosen to serve on the Whitehead
Institutes Board of Associates in 2003.
70
Board of
Directors
The number of directors is currently fixed at four directors.
Our Board of Directors is divided into three classes. One class
holds office for a term expiring at the annual meeting of
stockholders to be held in 2007, a second class holds office for
a term expiring at the annual meeting of stockholders to be held
in 2008, and a third class holds office initially for a term
expiring at the annual meeting of stockholders to be held in
2009. Each director holds office for the term to which he or she
is elected and until his or her successor is duly elected and
qualifies. Mr. Henriquezs term expires in 2007,
Mr. Badavas and Mr. Chows terms expire in 2008
and Mr. Woodwards term expires in 2009. At each
annual meeting of our stockholders, the successors to the class
of directors whose terms expire at such meeting will be elected
to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their
election and until their successors are duly elected and qualify.
In connection with its purchase of our preferred stock in
February 2004, we granted JMP Asset Management LLC the right to
designate one observer to attend meetings of our Board of
Directors, other than executive sessions, committee meetings or
subcommittee meetings consisting solely of independent directors
until February 2007. After the expiration of this initial
period, the independent directors on our board will consider, on
an annual basis, the extension of such observation rights for an
additional one year period. Upon certain events resulting in a
change of control of JMP Asset Management LLC, its observation
rights will immediately terminate.
Compensation
of Directors
As compensation for serving on our Board of Directors, each of
our independent directors receives an annual fee of $50,000 and
an additional $2,000 per each meeting of the board
attended. Employee directors and non-independent directors will
not receive compensation for serving on the board. Independent
directors who serve on board committees will receive cash
compensation in addition to the compensation they receive for
service on our Board of Directors. The chairperson of each
committee of our Board of Directors receives an additional
$15,000 per year and all committee members receive an
additional $2,000 for each committee meeting they attend. In
addition, we reimburse our directors for their reasonable
out-of-pocket
expenses incurred in attending meetings of the Board of
Directors.
On July 26, 2006, our Board of Directors approved
additional retainer fees for each of our non-interested
directors. Mr. Badavas received an additional $29,000, Mr. Chow
received an additional $113,000 and Mr. Woodward received
an additional $113,000. Each of the non-interested directors
elected to receive their retainer fees in stock in lieu of cash.
The Board of Directors approved the issuance of additional
retainer fees in the aggregate amount of up to $300,000 per
quarter for the next three quarters.
On June 21, 2005, we applied for exemptive relief from the
SEC to permit us to grant options to purchase our common stock
to our non-employee directors as a portion of their compensation
for service on our Board of Directors. On July 7, 2006, we
applied for exemptive relief from the SEC to permit us to grant
restricted stock to our officers, employees and directors. If we
do not receive the exemptive relief described above, we intend
to put in place and consider alternative compensation benefits
for the independent directors, which would include an additional
up-front cash retainer as well as an ongoing annual retainer.
Committees
of the Board of Directors
Audit Committee.
Our Board of Directors has
established an Audit Committee. The Audit Committee is comprised
of Messrs. Badavas, Chow and Woodward, each of whom is an
independent director and satisfies the independence requirements
for purposes of the Nasdaq Global Market listing standards.
Mr. Badavas serves as Chairman of the Audit Committee and
is a financial expert as defined under Nasdaq rules. The Audit
Committee is responsible for approving our independent
accountants, reviewing with our independent accountants the
plans and results of the audit engagement, approving
professional services provided by our independent accountants,
reviewing the independence of our independent accountants and
reviewing the adequacy of our internal accounting controls.
During the last fiscal year, the Audit Committee held three
meetings.
71
Valuation Committee.
Our Board of Directors
has established a Valuation Committee. The Valuation Committee
is comprised of Messrs. Badavas, Chow and Woodward, each of
whom is an independent director. Mr. Chow serves as
chairman of the Valuation Committee. The Valuation Committee is
responsible for reviewing and recommending to the full board the
fair value of debt and equity securities that are not publicly
traded in accordance with established valuation procedures. The
Valuation Committee may utilize the services of an independent
valuation firm in arriving at fair value of these securities.
During the last fiscal year, the Valuation Committee held three
meetings.
Compensation Committee.
Our Board of Directors
has established a Compensation Committee. The Compensation
Committee is comprised of Messrs. Badavas, Chow and
Woodward, each of whom is an independent director and satisfies
the independence requirements for purposes of the Nasdaq Global
Market listing standards. Mr. Woodward serves as Chairman
of the Compensation Committee. The Compensation Committee
determines compensation for our executive officers, in addition
to administering our 2004 Equity Incentive Plan, which is
described below. During the last fiscal year, the Compensation
Committee held three meetings.
Nominating and Corporate Governance
Committee.
Our Board of Directors has established
a Nominating and Corporate Governance Committee. The Nominating
and Corporate Governance Committee is comprised of
Messrs. Chow and Woodward, each of whom is an independent
director and satisfies the independence requirements for
purposes of the Nasdaq Global Market listing standards.
Mr. Woodward serves as Chairman of the Nominating and
Corporate Governance Committee. The Nominating and Corporate
Governance Committee will nominate to the Board of Directors for
consideration candidates for election as directors to the Board
of Directors. During the last fiscal year, the Nominating and
Corporate Governance Committee did not hold a meeting to discuss
candidate nominations. Discussions regarding corporate
governance were held in conjunction with the meetings of the
Board of Directors.
Until investment funds controlled by Farallon Capital
Management, L.L.C. beneficially own less than 10% of our
outstanding common stock, Farallon Capital Management, L.L.C.
has the right to recommend one person to our Nominating and
Corporate Governance Committee for consideration as a nominee to
our Board of Directors, provided that such person qualifies as
an independent director under the 1940 Act.
Compensation
of Executive Officers
Under SEC rules applicable to business development companies, we
are required to set forth certain information regarding the
compensation of certain of our executive officers and directors.
The following table sets forth information regarding the
compensation earned by our directors and our three highest paid
executive officers (collectively, they are referred to as
Compensated Persons) in all capacities during the
fiscal year ending December 31, 2005. No compensation is
paid to directors, in their capacity as such, who are
interested persons.
Summary
Compensation Table
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Aggregate
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Pension or
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Number of
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Compensation
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Retirement Benefits
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Securities
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Directors Fees
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from the
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Accrued as Part
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Underlying
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Paid by the
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Name
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Company
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of Company
Expenses
(1)
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Options/SARS
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Company
(2)
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Independent
Directors:
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Robert P.
Badavas
(3)
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Joseph W. Chow
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$
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77,500
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$
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77,500
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Allyn C. Woodward, Jr.
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79,000
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79,000
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Executive
Officers:
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Manuel A. Henriquez
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1,008,506
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605,000
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(4)
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H. Scott Harvey
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251,200
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141,000
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(5)
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David M.
Lund
(6)
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124,490
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40,000
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(7)
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Shane A. Stettenbenz
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189,446
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95,000
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(8)
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Former
Officer:
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Glen C.
Howard
(9)
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216,231
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32,000
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(10)
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(1)
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We do not have a profit sharing or
retirement plan, and directors do not receive any pension or
retirement benefits. Officers and employees are eligible for
annual bonuses based on performance measured against specific
goals and approved by the Board of Directors.
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72
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(2)
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Consists only of directors
fees we paid in 2005. Such fees are also included in the column
titled Aggregate Compensation from the Company.
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(3)
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Mr. Badavas was not a director
as of December 31, 2005.
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(4)
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Represents options to purchase
605,000 shares of our common stock at an exercise price per
share equal to $13.00 issued under our 2004 Equity Incentive
Plan.
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(5)
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Represents options to purchase
141,000 shares of our common stock at an exercise price per
share equal to $13.00 issued under our 2004 Equity Incentive
Plan.
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(6)
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Mr. Lund joined us in July
2005, and his compensation reflects less than a full year of
service.
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(7)
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Represents options to purchase
40,000 shares of our common stock at an exercise price per
share equal to $13.00 issued under our 2004 Equity Incentive
Plan.
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(8)
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Represents options to purchase
95,000 shares of our common stock at an exercise price per
share equal to $13.00 issued under our 2004 Equity Incentive
Plan.
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(9)
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Mr. Howard resigned from the
Company effective May 12, 2006.
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(10)
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Represents options to purchase
32,000 shares of our common stock at an exercise price per
share equal to $13.00 issued under our 2004 Equity Incentive
Plan.
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Compensation
of Portfolio Management Employees
The compensation of our investment committee, consisting of our
Chief Executive Officer, our Chief Legal Officer and our Chief
Financial Officer, is set by the compensation committee of our
Board of Directors. The investment committee is compensated in
the form of annual salaries, annual cash bonuses based on
performance measured against specific goals and long-term
compensation in the form of stock option grants.
Salaries
and Annual Bonus
The Compensation Committee of our Board of Directors meets with
the Chief Executive Officer to receive his recommendations
regarding the salary and annual bonus for each member of the
investment committee other than the Chief Executive Officer. The
committee also considers the recent performance of our portfolio
of investments and our profitability in light of general
economic and competitive conditions. Based on this information
and any other considerations it deems relevant, the Compensation
Committee sets salaries and annual bonus guidelines in its sole
discretion.
Long Term
Compensation
Long-term performance-based compensation generally includes
stock option grants under our 2004 Equity Incentive Plan. Stock
option grants to each investment committee member are based on
criteria established by the Compensation Committee, including
responsibility level, salary level, committee member
performance, overall investment portfolio performance and
overall profitability.
Option
Grants in Last Fiscal Year
The following table sets forth information concerning options
and warrants to purchase shares of our common stock granted to
our Compensated Persons.
Option
Grants During 2005
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Percent of
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Potential Realizable Value at
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Number of
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Total Options
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Assumed Annual Rates of
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Securities
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Granted to
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Stock Price Appreciation for
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Underlying
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Expiration
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Employees in
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Option
Term
(3)
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Name
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Option
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Date
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Fiscal Year
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5%
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10%
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Manuel A. Henriquez
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605,000
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(1)
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6/17/12
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47.64
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%
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$
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3,201,845
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$
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7,461,660
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H. Scott Harvey
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141,000
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(1)
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6/17/12
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11.10
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%
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746,215
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1,738,998
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David M. Lund
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40,000
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(2)
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7/15/12
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3.15
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%
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211,692
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493,333
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Shane A. Stettenbenz
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95,000
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(1)
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6/17/12
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7.48
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%
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502,769
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1,171,666
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Glen C. Howard
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32,000
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(1)
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6/17/12
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2.52
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%
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169,354
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394,666
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73
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(1)
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Issued in connection with the
Companys initial public offering.
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(2)
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Issued in connection with
employment.
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(3)
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The amounts shown on this table
represent hypothetical gains that could be achieved for the
respective options or warrants if exercised at the end of the
term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the
respective options or warrants were granted to their expiration
date. The gains shown are net of the applicable exercise price,
but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on exercises
will depend on the future performance of our common stock, the
holders continued employment through the option or warrant
period and the date on which the options or warrants are
exercised. If our common stock does not increase in value after
the grant date of the options and warrants, the options and
warrants are valueless.
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Employment
Agreement
We intend to enter into an employment agreement with
Mr. Henriquez which will provide for a three-year term with
automatic one-year renewals.
The employment agreement for Mr. Henriquez will set an
agreed base salary and will provide that he is entitled to
participate in an annual incentive performance based bonus and
long term retention program. His base salary for the remainder
of 2006 has not yet been set. Under such programs he will be
eligible to receive up to 200% of his base salary depending on
our performance against certain criteria to be established
annually by the compensation committee of the Board of
Directors. He will also be contractually entitled to participate
in our 2004 Equity Incentive Plan described below.
If we terminate Mr. Henriquezs employment by reason
of a disability, he would be entitled to receive from us the
difference between his then current base salary plus annual
incentive bonus, long-term retention program benefits and any
long-term disability benefits for two years. Additionally,
Mr. Henriquezs unvested options, which are scheduled
to vest within two years of the termination date, would
immediately vest. All vested options would expire unless
exercised within 18 months of the termination date. If we
terminate Mr. Henriquezs employment for any reason
other than for a disability or cause, he would be entitled to
receive his base salary and annual incentive bonus payments for
a period of two years from the date of termination. These
payments would also be made if Mr. Henriquez resigned for
good reason. Mr. Henriquez will also receive severance if
he is terminated in connection with a change of control or if he
is not notified that the employment agreement will not be
continued upon a change in control.
In the event that we terminate Mr. Henriquezs
employment for cause or in the event that he voluntarily
terminates his employment for other than good reason, all
unvested stock options would be forfeited and he would have no
more than 90 days to exercise any vested but unexercised
options.
Upon termination of employment, Mr. Henriquez would be
subject to certain non-compete covenants. These covenants would
generally apply for one year, although should Mr. Henriquez
resign with good reason, the covenants would apply for only six
months following the date of his resignation.
Mr. Henriquezs employment agreement will require that
he maintain the confidentiality of our confidential information
during and after the period of his employment.
Other than as described above, we have not entered into any
employment agreements.
2004
Equity Incentive Plan
Our Board of Directors and our stockholders have approved the
2005 Amendment and Restatement of the Hercules Technology Growth
Capital, Inc. 2004 Equity Incentive Plan, for the purpose of
attracting and retaining the services of executive officers,
directors and other key employees. Under the 2004 Equity
Incentive Plan, our Compensation Committee may award incentive
stock options within the meaning of Section 422 of the
Code, or ISOs, to employees, and nonstatutory stock options to
employees and directors.
Under the 2004 Equity Incentive Plan, we have authorized for
issuance up to 7,000,000 shares of common stock.
Participants in the 2004 Equity Incentive Plan may receive
awards of options to purchase our common stock, as determined by
our Compensation Committee. Options granted under the 2004
Equity Incentive Plan generally may be exercised for a period of
no more than seven years from the date of grant. Unless sooner
terminated by our Board of Directors, the 2004 Equity Incentive
Plan will terminate on the tenth anniversary of its adoption and
no additional awards may be made under the 2004 Equity Incentive
Plan after that date. The 2004 Equity Incentive
74
Plan provides that all awards granted under the plan are subject
to modification as required to ensure that such awards do not
conflict with the requirements of the 1940 Act applicable to us.
In connection with certain awards made under the 2004 Equity
Incentive Plan prior to our initial public offering, we issued
warrants to purchase one share of common stock with up to a
1-year
term,
which we refer to as the
1-year
warrants, and warrants to purchase one share of common
stock with a
5-year
term,
which we refer to as the
5-year
warrants. The
1-year
warrants and
5-year
warrants issued to executive officers and other key employees
under our 2004 Equity Incentive Plan are generally subject to
the same terms and conditions as the warrants included in the
units offered by us in our June 2004 private placement, except
that the warrants issued in connection with option grants under
the 2004 Equity Incentive Plan will be transferable only by will
or intestacy. See Description of Capital Stock
5-Year
Warrants.
In connection with our election to be regulated as a business
development company, the exercise price for all of our
outstanding
1-year
warrants and
5-year
warrants, including those granted under the 2004 Equity
Incentive Plan, was reduced to $10.57 per share, the net
asset value per share of our common stock on the date of
determination, as adjusted in accordance with the terms of such
warrants. All
1-year
warrants, including those outstanding under the 2004 Equity
Incentive Plan, that were not exercised in connection with our
election to be regulated as a business development company were
canceled. In addition,
5-year
warrants, including those granted under the 2004 Equity
Incentive Plan, to purchase an aggregate of 597,196 shares
of our common stock were canceled pro rata among holders of
5-year
warrants and 298,598 shares of our common stock were
simultaneously issued to such holders at a rate of one share of
common stock for two
5-year
warrants so cancelled, in each case in accordance with the terms
of such warrants. Following our election to be regulated as a
business development company,
5-year
warrants to purchase an aggregate of 673,223 shares of our
common stock remained outstanding at an exercise price per share
equal to $10.57. We do not anticipate issuing any additional
warrants under the 2004 Equity Incentive Plan.
Options granted under the 2004 Equity Incentive Plan will
entitle the optionee, upon exercise, to purchase shares of
common stock from us at a specified exercise price per share.
ISOs must have a per share exercise price of no less than the
fair market value of a share of stock on the date of the grant
or, if the optionee owns or is treated as owning (under
Section 424(d) of the Code) more than 10% of the total
combined voting power of all classes of our stock, 110% of the
fair market value of a share of stock on the date of the grant.
Nonstatutory stock options granted under the 2004 Equity
Incentive Plan must have a per share exercise price of no less
than the fair market value of a share of stock on the date of
the grant. Options will not be transferable other than by laws
of descent and distribution, or in the case of nonstatutory
stock options, by gift, and will generally be exercisable during
an optionees lifetime only by the optionee.
Our Compensation Committee administers the 2004 Equity Incentive
Plan and has the authority, subject to the provisions of the
2004 Equity Incentive Plan, to determine who will receive awards
under the 2004 Equity Incentive Plan and the terms of such
awards. Our Compensation Committee will have the authority to
adjust the number of shares available for awards, the number of
shares subject to outstanding awards and the exercise price for
awards following the occurrence of events such as stock splits,
dividends, distributions and recapitalizations. The exercise
price of an option may be paid in the form of shares of stock
that are already owned by such optionholder.
Upon specified covered transactions (as defined in the 2004
Equity Incentive Plan), all outstanding awards under the 2004
Equity Incentive Plan may either be assumed or substituted for
by the surviving entity. If the surviving entity does not assume
or substitute similar awards, the awards held by the
participants will be accelerated in full and then terminated to
the extent not exercised prior to the covered transaction.
Awards under the 2004 Equity Incentive Plan will be granted to
our executive officers and other employees as determined by our
Compensation Committee at the time of each issuance. In
connection with our initial public offer, our Compensation
Committee approved the grant of:
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options to purchase an aggregate of 266,000 shares common
stock to our officers and employees other than
Messrs. Henriquez, Howard, Harvey and;
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an option to Mr. Henriquez to purchase 605,000 shares
of common stock;
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an option to Mr. Howard to purchase 32,000 shares of
common stock; and
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an option to Mr. Harvey to purchase 141,000 shares of
common stock.
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75
The exercise price per share for all such options is
$13.00 per share, the public offering price of our common
stock in our initial public offering. Including the foregoing
grants, the outstanding options granted to our executive
officers and other employees represent approximately 10.6% of
our fully-diluted equity capitalization. We expect that, subject
to compliance with applicable regulations governing business
development companies, we will grant additional awards to our
officers and employees. The options and warrants granted to our
executive officers and employees in connection with our initial
public offering (including those granted following the closing
of our initial public offering described in the preceding
sentence) will generally vest over a three-year period,
one-third after one year and monthly thereafter. We expect that
any options granted to our non-employee directors will generally
vest over two years, in equal installments on each of the first
two anniversaries of the date of grant, subject to our receipt
of exemptive relief from the SEC.
2006
Non-Employee Director Plan
Our Board of Directors and stockholders have approved the 2006
Non-employee Director Plan (the Director Plan).
Under current SEC rules and regulations applicable to business
development companies, a business development company may not
grant options to non-employee directors. On June 21, 2005,
we applied for exemptive relief from the SEC to permit us to
grant options to purchase shares of our common stock to our
non-employee directors as a portion of their compensation for
service on our Board. We cannot provide any assurance that we
will receive any exemptive relief from the SEC. If the relief
requested from the SEC is granted, the three non-employee
Directors (and, upon his or her election to the Board, any
additional Director) would become eligible to participate in the
Director Plan. The following is a summary of the material
features of the Director Plan.
The Company has instituted the Director Plan for the purpose of
advancing the interests of the Company by providing for the
grant of awards under the Director Plan to eligible non-employee
Directors. The Director Plan authorizes the issuance of
non-statutory stock options (NSOs) to non-employee
Directors to purchase shares of common stock at a specified
exercise price per share. NSOs granted under the Director Plan
will have a per share exercise price of no less than the current
market value of a share of stock as determined in good faith by
the Board on the date of the grant.
Under the Director Plan, non-employee Directors will each
receive an initial and an annual grant of an option to purchase
up to 20,000 shares of common stock provided that the
maximum number of shares of common stock for which a
non-employee Director may be granted an option shall not exceed
20,000 shares per year. In addition, options granted to the
Companys non-employee Directors will generally vest over
two years, in equal installments on each of the first two
anniversaries of the date of grant. The Compensation Committee
has the authority to adjust the number of shares available for
options, the number of shares subject to outstanding options
under the Director Plan and the exercise price of options;
provided, however, that the exercise price of options granted
under the Director Plan will not be adjusted unless the Company
receives an exemptive order from the SEC or written confirmation
from the staff of the SEC that the Company may do so (except for
adjustments resulting from changes in the Companys capital
structure, such as stock dividends, stock splits and reverse
stock splits).
The Director Plan will be effective as of the date the Company
receives the requested exemptive relief from SEC.
Unless sooner terminated by the Board, the Director Plan will
terminate on the tenth anniversary of its adoption and no
additional awards may be made under the Director Plan after that
date. The Director Plan provides that all awards granted under
the Director Plan are subject to modification as required to
ensure that such awards do not conflict with the requirements of
the 1940 Act.
The Board will determine the period during which any options
granted under the Director Plan shall remain exercisable,
provided that no option will be exercisable after the expiration
of ten years from the date on which it was granted. Options
granted under the Director Plan are not transferable other than
by will or the laws of descent and distribution, or by gift, and
will generally be exercisable during a non-employee
Directors lifetime only by such non-employee Director. In
general, any portion of any options that are not then
exercisable will terminate upon the termination of the
non-employee Directors services to the Company. Generally,
any portion of any options that are exercisable at the time of
the termination of the non-employee Directors services to
the Company will remain exercisable for the lesser of (i) a
period of three months (or one year if the non-employee
Directors services to the
76
Company terminated by reason of the non-employee Directors
death) or (ii) the period ending on the latest date on
which such options could have been exercised had the
non-employee Directors services to the Company not
terminated. In addition, if the Board determines that a
non-employee Directors service to the Company terminated
for reasons that cast such discredit on the non-employee
Director as to justify immediate termination of the non-employee
Directors options, then all options then held by the
non-employee Director will immediately terminate.
The Compensation Committee administers the Director Plan. Under
the Director Plan, options may be granted from
time-to-time
for up to a maximum of 1,000,000 shares of common stock. As
of the date of this proxy statement, no options had been issued
pursuant to the Director Plan.
If there is a change in the capital structure of the Company by
reason of a stock dividend, stock split or combination of shares
(including a reverse stock split), recapitalization or other
change in the Companys capital structure, the Board will
make appropriate adjustments to the number and class of shares
of stock subject to the Director Plan and each option
outstanding under it. In the event of a consolidation, merger,
stock sale, a sale of all or substantially all of the
Companys assets, a dissolution or liquidation of the
Company or other similar events (a Covered
Transaction), the Board may provide for the assumption of
some or all outstanding options or for the grant of new
substitute options by the acquirer or survivor. If no such
assumption or substitution occurs, all outstanding options will
become exercisable prior to the Covered Transaction and will
terminate upon consummation of the Covered Transaction.
The Director Plan provides that no awards may be granted to the
non-employee Directors unless exemptive relief is granted from
the SEC. If the SEC grants the order, the Company intends to
award options under the Director Plan on an annual basis, though
the amount of options that may be granted are limited by the
terms of the Director Plan, which prohibits any grant that would
cause the Company to be in violation of Section 61(a)(3) of
the 1940 Act.
The Board may at any time or times amend the Director Plan or
any outstanding awards for any purpose which may at the time be
permitted by law, and may at any time terminate the Director
Plan as to any future grants of awards; provided, that except as
otherwise expressly provided in the Director Plan the Board may
not, without the participants consent, alter the terms of
an award so as to affect adversely the participants rights
under the award, unless the Board expressly reserved the right
to do so at the time of the grant of the award.
If and when we receive exemptive relief from the SEC, we intend
to issue options to purchase 20,000 shares of our common
stock to each of Messrs. Badavas, Chow and Woodward.
Restricted
Stock, Dividend Equivalent Rights or Other Similar
Rights
Under current SEC rules and regulations applicable to business
development companies, a business development company may not
grant restricted stock to employees or dividend equivalent
rights to option holders. Dividend equivalent rights allow an
optionholder to receive the economic value of dividends on the
stock underlying the options prior to exercise of the option. We
have applied for exemptive relief from the SEC to permit us to
issue restricted stock and dividend equivalent rights on options
to our employees. We cannot provide any assurance that we will
receive any such exemptive relief from the SEC. If the SEC does
not grant us exemptive relief, we will evaluate alternative
incentive plan arrangements.
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
No person will be deemed to control us, as such term is defined
in the 1940 Act.
The following table sets forth, as of October 9, 2006,
information with respect to the beneficial ownership of our
common stock by:
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each person known to us to beneficially own more than 5% of the
outstanding shares of our common stock based on our records of
ownership of our common stock as of the date of our initial
public offer and filings submitted by these companies to the SEC
regarding their ownership of our common stock.
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77
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each of our directors and each executive officers; and
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all of our directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within
60 days of October 9, 2006 are deemed to be
outstanding and beneficially owned by the person holding such
options or warrants. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage
ownership of any other person. Percentage of beneficial
ownership is based on 13,688,402 shares of common stock
outstanding as of October 9, 2006.
Unless otherwise indicated, to our knowledge, each stockholder
listed below has sole voting and investment power with respect
to the shares beneficially owned by the stockholder, except to
the extent authority is shared by spouses under applicable law,
and maintains an address of c/o Hercules Technology Growth
Capital, Inc., 525 University Avenue, Suite 700, Palo
Alto, California 94301.
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Shares of Common Stock
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Beneficially Owned
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Number
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Percentage
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Name and Address
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of Shares
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of Class
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Principal
Stockholders:
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Farallon Capital Management,
L.L.C.
(1)
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1,556,181
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11.4
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%
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One Maritime Plaza,
Suite 1325
San Francisco, CA 94111
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JMP Group
LLC
(2)
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1,338,307
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9.8
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%
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600 Montgomery Street,
Suite 1100
San Francisco, CA 94111
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(1)
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Includes 132,480 shares of
common stock that can be acquired upon the exercise of
outstanding
5-year
warrants. Farallon Capital Management, L.L.C. may be deemed to
beneficially own shares of our common stock, including shares of
common stock issuable upon the exercise of outstanding
5-year
warrants, held of record by certain investment funds affiliated
with Farallon Capital Management, L.L.C.
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(2)
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Information as of October 9,
2006 includes 152,797 shares of common stock that can be
acquired upon the exercise of outstanding
5-year
warrants. JMP Group LLC may be deemed to beneficially own shares
of our common stock, including shares of common stock issuable
upon the exercise of outstanding
5-year
warrants, held of record by certain investment funds for which
its wholly-owned subsidiary, JMP Asset Management LLC, acts as
either general partner or investment adviser. JMP Group LLC and
JMP Asset Management LLC each disclaim beneficial ownership of
all shares held of record by the funds to the extent
attributable to partnership or equity interests therein held by
persons other than JMP Group LLC, JMP Asset Management LLC, or
their affiliates. Joseph A. Jolson serves as Chief Executive
Officer of JMP Group LLC.
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Shares of Common Stock
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Beneficially Owned
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Number
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Percentage
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Name and Address
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of Shares
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of Class
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Directors and Executive
Officers
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Manuel A.
Henriquez
(1)
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973,066
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7.1
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%
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H. Scott
Harvey
(2)
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96,729
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*
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David M.
Lund
(3)
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22,070
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*
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Shane A.
Stettenbenz
(4)
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48,964
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*
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Robert P. Badavas
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5,332
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*
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Joseph W.
Chow
(5)
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17,310
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*
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Allyn C. Woodward, Jr.
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16,151
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*
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All directors and executive
officers as a group (7
persons)
(6)
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1,179,622
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8.6
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%
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(1)
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Includes 75,075 shares of
common stock that can be acquired upon the exercise of
outstanding
5-year
warrants and 427,485 shares of common stock that can be
acquired upon the exercise of outstanding options. Includes
shares of our common stock and
5-year
warrants held by certain trusts controlled by Mr. Henriquez.
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(2)
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Includes 4,279 shares of
common stock that can be acquired upon the exercise of
outstanding
5-year
warrants and 83,317 shares of common stock that can be
acquired upon the exercise of outstanding options.
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(3)
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Includes 18,888 shares of
common stock that can be acquired upon the exercise of
outstanding options.
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(4)
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Includes 47,498 shares of
common stock that can be acquired upon the exercise of
outstanding options.
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(5)
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Includes 794 shares of common
stock that can be acquired upon the exercise of outstanding
5-year
warrants.
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(6)
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Includes 80,148 shares of
common stock that can be acquired upon the exercise of
outstanding
5-year
warrants and 577,188 shares of common stock that can be
acquired upon the exercise of outstanding options.
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The following table sets forth as of October 9, 2006, the
dollar range of our securities owned by our directors and
employees primarily responsible for the
day-to-day
management of our investment portfolio.
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Aggregate Dollar Range of Equity
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Securities in all Registered
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Investment Companies Overseen
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Dollar Range of Equity
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by Director in Family of
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Name
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Securities in the Company
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Investment Companies
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Independent
Directors:
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Robert P. Badavas
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$50,001-$100,000
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$50,001-$100,000
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Joseph W. Chow
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over $100,000
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over $100,000
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Allyn C. Woodward, Jr.
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over $100,000
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over $100,000
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Interested Director/Portfolio
Management Employee:
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Manuel A. Henriquez
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over $100,000
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over $100,000
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Portfolio Management
Employees:
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H. Scott Harvey
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over $100,000
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over $100,000
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David M. Lund
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$10,001-$50,000
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$10,001-$50,000
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Shane A. Stettenbenz
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$10,001-$50,000
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$10,001-$50,000
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In December 2003, we entered into an engagement letter with JMP
Securities LLC, the lead underwriter in our initial public
offering. The engagement letter expired on June 16, 2004.
Pursuant to the engagement letter, we offered to JMP Securities
LLC the opportunity to act as the initial purchaser and
placement agent in connection with our June 2004 private
offering. As compensation for the services rendered, we agreed
to pay to JMP Securities LLC an aggregate amount equal to 7% of
the gross proceeds of the private offering, subject to limited
exceptions in connection with sales of our securities to persons
affiliated with us. In addition, we agreed to reimburse JMP
Securities LLC, upon its request, for up to $150,000 of its
reasonable
out-of-pocket
expenses. In accordance with the foregoing, we paid $1,343,619
in placement fees to JMP Securities LLC in connection with our
June 2004 private placement. We have agreed to indemnify JMP
Securities LLC, its affiliates and other related parties against
certain liabilities, including liabilities under the Securities
Act, and to contribute to payments that such persons may be
required to make for these liabilities.
In February 2004, we issued and sold 400 shares of our
Series A-1
preferred stock to JMP Group LLC, the ultimate parent entity of
JMP Securities LLC, for an aggregate purchase price of
$2.5 million and, in connection with such sale, we paid a
$175,000 placement fee to JMP Securities LLC. In addition, we
issued and sold 100 shares of our
Series A-2
preferred stock to an entity related to Mr. Henriquez for
an aggregate purchase price of $125,000, and we issued and sold
100 shares of our
Series A-2
preferred stock to Mr. Howard for an aggregate purchase
price of $125,000. Our
Series A-1
preferred stock held a liquidation preference over our
Series A-2
preferred stock and also carried separate, preferential voting
rights. In June 2004, each share of
Series A-1
preferred stock and
Series A-2
preferred stock was exchanged for 208.3333 units with the
same terms as the units sold in our June 2004 private offering.
79
In connection with the issuance of our
Series A-1
preferred stock and
Series A-2
preferred stock, we entered into a registration rights agreement
with the holders of our
Series A-1
preferred stock and
Series A-2
preferred stock. In June 2004, in connection with the conversion
of the Series A preferred stock, the registration rights
agreement entered into in connection with the issuance of our
preferred stock was terminated and the shares of our common
stock issued upon conversion were included in the registration
rights agreement entered into in connection with our June 2004
private offer. See Description of Capital
Stock Registration Rights.
We have entered into a letter agreement with Farallon Capital
Management, L.L.C. that provides that until such time as
investment funds controlled by Farallon Capital Management,
L.L.C. beneficially own less than 10% of our outstanding common
stock, Farallon Capital Management, L.L.C. will have the right
to recommend one person to our nominating committee for
consideration as a nominee to our Board of Directors, provided
that such person would not be considered an interested
person of the Company under the 1940 Act. Under the terms
of the letter agreement, we have also agreed that prior to the
date that is two years after certain investment funds controlled
by Farallon Capital Management, L.L.C. cease to own at least 10%
of our outstanding common stock and without the written consent
of Farallon Capital Management, L.L.C., we will not
(i) take any action to alter or repeal the resolution
adopted by our board exempting from the Business Combination Act
any business combination between us and certain investment funds
managed by Farallon Capital Management, L.L.C. in a manner that
would make the Business Combination Act applicable to
acquisitions of our stock by such investment funds or
(ii) amend the applicable provision of our bylaws in a
manner that would make the Control Share Acquisition Act
applicable to an acquisition of the Companys common stock
by investment funds controlled by Farallon Capital Management,
L.L.C.
We have also entered into a letter agreement with JMP Asset
Management LLC that provides that prior to the date that is two
years after certain investment funds controlled by JMP Asset
Management LLC cease to own at least 10% of our outstanding
common stock and without the written consent of JMP Asset
Management LLC that we will not (i) take any action to
alter or repeal the resolution adopted by our board exempting
from the Business Combination Act any business combination
between us and certain investment funds managed by JMP Asset
Management LLC in a manner that would make the Business
Combination Act applicable to acquisitions of our stock by such
investment funds or (ii) amend the applicable provision of
our bylaws in a manner that would make the Control Share
Acquisition Act applicable to an acquisition of the
Companys common stock by investment funds controlled by
JMP Asset Management LLC.
In connection with our June 2004 private offering, we agreed to
obtain the approval of each of JMP Asset Management LLC and
Farallon Capital Management, L.L.C. for each investment made by
us. Though this arrangement was terminated in connection with
our election to be regulated as a business development company,
under the terms of the letter agreements described above, we
have agreed to indemnify, to the maximum extent permitted by
Maryland law and the 1940 Act, representatives of JMP Asset
Management LLC and Farallon Capital Management, L.L.C. in
connection with their activities in evaluating our investment
opportunities prior to our election to be regulated as a
business development company on terms similar to those afforded
to our directors and officers under our charter and bylaws.
In accordance with a letter agreement dated June 22, 2004
between us and JMP Group LLC, in January 2005 we issued and sold
72,000 units to funds managed by JMP Asset Management LLC
at a price equal to $30.00 per unit, less a $2.10 initial
purchasers discount per unit.
On April 12, 2005, we entered into our Bridge
Loan Credit Facility with Alcmene Funding, LLC, a special
purpose entity affiliated with Farallon Capital Management,
L.L.C., one of our significant stockholders. See
Managements Discussion and Analysis of Financial
Condition Borrowings. In connection with the
closing of the Bridge Loan Credit Facility, we paid a
$500,000 upfront fee and will be obligated to pay additional
fees under the terms of the facility. On August 1, 2005, we
amended our Bridge Loan Credit Facility. The amendment
agreement extended the term of the loan to April 12, 2006,
eliminated the loan extension fee, revised the interest rate
effective August 1, 2005 to LIBOR plus 5.6% through
December 31, 2005 and thereafter to 13.5% per annum,
and amended certain collateral rights and financial covenants.
The loan fees are being amortized over the remaining ten-month
period. On March 6, 2006, we entered into an amendment of
our Bridge Loan Facility pursuant to which we
80
repaid $10 million to Alcmene Funding LLC, extended the
maturity date to June 30, 2006 and decreased the interest
rate to 10.86%.
As of March 2, 2006, we entered into an agreement with
various affiliates of Farallon Capital Management, L.L.C. to
sell $5 million of common stock, priced at the net asset
value on February 28, 2006. On March 20, 2006, we
completed the sale of 432,900 shares of common stock to the
Farallon funds at a price per share of $11.55, which was the net
asset value per share at February 28, 2006.
On June 8, 2005, we entered into an Underwriting Agreement
with JMP Securities LLC pursuant to which JMP Securities LLC
purchased 4,200,000 shares of our common stock and served
as the lead underwriter in our initial public offer.
In August 2000, Mr. Henriquez acquired an interest in JMP
Group LLC, the ultimate parent entity of the lead underwriter in
our initial public offering. Mr. Henriquezs interest
represents approximately 0.1% of the fully-diluted equity of JMP
Group LLC.
CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material
United States federal income tax considerations applicable to us
and to an investment in our shares. This summary does not
purport to be a complete description of the income tax
considerations applicable to such an investment. For example, we
have not described tax consequences that we assume to be
generally known by investors or certain considerations that may
be relevant to certain types of holders subject to special
treatment under United States federal income tax laws, including
stockholders subject to the alternative minimum tax, tax-exempt
organizations, insurance companies, dealers in securities,
pension plans and trusts, and financial institutions. This
summary assumes that investors hold our common stock as capital
assets (within the meaning of the Code). The discussion is based
upon the Code, Treasury regulations, and administrative and
judicial interpretations, each as in effect as of the date of
this prospectus and all of which are subject to change, possibly
retroactively, which could affect the continuing validity of
this discussion. We have not sought and will not seek any ruling
from the Internal Revenue Service regarding this offer. This
summary does not discuss any aspects of United States estate or
gift tax or foreign, state or local tax. It does not discuss the
special treatment under United States federal income tax laws
that could result if we invested in tax-exempt securities or
certain other investment assets in which we do not currently
intend to invest.
A U.S. stockholder generally is a beneficial
owner of shares of our common stock who is for United States
federal income tax purposes:
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a citizen or individual resident of the United States including
an alien individual who is a lawful permanent resident of the
United States or meets the substantial presence test
under Section 7701(b) of the Code;
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a corporation or other entity taxable as a corporation, for
United States federal income tax purposes, created or organized
in or under the laws of the United States or any political
subdivision thereof;
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a trust over which a court in the United States has primary
supervision over its administration or over which United States
persons have control; or
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an estate, the income of which is subject to United States
federal income taxation regardless of its source.
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A
Non-U.S. stockholder
is a beneficial owner of shares of our common stock that is not
a U.S. stockholder.
If a partnership (including an entity treated as a partnership
for United States federal income tax purposes) holds shares of
our common stock, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner
and the activities of the partnership. A prospective stockholder
who is a partner of a partnership holding shares of our common
stock should consult his, her or its tax advisors with respect
to the purchase, ownership and disposition of shares of our
common stock.
Tax matters are very complicated and the tax consequences to an
investor of an investment in our shares will depend on the facts
of his, her or its particular situation. We encourage investors
to consult their own tax advisors regarding the specific
consequences of such an investment, including tax reporting
requirements, the applicability
81
of federal, state, local and foreign tax laws, eligibility for
the benefits of any applicable tax treaty and the effect of any
possible changes in the tax laws.
Our
Taxation as a Corporation under Subchapter C of the Code and not
as a
Regulated Investment Company
Until such time as we elect to be treated and qualify as a RIC
under Subchapter M of the Code, and for any other period in
which we fail to qualify as a RIC, we will be taxed as a
corporation under Subchapter C of the Code and will therefore be
subject to corporate-level federal income tax on all of our
income at regular corporate rates. We will not be able to deduct
distributions to stockholders, nor will they be required to be
made. Distributions made prior to such election, to the extent
of our current and accumulated earnings and profits, are taxable
to our stockholders and, provided certain holding period and
other requirements were met (if made in a taxable year beginning
on or before December 31, 2008), could qualify for
treatment as qualified dividend income eligible for
the 15% maximum rate applicable to U.S. stockholders taxed
as individuals. Subject to certain limitations under the Code,
corporate distributees would be eligible for the dividends
received deduction. Distributions in excess of our current and
accumulated earnings and profits would be treated first as a
return of capital to the extent of the stockholders tax
basis, and any remaining distributions would be treated as a
capital gain.
Election
to be Taxed as a Regulated Investment Company
In conjunction with the filing of our December 31, 2006 tax
return, we intend to elect to be treated as a RIC under
Subchapter M of the Code as of January 1, 2006. 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.
As a RIC, we generally will not have to pay corporate-level
federal income taxes on any ordinary income or realized capital
gains that we distribute to our stockholders as dividends. We
may be required, however, to pay federal income taxes on gains
built into our assets as of the effective date of our RIC
election. See Certain United States Federal Income Tax
Considerations Conversion to Regulated Investment
Company Status. To qualify as a RIC, we must, among other
things, meet certain
source-of-income
and asset diversification requirements (as described below), and
we must distribute all of our earnings and profits for periods
prior to our qualification as a RIC. In addition, in order to
obtain the federal income tax benefits allowable to RICs, we
must distribute to our stockholders, for each taxable year, at
least 90% of our investment company taxable income,
which is generally our net ordinary income plus the excess, if
any, of realized net short-term capital gains over realized net
long-term capital losses (the Annual Distribution
Requirement).
Conversion
to Regulated Investment Company Status
We intend to elect to be treated as a RIC under Subchapter M of
the Code as of January 1, 2006. Prior to the effective date
of our RIC election, we will be taxable as a regular corporation
under Subchapter C of the Code. We anticipate that, on the
effective date of that election, we may hold assets (including
intangible assets not reflected on the balance sheet, such as
goodwill) with built-in gain, which are assets whose
fair market value as of the effective date of the election
exceeds their tax basis. In general, a corporation that converts
to taxation as a RIC must pay corporate level tax on any of the
net built-in gains it recognizes during the
10-year
period beginning on the effective date of its election to be
treated as a RIC. Alternatively, the corporation may elect to
recognize all of its built-in gain at the time of its conversion
and pay tax on the built-in gain at that time. We may or may not
make this election. If we do make the election, we will mark our
portfolio to market at the time of our RIC election, pay tax on
any resulting taxable income, and distribute resulting earnings
at that time or before the end of the first tax year in which we
qualify as a RIC. If we do not make the election, we will pay
such corporate level tax as is payable at the time the
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built-in gains are recognized (which generally will be the years
in which the built-in gain assets are sold in a taxable
transaction). The amount of this tax will vary depending on the
assets that are actually sold by us in this
10-year
period, the actual amount of net built-in gain or loss present
in those assets as of the effective date of our election to be
treated as a RIC and effective tax rates. Recognized built-in
gains that are ordinary in character and the excess of
short-term capital gains over long-term capital losses will be
included in our investment company taxable income, and generally
we must distribute annually at least 90% of any such amounts
(net of corporate taxes we pay on those gains) in order to be
eligible for RIC tax treatment. Any such amount distributed
likely will be taxable to stockholders as ordinary income.
Built-in gains (net of taxes) that are recognized within the
10-year
period and that are long-term capital gains likely will also be
distributed (or deemed distributed) annually to our
stockholders. Any such amount distributed (or deemed
distributed) likely will be taxable to stockholders as capital
gains.
One requirement to qualify as a RIC is that, by the end of our
first taxable year as a RIC, we must eliminate the earnings and
profits accumulated while we were taxable as a C corporation. We
would accomplish this by paying to our stockholders a cash
dividend representing all of our accumulated earnings and
profits for the period from our inception through the end of the
prior tax year. The actual amount of that dividend will be based
on a number of factors, including our results of operations
through the end of the prior tax year. The dividend, if any, of
our accumulated earnings and profits will be taxable to
stockholders as ordinary income. The dividend will be in
addition to the dividends we intend to pay (or be deemed to have
distributed) during our 2006 tax year equal to our net income
for that period. The following table summarizes our dividends
declared and paid on all shares, to date:
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Amount
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Date Declared
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Record Date
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Payment Date
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per Share
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October 27, 2005
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November 1, 2005
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November 17, 2005
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$
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0.025
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December 9, 2005
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January 6, 2006
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January 27, 2006
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0.300
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April 3, 2006
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April 10, 2006
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May 5, 2006
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0.300
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July 19, 2006
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July 31, 2006
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August 28, 2006
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0.300
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$
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0.925
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Taxation
as a Regulated Investment Company
For any taxable year in which we:
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qualify as a RIC; and
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satisfy the Annual Distribution Requirement;
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we generally will not be subject to federal income tax on the
portion of our investment company taxable income and net capital
gain (
i.e.
, net realized long-term capital gains in
excess of net realized short-term capital losses) we distribute
to stockholders with respect to that year. (However, as
described above, we will be subject to federal income taxes on
certain dispositions of assets that had built-in gains as of the
effective date of our conversion to RIC status (unless we elect
to be taxed on such gains as of such date). In addition, if we
subsequently acquire built-in gain assets from a C corporation
in a carryover basis transaction, then we may be subject to tax
on the gains recognized by us on dispositions of such assets
unless we make a special election to pay corporate-level tax on
such built-in gain at the time the assets are acquired.) We will
be subject to United States federal income tax at the regular
corporate rates on any income or capital gain not distributed
(or deemed distributed) to our stockholders.
As a RIC, we will be subject to a 4% nondeductible federal
excise tax on certain undistributed income unless we distribute
in a timely manner an amount at least equal to the sum of
(1) 98% of our ordinary income for each calendar year,
(2) 98% of our capital gain net income for the
1-year
period ending October 31 in that calendar year and
(3) any income realized, but not distributed, in the
preceding year (the Excise Tax Avoidance
Requirement). We will not be subject to excise taxes on
amounts on which we are required to pay corporate income tax
(such as retained net capital gains). We currently intend to
make sufficient distributions each taxable year to satisfy the
Excise Tax Avoidance Requirement.
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In order to qualify as a RIC for federal income tax purposes and
obtain the tax benefits of RIC status, in addition to satisfying
the Annual Distribution Requirement, we must, among other things:
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have in effect at all times during each taxable year an election
to be regulated as a business development company under the 1940
Act;
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derive in each taxable year at least 90% of our gross income
from (a) dividends, interest, payments with respect to
certain securities loans, gains from the sale of stock or other
securities, or other income derived with respect to our business
of investing in such stock or securities and (b) net income
derived from an interest in a qualified publicly traded
limited partnership (the 90% Income
Test); and
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diversify our holdings so that at the end of each quarter of the
taxable year:
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at least 50% of the value of our assets consists of cash, cash
equivalents, U.S. government securities, securities of
other RICs, and other securities if such other securities of any
one issuer do not represent more than 5% of the value of our
assets or more than 10% of the outstanding voting securities of
such issuer; and
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no more than 25% of the value of our assets is invested in
(i) securities (other than U.S. government securities
or securities of other RICs) of one issuer, (ii) securities
of two or more issuers that are controlled, as determined under
applicable tax rules, by us and that are engaged in the same or
similar or related trades or businesses or (iii) securities
of one or more qualified publicly traded
partnerships (the Diversification Tests).
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We may be required to recognize taxable income in circumstances
in which we do not receive cash. For example, if we hold debt
obligations that are treated under applicable tax rules as
having original issue discount (such as debt instruments with
payment-in-kind
interest or, in certain cases, increasing interest rates or
issued with warrants), we must include in income each year a
portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing
such income is received by us in the same taxable year. Because
any original issue discount accrued will be included in our
investment company taxable income for the year of accrual, we
may be required to make a distribution to our stockholders in
order to satisfy the Annual Distribution Requirement, even
though we will not have received any corresponding cash amount.
Gain or loss realized by us from the sale or exchange of
warrants acquired by us as well as any loss attributable to the
lapse of such warrants generally will be treated as capital gain
or loss. Such gain or loss generally will be long-term or
short-term, depending on how long we held a particular warrant.
We are authorized to borrow funds and to sell assets in order to
satisfy the Annual Distribution Requirement and the Excise Tax
Avoidance Requirement (collectively, the Distribution
Requirements). However, under the 1940 Act, we are not
permitted to make distributions to our stockholders while our
debt obligations and other senior securities are outstanding
unless certain asset coverage tests are met. See
Regulation Senior Securities; Coverage
Ratio. Moreover, our ability to dispose of assets to meet
the Distribution Requirements may be limited by (1) the
illiquid nature of our portfolio, or (2) other requirements
relating to our status as a RIC, including the Diversification
Tests. If we dispose of assets in order to meet the Distribution
Requirements, we may make such dispositions at times that, from
an investment standpoint, are not advantageous.
Any transactions in options, futures contracts, hedging
transactions, and forward contracts will be subject to special
tax rules, the effect of which may be to accelerate income to
us, defer losses, cause adjustments to the holding periods of
our investments, convert long-term capital gains into short-term
capital gains, convert short-term capital losses into long-term
capital losses or have other tax consequences. These rules could
affect the amount, timing and character of distributions to
stockholders. We do not currently intend to engage in these
types of transactions.
A RIC is limited in its ability to deduct expenses in excess of
its investment company taxable income (which is,
generally, ordinary income plus net realized short-term capital
gains in excess of net realized long-term capital losses). If
our expenses in a given year exceed investment company taxable
income (e.g., as the result of large amounts of equity-based
compensation), we would experience a net operating loss for that
year. However, a RIC is not permitted to carry forward net
operating losses to subsequent years. In addition, expenses can
be used only to
84
offset investment company taxable income, not net capital gain.
Due to these limits on the deductibility of expenses, we may for
tax purposes have aggregate taxable income for several years
that we are required to distribute and that is taxable to our
stockholders even if such income is greater than the aggregate
net income we actually earned during those years. Such required
distributions may be made from our cash assets or by liquidation
of investments, if necessary. We may realize gains or losses
from such liquidations. In the event we realize net capital
gains from such transactions, you may receive a larger capital
gain distribution than you would have received in the absence of
such transactions.
Following the effective date of our election to be treated as a
RIC, assuming we qualify as a RIC, our corporate-level federal
income tax should be substantially reduced or eliminated and, as
explained above, a portion of our distributions or deemed
distributions may be characterized as long-term capital gain in
the hands of stockholders. See Election to be Taxed as a
Regulated Investment Company above.
Except as otherwise provided, the remainder of this discussion
assumes that we qualify as a RIC and have satisfied the Annual
Distribution Requirement.
Taxation
of U.S. Stockholders
For federal income tax purposes, distributions by us generally
are taxable to U.S. stockholders as ordinary income or
capital gains. Distributions of our investment company
taxable income (which is, generally, our ordinary income
plus net realized short-term capital gains in excess of net
realized long-term capital losses) will be taxable as ordinary
income to U.S. stockholders to the extent of our current or
accumulated earnings and profits, whether paid in cash or
reinvested in additional common stock. For taxable years
beginning on or before December 31, 2008, to the extent
such distributions paid by us are attributable to dividends from
U.S. corporations and certain qualified foreign
corporations, such distributions may be designated by us as
qualified dividend income eligible to be taxed in
the hands of non-corporate stockholders at the rates applicable
to long-term capital gains, provided holding period and other
requirements are met at both the stockholder and company levels.
In this regard, it is anticipated that distributions paid by us
generally will not be attributable to dividends and, therefore,
generally will not be qualified dividend income. Distributions
of our net capital gains (which is generally our realized net
long-term capital gains in excess of realized net short-term
capital losses) properly designated by us as capital gain
dividends will be taxable to a U.S. stockholder as
long-term capital gains (currently at a maximum rate of 15%) in
the case of individuals, trusts or estates, regardless of the
U.S. stockholders holding period for his, her or its
common stock and regardless of whether paid in cash or
reinvested in additional common stock. Distributions in excess
of our current and accumulated earnings and profits first will
reduce a U.S. stockholders adjusted tax basis in such
stockholders common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such
U.S. stockholder.
We currently intend to retain our realized net long-term capital
gains in excess of realized net short-term capital losses, but
to designate the retained net capital gain as a deemed
distribution. In that case, among other consequences, we
will pay tax on the retained amount, each U.S. stockholder
will be required to include his, her or its share of the deemed
distribution in income as if it had been actually distributed to
the U.S. stockholder, and the U.S. stockholder will be
entitled to claim a tax credit equal to his, her or its
allocable share of the tax paid thereon by us. The amount of the
deemed distribution net of such tax will be added to the
U.S. stockholders cost basis for his, her or its
common stock. Since we expect to pay tax on any retained net
capital gains at our regular corporate tax rate, and since that
rate is in excess of the maximum rate currently payable by
individuals on long-term capital gains, the amount of tax that
individual stockholders will be treated as having paid and for
which they will receive a credit will exceed the tax they owe on
the retained net capital gain. Such excess generally may be
claimed as a credit against the U.S. stockholders
other federal income tax obligations or may be refunded to the
extent it exceeds a stockholders liability for federal
income tax. A stockholder that is not subject to federal income
tax or otherwise required to file a federal income tax return
would be required to file a federal income tax return on the
appropriate form in order to claim a refund for the taxes we
paid. For federal income tax purposes, the tax basis of shares
owned by a stockholder will be increased by an amount equal
under current law to the difference between the amount of
undistributed capital gains included in the stockholders
gross income and the tax deemed paid by the stockholder as
described in this paragraph. In order to utilize the deemed
distribution approach, we must provide written notice to
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our stockholders prior to the expiration of 60 days after
the close of the relevant taxable year. We cannot treat any of
our investment company taxable income as a deemed
distribution. We may, in the future, make actual
distributions to our stockholders of some or all of realized net
long-term capital gains in excess of realized net short-term
capital losses.
For purposes of determining (1) whether the Annual
Distribution Requirement is satisfied for any year and
(2) the amount of capital gain dividends paid for that
year, we may, under certain circumstances, elect to treat a
dividend that is paid during the following taxable year as if it
had been paid during the taxable year in question. If we make
such an election, the U.S. stockholder will still be
treated as receiving the dividend in the taxable year in which
the distribution is made. However, any dividend declared by us
in October, November or December of any calendar year, payable
to stockholders of record on a specified date in such a month
and actually paid during January of the following year, will be
treated as if it had been received by our U.S. stockholders
on December 31 of the year in which the dividend was
declared.
If an investor purchases shares of our common stock shortly
before the record date of a distribution, the price of the
shares will include the value of the distribution and the
investor will be subject to tax on the distribution even though
economically it may represent a return of his, her or its
investment.
A stockholder generally will recognize taxable gain or loss if
the stockholder sells or otherwise disposes of his, her or its
shares of our common stock. Any gain arising from such sale or
disposition generally will be treated as long-term capital gain
or loss if the stockholder has held his, her or its shares for
more than one year. Otherwise, it will be classified as
short-term capital gain or loss. However, any capital loss
arising from the sale or disposition of shares of our common
stock held for six months or less will be treated as long-term
capital loss to the extent of the amount of capital gain
dividends received, or undistributed capital gain deemed
received, with respect to such shares. In addition, all or a
portion of any loss recognized upon a disposition of shares of
our common stock may be disallowed if other shares of our common
stock are purchased (whether through reinvestment of
distributions or otherwise) within 30 days before or after
the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
For taxable years beginning on or before December 31, 2008,
individual U.S. stockholders are subject to a maximum
federal income tax rate of 15% on their net capital gain
(
i.e.
, the excess of realized net long-term capital gain
over realized net short-term capital loss for a taxable year)
including any long-term capital gain derived from an investment
in our shares. Such rate is lower than the maximum rate on
ordinary income currently payable by individuals. Corporate
U.S. stockholders currently are subject to federal income
tax on net capital gain at the maximum 35% rate also applied to
ordinary income. Non-corporate stockholders with net capital
losses for a year (
i.e.
, capital losses in excess of
capital gains) generally may deduct up to $3,000 of such losses
against their ordinary income each year; any net capital losses
of a non-corporate stockholder in excess of $3,000 generally may
be carried forward and used in subsequent years as provided in
the Code. Corporate stockholders generally may not deduct any
net capital losses for a year, but may carry back such losses
for three years or carry forward such losses for five years.
We will send to each of our U.S. stockholders, as promptly
as possible after the end of each calendar year, a notice
detailing, on a per share and per distribution basis, the
amounts includible in such U.S. stockholders taxable
income for such year as ordinary income and as long-term capital
gain. In addition, the federal tax status of each years
distributions generally will be reported to the Internal Revenue
Service (including the amount of dividends, if any, eligible for
the 15% qualified dividend income rate).
Distributions may also be subject to additional state, local,
and foreign taxes depending on a U.S. stockholders
particular situation. Dividends distributed by us generally will
not be eligible for the corporate dividends-received deduction
or the preferential rate applicable to qualified dividend
income.
We may be required to withhold federal income tax (backup
withholding), currently at a rate of 28%, from all taxable
distributions to any non-corporate U.S. stockholder
(1) who fails to furnish us with a correct taxpayer
identification number or a certificate that such stockholder is
exempt from backup withholding, or (2) with respect to whom
the Internal Revenue Service (the IRS) notifies us
that such stockholder has failed to properly report certain
interest and dividend income to the IRS and to respond to
notices to that effect. An individuals taxpayer
identification number is his or her social security number. Any
amount withheld under backup withholding is
86
allowed as a credit against the U.S. stockholders
federal income tax liability, provided that proper information
is provided to the IRS.
Taxation
of
Non-U.S. Stockholders
Whether an investment in the shares is appropriate for a
Non-U.S. stockholder
will depend upon that persons particular circumstances. An
investment in the shares by a
Non-U.S. stockholder
may have adverse tax consequences.
Non-U.S. stockholders
should consult their tax advisors before investing in our common
stock.
In general, dividend distributions (other than certain
distributions derived from net long-term capital gains) paid by
us to a
Non-U.S. stockholder
are subject to withholding of U.S. federal income tax at a
rate of 30% (or lower applicable treaty rate) even if they are
funded by income or gains (such as portfolio interest,
short-term capital gains, or foreign-source dividend and
interest income) that, if paid to a
Non-U.S. stockholder
directly, would not be subject to withholding. If the
distributions are effectively connected with a U.S. trade
or business of the
Non-U.S. stockholder,
(and, if an income tax treaty applies, attributable to a
permanent establishment in the United States), we will not be
required to withhold federal tax if the
Non-U.S. stockholder
complies with applicable certification and disclosure
requirements, although the distributions will be subject to
federal income tax at the rates applicable to
U.S. stockholders. (Special certification requirements
apply to a
Non-U.S. stockholder
that is a foreign partnership or a foreign trust, and such
entities are urged to consult their own tax advisors.)
For taxable years beginning prior to January 1, 2008,
except as provided below, we generally will not be required to
withhold any amounts with respect to certain distributions of
(i) U.S.-source
interest income, and (ii) net short-term capital gains in
excess of net long-term capital losses, in each case to the
extent we properly designate such distributions. We may or may
not make any such designations. In respect of distributions
described in clause (i) above, we will be required to
withhold amounts with respect to distributions to a
Non-U.S. stockholder:
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that has not provided a satisfactory statement that the
beneficial owner is not a U.S. person;
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to the extent that the dividend is attributable to certain
interest on an obligation if the
Non-U.S. stockholder
is the issuer or is a 10% stockholder of the issuer;
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that is within certain foreign countries that have inadequate
information exchange with the United States; or
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to the extent the dividend is attributable to interest paid by a
person that is a related person of the
Non-U.S. stockholder
and the
Non-U.S. stockholder
is a controlled foreign corporation for United
States federal income tax purposes.
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The cash dividend(s) we intend to pay to our stockholders
representing all of our accumulated earnings and profits, if
any, for the period from our inception through the effective
date of our election to be treated as a RIC, generally will be
taxable to
Non-U.S. stockholders
in the same manner as other dividend distributions described
above.
Actual or deemed distributions of our net capital gains to a
Non-U.S. stockholder,
and gains realized by a
Non-U.S. stockholder
upon the sale of our common stock, will not be subject to
federal withholding tax and generally will not be subject to
federal income tax unless the distributions or gains, as the
case may be, are effectively connected with a U.S. trade or
business of the
Non-U.S. stockholder
(and, if an income tax treaty applies, are attributable to a
permanent establishment maintained by the
Non-U.S. stockholder
in the U.S.), or in the case of an individual stockholder, the
stockholder is present in the U.S. for a period or periods
aggregating 183 days or more during the year of the sale or
capital gain dividend and certain other conditions are met.
If we distribute our net capital gains in the form of deemed
rather than actual distributions, a
Non-U.S. stockholder
will be entitled to a federal income tax credit or tax refund
equal to the stockholders allocable share of the tax we
pay on the capital gains deemed to have been distributed. In
order to obtain the refund, the
Non-U.S. stockholder
must obtain a U.S. taxpayer identification number and file
a federal income tax return even if the
Non-U.S. stockholder
would not otherwise be required to obtain a U.S. taxpayer
identification number or file a federal income tax return. For a
corporate
Non-U.S. stockholder,
distributions (both actual and deemed), and gains realized upon
the sale of our common stock that are effectively connected to a
U.S. trade or business may, under
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certain circumstances, be subject to an additional branch
profits tax at a 30% rate (or at a lower rate if provided
for by an applicable treaty). Accordingly, investment in the
shares may not be appropriate for a
Non-U.S. stockholder.
A
Non-U.S. stockholder
who is a non-resident alien individual, and who is otherwise
subject to withholding of federal tax, may be subject to
information reporting and backup withholding of federal income
tax on dividends unless the
Non-U.S. stockholder
provides us or the dividend paying agent with an IRS
Form W-8BEN
(or an acceptable substitute or successor form) or otherwise
meets documentary evidence requirements for establishing that it
is a
Non-U.S. stockholder
or otherwise establishes an exemption from backup withholding.
Non-U.S. persons
should consult their own tax advisors with respect to the United
States federal income tax and withholding tax, and state, local
and foreign tax consequences of an investment in the shares.
Failure
to Qualify as a Regulated Investment Company
If we were unable to qualify for treatment as a RIC, we would be
subject to tax on all of our taxable income at regular corporate
rates. We would not be able to deduct distributions to
stockholders, nor would they be required to be made. Such
distributions (if made in a taxable year beginning on or before
December 31, 2008) would be taxable to our
stockholders and, provided certain holding period and other
requirements were met, could qualify for treatment as
qualified dividend income eligible for the 15%
maximum rate to the extent of our current and accumulated
earnings and profits. Subject to certain limitations under the
Code, corporate distributees would be eligible for the
dividends-received deduction. Distributions in excess of our
current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the
stockholders tax basis, and any remaining distributions
would be treated as a capital gain. To requalify as a RIC in a
subsequent taxable year, we would be required to satisfy the RIC
qualification requirements for that year and dispose of any
earnings and profits from any year in which we failed to qualify
as a RIC. Subject to a limited exception applicable to RICs that
qualified as such under Subchapter M of the Code for at least
one year prior to disqualification and that requalify as a RIC
no later than the second year following the nonqualifying year,
we could be subject to tax on any unrealized net built-in gains
in the assets held by us during the period in which we failed to
qualify as a RIC that are recognized within the subsequent
10 years, unless we made a special election to pay
corporate-level tax on such built-in gain at the time of our
requalification as a RIC.
REGULATION
The following discussion is a general summary of the material
prohibitions and descriptions governing business development
companies generally. It does not purport to be a complete
description of all of the laws and regulations affecting
business development companies.
We have elected to be treated as a business development company
under the 1940 Act and intend to elect to be treated as a RIC
under Subchapter M of the Code as of January 1, 2006. A
business development company is a unique kind of investment
company that primarily focuses on investing in or lending to
private companies and making managerial assistance available to
them. A business development company provides stockholders with
the ability to retain the liquidity of a publicly-traded stock,
while sharing in the possible benefits of investing in
emerging-growth or expansion-stage privately-owned companies.
The 1940 Act contains prohibitions and restrictions relating to
transactions between business development companies and their
directors and officers and principal underwriters and certain
other related persons and requires that a majority of the
directors be persons other than interested persons,
as that term is defined in the 1940 Act. In addition, the 1940
Act provides that we may not change the nature of our business
so as to cease to be, or to withdraw our election as, a business
development company unless approved by a majority of our
outstanding voting securities. A majority of the outstanding
voting securities of a company is defined under the 1940 Act as
the lesser of: (i) 67% or more of such companys
shares present at a meeting if more than 50% of the outstanding
shares of such company are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of such
company.
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Qualifying
Assets
Under the 1940 Act, a business development company may not
acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, or qualifying
assets, unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the companys
total assets. The principal categories of qualifying assets
relevant to our business are the following:
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Securities of an eligible portfolio company
purchased in transactions not involving any public offering. An
eligible portfolio company is defined in the 1940
Act as any issuer which:
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is organized under the laws of, and has its principal place of
business in, the United States;
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is not an investment company (other than a small business
investment company wholly-owned by the business development
company) or a company that would be an investment company but
for certain exclusions under the 1940 Act; and
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satisfies any of the following:
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does not have outstanding any class of securities with respect
to which a broker or dealer may extend margin credit;
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is controlled by a business development company or a group of
companies including a business development company and the
business development company has an affiliated person who is a
director of the eligible portfolio company; or
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is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than
$2 million.
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Securities of any eligible portfolio company that we control.
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Securities purchased in a private transaction from a
U.S. issuer that is not an investment company and is in
bankruptcy and subject to reorganization.
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Securities of an eligible portfolio company purchased from any
person in a private transaction if there is no ready market for
such securities and we already own 60% of the outstanding equity
of the eligible portfolio company.
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Securities received in exchange for or distributed on or with
respect to securities described above, or pursuant to the
conversion of warrants or rights relating to such securities.
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Cash, cash equivalents, U.S. government securities or
high-quality debt securities maturing in one year or less from
the time of investment.
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Significant
Managerial Assistance
A business development company must have been organized and have
its principal place of business in the United States and must be
operated for the purpose of making investments in the types of
securities described above. However, in order to count portfolio
securities as qualifying assets for the purpose of the 70% test,
the business development company must either control the issuer
of the securities or must offer to make available to the issuer
of the securities (other than small and solvent companies
described above) significant managerial assistance; except that,
where the business development company purchases such securities
in conjunction with one or more other persons acting together,
one of the other persons in the group may make available such
managerial assistance. Making available significant managerial
assistance means, among other things, any arrangement whereby
the business development company, through its directors,
officers or employees, offers to provide and, if accepted, does
so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a
portfolio company through monitoring of portfolio company
operations, selective participation in board and management
meetings, consulting with and advising a portfolio
companys officers or other organizational or financial
guidance.
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Temporary
Investments
Pending investment in other types of qualifying assets, as
described above, our investments may consist of cash, cash
equivalents, U.S. government securities or high quality
debt securities maturing in one year or less from the time of
investment, which we refer to, collectively, as temporary
investments, so that 70% of our assets are qualifying assets.
Typically, we will invest in U.S. treasury bills or in
repurchase agreements, provided that such agreements are fully
collateralized by cash or securities issued by the
U.S. government or its agencies. A repurchase agreement
involves the purchase by an investor, such as us, of a specified
security and the simultaneous agreement by the seller to
repurchase it at an agreed upon future date and at a price which
is greater than the purchase price by an amount that reflects an
agreed-upon interest rate. There is no percentage restriction on
the proportion of our assets that may be invested in such
repurchase agreements. However, if more than 25% of our total
assets constitute repurchase agreements from a single
counterparty, we would not meet the diversification tests
imposed on us by the Code in order to qualify as a RIC for
federal income tax purposes. Thus, we do not intend to enter
into repurchase agreements with a single counterparty in excess
of this limit. We will monitor the creditworthiness of the
counterparties with which we enter into repurchase agreement
transactions.
Warrants
Under the 1940 Act, a business development company is subject to
restrictions on the amount of warrants, options or rights to
purchase shares of capital stock that it may have outstanding at
any time. In particular, the amount of capital stock that would
result from the conversion or exercise of all outstanding
warrants, options or rights to purchase capital stock cannot
exceed 25% of the business development companys total
outstanding shares of capital stock. This amount is reduced to
20% of the business development companys total outstanding
shares of capital stock if the amount of warrants, options or
rights issued pursuant to an executive compensation plan would
exceed 15% of the business development companys total
outstanding shares of capital stock.
Senior
Securities; Coverage Ratio
We will be permitted, under specified conditions, to issue
multiple classes of indebtedness and one class of stock senior
to our common stock if our asset coverage, as defined in the
1940 Act, is at least equal to 200% immediately after each such
issuance. In addition, while any senior securities remain
outstanding, we must make provisions to prohibit any dividend
distribution to our stockholders or the repurchase of such
securities or shares unless we meet the applicable asset
coverage ratios at the time of the dividend distribution or
repurchase. We may also borrow amounts up to 5% of the value of
our total assets for temporary or emergency purposes. For a
discussion of the risks associated with the resulting leverage,
see Risk Factors Because we borrow money,
there would be increased risk in investing in our company.
Code of
Ethics
We have adopted and will maintain a code of ethics pursuant to
Rule 17j-1
under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities
transactions. Personnel subject to the code may invest in
securities for their personal investment accounts, including
securities that may be purchased or held by us, so long as such
investments are made in accordance with the codes
requirements. Our code of ethics will generally not permit
investments by our employees in securities that may be purchased
or held by us. We may be prohibited under the 1940 Act from
conducting certain transactions with our affiliates without the
prior approval of our directors who are not interested persons
and, in some cases, the prior approval of the SEC.
Our code of ethics was filed with the SEC as an exhibit to the
registration statement (Registration
No. 333-126604)
for our initial public offering. You may read and copy the code
of ethics at the SECs Public Reference Room in
Washington, D.C. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-202-942-8090. In addition, the code of ethics is available on
the EDGAR Database on the SECs Internet site at
http://www.sec.gov. You may obtain copies of the code of ethics,
after paying a duplicating fee, by electronic request at the
following email address: publicinfo@sec.gov, or by writing the
SECs Public Reference Section, Washington, D.C. 20549.
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Privacy
Principles
We are committed to maintaining the privacy of our stockholders
and safeguarding their non-public personal information. The
following information is provided to help you understand what
personal information we collect, how we protect that information
and why, in certain cases, we may share information with select
other parties.
Generally, we do not receive any non-public personal information
relating to our stockholders, although certain non-public
personal information of our stockholders may become available to
us. We do not disclose any non-public personal information about
our stockholders or former stockholders to anyone, except as
permitted by law or as is necessary in order to service
stockholder accounts (for example, to a transfer agent).
We restrict access to non-public personal information about our
stockholders to our employees with a legitimate business need
for the information. We maintain physical, electronic and
procedural safeguards designed to protect the non-public
personal information of our stockholders.
Proxy
Voting Policies and Procedures
We vote proxies relating to our portfolio securities in the best
interest of our stockholders. We review on a
case-by-case
basis each proposal submitted to a stockholder vote to determine
its impact on the portfolio securities held by us. Although we
generally vote against proposals that may have a negative impact
on our portfolio securities, we may vote for such a proposal if
there exists compelling long-term reasons to do so.
Our proxy voting decisions are made by our investment committee,
which is responsible for monitoring each of our investments. To
ensure that our vote is not the product of a conflict of
interest, we require that: (i) anyone involved in the
decision making process disclose to our Chief Compliance Officer
any potential conflict that he or she is aware of and any
contact that he or she has had with any interested party
regarding a proxy vote; and (ii) employees involved in the
decision making process or vote administration are prohibited
from revealing how we intend to vote on a proposal in order to
reduce any attempted influence from interested parties.
Exemptive
Relief
On June 21, 2005, we filed a request with the SEC for
exemptive relief to allow us to take certain actions that would
otherwise be prohibited by the 1940 Act, as applicable to
business development companies. Specifically, although we cannot
provide any assurance that we will receive any such exemptive
relief, we requested that the SEC permit us to issue stock
options to our non-employee directors as contemplated by
Section 61(a)(3)(B)(i)(II) of the 1940 Act. On
March 21, 2006, we filed an amendment to this request.
In addition, on September 28, 2005, we filed an exemptive
relief application requesting that the SEC permit us to exclude
the indebtedness that our wholly-owned subsidiary, Hercules
Technology II, L.P., which is qualified as a small business
investment company, issues to the Small Business Administration
from the 200% asset coverage requirement applicable to us. On
September 27, 2006 Hercules Technology II, L.P.
received final approval to be licensed as a small business
investment company. On July 7, 2006, we requested exemptive
relief from the SEC to permit us to grant restricted stock and
dividend equivalent rights on options to our officers, employees
and directors.
Other
We will be periodically examined by the SEC for compliance with
the 1934 Act and the 1940 Act.
We are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development
company, we are prohibited from protecting any director or
officer against any liability to our stockholders arising from
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such
persons office.
We are required to adopt and implement written policies and
procedures reasonably designed to prevent violation of the
federal securities laws, review these policies and procedures
annually for their adequacy and the
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effectiveness of their implementation. We have designated
Mr. Harvey, our Chief Legal Officer, to be our Chief
Compliance Officer to be responsible for administering these
policies and procedures.
Small
Business Administration Regulations
Hercules Technology II, L.P., our wholly-owned subsidiary,
is licensed by the Small Business Administration as a small
business investment company (SBIC) under Section 301(c) of
the Small Business Investment Act of 1958. The Small Business
Investment Company regulations currently limit the amount that
is available to borrow by any SBIC to $124.4 million. There
is no assurance that we will draw up to the maximum limit
available under the Small Business Investment Company program.
Small business investment companies are designed to stimulate
the flow of private equity capital to eligible small businesses.
Under present Small Business Administration 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 million for the two most recent fiscal years. In
addition, a small business investment company must
devote 20% of its investment activity to
smaller concerns as defined by the Small Business
Administration. A smaller concern is one that has a tangible net
worth not exceeding $6 million and has average annual fully
taxed net income not exceeding $2 million for the two most
recent fiscal years. Small Business Administration 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 Small Business
Administration regulations, small business investment companies
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 Hercules Technology II, L.P., we plan to provide
long-term loans to qualifying small businesses, and in
connection therewith, make equity investments.
Hercules Technology II, L.P. will be periodically examined
and audited by the Small Business Administrations staff to
determine its compliance with small business investment company
regulations.
In January 2005, we formed Hercules Technology II, L.P.
(HT II) and Hercules Technology SBIC
Management, LLC (HTM). On September 27, 2006, HT II
received final approval to be licensed as a Small Business
Investment Company (SBIC). HT II is able to borrow
funds from the SBA against eligible pre-approved investments and
additional deposits to regulatory capital.
DIVIDEND
REINVESTMENT PLAN
We have adopted a dividend reinvestment plan (the
DRP), through which all dividend distributions are
paid to our stockholders in the form of additional shares of our
common stock, unless a stockholder elects to receive cash as
provided below. In this way, a stockholder can maintain an
undiluted investment in our common stock and still allow us to
pay out the required distributable income.
No action is required on the part of a registered stockholder to
receive a dividend distribution in shares of our common stock. A
registered stockholder may elect to receive an entire dividend
distribution in cash by notifying American Stock
Transfer & Trust Company, the plan administrator and
our transfer agent and registrar, so that such notice is
received by the plan administrator no later than 3 days
prior to the payment date for dividend distributions to
stockholders. The plan administrator will set up an account for
shares acquired through the DRP for each stockholder who has not
elected to receive distributions in cash (each a
Participant) and hold such shares in
non-certificated form. Upon request by a Participant, received
not less than 3 days prior to the payment date, the plan
administrator will, instead of crediting shares to the
Participants account, issue a certificate registered in
the Participants name for the number of whole shares of
our common stock and a check for any fractional share.
Those stockholders whose shares are held by a broker or other
financial intermediary may receive distributions in cash by
notifying their broker or other financial intermediary of their
election.
We expect to use primarily newly-issued shares to implement the
DRP, whether our shares are trading at a premium or at a
discount to net asset value. The number of shares to be issued
to a stockholder is determined by dividing the total dollar
amount of the dividend distribution payable to such stockholder
by the market price per
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share of our common stock at the close of regular trading on the
Nasdaq Global Market on the valuation date for such dividend
distribution. Market price per share on that date will be the
closing price for such shares on the Nasdaq Global Market or, if
no sale is reported for such day, at the average of their
electronically-reported bid and asked prices. The number of
shares of our common stock to be outstanding after giving effect
to payment of the distribution cannot be established until the
value per share at which additional shares will be issued has
been determined and elections of our stockholders have been
tabulated.
There is no charge to our stockholders for receiving their
dividend distributions in the form of additional shares of our
common stock. The plan administrators fees for handling
dividend distributions in stock are paid by us. There are no
brokerage charges with respect to shares we have issued directly
as a result of dividend distributions payable in stock. If a
Participant elects by internet or by written or telephonic
notice to the plan administrator to have the plan administrator
sell part or all of the shares held by the plan administrator in
the Participants account and remit the proceeds to the
Participant, the plan administrator is authorized to deduct a
$15.00 transaction fee plus brokerage commissions from the
proceeds.
Any shares issued in connection with a stock split or stock
dividend will be added to a Participants account with the
Plan Administrator. The Plan Administrator may curtail or
suspend transaction processing until the completion of such
stock split or payment of such stock dividend.
Stockholders who receive dividend distributions in the form of
stock generally are subject to the same federal, state and local
tax consequences as are stockholders who elect to receive their
dividend distributions in cash. A stockholders basis for
determining gain or loss upon the sale of stock received in a
dividend distribution from us will be equal to the total dollar
amount of the dividend distribution payable to the stockholder.
The DRP may be terminated by us upon notice in writing mailed to
each Participant at least 30 days prior to any record date
for the payment of any dividend distribution by us. All
correspondence concerning the DRP, including requests for
additional information, should be directed to the plan
administrator by mail at American Stock Transfer &
Trust Company, Attn: Dividend Reinvestment Department, P.O.
Box 922, Wall Street Station, New York, NY
10269-0560
or by phone at 1-866-669-9888.
DESCRIPTION
OF CAPITAL STOCK
The following description is based on relevant portions of the
Maryland General Corporation Law and on our charter and bylaws.
This summary may not contain all of the information that is
important to you, and we refer you to the Maryland General
Corporation Law and our charter and bylaws for a more detailed
description of the provisions summarized below.
Under the terms of our charter, our authorized capital stock
consists of 30,000,000 shares of common stock, par value
$0.001 per share, of which 13,688,402 shares are
outstanding as of October 9, 2006. Under our charter, our
Board of Directors is authorized to classify and reclassify any
unissued shares of stock into other classes or series of stock,
and to cause the issuance of such shares, without obtaining
stockholder approval. In addition, as permitted by the Maryland
General Corporation Law, but subject to the 1940 Act, our
charter provides that the Board of Directors, without any action
by our stockholders, may amend the charter from time to time to
increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that we
have authority to issue. Under Maryland law, our stockholders
generally are not personally liable for our debts or obligations.
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Amount Held
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Amount
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by Company
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Amount
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Title of Class
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Authorized
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for its Account
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Outstanding
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Common Stock, $0.001 par
value per share
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30,000,000
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13,688,402
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Common
Stock
All shares of our common stock have equal rights as to earnings,
assets, dividends and voting privileges, except as described
below and, when they are issued, will be duly authorized,
validly issued, fully paid and nonassessable. Distributions may
be paid to the holders of our common stock if, as and when
authorized by our Board of Directors and declared by us out of
assets legally available therefor. Shares of our common stock
have no conversion,
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exchange, preemptive or redemption rights. In the event of a
liquidation, dissolution or winding up of Hercules Technology
Growth Capital each share of our common stock would be entitled
to share ratably in all of our assets that are legally available
for distribution after we pay all debts and other liabilities
and subject to any preferential rights of holders of our
preferred stock, if any preferred stock is outstanding at such
time. Each share of our common stock is entitled to one vote on
all matters submitted to a vote of stockholders, including the
election of directors. Except as provided with respect to any
other class or series of stock, the holders of our common stock
will possess exclusive voting power. There is no cumulative
voting in the election of directors, which means that holders of
a majority of the outstanding shares of common stock will elect
all of our directors, and holders of less than a majority of
such shares will be unable to elect any director.
Preferred
Stock
Our charter authorizes our Board of Directors to classify and
reclassify any unissued shares of stock into other classes or
series of stock, including preferred stock. Prior to issuance of
shares of each class or series, the Board of Directors is
required by Maryland law and by our charter to set the terms,
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the Board of
Directors could authorize the issuance of shares of preferred
stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a premium price for holders of our
common stock or otherwise be in their best interest. You should
note, however, that any issuance of preferred stock must comply
with the requirements of the 1940 Act. The 1940 Act requires,
among other things, that (1) immediately after issuance and
before any dividend or other distribution is made with respect
to our common stock and before any purchase of common stock is
made, such preferred stock together with all other senior
securities must not exceed an amount equal to 50% of our total
assets after deducting the amount of such dividend, distribution
or purchase price, as the case may be, and (2) the holders
of shares of preferred stock, if any are issued, must be
entitled as a class to elect two directors at all times and to
elect a majority of the directors if dividends on such preferred
stock are in arrears by two years or more. Certain matters under
the 1940 Act require the separate vote of the holders of any
issued and outstanding preferred stock. We believe that the
availability for issuance of preferred stock will provide us
with increased flexibility in structuring future financings and
acquisitions.
5-Year
Warrants
As of June 30, 2006, we had outstanding
5-year
warrants to purchase an aggregate of 673,223 shares of our
common stock. These warrants were issued as part of the units
that we sold in our prior private financings and were issued
either under our warrant agreement with American Stock
Transfer & Trust Company, as warrant agent, or pursuant
to the terms of our 2004 Equity Incentive Plan. Each
5-year
warrant is exercisable until June 17, 2009 and entitles the
holder thereof to purchase one share of our common stock. In
connection with our election to be regulated as a business
development company, the exercise price per share for all of our
5-year
warrants was reduced from $15.00 per share to
$10.57 per share, the net asset value per share of our
common stock on the date of determination, in accordance with
the terms of the warrant agreement or the applicable warrant
certificate. In addition, the warrant agreement, restricts the
transfer of warrants outstanding thereunder to transactions
involving the transfer of at least 4,000 shares (or
securities convertible into or exchangeable for shares) of our
common stock.
Registration
Rights
In connection with our June 2004 private offering of units (each
unit consisting of two shares of our common stock, a warrant to
purchase one share of our common stock exercisable for one year
and a warrant to purchase one share of our common stock
exercisable for five years, in each case subject to adjustment
as provided for in the warrant agreement), we entered into a
registration rights agreement with JMP Securities LLC, the
initial purchaser and placement agent in that offer, and the
lead underwriter in our initial public offering. The selling
holders elected to include 3,801,965 shares of our common
stock, 673,223 warrants and 673,223 shares of common stock
issuable upon exercise of the warrants in the shelf registration
statement. On July 14, 2005, we filed the shelf
registration statement and on September 7, 2005, the shelf
registration statement was declared effective. We were required
to
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keep this registration statement effective until June 2006, two
years after the issuance of the securities to which the
agreement applied.
Pursuant to the registration rights agreement we entered on
March 2, 2006, we agreed to register for resale the
432,900 shares of common stock purchased by Farallon
Capital Management, L.L.C. and its affiliated funds. On
May 2, 2006, we filed a shelf registration to register the
resale of the 432,900 shares of common stock and on
June 6, 2006, the shelf registration statement was declared
effective. The registration rights agreement also permits the
Farallon funds to include any shares of common stock they hold
in future underwritten public offerings of our equity
securities, subject to certain limitations.
Limitation
on Liability of Directors and Officers; Indemnification and
Advance of Expenses
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. Our charter contains such a provision which
eliminates directors and officers liability to the
maximum extent permitted by Maryland law, subject to the
requirements of the 1940 Act.
Our charter authorizes us, to the maximum extent permitted by
Maryland law and subject to the requirements of the 1940 Act, to
indemnify any present or former director or officer or any
individual who, while a director or officer and at our request,
serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan
or other enterprise as a director, officer, partner or trustee,
from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his
or her service in any such capacity, except with respect to any
matter as to which such person shall have been finally
adjudicated in any proceeding not to have acted in good faith in
the reasonable belief that their action was in our best interest
or to be liable to us or our stockholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such persons
office. Our charter also provides that, to the maximum extent
permitted by Maryland law, with the approval of our Board of
Directors and provided that certain conditions described in our
charter are met, we may pay certain expenses incurred by any
such indemnified person in advance of the final disposition of a
proceeding upon receipt of an undertaking by or on behalf of
such indemnified person to repay amounts we have so paid if it
is ultimately determined that indemnification of such expenses
is not authorized under our charter. Our bylaws obligate us, to
the maximum extent permitted by Maryland law and subject to the
requirements of the 1940 Act, to indemnify any present or former
director or officer or any individual who, while a director or
officer and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee and who is made, or
threatened to be made, a party to the proceeding by reason of
his or her service in any such capacity from and against any
claim or liability to which that person may become subject or
which that person may incur by reason of his or her service in
any such capacity, except with respect to any matter as to which
such person shall have been finally adjudicated in any
proceeding not to have acted in good faith in the reasonable
belief that their action was in our best interest or to be
liable to us or our stockholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such persons
office. Our bylaws also provide that, to the maximum extent
permitted by Maryland law, with the approval of our Board of
Directors and provided that certain conditions described in our
bylaws are met, we may pay certain expenses incurred by any such
indemnified person in advance of the final disposition of a
proceeding upon receipt of an undertaking by or on behalf of
such indemnified person to repay amounts we have so paid if it
is ultimately determined that indemnification of such expenses
is not authorized under our bylaws.
Maryland law requires a corporation (unless its charter provides
otherwise, which our charter does not) to indemnify a director
or officer who has been successful in the defense of any
proceeding to which he or she is made, or threatened to be made,
a party by reason of his or her service in that capacity.
Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made, or threatened to be made, a party by reason of
their service in those or other capacities unless it is
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established that (a) the act or omission of the director or
officer was material to the matter giving rise to the proceeding
and (1) was committed in bad faith or (2) was the
result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal
benefit in money, property or services or (c) in the case
of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the
basis that a personal benefit was improperly received, unless in
either case a court orders indemnification, and then only for
expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the
corporations receipt of (a) a written affirmation by
the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written
undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately
determined that the standard of conduct was not met.
In addition, we have agreed to indemnify, to the maximum extent
permitted by Maryland law and the 1940 Act, representatives of
JMP Asset Management LLC and Farallon Capital Management, L.L.C.
on terms similar to those afforded to our directors and officers
under our charter and bylaws in connection with their activities
in evaluating our investment opportunities prior to our election
to be regulated as a business development company.
We currently have in effect a directors and officers
insurance policy covering our directors and officers and us for
any acts and omissions committed, attempted or allegedly
committed by any director or officer during the policy period.
The policy is subject to customary exclusions.
Provisions
of the Maryland General Corporation Law and Our Charter and
Bylaws
The Maryland General Corporation Law and our charter and bylaws
contain provisions that could make it more difficult for a
potential acquiror to acquire us by means of a tender offer,
proxy contest or otherwise. These provisions are expected to
discourage certain coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire
control of us to negotiate first with our Board of Directors. We
believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging any such acquisition
proposals because, among other things, the negotiation of such
proposals may improve their terms.
Classified
Board of Directors
Our Board of Directors is divided into three classes of
directors serving staggered three-year terms. The terms of the
first, second and third classes will expire in 2006, 2007 and
2008, respectively. Beginning in 2005, upon expiration of their
current terms, directors of each class will be elected to serve
for three-year terms and until their successors are duly elected
and qualify and each year one class of directors will be elected
by the stockholders. A classified board may render a change in
control of us or removal of our incumbent management more
difficult. We believe, however, that the longer time required to
elect a majority of a classified Board of Directors will help to
ensure the continuity and stability of our management and
policies.
Election
of Directors
Our charter provides that, except as otherwise provided in the
bylaws, the affirmative vote of the holders of a majority of the
outstanding shares of stock entitled to vote in the election of
directors will be required to elect each director. Our bylaws
currently provide that directors are elected by a plurality of
the votes cast in the election of directors. Pursuant to our
charter and bylaws, our Board of Directors may amend the bylaws
to alter the vote required to elect directors.
Number of
Directors; Vacancies; Removal
Our charter provides that the number of directors will be set
only by the Board of Directors in accordance with our bylaws.
Our bylaws provide that a majority of our entire Board of
Directors may at any time increase or decrease the number of
directors. However, unless the bylaws are amended, the number of
directors may never be less than one nor more than 12. We have
elected to be subject to the provision of Subtitle 8 of
Title 3 of the Maryland General
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Corporation Law regarding the filling of vacancies on the Board
of Directors. Accordingly, at such time, except as may be
provided by the Board of Directors in setting the terms of any
class or series of preferred stock, any and all vacancies on the
Board of Directors may be filled only by the affirmative vote of
a majority of the remaining directors in office, even if the
remaining directors do not constitute a quorum, and any director
elected to fill a vacancy shall serve for the remainder of the
full term of the directorship in which the vacancy occurred and
until a successor is elected and qualifies, subject to any
applicable requirements of the 1940 Act.
Our charter provides that a director may be removed only for
cause, as defined in the charter, and then only by the
affirmative vote of at least two-thirds of the votes entitled to
be cast in the election of directors.
Action by
Stockholders
Under the Maryland General Corporation Law, stockholder action
may be taken only at an annual or special meeting of
stockholders or by unanimous consent in lieu of a meeting
(unless the charter provides for stockholder action by less than
unanimous written consent, which our charter does not). These
provisions, combined with the requirements of our bylaws
regarding the calling of a stockholder-requested special meeting
of stockholders discussed below, may have the effect of delaying
consideration of a stockholder proposal until the next annual
meeting.
Advance
Notice Provisions for Stockholder Nominations and Stockholder
Proposals
Our bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board
of Directors and the proposal of business to be considered by
stockholders may be made only (1) pursuant to our notice of
the meeting, (2) by the Board of Directors or (3) by a
stockholder who is entitled to vote at the meeting and who has
complied with the advance notice procedures of the bylaws. With
respect to special meetings of stockholders, only the business
specified in our notice of the meeting may be brought before the
meeting. Nominations of persons for election to the Board of
Directors at a special meeting may be made only
(1) pursuant to our notice of the meeting, (2) by the
Board of Directors or (3) provided that the Board of
Directors has determined that directors will be elected at the
meeting, by a stockholder who is entitled to vote at the meeting
and who has complied with the advance notice provisions of the
bylaws.
The purpose of requiring stockholders to give us advance notice
of nominations and other business is to afford our Board of
Directors a meaningful opportunity to consider the
qualifications of the proposed nominees and the advisability of
any other proposed business and, to the extent deemed necessary
or desirable by our Board of Directors, to inform stockholders
and make recommendations about such qualifications or business,
as well as to provide a more orderly procedure for conducting
meetings of stockholders. Although our bylaws do not give our
Board of Directors any power to disapprove stockholder
nominations for the election of directors or proposals
recommending certain action, they may have the effect of
precluding a contest for the election of directors or the
consideration of stockholder proposals if proper procedures are
not followed and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal without regard to
whether consideration of such nominees or proposals might be
harmful or beneficial to us and our stockholders.
Calling
of Special Meeting of Stockholders
Our bylaws provide that special meetings of stockholders may be
called by our Board of Directors and certain of our officers.
Additionally, our bylaws provide that, subject to the
satisfaction of certain procedural and informational
requirements by the stockholders requesting the meeting, a
special meeting of stockholders shall be called by our secretary
upon the written request of stockholders entitled to cast not
less than a majority of all of the votes entitled to be cast at
such meeting.
Approval
of Extraordinary Corporate Action; Amendment of Charter and
Bylaws
Under Maryland law, a Maryland corporation generally cannot
dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business,
unless approved by the affirmative vote of stockholders entitled
to cast at least two-thirds of the
97
votes entitled to be cast on the matter. However, a Maryland
corporation may provide in its charter for approval of these
matters by a lesser percentage, but not less than a majority of
all of the votes entitled to be cast on the matter. Our charter
generally provides for approval of charter amendments and
extraordinary transactions by the stockholders entitled to cast
at least a majority of the votes entitled to be cast on the
matter. Our charter also provides that certain charter
amendments and any proposal for our conversion, whether by
merger or otherwise, from a closed-end company to an open-end
company or any proposal for our liquidation or dissolution
requires the approval of the stockholders entitled to cast at
least 75% of the votes entitled to be cast on such matter.
However, if such amendment or proposal is approved by at least
75% of our continuing directors (in addition to approval by our
Board of Directors), such amendment or proposal may be approved
by the stockholders entitled to cast a majority of the votes
entitled to be cast on such a matter. The continuing
directors are defined in our charter as our current
directors, as well as those directors whose nomination for
election by the stockholders or whose election by the directors
to fill vacancies is approved by a majority of the continuing
directors then on the Board of Directors.
Our charter and bylaws provide that the Board of Directors will
have the exclusive power to make, alter, amend or repeal any
provision of our bylaws.
No
Appraisal Rights
Except with respect to appraisal rights arising in connection
with the Control Share Act discussed below, as permitted by the
Maryland General Corporation Law, our charter provides that
stockholders will not be entitled to exercise appraisal rights.
Control
Share Acquisitions
The Maryland Control Share Acquisition Act (the Control
Share Act) provides that control shares of a Maryland
corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter.
Shares owned by the acquiror, by officers or by directors who
are employees of the corporation are excluded from shares
entitled to vote on the matter. Control shares are voting shares
of stock which, if aggregated with all other shares of stock
owned by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within
one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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The requisite stockholder approval must be obtained each time an
acquiror crosses one of the thresholds of voting power set forth
above. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously
obtained stockholder approval. A control share acquisition means
the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition may compel the Board of Directors of the corporation
to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. If no request
for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then the corporation may repurchase
for fair value any or all of the control shares, except those
for which voting rights have previously been approved. The right
of the corporation to repurchase control shares is subject to
certain conditions and limitations. Fair value is determined,
without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by
the acquiror or of any meeting of stockholders at which the
voting rights of the shares are considered and not approved. If
voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority
98
of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the shares as
determined for purposes of appraisal rights may not be less than
the highest price per share paid by the acquiror in the control
share acquisition.
The Control Share Act does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation
is a party to the transaction or (b) to acquisitions
approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the Control Share
Act any and all acquisitions by any person of our shares of
stock. There can be no assurance that such provision will not be
otherwise amended or eliminated at any time in the future.
However, we will amend our bylaws to be subject to the Control
Share Act only if the Board of Directors determines that it
would be in our best interests and if the staff of the SEC does
not object to our determination that our being subject to the
Control Share Act does not conflict with the 1940 Act.
Business
Combinations
Under the Maryland Business Combination Act (the Business
Combination Act), business combinations
between a Maryland corporation and an interested stockholder or
an affiliate of an interested stockholder are prohibited for
five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange or,
in circumstances specified in the statute, an asset transfer or
issuance or reclassification of equity securities. An interested
stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power
of the corporations shares; or
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation.
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A person is not an interested stockholder under this statute if
the Board of Directors approved in advance the transaction by
which such stockholder otherwise would have become an interested
stockholder. However, in approving a transaction, the Board of
Directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and
conditions determined by the board.
After the
5-year
prohibition, any business combination between the Maryland
corporation and an interested stockholder generally must be
recommended by the Board of Directors of the corporation and
approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder.
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These super-majority vote requirements do not apply if the
corporations common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid
by the interested stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by the Board
of Directors before the time that the interested stockholder
becomes an interested stockholder. Our Board of Directors has
adopted a resolution exempting any business combination between
us and any other person from the provisions of the Business
Combination Act, provided that the business combination is first
approved by the Board of Directors, including a majority of the
directors who are not interested persons as defined in the 1940
Act. This resolution, however, may be altered or repealed in
whole or in part at any time. In addition, our Board of
Directors has adopted a resolution exempting any business
combination with certain investment funds managed by JMP Asset
Management LLC and certain investment funds managed by Farallon
Capital Management, L.L.C. from the provisions of the Business
Combination Act. We have agreed with such investment funds that
we will not repeal or amend such resolution prior to the date
that is two years after such investment funds cease to own at
least 10% of
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our outstanding common stock in a manner that would make the
Business Combination Act applicable to acquisitions of our stock
by such investment funds without the written consent of such
investment funds. If these resolutions are repealed, or the
Board of Directors does not otherwise approve a business
combination, the statute may discourage others from trying to
acquire control of us and increase the difficulty of
consummating any offer.
Conflict
with 1940 Act
Our bylaws provide that, if and to the extent that any provision
of the Maryland General Corporation Law, or any provision of our
charter or bylaws conflicts with any provision of the 1940 Act,
the applicable provision of the 1940 Act will control.
Regulatory
Restrictions
Our wholly-owned subsidiary, Hercules Technology II, L.P.,
has obtained a small business investment company license. The
Small Business Administration prohibits, without prior Small
Business Administration approval, a change of
control or transfers which would result in any person (or
group of persons acting in concert) owning 10% or more of any
class of capital stock of a small business investment company. A
change of control is any event which would result in
a transfer of the power, direct or indirect, to direct the
management and policies of a small business investment company,
whether through ownership, contractual arrangements or otherwise.
100
SELLING
SHAREHOLDERS
Below is information with respect to the number of shares of
common stock owned by each of the shareholders. The common stock
is being registered to permit public secondary trading of the
shares of common stock. Selling holders, which term includes
their transferees, pledgees or donees or their successors, may
offer the shares of common stock for resale from time to time.
The following table sets forth the name of each selling holder
and the following information as of October 9, 2006: the
amount of common stock owned by each selling holder; the amount
of common stock which may be offered for the account of such
selling holder under this prospectus; and the amount of common
stock to be owned by such security holder after completion of
the offering.
The information included in the table under
Shares Beneficially Owned and Ownership Percentage
After Offering assumes that each stockholder below will
elect to sell all of the shares set forth under
Shares Being Offered. The information regarding
the identity of the selling stockholders and their affiliations,
including their beneficial ownership of our shares of common
stock, is based solely on information provided by or on behalf
of the selling stockholders.
These assumptions have been made under the rules and regulations
of the SEC and do not reflect any knowledge that we have with
respect to the present intent of the persons listed as selling
stockholders.
The address for each stockholder listed below is c/o Hercules
Technology Growth Capital, Inc., 525 University Avenue,
Suite 700 Palo Alto, CA 94301.
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Shares Beneficially
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Shares
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Shares Beneficially
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Owned and
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that
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Owned and
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Ownership Percentage
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May
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Ownership Percentage
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Prior to the
Offering
(1)(3)
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Be
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After
Offering
(2)(3)
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Name
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Shares
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Percentage
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Offered
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Shares
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Percentage
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Robert P. Badavas
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5,332
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*
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1,250
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4,082
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*
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Allyn C. Woodward Jr.
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16,151
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*
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5,000
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11,151
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*
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Joseph W.
Chow
(4)
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17,310
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*
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5,000
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12,310
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*
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Entities affiliated with
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1,556,181
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11.4%
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432,900
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1,123,208
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8.2%
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Farallon Capital Management,
L.L.C.
(5)
c/o Farallon
Capital Management, L.L.C.
One Maritime Plaza,
Suite 1325
San Francisco, CA 94111
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*
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Less than 1%
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(1)
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Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. Except
as indicated in the footnotes to this table, each person named
in the table has sole voting and investment power with respect
to the shares set forth opposite that persons name.
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(2)
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Assumes the sale of all shares
eligible for sale in this prospectus and no other purchases or
sales of our common stock. This assumption has been made under
the rules and regulations of the SEC and does not reflect any
knowledge that we have with respect to the present intent of the
persons listed as selling stockholders.
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(3)
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Applicable percentage of ownership
is based on 13,688,402 shares of our common stock
outstanding on October 9, 2006.
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(4)
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Includes 794 shares of common
stock that can be acquired upon the exercise of outstanding
5-year
warrants.
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(5)
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Includes 132,480 shares of
common stock that can be acquired upon the exercise of
outstanding
5-year
warrants. Farallon Capital Management, L.L.C. may be deemed to
beneficially own shares of our common stock, including shares of
common stock issuable upon the exercise of outstanding
5-year
warrants, held of record by certain investment funds affiliated
with Farallon Capital Management, L.L.C.
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SHARES ELIGIBLE
FOR FUTURE SALE
Future sales of substantial amounts of our common stock or
warrants in the public market, or the perception that such sales
may occur, could adversely affect the market price of our common
stock or warrants and could impair our future ability to raise
capital through the sale of our equity securities.
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We have 13,688,402 shares of our common stock outstanding
of which 444,150 are restricted securities under the
meaning of Rule 144 promulgated under the Securities Act.
We have certain restricted securities comprised of
432,900 shares of common stock, registered under a shelf
registration statement.
In general, under Rule 144 as currently in effect, if one
year has elapsed since the date of acquisition of restricted
securities from us or any of our affiliates, the holder of such
restricted securities can sell such securities; provided that
the number of securities sold by such person within any
three-month period cannot exceed the greater of:
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1% of the total number of securities then outstanding, or
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the average weekly trading volume of our securities during the
four calendar weeks preceding the date on which notice of the
sale is filed with the SEC.
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Sales under Rule 144 also are subject to certain manner of
sale provisions, notice requirements and the availability of
current public information about us. If two years have elapsed
since the date of acquisition of restricted securities from us
or any of our affiliates and the holder is not one of our
affiliates at any time during the three months preceding the
proposed sale, such person can sell such securities in the
public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public
information requirements or notice requirements. No assurance
can be given as to (1) the likelihood that an active market
for our common stock will develop, (2) the liquidity of any
such market, (3) the ability of our stockholders to sell
our securities or (4) the prices that stockholders may
obtain for any of our securities. No prediction can be made as
to the effect, if any, that future sales of securities, or the
availability of securities for future sale, will have on the
market price prevailing from time to time. Sales of substantial
amounts of our securities, or the perception that such sales
could occur, may affect adversely prevailing market prices of
the common stock.
PLAN OF
DISTRIBUTION
We may offer, from time to time, up to 8,000,000 shares of
our common stock. Also, the selling holders named in this
prospectus may offer, from time to time, up to 444,150 shares of
our common stock. See Selling Shareholders. The
selling holders may sell the shares held for their own account
or the shares may be sold by donees, transferees, pledgees or
other successors in interest that receive such shares from the
selling holders as a gift or other non-sale related transfer. We
and the selling holders may sell the shares of our common stock
through underwriters, broker-dealers or agents or through a
combination of any such methods of sale. Shares of our common
stock may also be sold
at-the-market
to or through a market maker or into an existing trading market
for shares, on an exchange or otherwise. Any underwriter or
agent involved in the offer and sale of the shares of our common
stock will be named in the applicable prospectus supplement.
The distribution of the shares of our common stock may be
effected from time to time in one or more transactions at a
fixed price or prices, which may be changed, at prevailing
market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided,
however, that the offering price per share of our common stock,
less any underwriting commissions or discounts, must equal or
exceed the net asset value per share of our common stock at the
time of the offering. We also may, from time to time, authorize
dealers or agents to offer and sell these securities upon such
terms and conditions as may be set forth in the applicable
prospectus supplement.
In connection with the sale of the shares of our common stock,
underwriters or agents may receive compensation from us or the
selling holders or from purchasers of the shares of our common
stock, for whom they may act as agents, in the form of
discounts, concessions or commissions. Underwriters may sell
shares of our common stock to or through dealers and such
dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agents.
Underwriters, dealers and agents that participate in the
distribution of shares of our common stock may be deemed to be
underwriters under the Securities Act, and any discounts and
commissions they receive from us or the selling holders and any
profit realized by them on the resale of shares of our common
stock may be deemed to be underwriting discounts and commissions
under the Securities Act. Any such underwriter or agent will be
identified and any such compensation received from us or the
selling holders will be described in the applicable prospectus
supplement.
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Any common stock sold pursuant to a prospectus supplement will
be quoted on the Nasdaq Global Market, or another exchange on
which the common stock is traded.
Under agreements into which we or the selling holders may enter,
underwriters, dealers and agents who participate in the
distribution of shares of our common stock may be entitled to
indemnification by us or the selling holders against certain
liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions
with, or perform services for, us or the selling holders in the
ordinary course of business.
If so indicated in the applicable prospectus supplement, we or
the selling holder will authorize underwriters or other persons
acting as our agents to solicit offers by certain institutions
to purchase shares of our common stock from us or the selling
holders pursuant to contracts providing for payment and delivery
on a future date. Institutions with which such contracts may be
made include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must
be approved by us or the selling holders. The obligations of any
purchaser under any such contract will be subject to the
condition that the purchase of shares of our common stock shall
not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such
contracts. Such contracts will be subject only to those
conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for
solicitation of such contracts.
The maximum commission or discount to be received by any member
of the National Association of Securities Dealers, Inc. or
independent broker-dealer will not be greater than 10% for the
sale of any securities being registered and 0.5% for bona fide
due diligence.
In order to comply with the securities laws of certain states,
if applicable, shares of our common stock offered hereby will be
sold in such jurisdictions only through registered or licensed
brokers or dealers.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we rarely use brokers in the
normal course of business. In those cases in which we do use a
broker, we do not execute transactions through any particular
broker or dealer, but will seek to obtain the best net results
for us, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the
firm and the firms risk and skill in positioning blocks of
securities. While we generally seek reasonably competitive
execution costs, we may not necessarily pay the lowest spread or
commission available. Subject to applicable legal requirements,
we may select a broker based partly upon brokerage or research
services provided to us. In return for such services, we may pay
a higher commission than other brokers would charge if we
determine in good faith that such commission is reasonable in
relation to the services provided. For the years ended
December 31, 2005 and 2004 we paid $4,000 and $0 in
brokerage commissions, respectively. For the six months ended
June 30, 2006 we paid $11,001 in brokerage commissions.
CUSTODIAN,
TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Securities we hold in connection with our investments are held
under a custody agreement with Union Bank of California. The
address of the custodian is 475 Sansome Street, 15th Floor,
San Francisco, California 94111. We have also entered into
a custody agreement with U.S. Bank National Association,
which is located at One Federal Street, Third Floor, Boston,
Massachusetts 02110. The transfer agent and registrar for our
common stock, American Stock Transfer & Trust Company,
will act as our transfer agent, dividend paying and reinvestment
agent and registrar. The principal business address of the
transfer agent is 59 Maiden Lane, New York, New York 10038.
LEGAL
MATTERS
Certain legal matters regarding the securities offered by this
prospectus will be passed upon for us by Sutherland Asbill &
Brennan LLP, Washington, D.C. Certain legal matters will be
passed upon for underwriters, if any, by the counsel named in
the prospectus supplement.
103
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements at December 31, 2005 and December 31, 2004
and for the period February 2, 2004 (commencement of
operations) to December 31, 2004, and the year ended
December 31, 2005, as set forth in their report. We have
included our consolidated financial statements in this
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority as experts in accounting and auditing.
AVAILABLE
INFORMATION
We have filed with the SEC a registration statement on
Form N-2,
together with all amendments and related exhibits, under the
Securities Act, with respect to our shares of common stock
offered by this prospectus. The registration statement contains
additional information about us and our shares of common stock
being offered by this prospectus.
We file annual, quarterly and current periodic reports, proxy
statements and other information with the SEC under the Exchange
Act. You may inspect and copy these reports, proxy statements
and other information, as well as the registration statement of
which this prospectus forms a part and the related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F
Street, N.E., Washington, D.C.
20549-0102.
You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet website that contains reports,
proxy and information statements and other information filed
electronically by us with the SEC which are available on the
SECs Internet website at http://www.sec.gov. Copies of
these reports, proxy and information statements and other
information may be obtained, after paying a duplicating fee, by
electronic request at the following
E-mail
address: publicinfo@sec.gov, or by writing the SECs Public
Reference Section, Washington, D.C.
20549-0102.
104
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
AUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
|
|
|
F-11
|
|
|
|
|
F-12
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-25
|
|
|
|
|
F-26
|
|
|
|
|
F-32
|
|
|
|
|
F-36
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-39
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Hercules Technology Growth Capital, Inc.
We have audited the accompanying consolidated statements of
assets and liabilities of Hercules Technology Growth Capital,
Inc., including the consolidated schedules of investments, as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in net assets and cash flows
for the year ended December 31, 2005 and for the period
from February 2, 2004 (commencement of operations) to
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our procedures included correspondence with each
portfolio company. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Hercules Technology Growth
Capital, Inc. at December 31, 2005 and 2004, the
consolidated results of its operations, the changes in its net
assets and its cash flows for the year ended December 31,
2005 and for the period from February 2, 2004 (commencement
of operations) to December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
San Francisco, California
January 30, 2006,
except for Note 16, as to which the date is
March 6, 2006
F-2
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Investments, at value (cost of
$176,004,865 and $16,700,000, respectively)
|
|
$
|
176,673,226
|
|
|
$
|
16,700,000
|
|
Deferred loan origination revenue
|
|
|
(2,729,982
|
)
|
|
|
(285,232
|
)
|
Cash and cash equivalents
|
|
|
15,362,447
|
|
|
|
8,678,329
|
|
Interest receivable
|
|
|
1,479,375
|
|
|
|
80,902
|
|
Prepaid expenses
|
|
|
1,310,594
|
|
|
|
20,942
|
|
Deferred tax asset
|
|
|
1,454,000
|
|
|
|
|
|
Property and equipment, net
|
|
|
77,673
|
|
|
|
35,231
|
|
Other assets
|
|
|
20,546
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
193,647,879
|
|
|
|
25,232,672
|
|
|
LIABILITIES
|
Accounts payable
|
|
|
150,081
|
|
|
|
1,979
|
|
Income tax payable
|
|
|
1,709,000
|
|
|
|
|
|
Accrued liabilities
|
|
|
1,436,468
|
|
|
|
152,560
|
|
Short-term loans payable
|
|
|
76,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
79,295,549
|
|
|
|
154,539
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
114,352,330
|
|
|
$
|
25,078,133
|
|
|
|
|
|
|
|
|
|
|
Net assets consist
of:
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
9,802
|
|
|
$
|
2,059
|
|
Paid-in capital in excess of par
value
|
|
|
114,524,833
|
|
|
|
27,117,896
|
|
Distributable earnings
(accumulated deficit)
|
|
|
(182,305
|
)
|
|
|
(2,041,822
|
)
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
114,352,330
|
|
|
$
|
25,078,133
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock outstanding
($0.001 par value, 30,000,000 authorized)
|
|
|
9,801,965
|
|
|
|
2,059,270
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
$
|
11.67
|
|
|
$
|
12.18
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Acceleron Pharmaceuticals, Inc.
(3.50%)*
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
4,000,000
|
|
|
$
|
3,932,539
|
|
|
$
|
3,932,539
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
69,106
|
|
|
|
68,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acceleron Pharmaceuticals,
Inc.
|
|
|
4,001,645
|
|
|
|
4,000,593
|
|
Guava Technologies, Inc. (3.94%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.25%
|
|
$
|
4,500,000
|
|
|
|
4,397,111
|
|
|
|
4,397,111
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
105,399
|
|
|
|
103,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guava Technologies, Inc.
|
|
|
4,502,510
|
|
|
|
4,500,948
|
|
Labopharm USA, Inc.
(8.63%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
9,837,901
|
|
|
|
9,869,420
|
|
|
|
9,869,420
|
|
Labopharm USA, Inc. (1.20%)
|
|
|
|
Common Stock
|
|
|
|
|
|
|
112,335
|
|
|
|
1,367,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Labopharm USA, Inc.
|
|
|
9,981,755
|
|
|
|
11,236,688
|
|
Merrimack Pharmaceuticals, Inc.
(7.89%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures October 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.15%
|
|
$
|
9,000,000
|
|
|
|
8,878,668
|
|
|
|
8,878,668
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
155,456
|
|
|
|
140,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merrimack Pharmaceuticals,
Inc.
|
|
|
9,034,124
|
|
|
|
9,019,343
|
|
Omrix Biopharmaceuticals, Inc.
(4.16%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.45%
|
|
$
|
4,709,994
|
|
|
|
4,701,782
|
|
|
|
4,701,782
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
11,370
|
|
|
|
58,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Omrix Biopharmaceuticals,
Inc.
|
|
|
4,713,152
|
|
|
|
4,760,181
|
|
Paratek Pharmaceuticals, Inc.
(8.76%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.6%
|
|
$
|
10,000,000
|
|
|
|
9,889,320
|
|
|
|
9,889,320
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
137,396
|
|
|
|
141,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paratek Pharmaceuticals,
Inc.
|
|
|
10,026,716
|
|
|
|
10,031,201
|
|
|
|
|
|
|
|
|
|
|
Total Biopharmaceuticals
(38.08%)
|
|
|
42,259,902
|
|
|
|
43,548,954
|
|
|
|
|
|
|
|
|
|
|
Atrenta, Inc. (4.38%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.50%
|
|
$
|
5,000,000
|
|
|
|
4,869,095
|
|
|
|
4,869,095
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
102,396
|
|
|
|
102,886
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
33,760
|
|
|
|
33,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Atrenta, Inc
|
|
|
5,005,251
|
|
|
|
5,005,741
|
|
Concuity, Inc. (3.99%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
4,570,498
|
|
|
|
4,567,873
|
|
|
|
4,567,873
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Concuity, Inc.
|
|
|
4,571,373
|
|
|
|
4,567,873
|
|
Gomez, Inc.
(1.93%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.25%
|
|
$
|
2,197,436
|
|
|
|
2,175,075
|
|
|
|
2,175,075
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,000
|
|
|
|
32,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gomez, Inc.
|
|
|
2,210,075
|
|
|
|
2,207,542
|
|
Inxight Software, Inc.
(4.38%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures February 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.00%
|
|
$
|
5,000,000
|
|
|
|
4,956,279
|
|
|
|
4,956,279
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
55,963
|
|
|
|
46,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inxight Software, Inc.
|
|
|
5,012,242
|
|
|
|
5,003,014
|
|
F-4
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED
SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Metreo, Inc. (1.11%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.95%
|
|
$
|
500,000
|
|
|
|
4,525,714
|
|
|
|
1,266,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Metreo, Inc.
|
|
|
4,575,714
|
|
|
|
1,266,000
|
|
Proficiency, Inc. (3.51%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.00%
|
|
$
|
4,000,000
|
|
|
$
|
3,917,802
|
|
|
$
|
3,917,802
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
96,370
|
|
|
|
94,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proficiency, Inc.
|
|
|
4,014,172
|
|
|
|
4,011,907
|
|
Sportvision, Inc.
(3.08%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
3,518,716
|
|
|
|
3,488,119
|
|
|
|
3,488,119
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
39,339
|
|
|
|
38,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sportvision, Inc.
|
|
|
3,527,458
|
|
|
|
3,526,642
|
|
Talisma Corp.
(2.99%)
(4)
|
|
Software
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
3,410,120
|
|
|
|
3,378,814
|
|
|
|
3,378,814
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
49,000
|
|
|
|
43,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Talisma Corp.
|
|
|
3,427,814
|
|
|
|
3,422,242
|
|
|
|
|
|
|
|
|
|
|
Total Software
(25.37%)
|
|
|
32,344,099
|
|
|
|
29,010,961
|
|
|
|
|
|
|
|
|
|
|
Wageworks, Inc.
(17.12%)
(4)
|
|
Consumer & business
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.00%
|
|
$
|
18,583,966
|
|
|
|
18,379,995
|
|
|
|
18,379,995
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
251,964
|
|
|
|
1,197,735
|
|
Wageworks, Inc. (0.22%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
249,995
|
|
|
|
249,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wageworks, Inc.
|
|
|
18,881,954
|
|
|
|
19,827,725
|
|
|
|
|
|
|
|
|
|
|
Total Consumer &
Business Products (17.34%)
|
|
|
18,881,954
|
|
|
|
19,827,725
|
|
|
|
|
|
|
|
|
|
|
IKANO Communications, Inc.
(14.44%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.25%
|
|
$
|
16,454,540
|
|
|
|
16,402,789
|
|
|
|
16,402,789
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
45,460
|
|
|
|
43,710
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
72,344
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IKANO Communications,
Inc.
|
|
|
16,520,593
|
|
|
|
16,517,499
|
|
Interwise, Inc.
(2.46%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 17.50%
|
|
$
|
2,809,653
|
|
|
|
2,809,653
|
|
|
|
2,809,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interwise, Inc.
|
|
|
2,809,653
|
|
|
|
2,809,653
|
|
Occam Networks, Inc. (2.79%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
2,559,827
|
|
|
|
2,540,021
|
|
|
|
2,540,021
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
14,000
|
|
|
|
286,364
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
368,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Occam Networks, Inc.
|
|
|
2,571,021
|
|
|
|
3,195,320
|
|
Optovia Corporation (4.37%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
7.25%
|
|
$
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optovia Corporation
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Pathfire, Inc. (4.38%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.65%
|
|
$
|
5,000,000
|
|
|
|
4,938,482
|
|
|
|
4,938,482
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
63,276
|
|
|
|
64,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pathfire, Inc.
|
|
|
5,001,758
|
|
|
|
5,002,626
|
|
|
|
|
|
|
|
|
|
|
Total Communications &
Networking (28.44%)
|
|
|
31,903,025
|
|
|
|
32,525,098
|
|
|
|
|
|
|
|
|
|
|
F-5
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED
SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Adiana, Inc.
(1.76%)
(4)
|
|
Medical devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
6.00%
|
|
$
|
2,000,000
|
|
|
|
1,943,979
|
|
|
|
1,943,979
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
67,225
|
|
|
|
66,404
|
|
Adiana, Inc. (0.44%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adiana, Inc.
|
|
|
2,511,204
|
|
|
|
2,510,383
|
|
Optiscan Biomedical, Corp.
(1.54%)
(4)
|
|
Medical devices &
|
|
Senior Convertible Term Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 15.00%
|
|
$
|
1,753,164
|
|
|
$
|
1,683,063
|
|
|
$
|
1,683,063
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
80,486
|
|
|
|
81,185
|
|
Optiscan Biomedical, Corp. (0.87%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optiscan Biomedical,
Corp.
|
|
|
2,763,549
|
|
|
|
2,764,248
|
|
Power Medical Interventions, Inc.
(3.52%)
|
|
Medical devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.71%
|
|
$
|
4,000,000
|
|
|
|
3,969,515
|
|
|
|
3,969,515
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
39,195
|
|
|
|
56,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Power Medical Interventions,
Inc.
|
|
|
4,008,710
|
|
|
|
4,026,005
|
|
Xillix Technologies Corp. (4.83%)
|
|
Medical devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.40%
|
|
$
|
5,500,000
|
|
|
|
5,195,589
|
|
|
|
5,195,589
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
313,108
|
|
|
|
325,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Xillix Technologies
Corp.
|
|
|
5,508,697
|
|
|
|
5,521,190
|
|
|
|
|
|
|
|
|
|
|
Total Medical Devices &
Equipment (12.96%)
|
|
|
14,792,160
|
|
|
|
14,821,826
|
|
|
|
|
|
|
|
|
|
|
Affinity Express, Inc.
(1.54%)
(4)
|
|
Internet consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business services
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 13.50%
|
|
$
|
1,583,531
|
|
|
|
1,560,450
|
|
|
|
1,560,450
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
187,922
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
15,000
|
|
|
|
12,995
|
|
Affinity Express, Inc. (0.22%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affinity Express, Inc.
|
|
|
1,842,450
|
|
|
|
2,011,367
|
|
Invoke Solutions, Inc. (1.31%)
|
|
Internet consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business services
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
1,500,000
|
|
|
|
1,457,391
|
|
|
|
1,457,391
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
43,826
|
|
|
|
44,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Total Invoke Solutions,
Inc.
|
|
|
1,501,217
|
|
|
|
1,501,546
|
|
RazorGator Interactive
|
|
Internet consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Group, Inc.
(3.64%)
(4)
|
|
business services
|
|
Matures January 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
4,104,553
|
|
|
|
4,095,853
|
|
|
|
4,095,853
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
13,050
|
|
|
|
64,833
|
|
RazorGator Interactive Group, Inc.
(0.87%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RazorGator Interactive Group,
Inc.
|
|
|
|
|
|
|
|
|
|
|
5,108,903
|
|
|
|
5,160,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Internet
Consumer & Business Services (7.58%)
|
|
|
8,452,570
|
|
|
|
8,673,599
|
|
|
|
|
|
|
|
|
|
|
Cornice, Inc.
(11.24%)
(4)
|
|
Electronics &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
computer hardware
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.50%
|
|
$
|
5,000,000
|
|
|
|
4,915,455
|
|
|
|
4,915,455
|
|
|
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
$
|
7,834,131
|
|
|
|
7,663,375
|
|
|
|
7,663,375
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
101,597
|
|
|
|
99,336
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,353
|
|
|
|
34,230
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
135,403
|
|
|
|
132,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornice, Inc.
|
|
|
12,851,183
|
|
|
|
12,844,786
|
|
F-6
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED
SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Sling Media, Inc.
(4.29%)
(4)
|
|
Electronics &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
computer hardware
|
|
Matures January 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
4,000,000
|
|
|
|
3,965,029
|
|
|
|
3,965,029
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
38,968
|
|
|
|
945,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sling Media, Inc.
|
|
|
4,003,997
|
|
|
|
4,910,394
|
|
|
|
|
|
|
|
|
|
|
Total Electronics &
Computer Hardware (15.53%)
|
|
|
16,855,180
|
|
|
|
17,755,180
|
|
|
|
|
|
|
|
|
|
|
Ageia Technologies
(7.00%)
(4)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
8,000,000
|
|
|
$
|
7,914,586
|
|
|
$
|
7,914,586
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
99,190
|
|
|
|
93,518
|
|
Ageia Technologies (0.44%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ageia Technologies
|
|
|
8,513,776
|
|
|
|
8,508,104
|
|
Cradle Technologies (1.75%)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.70%
|
|
$
|
2,000,000
|
|
|
|
1,923,049
|
|
|
|
1,923,049
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
79,150
|
|
|
|
78,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cradle Technologies
|
|
|
2,002,199
|
|
|
|
2,001,779
|
|
|
|
|
|
|
|
|
|
|
Total Semiconductors
(9.20%)
|
|
|
10,515,975
|
|
|
|
10,509,883
|
|
|
|
|
|
|
|
|
|
|
Total Investments (154.50%)
|
|
$
|
176,004,865
|
|
|
$
|
176,673,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Value as a percent of net assets.
|
|
(1)
|
|
All debt investments are income
producing. Preferred and common stock and all warrants are
non-income producing.
|
|
(2)
|
|
Tax cost at December 31, 2005
equals book cost. Gross unrealized appreciation, gross
unrealized depreciation, and net appreciation totaled
$4,035,789, $3,367,428 and $668,361, respectively, at
December 31, 2005.
|
|
(3)
|
|
Except for common stock held in
Labopharm Biopharmaceuticals, all investments are restricted at
December 31, 2005 and were valued at fair value as
determined in good faith by the Board of Directors. No
unrestricted securities of the same issuer are outstanding. The
Company uses the Standard Industrial Code for classifying the
industry grouping of its portfolio companies.
|
|
|
|
(4)
|
|
Debt and warrant investments of
this portfolio company have been pledged as collateral under the
Citigroup facility (see Note 5). Citigroup has an equity
participation right on warrants collateralized under the
Citigroup facility. The value of their participation right on
unrealized gains in the related equity investments was
approximately $342,000 at December 31, 2005 and is included
in accrued liabilities and reduces the unrealized gain
recognized by the Company at December 31, 2005.
|
|
|
|
(5)
|
|
All investments are less than 5%
owned.
|
See notes to consolidated financial statements.
F-7
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS
DECEMBER 31,
2004
(The following investments are all United States enterprises)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
Affinity Express, Inc. (6.78%)*
|
|
Internet Consumer
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and business services
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 13.50%
|
|
$
|
1,700,000
|
|
|
$
|
1,683,000
|
|
|
$
|
1,683,000
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affinity Express, Inc.
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
Occam Networks, Inc. (11.96%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
networking
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
3,000,000
|
|
|
|
2,969,000
|
|
|
|
2,969,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
14,000
|
|
|
|
14,000
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Occam Networks, Inc.
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Gomez, Inc. (11.96%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.25%
|
|
$
|
3,000,000
|
|
|
|
2,965,000
|
|
|
|
2,965,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gomez, Inc.
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Metreo, Inc. (19.94%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.95%
|
|
$
|
5,000,000
|
|
|
|
4,950,000
|
|
|
|
4,950,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Metreo, Inc.
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Talisma Corp. (15.95%)
|
|
Software
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
4,000,000
|
|
|
|
3,951,000
|
|
|
|
3,951,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
49,000
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Talisma Corp.
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
Total investments (66.59%)
|
|
$
|
16,700,000
|
|
|
$
|
16,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Value as a percent of net assets.
|
|
(1)
|
|
All debt investments are income
producing. All warrants are non-incoming producing.
|
|
(2)
|
|
Tax cost at December 31, 2004
equals book cost. The Company has no gross unrealized
appreciation or depreciation at December 31, 2004.
|
|
(3)
|
|
All investments are restricted at
December 31, 2004, and were valued at fair value as
determined in good faith by the Board of Directors. No
unrestricted securities of the issuer are outstanding. The
Company uses the Standard Industrial Code for classifying the
industry grouping of its portfolio companies.
|
|
(4)
|
|
All investments are less than 5%
owned.
|
See notes to consolidated financial statements.
F-8
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
(Commencement of
|
|
|
|
Year Ended
|
|
|
Operations) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
9,791,214
|
|
|
$
|
214,100
|
|
Fees
|
|
|
875,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
10,666,643
|
|
|
|
214,100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,800,536
|
|
|
|
|
|
Loan fees
|
|
|
1,098,507
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,705,784
|
|
|
|
1,164,504
|
|
General and administrative
|
|
|
2,285,038
|
|
|
|
411,418
|
|
Stock-based compensation
|
|
|
252,000
|
|
|
|
680,000
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,141,865
|
|
|
|
2,255,922
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
before provision for income tax expense and investment gains and
losses
|
|
|
1,524,778
|
|
|
|
(2,041,822
|
)
|
Income tax expense
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
1,269,778
|
|
|
|
(2,041,822
|
)
|
Net realized gain on equity
investment
|
|
|
481,694
|
|
|
|
|
|
Net increase in unrealized
appreciation on investments
|
|
|
353,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on investments
|
|
|
834,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net assets resulting
from operations
|
|
$
|
2,104,565
|
|
|
$
|
(2,041,822
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
before provision for income tax expense and investment gains and
losses per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
(1.72
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
Change in net assets per common
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
|
$
|
(1.72
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding Basic
|
|
|
6,939,000
|
|
|
|
1,187,000
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
7,016,000
|
|
|
|
1,293,000
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-9
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Net Assets
|
|
|
Balance at February 2, 2004
(commencement of operations)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Increase in net assets from capital
share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible preferred
stock, net of placement fees
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
1
|
|
|
|
2,574,999
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
offering costs
|
|
|
1,809,270
|
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
23,863,146
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to
common stock
|
|
|
250,000
|
|
|
|
250
|
|
|
|
(600
|
)
|
|
|
(1
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from
capital share transactions
|
|
|
2,059,270
|
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
26,437,896
|
|
|
|
|
|
|
|
26,439,955
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
680,000
|
|
|
|
|
|
|
|
680,000
|
|
Net decrease in net assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,041,822
|
)
|
|
|
(2,041,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
2,059,270
|
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
27,117,896
|
|
|
|
(2,041,822
|
)
|
|
|
25,078,133
|
|
Increase in net assets from capital
share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
offering costs
|
|
|
268,134
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
3,870,542
|
|
|
|
|
|
|
|
|
|
Issuance of shares in lieu of
5 year warrants
|
|
|
298,598
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
Issuance of shares on exercise of
1 year warrants
|
|
|
1,175,963
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
12,428,744
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in IPO,
net of offering costs
|
|
|
6,000,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
70,855,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from
capital share transactions
|
|
|
7,742,695
|
|
|
|
7,743
|
|
|
|
|
|
|
|
|
|
|
|
87,154,937
|
|
|
|
|
|
|
|
87,162,680
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,000
|
|
|
|
|
|
|
|
252,000
|
|
Distribution to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245,048
|
)
|
|
|
(245,048
|
)
|
Increase in net assets from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,269,778
|
|
|
|
|
|
Net realized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481,694
|
|
|
|
|
|
Net unrealized depreciation on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,285,392
|
)
|
|
|
|
|
Net unrealized appreciation on
equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,118,208
|
|
|
|
|
|
Net unrealized appreciation on
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,520,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,104,565
|
|
|
|
2,104,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
9,801,965
|
|
|
$
|
9,802
|
|
|
|
|
|
|
$
|
|
|
|
$
|
114,524,833
|
|
|
$
|
(182,305
|
)
|
|
$
|
114,352,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-10
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
(Commencement of
|
|
|
|
Year Ended
|
|
|
Operations) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets resulting from operations
|
|
$
|
2,104,565
|
|
|
$
|
(2,041,822
|
)
|
Adjustments to reconcile net
increase (decrease) in net assets resulting from operations to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(177,834,136
|
)
|
|
|
(16,700,000
|
)
|
Principal payments received on
investments
|
|
|
18,822,828
|
|
|
|
|
|
Net unrealized appreciation on
investments
|
|
|
(353,093
|
)
|
|
|
|
|
Net unrealized appreciation on
investments due to lender
|
|
|
(342,297
|
)
|
|
|
|
|
Net realized gain on sale of
equity investment
|
|
|
(481,694
|
)
|
|
|
|
|
Accretion of loan discounts
|
|
|
(358,611
|
)
|
|
|
|
|
Accretion of loan exit fees
|
|
|
(350,944
|
)
|
|
|
|
|
Depreciation
|
|
|
23,605
|
|
|
|
7,533
|
|
Stock-based compensation
|
|
|
252,000
|
|
|
|
680,000
|
|
Amortization of deferred loan
origination revenue
|
|
|
(790,169
|
)
|
|
|
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(1,047,529
|
)
|
|
|
(80,902
|
)
|
Prepaid expenses and other current
assets
|
|
|
(1,289,652
|
)
|
|
|
(23,442
|
)
|
Deferred tax asset
|
|
|
(1,454,000
|
)
|
|
|
|
|
Accounts payable
|
|
|
148,102
|
|
|
|
(2,481
|
)
|
Income tax payable
|
|
|
1,709,000
|
|
|
|
|
|
Accrued liabilities
|
|
|
1,283,908
|
|
|
|
157,020
|
|
Deferred loan origination revenue
|
|
|
3,277,238
|
|
|
|
285,232
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(156,680,879
|
)
|
|
|
(17,718,862
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity
investment
|
|
|
531,458
|
|
|
|
|
|
Purchases of capital equipment
|
|
|
(66,047
|
)
|
|
|
(40,264
|
)
|
Other long-term assets
|
|
|
(18,046
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
447,365
|
|
|
|
(42,764
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
convertible preferred stock, net
|
|
|
|
|
|
|
2,575,000
|
|
Proceeds from issuance of common
stock, net
|
|
|
87,162,680
|
|
|
|
23,864,955
|
|
Dividends paid
|
|
|
(245,048
|
)
|
|
|
|
|
Proceeds from short-term loans
|
|
|
76,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
162,917,632
|
|
|
|
26,439,955
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
6,684,118
|
|
|
|
8,678,329
|
|
Cash and cash equivalents at
beginning of period
|
|
|
8,678,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
15,362,447
|
|
|
$
|
8,678,329
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,704,244
|
|
|
$
|
|
|
Income taxes paid
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-11
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business and Basis of Presentation
|
Hercules Technology Growth Capital, Inc. (the
Company) is a specialty finance company that
provides debt and equity growth capital to technology-related
and life-science companies at all stages of development. The
Company sources its investments through its principal office
located in Silicon Valley, as well as through its additional
offices in the Boston, Boulder and Chicago areas. The Company
was incorporated under the General Corporation Law of the State
of Maryland in December 2003. The Company commenced operations
on February 2, 2004, when it sold 600 shares of
convertible preferred stock to investors 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). In conjunction with the filing of its
December 31, 2006 tax return, the Company intends to seek
to be treated for federal income tax purposes as a registered
investment company (RIC). As of December 31,
2005, the Company cannot determine the probability that during
2006 it will qualify as a RIC when its 2006 tax return is filed.
If the Company qualifies as a RIC as of December 31, 2006,
the election will be effective as of January 1, 2006.
On June 11, 2005, the Company raised approximately
$70.9 million, net of issuance costs, from an initial
public offering (IPO) of 6,000,000 shares of
its common stock.
In January 2005, the Company formed Hercules Technology II,
L.P. (HT II) and Hercules Technology SBIC
Management, LLC (HTM). On September 27, 2006, HT II
became licensed as a Small Business Investment Company
(SBIC). HT II is able to borrow funds from the Small
Business Administration (the SBA) against eligible
pre-approved investments and additional contributions to
regulatory capital. During 2005, HT II funded two
preapproved loans of which one was fully repaid in October 2005.
At December 31, 2005, the Company has a net investment of
$2.5 million in HT II and there is one outstanding
loan in the amount of $2.0 million. 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.
In July 2005, the Company formed Hercules Funding I LLC and
Hercules Funding Trust I, an affiliated statutory trust,
and executed a $100 million securitized credit facility
with Citigroup Global Markets Realty Corp. (see Note 5).
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In accordance with Article 6 of
Regulation S-X
under the Securities Act of 1933 and the Securities and Exchange
Act of 1934, the Company does not consolidate portfolio company
investments. The financial statements for the period ended
December 31, 2004 include all activities from
February 2, 2004 to December 31, 2004. Certain prior
period amounts have been reclassified to conform with the
current year presentation.
|
|
2.
|
Significant
Accounting Policies
|
Use of
estimates
The accompanying consolidated financial statements are presented
in conformity with accounting principles generally accepted in
the United States. This requires management to make estimates
and assumptions that affect the amounts and disclosures reported
in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more
information becomes known, and actual results could differ from
those estimates.
F-12
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
of Investments
Value is defined in Section 2(a)(41) of the 1940 Act, as
(i) the market price for those securities for which a
market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good
faith by the Board of Directors. Because the Company invests
primarily in structured mezzanine debt investments
(Debt) and equity growth capital
(Equity) of privately-held technology-related and
life-science companies backed by leading venture capital and
private equity firms for which market prices are not available,
the Company values substantially all of its investments at fair
value, as determined in good faith by the Board of Directors in
accordance with established valuation policies and consistent
procedures and the recommendations of the Valuation Committee of
the Board of Directors. At December 31, 2005, approximately
87.4% of the Companys net assets are investments in
privately held companies which are valued at fair value and
approximately 12.6% are valued based on readily available market
quotations.
Estimating fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment.
The Board of Directors estimates fair value to be the amount for
which an investment could be exchanged in an orderly disposition
over a reasonable period of time between willing parties other
than in a forced or liquidation sale. Due to the inherent
uncertainty in the valuation process, the Boards estimate
of fair value may differ significantly from the values that
would have been used had a ready market for the securities
existed, and the differences could be material. In addition,
changes in the market environment and other events that may
occur over the life of the investments may cause the gains or
losses ultimately realized on these investments to be different
than the valuations currently assigned.
When originating a Debt instrument, the Company will receive
warrants or other equity-related securities from the borrower.
The Company determines the cost basis of the warrants or other
equity-related securities received based upon their respective
fair values on the date of receipt in proportion to the total
fair value of the Debt and warrants or other equity-related
securities received. 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 issuers earnings, sales to third parties of similar
securities, the comparison to publicly traded securities, and
other factors. Any resulting discount on the loan from
recordation of the warrant or other equity instruments is
accreted into interest income over the life of the loan.
At each reporting date, privately held Debt and Equity
securities are valued based on an analysis of various factors
including, but not limited to, the portfolio companys
operating performance and financial condition and general market
conditions that could impact the valuation. When an external
event occurs, such as a purchase transaction, public offering,
or subsequent equity sale, the pricing indicated by that
external event is utilized to corroborate the Companys
valuation of the Debt and Equity securities. 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 borrowers ability to
pay, or there are other factors that lead to a determination of
a lower valuation for the debt or equity security. Conversely,
an unrealized gain 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.
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.
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. Non-Control/Non-Affiliate Investments
are those that are neither Control Investments nor Affiliate
Investments. Generally, under the 1940 Act, the Company is
deemed to Control a company in which it has invested
if it owns 25% or more of the voting securities of such company
or has greater than 50% representation on its board. 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. At December 31, 2005 and
2004, all of the Companys investments were in
Non-Control/Non-Affiliate companies.
F-13
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Recognition
Interest on loans are computed using a method that results in a
level rate of return on principal amounts outstanding. Interest
income is recognized as earned in accordance with the
contractual terms of the loan agreement. Any difference between
the face amount of a loan and its cost basis is accreted into
income over the term of the loan. When a loan becomes
90 days or more past due, or if the Company otherwise does
not expect to receive interest and principal repayments, we will
place the loan on non-accrual status and cease recognizing
interest income. The Company placed one loan on non-accrual
status during the period ended December 31, 2005 and none
in 2004.
Loan origination and commitment fees received in full at the
inception of a loan are deferred and amortized into fee income
over the contractual life of the loan. Loan exit fees to be paid
at the termination of the loan are accreted into fee income over
the contractual life of the loan. Original issue discounts are
accreted into interest income over the life of the loan. These
fees and discounts are reflected as adjustments to the loan
yield. The Company had approximately $2.7 million and
$285,000 of unamortized fees at December 31, 2005 and 2004,
respectively, and approximately $351,000 and $0 in exit fees
receivable at December 31, 2005 and 2004. respectively.
In certain investment transactions, the Company may provide
advisory services. For services that are separately identifiable
and external evidence exists to substantiate fair value, income
is recognized as earned, which is generally when the investment
transaction closes. The Company had no income from advisory
services in 2005 or 2004.
Financing
costs
Debt financing costs are fees and other direct incremental costs
incurred in obtaining debt financing and are recognized as
prepaid expenses or accrued liabilities in the case of back end
fees, and are amortized into the consolidated statement of
operations as loan fees over the term of the related debt
instrument. At December 31, 2005, prepaid debt financing
costs of approximately $537,000, net of accumulated
amortization, and accrued debt financings costs of approximately
$387,000 are included in the consolidated statements of net
assets and liabilities.
Cash
Equivalents
The Company considers money market funds and other highly liquid
short-term investments with a maturity of less than 90 days
to be cash equivalents.
Depreciation
and Amortization
Equipment is depreciated on a straight-line basis over an
estimated useful life of five years. Software is amortized over
three years.
Distributions
to Shareholders
Dividends payable to shareholders are recorded on the
ex-dividend date.
Federal
Income Taxes
For the periods ended December 31, 2005 and 2004, the
Company is taxed under Subchapter C of the Internal Revenue Code
and therefore is subject to corporate-level federal and state
income tax.
The Company accounts for income taxes in accordance with the
provisions 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
bases 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.
F-14
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Organization
Expenses
Organization expenses, totaling $15,000, were expensed upon
commencement of operations.
Offering
Costs and Placement Fees
Offering costs and placement fees are charged to paid-in capital
when shares of the Company are issued. Offering costs and
placement fees totaled approximately $7.7 million and
$2.9 million for the periods ended December 31, 2005
and 2004, respectively.
Stock-Based
Compensation
The Company follows Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payment
(FAS 123R)
, to account for stock options
granted. 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 over the
vesting period. Determining the appropriate fair value model and
calculating the fair value of stock-based awards at the grant
date requires judgment, including estimating stock price
volatility, forfeiture rate and expected option life.
Earnings
per share
Basic earnings per share is computed by dividing net income
applicable to common stockholders by the weighted average number
of shares of common stock outstanding for the period. Diluted
earnings per share is computed by dividing such net income by
the sum of the weighted average number of shares outstanding for
the period, the dilutive effect of potential shares that could
occur upon exercise of warrants and common stock options.
Segments
The Company lends to and invests in customers in various sectors
of technology-related and life-sciences sectors. The Company
separately evaluates the performance of each of its lending and
investment relationships. However, because each of these loan
and investment relationships has similar business and economic
characteristics, they have been aggregated into a single lending
and investment segment. All segment disclosures are included in
or can be derived from the Companys consolidated financial
statements.
A summary of the composition of the Companys investment
portfolio as of December 31, 2005 and 2004 at fair value is
shown as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Senior debt with warrants
|
|
$
|
163.4
|
|
|
|
92.4
|
%
|
|
$
|
12.7
|
|
|
|
76.0
|
%
|
Subordinated debt
|
|
|
8.4
|
|
|
|
4.8
|
%
|
|
|
4.0
|
|
|
|
24.0
|
%
|
Preferred stock
|
|
|
3.5
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1.4
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
$
|
16.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A Summary of the Companys investment portfolio, at fair
value, by geographic location is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
United States
|
|
$
|
159.9
|
|
|
|
90.5
|
%
|
|
$
|
16.7
|
|
|
|
100.0
|
%
|
Canada
|
|
|
16.8
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
$
|
16.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the periods ended December 31, 2005 and 2004, the
Company purchased debt investments totaling approximately
$175.3 million and $16.7 million, respectively. During
the year ended December 31, 2005, the Company exercised an
equity participation right with one portfolio company and
converted $1,000,000 of debt to equity. In addition, during
2005, the Company purchased equity securities totaling
$2.5 million and exercised a warrant for common shares in
one public company. The common shares had a fair value of
approximately $1.4 million at December 31, 2005.
Security transactions are recorded on the trade-date basis.
On April 12, 2005, the Company entered into a bridge loan
credit facility (the Bridge Loan Credit
Facility or the Loan) with Alcmene Funding,
L.L.C. (Alcmene), a special purpose vehicle that is
an affiliate of Farallon Capital Management, L.L.C., a
shareholder of the Company. The Loan is a $25 million
senior secured term loan, which allows for up to an additional
$25 million of discretionary supplemental senior secured
loans. The Loan matures on April 12, 2006 and is secured by
a first lien on all of the Companys assets, except loans
pledged under the Securitization Agreement (See
Note 5) which are secured by a second lien. The Loan
may be prepaid at any time by the Company without penalty. The
Loan contains a mandatory pay-down provision requiring the
Company to turn over to Alcmene all principal payments received
by the Company from portfolio companies if at such time the
Company has less than $5 million in cash or cash
equivalents on hand. At December 31, 2005, there was
$25 million outstanding under the Loan. The average debt
outstanding under the Credit Facility in 2005 was approximately
$18.0 million and the average interest rate was
approximately 9.02% per annum.
The interest rate on borrowings under the Loan was set at
8% per annum for the initial six-month period. On
August 1, 2005, the Company amended the Loan with an
agreement extending the term of the Bridge Loan Credit
Facility to April 12, 2006. The amendment eliminated the
loan extension fee, revised the interest rate effective
August 1, 2005 to LIBOR plus 5.6% through December 31,
2005 and thereafter to 13.5% per annum, and amended certain
collateral rights and financial covenants. At December 31,
2005, the interest rate on the loan was 9.76% per annum.
The loan fees are being amortized over the remaining four-month
period. See Note 16.
|
|
5.
|
Securitization
Agreement
|
On August 1, 2005, the Company, through Hercules Funding
Trust I, an affiliated statutory trust, executed a
$100 million securitized credit facility (the
Citigroup Facility) with Citigroup Global Markets
Realty Corp. (Citigroup). The Companys ability
to make draws on the Citigroup Facility expires on July 31,
2006 unless extended prior to such date for an additional
364-day
period with the lenders consent. If the Citigroup Facility
is not extended, any principal amounts then outstanding will be
amortized over a six-month period through a termination date in
January 2007. The Citigroup Facility is collateralized by loans
from the Companys portfolio companies, and includes an
advance rate of approximately 55% of eligible loans. The
Citigroup Facility contains covenants that, among other things,
require the Company to maintain a minimum net worth and to
restrict the loans securing the Citigroup Facility to certain
dollar amounts, to concentrations in certain geographic regions
and industries, to certain loan grade classifications, to
certain security interests, and to certain interest payment
terms. In addition, the Citigroup Facility provides that
Citigroup shall have a participation right equal to 10% of any
realized gains, to a maximum of $3.0 million, on equity
instruments included in the loan collateral. At
December 31, 2005, the
F-16
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company had recorded an accrued liability for approximately
$59,000 for amounts owed to Citigroup on the sale of common
stock of one portfolio company. In addition, the Company has
recorded an accrued liability of approximately $342,000 related
to unrealized gains on equity investments currently included in
the collateral pool.
Interest on borrowings under the Citigroup Facility will be paid
monthly and will be charged at one-month LIBOR plus a spread of
1.65%. The Company also paid a loan origination fee equal to
0.25% of the Citigroup Facility and will be subject to an unused
commitment fee of 0.50% until the earlier of the Company
borrowing $50.0 million under the facility or
February 1, 2006, and 0.25% thereafter. At
December 31, 2005, the interest rate on the loan was 6.04%
per annum. See Note 16.
At December 31, 2005, the Company, through its special
purpose entity (SPE), had transferred pools of loans with a face
value of approximately $103.6 million to Citibank and had
drawn $51.0 million under the facility. Transfers of loans
have not met the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, for sales treatment
and are, therefore, treated as secured borrowings, with the
transferred loans remaining in investments and the related
liability recorded in borrowings. The average debt outstanding
under the Citigroup Facility in 2005 was approximately
$2.3 million and the average interest rate was
approximately 6.42% per annum.
The benefit from (provision for) taxes on earnings was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,365.0
|
|
|
$
|
|
|
Deferred
|
|
|
(1,266.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99.0
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
|
344.0
|
|
|
|
|
|
Deferred
|
|
|
(188.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156.0
|
|
|
|
|
|
Foreign withholding tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit from (provision for)
income taxes
|
|
$
|
255.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, the Company had deferred tax assets
of approximately $785,718 which were fully reserved with a tax
valuation allowance. During 2005, the prior years deferred
tax asset was fully utilized. Additionally during 2005, the
Company determined that it is more likely than not that certain
future tax benefits will be realized as a result of historic and
current income, and the prospects of future taxable income due
to uncertainties that exist regarding the Companys ability
to qualify as a RIC as of December 31, 2006.
F-17
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets are related to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
535.0
|
|
Capitalized assets
|
|
|
2.0
|
|
|
|
5.0
|
|
Expenses not currently deductible
|
|
|
1,452.0
|
|
|
|
246.0
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
1,454.0
|
|
|
|
786.0
|
|
Valuation allowance
|
|
|
|
|
|
|
(786.0
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,454.00
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate to the Companys effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Tax at federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State, net of federal benefit
|
|
|
5.7
|
|
|
|
5.8
|
|
Other Items
|
|
|
3.4
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(33.3
|
)
|
|
|
(40.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10.8
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company had no net operating
loss carryforwards.
The Company intends to seek to be treated as a RIC when it files
its December 31, 2006 tax return. If the Company meets the
required qualifications as a RIC, any income timely distributed
to its shareholders will not be subject to corporate level
federal taxes in those periods that the Company qualifies as a
RIC. As such, the deferred tax asset of approximately
$1.4 million may have to be charged against earnings as
there would be no federal tax expense to offset the deferred tax
asset. As of December 31, 2005, the impact of charging off
the deferred tax asset would be to reduce the Companys NAV
from $11.67 to $11.52.
The Company is authorized to issue 30,000,000 shares of
common stock with a par value of $0.001. Each share of common
stock entitles the holder to one vote.
On February 2, 2004, the Company sold 600 shares of
convertible preferred stock for gross proceeds of $2,750,000
($2,575,000 net of the placement fee of $175,000) to
officers of the Company and JMP Group LLC (JMPG), an
affiliate of the placement agent.
In June 2004, the Company sold in a private placement,
904,635 units for gross proceeds of $26,614,080
($23,864,955 net of placement fees and offering costs of
$2,749,125), and all the convertible preferred stock was
converted into 125,000 units on a
208.3333-for-1
basis. Each unit consisted of two shares of common stock, which
were accompanied by a warrant to purchase one share of common
stock within one year (the 1 Year Warrant), and
a warrant to purchase one share of common stock within five
years (the 5 Year Warrant). Each warrant had an
exercise price of $15.00 per share through January 13,
2005. As of December 31, 2004, there were no authorized
shares of preferred stock.
In conjunction with the Companys decision to elect to be
regulated as a BDC, approximately 55% of the 5 Year
Warrants were subject to mandatory cancellation under the terms
of the Warrant Agreement with the warrant holder
F-18
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receiving one share of common stock for every two warrants
cancelled and the exercise price of all warrants was adjusted to
the then current net asset value of the common stock, subject to
certain adjustments described in the Warrant Agreement. In
addition, the 1 Year Warrants became subject to expiration
immediately prior to the Companys election to become a
BDC, unless exercised. On January 14, 2005, the Company
notified all shareholders of its intent to elect to be regulated
as a BDC and reduced the exercise price of all remaining
1 and 5 Year Warrants from $15.00 to $10.57. On
February 22, 2005, the Company cancelled 47% of all
outstanding 5 Year Warrants and issued 298,598 shares
of common stock to holders of warrants upon exercise. In
addition, the majority of shareholders owning 1 Year
Warrants exercised them, and purchased 1,175,963 of common
shares at $10.57 per share, for total consideration to the
Company of $12,429,920. All unexercised 1 Year Warrants
were then cancelled.
On January 26, 2005, the CEO, the President, and four
employees purchased 40,000, 13,500, and 8,567 units for
$1,200,000, $405,000 and $257,010, respectively. On
January 26, 2005, JMPG also purchased 72,000 units for
$2,008,800, which number is net of a placement fee of $151,200,
which was paid to an affiliate of JMPG.
On June 9, 2005, the Company raised approximately
$70.9 million, net of offering costs, from an IPO of
6,000,000 shares of its common stock.
On September 7, 2005, the Company registered
3,801,905 shares of common stock and 673,223
5-year
warrants pursuant to its obligations under a registration rights
agreement between the Company and certain shareholders. Prior to
registration, the common stock and warrants were restricted
securities within the meaning of the Securities Act of 1933. The
Company did not receive any proceeds from the registration of
these securities.
A summary of activity in the 1 Year and 5 Year
Warrants initially attached to units issued for the periods
ended December, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
One-Year
|
|
|
Five-Year
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants outstanding at
February 2, 2004
|
|
|
|
|
|
|
|
|
Warrants issued in June 2004
|
|
|
1,029,635
|
|
|
|
1,029,635
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at
December 31, 2004
|
|
|
1,029,635
|
|
|
|
1,029,635
|
|
Warrants issued in January 2005
|
|
|
134,067
|
|
|
|
134,067
|
|
Warrants cancelled in February 2005
|
|
|
(83,334
|
)
|
|
|
(547,030
|
)
|
Warrants exercised in February 2005
|
|
|
(1,080,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December,
2005
|
|
|
|
|
|
|
616,672
|
|
|
|
|
|
|
|
|
|
|
Common stock is reserved is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Stock options and warrants
|
|
|
7,904,405
|
|
|
|
5,000,000
|
|
Warrants issued in June 2004
|
|
|
616,672
|
|
|
|
2,059,270
|
|
|
|
|
|
|
|
|
|
|
Common stock reserved at December,
2005
|
|
|
8,521,077
|
|
|
|
7,059,270
|
|
|
|
|
|
|
|
|
|
|
The Company has 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 as amended and approved by the
shareholders in 2005, the Company is authorized to issue
8,000,000 shares of common stock under the 2004 Plan.
Unless terminated earlier by the Companys Board of
Directors, the 2004 Plan will terminate on June 9, 2014,
and no additional awards may be made under the 2004 Plan after
that date.
F-19
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2004, each employee stock option to purchase two shares of
common stock was accompanied by a warrant to purchase one share
of common stock within one year and a warrant to purchase one
share of common stock within five years. Both options and
warrants had an exercise price of $15.00 per share on date
of grant. On January 14, 2005, the Company notified all
shareholders of its intent to elect to be regulated as a BDC and
reduced the exercise price of all remaining 1 and 5 Year
Warrants from $15.00 to $10.57 but did not reduce the strike
price of the options (see Note 7). The unexercised one-year
warrants expired and 55% of the five-year warrants were
cancelled immediately prior to the Companys election to
become a BDC.
A summary of the Companys common stock options and warrant
activity under the 2004 Plan for the periods ended
December 31, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
One-Year
|
|
|
Warrants
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Five-Year
|
|
|
Outstanding at February 2,
2004 (commencement of operations)
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted 2004
|
|
|
273,436
|
|
|
|
106,718
|
|
|
|
106,718
|
|
Exercised 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
273,436
|
|
|
|
106,718
|
|
|
|
106,718
|
|
Granted 2005
|
|
|
1,270,000
|
|
|
|
|
|
|
|
|
|
Exercised 2005
|
|
|
|
|
|
|
(95,595
|
)
|
|
|
|
|
Cancelled 2005
|
|
|
(206,000
|
)
|
|
|
(11,123
|
)
|
|
|
(50,167
|
)
|
Expired 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
1,337,436
|
|
|
|
|
|
|
|
56,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price at
December 31, 2005
|
|
$
|
13.32
|
|
|
|
|
|
|
$
|
10.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the options granted in 2004 are 100% vested on the date
of grant, except for options granted to directors to acquire
30,000 shares which were cancelled in 2005 and options to
acquire 16,000 shares granted to employees in December
2004. Options generally vest 25% one year after the date of
grant and ratably over the succeeding 24 months. All
options may be exercised for a period ending seven years after
the date of grant. At December 31, 2005 options for
202,827 shares were exercisable at a weighted average
exercise price of $15.00 per share with a weighted average
exercise term of 5.5 years. The outstanding five year
warrants have an expected life of five years.
The Company determined that the fair value of options and
warrants granted during the periods ended December 31, 2005
and 2004 was approximately $1,427,000 and $865,000. During the
periods ended December 31, 2005 and 2004, $252,000 and
$680,000 of share-based cost was expensed, respectively. The
total income tax benefit recognized in the income statement for
share-based compensation arrangements for 2005 was approximately
$325,000 and no tax benefit was recognized in 2004. The fair
value of options granted in 2005 and 2004 was based upon a
Black-Scholes option pricing model using the assumptions in the
following table:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Expected volatility
|
|
|
25
|
%
|
|
|
0
|
%
|
Expected dividends
|
|
|
8
|
%
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
4.5
|
|
|
|
5.0
|
|
Risk-free rate
|
|
|
3.88-4.06
|
%
|
|
|
3.9
|
%
|
F-20
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shares used in the computation of the Companys basic and
diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average common shares
outstanding
|
|
|
6,939,000
|
|
|
|
1,187,000
|
|
Dilutive effect of warrants
|
|
|
77,000
|
|
|
|
|
|
Dilutive effect of convertible
preferred stock
|
|
|
|
|
|
|
106,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, assuming dilution
|
|
|
7,016,000
|
|
|
|
1,293,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, assuming dilution,
includes the incremental effect of shares that would be issued
upon the assumed exercise of warrants. The Company has excluded
all outstanding stock options from the calculation of diluted
net income per share because these securities are antidilutive
for all periods presented. These excluded common share
equivalents could be dilutive in the future. Options for
approximately 1,337,000 and 273,000 shares of common stock
have been excluded for the periods ended December 31, 2005
and 2004, respectively.
|
|
10.
|
Related-Party
Transactions
|
In January 2005, the Chief Executive Officer (CEO),
the President, JMPG and four employees purchased 40,000, 13,500,
72,000 and 8,567 units for $1,200,000, $405,000, $2,008,800
and $257,010, respectively. On January 26, 2005, JMPG also
purchased 72,000 units for $2,008,800, which is net of an
underwriting discount of $151,200. Each unit consisted of two
shares of our common stock, a 1 Year Warrant and a
5 Year Warrant.
The Henriquez Family Trust (the Trust) and Glen C.
Howard, President of the Company (the President)
were each issued 100 shares of
Series A-2
convertible preferred stock
(Series A-2)
for a total of $250,000 in February 2004. The Trust is
affiliated with Manuel A. Henriquez, Chairman of the Board of
Directors and CEO.
JMPG, formerly known as Jolson Merchant Partners Group, LLC,
purchased 400 shares of
Series A-1
convertible preferred stock
(Series A-1)
in February 2004 for $2,500,000 and, in connection therewith,
the Company paid a placement fee of $175,000 to JMP Securities
LLC (JMP), the placement agent for such offering and
a wholly-owned subsidiary of JMPG. The CEO owns approximately
0.1% of the fully diluted equity of JMPG.
The
Series A-1
and
Series A-2 shares
described above were sold at a price of $6,250 and
$1,250 per share, respectively, to reflect the fact that
Series A-1 shares
have separate preferential voting rights, and a preference on
any distribution of assets over
Series A-2.
On June 8, 2005, the Company entered into an Underwriting
Agreement with JMP Securities LLC pursuant to which JMP
Securities LLC served as the lead underwriter in the
Companys initial public offering completed on June 9,
2006. The Company paid JMP Securities LLC a fee of approximately
$3.8 million in connection with their services as the lead
underwriter.
|
|
11.
|
Commitments
and Contingencies
|
In the normal course of business, the Company is party to
financial instruments with off-balance sheet risk. These
instruments consist primarily of unused commitments to extend
credit, in the form of loans, to the Companys investee
companies. The balance of unused commitments to extend credit at
December 31, 2005 totaled approximately $30.2 million.
Since these commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future
cash requirements.
Certain premises are leased under agreements which expire at
various dates through December 31, 2006. Total expense
amounted to approximately $221,000 and $102,000 during the
periods ended December 31, 2005 and 2004. Future minimum
rental commitments totaled $244,000 as of December 31,
2005, all of which are due in 2006.
F-21
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Concentrations
of Credit Risk
|
The Companys customers are primarily small and medium
sized companies in the biopharmaceutical, communications and
networking, consumer and business products, electronics and
computers, medical device, semiconductor and software industry
sectors. These sectors are characterized by high margins, high
growth rates, consolidation and product and market extension
opportunities. Value is often vested in intangible assets and
intellectual property.
The largest companies vary from year to year as new loans are
recorded and loans pay off. Loan revenue, consisting of
interest, fees, and recognition of gains on equity interests,
can fluctuate dramatically when a loan is paid off or a related
equity interest is sold. Revenue recognition in any given year
can be highly concentrated among several customers. At
December 31, 2005, the Companys ten largest customers
represented approximately 58.7% of the total fair value of its
investments. The Company had six investments that represent 5%
or more of the fair value of its investments at
December 31, 2005. At December 31, 2005, the Company
had seven equity investments which represented 100% of the total
fair value of its equity investments and each represents 5% or
more of the total fair value of such investments.
|
|
13.
|
Selected
Quarterly Data (Unaudited)
|
The following tables set forth certain quarterly financial
information for each of the eight quarters ended with the
quarter ended December 31, 2005. This information was
derived from our unaudited consolidated financial statements.
Results for any quarter are not necessarily indicative of the
results for the full year or for any future quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
3/31/05
|
|
|
6/30/05
|
|
|
9/30/05
|
|
|
12/31/05
|
|
|
Investment income
|
|
$
|
753,973
|
|
|
$
|
1,912,824
|
|
|
$
|
3,659,998
|
|
|
$
|
4,339,848
|
|
Net investment income (loss)
before provision for income tax expense
|
|
$
|
32,370
|
|
|
$
|
(333,597
|
)
|
|
$
|
884,834
|
|
|
$
|
941,171
|
|
Net income
|
|
$
|
32,370
|
|
|
$
|
709,795
|
|
|
$
|
1,561,924
|
|
|
$
|
(199,524
|
)
|
Net income per common share basic
|
|
$
|
0.01
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
3/31/2004
(1)(2)
|
|
|
6/30/04
|
|
|
9/30/04
|
|
|
12/31/04
|
|
|
Investment income
|
|
$
|
2,435
|
|
|
$
|
2,822
|
|
|
$
|
49,418
|
|
|
$
|
159,425
|
|
Net investment income (loss)
before provision for income tax expense
|
|
$
|
(166,915
|
)
|
|
$
|
(993,029
|
)
|
|
$
|
(335,823
|
)
|
|
$
|
(546,055
|
)
|
Net income (loss)
|
|
$
|
(166,915
|
)
|
|
$
|
(993,029
|
)
|
|
$
|
(335,823
|
)
|
|
$
|
(546,055
|
)
|
Net income per common share basic
|
|
$
|
|
|
|
$
|
(5.43
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
(1)
|
|
Operations commenced
February 2, 2004.
|
|
(2)
|
|
There were no common shares
outstanding in the first quarter of 2004.
|
F-22
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following is a schedule of financial highlights for the years
ended December 31, 2005, and for the period from
February 2, 2004 (commencement of operations) to
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
February 2, 2004
|
|
|
|
|
|
|
(Commencement of
|
|
|
|
Year Ended
|
|
|
Operations) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of
period
|
|
$
|
12.18
|
|
|
$
|
13.19
|
(1)
|
Net investment income (loss)
|
|
|
0.18
|
|
|
|
(0.99
|
)
|
Net realized gain on investments
|
|
|
0.07
|
|
|
|
|
|
Net unrealized appreciation
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.30
|
|
|
|
(0.99
|
)
|
Net decrease in net assets from
capital share transactions
|
|
|
(0.82
|
)
|
|
|
(0.35
|
)
(2)
|
Dividends paid
|
|
|
(0.03
|
)
|
|
|
|
|
Stock-based compensation expense
included in investment
loss
(3)
|
|
|
0.04
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
11.67
|
|
|
$
|
12.18
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data:
|
|
|
|
|
|
|
|
|
Per share market value at end of
period
(4)
|
|
$
|
11.99
|
|
|
$
|
|
|
Total return
|
|
|
(7.58
|
)%
(6)
|
|
|
N/A
|
|
Shares outstanding at end of period
|
|
|
9,801,965
|
|
|
|
2,059,270
|
|
Weighted average number of common
shares outstanding
|
|
|
6,939,000
|
|
|
|
1,187,000
|
|
Net assets at end of period
|
|
$
|
114,352,330
|
|
|
$
|
25,078,133
|
|
Ratio of operating expense to
average net assets
|
|
|
11.57
|
%
|
|
|
8.81
|
%
(7)
|
Ratio of net investment
income/(loss) before provision for income tax expense and
investment gains and losses to average net assets
|
|
|
1.93
|
%
|
|
|
7.95
|
%
(7)
|
Average debt outstanding
|
|
$
|
20,284,932
|
|
|
$
|
|
|
Weighted average debt per common
share outstanding
|
|
$
|
2.92
|
|
|
$
|
|
|
Portfolio turnover
|
|
|
0.60
|
%
|
|
|
0.00
|
%
|
|
|
|
(1)
|
|
On June 29, 2004, the Company
completed its sale of common stock in a private placement at
$15.00 per share ($13.19 per share net of offering
costs).
|
|
(2)
|
|
Immediately after the private
placement of common stock in June 2004, 600 convertible
preferred shares were converted into 125,000 units (see
Note 7).
|
|
(3)
|
|
Stock option expense is a non-cash
expense that has no effect on net asset value. Pursuant to
Financial Accounting Standards No. 123 (revised 2004), net
investment loss includes the expense associated with the
granting of stock options which is offset by a corresponding
increase in paid-in capital.
|
|
(4)
|
|
The Company completed the initial
public offering of its common stock in June 2005, therefore, no
market value data is presented as of December 31, 2004.
|
|
(5)
|
|
The total return for the period
ended December 31, 2005; is for a shareholder who owned
common shares throughout the period, and received one additional
common share for every two 5 Year Warrants cancelled.
Shareholders who purchased common shares on January 26,
2005, exercised 1 Year Warrants, or purchased common shares
in the initial public offering will have a different total
return. The Company completed its initial public offering on
June 11, 2005, prior to that date shares were issued in a
private placement.
|
F-23
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(6)
|
|
Total market value is the return to
an investor who participated in the June 2005 initial public
offering and purchased shares at $13.00 per share
($12.18 per share net of offering costs). As no common
shares were publicly traded during the period ended
December 31, 2004, market value total investment return is
not presented.
|
The Company and its executives are covered by Directors and
Officers Insurance, with the directors and officers being
indemnified by the Company to the maximum extent permitted by
Maryland law subject to the restrictions in the 1940 Act.
At December 31, 2005, the Company reduced the fair value of
an investment in one portfolio company by approximately
$3.3 million to the expected realizable fair value of
$1.3 million. In January 2006, the principle assets of the
portfolio company were sold, and the Company received a cash
distribution of approximately $1.3 million. Terms of the
asset sale agreement call for two additional contingent payments
of up to $500,000 from which we are entitled to received
approximately $350,000 each, but the condition of the agreement,
make receipt of payments uncertain and the Company will account
for any future receipts as loss recoveries at the time of
payment. On February 6, 2006, the Company received an
additional cash distribution of $239,000 which will be accounted
for as a loss recovery in the first quarter of 2006.
In December 2005, the Company declared a dividend of
$0.30 per share for shareholders of record on
January 6, 2006. The dividend payment totaling
approximately $2.9 million was distributed to shareholders
on January 27, 2006.
On January 19, 2006, the Company filed a registration
statement with the SEC to sell approximately 3.3 million
shares of its common stock to existing shareholders in a Rights
Offering. The final number of shares sold and the offering price
will not be determined until closing of the offering which the
Company anticipates will be completed in April 2006. Proceeds
from the offering, if completed, will be used to invest in
portfolio companies in accordance with the Companys
investment objective and strategy and to pay operating expenses.
On March 6, 2006, the Company entered into an agreement to
repay $10.0 million of the $25.0 million outstanding
under its Bridge Loan Credit Facility. The Company also
extended the maturity of the remaining $15.0 million from
April 12, 2006 to June 30, 2006 and decreased the
interest rate from 13.5% to 10.86% per annum.
On March 6, 2006, the Company amended the Citigroup
facility with an agreement that increased the borrowing capacity
under the facility to $125.0 million, increased the advance
rate to 60% of eligible loans and increased the eligible
capacity for loans by geographic region. The amendment allows
for an interest rate of LIBOR plus 2.5% on amounts borrowed in
excess of $100.0 million and an interest rate of LIBOR plus
5.0% for amounts borrowed in excess of 55% of eligible loans.
The Company agreed to pay a restructuring fee of $150,000 that
will be expensed ratably through maturity on July 31, 2006.
On March 2, 2006, various funds affiliated with Farallon
agreed to purchase $5.0 million of the Companys
common stock at a price per share equal to the NAV at
February 28, 2006.
F-24
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Investments, at value (cost of
$190,355,515 and $176,004,865, respectively)
|
|
$
|
193,571,348
|
|
|
$
|
176,673,226
|
|
Deferred loan origination revenue
|
|
|
(3,222,094
|
)
|
|
|
(2,729,982
|
)
|
Cash and cash equivalents
|
|
|
23,211,755
|
|
|
|
15,362,447
|
|
Interest receivable
|
|
|
2,089,839
|
|
|
|
1,479,375
|
|
Prepaid expenses
|
|
|
564,422
|
|
|
|
1,310,594
|
|
Deferred Tax Asset
|
|
|
|
|
|
|
1,454,000
|
|
Property and equipment, net
|
|
|
84,662
|
|
|
|
77,673
|
|
Other assets
|
|
|
939,176
|
|
|
|
20,546
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
217,239,108
|
|
|
|
193,647,879
|
|
|
LIABILITIES
|
Accounts payable
|
|
|
679,984
|
|
|
|
150,081
|
|
Income tax payable
|
|
|
|
|
|
|
1,709,000
|
|
Accrued liabilities
|
|
|
2,230,038
|
|
|
|
1,436,468
|
|
Short-term loan payable
|
|
|
61,000,000
|
|
|
|
76,000,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
63,910,022
|
|
|
|
79,295,549
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
153,329,086
|
|
|
$
|
114,352,330
|
|
|
|
|
|
|
|
|
|
|
Net assets consist
of:
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
13,647
|
|
|
$
|
9,802
|
|
Paid-in capital in excess of par
value
|
|
|
153,637,428
|
|
|
|
114,524,833
|
|
Distributable earnings
(accumulated deficit)
|
|
|
(321,989
|
)
|
|
|
(182,305
|
)
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
153,329,086
|
|
|
$
|
114,352,330
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock
outstanding ($0.001 par value, 30,000,000 authorized)
|
|
|
13,646,857
|
|
|
|
9,801,965
|
|
|
|
|
|
|
|
|
|
|
Net asset value per
share
|
|
$
|
11.24
|
|
|
$
|
11.67
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements (unaudited).
F-25
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
|
(Unaudited)
|
|
|
Acceleron Pharmaceuticals,
Inc.(2.62%)*
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
4,000,000
|
|
|
$
|
3,942,412
|
|
|
$
|
3,942,412
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
69,106
|
|
|
|
67,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acceleron Pharmaceuticals,
Inc.
|
|
|
4,011,518
|
|
|
|
4,010,247
|
|
Aveo Pharmaceuticals, Inc.
(4.89%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.50%
|
|
$
|
7,500,000
|
|
|
|
7,500,000
|
|
|
|
7,500,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Aveo Pharmaceuticals,
Inc.
|
|
|
7,500,000
|
|
|
|
7,500,000
|
|
Guava Technologies, Inc.
(2.95%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.25%
|
|
$
|
4,500,000
|
|
|
|
4,412,168
|
|
|
|
4,412,168
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
105,399
|
|
|
|
103,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guava Technologies, Inc.
|
|
|
4,517,567
|
|
|
|
4,515,669
|
|
Labopharm USA, Inc.
(5.50%)
(4)(6)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
8,369,594
|
|
|
|
8,428,130
|
|
|
|
8,428,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Labopharm USA, Inc.
|
|
|
8,428,130
|
|
|
|
8,428,130
|
|
Merrimack Pharmaceuticals,
Inc.(5.15%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures October 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.15%
|
|
$
|
7,559,592
|
|
|
|
7,461,010
|
|
|
|
7,461,010
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
155,456
|
|
|
|
438,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merrimack Pharmaceuticals,
Inc.
|
|
|
7,616,466
|
|
|
|
7,899,533
|
|
Omrix Biopharmaceuticals, Inc.
(0.17)%
|
|
Biopharmaceuticals
|
|
Common Stock Warrants
|
|
|
|
|
|
|
11,370
|
|
|
|
266,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Omrix Biopharmaceuticals,
Inc.
|
|
|
11,370
|
|
|
|
266,493
|
|
Paratek Pharmaceuticals, Inc.
(5.59%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.60%
|
|
$
|
8,518,130
|
|
|
|
8,430,349
|
|
|
|
8,430,349
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
137,396
|
|
|
|
138,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paratek Pharmaceuticals,
Inc.
|
|
|
8,567,745
|
|
|
|
8,569,316
|
|
Quatrx Pharmaceuticals Company
(3.93%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures January 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
$
|
6,000,000
|
|
|
|
5,807,190
|
|
|
|
5,807,190
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
220,354
|
|
|
|
220,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Quatrx Pharmaceuticals Company
|
|
|
6,027,544
|
|
|
|
6,027,893
|
|
Sirtris Pharmaceuticals, Inc.
(6.52%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures April 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.60%
|
|
$
|
10,000,000
|
|
|
$
|
9,915,612
|
|
|
$
|
9,915,612
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
88,829
|
|
|
|
86,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sirtris Pharmaceuticals,
Inc.
|
|
|
10,004,441
|
|
|
|
10,002,026
|
|
TransOral Pharmaceuticals, Inc.
(2.61%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures October 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.69%
|
|
$
|
4,000,000
|
|
|
|
3,966,152
|
|
|
|
3,966,152
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,630
|
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TransOral Pharmaceuticals,
Inc.
|
|
|
4,001,782
|
|
|
|
4,000,581
|
|
|
|
|
|
|
|
|
|
|
Total Biopharmaceuticals
(39.93%)
|
|
|
60,686,563
|
|
|
|
61,219,888
|
|
|
|
|
|
|
|
|
|
|
F-26
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
|
(Unaudited)
|
|
|
Atrenta, Inc.
(3.28%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.50%
|
|
$
|
5,000,000
|
|
|
|
4,900,603
|
|
|
|
4,900,603
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
102,396
|
|
|
|
102,633
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
33,760
|
|
|
|
33,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Atrenta, Inc.
|
|
|
5,036,759
|
|
|
|
5,036,913
|
|
Compete, Inc.
(2.61%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.50%
|
|
$
|
4,000,000
|
|
|
|
3,944,643
|
|
|
|
3,944,643
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
62,067
|
|
|
|
60,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compete, Inc.
|
|
|
4,006,710
|
|
|
|
4,004,848
|
|
Concuity, Inc. (2.40%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
3,678,540
|
|
|
|
3,676,498
|
|
|
|
3,676,498
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Concuity, Inc.
|
|
|
3,679,998
|
|
|
|
3,676,498
|
|
GameLogic, Inc. (1.96%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime+
4.125%
|
|
$
|
3,000,000
|
|
|
|
2,949,901
|
|
|
|
2,949,901
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
52,604
|
|
|
|
50,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GameLogic, Inc.
|
|
|
3,002,505
|
|
|
|
3,000,758
|
|
Gomez, Inc.
(1.13%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.25%
|
|
$
|
1,719,873
|
|
|
|
1,703,345
|
|
|
|
1,703,345
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,000
|
|
|
|
28,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gomez, Inc.
|
|
|
1,738,345
|
|
|
|
1,731,504
|
|
HighRoads, Inc. (1.54%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures February 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.65%
|
|
$
|
2,349,845
|
|
|
$
|
2,311,555
|
|
|
$
|
2,311,555
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
44,466
|
|
|
|
43,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HighRoads, Inc.
|
|
|
2,356,021
|
|
|
|
2,355,041
|
|
Inxight Software, Inc.
(3.07%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures February 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.00%
|
|
$
|
4,699,490
|
|
|
|
4,666,262
|
|
|
|
4,666,262
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
55,963
|
|
|
|
41,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inxight Software, Inc.
|
|
|
4,722,225
|
|
|
|
4,708,214
|
|
Oatsystems, Inc. (1.96%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
$
|
3,000,000
|
|
|
|
2,967,945
|
|
|
|
2,967,945
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
33,742
|
|
|
|
32,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oatsystems, Inc.
|
|
|
3,001,687
|
|
|
|
3,000,626
|
|
Proficiency, Inc.
(1.97%)
(6)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.00%
|
|
$
|
4,000,000
|
|
|
|
3,934,808
|
|
|
|
3,026,687
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
96,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proficiency, Inc.
|
|
|
4,031,178
|
|
|
|
3,026,687
|
|
Savvion, Inc.
(1.31%)
(4)
|
|
Software
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
2.00%
|
|
$
|
2,000,000
|
|
|
|
1,965,243
|
|
|
|
1,965,243
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
52,135
|
|
|
|
50,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Savvion, Inc.
|
|
|
2,017,378
|
|
|
|
2,016,173
|
|
F-27
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
|
(Unaudited)
|
|
|
Sportvision, Inc. (0.02%)
|
|
Software
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
39,339
|
|
|
|
37,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sportvision, Inc.
|
|
|
39,339
|
|
|
|
37,531
|
|
Talisma Corp.
(1.75%
(4)
)
|
|
Software
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
2,663,637
|
|
|
|
2,640,498
|
|
|
|
2,640,498
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
49,000
|
|
|
|
37,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Talisma Corp.
|
|
|
2,689,498
|
|
|
|
2,678,196
|
|
|
|
|
|
|
|
|
|
|
Total Software
(23.00%)
|
|
|
36,321,643
|
|
|
|
35,272,989
|
|
|
|
|
|
|
|
|
|
|
Market Force Information, Inc.
(1.31%)
(4)
|
|
Consumer & Business
Products
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures May 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.45%
|
|
$
|
2,000,000
|
|
|
|
1,978,685
|
|
|
|
1,978,685
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
23,823
|
|
|
|
23,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Market Force Information,
Inc.
|
|
|
2,002,508
|
|
|
|
2,002,140
|
|
Wageworks, Inc.
(11.34%)
(4)
|
|
Consumer & Business
Products
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.00%
|
|
$
|
16,365,835
|
|
|
$
|
16,197,859
|
|
|
$
|
16,197,859
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
251,964
|
|
|
|
1,191,671
|
|
Wageworks, Inc. (0.16%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
249,995
|
|
|
|
249,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wageworks, Inc.
|
|
|
16,699,818
|
|
|
|
17,639,525
|
|
|
|
|
|
|
|
|
|
|
Total Consumer &
Business Products (12.81%)
|
|
|
18,702,326
|
|
|
|
19,641,665
|
|
|
|
|
|
|
|
|
|
|
IKANO Communications, Inc. (0.07%)
|
|
Communications & Networking
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
45,460
|
|
|
|
42,452
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
72,344
|
|
|
|
69,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IKANO Communications,
Inc.
|
|
|
117,804
|
|
|
|
112,112
|
|
Interwise, Inc.
(1.61%)
(4)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 17.50%
|
|
$
|
2,467,438
|
|
|
|
2,467,438
|
|
|
|
2,467,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interwise, Inc.
|
|
|
2,467,438
|
|
|
|
2,467,438
|
|
Optovia Corporation
(3.26%)
(4)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
7.25%
|
|
$
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optovia Corporation
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Pathfire, Inc.
(3.27%)
(4)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.65%
|
|
$
|
5,000,000
|
|
|
|
4,949,028
|
|
|
|
4,949,028
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
63,276
|
|
|
|
63,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pathfire, Inc.
|
|
|
5,012,304
|
|
|
|
5,012,997
|
|
Ping Identity Corporation
(1.96%)
(4)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.50%
|
|
$
|
3,000,000
|
|
|
|
2,953,652
|
|
|
|
2,953,652
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
51,801
|
|
|
|
50,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ping Identity Corporation
|
|
|
3,005,453
|
|
|
|
3,003,748
|
|
Rivulet Communications, Inc. (2.29%)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
2.75%
|
|
$
|
3,500,000
|
|
|
|
3,451,959
|
|
|
|
3,451,959
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
50,710
|
|
|
|
49,026
|
|
Rivulet Communications, Inc. (0.16%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rivulet Communications,
Inc.
|
|
|
3,752,669
|
|
|
|
3,750,985
|
|
F-28
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
|
(Unaudited)
|
|
|
Simpler Networks Corp.
(3.68%)
(4)
|
|
Communications & Networking
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.75%
|
|
$
|
5,000,000
|
|
|
$
|
4,863,209
|
|
|
$
|
4,863,209
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
160,241
|
|
|
|
772,809
|
|
Simpler Networks Corp. (0.33%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Simpler Networks Corp.
|
|
|
5,523,450
|
|
|
|
6,136,018
|
|
|
|
|
|
|
|
|
|
|
Total Communications &
Networking (16.63%)
|
|
|
24,879,118
|
|
|
|
25,483,298
|
|
|
|
|
|
|
|
|
|
|
Adiana, Inc.
(1.09%)
(4)
|
|
Medical Devices & Equipment
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
6.00%
|
|
$
|
1,652,109
|
|
|
|
1,607,292
|
|
|
|
1,607,292
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
67,225
|
|
|
|
65,439
|
|
Adiana, Inc. (0.33%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adiana, Inc.
|
|
|
2,174,517
|
|
|
|
2,172,731
|
|
Gynesonics, Inc. (0.01%)
|
|
Medical Devices & Equipment
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures September 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
1.25%
|
|
|
|
|
|
|
1,254
|
|
|
|
1,254
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
17,552
|
|
|
|
17,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gynesonics, Inc.
|
|
|
18,806
|
|
|
|
18,322
|
|
Optiscan Biomedical, Corp.
(0.94%)
(4)
|
|
Medical Devices & Equipment
|
|
Senior Convertible Term Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 15.00%
|
|
$
|
1,423,169
|
|
|
|
1,368,646
|
|
|
|
1,368,646
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
80,486
|
|
|
|
80,230
|
|
Optiscan Biomedical, Corp. (0.65%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optiscan Biomedical,
Corp.
|
|
|
2,449,132
|
|
|
|
2,448,876
|
|
Power Medical Interventions, Inc.
(2.17%)
|
|
Medical Devices & Equipment
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.71%
|
|
$
|
3,282,949
|
|
|
|
3,258,997
|
|
|
|
3,258,997
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
39,195
|
|
|
|
55,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Power Medical Interventions,
Inc.
|
|
|
3,298,192
|
|
|
|
3,314,491
|
|
Xillix Technologies Corp.
(3.49%)
(4)(6)
|
|
Medical Devices & Equipment
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.40%
|
|
$
|
5,500,000
|
|
|
|
5,247,774
|
|
|
|
5,247,774
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
313,108
|
|
|
|
103,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Xillix Technologies
Corp.
|
|
|
5,560,882
|
|
|
|
5,351,652
|
|
|
|
|
|
|
|
|
|
|
Total Medical Devices &
Equipment (8.68%)
|
|
|
13,501,529
|
|
|
|
13,306,072
|
|
|
|
|
|
|
|
|
|
|
Affinity Express, Inc.
(1.01%)
(4)
|
|
Internet Consumer & Business
Services
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 13.50%
|
|
$
|
1,318,547
|
|
|
$
|
1,301,761
|
|
|
$
|
1,301,761
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
185,369
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
15,000
|
|
|
|
55,941
|
|
Affinity Express, Inc. (0.16%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affinity Express, Inc.
|
|
|
1,583,761
|
|
|
|
1,793,071
|
|
Hedgestreet, Inc. (1.31%)
|
|
Internet Consumer & Business
Services
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.25%
|
|
$
|
2,000,000
|
|
|
|
1,953,956
|
|
|
|
1,953,956
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
54,956
|
|
|
|
55,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hedgestreet, Inc.
|
|
|
2,008,912
|
|
|
|
2,009,001
|
|
F-29
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
|
Cost
(2)
|
|
|
Value
(3)
|
|
|
|
(Unaudited)
|
|
|
Invoke Solutions, Inc.
(1.96%)
(4)
|
|
Internet Consumer & Business
Services
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
3,000,000
|
|
|
|
2,964,696
|
|
|
|
2,964,696
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
43,826
|
|
|
|
44,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Invoke Solutions, Inc.
|
|
|
3,008,522
|
|
|
|
3,008,738
|
|
RazorGator Interactive Group, Inc.
(2.63%)
(4)
|
|
Internet Consumer & Business
Services
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures January 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
3,446,622
|
|
|
|
3,440,097
|
|
|
|
3,440,097
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
13,050
|
|
|
|
588,025
|
|
RazorGator Interactive Group, Inc.
(1.11%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,708,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RazorGator Interactive Group,
Inc.
|
|
|
4,453,147
|
|
|
|
5,736,300
|
|
|
|
|
|
|
|
|
|
|
Total Internet
Consumer & Business Services (8.18%)
|
|
|
11,054,342
|
|
|
|
12,547,110
|
|
|
|
|
|
|
|
|
|
|
Cornice, Inc.
(7.93%)
(4)
|
|
Electronics & Computer
Hardware
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime+
4.50%
|
|
$
|
4,269,228
|
|
|
|
4,286,994
|
|
|
|
4,286,994
|
|
|
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
$
|
7,783,279
|
|
|
|
7,612,523
|
|
|
|
7,612,523
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
101,597
|
|
|
|
98,945
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,353
|
|
|
|
34,060
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
135,403
|
|
|
|
131,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornice, Inc.
|
|
|
12,171,870
|
|
|
|
12,164,391
|
|
Sling Media, Inc. (0.94%)
|
|
Electronics & Computer
Hardware
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
38,968
|
|
|
|
944,475
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sling Media, Inc.
|
|
|
538,968
|
|
|
|
1,444,475
|
|
ViDeOnline Communications, Inc.
(0.33%)
|
|
Electronics & Computer
Hardware
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures May 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 15.00%
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ViDeOnline Communications,
Inc.
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electronics &
Computer Hardware (9.20%)
|
|
|
13,210,838
|
|
|
|
14,108,866
|
|
|
|
|
|
|
|
|
|
|
Ageia Technologies
(5.23%)
(4)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
8,000,000
|
|
|
|
7,931,118
|
|
|
|
7,931,118
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
99,190
|
|
|
|
92,020
|
|
Ageia Technologies (0.33%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ageia Technologies
|
|
|
8,530,308
|
|
|
|
8,523,138
|
|
Cradle Technologies (1.28%)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.70%
|
|
$
|
1,947,643
|
|
|
|
1,883,883
|
|
|
|
1,883,883
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
79,150
|
|
|
|
78,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cradle Technologies
|
|
|
|
|
|
|
|
|
|
|
1,963,033
|
|
|
|
1,962,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Semiconductors
(6.84%)
|
|
|
10,493,341
|
|
|
|
10,485,501
|
|
|
|
|
|
|
|
|
|
|
Lilliputian Systems, Inc.
(0.98%)
(4)
|
|
Energy
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.75%
|
|
$
|
1,500,000
|
|
|
|
1,457,355
|
|
|
|
1,457,355
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
48,460
|
|
|
|
48,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lilliputian Systems,
Inc.
|
|
|
1,505,815
|
|
|
|
1,505,959
|
|
|
|
|
|
|
|
|
|
|
Total Energy (0.98%)
|
|
|
1,505,815
|
|
|
|
1,505,959
|
|
|
|
|
|
|
|
|
|
|
Total Investments (126.25%)
|
|
$
|
190,355,515
|
|
|
$
|
193,571,348
|
|
|
|
|
|
|
|
|
|
|
F-30
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
*
|
|
Value as a percent of net assets
|
|
(1)
|
|
All debt investments are income
producing. Preferred and common stock and all warrants are
non-income producing.
|
|
(2)
|
|
Tax cost at June 30, 2006
equals book cost. Gross unrealized appreciation, gross
unrealized depreciation, and net appreciation totaled
$4,507,950, $1,292,117 and $3,215,833, respectively.
|
|
(3)
|
|
Except for a warrant in one
publicly traded company, all investments are restricted at
June 30, 2006 and were valued at fair value as determined
in good faith by the Board of Directors. No unrestricted
securities of the same issuer are outstanding. The Company uses
the Standard Industrial Code for classifying the industry
grouping of its portfolio companies.
|
|
|
|
(4)
|
|
Debt and warrant investments of
this portfolio company have been pledged as collateral under the
Citigroup facility (see Note 4). Citigroup has an equity
participation right on loans collateralized under the Citigroup
facility. The value of their participation right on unrealized
gains in the related equity investments was approximately
$378,347 at June 30, 2006 and is included in accrued
liabilities and reduces the unrealized gain recognized by the
Company at June 30, 2006.
|
|
|
|
(5)
|
|
All investments are less than 5%
owned.
|
|
(6)
|
|
Non-U.S. company
or the companys principal place of business is outside of
the United States.
|
See notes to consolidated financial statements (unaudited).
F-31
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
Cost
(2)
|
|
Value
(3)
|
|
Acceleron Pharmaceuticals, Inc.
(3.50%)*
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
4,000,000
|
|
|
$
|
3,932,539
|
|
|
$
|
3,932,539
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
69,106
|
|
|
|
68,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acceleron Pharmaceuticals,
Inc.
|
|
|
4,001,645
|
|
|
|
4,000,593
|
|
Guava Technologies, Inc. (3.94%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.25%
|
|
$
|
4,500,000
|
|
|
|
4,397,111
|
|
|
|
4,397,111
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
105,399
|
|
|
|
103,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guava Technologies, Inc.
|
|
|
4,502,510
|
|
|
|
4,500,948
|
|
Labopharm USA, Inc.
(8.63%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
9,837,901
|
|
|
|
9,869,420
|
|
|
|
9,869,420
|
|
Labopharm USA, Inc. (1.20%)
|
|
|
|
Common Stock
|
|
|
|
|
|
|
112,335
|
|
|
|
1,367,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Labopharm USA, Inc.
|
|
|
9,981,755
|
|
|
|
11,236,688
|
|
Merrimack Pharmaceuticals, Inc.
(7.89%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures October 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.15%
|
|
$
|
9,000,000
|
|
|
|
8,878,668
|
|
|
|
8,878,668
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
155,456
|
|
|
|
140,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merrimack Pharmaceuticals,
Inc.
|
|
|
9,034,124
|
|
|
|
9,019,343
|
|
Omrix Biopharmaceuticals, Inc.
(4.16%)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.45%
|
|
$
|
4,709,994
|
|
|
|
4,701,782
|
|
|
|
4,701,782
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
11,370
|
|
|
|
58,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Omrix Biopharmaceuticals,
Inc.
|
|
|
4,713,152
|
|
|
|
4,760,181
|
|
Paratek Pharmaceuticals, Inc.
(8.76%)
(4)
|
|
Biopharmaceuticals
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.6%
|
|
$
|
10,000,000
|
|
|
|
9,889,320
|
|
|
|
9,889,320
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
137,396
|
|
|
|
141,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paratek Pharmaceuticals,
Inc.
|
|
|
10,026,716
|
|
|
|
10,031,201
|
|
|
|
|
|
|
|
|
|
|
Total Biopharmaceuticals (38.08%)
|
|
|
42,259,902
|
|
|
|
43,548,954
|
|
|
|
|
|
|
|
|
|
|
Atrenta, Inc. (4.38%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.50%
|
|
$
|
5,000,000
|
|
|
|
4,869,095
|
|
|
|
4,869,095
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
102,396
|
|
|
|
102,886
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
33,760
|
|
|
|
33,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Atrenta, Inc.
|
|
|
5,005,251
|
|
|
|
5,005,741
|
|
Concuity, Inc. (3.99%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
4,570,498
|
|
|
|
4,567,873
|
|
|
|
4,567,873
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Concuity, Inc.
|
|
|
4,571,373
|
|
|
|
4,567,873
|
|
Gomez, Inc.
(1.93%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.25%
|
|
$
|
2,197,436
|
|
|
|
2,175,075
|
|
|
|
2,175,075
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,000
|
|
|
|
32,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gomez, Inc.
|
|
|
2,210,075
|
|
|
|
2,207,542
|
|
Inxight Software, Inc.
(4.38%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures February 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.00%
|
|
$
|
5,000,000
|
|
|
|
4,956,279
|
|
|
|
4,956,279
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
55,963
|
|
|
|
46,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inxight Software, Inc.
|
|
|
5,012,242
|
|
|
|
5,003,014
|
|
Metreo, Inc. (1.11%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.95%
|
|
$
|
500,000
|
|
|
$
|
4,525,714
|
|
|
$
|
1,266,000
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Metreo, Inc.
|
|
|
4,575,714
|
|
|
|
1,266,000
|
|
F-32
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
Cost
(2)
|
|
Value
(3)
|
|
Proficiency, Inc. (3.51%)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures July 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.00%
|
|
$
|
4,000,000
|
|
|
|
3,917,802
|
|
|
|
3,917,802
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
96,370
|
|
|
|
94,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proficiency, Inc.
|
|
|
4,014,172
|
|
|
|
4,011,907
|
|
Sportvision, Inc.
(3.08%)
(4)
|
|
Software
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
3,518,716
|
|
|
|
3,488,119
|
|
|
|
3,488,119
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
39,339
|
|
|
|
38,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sportvision, Inc.
|
|
|
3,527,458
|
|
|
|
3,526,642
|
|
Talisma Corp.
(2.99%)
(4)
|
|
Software
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
3,410,120
|
|
|
|
3,378,814
|
|
|
|
3,378,814
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
49,000
|
|
|
|
43,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Talisma Corp.
|
|
|
3,427,814
|
|
|
|
3,422,242
|
|
|
|
|
|
|
|
|
|
|
Total Software
(25.37%)
|
|
|
32,344,099
|
|
|
|
29,010,961
|
|
|
|
|
|
|
|
|
|
|
Wageworks, Inc.
(17.12%)
(4)
|
|
Consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Products
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.00%
|
|
$
|
18,583,966
|
|
|
|
18,379,995
|
|
|
|
18,379,995
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
251,964
|
|
|
|
1,197,735
|
|
Wageworks, Inc. (0.22%)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
249,995
|
|
|
|
249,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wageworks, Inc.
|
|
|
18,881,954
|
|
|
|
19,827,725
|
|
|
|
|
|
|
|
|
|
|
Total Consumer & Business
Products (17.34%)
|
|
|
18,881,954
|
|
|
|
19,827,725
|
|
|
|
|
|
|
|
|
|
|
IKANO Communications, Inc.
(14.44%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.25%
|
|
$
|
16,454,540
|
|
|
|
16,402,789
|
|
|
|
16,402,789
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
45,460
|
|
|
|
43,710
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
72,344
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IKANO Communications,
Inc.
|
|
|
16,520,593
|
|
|
|
16,517,499
|
|
Interwise, Inc.
(2.46%)
(4)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 17.50%
|
|
$
|
2,809,653
|
|
|
|
2,809,653
|
|
|
|
2,809,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interwise, Inc.
|
|
|
2,809,653
|
|
|
|
2,809,653
|
|
Occam Networks, Inc. (2.79%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking
|
|
Matures December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.95%
|
|
$
|
2,559,827
|
|
|
|
2,540,021
|
|
|
|
2,540,021
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
14,000
|
|
|
|
286,364
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
368,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Occam Networks, Inc.
|
|
|
2,571,021
|
|
|
|
3,195,320
|
|
Optovia Corporation (4.37%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking
|
|
Matures September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
7.25%
|
|
$
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optovia Corporation
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Pathfire, Inc. (4.38%)
|
|
Communications &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.65%
|
|
$
|
5,000,000
|
|
|
$
|
4,938,482
|
|
|
$
|
4,938,482
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
63,276
|
|
|
|
64,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pathfire, Inc.
|
|
|
5,001,758
|
|
|
|
5,002,626
|
|
|
|
|
|
|
|
|
|
|
Total Communications &
Networking (28.44%)
|
|
|
31,903,025
|
|
|
|
32,525,098
|
|
|
|
|
|
|
|
|
|
|
Adiana, Inc.
(1.76%)
(4)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
6.00%
|
|
$
|
2,000,000
|
|
|
|
1,943,979
|
|
|
|
1,943,979
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
67,225
|
|
|
|
66,404
|
|
Adiana, Inc. (0.44%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adiana, Inc.
|
|
|
2,511,204
|
|
|
|
2,510,383
|
|
F-33
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
Cost
(2)
|
|
Value
(3)
|
|
Optiscan Biomedical, Corp.
(1.54%)
(4)
|
|
Medical Devices &
|
|
Senior Convertible Term Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
Matures March 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 15.00%
|
|
$
|
1,753,164
|
|
|
|
1,683,063
|
|
|
|
1,683,063
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
80,486
|
|
|
|
81,185
|
|
Optiscan Biomedical, Corp. (0.87%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Optiscan Biomedical,
Corp.
|
|
|
2,763,549
|
|
|
|
2,764,248
|
|
Power Medical Interventions, Inc.
(3.52%)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
Matures June 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.71%
|
|
$
|
4,000,000
|
|
|
|
3,969,515
|
|
|
|
3,969,515
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
39,195
|
|
|
|
56,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Power Medical Interventions,
Inc.
|
|
|
4,008,710
|
|
|
|
4,026,005
|
|
Xillix Technologies Corp. (4.83%)
|
|
Medical Devices &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 12.40%
|
|
$
|
5,500,000
|
|
|
|
5,195,589
|
|
|
|
5,195,589
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
313,108
|
|
|
|
325,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Xillix Technologies
Corp.
|
|
|
5,508,697
|
|
|
|
5,521,190
|
|
|
|
|
|
|
|
|
|
|
Total Medical Devices &
Equipment (12.96%)
|
|
|
14,792,160
|
|
|
|
14,821,826
|
|
|
|
|
|
|
|
|
|
|
Affinity Express, Inc.
(1.54%)
(4)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Services
|
|
Matures November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 13.50%
|
|
$
|
1,583,531
|
|
|
|
1,560,450
|
|
|
|
1,560,450
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
17,000
|
|
|
|
187,922
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
15,000
|
|
|
|
12,995
|
|
Affinity Express, Inc. (0.22%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affinity Express, Inc.
|
|
|
1,842,450
|
|
|
|
2,011,367
|
|
Invoke Solutions, Inc. (1.31%)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Services
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 11.25%
|
|
$
|
1,500,000
|
|
|
|
1,457,391
|
|
|
|
1,457,391
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
43,826
|
|
|
|
44,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Invoke Solutions, Inc.
|
|
|
1,501,217
|
|
|
|
1,501,546
|
|
RazorGator Interactive Group, Inc.
(3.64%)
(4)
|
|
Internet Consumer &
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Services
|
|
Matures January 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 9.95%
|
|
$
|
4,104,553
|
|
|
|
4,095,853
|
|
|
|
4,095,853
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
13,050
|
|
|
|
64,833
|
|
RazorGator Interactive Group, Inc.
(0.87%)
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RazorGator Interactive Group,
Inc.
|
|
|
5,108,903
|
|
|
|
5,160,686
|
|
|
|
|
|
|
|
|
|
|
Total Internet Consumer &
Business Service (7.58%)
|
|
|
8,452,570
|
|
|
|
8,673,599
|
|
|
|
|
|
|
|
|
|
|
Cornice Inc.
(11.24%)
(4)
|
|
Electronics & Computer
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
Matures November 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.50%
|
|
$
|
5,000,000
|
|
|
$
|
4,915,455
|
|
|
$
|
4,915,455
|
|
|
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
3.00%
|
|
$
|
7,834,131
|
|
|
|
7,663,375
|
|
|
|
7,663,375
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
101,597
|
|
|
|
99,336
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
35,353
|
|
|
|
34,230
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
135,403
|
|
|
|
132,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornice, Inc.
|
|
|
12,851,183
|
|
|
|
12,844,786
|
|
Sling Media, Inc.
(4.29%)
(4)
|
|
Electronics & Computer
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
Matures January 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
4,000,000
|
|
|
|
3,965,029
|
|
|
|
3,965,029
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
38,968
|
|
|
|
945,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sling Media, Inc.
|
|
|
4,003,997
|
|
|
|
4,910,394
|
|
|
|
|
|
|
|
|
|
|
Total Electronics &
Computer Hardware (15.53%)
|
|
|
16,855,180
|
|
|
|
17,755,180
|
|
|
|
|
|
|
|
|
|
|
Ageia Technologies (7.00%)
|
|
Semiconductor
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures August 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate 10.25%
|
|
$
|
8,000,000
|
|
|
|
7,914,586
|
|
|
|
7,914,586
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
99,190
|
|
|
|
93,518
|
|
Ageia Technologies
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ageia Technologies
|
|
|
8,513,776
|
|
|
|
8,508,104
|
|
F-34
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type of
Investment
(1)
|
|
Principal Amount
|
|
Cost
(2)
|
|
Value
(3)
|
|
Cradle Technologies
(1.75%)
(4)
|
|
Semiconductors
|
|
Senior Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Prime +
4.70%
|
|
$
|
2,000,000
|
|
|
|
1,923,049
|
|
|
|
1,923,049
|
|
|
|
|
|
Preferred Stock Warrants
|
|
|
|
|
|
|
79,150
|
|
|
|
78,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cradle Technologies
|
|
|
2,002,199
|
|
|
|
2,001,779
|
|
|
|
|
|
|
|
|
|
|
Total Semiconductors (9.20%)
|
|
|
10,515,975
|
|
|
|
10,509,883
|
|
|
|
|
|
|
|
|
|
|
Total Investments (154.50%)
|
|
$
|
176,004,865
|
|
|
$
|
176,673,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Value as a percent of net assets
|
|
(1)
|
|
All debt investments are income
producing. Preferred and common stock and all warrants are
non-income producing.
|
|
(2)
|
|
Tax cost at December 31, 2005
equals book cost. Gross unrealized appreciation, gross
unrealized depreciation, and net appreciation totaled
$4,035,789, $3,367,428 and $668,361, respectively, at
December 31, 2005.
|
|
(3)
|
|
Except for common stock held in
Labopharm Biopharmaceuticals, all investments are restricted at
December 31, 2005 and were valued at fair value as
determined in good faith by the Board of Directors. No
unrestricted securities of the same issuer are outstanding. The
Company uses the Standard Industrial Code for classifying the
industry grouping of its portfolio companies.
|
|
|
|
(4)
|
|
Debt and warrant investments of
this portfolio company have been pledged as collateral under the
Citigroup facility. Citigroup has an equity participation right
on warrants collateralized under the Citigroup facility. The
value of their participation right on unrealized gains in the
related equity investments was approximately $342,000 at
December 31, 2005 and is included in accrued.
|
|
|
|
(5)
|
|
All investments are less than 5%
owned.
|
See notes to consolidated financial statements (unaudited).
F-35
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,175,831
|
|
|
$
|
1,720,281
|
|
|
$
|
11,810,370
|
|
|
$
|
2,395,885
|
|
Fees
|
|
|
612,080
|
|
|
|
192,543
|
|
|
|
1,464,674
|
|
|
|
270,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
6,787,911
|
|
|
|
1,912,824
|
|
|
|
13,275,044
|
|
|
|
2,666,797
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,357,893
|
|
|
|
444,444
|
|
|
|
3,034,875
|
|
|
|
444,444
|
|
Loan fees
|
|
|
286,688
|
|
|
|
433,333
|
|
|
|
537,481
|
|
|
|
433,333
|
|
Compensation and benefits
|
|
|
1,127,238
|
|
|
|
869,874
|
|
|
|
2,332,320
|
|
|
|
1,364,828
|
|
General and administrative
|
|
|
1,418,584
|
|
|
|
442,770
|
|
|
|
2,603,977
|
|
|
|
645,419
|
|
Stock-based compensation
|
|
|
130,000
|
|
|
|
56,000
|
|
|
|
253,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,320,403
|
|
|
|
2,246,421
|
|
|
|
8,761,653
|
|
|
|
2,968,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
before provision for income tax and investment gains and losses
|
|
|
2,467,508
|
|
|
|
(333,597
|
)
|
|
|
4,513,391
|
|
|
|
(301,227
|
)
|
Income tax (benefit) expense
|
|
|
(771,823
|
)
|
|
|
|
|
|
|
988,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
3,239,331
|
|
|
|
(333,597
|
)
|
|
|
3,525,214
|
|
|
|
(301,227
|
)
|
Net realized gain on equity
investment
|
|
|
1,599,422
|
|
|
|
|
|
|
|
3,144,443
|
|
|
|
|
|
Net (decrease) increase in
unrealized appreciation on investments
|
|
|
(1,472,381
|
)
|
|
|
1,043,392
|
|
|
|
(798,292
|
)
|
|
|
1,043,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on investments
|
|
|
127,041
|
|
|
|
1,043,392
|
|
|
|
2,346,151
|
|
|
|
1,043,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
3,366,372
|
|
|
$
|
709,795
|
|
|
$
|
5,871,365
|
|
|
$
|
742,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
before provision for income tax and investment gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.39
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net assets per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.14
|
|
|
$
|
0.52
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.14
|
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,859,474
|
|
|
|
5,121,000
|
|
|
|
11,394,175
|
|
|
|
4,006,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,944,601
|
|
|
|
5,242,000
|
|
|
|
11,479,302
|
|
|
|
4,119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements (unaudited).
F-36
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Earnings
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Net
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Assets
|
|
|
|
(Unaudited)
|
|
|
Balance at December 31, 2004
|
|
|
2,059,270
|
|
|
$
|
2,059
|
|
|
$
|
27,117,896
|
|
|
$
|
(2,041,822
|
)
|
|
$
|
25,078,133
|
|
Issuance of common shares, net of
offering costs
|
|
|
268,134
|
|
|
|
268
|
|
|
|
3,870,542
|
|
|
|
|
|
|
|
3,870,810
|
|
Issuance of shares in lieu of
5 year warrants
|
|
|
298,598
|
|
|
|
299
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
Issuance of shares on exercise of
1 year warrants
|
|
|
1,175,963
|
|
|
|
1,176
|
|
|
|
12,428,744
|
|
|
|
|
|
|
|
12,429,920
|
|
Issuance of common shares in IPO,
net of offering costs
|
|
|
6,000,000
|
|
|
|
6,000
|
|
|
|
70,971,088
|
|
|
|
|
|
|
|
70,977,088
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Increase in net assets from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301,227
|
)
|
|
|
|
|
Net unrealized appreciation on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,165
|
|
|
|
742,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
9,801,965
|
|
|
$
|
9,802
|
|
|
$
|
114,467,971
|
|
|
$
|
(1,299,657
|
)
|
|
$
|
113,178,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
9,801,965
|
|
|
$
|
9,802
|
|
|
$
|
114,524,833
|
|
|
$
|
(182,305
|
)
|
|
$
|
114,352,330
|
|
Issuance of common shares
|
|
|
432,900
|
|
|
|
433
|
|
|
|
4,999,567
|
|
|
|
|
|
|
|
5,000,000
|
|
Issuance of common shares in
Rights Offering, net of offering costs
|
|
|
3,411,992
|
|
|
|
3,412
|
|
|
|
33,860,028
|
|
|
|
|
|
|
|
33,863,440
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
253,000
|
|
|
|
|
|
|
|
253,000
|
|
Distribution to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,011,049
|
)
|
|
|
(6,011,049
|
)
|
Increase in net assets from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,525,214
|
|
|
|
|
|
Net realized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,144,443
|
|
|
|
|
|
Net unrealized depreciation on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(908,121
|
)
|
|
|
|
|
Net unrealized appreciation on
equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,839,781
|
)
|
|
|
|
|
Net unrealized appreciation on
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,949,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,871,365
|
|
|
|
5,871,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
13,646,857
|
|
|
$
|
13,647
|
|
|
$
|
153,637,428
|
|
|
$
|
(321,989
|
)
|
|
$
|
153,329,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements (unaudited).
F-37
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
5,871,365
|
|
|
$
|
742,165
|
|
Adjustments to reconcile net
increase in net assets resulting from operations to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(65,850,000
|
)
|
|
|
(70,330,000
|
)
|
Principal payments received on
investments
|
|
|
48,823,968
|
|
|
|
937,529
|
|
Net unrealized appreciation on
investments
|
|
|
541,407
|
|
|
|
(1,043,392
|
)
|
Net unrealized appreciation on
investments due to lender
|
|
|
(23,001
|
)
|
|
|
|
|
Net realized gain on sale of
equity investment
|
|
|
(2,280,541
|
)
|
|
|
|
|
Accretion of loan discounts
|
|
|
(709,406
|
)
|
|
|
(82,129
|
)
|
Accretion of loan exit fees
|
|
|
(276,981
|
)
|
|
|
(87,312
|
)
|
Depreciation
|
|
|
20,638
|
|
|
|
8,517
|
|
Stock-based compensation
|
|
|
253,000
|
|
|
|
80,000
|
|
Amortization of deferred loan
origination revenue
|
|
|
(1,162,048
|
)
|
|
|
(270,912
|
)
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(475,402
|
)
|
|
|
(562,557
|
)
|
Prepaid expenses and other current
assets
|
|
|
888,091
|
|
|
|
(618,340
|
)
|
Income tax receivable
|
|
|
(533,423
|
)
|
|
|
|
|
Deferred tax asset
|
|
|
1,454,000
|
|
|
|
|
|
Accounts payable
|
|
|
529,903
|
|
|
|
718,510
|
|
Income tax payable
|
|
|
(1,709,000
|
)
|
|
|
|
|
Accrued liabilities
|
|
|
799,019
|
|
|
|
687,969
|
|
Deferred loan origination revenue
|
|
|
1,654,160
|
|
|
|
1,640,984
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(12,184,251
|
)
|
|
|
(68,178,968
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity
investment
|
|
|
2,594,002
|
|
|
|
|
|
Purchases of capital equipment
|
|
|
(27,627
|
)
|
|
|
(31,457
|
)
|
Other long-term assets
|
|
|
(385,207
|
)
|
|
|
(18,046
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
2,181,168
|
|
|
|
(49,503
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net
|
|
|
38,863,440
|
|
|
|
87,277,818
|
|
Dividends paid
|
|
|
(6,011,049
|
)
|
|
|
|
|
(Repayment) proceeds of credit
facilities
|
|
|
(15,000,000
|
)
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
17,852,391
|
|
|
|
112,277,818
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
7,849,308
|
|
|
|
44,049,347
|
|
Cash and cash equivalents at
beginning of period
|
|
|
15,362,447
|
|
|
|
8,678,329
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
23,211,755
|
|
|
$
|
52,727,676
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements (unaudited).
F-38
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
(unaudited)
|
|
1.
|
Description
of Business and Unaudited Interim Consolidated Financial
Statements Basis of Presentation
|
Hercules Technology Growth Capital, Inc. (the
Company) is a specialty finance company that
provides debt and equity growth capital to technology-related
and life-science companies at all stages of development. The
Company sources its investments through its principal office
located in Silicon Valley, as well as through its additional
offices in the Boston, Massachusetts, Boulder, Colorado and
Chicago, Illinois areas. The Company was incorporated under the
General Corporation Law of the State of Maryland in December
2003. The Company commenced operations on February 2, 2004
and commenced investment activities in September 2004.
The Company is an internally managed, non-diversified closed-end
investment company that has elected to be regulated as a
business development company (BDC) under the
Investment Company Act of 1940, as amended (the 1940
Act). The Company intends to elect to be regulated for
federal income tax purposes as a regulated investment company
(RIC) for the 2006 tax year. If the Company
qualifies as a RIC for the year ended December 31, 2006,
the election will be effective as of January 1, 2006.
On June 11, 2005, the Company raised approximately
$70.9 million, net of issuance costs, from an initial
public offering (IPO) of 6,000,000 shares of
its common stock. On April 21, 2006, the Company raised
approximately $34.0 million, net of issuance costs, from a
rights offering of 3,411,992 shares of its common stock.
The shares were sold at $10.55 per share which was
equivalent to 95% of the volume weighted average price of shares
traded during the ten days immediately prior to the expiration
date of the offering.
In January 2005, the Company formed Hercules Technology II,
L.P. (HT II) and Hercules Technology SBIC
Management, LLC (HTM). On September 27, 2006, HT II
became licensed as a Small Business Investment Company
(SBIC). HT II is able to borrow funds from the SBA
against eligible pre-approved investments and additional
contributions to regulatory capital. At June 30, 2006, the
Company has a net investment of $2.5 million in HT II,
and there is one outstanding investment in the amount of
$1.9 million, which was funded in 2005. 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.
In July 2005, the Company formed Hercules Funding I LLC and
Hercules Funding Trust I, an affiliated statutory trust,
and executed a $125 million securitized credit facility, as
amended, with Citigroup Global Markets Realty Corp. (see
Note 4).
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The
accompanying consolidated interim financial statements are
presented in conformity with U.S. generally accepted
accounting principles (U.S. GAAP) for interim
financial information, and pursuant to the requirements for
reporting on
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, certain disclosures accompanying annual
consolidated financial statements prepared in accordance with
U.S. GAAP are omitted. In the opinion of management, all
adjustments, 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 periods results of operations are not
necessarily indicative of results that ultimately may be
achieved for the year. Therefore, the interim unaudited
consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements
and notes thereto for the period ended December 31, 2005,
filed with the Securities and Exchange Commission on
March 7, 2006. Financial statements prepared on a
U.S. GAAP basis require management to make estimates and
assumptions that affect the amounts and disclosures reported in
the consolidated financial statements and accompanying notes.
Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts
reported and disclosed herein.
F-39
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Valuation
of Investments
|
Value is defined in Section 2(a)(41) of the 1940 Act, as
(i) the market price for those securities for which a
market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good
faith by the Board of Directors. Because the Company invests
primarily in structured mezzanine debt investments
(debt) and equity growth capital
(equity) of privately-held technology-related and
life-science companies backed by leading venture capital and
private equity firms, the Company values substantially all of
its investments at fair value, as determined in good faith by
the Board of Directors in accordance with established valuation
policies and consistent procedures and the recommendations of
the Valuation Committee of the Board of Directors. At
June 30, 2006, approximately 89% of the Companys
total assets represented investments in portfolio companies of
which greater than 99% are valued at fair value by the Board of
Directors.
Estimating fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment.
Fair value is the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of
time between willing parties other than in a forced or
liquidation sale. Due to the inherent uncertainty in the
valuation process, fair value may differ significantly from the
values that would have been used had a ready market for the
securities existed, and the differences could be material. In
addition, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the valuations currently assigned.
When originating a debt instrument, the Company expects to
receive warrants or other equity-related securities from the
borrower. The Company determines the cost basis of the warrants
or other equity-related securities received based upon their
respective fair values on the date of receipt in proportion to
the total fair value of the debt and warrants or other
equity-related securities received.
At each reporting date, privately held debt and equity
securities are valued based on an analysis of various factors
including, but not limited to, the portfolio companys
operating performance and financial condition and general market
conditions that could impact the valuation. When an external
event occurs, such as a purchase transaction, public offering,
or subsequent equity sale, the pricing indicated by that
external event is utilized to corroborate the Companys
valuation of the debt and equity securities. 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 borrowers ability to
pay, or there are other factors that lead to a determination of
a lower valuation for the debt or equity security. Conversely,
an unrealized gain 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 issuers earnings, sales to third
parties of similar securities, the comparison to publicly traded
securities, and other factors. Any resulting discount on the
loan from recordation of the warrant or other equity instruments
is accreted into interest income over the life of the loan.
As required by the 1940 Act, the Company classifies its
investments by level of control. Control Investments
are defined in the 1940 Act as investments in those companies
that the Company is deemed to Control. Generally,
under the 1940 Act, the Company is deemed to Control
a company in which it has invested if it owns 25% or more of the
voting securities of such company or has greater than 50%
representation on its board. Affiliate Investments
are investments in those companies that are Affiliated
Companies of the Company, as defined in the 1940 Act,
which are not Control Investments. The Company is deemed to be
an Affiliate of a company in which it has invested
if it owns 5% or more but less than 25% of the voting securities
of such company. Non-Control/Non-Affiliate
Investments are those investments that are neither Control
Investments nor Affiliate Investments. At June 30, 2006 and
2005, all of the Companys investments were in
Non-Control/Non-Affiliate companies.
Security transactions are recorded on the trade-date basis.
F-40
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the composition of the Companys investment
portfolio as of June 30, 2006 and December 31, 2005 at
fair value is shown as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Senior debt with warrants
|
|
$
|
180.4
|
|
|
|
93.2
|
%
|
|
$
|
163.4
|
|
|
|
92.4
|
%
|
Subordinated debt
|
|
|
7.7
|
|
|
|
4.0
|
%
|
|
|
8.4
|
|
|
|
4.8
|
%
|
Preferred stock
|
|
|
5.5
|
|
|
|
2.8
|
%
|
|
|
3.5
|
|
|
|
2.0
|
%
|
Common stock
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1.4
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A Summary of the Companys investment portfolio, at value,
by geographic location is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
United States
|
|
$
|
176.8
|
|
|
|
91.3
|
%
|
|
$
|
155.9
|
|
|
|
88.2
|
%
|
Canada
|
|
|
13.8
|
|
|
|
7.1
|
%
|
|
|
16.8
|
|
|
|
9.5
|
%
|
Israel
|
|
|
3.0
|
|
|
|
1.6
|
%
|
|
|
4.0
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the fair value of our portfolio by
industry sector at June 30, 2006 and December 31, 2005
(excluding unearned income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Investments
|
|
|
Percentage of
|
|
|
Investments
|
|
|
Percentage of
|
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
at Fair Value
|
|
|
Total Portfolio
|
|
|
|
($ in millions)
|
|
|
Biopharmaceuticals
|
|
$
|
61.2
|
|
|
|
31.6
|
%
|
|
$
|
43.6
|
|
|
|
24.7
|
%
|
Software
|
|
|
35.3
|
|
|
|
18.2
|
%
|
|
|
29.0
|
|
|
|
16.4
|
%
|
Communications &
networking
|
|
|
25.5
|
|
|
|
13.2
|
%
|
|
|
32.5
|
|
|
|
18.4
|
%
|
Consumer & business
products
|
|
|
19.6
|
|
|
|
10.1
|
%
|
|
|
19.8
|
|
|
|
11.2
|
%
|
Electronics & computer
hardware
|
|
|
14.1
|
|
|
|
7.3
|
%
|
|
|
17.8
|
|
|
|
10.1
|
%
|
Medical devices
|
|
|
13.3
|
|
|
|
6.9
|
%
|
|
|
14.8
|
|
|
|
8.4
|
%
|
Internet consumer &
business services
|
|
|
12.6
|
|
|
|
6.5
|
%
|
|
|
8.7
|
|
|
|
4.9
|
%
|
Semiconductors
|
|
|
10.5
|
|
|
|
5.4
|
%
|
|
|
10.5
|
|
|
|
5.9
|
%
|
Energy
|
|
|
1.5
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193.6
|
|
|
|
100.0
|
%
|
|
$
|
176.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three- and six- month periods ended June 30,
2006, the Company made investments in debt securities totaling
$32,100,000 and $64,600,000, respectively. In addition, during
the three- and six- month periods ended June 30, 2006, the
Company made investments in equity securities of $750,000 and
$1,250,000, respectively.
Loan origination and commitment fees received in full at the
inception of a loan are deferred and amortized into fee income
as an enhancement to the related loans yield over the
contractual life of the loan. Loan exit fees to be paid at the
termination of the loan are accreted into fee income over the
contractual life of the loan. Original discount fees are
reflected as adjustments to the loan yield. The Company had
approximately $3.2 million and $2.7
F-41
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of unamortized fees at June 30, 2006 and December 31,
2005, respectively, and approximately $655,595 and
$351,000 million in exit fees receivable at June 30,
2006 and December 31, 2005, respectively.
On April 12, 2005, the Company entered into a bridge loan
credit facility (the Bridge Loan Credit
Facility or the Loan) with Alcmene Funding,
L.L.C. (Alcmene), a special purpose vehicle that is
an affiliate of Farallon Capital Management, L.L.C., a
shareholder of the Company. The Loan was subsequently amended on
August 1, 2005 and March 6, 2006. The Loan was
originally a $25 million senior secured term loan, allowing
for up to an additional $25 million of discretionary
supplemental senior secured loans. On August 1, 2005, the
Company amended the Loan with an agreement extending the term of
the Bridge Loan Credit Facility to April 12, 2006. The
amendment eliminated the loan extension fee, revised the
interest rate effective August 1, 2005 to LIBOR plus 5.6%
through December 31, 2005 and thereafter to 13.5% per
annum, and amended certain collateral rights and financial
covenants. On March 6, 2006, the Company entered into an
agreement to repay $10.0 million of the $25.0 million
outstanding under its Bridge Loan Credit Facility. The
Company also extended the maturity of the remaining
$15.0 million to June 30, 2006 and decreased the
interest rate from 13.5% to 10.86% per annum. On
May 10, 2006, the Company repaid the $15.0 million
outstanding under the Bridge Loan Credit Facility and paid
a $500,000 loan fee due on maturity plus all accrued and unpaid
interest through the date of repayment. At June 30, 2006,
the Bridge Loan Credit Facility is no longer outstanding.
|
|
4.
|
Securitization
Agreement
|
On August 1, 2005, the Company, through Hercules Funding
Trust I, an affiliated statutory trust, executed a
$100 million securitized credit facility (the
Citigroup Facility) with Citigroup Global Markets
Realty Corp. (Citigroup). The Companys ability
to make draws on the Citigroup Facility was to expire on
July 31, 2006, however, it was extended for an additional
364-day
period with the lenders consent on July 28, 2006.
Prior to its July 31, 2007 expiration date, Citigroup
Facility may be extended for an additional
364-day
period with the lenders consent If the Citigroup Facility
is not extended, any principal amounts then outstanding will be
amortized over a six-month period through a termination date in
January 2008.
The Citigroup Facility is collateralized by loans from the
Companys portfolio companies, and includes an advance rate
of approximately 55% of eligible loans. The Citigroup Facility
contains covenants that, among other things, require the Company
to maintain a minimum net worth and to restrict the loans
securing the Citigroup Facility to certain dollar amounts, to
concentrations in certain geographic regions and industries, to
certain loan grade classifications, to certain security
interests, and to certain interest payment terms. In addition,
the Citigroup Facility provides that Citigroup shall have a
participation right equal to 10% of any realized gains, to a
maximum of $3.0 million, on equity instruments included in
the loan collateral. At June 30, 2006, the Company has
recorded an accrued liability of approximately $378,000 related
to unrealized gains on equity investments currently included in
the collateral pool.
Interest on borrowings under the Citigroup Facility are paid
monthly and are charged at one-month LIBOR plus a spread of
1.65%. The Company also paid a loan origination fee equal to
0.25% of the Citigroup Facility. On March 6, 2006, the
Company amended the Citigroup facility with an agreement that
increased the borrowing capacity under the facility to
$125.0 million, increased the advance rate to 60% of
eligible loans and increased the eligible capacity for loans by
geographic region. The amendment allows for an interest rate of
LIBOR plus 2.5% on amounts borrowed in excess of
$100.0 million and an interest rate of LIBOR plus 5.0% for
amounts borrowed in excess of 55% of eligible loans. The Company
paid a restructuring fee of $150,000 that will be expensed
ratably through maturity on July 31, 2006.
At June 30, 2006, the Company, through its special purpose
entity (SPE), had transferred pools of loans with a fair value
of approximately $157.3 million to Citibank and had drawn
$61.0 million under the facility. Transfers of loans have
not met the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
F-42
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Extinguishments of Liabilities, for sales treatment
and are, therefore, treated as secured borrowings, with the
transferred loans remaining in investments and the related
liability recorded in borrowings. The average debt outstanding
under the Citigroup Facility for the three and six months ended
June 30, 2006 was approximately $62.9 and
$64.8 million, respectively, and the average interest rate
were approximately 6.73% and 6.50%, respectively.
During the second quarter ended June 30, 2006, the Company
determined that it is more likely than not that it will be able
to qualify as a RIC for tax reporting purposes for the year
ended December 31, 2006. The Company intends to elect to be
regulated as a RIC for 2006. The election will be submitted with
the filing of its 2006 tax return and would be effective as of
January 1, 2006. If the Company meets the required
qualification tests of a RIC, any income timely distributed to
its shareholders will not be subject to corporate level federal
income or excise taxes in those years that the company qualifies
as a RIC. At March 31, 2006, the Company had a deferred tax
asset of approximately $181,000. During the second quarter, a
full valuation reserve was recorded against this asset in
anticipation that the Company would not have a future federal
tax expense to offset the deferred tax asset. In addition,
during the first quarter of 2006, the Company recorded a tax
expense in the amount of approximately $1.8 million that
was reversed in the second quarter as the Company would not be
subject to federal income or excise taxes in 2006. As a result,
the Company recorded a tax benefit of approximately
$800,000 million in the second quarter.
The Company is authorized to issue 30,000,000 shares of
common stock with a par value of $0.001. Each share of common
stock entitles the holder to one vote.
In January 2005 the Company notified its shareholders of its
intent to elect to be regulated as a BDC. In conjunction with
the Companys decision to elect to be regulated as a BDC,
approximately 55% of the 5 Year Warrants were subject to
mandatory cancellation under the terms of the Warrant Agreement
with the warrant holder receiving one share of common stock for
every two warrants cancelled and the exercise price of all
warrants was adjusted to the then current net asset value of the
common stock, subject to certain adjustments described in the
Warrant Agreement. In addition, the 1 Year Warrants became
subject to expiration immediately prior to the Companys
election to become a BDC, unless exercised. Concurrent with the
announcement of the BDC election, the Company reduced the
exercise price of all remaining 1 and 5 Year Warrants from
$15.00 to $10.57. On February 22, 2005, the Company
cancelled 47% of all outstanding 5 Year Warrants and issued
298,598 shares of common stock to holders of warrants upon
exercise. In addition, the majority of shareholders owning
1 Year Warrants exercised them, and purchased 1,175,963 of
common shares at $10.57 per share, for total consideration
to the Company of $12,429,920. All unexercised 1 Year
Warrants were then cancelled.
On January 26, 2005, the CEO, the President, and four
employees purchased 40,000, 13,500, and 8,567 units for
$1,200,000, $405,000 and $257,010, respectively. On
January 26, 2005, JMPG also purchased 72,000 units for
$2,008,800, which number is net of a placement fee of $151,200,
which was paid to an affiliate of JMPG.
On June 9, 2005, the Company raised approximately
$70.9 million, net of offering costs, from an IPO of
6,000,000 shares of its common stock.
On September 7, 2005, the Company registered
3,801,905 shares of common stock and 673,223
5-year
warrants pursuant to its obligations under a registration rights
agreement between the Company and certain shareholders. The
Company will not receive any proceeds from the sale of these
securities.
On March 7, 2006, the Company issued 432,900 shares of
common stock for approximately $5.0 million in a private
placement. The shares of common stock are subject to a
registration rights agreement between the Company and the
purchasers. The shares were registered pursuant to a
registration statement that was declared effective on
June 7, 2006.
F-43
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On April 21, 2006, the Company raised approximately
$34.0 million, net of estimated issuance costs, from a
rights offering of 3,411,992 shares of its common stock.
The shares were sold at $10.55 per share which was
equivalent to 95% of the volume weighted average price of shares
traded during the ten days immediately prior to the expiration
date of the offering.
A summary of activity in the 5 Year Warrants initially
attached to units issued for the six months ended June 30,
2006 is as follows:
|
|
|
|
|
|
|
Five-Year
|
|
|
|
Warrants
|
|
|
Warrants outstanding at
December 31, 2005
|
|
|
616,672
|
|
Warrants issued
|
|
|
|
|
Warrants cancelled
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at
June 30, 2006
|
|
|
616,672
|
|
|
|
|
|
|
A summary of common stock options and warrant activity under the
Companys equity incentive plan for the six months ended
June 30, 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Five-
|
|
|
|
Stock
|
|
|
Year
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Outstanding at December 31,
2005
|
|
|
1,337,436
|
|
|
|
56,551
|
|
Granted
|
|
|
536,500
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(43,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
1,830,936
|
|
|
|
56,551
|
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of the Companys basic and
diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average common shares
outstanding
|
|
|
12,859,474
|
|
|
|
5,121,000
|
|
|
|
11,394,175
|
|
|
|
4,006,000
|
|
Dilutive effect of warrants
|
|
|
85,127
|
|
|
|
121,000
|
|
|
|
85,127
|
|
|
|
113,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, assuming dilution
|
|
|
12,944,601
|
|
|
|
5,242,000
|
|
|
|
11,479,302
|
|
|
|
4,119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, assuming dilution,
includes the incremental effect of shares that would be issued
upon the assumed exercise of warrants. The Company has excluded
all outstanding stock options from the calculation of diluted
net income (loss) per share because these securities are
antidilutive for all periods presented. These excluded common
share equivalents could be dilutive in the future. Options for
approximately 1,831,000 and 1,403,000 shares of common
stock have been excluded for the three months ended
June 30, 2006 and 2005, respectively.
|
|
8.
|
Related-Party
Transactions
|
In January 2005, the Chief Executive Officer (CEO),
the President, JMPG and four employees purchased 40,000, 13,500,
72,000 and 8,567 units for $1,200,000, $405,000, $2,008,800
and $257,010, respectively. On
F-44
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 26, 2005, JMPG also purchased 72,000 units for
$2,008,800, which is net of an underwriting discount of
$151,200. Each unit consisted of two shares of our common stock,
a 1 Year Warrant and a 5 Year Warrant.
On June 8, 2005, the Company entered into an Underwriting
Agreement with JMP Securities LLC pursuant to which JMP
Securities LLC served as the lead underwriter in the
Companys initial public offering completed on June 9,
2006. The Company paid JMP Securities LLC a fee of approximately
$3.8 million in connection with their services as the lead
underwriter.
In conjunction with the Companys Rights offering completed
on April 21, 2006, the Company agreed to pay JMP Securities
LLC a fee of approximately $700,000 as co-manager of the
offering.
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 Companys Board of
Directors, the 2004 Plan will terminate on June 9, 2014,
and no additional awards may be made under the 2004 Plan after
that date.
In 2004, each employee stock option to purchase two shares of
common stock was accompanied by a warrant to purchase one share
of common stock within one year and a warrant to purchase one
share of common stock within five years. Both options and
warrants had an exercise price of $15.00 per share on date
of grant. On January 14, 2005, the Company notified all
shareholders of its intent to elect to be regulated as a BDC and
reduced the exercise price of all remaining 1 and 5 Year
Warrants from $15.00 to $10.57 but did not reduce the strike
price of the options (see Note 7). The unexercised one-year
warrants expired and 55% of the five-year warrants were
cancelled immediately prior to the Companys election to
become a BDC.
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 Companys Board of Directors, the 2006 Plan
will terminate on May 29, 2016 and no additional awards may
be made under the 2006 Plan after that date. The Company has
filed an exemptive relief request with the Securities and
Exchange Commission (SEC) to allow options to be
issued under the 2006 Plan. No shares may be issued out of the
2006 Plan until such time as relief is provided by the SEC, and,
as such, no shares were issued as of June 30, 2006.
F-45
HERCULES
TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following is a schedule of financial highlights for the six
months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of
period
|
|
$
|
11.67
|
|
|
$
|
12.18
|
|
Net investment income (loss)
|
|
|
0.31
|
|
|
|
(0.03
|
)
|
Net realized gain on investments
|
|
|
0.28
|
|
|
|
|
|
Net unrealized appreciation
|
|
|
(0.07
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.52
|
|
|
|
0.08
|
|
Net decrease in net assets from
capital share transactions
|
|
|
(0.44
|
)
|
|
|
(0.72
|
)
|
Dividends paid
|
|
|
(0.53
|
)
|
|
|
|
|
Stock-based compensation expense
included in investment
loss
(1)
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
11.24
|
|
|
$
|
11.55
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data:
|
|
|
|
|
|
|
|
|
Per share market value at end of
period
|
|
$
|
12.10
|
|
|
|
12.90
|
%
|
Total return
|
|
|
5.34
|
%
(2)
|
|
|
17.11
|
%
(3)
|
Shares outstanding at end of period
|
|
|
13,646,857
|
|
|
|
9,801,965
|
|
Weighted average number of common
shares outstanding
|
|
|
11,394,175
|
|
|
|
4,005,932
|
|
Net assets at end of period
|
|
$
|
153,329,086
|
|
|
$
|
113,178,116
|
|
Ratio of operating expense to
average net assets (annualized)
|
|
|
13.67
|
%
|
|
|
13.55
|
%
|
Ratio of net investment income
before provision for income tax expense and investment gains and
losses (annualized)
|
|
|
7.04
|
%
|
|
|
(1.37
|
)%
|
Average debt outstanding
|
|
$
|
70,889,503
|
|
|
$
|
10,972,222
|
|
Weighted average debt per common
share
|
|
$
|
6.22
|
|
|
$
|
2.74
|
|
Portfolio turnover
|
|
|
1.31
|
%
|
|
|
0.00
|
%
|
|
|
|
(1)
|
|
Stock option expense is a non-cash
expense that has no effect on net asset value. Pursuant to
Financial Accounting Standards No. 123 (revised 2004), 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 for the period
ended June 30, 2006 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.
|
|
(3)
|
|
The total return for the period
ended June 30, 2005 is for a shareholder who owned common
shares throughout the period, and received one additional common
share for every two 5 Year Warrants cancelled. Shareholders
who purchased common shares on January 26, 2005, exercised
1 Year Warrants, or purchased common shares in the initial
public offering will have a different total return. The Company
completed its initial public offering on June 11, 2005;
prior to that date shares were issued in private placements.
|
|
|
11.
|
Commitments
and Contingencies
|
In June 2006, the Company entered into a lease agreement for new
office headquarters located in Palo Alto, California. The lease
is scheduled to commence in October 2006 and terminates in
December 2013.
The Company and its executives are covered by Directors and
Officers Insurance, with the directors and officers being
indemnified by the Company to the maximum extent permitted by
Maryland law subject to the restrictions in the 1940 Act.
On July 19, 2006, the Board of Directors approved a
dividend of $0.30 per share to shareholders of record as of
July 31, 2006 and payable on August 28, 2006.
F-46
PART C
OTHER INFORMATION
|
|
Item 25.
|
Financial
Statements and Exhibits
|
1.
Financial Statements
The following financial statements of Hercules Technology Growth
Capital, Inc. (the Company or the
Registrant) are included in this registration
statement in Part A Information Required
in a Prospectus:
|
|
|
|
|
AUDITED FINANCIAL STATEMENTS
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Statements of Assets
and Liabilities as of December 31, 2005 and 2004
|
|
|
F-3
|
|
Consolidated Schedules of
Investments as of December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of
Operations for the year ended December 31, 2005 and for the
period from February 2, 2004 (commencement of operations)
to December 31, 2004
|
|
|
F-9
|
|
Consolidated Statements of Changes
in Net Assets for the year ended December 31, 2005 and for
the period from February 2, 2004 (commencement of
operations) to December 31, 2004
|
|
|
F-10
|
|
Consolidated Statements of Cash
Flows for the year ended December 31, 2005 and for the
period from February 2, 2004 (commencement of operations)
to December 31, 2004
|
|
|
F-11
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-12
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Statements of Assets
and Liabilities as of June 30, 2006 (unaudited) and
December 31, 2005
|
|
|
F-25
|
|
Consolidated Schedule of
Investments as of June 30, 2006 (unaudited)
|
|
|
F-26
|
|
Consolidated Schedule of
Investments as of December 31, 2005
|
|
|
F-32
|
|
Consolidated Statements of
Operations for the three and six-month periods ended
June 30, 2006 and 2005 (unaudited)
|
|
|
F-36
|
|
Consolidated Statements of Changes
in Net Assets for the six-month period ended June 30, 2006
and 2005 (unaudited)
|
|
|
F-37
|
|
Consolidated Statements of Cash
Flows for the six-month period ended June 30, 2006 and 2005
(unaudited)
|
|
|
F-38
|
|
Notes to Consolidated Financial
Statements (unaudited)
|
|
|
F-39
|
|
2.
Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
a
|
|
|
Articles of Amendment and
Restatement.
(2)
|
|
b
|
|
|
Amended and Restated
Bylaws.
(2)
|
|
d
|
|
|
Specimen certificate of the
Companys common stock, par value $.001 per
share.
(3)
|
|
e
|
|
|
Form of Dividend Reinvestment
Plan.
(4)
|
|
f
|
.1
|
|
Credit Agreement dated as of
April 12, 2005 between Hercules Technology Growth Capital,
Inc. and Alcmene Funding,
L.L.C.
(2)
|
|
f
|
.2
|
|
Pledge and Security Agreement
dated as of April 12, 2005 between Hercules Technology
Growth Capital, Inc. and Alcmene Funding,
L.L.C.
(2)
|
|
f
|
.3
|
|
First Amendment to Credit and
Pledge Security Agreement dated August 1, 2005 between
Hercules Technology Growth Capital, Inc. and Alcmene Funding
L.L.C.
(5)
|
|
f
|
.4
|
|
Loan Sale Agreement between
Hercules Funding LLC and Hercules Technology Growth Capital,
Inc. dated as of August 1,
2005.
(5)
|
|
f
|
.5
|
|
Sale and Servicing Agreement among
Hercules Funding Trust I, Hercules Funding LLC, Hercules
Technology Growth Capital, Inc., U.S. Bank National
Association and Lyon Financial Services, Inc. dated as of
August 1,
2005.
(5)
|
|
f
|
.6
|
|
Indenture between Hercules Funding
Trust I and U.S. Bank National Association dated as of
August 1,
2005.
(5)
|
C-1
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
f
|
.7
|
|
Note Purchase Agreement among
Hercules Funding Trust I, Hercules Funding I LLC, Hercules
Technology Growth Capital, Inc. and Citigroup Global Markets
Realty Corp. dated as of August 1,
2005.
(5)
|
|
f
|
.8
|
|
Second Amendment to Credit and
Pledge and Security Agreement by and among Hercules Technology
Growth Capital, Inc. and Alcmene Funding, L.L.C., as lender and
administrative agent for the lenders, dated March 6,
2006.
(6)
|
|
f
|
.9
|
|
First Omnibus Amendment by and
among Hercules Funding Trust I, Hercules Funding I,
LLC, Hercules Technology Growth Capital, Inc., U.S. Bank
National Association, Lyon Financial Services, Inc. and
Citigroup Global Markets Realty Corp. dated March 6
2006.
(6)
|
|
f
|
.10
|
|
Intercreditor Agreement among
Hercules Technology Growth Capital, Inc., Alcmene Funding,
L.L.C. and Citigroup Global Markets Realty Corp. dated as of
March 6,
2006.
(6)
|
|
f
|
.11*
|
|
Warrant Participation Agreement
between the Company and Citigroup Global Markets Realty Corp.
dated as of August 1, 2005.
|
|
f
|
.12*
|
|
Second Amendment to Warrant
Participation Agreement dated as of October 16, 2006.
|
|
h
|
.1*
|
|
Form of Underwriting Agreement.
|
|
i
|
.1
|
|
Hercules Technology Growth
Capital, Inc. 2004 Equity Incentive Plan (2005 Amendment and
Restatement).
(4)
|
|
i
|
.2
|
|
Form of Incentive Stock Option
Award under the 2004 Equity Incentive
Plan.
(2)
|
|
i
|
.3
|
|
Form of Nonstatutory Stock Option
Award under the 2004 Equity Incentive
Plan.
(2)
|
|
j
|
|
|
Form of Custody Agreement between
the Company and Union Bank of
California.
(2)
|
|
k
|
.1
|
|
Form of Registrar Transfer Agency
and Service Agreement between the Company and American Stock
Transfer & Trust
Company.
(2)
|
|
k
|
.2
|
|
Warrant Agreement dated
June 22, 2004 between the Company and American Stock
Transfer & Trust Company, as warrant
agent.
(1)
|
|
k
|
.3
|
|
Side Letter dated February 2,
2004 between the Company and Jolson Merchant Partners Group LLC
(now known as JMP Group
LLC).
(1)
|
|
k
|
.4
|
|
Registration Rights Agreement
dated June 22, 2004 between the Company and JMP Securities
LLC.
(1)
|
|
k
|
.5
|
|
Letter Agreement dated
February 22, 2005 between the Company and JMP Asset
Management
LLC.
(2)
|
|
k
|
.6
|
|
Letter Agreement dated
February 22, 2005 between the Company and Farallon Capital
Management,
L.L.C.
(2)
|
|
k
|
.7
|
|
Subscription Agreement among
Hercules Technology Growth Capital, Inc. and the subscribers
named therein dated March 2,
2006.
(6)
|
|
k
|
.8
|
|
Registration Rights Agreement
among Hercules Technology Growth Capital, Inc. and the
purchasers named therein dated March 2,
2006.
(6)
|
|
l*
|
|
|
Opinion of Sutherland Asbill &
Brennan LLP.
|
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n
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.1
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Consent of Ernst & Young
LLP.
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n
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.2*
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Consent of Sutherland Asbill &
Brennan LLP (included in Exhibit l).
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n
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.3
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Consent of VentureOne.
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p
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Subscription Agreement dated
February 2, 2004 between the Company and the subscribers
named
therein.
(2)
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r
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Code of
Ethics.
(2)
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(1)
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Previously filed as part of the
Registration Statement on
Form N-2
of the Company, as filed on February 22, 2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-034405).
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(2)
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Previously filed as part of
Pre-Effective Amendment No. 1, as filed on May 17,
2005 (File
No. 333-122950)
(SEC Accession No. 0001193125-05-109178) to the Registration
Statement on
Form N-2
of the Company, originally filed with the commission on
February 22, 2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-034405).
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C-2
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(3)
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Previously filed as part of
Pre-Effective Amendment No. 2, as filed on June 8,
2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-121834)
to the Registration Statement on
Form N-2
of the Company, originally filed with the commission on
February 22, 2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-034405).
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(4)
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Previously filed as part of
Post-Effective Amendment No. 1, as filed on June 10,
2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-123499)
to the Registration Statement on
Form N-2
of the Company, originally filed with the commission on
February 22, 2005 (File
No.
333-122950
)
(SEC Accession
No. 0001193125-05-034405).
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(5)
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Previously filed as part of the
Current Report on
Form 8-K
of the Company, as filed on August 5, 2005 (File
No.
814-00702
)
(SEC Accession
No. 0001193125-05-157986).
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(6)
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Previously filed as part of
Post-Effective Amendment No. 3, as filed on March 9,
2006 (File
No.
333-126604
)
(SEC Accession
No. 0001193125-06-049783)
to the Registration Statement on
Form N-2
of the Company, originally filed with the commission on
July 14, 2005 (File No.
333-126604
) (SEC
Accession
No. 0001193125-05-142384).
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Item 26.
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Marketing
Arrangements
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The information contained under the heading Plan of
Distribution of the prospectus is incorporated herein by
reference, and any information concerning any underwriters will
be contained in any prospectus supplement, if any, accompanying
this prospectus.
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Item 27.
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Other
Expenses of Issuance and Distribution
|
The following table sets forth the estimated expenses payable by
us in connection with the offering (excluding placement fees):
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Amount
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SEC registration fee
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$
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10,158
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NASD filing fee
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$
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10,506
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Nasdaq listing fee
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$
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45,000
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Accounting fees and expenses
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$
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100,000
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Legal fees and expenses
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$
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275,000
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Printing expenses
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$
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100,000
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Miscellaneous
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$
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54,336
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Total
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$
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495,000
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The amounts set forth above, except for the SEC fees, are in
each case estimated.
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Item 28.
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Persons
Controlled by or Under Common Control
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Hercules Technology SBIC Management, LLC is a wholly-owned
subsidiary of the Company. Hercules Technology SBIC Management,
LLC is the general partner of Hercules Technology II, L.P.
and the Company owns substantially all of the limited
partnership interests in Hercules Technology II, L.P.
Hercules Funding I LLC, a Delaware limited liability company, is
a wholly-owned subsidiary of the Company. Hercules Funding I LLC
holds all the ownership interests of Hercules Funding
Trust I, a Delaware statutory trust. Accordingly, the
Company may be deemed to control, directly or indirectly, the
following entities:
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Jurisdiction of
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Name
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Organization
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Hercules Technology SBIC
Management, LLC
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Delaware
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Hercules Technology II,
L.P.
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Delaware
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Hercules Funding I LLC
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Delaware
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Hercules Funding Trust I
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Delaware
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C-3
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Item 29.
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Number
of Holders of Securities
|
The following table sets forth the approximate number of record
holders of the Companys common stock as of October 9,
2006:
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Number of
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Record
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Title of Class
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Holders
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Common stock, par value
$.001 per share
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2,397
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Warrants to purchase shares of
common stock
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32
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Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. The Registrants charter contains such a
provision which eliminates directors and officers
liability to the maximum extent permitted by Maryland law,
subject to the requirements of the 1940 Act.
The Registrants charter authorizes the Registrant, to the
maximum extent permitted by Maryland law and subject to the
requirements of the 1940 Act, to obligate itself to indemnify
any present or former director or officer or any individual who,
while a director or officer of the Registrant and at its
request, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise as a director, officer, partner
or trustee, from and against any claim or liability to which
that person may become subject or which that person may incur by
reason of his or her service in any such capacity and, under
certain circumstances and provided certain conditions have been
met, to pay or reimburse their reasonable expenses in advance of
final disposition of a proceeding. The Registrants bylaws
obligate the Registrant, to the maximum extent permitted by
Maryland law and subject to the requirements of the 1940 Act, to
indemnify any present or former director or officer or any
individual who, while a director or officer of the Registrant
and at its request, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director,
officer, partner or trustee and who is made, or threatened to be
made, a party to the proceeding by reason of his or her service
in any such capacity from and against any claim or liability to
which that person may become subject or which that person may
incur by reason of his or her service in any such capacity and,
under certain circumstances and provided certain conditions have
been met, to pay or reimburse their reasonable expenses in
advance of final disposition of a proceeding. The charter and
bylaws also permit the Registrant to indemnify and, under
certain circumstances and provided certain conditions have been
met, advance expenses to any person who served a predecessor of
the Registrant in any of the capacities described above and any
of the Registrants employees or agents or any employees or
agents of its predecessor. In accordance with the 1940 Act, the
Registrant will not indemnify any person for any liability to
which such person would be subject by reason of such
persons willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
his office. Additionally, the Registrant will not indemnify any
person with respect to any matter as to which such person shall
have been finally adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that their action
was in the best interests of the Registrant.
Maryland law requires a corporation (unless its charter provides
otherwise, which the Registrants charter does not) to
indemnify a director or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which
he or she is made, or threatened to be made, a party by reason
of his or her service in that capacity. Maryland law permits a
corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made, or
threatened to be made, a party by reason of their service in
those or other capacities unless it is established that
(a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and
(1) was committed in bad faith or (2) was the result
of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under
Maryland law, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation
or for a judgment of liability on the
C-4
basis that a personal benefit was improperly received, unless in
either case a court orders indemnification, and then only for
expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the
corporations receipt of (a) a written affirmation by
the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written
undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately
determined that the standard of conduct was not met.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Company pursuant to the
provisions described above, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or
controlling person in the successful defense of an action, suit
or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
In addition, we have agreed to indemnify, to the maximum extent
permitted by Maryland law and the 1940 Act, representatives of
JMP Asset Management LLC and Farallon Capital Management, L.L.C.
on terms similar to those afforded to our directors and officers
under our charter and bylaws in connection with their activities
in evaluating our investment opportunities prior to our election
to be regulated as a business development company.
The Company carries liability insurance for the benefit of its
directors and officers (other than with respect to claims
resulting from the willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his or her office) on a claims-made basis of up to
$3,000,000, subject to a $250,000 retention and the other terms
thereof.
The Company has agreed to indemnify the underwriters against
specified liabilities for actions taken in their capacities as
such, including liabilities under the Securities Act of 1933, as
amended.
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Item 31.
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Business
and Other Connections of Investment Advisor
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Not applicable.
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Item 32.
|
Location
of Accounts and Records
|
The Company maintains at its principal office physical
possession of each account, book or other document required to
be maintained by Section 31(a) of the 1940 Act and the
rules thereunder.
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Item 33.
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Management
Services
|
Not applicable.
We hereby undertake:
(1) to suspend the offering of shares until the prospectus
is amended if (i) subsequent to the effective date of this
registration statement, the net asset value declines more than
ten percent from the net asset value as of the effective date of
this registration statement, or (ii) the net asset value
increases to an amount greater than the net proceeds as stated
in the prospectus;
(2) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
C-5
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(3) that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
those securities at that time shall be deemed to be the initial
bona fide
offering thereof;
(4) to remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering; and
(5) that, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser, if the Registrant
is subject to Rule 430C [17 CFR 230.430C]: Each prospectus
filed pursuant to Rule 497(b), (c), (d) or
(e) under the Securities Act of 1933 [17 CFR 230.497(b),
(c), (d) or (e)] as part of a registration statement
relating to an offering, other than prospectuses filed in
reliance on Rule 430A under the Securities Act of 1933 [17
CFR 230.430A], shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness.
Provided, however
, that no statement made
in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(6) that for the purpose of determining liability of the
Registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of securities: The undersigned
Registrant undertakes that in a primary offering of securities
of the undersigned Registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned Registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to the purchaser:
(i) any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering required to be
filed pursuant to Rule 497 under the Securities Act of 1933
[17 CFR 230.497];
(ii) the portion of any advertisement pursuant to
Rule 482 under the Securities Act of 1933
[17 CFR 230.482] relating to the offering containing
material information about the undersigned Registrant or its
securities provided by or on behalf of the undersigned
Registrant; and
(iii) any other communication that is an offer in the
offering made by the undersigned Registrant to the purchaser.
(7) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 497(h) under
the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective;
and
(8) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(9) to send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of
Additional Information.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, and State of California,
on the
17
th
day of October, 2006.
Hercules Technology
Growth Capital, Inc.
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By:
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/s/ Manuel
A. Henriquez
|
Name: Manuel A. Henriquez
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Title:
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Chairman of the Board, President and
|
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Manuel
A. Henriquez
Manuel
A. Henriquez
|
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Chairman of the Board, President
and
Chief Executive Officer
(principal executive officer)
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October 17, 2006
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/s/ David
M. Lund
David
M. Lund
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Chief Financial Officer
(principal financial and accounting officer)
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October 17, 2006
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*
Allyn
C. Woodward, Jr.
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Director
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October 17, 2006
|
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*
Joseph
W. Chow
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Director
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|
October 17, 2006
|
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*
Robert
P. Badavas
|
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Director
|
|
October 17, 2006
|
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*
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Signed by Manuel A. Henriquez on behalf of those identified
pursuant to his designation as
attorney-in-fact
signed by each on August 25, 2006.
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EXHIBIT INDEX
|
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Exhibit
|
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Number
|
|
Description
|
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f
|
.11
|
|
Warrant Participation Agreement
between the Company and Citigroup Global Markets Realty Corp.
dated as of August 1, 2005.
|
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f
|
.12
|
|
Second Amendment to Warrant
Participation Agreement dated as of October 16, 2006.
|
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h
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.1
|
|
Form of Underwriting Agreement.
|
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l
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|
|
Opinion of Sutherland Asbill &
Brennan LLP.
|
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n
|
.1
|
|
Consent of Ernst & Young
LLP.
|
|
n
|
.2
|
|
Consent of Sutherland Asbill &
Brennan LLP (included in Exhibit l).
|
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n
|
.3*
|
|
Consent of Venture One.
|